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Category: Direct Taxes

Additions made by AO u/s.40A(2)(b) — Penalty levied — Held : it is not a case of concealment of income or furnishing of inaccurate particulars.

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Part
A: Reported Decisions

27 Jhavar Properties (P.) Ltd.
123 ITD 429 (Mum.)
A.Y. 2001-02. Dated : 10-9-2008

 

Additions made by AO u/s.40A(2)(b) — Penalty levied — Held :
it is not a case of concealment of income or furnishing of inaccurate
particulars.

The assessee was engaged in business of real estate
development and construction. During assessment, it was found by the AO that the
assessee has claimed a sum of Rs.63 lakhs as payment made to sister concern for
job work. After examination of details, the AO found that the value of job
entrusted to the sister concern was only Rs.32,09,974 for which the appellant
made a payment of Rs.63,00,000. He thus disallowed a sum of Rs.30,82,026
u/s.40A(2)(b). This was confirmed by the CIT(A). The AO initiated penalty
proceedings and levied penalty.

Held :

Since, no specific disclosure is required to be made in
respect of income subject to scrutiny u/s.40A(2)(b) in Act or in Rules or in the
form of return of income, the assessee cannot be held guilty of non-disclosure
of income. It is not a case of concealment of income or furnishing of inaccurate
particulars. When additions are made on the basis of estimate and not on account
of any concrete evidence of concealment, penalty was not leviable.

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Exemption available under the law should be granted by the Assessing Officer, even if the assessee has not claimed it in its return of income.

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Part
A: Reported Decisions

26 ACWT v. Ku. Ragini Sanghi
123 ITD 384 (Indore)
A.Ys. : 1997-98 and 1998-99
Dated : 25-1-2008

 

Exemption available under the law should be granted by the
Assessing Officer, even if the assessee has not claimed it in its return of
income.

The assessees are beneficiaries of a trust and enjoy 50%
share of interest in the assets of this trust. The trust owned a flat which was
a residential house. As per the assessment order of the trust, the value of
assets owned by it was to be included in the hands of beneficiaries. Since no
interest in the assets of trust was shown in the original return of
beneficiaries, notice u/s.17 was issued to the beneficiaries. The assesses
submitted that the flat was exempt u/s.5(1)(vi) of the Wealth-tax Act since they
had no other residential house in their names. Thus the value of the flat was
shown as NIL. It was contended on behalf of Department that since the assessee
claimed deduction at the assessment stage and not in the return of wealth, it
should not be allowed.

Held :

S. 5(1)(vi) of the Wealth-tax Act clearly provides for the
exemption of one house and as such, the law as it stood should have been applied
by the AO for granting exemption. There is no need for the assessee to seek
exemption as per law. Even when the assessee has not sought exemption expressly,
the AO should apply the statutory provisions and grant exemption.

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S. 80P(2)(a)(i) — Interest on income-tax refund — Assessable under the head ‘Income from other sources’ — Since it is covered within the expression ‘profits and gains attributable to banking business’, deduction u/s.80P(2)(a)(i) is available.

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Part
A: Reported Decisions

25 (2010) 37 DTR (Mumbai) (SB) (Trib) 194
The Maharashtra State Co-Operative Bank Ltd. v. ACIT
A.Y. : 2000-01. Dated : 22-1-2010

 

S. 80P(2)(a)(i) — Interest on income-tax refund — Assessable
under the head ‘Income from other sources’ — Since it is covered within the
expression ‘profits and gains attributable to banking business’, deduction
u/s.80P(2)(a)(i) is available.

Facts :

The assessee received interest u/s.244A of Rs.34.33 crores
which was included in its total income under the head “Income from Business” and
deduction was claimed u/s.80P(2)(a)(i). This interest has arisen upon favourable
order of Tribunal for earlier assessment years and the resultant refund of
assessment dues collected. The AO denied the deduction u/s.80P(2)(a)(i) in
respect of the same.

Upon further appeal, the CIT(A) confirmed the order of the AO
and has held as under :

(i) The interest was assessable under the head ‘Income from
other sources’.

(ii) The interest on income-tax refund was not attributable
to the banking business.

(iii) The favourable decision of the Tribunal in assessee’s
own case for A.Y. 2001-02 was distinguishable, because in that case the issue
was about the interest u/s.244A arising out of excess deduction of tax at
source.

Held :

The principle of consistency qua the judicial forums is not
unexceptionable. If the subsequent Bench finds it difficult to follow the
earlier view due to any convincing reason such as change in the factual or legal
position or non-raising or non-consideration of an important argument by the
earlier Bench having bearing on the issue, then the earlier view cannot be
thrust upon it and in such a case a reference should be made to a larger Bench.
The appeal in the present case needs to be decided on merits rather than
following the earlier view taken by the Tribunal in its own case. Upon merits,
three issues were identified :

(1) Head of income under which interest on income-tax
refund falls :


In order to categorise income under the head ‘Profits and
gains of business of profession’, it is imperative that income should have
arisen from business carried on by the assessee and Business refers to a
systematic, real and organised activity conducted with a view to earn income.
Payment of income-tax is an event which takes place after the determination of
profits of the business for the year. Eventually when the income-tax was
refunded along with interest u/s.244A, that would also, naturally, be an event
after the determination of income on year-to-year basis. Payment of income-tax
cannot be held to be a business activity or a transaction done during carrying
on of the business. There cannot be an intention of the assessee to earn income
by paying income-tax. Interest on refund of income-tax does not and can never
fall under the head ‘Profits and gains of business or profession’, irrespective
of the fact that the assessee is in banking or non-banking business.

(2) Meaning of expression ‘profits and gains’ of
business as used in S. 80P :


The use of the expression ‘profits and gains of business’ in
S. 80P(2) is to be seen in contradiction to the expression ‘income chargeable
under the head ‘Profits and gains of business or profession’. The latter
expression is used in several Sections of the Act including S. 80E, S.
80HHC(baa), etc. The employment of the expression ‘profits and gains’ in S.
80P(2) demonstrates the intention of the Legislature that the benefit of
deduction is not confined to the income arising directly from the banking
business (as covered by ‘profits’), which falls under the head ‘Profits and
gains of business or profession’, but also includes other items of income (as
covered by ‘gains’), which have some relation with the business of banking even
though they do not fall under the head of business income. Since income-tax was
paid in relation to the banking business, the interest on income-tax refund will
be considered as ‘gain’ (not ‘profit’) of banking business covered within the
expression ‘profit and gains’ of banking business.

(3) Scope of phrase ‘attributable to’ eligible business
:


The scope of the phrase ‘attributable to’ is wider than
‘derived from’. Whereas in the case of the latter, the relation of the income
with the source must be direct and that of the first degree, but in the former
even some commercial or casual connection suffices the test. The expression
‘attributable to’ covers ‘receipts from sources other than the actual conduct of
the business’. The income-tax, on which interest was granted, was utilised to
satisfy the demand raised in relation to the banking business. It is for the
banking business that income-tax was originally paid and subsequently the amount
was refunded along with interest. There exists a commercial and causal
connection between the interest on income-tax refund and the banking business
and hence it can be regarded as attributable to the banking business.

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Undisclosed income on the basis of cheques found during the course of search — Cheques received from various parties as security against advances made in cash out of undisclosed income — Amount not recovered by assessee telescoped against undisclosed inco

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Part
A: Reported Decisions

24 (2010) 37 DTR (Chennai) (TM) (Trib) 233
ACIT v. M. N. Rajendhran
A.Y. : 1-4-1995 to 24-1-2002. Dated : 29-1-2010

 

Undisclosed income on the basis of cheques found during the
course of search — Cheques received from various parties as security against
advances made in cash out of undisclosed income — Amount not recovered by
assessee telescoped against undisclosed income assessed on basis of same
cheques.

Facts :

During course of search, certain cheques were found from
premises of the assessee, which were received from various parties as a security
against loans advanced to them by the assessee in cash out of undisclosed
income. Loans were not repaid as confirmed by the parties. Addition was made by
the AO as an undisclosed income.

Upon further appeal to the CIT(A), addition was deleted on
the basis of his own order in the assessee’s brother’s case on the inference
that on the face of evidence, money lent for money-lending business had not been
recovered as per the statements of debtors placed on record.

The decision of CIT(A) in the assessee’s brother’s case was
upheld by the Tribunal. However, the learned Judicial Member set aside the
matter on the ground that the decision of the Tribunal in the case of the
assessee’s brother is entirely on different point. The learned Accountant Member
did not agree and the matter was referred to the Third Member.

Held :

In the assessee’s brother’s case, the Tribunal accepted the
assessee’s plea that no income accrued to the assessee as the cheques remained
unencashed. The amount not recovered by the assessee is telescoped against the
undisclosed income assessed on the basis of same cheques. This ratio is
applicable in the present case also. On the same set of facts, a Co-ordinate
Bench of the Tribunal cannot come to a diametrically opposite conclusion than
arrived at in the earlier case. The names of creditors do not matter. Therefore,
the addition was deleted.

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The AO observed that the assessee has earned an amount of Rs.1,31,39,526 on account of trading in shares and also earned brokerage of Rs.1,49,75,135. He held that according to Explanation to S. 73, the nature of share trading business of the assessee is d

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23 2010 TIOL 232 ITAT (Mum.)
ACIT v. KNP Securities Pvt. Ltd.
A.Y. : 1999-2000. Dated : 26-3-2010
S. 28, S. 43(5) and S. 73 — Explanation 2 to S. 28 does not apply if the
assessee is dealing in delivery-based transactions.

Facts :

The AO observed that the assessee has earned an amount of
Rs.1,31,39,526 on account of trading in shares and also earned brokerage of
Rs.1,49,75,135. He held that according to Explanation to S. 73, the nature of
share trading business of the assessee is deemed to be speculative and as per
Explanation to S. 28, speculation business should be segregated from other
business. Therefore, he allocated the expenditure incurred to speculative
business and other business. He, accordingly, arrived at a speculation loss of
Rs.49,66,658.

The CIT(A) deleted the allocation of expenditure made by the
AO and allowed this ground.

The Revenue preferred an appeal to the Tribunal.

Held :

The CIT(A) has correctly held that considering the
transactions as speculative will come only when a particular transaction is
considered as speculative in nature u/s.43(5). So long as the assessee deals in
delivery-based transactions, Explanation to S. 28 does not come into operation
as there are no speculative transactions u/s.43(5). The issue can only be
considered with reference to Explanation to S. 73. That portion of the Section
will come into play after considering the income under the head ‘Income from
Business’ as also income under other heads. The allocation of expenditure and
segregation of business will come into picture only when the assessee indulges
in speculative nature of transactions. The order of the CIT(A) was held to be
correct both on facts as well as on law.

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Explanation 1 to S. 17(2), S. 192 — Assessee employer is not hit by the retrospective insertion of Explanation 1 to S. 17(2) in the absence of any such extension of retrospective effect either in S. 192 or S. 201.

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22 2010 TIOL 231 ITAT (Hyd.)
State Bank of India, IFB Branch, Hyderabad v. DCIT (TDS)
A.Ys. : 2004-2005 to 2007-08.
Dated : 3-12-2009

 

Explanation 1 to S. 17(2), S. 192 — Assessee employer is not
hit by the retrospective insertion of Explanation 1 to S. 17(2) in the absence
of any such extension of retrospective effect either in S. 192 or S. 201.

Facts :

The assessee employer took residential premises on lease and
provided them to its employees. It recovered from its employees standard rent
for the accommodation so provided. Lease rent paid by the assessee was greater
than amount recovered by it from its employees. In accordance with the ratio of
decisions of several High Courts including the jurisdictional High Court, the
difference between the amount of rent paid by the employer and the amount of
standard rent charged from the employee was not regarded as a perquisite.
Subsequently, the Finance Act, 2007 inserted Explanation 1 to S. 17(2)(ii) with
retrospective effect from 1-4-2002. As a result of the retrospective amendment
the employee became chargeable to tax on perquisite value of the accommodation
where the rent paid by the assessee was greater than the rent recovered from the
employee.

The AO held that the assessee has short-deducted income-tax
at source from salaries paid by it to its employees and consequently the AO held
the assessee to be an assessee in default and demanded the amount of income-tax
short-deducted along with interest u/s.201(1A). The CIT(A) upheld the action of
the AO.

The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that :

(a) at the relevant time, when the TDS was to be effected
by the assessee-bank, there was no such provision on the statute book and the
law was amended at a later date with retrospective effect from 1-4-2002.

(b) the issue under consideration is covered in favour of
the assessee with the decision of the Nagpur Bench of the Tribunal in the
group cases of Canara Bank where it has been held that as far as the
assessee-employer is concerned, it is not hit by the retrospective insertion
of Explanation 1 to S. 17(2) thereof in the absence of any such extension of
retrospective effect either to S. 192 or S. 201.

The Tribunal, agreeing with the ratio of the Nagpur Bench
division decided the issue in favour of the assessee.

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S. 2(15) — Provisions of proviso to S. 2(15) are prospective and not retrospective — not applicable to donations received up to 31-3-2009.

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21 2010 TIOL 226 ITAT (Hyd.)
The Andhra Pradesh Chambers of Commerce and Trade Secunderabad v. DDIT
Dated : 23-12-2009

 

S. 2(15) — Provisions of proviso to S. 2(15) are prospective
and not retrospective — not applicable to donations received up to 31-3-2009.

Facts :

The assessee-was registered under the provisions of Andhra
Pradesh (Telangana Area) Public Societies Registration Act in 1982. It was
established for promotion of trade and commerce and some other charitable
objects. It was granted registration u/s.12A and was also granted recognition
u/s.80G.

It’s application dated 8-3-2008 for renewal of recognition
u/s.80G was rejected by DIT on the ground that the Finance Act, 2008 has w.e.f.
1-4-2009 amended the definition of the term ‘charitable purpose’ by adding a
proviso to S. 2(15), which specifically lays down that advancement of any other
objects of general public utility shall not be ‘charitable purpose’ if it
involves carrying on of any activity in the nature of trade, commerce or
business for a cess or fee or any other consideration, irrespective of the
nature of use of application, or retention, of the income from such activity.

The assesee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that :

(a) there was no violation of S. 80G(5) by the assessee;

(b) the decision of the Tribunal, relied upon by the D.R.,
in Andhra Pradesh Federation of Textile Association (ITA No. 88/Hyd./08, dated
30-1-2009) is not applicable to the facts of this case, as in that case, it
was found that the element of charity in the activities of the assessee was
absent, and held that the association could not be considered as a charitable
association within the meaning of S. 2(15) of the Act;

(c) the issue is covered by the decision of the Tribunal in
DDIT v. Indian Electrical and Electronics Manufacturers Association, (2009) 31
SOT 346 (Mum.) where it has been held that the proviso to S. 2(15) is not
clarificatory in nature and would not apply retrospectively;

(d) Legislature has specified the date from which proviso
to S. 2(15) is applicable;

(e) the provisions of S. 80G allowing certain deductions to
the donors apply to specific act of donation made on particular date.

Held that, the provisions of proviso to S. 2(15) shall not
apply to donations received by the assessee up to 31-3-2009. In the absence of
any violation of provisions of S. 80G(5), the assessee is entitled for approval
u/s. 80G in respect of donations received up till 31-3-2009. The Tribunal
directed the DDIT accordingly and allowed the appeal of the assessee.

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S. 194C — Payments made to producers, directors, actors for financing film production are not covered by S. 194C.

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20 2010 TIOL 210 ITAT (Mum.)

Entertainment One Ltd. v. ITO (TDS)
A.Ys. : 2003-2004 to 2006-2007
Dated : 15-6-2009

S. 194C — Payments made to producers, directors, actors for
financing film production are not covered by S. 194C.

Facts :

The objects of the assessee company inter alia included
production of feature films, TV serials, video films and documentary films, etc.
In the course of survey action it was found that assessee had made payments to
various film and T.V. serial producers and directors under different agreements.
The AO, on examining the agreements entered into, came to the conclusion that
the assessee has incurred expenditure for production of films as a whole. After
the film is produced, it acquires the entire right of the film concerned,
including the intellectual property right as well as complete ownership of
distribution and exhibition rights of the film and serial.

He rejected the arguments of the assessee that

(a) it has merely financed the film and has retained
control over negative rights of the completed film as assurance of realisation
of money from the producer;

(b) control over distribution of the film has been taken to
ensure best price available can be recovered from the distribution of the
film;

(c) the producer is in full command of making the film and
not the assessee;

(d) the assessee has neither produced the film, nor has it
got it produced;

(e) the producers/directors with whom agreements are
entered into and to whom advances are made are not
contractors/sub-contractors. For all these reasons the assessee contended that
the provisions of S. 194C are not attracted to the payments made by ic.

The AO held that advances made by the assessee to producers
and directors are covered u/s.194C. He issued notice u/s.201 treating the
assessee as an assessee in default and raised demands for tax and interest
u/s.201(1)/(1A).

In appeal, the CIT(A) gave partial relief to the assessee.
The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal observed that :

(a) in majority of the agreements film-makers and producers
have right to participate in the surplus after repayment of the principal
amount and these terms support the case of the assessee that status of the
film-makers/ producers is also like principal, as in normal commercial
practice, once the contract is executed, the contractor is out of the project
and the entire surplus is enjoyed by the principal;

(b) while the relationships of the principal and contractor
can be determined on the basis of the terms of the agreement or contract, at
the same time, industry and trade practices and conventions are also to be
taken judicial note of, and considered before arriving at final conclusions,
in respect of the relationships created. In film industry, it is not uncommon
that the entire film project is financed by a third party, who otherwise is
not involved in the execution of a film project;

(c) the AO had admitted that the assessee has not hired the
services of the producer and director. This itself takes the
producers/directors out of the term “contractors” and hence, the first mandate
of S. 194C is not fulfilled;

(d) production of the film goes through many stages and it
is nowhere the case of the Revenue that the assessee has any active role in
the production of the film;

(e) Censor Board certificates in respect of the films which
the assessee has financed were all in the name of the producers. If the
assessee’s role was as a producer, then the Censor Board Certificates being
very important legal documents, would have shown the assessee as a producer.

On examining the agreements, the Tribunal concluded that no
relationship of ‘principal’ and ‘contractor’ was created between the assessee
and film-producers/directors, but all agreements were finance agreements with
unique features
to participate in the surplus by taking the risk of losses also.

The Tribunal held that the payments made by the assessee to
producers and directors of the film/TV serials cannot be said to be covered by
S. 194C. It held that the assessee is not a deemed defaulter u/s.201(1) and
there is no question of levy of interest u/s.201(1A).

The Tribunal allowed the appeal of the assessee.

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S. 35DDA — Claim for deduction of 1/5th of the expenditure incurred on VRS cannot be denied merely on the ground that there was no manufacturing activity during the year, particularly when similar expenses are allowed in the previous year.

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19 2010 TIOL 205 ITAT (Mum.)

Apte Amalgamations Ltd. v. DCIT
A.Y. : 2002-03. Dated : 9-3-2010

S. 35DDA — Claim for deduction of 1/5th of the expenditure
incurred on VRS cannot be denied merely on the ground that there was no
manufacturing activity during the year, particularly when similar expenses are
allowed in the previous year.

Facts :

The assessee-company had in its return of income claimed a
deduction of Rs.19,18,441 being 1/5th of the total expenditure incurred on VRS.
The Assessing Officer (AO) disallowed this on the ground that the expenditure
was incurred subsequent to closure of the business and hence VRS expenditure was
not wholly and exclusively incurred for the purpose of business.

In appeal to the CIT(A) observed that during the current year
there was no manufacturing activity, hence, the question of allowability of
expenses relating to manufacturing business did not arise. He confirmed the
disallowance on further appeal by the assessee:

Held :

The Tribunal noted that :

(a) the AO observed that “the assessee-company is engaged
in the business of manufacturing chemicals and trading of scientific
instruments”;

(b) the CIT(A) while considering the assessee’s claim of
depreciation has observed that during the year the assessee had not undertaken
any manufacturing activity and that the business income was by way of trading,
service charges and commission. He upheld the disallowance of depreciation on
plant and machinery, but allowed depreciation on non-manufacturing items
(computer, furniture and motor cars) as the assessee was having some business
activity during the year, and

(c) in the A.Y. 2001-02 similar disallowance made by the AO
on the ground that expenditure has been incurred subsequent to closure of
business was deleted by the CIT(A) and the Tribunal had, on an appeal by the
Revenue, upheld the action of the CIT(A),

Following the order of the Tribunal for the earlier year and
also keeping in view that merely because the assessee has closed its
manufacturing activity did not mean that the assessee has not carried out its
business activities, the claim of the assessee was held allowable.

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Income-tax Act, 1961 — Section 6(1)(c) and Explanation to S. 6(1) — In the case of an assessee who is sent on deputation by his Indian employer to a company outside India and his salary is borne and paid by the foreign company, can it be said that the ass

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  1. 2009-TIOL-261-ITAT-Mad.

DCIT vs. Ashok Kumar

A.Y. : 2004-2005. Date of Order : 6.3.2009

Income-tax Act, 1961 — Section 6(1)(c) and Explanation to
S. 6(1) — In the case of an assessee who is sent on deputation by his Indian
employer to a company outside India and his salary is borne and paid by the
foreign company, can it be said that the assessee has left India for the
purpose of employment and therefore his case is covered by clause (a) of
Explanation to S. 6(1) — Held : Yes.

 

Facts :

The assessee was an employee of ONGC. During the previous
year relevant to assessment year 2004-05, he was seconded to ONGC Nile Ganga
BV, a Dutch company. During the year under consideration his stay in India was
for 98 days. The AO held that in view of S. 6(1)(c) of the Act the assessee
became resident and accordingly he charged to tax salary received by the
assessee from ONGC Nile Ganga in Sudan. The AO held that the assessee did not
leave India for employment outside India but was sent for work of ONGC out of
India and, therefore, his income was chargeable to tax.

The CIT(A) held the assessee to be a non-resident and
directed the AO to exclude salary received by the assessee from ONGC Nile
Ganga by treating the assessee as a non-resident.

The Revenue filed an appeal to the Tribunal.

Held :

The Tribunal noted that during the period when the assessee
was deputed to ONGC Nile Ganga no salary was paid by ONGC. It held that since
ONGC Nile Ganga B.V. is a foreign company, a separate entity, the assessee can
be said to have left India but joined employment in a foreign country and,
therefore, the condition for treating him as resident would be for 180 days (sic
182 days) as against 60 days provided in the Explanation. Accordingly, it
held that the assessee was a non-resident and therefore, income received by
him from ONGC Nile Ganga in Sudan would not be taxable. It noted that this
view was also supported by the decision of AAR in the case of British Gas
India P. Ltd. (285 ITR 218). The Tribunal dismissed the appeal of the Revenue.


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Income-tax Act, 1961 — Sections 40(a)(i) and S. 195 — Whether provisions of S. 195 apply only to income chargeable to tax in India — Held : Yes. Whether in a case where amount paid to non-resident is not chargeable to tax in India and therefore provisions

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  1. 2009-TIOL-241-ITAT-Mad.

DCIT vs. Venkat Shoes Pvt. Ltd.

A.Y. : 2004-2005. Date of Order : 6.3.2009

Income-tax Act, 1961 — Sections 40(a)(i) and S. 195 —
Whether provisions of S. 195 apply only to income chargeable to tax in India —
Held : Yes. Whether in a case where amount paid to non-resident is not
chargeable to tax in India and therefore provisions of Chapter XVII-B are not
applicable, can such an amount be disallowed u/s. 40(a)(i) — Held : No.

 

Facts :

The assessee paid a sum of Rs.23,57,715 as commission to a
non-resident. The commission was paid for services rendered by the agent
outside India. The assessee did not deduct tax at source on the ground that
the services have been rendered outside India. The AO held that in view of the
ratio of the decision of the Supreme Court in the case of Transmission
Corporation of India the assessee ought to have deducted tax at source. The AO
disallowed this sum u/s. 40(a)(i) since according to the him tax was
deductible on this sum and the assessee had failed in its duty of deducting
tax as per S. 195.

The CIT(A) held that (a) the commission paid by the
assessee was not chargeable to tax in India as per Ss. 4 and 5 of the Act; (b)
the case of the assessee was supported by CBDT Circular No. 786, dated
7.2.2000. Accordingly, he held that the provisions of S. 195 and S. 40(a)(i)
were not applicable. He also accepted the assessee’s contention that the Apex
Court decision in the case of Transmission Corporation of AP Ltd. and Another
mandated deduction of tax at source only when the same is chargeable to tax in
India. Accordingly, he allowed the assessee’s appeal.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that as the non-resident rendered
services outside India, the amount under consideration could not be said to
have been deemed to accrue or arise in India and also the payment was remitted
abroad and therefore the amount was not exigible to tax in India. The Tribunal
held that since the payment was not chargeable to tax in India, the provisions
of S. 195(2) are not applicable.

The Tribunal also found the case of the assessee to be
fully meeting the criteria laid down by the CBDT in its Circular No. 786,
dated 7th February, 2000 and Circular No. 23, dated 23rd July, 1969 according
to which, no tax is deductible u/s. 195. The Tribunal noted that in view of
the decision of the Apex Court in Azadi Bachao Andolan the circulars of CBDT
are binding on the Revenue authorities.

The Tribunal held that it cannot be said that the decision
of the Apex Court in Transmission Corporation mandates deduction of tax at
source, if non-resident renders service outside India which is not chargeable
to tax. The Hon’ble Court’s exposition in that case was on the premise that at
least some part of the receipt may be chargeable to tax. The Apex Court has
clearly upheld that the obligation of the assessee to deduct tax at source is
limited to the appropriate portion of income chargeable under the Act. So when
there is no income chargeable to tax, the question of deduction at source does
not arise.


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A.P. (DIR Series) Circular No. 36, dated 4-4-2008 — Liberalised Remittance Scheme for Resident Individuals — Reporting.

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Given below are the highlights of RBI Circulars.


 

29 A.P. (DIR Series) Circular No. 36, dated
4-4-2008 — Liberalised Remittance Scheme for Resident Individuals — Reporting.

Presently, banks are required to furnish information to RBI
in respect of the Liberalised Remittance
Scheme on a quarterly basis in the prescribed format.

This Circular requires the information to be submitted by the
banks on a monthly basis from April, 2008 onwards in the format annexed to this
Circular.

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New procedure for issuance of statutory declaration and forms under C.S.T. Act, 1956 : Trade Circular No. 15T.

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M-VAT

28 New procedure for issuance of statutory
declaration and forms under C.S.T. Act, 1956 : Trade Circular No. 15T.

To overcome the difficulties faced by the dealers as well as
the staff of the Sales Tax office at Mazgaon, procedure for obtaining the
statutory declarations/ forms such as ‘C’, ‘H’ and ‘F’ have been streamlined
wherein certain days have been allocated for certain tasks and certain officers
are also dedicated for this purpose. The timings and days as per new procedure
are summarised as under :

It may be noted that there would no change for dealers making
on-line application as well as dealers outside Mumbai city and suburbs. The new
procedure would apply from 28-4-2008.

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Uncertainty over CST rate cut : Maharashtra Govt. asks dealers to continue collecting 3% on interstate sales : Trade Circular No. 14T of 2008, dated 15-4-2008.

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M-VAT

27 Uncertainty over CST rate cut :
Maharashtra Govt. asks dealers to continue collecting 3% on interstate sales :
Trade Circular No. 14T of 2008, dated 15-4-2008.

The Finance Minister in the Budget speech has informed the
reduction in the CST rate from 3% to 2% with effect from 1-4-2008. However, a
Notification giving effect to such change is yet not issued. Hence the
Maharashtra Government has advised dealers to deduct CST @ 3% till the
Notification for reduction in the rate is issued and gazetted.

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Refund of Service Tax paid on taxable services : Instruction F. No. 341/15/2007-TRU, dated 17-4-2008.

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26 Refund of Service Tax paid on taxable
services : Instruction F. No. 341/15/2007-TRU, dated 17-4-2008.


The Board has issued instructions for refund claims of
Service Tax paid on taxable services which could be attributable to exports, but
which are not input services, stating that the refund claims need to be
processed within 30 days of filing of the application by the exporter. In case
it is not processed within the set time limit, the matter needs to be reported
by the Commissioners to the Chief Commissioners in prescribed format by 10th of
every month. Further in case the matter is not settled within 45 days of filing,
then the matter needs to be escalated to the Member (Service Tax).

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Clarification regarding Service Tax Refund for export of services : Policy Circular No. 1 (RE-08)/2004-2009, dated 11-4-2008.

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Service tax :


25 Clarification regarding Service Tax
Refund for export of services : Policy Circular No.
1 (RE-08)/2004-2009, dated 11-4-2008.


In addition to the various Circulars that have been notified
in the recent past pursuant to the decision to refund/exempt Service Tax on
export of services, further clarifications have been issued as under :



  •  Services which would be exempt from Service Tax include participation in
    exhibition outside India, services availed outside the country such as Customs
    House Agent (CHA) Services, Accountancy Services, etc.



  •  For the newly introduced service ‘Foreign exchange dealer’, there would be no
    Service Tax on exports as well as imports.



  •  Clearing and forwarding agency, handling of exports cargo would not be liable
    to Service Tax



  • In case there are new areas notified for levy of Service tax, simultaneous
    refund notifications would also be issued for exports wherever proper linkages
    can be established.


 

 

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Exemption limit for small service providers increased from 8 lacs to 10 lacs with effect from 1 April, 2008 : Notification No. 8/2008-Service Tax, dated 1-3-2008.

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Service tax


 

8 Exemption limit for small service providers
increased from 8 lacs to 10 lacs with effect from 1 April, 2008 : Notification
No. 8/2008-Service Tax, dated 1-3-2008.

 

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Service Tax not applicable on commission paid to Managing Director/Director : Circular No. 115/08/2009-ST, dated 31-7-2009.

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Part B : Indirect Taxes

 Updates in VAT and Service Tax :

Service Tax UPDATE

Circulars

  1. Service Tax not applicable on commission paid to Managing
    Director/Director : Circular No. 115/08/2009-ST, dated 31-7-2009.

It is clarified that remunerations paid to Managing
Director/Directors of companies, whether whole-time or independent, when being
compensated for their performance as Managing Director/Directors would not be
liable to Service Tax.

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Instruction No. 1829, dated 21st September 1989 laying down guidelines for determining taxability of non-residents from execution of power projects on a turnkey basis stand withdrawn — Instruction No. 5, dated 20-7-2009 (reproduced).

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79. 


Instruction No. 1829, dated 21st September 1989 laying down guidelines for
determining taxability of non-residents from execution of power projects on a
turnkey basis stand withdrawn — Instruction No. 5, dated 20-7-2009 (reproduced).


Instruction No 1829, dated 21-9-1989 (hereinafter called ‘the instruction’)
issued by the Central Board of Direct Taxes deals with the taxability of income
arising to non-residents from the execution of power projects on turnkey basis
involving activities to be carried out in India as well as outside India. The
Instruction analyses a hypothetical situation and taxability thereof. The
Instruction lays down the basis of taxation with regard to the four activities
listed therein. With regard to the activity relating to profits from sale of
equipments and materials on FOB basis, delivered at port outside India, where
the payments are also made outside India, it instructs that on the given facts
no part of the income will be deemed to accrue or arise in India.


2. This Instruction was issued in 1989 with regard to execution of power
projects on turnkey basis with certain specified features. Further, the
Instruction quite clearly covers a specific situation in which there is actually
a consortium of foreign companies.


3. In practice, however, the assessees rely on the Instruction for not only the
power projects but other projects as well. Further, a single project is split
into various components like offshore supply of equipments/services, onshore
supply equipments and onshore services. Sometimes, the contract is split even
when only one contractor/supplier bid for the project. In such cases the
contract is split into various components to be executed by the bidder and its
associate concerns. Thus consortium of foreign companies is not in existence,
but is created to take advantage of the Instruction. This is not the same case
as ‘consortium of foreign companies’ envisaged in the Instruction.


4. It is also noticed that most of the profit is loaded in the offshore supply
and the payments for the Indian portion of the contracts barely meet the
expenses resulting into either losses in India or very low profit. The Assessing
Officer’s attempt to apportion profit correctly into various components of the
overall project on the basis of functions, risks and assets is often resisted by
the assessee taking recourse to the Instruction. Further, even if it is proved
that a part of the operations relating to supplies have taken place in India or
the permanent establishment of the assessee had a role in offshore supply, the
profit from offshore supply is claimed to be exempt under the Instruction.


5. Thus the Instruction which was originally intended for only a particular type
of turnkey power project, for a given situation, is being relied upon by
assessees in all cases, in all situations, to align their business operation in
a manner to avoid payment of taxes in India, This was never the purpose of
issuance of this Instruction. Accordingly, the Central Board of Direct Taxes
hereby withdraws the Instruction No. 1829, dated 21-9-1989 with immediate
effect.


6. It is clarified that the withdrawal of Instruction will not in any way
prejudice the plea of the Income-tax Department, in any appeal, reference or
petition, that the Instruction No. 1829 does not apply to a particular case on
the given facts even though it was in force at the time of making the
assessment.


7. This may be brought to the knowledge of all officers within your region.

 

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Works Contract (Composition Scheme for Payment of Service Tax Amendment) Rules, 2008 : Notification No. 7/2008-Service Tax, dated 1-3-2008.

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Service tax


 7 Works Contract (Composition Scheme for
Payment of Service Tax Amendment) Rules, 2008 : Notification No. 7/2008-Service
Tax, dated 1-3-2008.

The rate prescribed for optional scheme for payment of
Service Tax for works contract service has been enhanced from the present rate
of 2% of the total value of the contract to 4% of the total value of the
contract.

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Taxation of Services (Provided from outside India and received in India) Rules, 2006 : Notification No. 6/2008-Service Tax, dated 1-3-2008.

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Service tax


6 Taxation of Services (Provided from outside
India and received in India) Rules, 2006 : Notification No. 6/2008-Service Tax,
dated 1-3-2008.

Under the reverse charge method, provision of notified
services through Internet, etc. in relation to any goods or materials or any
immovable property, as the case may be, situated in India at the time of
provision of service, whether or not partly performed outside India, shall be
treated as performed in India and leviable to Service Tax.

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Export of Services (Amendment) Rules, 2008 : Notification No. 5/2008-Service Tax, dated 1-3-2008.

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Service tax

5 Export of Services (Amendment) Rules, 2008
: Notification No. 5/2008-Service Tax, dated 1-3-2008.

Export of service rules have been amended to consider
services including management, maintenance or repair, technical testing and
analysis and technical inspection and certification services which are provided
remotely through Internet or an electronic network including a computer network
or any other means, in relation to any goods or materials or any immovable
property, situated outside India at the time of provision of service, whether or
not partly performed in India, shall be treated as performed outside India and
treated as export of service.

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Service Tax (Amendment) Rules, 2008 : Notification No. 4/2008-Service Tax dated 1-3-2008.

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Service tax

4 Service Tax (Amendment) Rules, 2008 :
Notification No. 4/2008-Service Tax dated 1-3-2008.

The following major amendments have been carried out by this
notification :


à
The Board has allowed payment of advance Service Tax, provided intimation is
submitted with the jurisdictional office and in the next return of Service
Tax, the said advance tax is duly disclosed.

à
Self-adjustment of excess service tax paid is enhanced from Rs.50000 up to
Rs.1 lakh for a relevant month or quarter, as the case may be.

à
Period for filing of revised return has been increased from sixty days to
ninety days.

à
Penalty for late filing of return may be reduced or waived by the concerned
officer on being satisfied that there was reasonable cause for delay.

 


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Clarification issued by the Finance Ministry on retrospective amendment to S. 271(1)(c) : Press Release BSC/SS/GN-67/08 dated 14-3-2008.

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3 Clarification issued by the Finance
Ministry on retrospective amendment to S. 271(1)(c) : Press Release BSC/SS/GN-67/08
dated 14-3-2008.


It has been clarified that the amendment has been made only
to settle the contrary views expressed by different Courts. However,
retrospective amendment will not prejudice taxpayers’ right to agitate the levy
of penalty on merits. Further, while no separate satisfaction is required to be
recorded before initiating penalty proceedings, it is still incumbent upon the
Assessing Officer to record his satisfaction before levying the penalty.
Accordingly, there is neither violation of the principle of natural justice, nor
any prejudice caused to the taxpayer as a result of the retrospective amendment.

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Clarification regarding transactions under Securities Lending and Borrowing Scheme issued by SEBI : Circular No. 2/2008, dated 22-2-2008.

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2 Clarification regarding transactions under
Securities Lending and Borrowing Scheme issued by SEBI : Circular No. 2/2008,
dated 22-2-2008.


It has been clarified that the exemption under Section 47(xv)
of the Act would apply to transfers/ transactions under the new scheme notified
by SEBI vide Circular No. MRD/DoP/SE/DEP/Cir. 14/2007, dated 20-12-2007.
Consequently there would be no capital gains liability on these transfers/
transactions. Also securities transaction tax would not be levied on these
transactions.

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Explanatory notes to the provisions of the Finance Act, 2007 : Circular no. 3/ 2008, dated 12-3-2008

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1 Explanatory notes to the provisions of the
Finance Act, 2007 : Circular no. 3/ 2008, dated 12-3-2008.


A detailed Circular has been issued by the CBDT to clarify as
well as explain the amendments made by the Finance Act, 2007 i.e., the
Budget of last year.

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Section 37(1)- Amount paid towards discharge of corporate guarantee obligation, which guarantee was issued for its subsidiary company and was in the interest of the assessee’s business, is allowable as a deduction while computing `Business Income’.

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45 2009-TIOL- 783-ITAT- MAD

ACIT vs. W S Industries (India)
Ltd.

ITA No. 1373/Mds/2008

Assessment Year: 2004-05.
Date of Order: 21.8.2009

Section 37(1)- Amount paid
towards discharge of corporate guarantee obligation, which guarantee was issued
for its subsidiary company and was in the interest of the assessee’s business,
is allowable as a deduction while computing `Business Income’.

Facts:

The assessee was engaged in the business of manufacturing
electro porcelain products. W. S. Telesystems (WSTL), a subsidiary of the
assessee, was supplying to the assessee the material required by the assessee
for executing its contracts. For this purpose, the assessee used to make
advances to WSTL from time to time. Over a period of time, amounts aggregating
to Rs 6.11 crores were advanced by the assessee in excess of the amounts billed.
The assessee had issued corporate guarantees in respect of borrowings of WSTL
from ICICI, Central Bank of India and Kirloskar Finance Ltd. Upon WSTL becoming
sick and being under the threat of invocation of guarantees, the assessee
entered into a onetime settlement with the lenders of WSTL, whom the assessee
had given corporate guarantees and paid amounts aggregating to Rs 13.07 crores
in consideration of discharge of corporate guarantees. Thus, a total Rs 19.18
crores was shown as receivable from WSTL. Upon closure of the WSTL factory and
WSTL becoming sick, the assessee, with the approval of the High Court of Madras,
u/s 391 of the Companies Act, 1956, debited the sum of Rs 19.18 crores to share
premium account in the books of the company, but claimed it as a deduction in
the course of assessment. The Assessing Officer (AO) allowed the deduction of Rs
6.11 crores, but did not allow the deduction of Rs 13.07 crores.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
allowed the deduction of Rs 13.07 crores towards discharge of corporate
guarantee obligation.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

Giving corporate guarantee was one of the objects under the
Memorandum of Association; and also since the subsidiary company was supplying
materials which were important for the assessee’s business, the action of giving
corporate guarantee as well as advances was held to be incidental to the
assessee’s business, and a commercially expedient decision. The Tribunal
observed that when the writing off of advances has been allowed as a deduction,
there is no reason why the amount paid towards discharge of corporate guarantee
should be treated any differently. Incurrence of expenditure was incidental to
the interest of the business of the assessee.

The appeal filed by the Revenue was dismissed.

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Section 45(3)- Provisions of S. 45(3) are attracted even when an asset held as stock-in-trade is introduced by an assessee into a partnership firm as its capital contribution.

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44 2010-TIOL-16-ITAT-D-L-SB
DLF Universal Ltd vs DCIT

ITA No. 3622/Del/1995

Assessment Year: 1992-93.
Date of Order – 4.1.2010

Section 45(3)- Provisions of S.
45(3) are attracted even when an asset held as stock-in-trade is introduced by
an assessee into a partnership firm as its capital contribution.

Facts:

The assessee was engaged in the business of real estate
development. The assessee held land costing Rs 4.40 crores as its
stock-in-trade. Vide a Memorandum of Partnership executed on 23rd March, 1992,
the assessee entered into a partnership with four of its subsidiaries and one
individual. The assessee contributed all its rights in the five plots of land to
the newly constituted partnership firm in which the assessee became a partner
with 76% share. The rights of the assessee in the land so contributed became the
property of the firm from 16th March, 1992. A sum of Rs 11.50 crores,
representing the market value of the land, was credited by the partnership firm
to the capital account of the assessee. The assessee credited its ‘profit and
loss’ account with Rs 6.01 crores, the sum being the difference between market
value of the land introduced into the firm and its book value. However, in the
return of income filed by the assessee, this sum of Rs 6.01 crores was claimed
to be not taxable on the ground that the introduction of an asset into a
partnership firm does not constitute sale. In support of its contention, the
assessee placed reliance on the decision of the Apex Court in the case of Hind
Construction Ltd. (83 ITR 211)(SC). The AO and the CIT (A), relying on the ratio
of the decision of the Apex Court in the case of Sunil Siddharthbhai, taxed this
amount.

Aggrieved, the assessee preferred an appeal to the Tribunal.

The Special Bench of the Tribunal, by the majority, held as
follows:

Held:



(i) The Apex Court has in the case of Sunil Siddharthbhai
held that when a partner introduces his asset into a firm as capital
contribution, there is a `transfer’, though the gains are not chargeable to
tax, as the consideration is not determinable. The Apex Court has clarified
that this principle does not apply if the partnership was non-genuine or a
sham or where the transaction of transferring personal assets to the
partnership firm was a device or ruse to convert personal assets into money
while evading tax on capital gains.

(ii) The bench, upon having noted that the assessee had
encashed its stock-in-trade and had derived gains, held that going by facts —
though there was no material to hold that the partnership was non-genuine or
sham — the assessee had adopted a calculated device of converting land into
money by withdrawing substantial sums from the firm and debiting the same to
its current account. Accordingly, the contribution by the assessee of its
personal land to the capital of the firm was a device or ruse for converting
land into money for its benefit. Thus, the entry of Rs 11.50 crores being the
value of land credited in the assessee’s capital account was not imaginary or
notional. The surplus was chargeable to tax.

(iii) S. 45(3) applies when a capital asset is introduced
into a firm as capital contribution. S. 45(3) applies also when stock-in-trade
is introduced into a firm. The transaction of introducing stock-in-trade into
a firm is on capital account. At the point of time of introduction, the
stock-in-trade does not retain its character as stock-in-trade. This is also
shown by the fact that the assessee revalued the stock-in-trade to its market
value prior to introduction into the firm. Consequently, the gains on such
transfer are taxable u/s 45(3);

(iv) As regards the contention whether the AO, after having
assessed the gain as business profits, is entitled to urge before the Tribunal
that the gains should be assessed as capital gains u/s 45(3), it held in the
affirmative for the reason that this is merely an alternative argument on the
same set of facts and not making out of a new case against the assessee. The
bench noted that in Sumit Bhattacharya 112 ITD 1 (Mum)(SB), it was held that
the Tribunal was competent to change the head of income even at the instance
of the respondent.

(v) The surplus to the assessee from the contribution of
land to the firm as capital was held to be assessable u/s 45(3). Even
otherwise, the surplus was taxable as the transaction was a colorable device.
Without prejudice, if it was held that the land should be treated as
stock-in-trade, the surplus is assessable as business income.

 


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S. 2(22)(e) — Whether deemed dividend can be assessed in hands of person other than a shareholder of lender — Held, No — Whether words ‘such shareholder’ in S. 2(22)(e) refer to shareholder who is both registered and also beneficial — Held, Yes.

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32 2008 TIOL 641 ITAT Mum-SB


ACIT v. Bhaumik Colour Pvt. Ltd.

ITA No. 5030/Mum./2004

A.Y. : 1997-98. Dated : 19-11-2008

S. 2(22)(e) of the Income-tax Act, 1961 — Assessee received
interest-bearing loan of Rs.9 lakhs from Umesh Pencils Pvt. Ltd. (UPPL) —
Narmadaben Nandlal Trust (NMT), a shareholder holding 20% shares in assessee
company held 10% shares in UPPL — Trustees of NMT were the registered
shareholders in both the companies, but the beneficiaries of NMT were different
from the trustees – Assessing Officer taxed the amount of loan received by
assessee as deemed dividend u/s.2(22)(e) — Whether deemed dividend can be
assessed in the hands of a person other than a shareholder of the lender — Held,
No — Whether the words ‘such shareholder’ in S. 2(22)(e) of the Act refer to a
shareholder who is both the registered shareholder and also the beneficial
shareholder — Held, Yes.

 

Facts :

Bhaumik Colour Pvt. Ltd. (BCPL), the assessee, was a company
engaged in the business of manufacture of pencil-paints. The assessee took an
interest-bearing loan of Rs.9 lakhs from UPPL. The AO found that though the
assessee was not a shareholder of UPPL, both the companies had one common
shareholder i.e., NNT. The said trust was holding 20% shares in
assessee-company i.e., holding substantial interest and 10% shares in
UPPL. The shares were held by the trust in the name of three trustees for and on
behalf of the trust and the beneficiaries of the trust were five in number and
none of the trustees was the beneficiary of the trust. The AO was of the view
that this transaction was covered by the second limb of provisions of S.
2(22)(e) of the Act. The AO taxed the sum of Rs.9 lakhs in the hands of the
assessee. The CIT(A) deleted the addition made by the AO for the reason that NNT
was not beneficial shareholder of shares in BCPL or UPPL and therefore the
second limb of the provisions of S. 2(22)(e) could not be applied vis-à-vis
the assessee. Aggrieved by the order of the CIT(A), the Revenue preferred an
appeal to the Tribunal. The Division Bench noted that there was a direct
conflict between the decisions in Nikko Technologies (I) Pvt. Ltd. and Seamist
Properties (P) Ltd., and was, therefore, of the opinion that the matter should
be heard by a Special Bench on the following questions :

(a) Whether deemed dividend u/s.2(22)(e) of the Act, can be
assessed in the hands of a person other than a shareholder of the lendor ?

(b) Whether the words ‘such shareholder’ occurring in S.
2(22)(e) refer to a shareholder who is both the ‘registered’ shareholder and
also the ‘beneficial’ shareholder ?

The Special Bench held as under :

(1) The provisions of S. 2(22)(e) of the Act, and the
provisions of S. 2(6A)(e) of the Income-tax Act, 1922 were considered. The
Bench analysed the amendments made in S. 2(22)(e) from time to time and
observed that under the 1922 Act, two categories of payment were considered as
dividend viz. (a) any payment by way of advances or loan to a
shareholder was considered as dividend paid to the shareholder, or (b) any
payment by any such company on behalf of or for the individual benefit of a
shareholder was considered as dividend. In the 1961 Act, the very same two
categories of payment were considered as dividend but an additional condition
that payment should be to a shareholder being a person who is the beneficial
owner of shares and who has a substantial interest in the company viz.,
share-holding which carries not less than twenty percent of the voting power,
was introduced.

(2) The Apex Court has in the case of C. P. Sarathy
Mudaliar (83 ITR 170), while dealing with provisions of S. 2(6A)(e),
(synonymous to the provisions of S. 2(22)(e) of the 1961 Act,) held that when
the Act speaks of shareholder, it refers to the registered shareholder. This
decision was followed by the Apex Court in Rameshwarlal Sanwarmal (122 ITR 1).
It is clear from these pronouncements that to attract the first limb of S.
2(22)(e), the payment must be to a person who is a registered holder of
shares.

(3) The word ‘shareholder’ is followed by the words ‘being
a person who is the beneficial owner of shares’. These provisions do not
substitute the aforesaid requirement to a requirement of merely holding a
beneficial interest in the shares without being a registered holder of shares.
Thus the expression ‘shareholder being a person who is the beneficial owner of
shares’ referred first time in S. 2(22)(e) means both a registered shareholder
and beneficial shareholder. If a person is a registered shareholder but not
the beneficial shareholder or vice versa, then the provisions of S.
2(22)(e) will not apply.

(4) There are divergent views on this issue of the person
in whose hands dividend is to be taxed viz. the ‘concern’ or the
‘shareholder’. The Rajasthan High Court in the case of Hotel Hilltop (217 CTR
527), held that the liability of tax, as deemed dividend, could be attracted
in the hands of the ‘shareholder’ and not the ‘concern’.

(5) The provisions of S. 2(22)(e) do not spell out as to
whether the income has to be taxed in the hands of the shareholder or the
concern. Since the provisions are ambiguous, the intention behind enacting the
provisions of S. 2(22)(e) should be examined. The intention of the Legislature
is to tax dividend only in the hands of the shareholder and not in the hands
of the concern.

(6) The decision of the Apex Court in the case of Kantilal
Manilal (41 ITR 275), explained the basic characteristic of dividend.
Provisions of S. 206 of the Companies Act prohibits payment of dividend to
persons other than shareholders and in the case of Nalin Beharilal (74 ITR
849), the Apex Court considered what can come within the artificial definition
of dividend u/s.2(22).

S. 36(1)(va), S. 43B, S. 37(1) — Delayed payment of employees contribution to PF/ESIC beyond the grace period but before due date of filing return of income is allowable. Unrecoverable advances made for purchase of capital asset are allowable as revenue e

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(Full texts
of the following Tribunal decisions are available at the Society’s office on
written request. For members desiring that the Society mails a copy to them,
Rs.30 per decision will be charged for photocopying and postage.)

 




3. Pik Pen Private Ltd. v. ITO


ITAT ‘C’ Bench, Mumbai

Before P. M. Jagtap (AM) and

R. S. Padvekar (JM)

ITA No. 6847/Mum./2008

A.Y. : 2005-06. Decided on : 28-1-2010

Counsel for assessee/revenue : K. Shivaram/ Chandra
Ramakrishnan

S. 36(1)(va), S. 43B, S. 37(1) — Delayed payment of employees
contribution to PF/ESIC beyond the grace period but before due date of filing
return of income is allowable. Unrecoverable advances made for purchase of
capital asset are allowable as revenue expenditure u/s.37(1).

Per R. S. Padvekar :

Facts I :

The assessee made payment of employees contribution to PF/ESIC
for the month of February, beyond the grace period but before due date of filing
return of income. The Assessing Officer (AO) disallowed the payment of Rs.43,721
u/s.36(1)(va) as he was of the opinion that the employees’ contribution to PF/ESIC
even if made before filing of the return of income is not covered u/s.43B of the
Act.

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

Facts II :

The assessee had debited a sum of Rs.2,96,135 which
represented advances made for purchase of machinery, but since the machinery was
not supplied the unrecovered amount of advances was written off and treated as
revenue expenditure allowable u/s. 37(1) of the Act. The Assessing Officer (AO)
was of the view that since the advances were made for purchase of capital asset,
un-recovered amount of advances represented a capital loss and was not
allowable. He disallowed the sum of Rs.2,96,135.

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 I :

In the case of Alom Extrusion Ltd. 319 ITR 306 (SC) it has
been held that the omission of the second proviso to S. 43B of the Act by the
Finance Act, 2003 operated retrospectively w.e.f. 1-4-1988. In the said case
also, the issue was concerning the contribution payable by the employer to the
PF/Superannuation Fund or any other fund for the welfare of the employees. The
Court held that the contribution paid before due date of filing return of income
is allowable. Consequently, the Tribunal held that the issue is covered in
favour of the assessee and the deduction is allowable.

Held II :

The Tribunal following the principles laid down by the
Rajasthan High Court in the case of CIT v. Anjanikumar Co. Ltd., (259 ITR 114)
decided the issue in favour of the assessee and deleted the addition by treating
the write-off as revenue expenditure u/s.37(1) of the Act, as admittedly, no
capital asset came into existence. This ground was decided in favour of the
assessee.

 

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S. 40(b) — Remuneration to working partner as per the partnership deed — Partnership deed gave power to modify the terms of remuneration — Whether the existence of such term would render remuneration not qualified for deduction — Held, No.

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(Full texts
of the following Tribunal decisions are available at the Society’s office on
written request. For members desiring that the Society mails a copy to them,
Rs.30 per decision will be charged for photocopying and postage.)

 



2. Shabro International v. Addl. CIT


ITAT ‘E’ Bench, Mumbai

Before R. S. Sayal (AM) and

V. Durga Rao (JM)

ITA No. 6629/Mum./2008

A.Y. : 2005-06. Decided on : 20-3-2010

Counsel for assessee/revenue : Pradip Kapasi/ A. K. Kadam

S. 40(b) — Remuneration to working partner as per the
partnership deed — Partnership deed gave power to modify the terms of
remuneration — Whether the existence of such term would render remuneration not
qualified for deduction — Held, No.

Per R. S. Sayal :

Facts :

The assessee, a firm, executed a supplementary partnership
deed on 20-6-2004 to provide for the payment of interest and remuneration to the
working partners. As per the deed, the remuneration was to be calculated as a
percentage of the profit as per S. 40(b) of the Act. One of the clauses in the
deed further provided that the partners may decide to pay remuneration at a
lower amount or not to pay remuneration or to pay remuneration on any other
criteria or ratio. According to the AO, as explained in Circular No. 739, dated
25-3-1996, since the partnership deed did not contain a specific provision for
calculating the amount of remuneration, no remuneration was allowable. He
further held that in any case, the remuneration for the period till 20-6-2004,
since it pertained to the period prior to the date of the execution of the deed,
cannot be allowed. The CIT(A) on appeal upheld the order of the AO.

Held :

According to the Tribunal, the Board Circular referred to by
the Tribunal required that either the remuneration payable to each of the
working partners is laid down in the deed or the deed must lay down the manner
of ascertaining such remuneration. Referring to the supplementary deed, the
Tribunal noted that the deed did provide the manner of quantifying the
remuneration to the partners. According to the Tribunal, the presence of clause
3(d) which empowered the partners to lower the remuneration or to not pay the
remuneration, did not erase the other clauses which clearly laid down the amount
of remuneration payable. It further observed that even in the absence of the
said clause 3(d), the partners had the power to alter the remuneration payable.
Accordingly, the orders of the lower authorities were modified to the said
extent.

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S. 41(1) — Remission or cessation of liability — Receipt of advance money against order remaining unclaimed — Creditor under liquidation — Whether AO justified in treating the unclaimed sum as income — Held, No.

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New Page 2

(Full texts
of the following Tribunal decisions are available at the Society’s office on
written request. For members desiring that the Society mails a copy to them,
Rs.30 per decision will be charged for photocopying and postage.)

 

1. Nash Machines & Electronics Pvt. Ltd. v.
Jt. CIT

ITAT ’A’ Bench, Pune

Before Mukul Shrawat (JM) and

D. Karunakara Rao (AM)

ITA Nos. 163/PN/2008

A.Y. : 2004-05. Decided on : 30-11-2009

Counsel for assessee/revenue : C. N. Vaze/

Amrinder Kumar

S. 41(1) — Remission or cessation of liability — Receipt of
advance money against order remaining unclaimed — Creditor under liquidation —
Whether AO justified in treating the unclaimed sum as income — Held, No.

Per Mukul Shrawat :

Facts :

The assessee had received the sum of Rs.36.33 lacs in the F.Y.
1996-97 from a party called PMA Ltd. as advance against sales. Before the
assessee could supply the material, PMA went into liquidation. The last
correspondence with the party was in February 1999 when a liquidator informed
the assessee about the fact of liquidation.

Applying the ratio of the decision of the Supreme Court in
the case of T. V. Sundaram Iyenger & Sons Ltd., of the Chennai High Court in the
case of Aries Advertising Pvt. Ltd. and of the Delhi High Court in the case of
State Corporation of India Ltd., the AO treated the said unclaimed amount as the
income of the assessee. On appeal the CIT(A) agreed with the order of the AO and
noted that since the amount remained unpaid for a long period, it assumed the
character of trade receipt taxable u/s.41(1) of the Act. He also relied on the
decision of the Karnataka High Court in the case of Mysore Thermo Electric Pvt.
Ltd.

Held :

According to the Tribunal, the provisions of S. 41 would
apply where an allowance or deduction had been made of loss or expenditure in
the assessment of earlier year and in any subsequent years the assessee availed
the benefit by way of remission or cessation of such trading liability. In the
case of the assessee, the impugned amount was not of the character of ‘trading
liability’ for which the assessee had ever obtained any benefit or deduction or
allowance in any of the past years. Further, there was no evidence or any
specific communication to indicate the remission or waiver of debt by the
creditor. Hence, according to the Tribunal, the provisions of S. 41(1) were not
applicable. For the purpose it also relied on the decisions of the Calcutta High
Court in the case of S. K. Bhagat & Co. and of the Rajasthan High Court in the
case of Shree Pipes Ltd. According to it, all the decisions relied on by the
lower authorities were distinguishable on facts and hence, not applicable to the
case of the assessee.

Cases referred to :


1. S. K. Bhagat & Co. v. CIT, 275 ITR 464 (Cal.);

2. CIT v. Shree Pipes Ltd., 301 ITR 240 (Raj.);

3. U. B. Engineering Ltd., ITA No. 1368/PN/06 dated
31-8-2009;

4. T. V. Sundaram Iyenger & Sons Ltd., 222 ITR 344 (SC);

5. CIT v. Aries Advertising Pvt. Ltd., 255 ITR 510 (Mad.);

6. CIT v. State Corporation of India Ltd., 247 ITR 114
(Del.);

7. Mysore Thermo Electric Pvt. Ltd. v. CIT, 221 ITR
504 (Kar.)




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Income-tax Act, 1961 — S. 32(1)(ii) — Depreciation on Intangible Assets — Payment for Non-compete fees — Whether by payment of non-compete fees the assessee can be said to have acquired a commercial or business right similar to the intangible assets enume

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6 ITO v. Medicorp Technologies India Ltd.

ITAT ‘A’ Bench, Chennai

Before H. S. Sidhu (JM) and Ahmad Fareed (AM) ITA No. 2328/Mds./2007

A.Y. : 2002-03. Decided on : 16-1-2009
Counsel for revenue/assessee : Shahji P. Jacob/ K. Ravi

Income-tax Act, 1961 — S. 32(1)(ii) — Depreciation on Intangible Assets — Payment for Non-compete fees — Whether by payment of non-compete fees the assessee can be said to have acquired a commercial or business right similar to the intangible assets enumerated in S. 32(1)(ii)of the Act — Held, Yes. Whether claim of depreciation is admissible on non-compete fees paid by the assessee — Held, Yes.

Facts :

The assessee-company was in the business of manufacture and distribution of bulk drugs and intermediaries, and exporting these products to the USA, Canada, Europe and Australia. Another company, Medispan Limited (MS) was engaged in the business of development and production of medical and pharmaceutical formulations and had been exporting it to various South American, African and South-East Asian countries. The assessee with an intention to expand its market reach to South American and African countries, for its own products as well as for other formulations, drugs and medicines, entered into an agreement dated 12-7-2000, whereby MS agreed to transfer the business and activities of its export division to assessee for a consideration of Rs.5.33 crores. Clause III of the agreement inter alia provided for break-up of various components of the consideration of Rs.5.33 crores. It was provided that the consideration of Rs.5.33 crores comprises Rs.2 crores towards compensation for MS accepting noncompete obligation in respect of export of bulk drugs, pharmaceutical products and formulations. In the computation of total income filed along with the return of income, the assessee had claimed the payment of Rs.2 crores towards non-compete obligation as revenue expenditure. The AO rejected the claim. The assessee made an alternative claim before the AO that depreciation be allowed u/s.32(1) of the Act on the non-compete fee. The AO rejected this claim also. The CIT(A) held that depreciation on this sum of Rs.2 crores be granted u/s.32(1) of the Act. Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal considered the legislative history and scope of the provisions dealing with the benefit of ‘depreciation’ under the Act. It noted that the scope of S. 32(1) was widened by the Finance Act, 1999 by allowing depreciation in respect of ‘intangible assets’ w.e.f. 1-4-1999. This has been achieved by introducing clause (ii) in S. 32(1) of the Act. Prior to this, depreciation was allowable only in respect of ‘tangible assets’ viz. buildings, machinery, plant or furniture. It stated that the words ‘being intangible assets’ appear in clause (ii) by way of a nomenclature, to contradistinguish the items appearing in clause (ii) from those appearing in clause (i). It noted that the provisions of S. 32(1)(ii) w.e.f. 1-4-1999 not only extended the benefit of S. 32 to the ‘intangible assets’ but also gave therein an ‘inclusive’ definition of the ‘intangible assets’, for this purpose. It stated that one can say that clause (ii) contains an ‘inclusive’ definition of ‘intangible assets’, for the purpose of S. 32.

The Tribunal found that it was an admitted fact that the payment of Rs.2 crores was made by the asses-see-company to ward off competition in the export business which was acquired by it from MS. Therefore, it concluded that what was acquired by the assessee by paying this amount of Rs.2 crores was a business/commercial right. It observed that it is clear from the language of clause (ii) of S. 32(1) that each of the terms, know-how, patents, copyright, trade mark, licences, or franchises represents a ‘business or a commercial right’. It then proceeded to examine the ‘nature’ of these business/commercial rights and compared their ‘nature’ with the ‘nature’ of the impugned business/commercial right which was acquired by the assessee and concluded that in the case of copyright, trade mark, licence, and franchises also the owners have exclusive business/ commercial rights, and if there is a breach they can sue. It held that similar was the nature of the impugned right acquired by the assessee. It further stated that if the business/commercial right of a patent, copyright, trademark, licence and franchise fulfils the conditions of being intangible asset, then surely the impugned business/commercial right acquired by the assessee also fulfils that condition by way of a logical corollary. The decision of Madras Tribunal in the case of A. B. Mauria India Pvt. Ltd. was held to be not applicable in the facts of the present case. The Tribunal held that the payment of Rs.2 crores made by the assessee under agreement dated 12-7-2000 to ward off competition was a business/commercial right which was similar in nature to copyright, trade mark, licence and franchises and therefore qualified for depreciation u/s.32(1)(ii) of the Act. The Tribunal observed that the decision of ITAT, Chennai, in the case of A. B. Mauria India Pvt. Ltd., on which reliance was placed on behalf of the Revenue, does not support the case of the Department on the facts of the case in the present appeal.

Case referred to :

1. A. B. Mauria India Pvt. Ltd. (ITA No. 1293/ Mds./2006, dated 23-11-2007)

 

S. 133A of the Income-tax Act, 1961 — Whether an addition can be sustained merely on the basis of statement made at the time of Survey — Held, No.

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5 Dy. CIT v. Premsons

ITAT ‘B’ Bench, Mumbai
Before R. S. Syal (AM) and Asha Vijayaraghavan (JM) ITA No. 4698/Mum./2006

A.Y. : 2003-04. Decided on : 15-1-2009 Counsel for revenue/assessee : Pitambar Das/ Reepal Tralshawala

S. 133A of the Income-tax Act, 1961 — Whether an addition can be sustained merely on the basis of statement made at the time of Survey — Held, No.

Per R. S. Syal :

Facts :

A survey action u/s.133A of the Act was conducted on the office premises of the assessee along with its two sister concerns on 15-1-2003. During the course of survey, physical stock in the case of the assessee was found to be excessive by Rs.21,14,146. Statement of Mr. Bharat Gala, partner of the assessee firm, was recorded. The assessee admitted to surrender a sum of Rs.50 lakhs as additional income over and above the income recorded in the books of accounts with the following bifurcation :

Towards excess stock Rs.21 lakhs

Towards any other discrepancy Rs.29 lakhs

After the close of survey but before the close of the year the assessee retracted from the surrender made during survey, vide its letter dated 24-3-2003. The assessee mentioned in its letter that the surrender was obtained forcefully by the survey team.

The assessee filed its return of income declaring total income of Rs.25,20,483 which included the surrender of Rs.21.14 lakhs towards difference in closing stock. The remaining portion of Rs.28.85 lakhs agreed by the assessee at the time of survey was not offered for taxation.

While assessing the total income of the assessee, the AO held that retraction was an after thought and further since the assessee had not maintained quantitative stock register, it was not possible to check the sales and purchases of different items dealt in by it. He also held that accounting of sales was such that it was open to manipulation. He, therefore, made an addition of Rs.28.85 lakhs.

The CIT(A) held that the books of accounts ought not to have been rejected and also the addition of Rs.28.85 lakhs was deleted by him. Aggrieved, the Revenue preferred an appeal to the Tribunal on these two grounds.

Held :

As regards rejection of the books of accounts by the AO, the Tribunal held that the books of accounts can be said to be properly maintained when correct income can be deduced therefrom. It is not only the arithmetical inaccuracy in the books of accounts which would call for the resorting to the provisions of S. 145(3). Since during the course of survey physical stock was found to be excessive as compared to the books of accounts, the Tribunal held that the books of accounts were rightly rejected by the AO.

As regards the addition of Rs.28.85 lakhs, the Tribunal noted that the real question before it was whether addition can be sustained simply on the basis of statement recorded at the time of survey. The Tribunal noted that the Kerala High Court has in the case of Paul Mathew & Sons held that addition cannot be sustained simply on the basis of statement recorded at the time of survey. The Madras High Court has in the case of S. Khader Khan Son, held that S. 133A does not empower any Income-tax authority to examine any person on oath and hence such a statement has no evidentiary value. The Tribunal also observed that the Circular dated 10-3-2003 issued by the CBDT which makes it clear that no attempt should be made to obtain undue confession from the assessee during search or survey proceedings is indicative of the fact that the Department is also not oblivious of the practice by which the Revenue Authorities obtain undue confession from the assessee during search or survey. The Tribunal held that in view of the verdict of the two High Courts and the position reaffirmed by the CBDT through its Circular, it is abundantly clear that no addition can be made or sustained simply on the basis of statement recorded at the time of survey/search. It further held that in order to make an addition on the basis of surrender during search or survey, it is sine qua non that there should be some other material to correlate the undisclosed income with such statement. The Tribunal noted that the surrender to the extent of Rs.28.85 lakhs was specifically ‘towards other discrepancy’. The assessment order had no mention of any such discrepancy found as a result of survey throwing light on undisclosed income. There was nothing on record which could correlate such income offered by the assessee during the course of survey with any other discrepancy. The Tribunal was of the view that there is no basis for sustaining the addition in question.

Cases referred to :

  •     Paul Mathew & Sons v. CIT, (2003) 263 ITR 101 (Ker.)
  •     CIT v. S. Khader Khan Son, (2008) 300 ITR 157 (Mad.)

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for concealment — Claim made under bona fide belief rejected and penalty imposed — Whether penalty can be levied — Held, No.

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4 Kisanlal Sarda v. ACIT

ITAT Pune Bench ‘A’ Pune
Before Pramod Kumar (AM) and Mukul Shrawat (JM) ITA No. 241/PN/2006


A.Y. : 1994-95. Decided on : 29-8-2008 Counsel for assessee/revenue : B. V. Jhaveri/
S. Bains

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for concealment — Claim made under bona fide belief rejected and penalty imposed — Whether penalty can be levied — Held, No.

Per Mukul Shrawat :

Facts :

The case before the Tribunal was about a penalty being levied on account of the claim of inadmissible higher rate of depreciation. The facts of the case were, the assessee in the earlier two years had claimed depreciation @ 40% in respect of two vehicles which were given on hire and the same was allowed. The assessee’s claim for the same in the year under appeal was negatived by the AO on the ground that during the year, the main activity of the assessee was not that of running the vehicles on hire, hence he was entitled to depreciation @ 25% only. On appeal the CIT(A) confirmed the AO’s order. For claiming depreciation at the higher rate, the AO levied penalty of Rs.4.68 lacs, which was confirmed by the CIT(A).

Before the Tribunal the Revenue relied on the decision of the Bombay High Court in the case of Ramesh Chandra & Co. and contended that once the addition was accepted by not filing appeal against the same, the assessee has no right to challenge the levy of penalty.

Held :

The Tribunal noted that the claim by the assessee of depreciation at the higher rate was based on the advice given by his chartered accountant. Secondly, it was not the case of the Revenue that there was a deliberate attempt to conceal the vital facts of the case pertaining to the claim of depreciation, and all the necessary information on the basis of which the correct claim of depreciation had to be allowed was on record and furnished by the assessee. Accordingly, relying on the ratio in the decisions listed at S. Nos. 2 to 6 below, it held in favour of the assessee. Further, it also referred to the recent Supreme Court decision in the case of Dilip N. Shroff, where in the context of the penalty u/s.271(1)(c), the Court had observed that the AO was required to arrive at a finding that the explanation offered by the assessee was false. Based on the same, the Tribunal reversed the orders of the authorities below and allowed the appeal.

Cases referred to :

  •     Dilip N. Shroff 291 ITR 519 (SC)
  •     Orion Travels Pvt. Ltd. v. ACIT, 87 TTJ 246 (Mum.)
  •     Kalyani Enterprises v. ACIT, 86 TTJ 767 (Mad.)
  •     ITO v. Tolaram Phusanan, 88 TTJ 1040
  •     Udan Research & Flying Institute Pvt. Ltd. v. JCIT, (2007) 17 SOT 494 (Mum.)
  •     ACIT v. Malhotra Mukesh Satpal, (2008) 113 TTJ 401 (Pune)

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Income-tax Act, 1961 — S. 50C — Whether provisions of S. 50C are applicable only in respect of computation of income under the head ‘Income from Capital Gains’ and that the said Section cannot be invoked where the income is assessed as business income und

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3 Inderlok Hotels Pvt. Ltd. v. ITO, Circle 5(2)(1)
ITAT ‘I’ Bench, Mumbai
Before A. L. Gehlot (AM) and R. S. Padvekar (JM)
ITA No. 4376/Mum./2008

A.Y. : 2005-06. Decided on : 5-2-2009 Counsel for assessee/revenue : A. H. Dalal / S. K. Singh

Income-tax Act, 1961 — S. 50C — Whether provisions of S. 50C are applicable only in respect of computation of income under the head ‘Income from Capital Gains’ and that the said Section cannot be invoked where the income is assessed as business income under the head ‘profits and gains of business or profession’ — Held, Yes.

Per R. S. Padvekar : Facts :

The assessee had constructed a building on land held by it as stock-in-trade. During the previous year relevant to the assessment year under consideration two flats in the building constructed by the asses-see were sold for a consideration of Rs.60 lakhs and Rs.40 lakhs, respectively. The Stamp Authorities had for the purposes of levy of stamp duty valued the flats at Rs.78,41,500 and Rs.72,81,456, respectively. The assessee accepted the valuation done by the Stamp Authorities. The assessee declared profit @ 8% of the sale price. The profit declared by the assessee was offered for taxation under the head ‘Income from Business’. The AO assessed profit arising on sale of these two flats under the head ‘Income from Business’, but made an addition of Rs.51,22,956. This amount represented the difference between valuation adopted for the purpose of the stamp duty and actual sale consideration shown by the assessee. The CIT(A) confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted S. 50C deals with transfer of a ‘capital asset’ being land or building or both and it provides for replacing the value adopted or assessed for the purpose of stamp duty more particularly u/s.48 of the Act in place of value or sale consideration shown by the assessee if it is lower than the value adopted or assessed for the purpose of levy of stamp duty. It observed that the expression ‘capital asset’ has specific relevance with S. 45 which provides for taxing gain on transfer of ‘capital asset’ as capital gain. The Tribunal upon consideration of the language of the provisions of S. 50C of the Act and also the intention of insertion of the provisions of S. 50C as mentioned in the Explanatory Circular No. 8, dated 27-8-2002 issued by the CBDT, held that there should not be any cloud of doubt that S. 50C has application only to the extent of determining sale consideration for computation of capital gain and it cannot be applied for determining the income under other heads.

 

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S. 80IB of the Income-tax Act, 1961 — Whether income from DEPB and drawback eligible for deduction — Held, Yes.

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2 ACIT v. Podar Associates
ITAT ‘B’ Bench, Jaipur
Before I. C. Sudhir (JM) and B. P. Jain (AM) ITA No. 579/JP/2008

A.Y. : 2003-04. Decided on : 13-8-2008 Counsel for revenue/assessee : Jai Singh/ Mahendra Gargieya

S. 80IB of the Income-tax Act, 1961 — Whether income from DEPB and drawback eligible for deduction — Held, Yes.

Per B. P. Jain :

Facts :

One of the issues before the Tribunal was about the allowability of deduction u/s.80IB with respect to income earned by way of DEPB and drawback. The CIT(A) had held in favour of the assessee.

Held :

The Tribunal agreed with the assessee that the income from DEPB and drawback went to reduce the cost of purchase and therefore, income to that extent was derived from the eligible undertaking. According to it, a similar view was expressed by the Gujarat High Court in the case of India Gelatine and Chemical Ltd. where the Court had also distinguished the decision in the case of Cambay Electric Supply Co. Ltd.. Further, it also referred to the provisions of S. 28(iiid), whereunder such receipt is treated as business profit. Accordingly, relying on the decisions of the Jaipur Bench of the Tribunal in the case of Vijay Industries and in the case of Garment Craft India Ltd. and also on the Delhi High Court decision in the case of Eltek SGS Pvt. Ltd., it upheld the order of the CIT(A).

Cases referred to :

  1. CIT v. India Gelatine and Chemical Ltd., 275 ITR 284 (Guj.);


  2. Vijay Industries (ITA No. 247/JP/05 dated 29-6-2007);


  3. Garment Craft India Ltd. (ITA No. 105/JP/06 dated 28-9-2007);


  4. CIT v. Eltek SGS Pvt. Ltd., 300 ITR 06 (Del.);


  5. Cambay Electric Supply Co. Ltd., 113 ITR 84 (SC)

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Rule 8D read with S. 14A of the Income-tax Act, 1961 — Expenditure disallowable with reference to exempt income — Disallowed expenditure is the subject matter of appeal before the Tribunal — Whether Revenue justified in its contention to apply the ratio o

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1 ACIT v. Indexport Ltd.
ITAT ‘D’ Bench, Mumbai
Before Sushma Chowla (JM) and Abraham P. George (AM) ITA Nos. 1941 and 2200/Mum./2004

A.Y. : 2000-01. Decided on : 29-1-2009 Counsel for revenue/assessee : Sanjay Agarwal/ Nishant Thakkar

Rule 8D read with S. 14A of the Income-tax Act, 1961 — Expenditure disallowable with reference to exempt income — Disallowed expenditure is the subject matter of appeal before the Tribunal — Whether Revenue justified in its contention to apply the ratio of the Special Bench decision rendered in the matter — Held, Yes but the disallowance cannot exceed the amount originally disallowed by the AO.

Per Sushma Chowla :

Facts :

One of the issues before the Tribunal was regarding the disallowance of expenditure u/s.14A. The AO had disallowed the aggregate sum of Rs.15.2 lacs consisting of interest of Rs.8.46 lacs and other expenses of Rs.6.74 lacs under the said provisions of S. 14A. The interest amount was computed by applying the ratio of investment attributable to tax-free income earned by the assessee to total investments, including the current assets, to the sum of interest paid by the assessee. The other expenses were estimated at 10% of the total of other expenses incurred by the assessee. On appeal, the CIT(A) gave partial relief by restricting the disallowance of other expenses at 5% of the total of such expense. Being aggrieved with the order of the CIT(A) qua the other expenses, the assessee as well as the Revenue, both appealed before the Tribunal.

Before the Tribunal, the Revenue challenged the order of the CIT(A) in giving partial relief to the assessee and also sought to apply the ratio of the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd. in support of its contention for the enhanced sum of disallowance.

Held :

The Tribunal noted that the Special Bench in the case of Daga Capital Management Pvt. Ltd. has held that the provisions of Rule 8D are explanatory in nature and are applicable to all the pending cases. Therefore, even though the Tribunals in the case of the assessee in respect of the earlier years had fully allowed the expenses incurred, including the interest paid, following the Special Bench decision, it remitted back the matter to the AO with a direction to recalculate the disallowance. However, the order passed was with a condition that the amount of disallowance should not exceed the amount originally disallowed by the AO.

Case referred to :

ITO v. Daga Capital Management Pvt. Ltd., 26 SOT 603 (Mum.) (SB)

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S. 272A(2)(e) : No penalty imposable where net income before deduction u/s.11 below taxable limit

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Tribunal News

1) Hitesh D. Gajaria v. ACIT


ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 992/Mum./2007

A.Y. : 2003-04. Decided on : 22-2-2008

Counsel for assessee/revenue : Deepak Shah/

Manvendra Goyal

S. 271B r.w. S. 44AB of the Income-tax Act, 1961 — Penalty
for failure to get accounts audited — Assessee, a chartered accountant by
profession, being proprietor and also a partner in a firm — Gross receipts
excluding his share of income from the firm was less than Rs.10 lacs — Penalty
imposed for failure to get the accounts audited — Whether AO justified — Held,
No.

Per P. Madhavi Devi :

Facts :

The assessee was a chartered accountant by profession. He had
a proprietory concern besides being a partner in Bharat S. Raut & Co. During the
year, he received share of profit and remuneration from the said firm, each of
which was more than Rs.10 lacs. However, the gross receipts earned by his
proprietary concern were less than Rs.10 lacs. According to the AO, the
provisions of S. 44AB were applicable. However, the assessee relying on the
opinion of the senior counsel contended that partner’s allocated amounts were
not gross receipts as contemplated in S. 44AB and accordingly, he was not
required to get the accounts audited. However, the AO did not agree and levied a
penalty u/s.271B r.w. S. 274 of the Act. On appeal, the CIT(A) confirmed the
AO’s order.

Held :

The Tribunal noted that assessee’s major income was not from
profession, but from the share of his profit from the professional firm.
According to it, share of profit cannot be equated with income from profession.
Further, it noted that the assessee had relied on the opinion of the senior
counsel, where-in it was opined that it was not necessary to get the accounts
audited. Therefore, relying on the Jodhpur Bench decision in the case of Dr.
Sunderlal Surana, the Tribunal held that the assessee had reasonable cause for
the failure to get his accounts audited as required u/s.44AB of the Act.
Accordingly, the penalty imposed by the lower authorities was deleted.

Case referred to :


Dr. Sunderlal Surana v. ITO, (2006) 105 TTJ (Jd) 907


2) ITO
v.
Lalitaben B. Kapadia



ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 8763/Mum./2004

A.Y. : 2001-02. Decided on : 20-9-2007

Counsel for assessee/revenue : N. R. Agarwal/

Milind Bhusari

S. 55A of the Income-tax Act, 1961 — Reference to
Valuation Officer — Value returned by the assessee was more than the fair market
value arrived at by the Valuation Officer and accepted by the AO — Whether
action of the AO in making reference to the Valuer justifiable — Held, No.


Per P. Madhavi Devi :

Facts :

The assessee had returned income under the head long-term
capital gain from the sale of immovable property. For the purpose, the assessee
had shown fair market value (FMV) as on 1-4-1981 as Rs.10 lacs. U/s.55A, the AO
made reference to the Valuation Officer who valued the property at Rs.6.6 lacs
as on the said date. On appeal, the CIT(A) took the FMV at Rs.9.36 lacs. Being
aggrieved, the Revenue appealed before the Tribunal.

Held :

According to the Tribunal, reference u/s.55A could be made
only if the AO was of the opinion that the value returned by the assessee was
less than its FMV. The act of the AO in accepting the valuation made u/s.55A,
which was undoubtedly less than the FMV claimed by the assessee, proved that the
AO was of the opinion that the assessee’s claim was more than its FMV. Thus,
according to the Tribunal, the AO was not justified in making reference to the
Valuation Officer. Therefore, relying on the decision of the Mumbai Tribunal in
the case of Rubab M. Kazerani, the Tribunal dismissed the appeal filed by the
Revenue.

Case referred to :


Rubab M. Kazerani v. JCIT, 97 TTJ (TM) 698 (Mum.)


3. Manisha R. Chheda v. ITa Mukesh P. Chheda v. ITa ITAT ‘B’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and P. Madhavi Devi OM) ITA No. 5961 and 5962/Mum./2004
A.Y. : 2001-02. Decided on: 17-8-2007 Counsel for assessee/revenue: Pradeep Kapasi/ Chet Ram

s. 263 of the Income-tax Act, 1961 – Power to revise AO’s order – AO making certain additions to the income returned – Whether the Commissioner has power to revise AO’s order in order to sustain the addition but on different reasons – Held, No.

Per J. Sudhakar Reddy:

Facts:

In their return of income filed, both the assessees had returned besides other income, income from agriculture. According to the AO, the assessees had not proved with evidence that they were engaged in agricultural activities. Therefore, the income so declared was treated by the AO as income from other sources.

According to the CIT, the reasons for additions given by the AO were grossly inappropriate and inadequate for sustaining the additions. In order to strengthen the case of the Revenue, he held both the orders passed by the AO as erroneous and prejudicial to the interest of the Revenue. Accordingly, he directed the AO to make fresh assessment. The assessees challenged the orders passed by the CIT before the TribunaL

Held:

According to the Tribunal, the crr wanted to indicate the same thing what the AO had indicated, but for different reasons. It further observed that an order u/ s.263 cannot be passed for giving additional reasons or substituting reasons by a higher authority to support the same cause. According to it, when the AO had in fact rejected the claim of the assessee, it cannot be said that any prejudice was caused to the Revenue. Merely because the CIT was not happy with the reasons given by the AO, the same did not give jurisdiction to invoke the powers conferred on him u/ s.263. The Tribunal further observed that once an addition was made, the issue if appealed against, travelled to the First Appellate Authority whose powers were co-terminus with that of the Assessing Officer. The first appellate authority, according to the Tribunal, can always, if he feels that the reasoning given by the Assessing Officer was not sufficient, strengthen the order by giving his own reasons, if the situation so permitted. If the assessees did not carry the matter in appeal, the assessment orders attain finality. Thus, it was noted that, in either case, the scheme of the Act does not permit the supervisory Commissioner to give additional reasons for supporting the same additions that had been made by the AO.

For the reasons stated as above, the Tribunal quashed both the orders passed by the CIT u/ s.263 and allowed the appeals filed by the assessee.

4. Boon Industries v. ITO ITAT ‘K’ Bench, Mumbai Before O. K. Narayanan (AM) and Sushma Chowla OM) ITA No. 6736 and  6737/Mum./2006 A.Ys. : 1998-99 & 1999-2000. Decided on: 27-11-2007

Counsel  for assessee Zrevenue :

Prakash  Jhunjhunwala/Malathi Sridharan

S. 271(1)(b) read with S. 142(1) and S. 143(2) of the Income-tax Act, 1961 – Penalty for non-compliance with notices issued – On the facts held that penalty cannot be imposed.

Per O. K. Narayanan:

Held:

The penalty of Rs.0.2 lac each imposed for the years under appeal for non-compliance of statutory no-tices issued u/s.142(1) and S. 143(2) were deleted by the TribunaL According to it, it cannot be said that the assessee was indifferent in the matter and did not co-operate with the assessing authorities, when it complied with the requirements twelve times out of the sixteen times. It further held that the non-compliance cannot be said to be willful when the time given to the assessee to attend be-fore the AO was only four to six days. According to it, the failure of the assessee to sought adjournment or inform the AO was not that much material in the light of the conduct of the assessee by appearing before the AO for not  less  than twelve times.

5. Jayram Rajgopal Poduval v. ACIT ITAT ‘H’ Bench, Mumbai Before R. S. Syal (AM) and Sushma Chowla OM) ITA No.  7072/M/2004 AY. : 2001-02. Decided on:    18-1-2008 Counsel for assessee/revenue: Rajan Vora/ B. K. Singh

S. 6(6) of the Income tax Act, 1961 – Resident but not ordinarily resident – Whether the two conditions specified in the provisions are cumulative – Held, No.

Per  R. S. Syal :

Facts:

The  assessee’s stay in India in the  preceding 10 years was as under:


According to the AO, the assessee was not ‘non-resident’ in 9 out of 10 years and had also resided in India for more than 730 days in the preceding 7 years. Hence, he held that the status of the assessee was ‘Resident and ordinarily resident’ (ROR). According to the CIT(A), in order that a person could be considered as Resident but not ordinarily resident (RNOR), he must fulfil the following two conditions given in S. 6(6)(a) viz. :

  •     He has not been resident in India in nine out of the ten previous years; and


  •     He has not during the seven previous years preceding that year been in India for a period of 730 days or more.

 
Since the assessee’s stay in India was for more than 730 days in the 7 preceding years, he, relying on the decision of the Gujarat High Court in the case of Pradeep J. Mehta, dismissed the appeal filed by the assessee.

Held:

The Tribunal noted that the provisions of S. 6(6)(a) uses the term ‘or’ and not ‘and’ between the two conditions given therein. Accordingly, the person would be considered as RNOR if he complies with either of the two conditions given therein. It dis-agreed with the CIT(A) that in order to qualify as RNOR, the assessee should fulfil both the condi-tions. In the case of the assessee, since he was not resident in India in nine out of ten previous years, his status would be that of RNOR. In support it also relied on the decision of the Apex Court in the case 4 of Morgenstern Werner.

Cases referred to :

1. Cl’T and Another v. Morgenstern Werner, (2003) 259 ITR 486 (SC)
2. PradeepJ. Mehta v. CIT, (2202) 256 ITR 647 (Guj.)

Note: The provisions of S. 6(6) have been substituted by the Finance Act, 2003 w.e.f. 1-4-2004. As per the substituted provisions, in order to qualify as RNOR, the person should be non-resident in nine out of ten previous years. The other alternative condition remains unchanged.


6. Innerwheel Club of Bombay v. ADIT ITAT ‘e’ Bench, Mumbai Before O. K. Narayanan (AM) and P. Madhavi Devi OM) ITA No.  4855/Mum.l2003

AY. : 1999-2000.  Decided on: 12-10-2007 Counsel for assessee/revenue: Jayesh Dadia/ J. K. Garg

S. 272A(2)(e) r.w. S. 139(4A) of the Income-tax Act, 1961 – Penalty for failure to file return of income – Net income before claiming deduction u/s.11 be-low the taxable limit – Whether AO justified in levying penalty for delay in filing of return – Held, No.

Per  P. Madhavi Devi  :

Facts:

The assessee was a public charitable trust eligible for deduction u/s.ll. During the year under appeal, its gross total income was Rs.0.71 lac and after deducting establishment expenses of Rs.0.7Iac, the surplus remained was only Rs.353. It filed its return of income on 15-5-2000. For delay in filing return of income, the AO imposed a penalty of Rs.13,500 which was confirmed by the CIT(A).

Held:

The Tribunal noted that the AO had not rejected the audited accounts of the assessee. And as per the accounts, the net income of the assessee was below taxable limit even before claiming deduction u/s.11.
 
Therefore, relying on the decision of the Mumbai Tribunal in the case of Durgadevimata and of the Delhi Tribunal in the case of Purakh Chand Askaran Pugella Charitable Trust, the Tribunal held that the AO was not justified in levying penalty.

Cases  referred to:

1. Durgadevimata  v. lTG,  (ITA No. 36/M/2000)
2. Purakh Chand Askaran Pugella Charitable Trust, 124 Taxman (Mag) 74 (Del.)

S. 6(6) : The two conditions specified in the provision are not cumulative

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5) Jayram Rajgopal Poduval
v. ACIT


ITAT ‘H’ Bench, Mumbai

Before R. S. Syal (AM) and

Sushma Chowla (JM)

ITA No. 7072/M/2004

A.Y. : 2001-02. Decided on : 18-1-2008

Counsel for assessee/revenue : Rajan Vora/

B. K. Singh

S. 6(6) of the Income tax Act, 1961 — Resident but not
ordinarily resident — Whether the two conditions specified in the provisions are
cumulative — Held, No.

Per R. S. Syal :

Facts :

The assessee’s stay in India in the preceding 10 years was as
under :

No.


Assessment Year

No. of
days in India

1.

1991-92

29

2.

1992-93

15

3.

1993-94

23

 

(A)

67

 4.

1994-95

24

5.

1995-96

92

6.

1996-97

366

7.

1997-98

365

8.

1998-99

359

9.


1999-2000

365

10.

2000-01

366

 

(B)


1,937

 

(A)
+ (B)

2004

According to the AO, the assessee was not ‘non-resident’ in 9
out of 10 years and had also resided in India for more than 730 days in the
preceding 7 years. Hence, he held that the status of the assessee was ‘Resident
and ordinarily resident’ (ROR). According to the CIT(A), in order that a person
could be considered as Resident but not ordinarily resident (RNOR), he must
fulfil the following two conditions given in S. 6(6)(a) viz. :

  • He has not been resident in India in nine out of the ten previous years; and

  •     He has not during the seven previous years pre-ceding that year been in India for a period of 730 days or more.

Since the assessee’s stay in India was for more than 730 days in the 7 preceding years, he, relying on the decision of the Gujarat High Court in the case of Pradeep J. Mehta, dismissed the appeal filed by the assessee.

Held:

The Tribunal noted that the provisions of S. 6(6)(a) uses the term ‘or’ and not ‘and’ between the two conditions given therein. Accordingly, the person would be considered as RNOR if he complies with either of the two conditions given therein. It disagreed with the CIT(A) that in order to qualify as RNOR, the assessee should fulfil both the conditions. In the case of the assessee, since he was not resident in India in nine out of ten previous years, his status would be that of RNOR. In support it also relied on the decision of the Apex Court in the case 4 of Morgenstern Werner.

Cases referred to :

    1. CIT and Another v. Morgenstern Werner, (2003) 259 ITR 486 (SC)

    2. PradeepJ. Mehta v. CIT, (2202) 256 ITR 647 (Guj.)

Note: The provisions of S. 6(6) have been substituted by the Finance Act, 2003 w.e.f. 1-4-2004. As per the substituted provisions, in order to qualify as RNOR, the person should be non-resident in nine out of ten previous years. The other alternative condition remains unchanged.


S. 271(1)(b) : Penalty for non-compliance with notices deleted, where inadequate notice given

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4) Boon Industries v. ITO


ITAT ‘K’ Bench, Mumbai

Before O. K. Narayanan (AM) and

Sushma Chowla (JM)

ITA No. 6736 and 6737/Mum./2006

A.Ys. : 1998-99 & 1999-2000. Decided on : 27-11-2007

Counsel for assessee/revenue :

Prakash Jhunjhunwala/Malathi Sridharan

S. 271(1)(b) read with S. 142(1) and S. 143(2) of the
Income-tax Act, 1961 — Penalty for non-compliance with notices issued — On the
facts held that penalty cannot be imposed.

Per O. K. Narayanan :

Held :

The penalty of Rs.0.2 lac each imposed for the years under
appeal for non-compliance of statutory notices issued u/s.142(1) and S. 143(2)
were deleted by the Tribunal. According to it, it cannot be said that the
assessee was indifferent in the matter and did not co-operate with the assessing
authorities, when it complied with the requirements twelve times out of the
sixteen times. It further held that the non-compliance cannot be said to be
willful when the time given to the assessee to attend before the AO was only
four to six days. According to it, the failure of the assessee to sought
adjournment or inform the AO was not that much material in the light of the
conduct of the assessee by appearing before the AO for not less than twelve
times.

 

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S. 263 : Commissioner has no power to revise AO’s order by giving additional reasons for sustaining same additions

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3) Manisha R. Chheda
v.
ITO


Mukesh P. Chheda


v. ITO


ITAT ‘B’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 5961 and 5962/Mum./2004

A.Y. : 2001-02. Decided on : 17-8-2007

Counsel for assessee/revenue : Pradeep Kapasi/

Chet Ram


S. 263 of the Income-tax Act, 1961 — Power to revise AO’s
order — AO making certain additions to the income returned — Whether the
Commissioner has power to revise AO’s order in order to sustain the addition but
on different reasons — Held, No.

Per J. Sudhakar Reddy :

Facts :

In their return of income filed, both the assessees had
returned besides other income, income from agriculture. According to the AO, the
assessees had not proved with evidence that they were engaged in agricultural
activities. Therefore, the income so declared was treated by the AO as income
from other sources.

According to the CIT, the reasons for additions given by the
AO were grossly inappropriate and inadequate for sustaining the additions. In
order to strengthen the case of the Revenue, he held both the orders passed by
the AO as erroneous and prejudicial to the interest of the Revenue. Accordingly,
he directed the AO to make fresh assessment. The assessees challenged the orders
passed by the CIT before the Tribunal.

Held :

According to the Tribunal, the CIT wanted to indicate the
same thing what the AO had indicated, but for different reasons. It further
observed that an order u/s.263 cannot be passed for giving additional reasons or
substituting reasons by a higher authority to support the same cause. According
to it, when the AO had in fact rejected the claim of the assessee, it cannot be
said that any prejudice was caused to the Revenue. Merely because the CIT was
not happy with the reasons given by the AO, the same did not give jurisdiction
to invoke the powers conferred on him u/s.263. The Tribunal further observed
that once an addition was made, the issue if appealed against, travelled to the
First Appellate Authority whose powers were co-terminus with that of the
Assessing Officer. The first appellate authority, according to the Tribunal, can
always, if he feels that the reasoning given by the Assessing Officer was not
sufficient, strengthen the order by giving his own reasons, if the situation so
permitted. If the assessees did not carry the matter in appeal, the assessment
orders attain finality. Thus, it was noted that, in either case, the scheme of
the Act does not permit the supervisory Commissioner to give additional reasons
for supporting the same additions that had been made by the AO.

For the reasons stated as above, the Tribunal quashed both
the orders passed by the CIT u/s.263 and allowed the appeals filed by the
assessee.




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S. 55A : AO cannot make reference to valuation officer when value returned as at 1-4-1981 is more than fair market value determined by valuation officer

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2) ITO
v.
Lalitaben B. Kapadia



ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 8763/Mum./2004

A.Y. : 2001-02. Decided on : 20-9-2007

Counsel for assessee/revenue : N. R. Agarwal/

Milind Bhusari


S. 55A of the Income-tax Act, 1961 — Reference to
Valuation Officer — Value returned by the assessee was more than the fair market
value arrived at by the Valuation Officer and accepted by the AO — Whether
action of the AO in making reference to the Valuer justifiable — Held, No.

Per P. Madhavi Devi :


Facts :

The assessee had returned income under the head long-term
capital gain from the sale of immovable property. For the purpose, the assessee
had shown fair market value (FMV) as on 1-4-1981 as Rs.10 lacs. U/s.55A, the AO
made reference to the Valuation Officer who valued the property at Rs.6.6 lacs
as on the said date. On appeal, the CIT(A) took the FMV at Rs.9.36 lacs. Being
aggrieved, the Revenue appealed before the Tribunal.

Held :

According to the Tribunal, reference u/s.55A could be made
only if the AO was of the opinion that the value returned by the assessee was
less than its FMV. The act of the AO in accepting the valuation made u/s.55A,
which was undoubtedly less than the FMV claimed by the assessee, proved that the
AO was of the opinion that the assessee’s claim was more than its FMV. Thus,
according to the Tribunal, the AO was not justified in making reference to the
Valuation Officer. Therefore, relying on the decision of the Mumbai Tribunal in
the case of Rubab M. Kazerani, the Tribunal dismissed the appeal filed by the
Revenue.

Case referred to :


Rubab M. Kazerani v. JCIT, 97 TTJ (TM) 698 (Mum.)


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Revision in powers of adjudication of Central Excise Officers in Service Tax cases — Circular No. 130/12/2010-ST, dated 20-9-2010.

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SERVICE TAX UPDATE

 

16. Revision in powers of adjudication of Central Excise
Officers in Service Tax cases — Circular No. 130/12/2010-ST, dated 20-9-2010.

By this Circular, Superintendents have been vested with powers to adjudicate
the cases upto the monetary limits determined in this behalf and uniform
monetary limits for adjudication of cases u/s.73 and u/s.83A of the Finance Act,
1994 have been revised and given in the Circular in a tabular form.

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Classification of New Services notified through Finance Act, 2010 under Export of Services Rules, 2005 — Circular No. 129/11/2010-ST, dated 21-9-2010.

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SERVICE TAX UPDATE

 

15. Classification of New Services notified through Finance
Act, 2010 under Export of Services Rules, 2005 — Circular No. 129/11/2010-ST,
dated 21-9-2010.


To resolve the doubts raised by the service tax payers
regarding classification of new services introduced by the Finance Act, 2010,
the CBEC has clarified that all the new services shall fall in category 3(iii)
of the Export of Services Rules, 2005 and Taxation of Services (Provided from
Outside India and Received in India) Rules, 2006 popularly known as Import
Rules, 2006. Consequently for services to be classified as an eligible export,
the same must be provided to a service recipient located outside India and for
services to be classified as import of service the same must be provided from
outside India to a service recipient located in India.

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Mid-Day Meal Scheme — Outdoor catering service provided by a NGO exempted — Notification No. 47/2010, dated 3-9-2010.

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SERVICE TAX UPDATE

 

14. Mid-Day Meal Scheme — Outdoor catering service provided
by a NGO exempted — Notification No. 47/2010, dated 3-9-2010.

By this Notification, outdoor catering services provided by a
NGO registered under any Central or State Act, under the Centrally assisted
Mid-Day Meal Scheme are exempted.

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Fresh Guidelines for Grant and Disbursement of Refunds — Circular No. 22T of 2010, dated 5-10-2010.

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MVAT UPDATE


MVAT CIRCULARS

13. Fresh Guidelines for Grant and Disbursement of Refunds —
Circular No. 22T of 2010, dated 5-10-2010.

In suppression of all the earlier circulars relating to grant
of refunds, this Circular is now issued giving detailed guidelines for grant and
disbursement of refunds.

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Mandatory E-Payment under MVAT and CST Acts, for Quarterly Return filers — Circular No. 21T of 2010, dated 27-9-2010.

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MVAT UPDATE


MVAT CIRCULARS

12. Mandatory E-Payment under MVAT and CST Acts, for
Quarterly Return filers — Circular No. 21T of 2010, dated 27-9-2010.

This Circular explains procedure step by step in detail to be
followed by a Quarterly Return Filer for mandatory electronic tax payment under
MVAT Act, 2002 & CST Act, 1956 with effect from 1st October, 2010.

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Set-off on Import Licences, etc. — Notification No. VAT.1510/CR.109-A/Taxation-1, dated 20-12-2010.

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Part B : INDIRECT TAXES


74 Set-off on Import Licences, etc. — Notification No.
VAT.1510/CR.109-A/Taxation-1, dated 20-12-2010.

Rule 54(f)(i) has been amended and set-off has been allowed
on Import Licences including Special Import Licences, Duty-Free Advance Licences
and any other Scrips issued under the Foreign Trade Policy, from time to time
under the Foreign Trade Development & Regulation Act, 1992 described in Entry 3
and on Export Permit or licence or quota described in Entry 4 of Notification
under Schedule Entry C-39.


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Schedule Entry C-39 to include import licences — Notification No. VAT.1510/CR.109/Taxation-1, dated 20-12-2010.

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Part B : INDIRECT TAXES


73 Schedule Entry C-39 to include import licences —
Notification No. VAT.1510/CR.109/Taxation-1, dated 20-12-2010.

Vide this Notification, Notified List in Schedule Entry C-39
for goods of incorporeal nature or intangible character, has been amended. Entry
3 has been substituted by Import Licences including Special Import Licence,
Duty-Free Advance Licence and any other Scrips issued under the Foreign Trade
Policy, from time to time under the Foreign Trade Development & Regulation Act,
1992. Entry No. 6 for credit of Duty Entitlement Pass Book, Entry No. 13 for
credit of Duty-Free Replenishment Certificate and Entry No. 14 for credits of
Duty Free Import Authorisation (DFIA) have been deleted w.e.f. 1-1-2011.


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E-payment — Notification No. VAT.1510/CR.165/Taxation-1, dated 20-12-2010.

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Part B : INDIRECT TAXES


72 E-payment — Notification No. VAT.1510/CR.165/Taxation-1,
dated 20-12-2010.

Every registered dealer liable to file six-monthly returns
shall make payment electronically w.e.f. 31-3-2011 under the MVAT Act, 2002.

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Due date for submission of Audit Report for 2009-10 extended — Trade Circular 3T of 2011, dated 31-1-2011.

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Part B : INDIRECT TAXES


MVAT UPDATE

71 Due date for submission of Audit Report for 2009-10
extended — Trade Circular 3T of 2011, dated 31-1-2011.

Due date for submission of MVAT Audit Report in Form 704 for
the period 2009-10 has been extended from 31st January, 2011 to 15th February,
2011 and due date for statement of submission of audit report in Form 704 along
with required documents would be 25th February, 2011.

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Fumigation of Export Cargo not a taxable service — Circular No. 132/1/2011-ST, dated 12-1-2011

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Part B : INDIRECT TAXES


70 Fumigation of Export Cargo not a taxable service —
Circular No. 132/1/2011-ST, dated 12-1-2011.

By this Circular, it has been clarified that Fumigation of
Export cargo is not a taxable service under ‘Cleaning Service’ as this service
does not satisfy the statutory definition of ‘Cleaning Activity’ u/s.65(24b).
Further this exclusion is also substantiated by earlier Notification No.
41/2007-ST, dated 6th October 2007 as amended by Notification No. 42/2007, dated
29th November 2007.

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Janata Personal Accident Policy not liable to service tax — Circular No. 133/2/2011-ST, dated 18-1-2011

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Part B : INDIRECT TAXES


SERVICE TAX UPDATE

69 Janata Personal Accident Policy not liable to service tax
— Circular No. 133/2/2011-ST, dated 18-1-2011.

By this Circular it has been clarified that the Janata
Personal Accident Policy is exempt from service tax as this is customised group
insurance scheme floated as per the specifications of State Government to extend
risk cover to target population and to fulfil rural or social sector obligations
prescribed by IRDA.

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Payments made for charter hire charges to a non resident shipping company for transporting merchandise from one foreign port to another foreign port is not royalty chargeable to tax in term of provision of S. 9 of the Act.

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  1. M/s. ACIT v. Kin Ship Services India (P) Ltd.



(Cochin) (31 SOT 375)

S. 9, S. 40(a)(i), S. 195, Income-tax Act

A.Y. : 2004-05. Dated : 26-3-2009

Issue :

Payments made for charter hire charges to a non resident
shipping company for transporting merchandise from one foreign port to another
foreign port is not royalty chargeable to tax in term of provision of S. 9 of
the Act.

Facts :

The assessee is engaged in shipping and other related
activities such as stevedoring, clearing and forwarding. During A.Y. 2004-05,
the assessee made certain payments to non resident companies for charter hire
charges.

The Assessing Officer (AO) held that payments made by the
assessee on account of charter hire charges were in the nature royalties and
therefore such payments were taxable in the hands of recipients in term of S.
9(1)(vi) of the Act. The AO disallowed the payment by invoking provisions of
S. 40(a)(i) of the Act by alleging that the assessee failed to deduct tax at
source.

The assessee contended that the payments made for charter
ship hire is not in the nature of royalty. It was claimed that the assessee
had not acquired any right on the foreign ships nor had it acquired any
property in the ship by chartering it. The ships were hired following
international chartering protocol for transporting merchandise from foreign
port to another foreign port and hence the payments cannot be held to be in
the nature of royalty.

The CIT(A) accepted the contentions of the assessee by
relying on the ruling in the case of Ind Telesoft (P) Ltd. (267 ITR 725) (AAR
New Delhi).

Held :

The ITAT held :

(a) The payments made by the assessee company were in the
nature of payments for chartering ships on hire for doing the business
outside India. The payments did not satisfy the test laid down in S. 9 of
the Income-tax Act, 1961.

(b) To constitute royalty, payments have to be for use of
specified assets. The tribunal concluded that the ship hire charges did not
satisfy this test by observing :

‘Royalty means consideration for the transfer of all or
any rights in respect of a patent, invention, model design, secret formula
or processes or trade mark or similar property. A plain reading makes it
clear that the charter ship hire payments made by the assessee do not fall
under the above category. The royalty also means consideration for imparting
of any information concerning the working of, or the use of, a patent,
invention, model design, secret formula or process or trade mark or similar
property. The payments made by the assessee do not have nay of these
characteristics.’

(c) The liability to deduct tax at source u/s.195 is cast
on the assessee only when the payment is made to a non-resident which is
chargeable under the provisions of the Income-tax Act. In the present case
since payments made by the assessee do not fall u/s.9 and the payments do
not take the character of any sum chargeable to tax under this Act,
provisions of S. 195 are not applicable.

(d) When S. 195 does not apply, there cannot be a
violation of that section and consequently question of disallowance
u/s.40(a)(i) does not arise.

 

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German company is not liable to pay tax in respect of its supervision activity in India which is expected to last for about 2 months.

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  1. Pintsch Bamag

(AAR) (2009 TIOL 23 ARA IT)

AAR No. 790 of 2008

Dated : 11-9-2009

Issues :

German company is not liable to pay tax in respect of its
supervision activity in India which is expected to last for about 2 months.

Independent sub-contractor’s time is not to be added for
determining threshold for construction of PE.

Article 5, 12, India-Germany Treaty; S. 9(1)(vii),
Income-tax Act.

Facts :

The applicant, a German company, was awarded a contract by
Tuticorin Port Trust (TPT) on 28th November, 2006 through the process of
international bidding.

The scope of work for the contract was ‘work design,
fabrication supply, transportation, delivery, installation and maintenance of
mild steel, navigational channel and fairway buoys, mooring gear and solar
operated navigational lighting equipments’ in relation to Sethu Samudram Ship
Channel Project being executed by TPT in Tamil Nadu.

The applicant sub-contracted certain part of work to
independent third parties in India. Though the agreements with the
sub-contractors were entered into in 2006, formal permission for
sub-contracting was obtained from the TPT in June, 2009.

The following work was to be undertaken by the applicant :

(i) Study of the technical requirements in relation to
the execution of the Contract.

(ii) Designing of Fairway Buoys, Mooring Gears and Solar
Operated Navigational Equipments.

(iii) Supply of critical components to sub-contractors,
if required.

(iv) Supervision of installation of equipments and other
items mentioned in the Main Contract, as and when the installation is
carried out by the sub-contractor.

The scope of work mentioned in point (ii) and (iii) above
was to be executed by the applicant’s office in Germany.

(v) The work at point (iv) was to be carried out in India
and for this purpose two engineers were to be deputed to India. The work was
expected to last for not more than 2 months.

Before the AAR, the applicant contended that as per clause
(i) of Article 5.2 of the India Germany DTAA, it is not expected to have
Permanent Establishment in India and in absence thereof, no part of income is
liable to tax in India. In this regard the applicant placed reliance on the
decision of the Andhra Pradesh High Court in CIT v. Vishakapatnam Port
Trust, (144 ITR 146).

The revenue contended that the sub-contractor is
undertaking various activities which constitute the core of the contract work
entrusted to the applicant. All the activities undertaken by the
sub-contractor are on behalf of the applicant and in connection with the
execution of the contract between the applicant and TPT. As a result, length
of construction of PE needs to be reckoned having regard to time spent by the
sub contractor. Alternatively, place of manufacture of the sub-contractor
constitutes permanent establishment of the applicant itself. Still
alternatively, the revenue contended that length of construction PE needs to
be reckoned.

The revenue authorities also contended that the services
rendered for designing are taxable as fees for technical services under
Article 12.4 of the Indo German DTAA.1

Held :

AAR held :

  • The work/project of the
    applicant are in the nature of construction project. As a consequence,
    article 5.2 gets attracted and therefore duration test of six months
    necessarily applied to determine whether the applicant has taxable presence.

  • AAR referred to and relied on
    earlier ruling in the case of Cal Dive Marine Construction (Mauritius) Ltd.
    315 ITR 334 to conclude that once construction PE clause is attracted,
    minimum period test has to be necessarily applied. The fact that the
    applicant may have a project office or a workshop for the purpose of
    carrying out contract work does not bring the establishment of the applicant
    within the other clauses of Article 5(2) to the exclusion of requirement of
    minimum duration test of construction PE. In case of construction PE, a
    specific provision dealing with construction or assembly project, prevails
    over the other general clauses of Article 5(2). An office or workshop,
    established as a part of or incidental to the execution of a construction or
    assembly project does not alter the minimum period test contemplated by
    construction PE.

  • The fact that sub-contractor
    is only a nominee carrying out the work which otherwise would have been
    performed by the applicant does not transform the workshop of the
    sub-contractor into the PE of the applicant. The sub-contractor cannot be
    treated as a dependent agent of the applicant. Article 5 of the treaty
    regards a place to be a PE only if the applicant carries on business through
    such place. The concept of PE conveys the idea that the enterprise has
    visible presence in the other country. The presence can be either in the
    form of applicant’s own PE or the presence of dependent agent. The
    independent contractor does not satisfy any of these tests.

  • The revenue’s reliance on OECD
    commentary which indicates that the time taken by a sub-contractor needs to
    be added for reckoning threshold of PE of general contractor is limited in
    its application to a situation where the building site is set up by the main
    contractor and the services of the sub-contractor are deployed in aiding the
    execution of such building project with conjoint effort of contractor and
    sub-contractor. In case of the applicant, the sub-contractor carries out
    fabrication and assembly at a place away from the installation site by
    independently running such facility and does not get covered by this
    contingency.

  • The aspect of comprehensive
    responsibility being that of the contractor as also the furnishing of
    performance guarantee by applicant does not alter the legal position above.

S. 142(2A) and S. 142(2C). The amendment to S. 142(2C) by insertion of the words ‘suo moto or’ w.e.f. 1-4-2008 is prospective and prior to this date AO could not grant extension of time except on an application by the assessee.

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  1. Bishan Saroop Ram Kishan Agro Pvt. Ltd. v. DCIT

ITAT ‘A’ Bench, New Delhi

Before K. G. Bhansal (AM) and

George Mathan (JM)

ITA Nos. 3413, 3415, 3416, 3459, 3068 and

3670/Del./2008

A.Ys. : 1999-2000 to 2005-06. Decided on : 18-9-2009

Counsel for assessee/revenue : Rano Jain &

V. Mohan/Pratima Kaushik

S. 142(2A) and S. 142(2C). The amendment to S. 142(2C) by insertion of the words ‘suo moto or’ w.e.f. 1-4-2008 is prospective and prior to this date AO could not grant extension of time except on an application by the assessee.

Per Bench :

Facts :

On 7-10-2004 there was a search action on the assessee. The last panchnama was drawn on 6-12-2004. As per provisions of S. 153B(i), the assessment u/s.153A could be completed upto 31-12-2006. On 12-12-2006, the AO passed an order directing the assessee to get his accounts audited u/s.142(2A) and the time given for filing audit report was 90 days. Thus, due date for furnishing audit report u/s. 142(2A) was 12-3-2007.

Due to alleged non co-operation by the assessee, the AO, at the request of the auditor, vide order dated 7-3-2007 extended time from 12-3-2007 to 20-4-2007. Subsequently, two more extensions, of one month each, were granted vide orders dated 17-4-2007 and 17-5-2007. The audit report was finally submitted on 4-6-2007 and the assessment order was passed on 3-8-2007.

The assessment order passed u/s.153A was challenged on the ground that it was barred by limitation. It was contended that since special audit had been ordered on 12-12-2006 and was to be completed on 12-3-2007 and as per the provisions as they stood at the relevant point of time the AO did not have the power to suo moto extend the time limit for completion of special audit u/s.142(2A). Extension granted by the AO at the request of the auditor resulted into a suo moto extension being granted by the AO. Consequently, as per provisions of S. 153B(1) the time limit for completion of assessment expired on 11-5-2007. Since assessment order was passed on 3-8-2007 it was barred by limitation.

On an appeal to the Tribunal,

Held :

The provisions of S. 142(2A) do not provide for any time limit for completion of the special audit. However, S. 142(2C) specifies that the AO can, at his discretion, give any time limit subject to a maximum of 180 days from the date on which the direction u/s.142(2A) is received by the assessee. The provisions of S. (2A), S. (2B), S. (2C) and S. (2D) of S. 142 are to be read together as a complete code. It cannot be held that the provisions of S. 142(2A) have a stand alone position and are unfettered by S. 142(2C).

The Tribunal noticed that the assessee had not made an application for extension of time. The extension of time granted by the AO, at the request of the auditor, was held to be suo moto action of the AO. The Tribunal on perusal of the memorandum explaining the provisions of the Finance Bill, 2008 as also Circular No. 1 dated 27-3-2008 explaining the amendment to the proviso to S. 142(2C) held that the power to suo moto extend the time limit for completion of audit u/s.142(2A) was available to the AO w.e.f. 1-4-2008 and before such date, the extension could have been made only at the request of the assessee. The extensions granted by the AO were held to be without jurisdiction and accordingly such extensions could not extend the limitation. The exclusion as provided in Explanation (ii) to S. 153B was read to be 90 days being a period between 12-12-2006 to 12-3-2007.

The Tribunal upheld the claim of the assessee that the assessment was barred by limitation.

 

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S. 234C — Interest u/s.234C is not payable if, on the date of payment of advance tax it is not known whether the demerger scheme will be sanctioned or not and from which date it would be sanctioned.

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  1. Ultratech Cement Ltd. v. Dy. CIT



ITAT ‘E’ Bench, Mumbai

Before R. K. Gupta (JM) and

D. Karunakara Rao (AM)

ITA No. 7646 & 7647/Mum./2007

A.Y. : 2004-05. Decided on : 20-8-2009

Counsel for assessee/revenue : Arvind Sonde &

Sampat Kabra/K. K. Das

S. 234C — Interest u/s.234C is not payable if, on the date
of payment of advance tax it is not known whether the demerger scheme will be
sanctioned or not and from which date it would be sanctioned.

Per R. K. Gupta :

Facts :

The assessee, pursuant to a demerger scheme, acquired
cement business of L & T Limited from 1-4-2003. The scheme of demerger was
sanctioned by the Bombay High Court on 22-4-2004 effective from 1-4-2003 as a
result of which the income for the period from 1-4-2003 to 31-3-2004 became
taxable in the hands of the assessee. The assessee had not paid advance tax in
respect of this income. Consequently, the Assessing Officer charged interest
of Rs.44,94,392 u/s.234C.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where it contended that interest is not payable since on the due dates for
payment of advance tax there was no liability to pay tax. It was further
submitted that if the liability to pay advance tax arises on account of
subsequent event, i.e. demerger sanctioned after the end of the
previous year then in such an event it cannot be said that the assessee was
liable to pay advance tax on due dates specified in S. 210. The CIT(A)
dismissed the ground by observing that the assessee was liable for payment of
advance tax u/s.208 with all consequences of law to pay interest u/s.234B and
u/s.234C. He held that since there was a shortfall in payment of installments
of advance tax, liability of interest u/s.234C is automatically attracted.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it was also contended on behalf of the assessee that it was impossible
to pay advance tax as it was not aware whether the demerger scheme would be
sanctioned and if yes, from which date.

Held :

The Tribunal observed that the liability to pay advance tax
in respect of cement business had arisen consequent to the sanction of the
demerger scheme by the Bombay High Court on 22-4-2004 i.e. after the
due dates of payments of advance tax. The Tribunal noted that the tax
liability arising after the date of sanction of the demerger scheme has been
paid by the assessee while filing its return of income along with interest
u/s.234A & B. It held that payment of advance tax in respect of cement
division was an impossible situation. The Mumbai Bench of the Tribunal in the
case of Reliance Energy Ltd. in ITA No. 218/Mum./05 (order dated 24-1-2008)
has after considering several decisions of the Tribunal and discussing the
doctrine of impossibility held that an assessee cannot be forced to do an
impossible task.

S. 48 — Capital gains on sale of land — Land purchased out of borrowed funds — Whether registration charges and interest paid on borrowings eligible for deduction and indexation — Held, Yes.

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  1. Ishtiaque Ahmad v. ACIT



ITAT Bench ‘C’, New Delhi

Before D. R. Singh (JM) and

K. G. Bansal (AM)

ITA No. 863/D/2009

A.Y. : 2002-03. Decided on : 28-8-2009

Counsel for assessee/revenue : J. J. Mehrotra/

D. N. Kar

S. 48 — Capital gains on sale of land — Land purchased out
of borrowed funds — Whether registration charges and interest paid on
borrowings eligible for deduction and indexation — Held, Yes.

Per K. G. Bansal :

Facts :

The assessee had purchased a piece of land in October 2006
out of borrowed funds. The land was sold in the year under appeal. While
returning income as long term capital gains — it claimed registration charges
of Rs.4.63 lacs and the interest paid by him during the years 1997-98 to
2001-02 aggregating to Rs.72 29 lacs, as the cost of improvement. The claim
was disallowed by the AO. On appeal the CIT(A) allowed the claim qua the
registration charges, however, the claim for indexation was denied. In respect
of interest paid, the CIT(A) agreed with the AO and held that the interest
payable on loan taken for acquisition of the land was not part of the cost of
acquisition/improvement.

Held :

The Tribunal noted that the registration charges paid was
treated as cost of improvement of the land and as such allowed as deduction by
the CIT(A). Referring to the provisions of second proviso to S. 48, it agreed
with the submission of the assessee that the provisions contained in clause
(ii) shall have the effect as if for the words ‘cost of acquisition’ and ‘cost
of any improvement’, the words ‘indexed cost of acquisition’ and ‘indexed cost
of any improvement’ had respectively been substituted. Therefore, it was held
that the assessee was entitled to indexation with reference to the
registration charges paid.

In respect of interest paid — the Tribunal agreed with the
assessee that as held by the Delhi High Court in case of CIT v. Mithlesh
Kumari, the actual cost of the asset need not be only those costs incurred
on the date of acquisition. Accordingly, relying on the decision of the Delhi
High Court (supra), it held that interest paid on borrowed funds for
purchase of land after its actual purchase constituted cost of the land. It
further held that in terms of second proviso to S. 48, the cost has to be
indexed for working out the capital gains.

Case referred to :


CIT v. Mithlesh Kumari, (1973) 92 ITR 9 (Del.)

 

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S. 37(1) — Business expenditure — Reimbursement of expenditure incurred in running the school — Whether allowable — Held, Yes.

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  1. Tata International Ltd. v. ACIT



ITAT ‘I’ Bench, Mumbai

Before A. L. Gehlot (AM) and

Sushma Chowla (JM)

ITA No. 5591/M/2005

A.Y. : 1999-2000. Decided on : 11-9-2009

Counsel for assessee/revenue : Dinesh Vyas/

R. P. Meena

S. 37(1) — Business expenditure — Reimbursement of
expenditure incurred in running the school — Whether allowable — Held, Yes.

Per A. L. Gehlot :

Facts :

The assessee was engaged in the business of export. One of
the issues before the Tribunal was regarding the allowability of expenditure
incurred on the maintenance of a school run by TATA at Dewas. The school was
situated at the place where the assessee’s factory was located and substantial
number of students of the school were children of the assessee’s employees.
During the year the assessee had paid the sum of Rs.1,88,540 by way of
reimbursement, part of the expenditure incurred in running the School. The
same was disallowed by the lower authorities.

Held :

According to the Tribunal, the case of the assessee was
covered by the Tribunal decision in the assessee’s own case for the A.Ys.
1992-93, 1993-94 and 1994-95 which was later affirmed in the
assessee’s own case for the A.Ys. 1996-97 to 1998-99. Noting the fact that the
school was situated at the same place where the assessee’s factory was located
and substantial number of students of the school were children of the
assessee’s employees, the expenditure claimed was allowed.

Case referred to :

Tata International Ltd. ITA No. 4823 to 4825/M/2005 dated
26-3-2009.

 

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S. 28, S. 36(1)(vii), S. 37. Amount paid by the assessee under Performance Guarantee Bond is allowable as a business loss/expenditure. Mere fact that the assessee has claimed the amount written off in the course of business as ‘bad debt’ does not preclude

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6. Anang Tradevest Pvt. Ltd. v. ITO

ITAT ‘A’ Bench,
Mumbai

Before D.
Manmohan (VP) and

Abraham George
(AM)

ITA No.
10/Mum./2008

A.Y. : 2003-04.
Decided on : 10-8-2009

Counsel for assessee/revenue :

Prakash Jhunjhunwala/R.
S. Srivastava

S. 28, S.
36(1)(vii), S. 37. Amount paid by the assessee under Performance Guarantee
Bond is allowable as a business loss/expenditure. Mere fact that the assessee
has claimed the amount written off in the course of business as ‘bad debt’
does not preclude him from claiming the same as business loss/expenditure.

Per Abraham P.
George :

Facts :

The assessee, as a
part of its business activity, was introducing certain clients to M/s. Joindre
Capital Services Ltd., who entered into share purchase and sale transactions
for such clients. As per the terms of the agreement entered into between the
assessee and M/s. Joindre Capital Services Pvt. Ltd., assessee had to
indemnify Joindre Capital Services Ltd., in case clients introduced by the
assessee failed to honor any of their commitments.

During the previous
year in respect of three parties, assessee had shown a sum of Rs.11,90,779 as
bad debts written off. The Assessing Officer (AO) held that such claim could
not be allowed since assessee was a sub-broker and the debt was never taken
into account for computing the income of the assessee for the relevant
previous year or any preceding previous years.

The CIT(A) held that
the bad debt written off was rightly disallowed by the AO.

Aggrieved, the
assessee preferred an appeal to the Tribunal where disallowance of bad debt of
Rs. 11,90,779 was taken as a ground. In the course of the hearing, the
assessee withdrew the original ground and by way of an additional ground
claimed that this sum of Rs.11,90,779 paid under a performance guarantee bond
be allowed either as business expenditure u/s.37(1) or as business loss. On
behalf of the assessee it was contended that the Tribunal has in the case of
India Infoline Securities (P) Ltd. v. ACIT, (25 SOT 123) (Mum.) held
that losses incurred by an assessee in the course of his business as a stock
broker, on account of default of his clients, could be claimed as a business
loss.

Held :


Neither the AO nor the CIT(A) had gone through the agreement entered into by
the assessee with Joindre Capital Services Ltd., for verifying whether such
claim could be allowed as business expense or loss. The fact that the assessee
had claimed the amount as bad debt would not preclude it from claiming the
amount as business loss or expenses, since the write off was done in the
course of business only.

With a view to
verify whether the claim of the as-sessee was in relation to clients
introduced by it to M/s. Joindre Capital Services Ltd., as also whether the
indemnity agreement with Joindre Capital Services Ltd. was applicable, in
relation to such write off effected by the assessee, the Tribunal set aside
the orders of the AO and the CIT(A) and restored the matter back to the AO for
considering the issue afresh in accordance with law after giving proper
opportunity to the assessee to represent its case.

S. 271(1)(c) — Penalty for concealment of income — Whether non bifurcation of short term capital loss from the overall business loss amounted to concealment of income and furnishing of inaccurate particulars of income — Held, No.

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  1. Nera (India) Limited v. DCIT

ITAT ‘F’ Bench, New
Delhi

D. R. Singh (JM)
and K. G. Bansal (AM)

ITA No.
107/Del./2009

A.Y. : 2004-05.
Decided on : 4-8-2009

Counsel for assessee/revenue :
A. K. Mittal/

Sunita Singh

S. 271(1)(c) —
Penalty for concealment of income — Whether non bifurcation of short term
capital loss from the overall business loss amounted to concealment of income
and furnishing of inaccurate particulars of income — Held, No.

Per D. R.
Singh :

Facts :

The assessee had
filed return of income declaring business loss of Rs.1.37 crore. During the
course of assessment proceedings, it was noticed by the AO that the Auditors
in Form No. 3CD had reported that debit to the Profit & Loss account included
capital expenditure by way of fixed assets written off amounting to Rs.l0.17
lacs, which was not added back by the assessee. The same was added to the
income (reduced from the loss) of the assessee and the business loss was
assessed accordingly. According to the AO since the assessee accepted the
mistake only after the show cause was issued, he was of the view that the
assessee had concealed his income and furnished inaccurate particulars of
income. He therefore levied penalty of Rs.3.65 lacs u/s.271(1)(c) of the Act.
On appeal, the CIT(A) confirmed the same.

Before the Tribunal
the assessee explained that instead of classifying the sum of Rs.10.17 lacs as
short term capital loss, which was allowable to be carried forward u/s.70 of
the Act, the assessee in its return made a technical error of not bifurcating
short term capital loss from the overall business loss of the company. The
assessee claimed that the same cannot by any assumption be deemed to be
concealment of income or furnishing of inaccurate particulars of the income.

Held :

According to the
Tribunal, a mere omission or negligence would not constitute a deliberate act
of suppression. It agreed with the assessee that its explanation cannot be
treated as false and inaccurate simply because of its mistake in wrongly
classifying heads of loss. Accordingly, the penalty imposed was deleted.

S. 195, S. 244A. When tax which was deducted at source and deposited with the Government pursuant to an order passed u/s. 195(2) of the Act is refunded to the assessee, upon the CIT(A) deciding the appeal in favor of the assessee, the assessee is entitled

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  1. 2009 TIOL 602 ITAT Mum.

Addl DIT
v. Reliance Infocomm Ltd.

ITA No. 6100 to
6110/M/2008

Dated : 9-9-2009

S. 195, S. 244A.
When tax which was deducted at source and deposited with the Government
pursuant to an order passed u/s. 195(2) of the Act is refunded to the assessee,
upon the CIT(A) deciding the appeal in favor of the assessee, the assessee is
entitled to refund of amount paid with interest u/s.244A.

Facts :

The assessee
approached the DDIT, International Taxation, with a request to issue a
certificate for making payment to M/s. ECI Telecom — NGTS Ltd., Israel, for
purchase of certain software for the purpose of operation of Wireless
Telecommunication Network, without deduction of tax at source. The DDIT passed
an order u/s.195(2) of the Act holding that the payment was in the nature of
‘Royalty’ and accordingly, tax was required to be deducted at source. The
assessee deducted the tax and made payment to the authorities as directed by
the aforesaid order passed by the DDIT.

The assessee
preferred an appeal against the said order u/s.195(2) of the Act, which was
allowed by CIT(A). Pursuant to the appeal order, the DDIT passed an order
giving effect to the order of CIT(A) and granted refund of amount paid by the
assessee but did not grant interest on the amount refunded on the ground that
refund has arisen not under the Income-tax Act as such.

Aggrieved, assessee
preferred an appeal to the CIT(A) who held that the assessee was entitled to
interest u/s.244A of the Act on the refund of TDS u/s.195.

Aggrieved by the
order of CIT(A) directing the DDIT to grant interest on refund of TDS, Revenue
preferred an appeal to the Tribunal.

Held :

The Tribunal found
the issue under consideration to be covered against the revenue by various
decisions including the decision of ITAT in the case of Tata Chemicals Ltd.;
16 SOT 418 and in the case of Star Cruises India Travel Services Pvt. Ltd. in
ITA No. 6498 & 6500/Mum./06 order dated 24th March, 2009 (2009 TIOL 351 ITAT
Mum). Since the facts were identical to the decisions mentioned above the
Tribunal confirmed the order passed by CIT(A) and held that the assessee is
entitled to interest on refund of amount paid pursuant to an order passed u/s.
195(2).

The appeal filed by
the department was dismissed.

S. 70(3), S. 111A, S. 115D. As per the provisions of S. 70(3) r.w. S. 111A and S. 115AD, the assessee has an option to set off the short term capital loss against the short term capital gains. Short term capital loss suffered after 1-10-2004 could be set

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  1. 2009 TIOL 547 ITAT Mum.

First State
Investments (Hongkong) Ltd. v. Addl. DIT (International Tax)

ITA No.
2895/Mum./2008

A.Y. : 2005-06.
Dated : 23-7-2009

S. 70(3), S.
111A, S. 115D. As per the provisions of S. 70(3) r.w. S. 111A and S. 115AD,
the assessee has an option to set off the short term capital loss against the
short term capital gains. Short term capital loss suffered after 1-10-2004
could be set off against short term capital gains earned before 30-9-2004.

Facts :

For A.Y. 2005-06,
the assessee computed short term capital gain of Rs.331.33 lakhs. The amount
of short term capital gain and short term capital loss for the period upto
30-9-2004 and after 30-9-2004 was as under :

Particulars

upto 30-9-2004

after 30-9-2004

Total

 

Rupees in lakhs

Short term capital
gain

36.54

472.16

508.70

Short term capital
loss

8.14

169.23

177.37

Total

28.40

302.93

331.33

The assessee sought
to set off the short term capital loss suffered in the period after 30-9-2004
against short term capital gain for a period before 30-9-2004 and contended
that the short term capital gain upto 30-9-2004 was Rs.Nil and that the entire
short term capital gain was for a period after 30-9-2004 and therefore was
taxable @ 10%.

According to the
Assessing Officer, the assessee could not set off the short term capital loss
for a period after 30-9-2004 with the short term capital gain arising in a
period prior to 1-10-2004 since in the period prior to 1-10-2004 short term
capital gain was chargeable at normal rates whereas in the period after
30-9-2004 short term capital gain on which STT was paid was chargeable at
concessional rate of 10%. He, held that Rs.28.40 lakhs is capital gain for the
period upto 30-9-2004 and Rs.302.93 lakhs is capital gain arising during the
period after 30-9-2004.

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

S. 80, S. 139(3) and S. 139(5) — Loss return filed within time could be revised and loss carried forward.

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  1. (2009) 119 ITD 119 (Delhi ITAT)

Escorts Mahle
Ltd. v. DCIT

A.Y. : 2001-02.
Dated : 21-3-2008

S. 80, S. 139(3)
and S. 139(5) — Loss return filed within time could be revised and loss
carried forward.

Facts :

The assessee company
filed a return of loss on 31-10-2001 which was accompanied by the unaudited
profit and loss account and balance sheet. Further the tax audit report was
also not filed. On 27-3-2003, the assessee company filed another return in
which a higher loss was claimed. The profit and loss account, balance sheet
and audit report were attached to subsequent return.

The assessing
officer took the view that since the return filed on 31-10-2001 was not
accompanied by audited accounts, the same was not a valid return. He,
therefore, considered the return filed on 27-3-2003 as the first valid return.
Further, he held that since the return filed on 27-3-2003 was filed beyond the
time limit prescribed u/s.139(1) of the Income-tax Act, 1961 (‘the Act’), the
loss declared therein could not be carried forward.

The CIT(Appeals)
held that the return filed on 27-3-2003 was revised return filed u/s.139(5) of
the Act and took the place of the original return filed on 31-10-2001. It
should, therefore, be taken to have been filed within the time limit
prescribed u/s.139(3) of the Act.

On Revenue’s appeal,
the Delhi ITAT observed that the assessing officer processed the return filed
on 31-10-2001 u/s.143(1) of the Act and also did not issue any defect notice
u/s.139(9) of the Act. Thus, the said return cannot be said to have been
considered as invalid return. This being the case, the return filed on
27-3-2003 was to be treated as valid revised return. The revised return took
the place of original return and the original return having been admittedly
filed within time allowed u/s.139(1) of the Act, the loss was to be carried
forward. The return of loss filed on 31-10-2001 was filed in accordance with
S. 139(3) of the Act and could be validly revised u/s.139(5) of the Act.

Even though assessee might have committed a serious economic offence, yet he could not be charged to income unless it was proved beyond doubt that said income was generated to him alone.

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  1. (2009) 119 ITD
    71 (Bang.)

Ibrahim Vittal
v. ITO, Ward 2(3), Mangalore

A.Y. : 2003-04.
Dated : 25-4-2008

Even though
assessee might have committed a serious economic offence, yet he could not be
charged to income unless it was proved beyond doubt that said income was
generated to him alone.

Facts :

A search was made in
the residence of appellant u/s.37(3) of Foreign Exchange Management Act, 1999
(FEMA) on the basis of certain information by Directorate of Enforcement
(DOE). During search, some documents were seized which disclosed that assessee
had received a cash of Rs.23,15,000. The contention of assessee that it was
received from his brothers and brother-in-law working abroad for construction
of their houses was rejected by DOE and penalty was imposed on him. On this
basis, AO treated the said money as unexplained and taxed it u/s.69A. On
appeal to CIT(A), it confirmed the addition. On appeal to Tribunal, it held
that the AO did not make any independent enquiries. Rather he relied upon the
letter received from one of the brothers-in-law which was signed by him on
behalf of all the other persons and hence was not having any evidential value.
In a search conducted under FEMA, no other property was confiscated from
assessee. Hence, the assessee had received the amount on behalf of his
brothers and brothers-in-law.

It was not the case
of the AO that the assessee had made any investments or the assessee was found
to be the owner of any bullion, jewellery or other valuable articles. So, the
AO was not right, in law, in completing the assessment u/s.69A.

S. 147 — Reopening of the assessment for the second time to take a different view on the same matter is bad in law and liable to be quashed.

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  1. (2009) 119 ITD 21 (Mum.)

Aum Chemicals
v.
ACIT, Palghar
Circle, Palghar

A.Y. : 1998-99.
Dated : 30-4-2008

Held 1 :

S. 147 —
Reopening of the assessment for the second time to take a different view on
the same matter is bad in law and liable to be quashed.

Held 2 :

S. 45 — A
partnership firm consisting of 2 partners was converted into company —
Partners were given shares of Company A to the extent of their credit balances
in Capital Account — It was held that since the condition of distribution of
capital assets on dissolution of firm is not fulfilled, S. 45(4) is not
applicable. Even otherwise after deducting cost of capital which was equal to
book value, capital gain would be nil.

Fact 1 :

The assessee firm
decided to sell its assets and liabilities to a private limited company.
Subsequently, the said consideration was distributed among partners and the
firm was dissolved. The Assessing Officer reopened the assessment and added
certain amount as Short Term Capital Gain u/s.45(4). The CIT(A) deleted the
addition. Afterwards AO again reopened the assessment on the ground that the
partners made an arrangement to avoid tax by not assigning values to
individual assets and added the value difference of assets to the income of
the assessee. On appeal to Tribunal, it held that there was nothing on record
to show that there was any failure on the part of assessee. It had disclosed
all material facts at the time of first reopening of assessment. Hence, it was
not permissible to reopen the assessment on the same reason to take different
view. Consequently, second time reopening of assessment was bad in law and
liable to be quashed.

Fact 2 :

On distribution of
assets and liabilities to the company, the company allotted shares to partners
in proportion to their capital contribution. The AO taxed short term capital
gain by invoking provisions of S. 45(4). It was held that for invoking S.
45(4) following two conditions are to be satisfied :

    1. Transfer by way
    of distribution of capital asset.

    2. Transfer should
    be on the dissolution of the firm or otherwise.

There is a
difference between vesting in private limited company and distribution of
capital assets. In case of vesting of property, the property vests in the
company as it exists. On the other hand, distribution on dissolution
presupposes processes of division, realisation, encashment of assets and
apportionment of the realised amount.

In the given case
there was no transfer of assets on dissolution of firm. Hence, first condition
is not satisfied. Further, even if S. 45(1) is applied, the full value of
consideration for the firm is book value of assets as allocation of shares had
no correlation of vesting of properties in company. Hence, capital gain would
be Nil.

Clarification regarding eligibility of expenditure pertaining to widening of roads eligible for deduction u/s.80-IA(4)(i) of the Act — Circular No. 4/2010, dated 18-5-2010.

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Part A : Direct Taxes

34 Clarification regarding eligibility of expenditure
pertaining to widening of roads eligible for deduction u/s.80-IA(4)(i) of the
Act — Circular No. 4/2010, dated 18-5-2010.

It has been clarified by the Board that widening of an
existing road by constructing additional lanes as a part of a highway project by
an undertaking would be regarded as a new infrastructure facility for the
purpose of S. 80IA(4)(i). However, simply relaying of an existing road would not
be classifiable as a new infrastructure facility for this purpose.

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Fresh Additional Relief Package — PIB Press Release No. BY/KP/GN-151/10, dated 29-4-2010.

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Part A : Direct Taxes

33 Fresh Additional Relief Package — PIB Press Release No.
BY/KP/GN-151/10, dated 29-4-2010.

The following important amendments were made to the Finance
Bill 2010 :

  • Two items are included as
    ‘specified business for availing the benefit of investment linked deduction
    u/s.80-IB(11C) of the Act — business of a new hospital anywhere in India
    (unlike certain prescribed areas as proposed earlier), with at least 100 beds
    for patients, and business of developing and building a housing project under
    a scheme for slum redevelopment or rehabilitation framed by the Central
    Government or a State Government.

  • Transfer of shares by
    shareholders on conversion of a company into an LLP is proposed to be tax
    exempt.



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The Finance Bill received the Presidential Assent on 8 May 2010 and hence got enacted with effect from 8-5-2010

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Part A : Direct Taxes

32 The Finance Bill received the Presidential Assent on 8 May
2010 and hence got enacted with effect from 8-5-2010.

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Notification No. FEMA. 174/2007-RB, dated 25-11-2007 — Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2008.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 

 

13 Notification No. FEMA. 174/2007-RB, dated
25-11-2007 — Foreign Exchange Management (Foreign Currency Account by a Person
Resident in India) Regulations, 2008.


This notification substitutes Regulation 6 of the Foreign
Exchange Management (Foreign Currency Account by a Person Resident in India)
Regulations, 2000 with effect from April 30, 2007.

 

It permits the opening, holding and maintaining of Foreign
Currency Account in India by :

1. Shipping or airline company incorporated outside India or
its agent in India for meeting local expenses in India of the shipping or
airline company out of freight or passage collected in India or out of inward
remittances through normal banking channels from office/principal outside India.

2. Ship-manning/crew managing agencies in India for undertaking transactions
in the ordinary course of their business.



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Notification No. FEMA. 171/2007-RB, dated 10-12- 2007 — Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) (Second Amendment) Regulations, 2007.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.



12 Notification No. FEMA. 171/2007-RB, dated
10-12- 2007 — Foreign Exchange Management (Foreign Currency Account by a Person
Resident in India) (Second Amendment) Regulations, 2007.

This notification amends the proviso to Regulation 9(1) of
the Foreign Exchange Management (Foreign Currency Account by a Person Resident
in India) Regulations, 2000 with effect from April 30, 2007 as under :

“The EEFC account referred to in Regulation 4, shall be
opened, held or maintained in the form of an account in terms of such
directions as may be issued by the RBI from time to time”.


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A.P. (DIR Series) Circular No. 41, dated 28-4-2008 — Foreign investment in Commodity Exchanges — Amendment to the Foreign Direct Investment Scheme.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


11 A.P. (DIR Series) Circular No. 41, dated
28-4-2008 — Foreign investment in Commodity Exchanges — Amendment to the Foreign
Direct Investment Scheme.

Pursuant to Press Note No. 2 (2008) issued by Commerce
Ministry (see April 2008 BCAJ, page 97).

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A.P. (DIR Series) Circular No. 40, dated 28-4-2008 — Foreign investment in Credit Information Companies — Amendment to the Foreign Direct Investment Scheme.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 



10 A.P. (DIR Series) Circular No. 40, dated
28-4-2008 — Foreign investment in Credit Information Companies — Amendment to
the Foreign Direct Investment Scheme.

Pursuant to Press Note No. 1 (2008) issued by Commerce
Ministry (see April 2008 BCAJ, page 97).

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A.P. (DIR Series) Circular No. 39, dated 28-4-2008 — Bids in foreign currency for projects to be executed in India.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 

9 A.P. (DIR Series) Circular No. 39, dated
28-4-2008 — Bids in foreign currency for projects to be executed in India.

Presently, person resident in India can incur liability in
foreign exchange and to make or receive payments in foreign exchange in respect
of global bids only where the Central Government has authorised such projects to
be executed in India and approval of the concerned Administrative Ministry has
been obtained.

 

This circular has done away with the requirement of obtaining
prior permission of Administrative Ministry/Authorisation from Central Govt. may
not be necessary for International Competitive Bidding (ICB). Hence, persons
resident in India are now permitted to incur liability in foreign exchange and
to make or receive payments in foreign exchange in respect of global bids for
projects to be executed in India without insisting on prior approval of the
concerned Administrative Ministry for ICB.

 


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Amendments in the Cenvat Credit Rules, 2004 w.e.f. 1-4-2008 — Clarification about Rule 6 : Circular No. 868/6/2008-CX dated 9-5-2008.

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Part A : DIRECT TAXES Part
B : Indirect taxes


8 Amendments in the Cenvat Credit Rules, 2004
w.e.f. 1-4-2008 — Clarification about Rule 6 : Circular No. 868/6/2008-CX dated
9-5-2008.

In the Finance Act, 2008, certain amendments are made, among
others, to Rule 6 of Cenvat Credit Rules, 2004. The above circular clarifies
certain doubts relating to these amendments.

 

Others :

Employees’ State Insurance Corporation has amended the
Regulation 26 of the ESI (General) Regulations, 1950 and the Return of
Contributions in Form 5. The salient features of the amendments made in the Form
5 are as under :

Sr.
No. 		Category of dealers
 Eligibility criteria
 Period of
first return 		Due date of
submission of such first return
1 Dealers eligible to
file monthly returns		 (1) Taxes paid more
than Rs.10 lac or Refund was more than Rs.1 crore during the previous year		 April 2008 21-5-2008
2 Dealers eligible to
file quarterly returns

(1) Dealers under Package Scheme of Incentive. to
30-6-2008

(2) Taxes paid more than Rs.1 lac and less than Rs.10 lac
or Refund more than Rs.10 lac and less than Rs.1 crore during the previous
year

 1-4-2008 21-7-2008
3 Dealers eligible to
file six-monthly returns 		(1) Newly registered
dealers

(2) Retailers
opted for Composition

 (3)
Taxes paid less than Rs.1 lac or Refund less than Rs.10 lac during the
previous year

 1-4-2008 to 30-9-2008
Scheme		 21-10-2008




  • Self declaration by the employers, regarding maintenance of records and
    registers, submission of declaration forms, distribution of
    temporary/permanent identity cards, coverage of employees directly or through
    immediate employers and wages paid to workers.



  • All employers employing 40 or more employees, shall append a certificate duly
    certified by a Chartered Accountant, in the revised format of Return of
    Contributions.


All employers, employing less than 40 employees, will provide
self certification without any certification by a C.A.


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Amendments to VAT rule for periodicity of filing of returns under Rule 17 of Maharashtra Value Added Tax Rules 2005 : Trade Circular No. 17T of 2008 dated 5-5-2008.

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Part A : DIRECT TAXES Part
B : Indirect taxes




M-VAT

7 Amendments to VAT rule for periodicity of
filing of returns under Rule 17 of Maharashtra Value Added Tax Rules 2005 :
Trade Circular No. 17T of 2008 dated 5-5-2008.

The Government by Notification No. VAT/1507/CR 17/Taxation 1
dated 31-10-2007 and No. VAT/1507/CR 94/Taxation 1 dated 14-3-2008 has carried
out certain amendments to Rule 17 of Maharashtra Value Added Tax Rules, 2005
pertaining to the periodicity of filing of return.

 

As per the amendments the periodicity of filing of Returns
for the periods starting on or after 1st April 2008 will be as under :




  • The earlier return forms 221, 222, 223, 224 and 225 have been replaced with
    the new return forms 231,232, 233, 234 and 235, respectively.



  • The dealers whose tax liability in the previous year i.e. 2006-07 was
    equal to or above Rs.1 crore, have to file their return from February 2008
    onwards in electronic form.



  • The dealers whose tax liability in the previous year i.e. 2007-08 was
    equal to or above Rs.10 lakhs, have to file their return for the month of May
    2008 onwards in electronic form.



  • The dealers eligible to file electronic return under MVAT Act Rules should
    file their Central Sales Tax return in Form IIIE electronically.



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Post Budget notifications to give effect to the provisions of Finance Act, 2008 (18 of 2008) dated 10-5-2008 (Press release reproduced).

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Part A : DIRECT TAXES Part
B : Indirect taxes


Service tax :

6 Post Budget notifications to give effect to
the provisions of Finance Act, 2008 (18 of 2008) dated 10-5-2008 (Press release
reproduced).

The Finance Bill, 2008 received the assent of the President
of India on the 10th May 2008 and consequently the Finance Act, 2008 is being
published in the Gazette of India dated 10th May 2008 as Act No. 18 of 2008.
Central Government has issued seven notifications relating to service tax so as
to give effect to various provisions of the Finance Act, 2008.


 

2. Transaction between associated enterprises :



2.1 In the Finance Act, 2008, S. 67 has been amended. As per
this amendment, service tax is required to be paid by the person liable to pay
service tax on the taxable services provided even if the consideration for the
taxable services provided is not actually received. In such cases, service tax
is required to be paid immediately after crediting/debiting of the amount in the
books of accounts or receipt of payment, whichever is earlier. However, this
provision is restricted to transaction between associated enterprises and shall
come into force w.e.f. 10th May 2008. Explanation to Rule 6(1) of the Service
Tax Rules, 1994 has been added as removal of doubts stating that any payment
received towards the value of taxable service shall include any amount credited
or debited, as the case may be, to any account, whether called ‘Suspense
account’ or by any other name, in the books of account of a person liable to pay
service tax (Refer Notification No. 19/2008-Service Tax dated 10-5-2008).


 

3. Certain provisions relating to the levy of service tax in
the Finance Act, 2008 shall come into force from a date to be notified. For this
purpose, Notifications No. 18/2008 to 24/2008-Service Tax, all dated 10th May,
2008 have been issued.

 

4. Following changes/amendments shall come into force w.e.f.
16-5-2008 :


à
Seven services which are specifically mentioned in the category of taxable
services and amendments made relating to existing taxable services.


à
Amendments made in S. 65 (defines taxable services and specified terms used in
relation to taxable services) and S. 66 (charging section) vide the Finance
Act, 2008.


à
Amendments made in Export of Services Rules, 2005 and the Taxation of Services
(Provided from Outside India and Received in India) Rules, 2006 so as to
categorise the newly specified taxable services under Rule 3 [Refer
Notification No. 20/2008-Service Tax dated 10-5-2008 and Notification No.
21/2008-Service Tax dated 10-5-2008].


à
Optional Scheme for payment of service tax on Purchase or Sale of foreign
currency : Service tax is leviable on purchase or sale of foreign currency,
including money changing, provided by an authorised dealer in foreign currency
or an authorised money changer, or a foreign exchange broker. Where the
consideration for the services provided in relation to purchase or sale of
foreign currency is not explicitly indicated, the person liable to pay service
tax has been given the option to pay service tax calculated at the rate of
0.25% of the gross amount of currency exchanged. The method is prescribed
under Rule 6(7B) of the Service Tax Rules, 1994. [Refer Notification No.
19/2008-Service Tax dated 10-5-2008].


5. Government of India has already notified, vide
Notifications No. 41/2007-Service Tax, dated 6-1-2007 and 43/2007-ST, dated
29-11-2007, sixteen taxable services attributable to export goods, whether or
not in the nature of input services, providing refund of service tax paid on the
said sixteen taxable services. Consequent upon the enactment of the Finance Act,
2008, Government has notified 16-5-2008 as the effective date for the
specifically included taxable services vide the Finance Act, 2008. Out of the
said taxable services, refund of service tax paid by exporters has been extended
to the following additional 3 services :


à
Purchase or sale of foreign currency under banking and other financial
service,


à
Purchase or sale of foreign currency under foreign exchange broking service,


à
Supply of tangible goods for use of service (refer Notification No.
24/2008-ST, dated 10-5-2008)


6. Notifications No. 18/2008 to 24/2008-Service Tax, all
dated 10th May 2008 are available on the CBEC website http://www.cbec.gov.in.
For details, relevant provisions of the law and notifications may be referred of
the Ministry of Finance, Department of Revenue, Tax Research Unit, Govt. of
India.


Revision of monetary limits for filing appeals by the Income-tax Department before ITAT, HC and SC : Instruction No. 5/2008, dated 15-5-2008.

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Part A : DIRECT TAXES



5 Revision of monetary limits for filing
appeals by the Income-tax Department before ITAT, HC and SC : Instruction No.
5/2008, dated 15-5-2008.

Appeals shall be filed by the Department after 15th May,
2008, only if the cases where tax effect exceeds monetary limits given
hereunder :

Sr. No.
Appeals in Income tax matters
Monetary limit (In Rs.)
1
Appeal before Appellate Tribunal
2,00,000
2
Appeal u/s.260A before High Court
4,00,000
3
Appeal before Supreme Court
10,00,000

Tax effect has been defined to mean difference between tax
assessed and tax that would have been chargeable on disputed issues (to apply to
loss cases also). It is also clarified that ‘tax’ shall not include interest. In
the cases of penalty orders, the tax effect will mean quantum of penalty deleted
or reduced in the order to be appealed against. The instructions also specify
the cases, wherein appeal can be filed by Department irrespective of the
monetary limit and the mode of computation for consolidated appeals which cover
more than one assessment year. It has been clarified that non-filing of appeal
by department due to monetary limits as prescribed does not mean the decision as
taken by the appropriate authority is accepted. Also there are instances
specified when the appeal needs to be filed irrespective of the quantum
involved.

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Clarification on deduction of tax at source on service tax component on rental income u/s.194-I.

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Part A : DIRECT TAXES


4 Clarification on deduction of tax at source
on service tax component on rental income u/s.194-I.

CBDT has clarified that TDS provisions u/s.194-I would be
applicable only on the net rent paid/payable excluding the service tax
component.


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India has signed a DTAA with Mexico. The said agreement shall enter into force on a date to be notified in due course.

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Part A : DIRECT TAXES


3 India has signed a DTAA with Mexico. The
said agreement shall enter into force on a date to be notified in due course.

 

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Benign Assessment procedure for assesses engaged in diamond manufacturing and/or trading : Instruction No. 2/2008 dated 22-2-2008.

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Part A : DIRECT TAXES


2 Benign Assessment procedure for assesses
engaged in diamond manufacturing and/or trading : Instruction No. 2/2008 dated
22-2-2008.

In the last Budget, the Finance Minister had announced a
Benign Assessment procedure for assesses engaged in diamond manufacturing and/or
trading. The main features of the scheme are :



  •  If the assessee offers 6% or more of its total turnover as business income,
    the same should be accepted by AO



  •  Separate books of account need to be maintained



  •  6% would not be a precedent for that or any other assessee



  • This procedure would not apply when :



* assessment is pursuant to search, survey, requisition or seizure action


* 50% or more of such income is claimed as a deduction


* Where there is information of income being escaped




  •  The said procedure shall apply for assessments made during the financial year
    2008-09.




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The Finance Bill, 2008 received the assent of the President of India on 10th May 2008, after certain amendments to clauses of Finance Bill, 2008.

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Part A : DIRECT TAXES


1 The Finance Bill, 2008 received the assent
of the President of India on 10th May 2008, after certain amendments to clauses
of Finance Bill, 2008.

 

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Powers of CIT(A) — Rule 24 of Appellate Tribunal Rules, 1963 — Whether CIT(A) can dismiss appeal for want of prosecution by assessee — Held, No. Whether CIT(A) is bound to dispose of appeal on merits, even when there is default of non-appearance — Held, Y

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31 2008 TIOL 601 ITAT Mum.


British Pharmaceutical Laboratories v. ACIT

ITA No. 6263/Mum./2006

A.Y. : 1999-2000. Dated : 1-10-2008

Powers of CIT(A) — Rule 24 of Income-tax Appellate Tribunal
Rules, 1963 — Whether CIT(A) can dismiss the appeal for want of prosecution by
the assessee — Held, No. Whether CIT(A) is bound to dispose of the grounds of
appeal on merits, even when there is a default of non-appearance by the
appellant — Held, Yes.

 

Facts :

The assessee filed a return of income declaring a loss of
Rs.2,19,69,182. The Assessing Officer passed an order u/s.143(3) of the Act
assessing the total income of the assessee at Rs.19,75,603. Aggrieved, the
assessee preferred an appeal to the CIT(A), but failed to attend the
proceedings before the CIT(A). The CIT(A) did not record decision on merits on
the ground of assessee’s failure to attend the proceedings and by taking a
clue from the decision of the Delhi Tribunal in the case of Multiplan (India)
Ltd., he dismissed the appeal. Aggrieved, the assessee preferred an appeal to
the Tribunal.

 

Held :

The Tribunal noted that under Rule 24 of the Income Tax
Appellate Tribunal Rules, 1963 the Tribunal has the power to dismiss an appeal
for want of prosecution and it is also empowered to recall that order, if
satisfied about the existence of reasonable cause subsequently shown by the
appellant. The Tribunal held that since the CIT(A) does not have such a power
under the Income-tax Act, 1961, he is bound to dispose of the grounds of
appeal on merits, even when there is a default of non-appearance by the
appellant. Since the CIT(A) had not recorded decision on merits, the Tribunal
set aside his order and restored the appeal to the file of the CIT(A) for
fresh disposal in accordance with law, after giving reasonable opportunity of
being heard to the assessee.

 


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S. 254(2) — The order pronounced at the conclusion of the hearing is an order of the Tribunal — It cannot be called a tentative order or a prima facie view — If there is mistake apparent on record, the order pronounced in the Court which is an oral order

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 Part A: Reported Decisions

 

14 (2010) 36 DTR (Chennai) (TM) (Trib) 42
ITO v. M. Vijayan/ITO v. Smt. V. Meenakshi
A.Ys. : 1999-00 to 2004-05. Dated : 18-12-2009

 

S. 254(2) — The order pronounced at the conclusion of the
hearing is an order of the Tribunal — It cannot be called a tentative order or a
prima facie view — If there is mistake apparent on record, the order pronounced
in the Court which is an oral order can be recalled to rectify such mistake.

Facts :

In this case, a survey u/s.133A was conducted at the business
premises of the assessee (M. Vijayan). During the course of survey, certain
documents pertaining to income and investment were found. Sworn statements were
recorded from the assessee and his wife. On the basis of sworn statements
supplied during the course of the survey, the Assessing Officer inferred that
the income and investment shown in the name of the wife actually belonged to the
assessee and he therefore made the impugned addition in the hands of the
assessee on substantive basis and in thehands of the wife on protective basis.

Upon assessee’s appeal, the learned CIT (A) found that the
wife had independent sources of income. He also found that there is no finding
that the money was actually invested by the husband or that he enjoyed the
profits earned from the business and investment in the name of his wife. Hence,
he allowed the assessee’s appeal and deleted the addition in the hands of the
husband.

Upon further appeal by the Revenue, the Tribunal decided the
issue in favour of the assessee relying on the decision of the jurisdictional
High Court in the case of CIT v. S. Khader Khan Son, (300 ITR 157) (Mad.)
wherein it was held that the materials collected and the statements recorded
during the survey u/s.133A were not conclusive piece of evidence by itself. The
order was pronounced in the open Court as well as communicated orally to the
parties concerned.

The Judicial Member subsequently proposed to recall the order
on the ground of non-consideration of the judgment of the jurisdictional High
Court in the case of H. Shahul Hameed v. ACIT, (258 ITR 266) (Mad.). Difference
of opinion arose between the Members regarding refixing the matter for hearing
and also on merits of the issue and therefore the matter was referred to the
Third Member.

Held :

The order pronounced at the conclusion of the hearing is an
order of the Tribunal. It cannot be called a tentative order or a prima facie
view. In the present case, the order is pronounced as well as communicated
orally to the parties concerned and hence it is an order. De hors the facts of
the present case, if there is mistake apparent on record, the order pronounced
in the Court which is an oral order can be recalled to rectify such mistake.

In the present case, there was no search but only survey
u/s.133A. In the decision of S. Khader Khan Son (supra), the jurisdictional High
Court has distinguished the provisions of S. 132(4) with those of S. 133A and
held that the material collected and statements recorded during the survey
u/s.133A are not conclusive piece of evidence and that the same cannot be the
basis for making any addition. Therefore the judgment based upon which the
Judicial Member has proposed to recall the order is not applicable to the facts
of the case. Further, the fact that the Judicial Member had to devote nearly
twenty-five pages to point out the error and then to set it aside for
reconsideration, itself proves that the conclusion of the Judicial Member is the
result of a long drawn-out process of reasoning on points where there may
conceivably be two opinions and thus, there was no mistake apparent from record.

Further, instead of acting upon what had been conclusively
pronounced in the Court, the Judicial Member kept the matter pending with him
and expressed his opinion to reopen the case after three months as against the
long-standing convention of passing dissenting orders within fifteen days.
Therefore, the matter cannot be refixed for hearing on the ground that there is
a mistake apparent from record.

 

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Extension of date for physical submission of acknowledgement of audit report in Form 704 — Trade Circular No. 16T of 2010, dated 10-5-2010.

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Part B : Indirect Taxes


MVAT

37 Extension of date for physical submission of
acknowledgement of audit report in Form 704 — Trade Circular No. 16T of 2010,
dated 10-5-2010.

Date for physical submission of acknowledgement of Audit
Report in Form 704 along with required document is extended from 10-5-2010 to
15-5-2010.

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Clarification on Instruction No. 49 on FTWZ issues — Instruction No. 71, dated 12 November 2010 (reproduced)

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Part E : Miscellaneous


2. Clarification on Instruction No. 49 on FTWZ issues —
Instruction No. 71, dated 12 November 2010 (reproduced)


I am directed to refer to Instruction No. 49 dated 12 March
2010 of this Department and to amend the point no. (iv) of the above-mentioned
instruction to the extent that instrad of there being no limitation on units set
up in FTWZ located in sector specific SEZs to carry out trading and warehousing
activities in respect of any products, it has been decided that units in Free
Trade Warehousing Zones (FTWZ) in a Sector Specific SEZ can store goods required
for development of zone or setting up of units or for manufacturing and export/DTA
sale of goods and services or
finished products of the units in that particular sector-specific zone.

Yours faithfully

G. Muthuraja
Under Secretary to the Government of India


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Revision of Form 32 pertaining to change in directors, manager, secretaries (vide Notification GSR 68(E), dated 10-2-2010), with effect from 14-3-2010.

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15 Revision
of Form 32 pertaining to change in directors, manager, secretaries (vide
Notification GSR 68(E), dated 10-2-2010), with effect from 14-3-2010.

Under the Notification :


1. Form 32 can be filed
for those directors who do not have a DIN and who have ceased to be
associated with the company on or before 31-10-2006.

2. Signatory to the form
has to verify that the director has given declaration to the company in
writing that he is not restrained/disqualified/removed of, for being
appointed as a director under the provisions of the Act including S. 203, S.
274 and S. 388E.



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Circular No. 2 of 2010, dated 30-9-2010 issued by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India.

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Spotlight

Given below are the highlights of certain RBI/DIPP Circulars.


17. Circular No. 2 of 2010, dated 30-9-2010 issued by the
Department of Industrial Policy & Promotion, Ministry of Commerce & Industry,
Government of India.

This Circular has updated the FDI Policy by incorporating all
instructions and clarifications up to September 30, 2010.

The substantive issues clarified are :

(i) Incorporation of Press Note 2 of 2010, relating to the
prohibition on manufacture of cigarettes, etc.

(ii) Clarification on the coverage of ‘controlled
conditions’ for FDI in agriculture, animal
husbandry, etc.

(iii) Clarification on the concept of value addition in
case of mining and mineral separation of titanium bearing minerals.

(iv) Clarification that 100% foreign owned NBFCs, with a
minimum capitalisation of $ 50 million, can set up subsidiaries for specific
NBFC activities, without bringing additional capital towards minimum
capitalisation.

(v) Introduction of specific provision for
downstream investment through internal accruals.

(vi) Clarification of the terms ‘original investment’ and
‘lock-in period’ in case of minimum capitalisation of construction development
projects.

(vii) Removal of the condition that ‘wholesale trading made
to group companies should be for internal use only’ in the guidelines for Cash
& Carry Wholesale Trading.

(viii) Clarification that minimum capitalisation includes
share premium received along with face value of the shares only when it is
received by the company upon issue of the shares to the non-resident
investors.

(ix) Amendment of Note below the definition of ‘Capital’ to
allow for FDI in partly-paid shares and warrants through the Government route.

(x) Changes in the paragraphs relating to issue price of
shares and addition of a paragraph on share-swaps, consistent with extant
instructions.


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Criteria for identification of a vanishing company — Clarification on MCA website

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Part D : Company Law updates


18 Criteria
for identification of a vanishing company — Clarification on MCA website

A company would be deemed to
be a vanishing
company, if it is found to have :


(a) Failed to file
returns with Registrar of Companies (ROC) for a period of two years;

(b) Failed to file
returns with Stock Exchange (SE) for a period of two years (if it continues
to be a listed company);

(c) It is not
maintaining its registered office of the company at the address notified
with the Registrar of Companies/Stock Exchange; and

(d) None of its
directors are traceable.



Notes :




(i) All the conditions
mentioned above would have to be satisfied before a listed company is
declared as a vanishing company; and

(ii) The conditions
mentioned at (a), (c) and (d) would suffice to declare a company as
vanishing if such company has been de-listed from the Stock Exchange.




erala, Lakshadweep, Madhya
Pradesh, Maharashtra, Manipur, Meghalaya, Orissa, Punjab, Rajasthan, Tamil Nadu,
Uttar Pradesh, Uttarakhand and West Bengal with effect from 1st April 2010.

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Updated list of S. 25 companies is available at the following : URL http://www.mca.gov.in/Ministry/pdf/S. 25 — Companies — 6nov2008.pdf

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Part D : Company Law updates





 




17 Updated
list of S. 25 companies is available at the following : URL http://www.mca.gov.in/Ministry/pdf/S.
25 — Companies — 6nov2008.pdf

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New Form 68 (vide Notification GSR 177(E), dated 5-3-2010) pertaining to application for rectification of mistakes apparent on record in e-Form 1A, e-Form 1 and Form 44 with effect from 14-3-2010.

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Part D : Company Law updates


16 New Form
68 (vide Notification GSR 177(E), dated 5-3-2010) pertaining to application for
rectification of mistakes apparent on record in e-Form 1A, e-Form 1 and Form 44
with effect from 14-3-2010.

Under the Notification
u/s.20G(1), an application for rectification of mistakes made while filing Form
No. 1, Form No. 1A and Form No. 44 electroncially on the Ministry’s website,
shall be made to the Registrar of Companies in Form No. 68 and such application
shall be accompanied by fee of Rs.1000 for rectification of mistakes in Form No.
1 and Form No. 1A, and Rs.10,000 for rectification of mistakes in Form No. 44,
respectively. An application in Form 68 complete in all respects shall be made
to the Registrar within 365 days from the date of approval of Form No. 1, Form
No. 1A and Form No. 44, respectively by the Registrar.

This rectification of
mistakes is also applicable to Form 1, Form 1A and Form 44 approved by the
Ministry prior to 14th March, 2010 and the mistakes shall be examined, approved
and intimated to the applicant within 60 days of filing the Form. It is also
provided that the rectification of mistakes shall be allowed only once in
respect of one company.

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S. 22 and S. 24 of the Income-tax Act, 1961 — Rent, being only a surrogate measure of annual value, has to be reduced by the expenses not connected with property but incurred by landlord for enjoyment of property by tenants, such as salary and bonus to sw

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  1. (2009) 120 TTJ 1127 (Ahd.)


J. B. Patel & Co. (Co-owners) v. Dy. CIT

ITA No. 4033 (Ahd.) of 2004

A.Y. : 1993-94. Dated : 29-2-2008

S. 22 and S. 24 of the Income-tax Act, 1961 — Rent, being
only a surrogate measure of annual value, has to be reduced by the expenses
not connected with property but incurred by landlord for enjoyment of property
by tenants, such as salary and bonus to sweeper, pumpman and liftman and
electricity charges for pump motor and common passage.

For the relevant assessment year, the assessee computed
rental income under ‘Income from House Property’ after claiming deductions in
respect of the following expenses :

(a) Salary and bonus paid to sweepers/pumpman/liftman

(b) Electricity charges for pump motor and common
passage.

Since these expenses were not covered by S. 23 and S. 24,
the Assessing Officer denied the assessee’s claim. The disallowance was upheld
by the CIT(A).

The Tribunal, deciding in assessee’s favour, noted as
under :

(1) The rent being charged by the assessee is only a
surrogate measure of the said annual value. The expenditure on the aforesaid
items, i.e. the salary (including bonus) to the maintenance staff of
the facilities such as electric motors, lift, cleaning, etc., as well as
that on the electricity consumed in respect of any common area and the
electric motors, is not attributable directly to the house property as such,
but to its enjoyment by the tenants/users thereof.

(2) In a given case it may happen that the said
expenditure is incurred by the tenant or tenants (collectively), with the
landlord having no locus standi or role therein. Who incurs the expenditure
in the first instance is only a matter of mutual arrangement or convenience
and thus, of no consequence where the bona fides of such expenditure are, as
in the present case, not in doubt. The rent being charged by the assessee,
which represents the measure of its annual value, would, in such a case
stand correspondingly reduced.

(3) As such, although the assessee, being entitled only
to the deductions in respect of the said expenditure in the computation of
income under the said head of income only in terms of its provisions, would
not be entitled to the impugned deductions, we consider that the annual
value of its house property be assumed at the reduced value, i.e.
after deducting the impugned amounts (from the rental), being only in
relation to the expenditure required to be necessarily incurred for the
enjoyment/user of the relevant property and, therefore, can only be
considered as having been included at the said amount, i.e. at cost
by the two parties in the determining of the rental.

(4) The standard deduction admissible to the assessee on
account of repairs @ 1/6th of the annual value of its house property is in
relation to the repairs, whether actually incurred or not, by the assessee
during the relevant year. The impugned sums are not in relation to any
repairs to the house property, but for the maintenance of the facilities
enjoined therewith and necessary for its useful enjoyment.

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S. 143(1) and S. 263 of the Income-tax Act, 1961 — Provisions of S. 263 are not applicable where only intimation u/s.143(1) has been issued.

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New Page 1

  1. (2009) 120 TTJ 1009 (Agra) (TM)


Vinod Kumar Rai v. CIT

ITA No. 234 (Agra) of 2005

A.Y. : 2002-03. Dated : 21-11-2008

S. 143(1) and S. 263 of the Income-tax Act, 1961 —
Provisions of S. 263 are not applicable where only intimation u/s.143(1) has
been issued.

For the relevant assessment year, the CIT passed a revision
order u/s.263 in respect of the return of income processed u/s.143(1). Before
the Tribunal, the assessee contended that the processing u/s.143(1) is neither
an assessment nor an assessment order and the same cannot be subjected to
revision u/s.263 and the revision order made by the CIT may, therefore, be
declared as bad in law.

On account of difference of opinion between members of the
Bench, the matter was referred to the Third member u/s.255(4).

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

(a) After an intimation u/s.143(1) is issued, the
Assessing Officer had full power to issue a notice u/s.143(2) and make a
regular assessment u/s.143(3). The Assessing Officer could also proceed
u/s.147/148, if applicable.

(b) There was no explanation as to why these provisions
were not applied in this case.

(c) Various High Courts in India are not unanimous
whether provisions of S. 263 are applicable where only intimation u/s.143(1)
has been issued, whether such intimation is an order or assessment to
attract provisions of S. 263. The Supreme Court, at an appropriate time,
will take up and settle the issue.

(d) It is clear from the record that two reasonable views
of the matter are possible. In such a situation, it has been laid down by
the Supreme Court in numerous cases that the view which is favoring the
assessee has to be taken.

Therefore, it was held that the intimation u/s.143(1)
cannot be sought to be revised u/s.263.

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S. 32 of the Income-tax Act, 1961 — Commercial right comes into existence whenever the assessee makes payment of non-compete fee and such non compete right is an intangible asset eligible for depreciation.

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  1. (2009) 120 TTJ 983 (Chennai)


ACIT v. Real Image Tech. (P) Ltd.

ITA No. 201 (Mad.) of 2007

A.Y. : 2001-02. Dated : 15-2-2008

S. 32 of the Income-tax Act, 1961 — Commercial right comes
into existence whenever the assessee makes payment of non-compete fee and such
non compete right is an intangible asset eligible for depreciation.

During the relevant assessment year, the non-compete fees
paid by the assessee in pursuance of non-compete agreements entered into by it
with certain companies was claimed as revenue expenditure and the claim was
disallowed by the Assessing Officer. Under an application to the Joint CIT
u/s.144A, the assessee made an alternate plea for treating such fees as
capital expenditure — it should be treated as an intangible asset u/s.32 and
depreciation be allowed accordingly. The Jt. CIT did not allow the same,
holding that the payment was capital in nature i.e. neither a revenue
expenditure nor a capital expenditure. The CIT(A) allowed the assessee’s
claim.

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

(b) ACIT v. Radaan Media Works India Ltd., ITA No.
2241 (Mad.) of 2006 dated 14-12-2007

(c) Techno Shares & Stocks Ltd. v. ITO, (2006) 101
TTJ 349 (Mum.)

The Tribunal noted as under :

(1) When a businessman pays money to another businessman
for restraining the other businessman from competing with the assessee, he
gets a vested right which can be enforced under law and without that the
other businessman can compete with the first businessman.

(2) When by payment of non-compete fee, the businessman
gets his right what he is practically getting is kind of monopoly to run his
business without bothering about the competition.

(3) Generally, non-compete fee is paid for a definite
period which in this case is five years. The idea is that by that time the
business would stand firmly on its own footing and can sustain later on.
This clearly shows that a commercial right comes into existence whenever the
assessee makes payment for non-compete fee.

(4) The term ‘or any other business or commercial rights
of similar nature’ has to be interpreted in such a way that it would have
some similarities as other assets mentioned in clause (b) of Expln. 3. The
other assets mentioned are know-how, patents, copyrights, trade marks,
licences, franchises, etc. In all these cases no physical asset comes into
possession of the assessee. What comes in is only a right to carry on the
business smoothly and successfully and, therefore, even the right obtained
by way of non-compete fee would also be covered by the term ‘or any other
business or commercial rights of similar nature’ because after obtaining
non-compete right, the assessee can develop and run his business without
bothering about the competition. The right acquired by payment of
non-compete fee is definitely an intangible asset.

(5) This right (asset) will evaporate over a period of
time (of five years in this case) because after that the protection of
non-competition will not be available to the assessee. This right is subject
to wear and tear by the passage of time, in the sense that after the lapse
of a definite period of five years, this asset will not be available to the
assessee and, therefore, this asset must be held to be subject to
depreciation.

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S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free loan obtained by assessee from sister concerns for purchase of a flat from one of them cannot be said to be without consideration because while the assessee was benefited by interest-free loan, lende

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  1. (2009) 121 TTJ 145 (Mumbai)


Chandrakant H. Shah v. ITO

ITA No. 3966 (Mum.) of 2008

A.Y. : 2005-06. Dated : 12-1-2009

S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free
loan obtained by assessee from sister concerns for purchase of a flat from one
of them cannot be said to be without consideration because while the assessee
was benefited by interest-free loan, lenders were benefited by profit embedded
in the sale consideration, hence not exigible to tax u/s.56(2)(v).

During the relevant assessment year, the assessee took
interest-free loans of Rs.54.70 lacs from four builders (sister concerns) for
purchasing a flat from one of them. The assessee was also employed with one of
the concerns. The Assessing Officer formed an opinion that the assessee was
working with the group for several decades and, hence, having regard to the
said association, these parties gave such a huge loan to the assessee without
any security and interest as a mark of gratitude irrespective of his repayment
capacity and, therefore, in the absence of any obligation on the part of the
assessee to repay these loans, the entire transaction was of the nature of
gift which was given a colour of loan. Accordingly, he added a sum of Rs.54.45
lacs after giving a rebate of Rs.25,000 u/s.56(2)(v) to the total income of
the assessee.

The CIT(A) held that such loan transactions were abnormal
in the sense that there was no interest or any repayment stipulation, and
hence, the said sums were without consideration and upheld the addition.

The Tribunal, relying on various decisions, deleted the
addition.

The Tribunal noted as under :

(1) All these loans have been shown in the balance sheet
submitted along with the return of income as loans and the lenders have also
confirmed the same as such. Thus, apparently, it is a case of loan
transactions and not a case of gift.

(2) Since some of the loans were repaid partly/fully, it
was a material fact so as to rebut the presumption of the Assessing Officer
that the assessee was not under any obligation to repay the loans and this
fact also proves the assessee’s claim that no opportunity was granted by the
Assessing Officer to the assessee before making such addition.

(3) This type of addition also leads to a situation of
having two provisions for charging one type of income i.e. the
legislature has provided two charging sections i.e. S. 68 and S. 56
(2)(v) which cannot be possible. In that case, the legislature would have
made the provisions of S. 56(2)(v) either of overriding nature by stating
that ‘notwithstanding anything contained in S. 68’ or by providing for
applicability of provisions of S. 56(2)(v) in any other manner, in case
provisions of S. 68 could not be invoked. When a specific provision exists
in law for a particular thing, then that thing is liable to be examined
thereunder only and if that item cannot be taxed under that provision, then
that thing cannot be charged to tax under other provisions of the Act.

(4) In the present case, it is not that provisions of S.
68 were not applicable at all and, hence, the Assessing Officer invoked the
provisions of S. 56(2)(v). On the contrary, the Assessing Officer has made
necessary enquiries in that regard and he has not made addition u/s.68 for
the reason that all the requirements of that section i.e. identity,
creditworthiness and genuineness of transactions have been proved. Hence, a
loan transaction has to be treated as a loan transaction only and it should
be examined in the light of provisions of S. 68 and not under provisions of
S. 56(2)(v) and for this reason alone, this addition is liable to be
deleted.

(5) It is important to note that in S. 56(2)(v), the term
‘consideration’ is neither prefixed by the word ‘adequate’ nor it is
suffixed by the words ‘money or money’s worth’. Hence, if in any transaction
there exists consideration as per the provisions of the Indian Contract Act,
1872 such transaction would not come into the ambit of this section.

(6) Consideration for a promise may consist of either
some benefit conferred on the promisor or detriment suffered by the promisee
or both. Hence, on this criteria, the assessee has gained by way of
interest-free loan and the lenders have suffered by giving interest-free
loans and such suffering has got some value and, therefore, the said
transaction cannot be said to be without consideration.

(7) There is another very important aspect of the matter,
i.e. lenders have sold the flat to the assessee. In that sale
consideration, they have earned profit because it is nobody’s case that the
flat to the assessee has been sold at cost. Therefore, lenders have also
derived some benefit which has got value and, therefore, the same forms
consideration for giving interest-free loans to the assessee. Other three
lenders are the sister concerns of the company who actually built or sold,
hence the benefit derived by such company is a good consideration for other
three lenders. Benefit conferred to a third party not connected with the
promissor or promise in a pecuniary capacity would also be a good
consideration to support the transaction. There can be consideration without
any apparent monetary consideration and the only requirement is that the
consideration should create a legal relationship between the contracting
parties and this fact is not in dispute in the present case. Hence, the
transaction is with consideration. The term ‘consideration’ in legal sense,
is somewhat different from what is generally understood and the Revenue’s
decision is based on general understanding and, therefore, the same is not
correct in law. The transaction meets all the requirements of general law
which is only to be looked into while invoking provisions of S. 56(2)(v)
and, therefore, it is a transaction having a consideration and, therefore,
the same does not fall within the ambit of the provisions of S. 56(2)(v) for
this reason also.

 

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E-payment of Stamp Duty.

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19
E-payment of Stamp Duty.

Vide Notifications Number
GSR 642(E) and SO 2276(E), dated 7-9-2009 and SO 3314(E), dated 31-12-2009,
Payment of Stamp Duty for Form No. 1, Memorandum of Association, Articles of
Association, Form No. 5 and Form No. 44 is mandatory to be paid electronically,
through MCA portal (www.mca.gov.in) in respect of the States and Union
Territories of Andaman and Nicobar Islands, Andhra Pradesh, Arunachal Pradesh,
Assam, Bihar, Chhattisgarh, Delhi, Gujarat, Haryana, Jharkhand, Karnataka,
Kerala, Lakshadweep, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Orissa,
Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand and West Bengal with
effect from 1st April 2010.

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S. 14A and S. 48 of the Income-tax Act, 1961 (i) Interest on funds borrowed for acquisition of shares is to be taken into account towards the cost of acquisition for the purpose of computation of capital gains as prescribed u/s.48(ii)

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  1. (2009) 120 TTJ 397 (Pune)


Balan alias Shanmugam Balkrishnan Chettiar v.
Dy. CIT

ITA No. 1859 (Pune) of 2005

A.Y. : 2002-03. Dated : 31-1-2008

S. 14A and S. 48 of the Income-tax Act, 1961 :


(i) Interest on funds borrowed for acquisition of
shares is to be taken into account towards the cost of acquisition for the
purpose of computation of capital gains as prescribed u/s.48(ii)


(ii) Capital gain on the sale of shares being part of
the total income of the assessee and not an exempt income, S. 14A has no
application.



For the relevant assessment year, the Assessing Officer and
the CIT(A) disallowed the assessee’s claim for inclusion of interest paid on
funds borrowed for investment in shares in the cost of acquisition for the
purpose of computing capital gains.

The Tribunal, relying on the decisions in the following
cases, held in favour of the assessee :

(a) CIT v. Mithilesh Kumari, (1973) 92 ITR 9
(Del.)

(b) Addl. CIT v. K. S. Gupta, (1979) 119 ITR 372
(AP)

(c) CIT v. Maithreyi Pai, (1984) 43 CTR 88 (Kar.)/
(1985) 152 ITR 247 (Kar.)

The Tribunal noted as under :

(1) In the past, the assessee had always capitalised the
interest.

(2) S. 48 says that capital gain is to be computed by
deducting from the consideration the cost of acquisition of the asset and
the cost of any improvement thereto.

(3) Once it is established that the assessee had borrowed
the funds for acquisition of shares and the burden of interest had been
capitalised, that interest burden cannot be segregated from the amount of
investment.

In response to the argument of the Revenue that since
interest had a nexus to exempt income, the provisions of S. 14A should be
applied, the Tribunal noted as under :

(1) The words ‘in relation to income which does not form
part of the total income under this Act’ mean if an income does form part of
the total income, then the related expenditure is out of the ambit of the
applicability of S. 14A. The capital gain shown by the assessee had formed
part of the total income of the assessee. Otherwise also, capital gain is
not exempt income and without any ifs and buts, always being taxed in the
hands of a taxpayer. Therefore, the Revenue authorities have proceeded on a
wrong premise that the interest expenditure was in respect of an income
which was exempt or did not form part of the total income.

 

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S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit from sale of shares out of investment portfolio was taxable as capital gains and not as business income.

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  1. (2009) 120 TTJ 216 (Luck.)


Sarnath Infrastructure (P) Ltd. v. ACIT

ITA No. 301 (Luck.) of 2006

A.Y. : 2004-05. Dated : 20-12-2007

S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit
from sale of shares out of investment portfolio was taxable as capital gains
and not as business income.

The assessee-company was dealing in shares both as business
as well as investment and keeping separate accounts in respect of the two
portfolios. Valuation of holdings in investment portfolio was done at cost
only and holdings were reflected in Balance Sheet as investment. For the
relevant assessment year, the profit on sale of shares out of the investment
portfolio was treated by the Assessing Officer as business income and not as
long term capital gain. The CIT(A) upheld the addition.

The Tribunal held that the said profit was to be treated as
long term capital gain and not as business income. The Tribunal’s decision was
arrived at after examining various decisions.

The Tribunal noted as under :

(1) The material on record showed that the assessee had
clear independent portfolios for investment in shares as well for trade and
it has kept separate accounts in respect of the two portfolios.

(2) The shares which were sold out of investment
portfolio during this year and on which capital gains have been offered by
the assessee were held by it for more than two years and in some cases for
more than three years.

(3) No material is brought on record by the Department to
show that demarcation line between business and investment is hazy or that
assessee has not maintained an investment portfolio and it was dealing in
shares only like a trader.

(4) Valuation of holdings has been done at cost for
investment portfolio. They were reflected in the Balance Sheet as
investment.

(5) The frequency of such purchase or sale in this
portfolio is not large enough to doubt that the investment portfolio is only
a device to pay lesser taxes by parking some stock-in-trade in the
investment portfolio.

(6) Turnover to stock ratio in investment portfolio is
very low as compared to that in trading portfolio. Further, there is no
material to show that these shares in the investment portfolio were also
traded in the same and like manner as those which were in stock-in trade
portfolio.

(7) All the sales out of the investment portfolio were
identifiable to purchases made in the same portfolio.

(8) In view of the above facts, the assessee had
discharged its primary onus by showing that it was maintaining separate
accounts for two portfolios and there was no intermingling. The onus then
shifted on the Revenue to show that apparent was not real. There was no
material brought in by the Revenue to show that separate accounts of two
portfolios were only a smoke screen and there was no real distinction
between the two types of holdings. This could have been done by showing that
there was intermingling of shares and transactions and the distinction
sought to be created between two types of portfolios was not real but only
artificial and arbitrary.

Therefore, in absence of any material to the contrary and
on appreciation of cumulative effect of several factors present, it was held
that the surplus was chargeable to capital gains only and the assessee was not
to be treated as trader in respect of sales and purchases of shares in the
investment port-folio.

 

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Income-tax Act, 1961 — S. 194A — Whether a chit fund agreement is not a money lending contract but a special type of contract — Held, Yes. Whether in a scheme of chit fund there is neither any money borrowed nor any debt incurred, the dividends paid by th

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New Page 1

  1. 2009 TIOL 328 ITAT (Bang.)


ITO v. Margasoochi Chits Pvt. Ltd.

ITA No. 995/Bang./2008

A.Y. : 2005-2006. Dated : 16-1-2009

Income-tax Act, 1961 — S. 194A — Whether a chit fund
agreement is not a money lending contract but a special type of contract —
Held, Yes. Whether in a scheme of chit fund there is neither any money
borrowed nor any debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest — Held, Yes.

Facts :

In these cases the AO relying on the instructions issued by
CBDT held that the dividend payments made to the subscribers of chit fund were
in the nature of interest and were liable for deduction of tax at source
u/s.194A. Since the assessees had not deducted tax u/s.194A, the AO passed
orders u/s.201(1) and u/s.201(1A) in respect of five assessees for the
impugned assessment years by creating demand on the dividends paid but not
subjected to tax deduction at source. Since identical orders were passed in
all the fifteen appeals they were taken up together by the Tribunal.

The CIT(A) held that a chit agreement is not a money
lending contract, but a special type of contract and any payment with
reference to a chit agreement being referred to as interest payment does not
arise and installments in chit fund being non-refundable in nature cannot be
equated with ‘deposit’ and consequently, the dividend or discount credited to
the account of the subscribers would not constitute interest. He also held
that the CBDT circulars are not binding on the appellate authorities.

Aggrieved by the orders of CIT(A), Revenue preferred an
appeal to the Tribunal.

Held :

The Tribunal noted that the scheme of Chit Funds is
regulated by The Chit Funds Act, 1982 and S. 3 in Chapter I of the Chit Funds
Act provides that the provisions of the Act override all other laws,
memoranda, articles, etc. save as otherwise expressly provided in the Act. In
view of the non obstante clause the Tribunal held that the definitions of the
expression ‘discounts’, ‘dividends’, ‘prize amount’ as given in the said Chit
Funds Act will prevail over similar definition as found in the Income-tax Act.
The Tribunal held that in a scheme of chit fund there is neither any money
borrowed nor a debt incurred and since interest is defined in the Income-tax
Act as interest payable in any manner in respect of any monies borrowed or
debt incurred (including deposit) and in a chit fund there is neither any
money borrowed nor a debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest. The Tribunal held that the demands created u/s.201(1) and
u/s.201(1A) were not justified. It upheld the order of the CIT(A) and
dismissed the appeals filed by the revenue.

 

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