Category: Direct Taxes

It is settled legal position that producing articles whether
by any labour or by machine will amount to manufacture if the final product is
different from the input and is known as a commercially different product in the
business parlance. The assessee is producing different variety of masala, such
as chiwda masala, pickle masala, etc. which are commercially known products in
the market and these products are different from the different spices used in
the process. In case of the assessee, different raw spices which are inputs are
combined in different proportions and undergo different processes to produce the
final product which is masala and which is different from the input raw
material. The assessee is producing different types of masala using different
formula with the help of input spices and these products are commercially known
products, such as garam masala, mutton masala, pav bhaji masala and have
different uses. The Tribunal noted that the judgment of the Supreme Court in
Aspinwall & Co. supports the case of the assessee and that the decision of the
Tribunal in the case of Tirupathi Microtech Pvt. Ltd. is in favour of the
assessee. The judgments relied upon by the AO viz. Appejay Plantation, Indian
Hotels and Sacs Eagles Chicory were found to be distinguishable. Accordingly,
the Tribunal held that the assessee is a manufacturing concern entitled to
deduction u/s.80IB.

Before the Tribunal, the Revenue relied on the Mumbai Bench
Tribunal decision in the case of Citicorp Finance (India) Ltd. and contended
that the orders of the lower authorities be upheld.

According to the Tribunal, the pre-requisite for disallowance
u/s.14A is that the expenditure should have been incurred in relation to exempt
income. In the given case, the assessee had all along claimed that it had not
incurred any expenditure. It further noted that the AO had not been able to
correlate any expenditure, which could be said to have been incurred for earning
exempt income. According to it, the decision in the case of Citicorp Finance
(India) Ltd. relied on by the Revenue was based on the provisions in Ss.(2) and
(3) which were inserted by the Finance Act, 2006 w.e.f. 1-4-2007. According to
it, the insertion of the said provisions was not retrospective in nature. Hence,
the ratio as laid down in the said Tribunal decision cannot be applied to the
case of the assessee. Further, relying on the decision of the Delhi Tribunal in
the case of Wimco Seedling Ltd., the Tribunal allowed the appeal of the assessee.

While computing the book profit u/s.115JB for A.Y. 2003-04,
the Assessing Officer held that since there was a substantial change in
shareholding in A.Y. 2000-01, the provisions of S. 79 were attracted. Therefore,
the brought forward loss/depreciation up to A.Y. 2000-01 is not to be carried
forward for computing the business income as well as for the purposes of S.
115JB. The Assessing Officer also held that there is no direct case law on the
subject, but logic demands that prohibition u/s.79 shall apply both to normal
computation u/s.28 to u/s.43C as well as u/s.115JB. The CIT(A) upheld the
Assessing Officer’s order.

Tamil Nadu Road Development Co. Ltd. v. ACIT/ITO

A.Ys. : 2003-04 and 2004-05

Dated : 24-10-2008

S. 32 — Whether road is eligible for depreciation in
category of ‘building’ at rate applicable to buildings — Held, Yes.

The assessee-company was incorporated for construction,
development and maintenance of roads at various places in Tamil Nadu as per
the agreement entered into with the Government of Tamil Nadu. Its claim for
depreciation on roads at the rate of 25% (as plant and machinery), was
rejected by the Assessing Officer as road did not figure in the depreciation
schedule. He further observed that roads were not buildings, entitled to
depreciation. On appeal, the Commissioner (Appeals) upheld the Assessing
Officer’s view.

On second appeal by the assessee, the Tribunal held that :

(1) Merely because some optical fibre lines or connection
lines had been laid, the road could not get converted into a plant.

(2) The assessee-company was entitled to collect fixed
amount of toll per vehicle for which it could have created any kind of
barrier for collection of such toll. If the assessee had chosen to install
automated toll plaza, then mere construction of one toll plaza would not
change the nature of the asset which remained the road.

(3) After the A.Y. 1988-89, all the appendices,
prescribing the table of rates of depreciation had the note that building
would include road. Therefore, the assessee would become entitled to
depreciation on the road in the category of ‘building’.

 

In these circumstances, the order of the Commissioner
(Appeals) was set aside and the Assessing Officer was directed to allow
depreciation on the road at the rate applicable to the buildings.

Akola Municipal Corporation v. ITO

A.Ys. : 2005-06 to 2007-08

Dated : 21-5-2008

 

Collection of tax at source u/s.206C — Collection of octroi
under Bombay Provincial Municipal Corporation Act, 1949 was neither for
parking lot nor at toll plaza nor for mining or quarrying nor it was for
purpose of business, and, therefore, collection of octroi by agent appointed
by assessee would not fall in S. 206C(1C).

 

The assessee-corporation had appointed an agent for
collection of octroi, as levied by the assessee under the Bombay Provincial
Municipal Corporation Act, 1949. The assessing authority held that the
assessee was to collect tax at source on the octroi which was in the nature of
‘Toll Plaza’ within meaning of S. 206C(1C). On appeal, the Commissioner
(Appeals) confirmed the order of the assessing authority.

 

On second appeal by the assessee :

(1) On a close reading of the legislation like the Bombay
Provincial Municipal Corporation Act, 1949, the Constitution, the Tolls Act,
1851 and the Supreme Court and the High Courts’ decisions and various
dictionary meanings, it could be said that ‘toll’ is a different thing than
‘octroi’. Octroi is normally a tax levied on entry of goods into local
areas, whereas ‘toll’ is a tax levied as compensation for the purpose of
temporary use of land or allowing passage of vehicles through the land.

(2) In the instant case, the contract of the
assessee-corporation with the agent for collecting octroi, was different
from clause (e) of the said section dealing with ‘toll’.

 

Accordingly, the orders of the Commissioner (Appeals) as
well as the Assessing Officer were to be vacated and the appeal of the
assessee was to be allowed.

Enem Nostrum Remedies (P.) Ltd. v. ACIT

A.Ys. : 2003-04 and 2004-05

Dated : 28-8-2008

Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S.
80-IB are to be fulfilled only if eligible assessee is an industrial
undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where
assessee was engaged in business of carrying out scientific research and
development and was not an industrial undertaking and had been approved by
Government of India, for claiming benefit of deduction u/s.80-IB(8A),
conditions of Ss.(2) of S. 80-IB were not required to be fulfilled by it.

 

The assessee-company had been approved as an R&D company by
the department of scientific and industrial research. It claimed deduction
u/s.80-IB(8A). The Assessing Officer denied the deduction u/s.80-IB(8A) by
observing that :

(1) The assessee had not claimed deduction u/s.80-IB(8A)
in the initial year,

(2) Subsequent claim made by it in the relevant
assessment years could only lead to the surmise that its business was formed
by splitting up, or the reconstruction of a business already in existence;

(3) The certificate by the Chartered Accountant in Form
10CCB was not produced.

 

On appeal, the Commissioner (Appeals) held that the
assessee did not fulfill the conditions of S. 80-IB(2)(iii) as it was not
manufacturing or producing any article or thing, and, accordingly, upheld the
view of the Assessing Officer on a different count.

On second appeal by the assessee, the Tribunal held that :

(1) The four conditions stipulated U/ss.(2) of S. 80-IB
are to be fulfilled only if the eligible assessee is an industrial
undertaking within the meaning of S. (3) to S. (5) of said Section, as the
case may be.

(2) If the assessee is not an ‘industrial undertaking’
but is otherwise eligible for deduction under any of other sub-sections of
S. 80-IB, then there is no requirement for importing the conditions
stipulated in Ss.(2) of S. 80-IB which are applicable to industrial
undertakings.

(3) Since in the instant case, the assessee was engaged
in the business of carrying out scientific research and development and had
been approved by the Government of India, for claiming the benefit of
deduction u/s.80-IB(8A), the conditions of Ss.(2) of S. 80-IB were not
required to be fulfilled by it.

Based on the above observations, the Tribunal directed the
Assessing Officer to allow deduction as claimed by the assessee.

The assessee had sold a plot of land for sale
consideration of Rs.10.81 lac and declared a long-term capital gain of Rs.5,558.
The AO invoked provisions of S. 50C and the full consideration was taken as
Rs.19,24,987 and reworked capital gain accordingly.

The assessee has purchased a flat within a period
of two years from the date of transfer of the plot. The assessee has made total
investment of Rs.21,14,986, out of which Rs.16.74 lac was paid before the date
of filing of return for concerned assessment year. Therefore, before the learned
CIT(A), the assessee contended that the assessee may be allowed relief u/s.54F
by considering the full value of the consideration as shown by the assessee in
the sale deed as compared to the full value of consideration adopted by the AO
in view of S. 50C of the Act. The learned CIT(A) rejected the claim of the
assessee by observing that the assessee had not claimed S. 54F deduction at the
time of filing of return of income or during the course of assessment
proceedings. Further, the learned CIT(A) held that the availability of deduction
u/s.54F is subject to fulfilment of various conditions and those conditions were
not fulfilled by the assessee.

The deeming fiction as provided in S. 50C in
respect of the words, ‘full value of consideration’ is to be applied only for S.
48 of the Income-tax Act. The words ‘full value of consideration’ as mentioned
in other provisions of the Act are not governed by the meaning as provided in S.
50C. For the meaning of full value of consideration as mentioned in different
provisions of the Act except in S. 48, one will have to consider the full value
of consideration as specified in the sale deed.

For claiming exemption u/s.54F, net consideration
received upon transfer of original asset is compared with the cost of the new
asset. In Explanation to S. 54F(1), it is mentioned that net consideration means
the full value of consideration received or accruing as a result of the transfer
of the capital asset as reduced by any expenditure incurred wholly and
exclusively in connection with such transfer. The meaning of full value of
consideration in Explanation to S. 54F(1) will not be governed by meaning of
words ‘full value of consideration’ as mentioned in S. 50C. In the instant case,
the cost of new asset is not less than the net consideration as per sale deed,
thus the whole of the capital gains will not be charged even if the capital
gains have been computed by adopting the value adopted by the stamp registration
authority.

The decision of Goetze (India) Ltd. v. CIT, (2006)
204 CTR (SC) 182 restricts the power of the AO to entertain the claim for
deduction otherwise than by revised return and did not impinge on the power of
the Tribunal u/s.254 of the Act. In the instant case, the assessee has claimed
the deduction u/s.54F before the learned CIT(A) and the learned CIT(A) has
entertained such claim. Therefore, the issue of claim can be considered.

The assessee was into the business of warehousing,
property leasing, trading in chemical and textile auxiliaries. The assessee
entered into a leave-and-licence agreement with Concord Motors Ltd., a
subsidiary of Tata Motors Ltd. for a period of two terms of three years each. A
lock-in period of five years and six months was provided in the agreement. The
lease rent was treated as business income. During the assessment year under
consideration, the agreement was terminated prematurely by the licensee when 16
months were still remaining out of the lock-in period. On termination of the
lease, the assessee forfeited the interest-free security deposit received by it
from the licensee which was for an amount of Rs.1.50 crore under a separate
security deposit agreement and Rs.5 lakh under a leave-and-licence agreement.
Further, the assessee had received an amount of Rs.24,37,500 as damages for
premature termination from the licensee. This amount was paid on account of
hardship and inconvenience suffered by the assessee as damages. The assessee
treated entire receipt as capital receipt. The AO treated it as revenue receipts
and as taxable income. Upon further appeal, the CIT(A) upheld the order of the
AO.

A perusal of the terms of agreements clearly shows
that the security deposit is a capital receipt. The deposit is not in the nature
of advance for goods or services, nor could it be qualified as in relation to
the rental component. It is in the nature of loan and is in the capital field.
On a perusal of the termination agreement, it is clear that the forfeiture of
security deposit in question is not in lieu of rental payments and the assessee
is not in default. The forfeiture of security deposit does not partake the
character of income, because a capital receipt cannot be said to have converted
itself into a trading receipt on signing the agreement.

In a decision of Morely (Inspector of Taxes) v.
Tattersall, (1939) 7 ITR 316 (CA), it is clearly laid down that the quality and
nature of receipt for income-tax purpose are fixed once and for all when it is
received and that it does not change its character subsequently. This decision
has been followed in the case of K.M.S. Lakshmanier & Sons v. CIT, (1953) 23 ITR
202 (SC) and it has been observed that one of the conditions is that it is to be
adjusted against a claim arising out of a possible default of a depositor,
cannot alter the character of the transaction or the fact that the purpose for
which the deposit is made is to provide a security for the due performance of a
collateral contract, cannot invest the deposit with a different character. It
remains a loan of which the repayment in full is conditioned by the due
fulfilment of obligations under the collateral contract.

In a subsequent decision of CIT v. T.V. Sundaram
Iyengar & Sons Ltd., (1996) 222 ITR 344 (SC), the above decision of Morely
(Inspector of Taxes) v. Tattersall was considered and held that if an amount is
received in the course of trading transaction, even though it is not taxable in
the year of receipt as being of revenue character, the amount changes its
character when the amount becomes the assessee’s own money because of limitation
or by any other statutory or contractual right. In the case on hand, the
original receipt was in the nature of a loan and never had a revenue character
as it was not at any time a trading receipt as in the case of T.V. Sundaram
Iyengar & Sons.

Further, in the case of Mahindra & Mahindra Ltd. v.
CIT, (2003) 261 ITR 501 (Bom.), it is held that subsequent waiver of principal
amount of loan was not assessable u/s.28(iv) of the Act.

Therefore, the forfeiture of security deposit
amounting to Rs.1.55 crore is not taxable. However, the payment of lump sum
consideration of Rs.24.37 lac is in lieu of the rents and is in the revenue
field unlike the remission of a loan liability. Therefore the same was rightly
taxed as such.