BCAJ | Bombay Chartered Accountant Journal

Search and seizure: Block assessment: S/s. 69A, 80-IB(10) and 158BB: Block Period 1-4- 1995 to 21-2-2002: Assessee in construction business eligible for deduction u/s. 80-IB(10): Disclosure of construction income: Assessee is entitled to deduction u/s. 80-IB(10):

CIT vs. Sheth Developers (P) Ltd.; 254 CTR 127 (Bom):

The assessee carried on business as a builder and was entitled to deduction u/s. 80-IB(10). In the course of the search action u/s. 132 of the Act, on 21/02/2002, the assessee had made a declaration of undisclosed income of Rs. 7 crore. In the block return, the assessee offered undisclosed income of Rs. 3.5 crore. The assessee claimed that at the time of making the statement, the director of the assessee was unaware of the deduction u/s. 80-IB of the Act. The Assessing Officer did not allow the claim for deduction u/s. 80-IB(10) of the Act and computed the undisclosed income at Rs. 7.68 crore. CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) Consequent to the amendment by the Finance Act, 2002 with retrospective effect from 1-7-1995, the total income or loss has to be computed in accordance with the provisions of the Act. Consequently, w.e.f. 1-7-1995, the total income/ loss for the block period has to be computed in accordance with the provisions of the Act and the same would include Chapter VI-A. Section 80-IB is a part of Chapter VI-A. In view of the above, while computing the undisclosed income for the block period, the respondent assessee is entitled to claim deduction from its income u/s. 80-IB.

ii) It is not the case of the Revenue that the money found in possession of the assessee could not be explained and/or its source could not be explained to the satisfaction of the Assessing Officer. In the present case, undisclosed income found in the form of cash was explained as having been acquired while carrying on business as builder and this explanation was accepted by the Assessing officer by having assessed the undisclosed income for the block period as income from profits and gains of business or profession.

iii) In the present case, no question of application of sections 68, 69, 69A, 69B and 69C arises as the same has not been invoked by the Department. It is an admitted position between the parties as reflected even in the order of the Assessing Officer that undisclosed income was in fact received by the assessee in the course of carrying out its business activities as a builder. In view of the above, the order of the Tribunal cannot be faulted.”

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Nirav Shah

Reassessment: S/s. 115AD, 147 and 148: A. Y. 2006-07: Validity to be determined with reference to reasons recorded for belief: Assessment u/s. 143(1) determining Nil income: Notice u/s. 148 on the ground that that section 115AD may be applicable: Not valid:

Indivest Pte Ltd. vs. Addl. DIT; 350 ITR 120 (Bom):

The assessee company was owned by the Government of Singapore. For the A. Y. 2006-07, in the return of income, the assessee had claimed that the profits earned from the transactions in Indian securities are not liable to tax in India in view of Article 7 of the India-Singapore tax treaty. Accordingly, the assessee had returned Nil income. The assessment was completed u/s. 143(1) of the Income-tax Act, 1961 determining Nil income. Subsequently, the Assessing Officer issued notice u/s. 148 dated 16-3-2011 on the ground that the possibility of escapement of income taxable as STCG under the Act may not be ruled out.

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

“i) The Assessing Officer has power to reopen an assessment, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reason must have a live link with the formation of the belief. The validity of the notice reopening the assessment u/s. 148 of the Act, has to be determined on the basis of the reasons which are disclosed to the assessee. Those reasons constitute the foundation of the action initiated by the Assessing Officer of reopening the assessment. Those reasons cannot be supplemented or improved upon subsequently.

ii) Reading the reasons of the Assessing Officer, it was evident that there was absolutely no tangible material on the basis of which the assessment for the A. Y. 2006-07 could have been reopened. Upon the return of income being filed by the assessee both in electronic form and subsequently in the conventional mode, the assessee received an intimation u/s. 143(1).

iii) While disposing of the objections of the assessee, the Assessing Officer had purported to state that the assessee had filed only sketchy details in its return filed in the electronic form. The relevant provisions expressly make it clear that no document or report can be filed with the return of income in the electronic form.

iv) The notice was not valid and was liable to be quashed.”

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Nirav Shah

Industrial undertaking: Deduction u/s. 80-IC: A. Y. 2004-05: Interest received for delay in payment for goods: Is income derived from industrial undertaking: Eligible for deduction u/s. 80-IC:

CIT Vs. Universal Pipes (P) Ltd.; 254 CTR 311 (Gau):

The assessee was engaged in the manufacture and sale of PVC pipes. The assessee was entitled to deduction u/s. 80-IC. In the relevant year, the assessee had received an amount of Rs. 3,13,19,602/- by way of interest from the irrigation department, as per the order of the High Court, for the delay involved in the payment in connection with delivery of goods. The Assessing Officer disallowed the claim for deduction u/s. 80-IC in respect of this amount. The Tribunal allowed the assessee’s claim.

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

“Interest received from the Irrigation Department as per the order of the Court for the delay involved in the payment in connection with delivery of goods to Irrigation Department constituted income derived from the industrial undertaking of the assessee and is eligible for deduction u/s. 80-IC.”

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Nirav Shah

Income from undisclosed sources: Reference to DVO: S/s. 69 and 142A: A. Y. 1989-90: Rejection of books of account is prerequisite for valid reference to DVO for valuation u/s. 142A: Report of DVO pursuant to invalid reference could not be a basis for addition u/s. 69:

Goodeluck Automobiles (P) Ltd. vs. ACIT; 254 CTR 1 (Guj):

In the previous year relevant to the A. Y. 1989-90, the assessee had constructed a building and had declared the cost of construction to be Rs. 13,23,321/-. The Assessing Officer made a reference to the DVO for valuation who computed the cost of construction at Rs. 19,13,100/-. The Assessing Officer made the addition of the difference of Rs. 5,89,779/- as undisclosed income u/s. 69 of the Income-tax Act, 1969. The reference to the DVO and the addition was upheld by the Tribunal.

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

“i) Expression used by the Legislature in the heading of section 142A as well as in the opening part of the said section is “estimate”. Question of estimate arises only when the books of account of the assessee are not reliable. For the purpose of resorting to the provisions of section 142A, the Assessing Officer is first required to record a satisfaction that the assessee has made investments which are not recorded in the books of account. As a necessary corollary, he would then reject the books of account as not reflecting the correct position and then proceed to make the assessment on the basis of the estimation. Thus, it is apparent that the question of estimating the value of any investment would arise only when the books of account are not reliable. Accordingly, the Assessing Officer is first required to reject the books of account before making a reference to the Valuation Officer.

ii) Report of the Valuation Officer cannot form the foundation for rejection of the books of account. In the instant case, the Assessing Officer has categorically recorded a finding to the effect that the assessee’s accounts are duly audited and complete details are available. He made reference to the valuation Officer merely to seek expert advice regarding the cost of construction. There is nothing in the assessment order to suggest that the Assessing Officer had any doubt regarding the cost of construction or that he was not satisfied regarding the correctness or completeness of the books of account.

iii) Prior to making the reference to the valuation Officer, the Assessing Officer has not ascertained what was the defect in the cost of construction disclosed by the assessee in its return. Except for the difference between the estimated cost determined by the Valuation Officer and the actual cost shown by the assessee, the Assessing Officer has not brought any material on record to establish that the assessee has made any unaccounted investment in the construction of the building in question and that the books of account do not reflect the correct cost of construction.

iv) Hence, the reference made to the Valuation Officer not being in consonance with the provisions of law was invalid. Accordingly, the report made by the valuation Officer pursuant to such invalid reference could not have been made the basis of the addition u/s. 69.

v) In view of the above discussion, the Tribunal was not justified in holding that the reference made by the Assessing Officer to the Valuation Officer for estimating the cost of construction was not invalid. The Tribunal was also not justified in holding that the addition made by the Assessing officer u/s. 69 of the Act was correct.”

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Nirav Shah

Income: Accrual of: Section 5: A. Y. 2004-05: Amount (Rs. 3,037 crore) for transfer of indefeasible right of connectivity for 20 years: Assessee correctly spread the entire fee of Rs. 3,037 crore over a period of 20 years and accordingly paid tax: Entire amount was not assessable during the relevant year:

CIT vs. Reliance Communication Infrastructure Ltd.; 254 CTR 251 (Bom):

In the previous year relevant to the A. Y. 2004-05, the assessee had received an amount of Rs. 3,037 crore as fees for grant of Indefeasible Right of Connectivity for a period of 20 years. The assessee spread the amount over a period of 20 years and accordingly paid the tax. The Assessing Officer allowed the claim. Exercising the powers u/s. 263 of the Income-tax Act, 1961, the Commissioner held that the entire amount was income accrued to the assessee in the relevant year i.e. A. Y. 2004-05 itself. The Tribunal upheld the assessee’s claim.

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

“i) The Tribunal has on examination of the agreement dated 30-4-2003 entered into between RI Ltd and the assessee concluded that RI Ltd in terms of the agreement had only a right to use the network during the tenure of 20 years agreement. Further, the agreement was liable to be terminated at the sole discretion of RI Ltd. and consequently, the amount received as advance for 20 years lease period would have to be returned on such termination for the balance unutilised period.

ii) Further, the Tribunal held that the agreement dated 30-4-2003 was only in the nature/form of a lease agreement. On application of AS-19 formulated by the ICAI, a lease income arising from operating lease should be recognised in the statement of profit and loss in a straight line method over the term of the lease. Therefore, the assessee had in terms of AS-19 correctly spread the entire fee of Rs. 3,037 crore over the period of 20 years and to pay tax thereon over the entire period.”

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Nirav Shah

Expenditure: Capital or revenue: Section 37: A. Y. 1997-98: Amounts paid by assessee to clubs for obtaining membership is revenue expenditure:

CIT vs. Infosys Technologies Ltd. (No. 3); 349 ITR 598 (Kar):

In the relevant year, the Assessing Officer disallowed the claim of the assessee for deduction of the amount paid to the clubs for obtaining membership holding the same as capital expenditure. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, Karnataka High Court upheld the decision of the Tribunal and held that the amount paid to the clubs for obtaining membership is revenue expenditure.

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Nirav Shah

Charitable trust: Registration: S/s 12A and 12AA: Statute does not prohibit or enjoin the CIT from registering trust solely based on its objects, without any activity, in the case of a newly registered trust:

DI vs. Foundation of Opthalmic and Optometry Research Education Centre; 254 CTR 133 (Del):

The assessee society had applied for registration u/s. 12AA on 10-7-2008. The Director of IT(Exemption) refused to grant registration on the ground that no charitable activity had in fact taken place since the society was a newly established one. The Tribunal allowed the assesse’s appeal.

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

“i) Facially, the provisions of section 12AA would suggest that there are no restrictions of the kind which the Revenue is reading into this case. In other words, the statute does not prohibit or enjoin the CIT from registering trust solely based on its objects, without any activity, in the case of a newly registered trust. The statute does not prescribe a waiting period, for a trust to qualify itself for registration.

ii) Tribunal was right in holding that while examining the application u/s. 12AA(1)(b) r.w.s. 12A, the concerned CIT/Director is not required to examine the question whether the trust has actually commenced and has, in fact, carried on charitable activities.

iii) The appeal is accordingly dismissed.”

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Nirav Shah

Reassessment: S/s. 143(1), 143(3), 147 and 148: A. Y. 2002-03: No distinction to be made while interpreting the words “reason to believe” vis-à-vis section 143(1) and 143(3): In the absence of “fresh material” assessment cannot be reopened: Change of opinion is not a valid basis for reopening assessment:

CIT vs. Oriented Craft Ltd.(Del); ITA No. 555 of 2012 dated 12/12/2012:

For the A. Y. 2002-03, the assessee filed the return of income claiming deduction of Rs. 13.35 crore u/s. 80HHC of the Income-tax Act, 1961. The returned income was accepted by an order u/s. 143(1) of the Act. Subsequently, the Assessing officer issued notice u/s. 148 of the Act and reopened the assessment on the ground that the sale proceeds of the quota was wrongly considered as export turnover and that it was business profits and 90% thereof had to be reduced for computing deduction u/s. 80HHC. The assessee challenged the reopening on the ground that there was no “fresh material” as contemplated by the Supreme Court in the case of CIT Vs. Kelvinator of India Ltd; 320 ITR 561 (SC). The Tribunal accepted the assessee’s contention and held that the Assessing Officer had no jurisdiction to reopen the assessment made u/s. 143(1) of the Act.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) Section 147 permits an assessment to be reopened if there is “reason to believe”. It makes no distinction between an order u/s. 143(3) or an intimation u/s. 143(1) of the Act. Accordingly, it is not permissible to adopt different standards while interpreting the words “reason to believe” vis-à-vis section 143(1) and 143(3). The Department’s argument that the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of a section 143(3) assessment cannot apply to a section 143(1) intimation is not acceptable because it would place an assessee whose return is processed u/s. 143(1) in a more vulnerable position than an assessee in whose case there is a full-fledged scrutiny assessment u/s. 143(3).

ii) Whether the return is put to scrutiny or accepted without demur is not a matter which is within the control of assessee. An interpretation which makes distinction between the meaning and content of the expression “reason to believe” between a case where a section 143(3) assessment is made and one where an intimation u/s. 143(1) is made may lead to unintended mischief, be discriminatory and lead to absurd results.

iii) In CIT vs. Kelvinator India Ltd; 320 ITR 561(SC) it was held that the term “reason to believe” means that there is “tangible material” and not merely a “change of opinion” and this principle will apply even to section 143(1) intimation.

iv) On facts, the Assessing Officer reached the belief that there was escapement of income on going through the return of income filed by the assessee. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer. There is no whisper in the reasons recorded of any tangible material which came to the possession of the Assessing Officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of power conferred u/s. 147.

v) Appeal of the Revenue is accordingly dismissed.”

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Nirav Shah

Appeal to High Court – High Court should not overrule the findings of the Tribunal and Commissioner (Appeals) on the factual aspects and in case of doubt should remit the matter for deciding the matter afresh after giving reasonable opportunity to the assessee.

M.K. Shanmugam vs. CIT [2012] 349 ITR 384 (SC)

The assessee was engaged in the business of jewellery and money-lending. He was the proprietor of M/s. Sri Velmurugan Financiers, M/s. Sri Raja Jewellery, M/s. Sri Raja Silks and M/s. M.K.S. Finance. He was also the managing director of M/s. Shanmugaraja Chit Funds Pvt. Ltd. and partner in M/s. Sri Raja Chit Funds, M/s. Sri Velmurugan Chit Funds, Coimbatore and M/s. United Fabrics, Tiruppur. A search was conducted in the business premises of the assessee on 31st January, 2001, u/s. 132 of the Income-tax Act, 1961, hereinafter referred to as “the Act”, by the Investigation Unit II, Coimbatore. During the course of the search, various incriminating documents were seized, which indicated that the assessee did not disclose the correct income earned by him in the returns filed by him before conducting such a search. Before the date of the search, the assessee filed returns of income only up to the assessment year 1998-99. Therefore, a notice u/s. 158BC of the Act was issued to the assessee on 28th February, 2001. The search was concluded on 13th March, 2001. On 18th September, 2002, block return in Form 2B was filed by the assessee for the period from 1st April, 1990 to 13th March, 2001, declaring a loss of Rs. 16,47,844. In response to the notices and the letters issued, the assessee made written as well as oral submissions in respect of his income and investments during the said block period. The documents seized from his business premises and the documents produced by him were scrutinised and after hearing the assessee, the Assessing Officer completed the assessment. The Assessing Officer made additions of (i) Rs. 42 lakh on account on-money received from sale of Raja Street properties; (ii) Rs. 60,72,900 being bogus outstanding deposit in jewellery; (iii) Rs. 3,83,000 being bogus outstanding fixed deposits in Sri Velmurugan Finances; (iv) Rs. 26,63,130 in respect of unexplained payments made to various parties, and (v) Rs. 2,00,000/- being sale proceeds of A.P. Lodge.

As against the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) II, Coimbatore, who by order dated 25th March, 2004, allowed the appeal in part. Aggrieved by the said order of the Commissioner of Income Tax (Appeals), the Revenue filed an appeal before the Income Tax Appellate Tribunal and the assessee filed cross-objection in respect of the disallowed portion. The Income Tax Appellate Tribunal, by its common order dated 23rd November, 2006, dismissed the appeal filed by the Revenue and partly allowed the cross objection filed by the assessee. Challenging the same, the Revenue filed appeal before the High Court.

The High Court allowing the appeal held that
(i) the Assessing Officer had not committed any error in making the addition of Rs. 42 lakh, while completing the block assessment,
(ii) out of Rs. 60,92,900/- a sum of Rs. 21,21,400/- was assessable as undisclosed income,

(iii) the addition of Rs. 13,83,000 was justified and
(iv) the amount of Rs. 26,63,130/- was rightly treated as undisclosed income [349 ITR 369 (Mad)].

On appeal to the Supreme Court by the assessee, the Apex Court, after going through the judgment of the High Court, observed that the High Court had overruled the decisions of the Income Tax Appellate Tribunal and of the Commissioner of Income Tax (Appeals) on factual aspects also. By way of illustration, the Supreme Court pointed out that the High Court had stated that cash flow statements submitted by the assessee were not supported by the documents. According to the Supreme Court, in such a case, the High Court should have remitted the case to the Commissioner of Income Tax (Appeals) giving opportunity to the assessee to produce relevant documents. The Supreme Court, for the aforestated reasons, set aside the judgement of the High Court and remitted the case to the Commissioner of Income Tax (Appeals), to decide the matter uninfluenced by the judgment of the High Court.

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Nirav Shah

Business Expenditure – Disallowance under section 40A(9) – The Supreme Court refrained from going into the scope and applicability of section 40A(9) when the proper foundation of facts had not been laid.

Sandur Manganese And Iron Ores Ltd. vs. CIT [2012] 349 ITR 386 (SC)

The assessee, a limited company engaged in the business of extraction of manganese and iron ore had claimed in the return of income filed for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93, deductions for the payments made to Sandur Residential School and Sandur Educational Society.

In the orders of assessments passed for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93, the Assessing Officer disallowed the deductions claimed for the payments made to Sandur Residential School and Sandur Educational Society by applying the provisions of section 40A(9) of the Act r.w.s. 40A(10) of the Act.

The assessee after exhausting the remedy of the first appeal before the Appellate Commissioner, filed the second appeal before the Income Tax Appellate Tribunal. The Tribunal allowed the deductions claimed, on the ground that the expenses had been incurred fully and exclusively for the purpose of business and welfare of the employees’ children. Therefore, the deduction was allowable for the assessment year 1983-84 in view of the non-obstante clause of section 40A(10) of the Act and for the assessment years 1985-86 till 1992-93 in view of section 37(1) of the Act. The Tribunal placed reliance on the decision in the case of Mysore Kirloskar Ltd. vs. CIT [1987] 166 ITR 836 (Karn).

The Tribunal inter alia referred the following question of law to the High Court for its consideration and opinion.

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in allowing the payments made by the assessee to Sandur Residential School and Sandur Educational Society as business expenditure for the assessment years 1985-86, 1986-87, 1989-90, 1990-91 and 1992-93?” The High Court held that a reading of the Budget speech of the Finance Minister would indicate that under the provisions of section 40A(9) of the Act, no deduction is permissible on the contribution made by the corporate bodies to the so-called welfare funds, except the contributions made to such funds which are established under the statute or an approved provident fund, superannuation fund or gratuity fund.

The High Court did not accept the view expressed by the Kerala High Court in P. Balakrishnan, CIT v. Travancore Cochin Chemicals Ltd. (2000) 243 ITR 284 (Ker) and by the Bombay High Court in CIT v. Bharat Petroleum Corporation Ltd. (2001) 252 ITR 431 (Bom) in view of the decision of the Supreme Court in Larsen and Toubro Institute of Technology v. All India Council for Technical Education, AIR 1995 (SC) 1585. The High Court answered the question in favour of the Revenue and against the assessee.

On an appeal to the Supreme Court, on the issue of the allowability of the sum spent as welfare expenses towards providing education to its employees’ children, the Supreme Court observed that section 40A(9) was inserted as a measure for combating tax avoidance. The application of section 40A(9) would come into play only after the assessee has established the basic facts. According to the Supreme Court, the facts were not clear inasmuch as the assessee had made payments to other educational institutions and also not only to the school or the society promoted by the assessee. According to the Supreme Court, from each assessment year, the Tribunal would have to record a separate finding as to whether the claim for deduction was being made for payments to the school promoted by the assessee or to some other educational institutions/ schools and thereafter apply section 40A(9). The Supreme Court accordingly restored the matter to Tribunal, for de novo consideration for each of the assessment years and directing it to give a clear bifurcation between payments made by the assessee to Sandur Residential School and Sandur Education Society and payments made to schools other than the above two institutions. The Supreme Court however, refrained from going into the scope and applicability of section 40A(9) in the absence of proper facts.

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Nirav Shah

THE FINANCE ACT, 2013

1 Introduction

1.1 Shri P. Chidambaram, the Union Finance Minister, presented the last effective Budget of the present term of the UPA II Government for the year 2013-14 on 28th February, 2013. The Finance Bill, 2013, introduced by him with his budget, contained 125 clauses, out of which only 53 clauses relate to ‘Direct Taxes’ and 72 clauses relate to ‘Indirect Taxes’. This year, there was no serious debate in the Parliament on the Finance Bill. The Finance Minister introduced 11 new clauses, which were more or less of clarificatory nature on 30th April, 2013, and the Bill was passed by the Lok Sabha on the same day without any debate. Similarly, the Rajya Sabha passed the Finance Bill without any debate on 2nd May, 2013. The Bill has received the assent of the President on 10th May, 2013.

1.2 While concluding his Budget Speech, the Finance Minister has, in Para 188, made some predictions as under:

“Any economist will tell us what India can become. We are the tenth-largest economy in the World. We can become the eighth, or perhaps the seventh largest by 2017. By 2015, we could become a $5 trillion economy, and among the [top] five in the world. What we will become depends on us and on the choices that we make. Swami Vivekananda, whose 150th birth anniversary we celebrate this year, told the people: “All the strength and succour you want is within yourself. Therefore, make your own future.”

1.3 In Para 185 of the Budget Speech, it is stated that the effect of changes in Direct Tax Laws this year will bring additional revenue of Rs. 13,300 crore. So far as Indirect Taxes are concerned, the additional revenue will be Rs 4,700 crore.

1.4 In this Article, the amendments made in the Income-tax Act, the Wealth Tax Act and Securities Transaction Tax (STT) are discussed. A new tax viz. “Commodities Transaction Tax” (CTT) is now levied u/s. 105 to 124 of the Finance Act, 2013. This is on the same lines as the STT. The important features of this new tax are also discussed in this Article.

2 Rates of income tax, surcharge and education cess:
2.1 Surcharge on Super-Rich:

There are no changes in the tax slabs, rates of income tax, or rates of Education Cess. In Para 126 of the Budget Speech, the Finance Minister has stated that “Fiscal consolidation cannot be effected only by cutting expenditure. Wherever possible, revenues must also be augmented. When I need to raise resources, who can I go to except those who are relatively well placed in society? There are 42,800 persons — let me repeat, only 42,800 persons — who admitted to a taxable income exceeding Rs. 1 crore per year. I propose to impose a surcharge of 10 percent on persons whose taxable income exceeds Rs. 1 crore per year. This will apply to individuals, HUFs, firms and entities with similar tax status.” In Para 127, he has stated that in the cases of domestic companies, the existing surcharge is 5% if the taxable income exceeds Rs. 1 crore. This will now be 10% if the taxable income exceeds Rs. 10 crore. Similarly, in the case of a foreign company the existing surcharge of 2% will increase to 5% — if the income exceeds Rs. 10 crore. In Para 128, the Finance Minister has stated that the existing surcharge of 5% will increase to 10% in case of tax on dividend distribution. Further, in Para 129 of his speech, he has stated that this additional surcharge will be in force only for one year i.e. financial year 2013-14 (A.Y. 2014-15).

2.2 Rebate from Tax:

In order to give a small relief to Resident Individual Tax Payers, a new Section 87A is inserted in the Income-tax Act (IT Act) w.e.f. A.Y. 2014-15. Under this section, a resident individual whose total income does not exceed Rs. 5 lakh, will be entitled to receive a rebate of Rs. 2,000/- or the income tax payable (whichever is less) from the income tax payable by him. It may be noted that this rebate cannot be claimed by an HUF.

2.3 Rates of Income-tax and Surcharge:

(i) For Resident Individuals, HUF, AOP, BOI and Artificial Juridical Person, as stated above, there are no changes in the tax slabs, rates of Income tax or rates of Education Cess. The only change is about levy of 10% surcharge on tax if the income exceeds Rs. 1 crore. The rates of tax for A.Y. 2013-14 and A.Y. 2014-15 (Accounting years ending on 31-03-2013 and 31-03-2014) are the same as stated below):

Notes:

•    In A.Y. 2014-15 Surcharge @ 10% of the tax will be payable if income of the assessee exceeds Rs. 1 crore.
•    An Individual having gross total income below Rs 5 lakh will get rebate upto Rs. 2,000/- from tax in A.Y. 2014-15 u/s. 87A.
•    Education Cess of 3% (2%+1%) of the tax is payable for both the years.

(ii) The following table gives figures of tax payable by Resident Individual, HUF, AOP, BOI etc. in A.Y. 2013-14 and A.Y. 2014-15.

(a) Tax payable in A.Y. 2013-14 (Accounting year ending on 31-03-2013)

Note: The above tax is to be increased by 3% of tax for Education Cess.

(b) Tax payable in A.Y. 2014-15(Accounting year ending on 31-03-2014)

Notes:

•    In the first two items (Rs. 3 lakh and Rs. 5 lakh) in the case of an Individual having income below Rs. 5 lakh, the tax payable will be reduced by Rebate of Rs. 2,000/- u/s. 87A.
•    The last item (Rs. 125 lakh) includes surcharge of 10%.
•    The above tax is to be increased by 3% of tax for Education Cess.

(iii) Other Assessees (excluding companies)

The rates of taxes (including rate of Education Cess) for the other assesses (excluding companies) for A.Y. 2013-14 and A.Y. 2014-15 are the same. No surcharge on tax was payable by Co-operative Societies, Firms, LLP or Local Authority in A.Y. 2013-14. However, in A.Y. 2014-15, if the income of the above entities exceed Rs. 1 crore, Surcharge @ 10% of tax will be payable.

(iv) For Companies:

The rates of Income tax for Companies for A.Y. 2013-14 and A.Y. 2014-15 are the same. For domestic companies, surcharge of 5% of tax is payable in A.Y. 2013-14 if the total income exceeds Rs. 1 crore. In A.Y. 2014-15, the rate of surcharge will be 5% if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore. If the total income exceeds Rs. 10 crore, the rate of surcharge will be 10% of the tax payable on the entire income.

In the case of a foreign company there is no change in the rates of income tax in A.Y. 2013- 14 and A.Y. 2014-15. As regards surcharge, the rate is 2% of the tax if the total income exceeds Rs. 1 crore in A.Y. 2013-14. In A.Y. 2014-15, the rate of surcharge will be 2% if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore. If the total income exceed Rs 10 crore the rate of surcharge will be 5% of the tax payable on the entire income.

In both the above cases, Education Cess @ 3% of tax is payable in A.Y. 2013-14 and A.Y. 2014-15.

(v) Rate of Tax u/s. 115JB (MAT)

The rate of tax (i.e. 18.5%) will be payable on the book profits of a company computed u/s. 115JB (MAT) in A.Y. 2013-14 and A.Y. 2014-15. The surcharge will be payable on this tax as stated in (iv) above. Education Cess @ 3% of the tax plus applicable surcharge will be payable as at present.

(vi) Rate of Tax u/s. 115JC (AMT)

The rate of tax (i.e. 18.5%) will be payable on the adjusted total income of non-corporate assesses u/s. 115JC (AMT) in A.Y. 2013 -14 and A.Y. 2014-15. The surcharge and Education Cess will be payable on this tax as stated in (iii) above.

(vii) Dividend Distribution Tax:

Dividend Distribution Tax or Income Distribution Tax payable u/s. 115O, 115QA, 115R or 115TA shall be pay-able as provided in these section. The surcharge at 10% of tax will be payable in respect of the above tax for A.Y. 2014-15. The Education Cess @ 3% of the tax shall also be payable on the above tax. It may be noted that surcharge @ 10% of tax will be payable irrespective of the amount distributed under these sections.

(viii) Rate of Tax on Dividends from Specified Foreign Companies:

The concessional rate of 15% plus applicable surcharge and Education Cess which was applicable for A.Y. 2013-14 u/s. 115BBD has been extended for one more year i.e. for A.Y. 2014-15.

2.4 Education Cess:

As in the earlier years, Education Cess of 3% (including 1% Higher Education Cess) of the income tax and applicable surcharge is payable by all resident assessees and non-resident assessees. No Education Cess or surcharge is applicable on TDS and TCS from payments to all resident corporate and non-corporate assesses. However, if tax is deducted from

(a) payments to foreign companies, (b) payments to non-residents or (c) salary to residents or non-residents, Education Cess at 3% of the tax and applicable surcharge is to be deducted.

3. Tax deduction and collection at source (TDS and TCS)

3.1 In the case of a resident assessee or a domestic company, where tax is required to be deducted or collected at source, no surcharge or Education Cess of the applicable rate of tax is to be considered. However, in the case of a non -resident or a foreign company while deducting or collecting tax at source, under the provisions of the Income-tax Act during the period commencing from 01-04-2013, the applicable rate of tax is to be increased by the applicable rate of surcharge and Education Cess. As stated earlier, in the case of non-residents (other than foreign companies), if the total income exceeds Rs. 1 crore, the rate of surcharge is 10% of the tax. In the case of a foreign company, if the total income is more than Rs. 1 crore but less than Rs. 10 crore, the rate of surcharge is 2% of the tax. If the income is more than Rs. 10 crore, this rate is 5% of the tax on total income. In all cases, the rate of Education Cess is 3% of the tax (including applicable surcharge).

3.2 TDS on transfer of immovable property:

(i) Section 194-1A – This new section is inserted in the Income-tax Act w.e.f. 01-06-2013. It provides that any person (transferee) who purchases any immovable property (whether residential or commercial) for a consideration, shall now deduct tax at source at the rate of 1% of the amount paid to a resident seller (transferor) if the said consideration exceeds Rs. 50 lakh. For this purpose, the term “Immovable Property”, is defined to mean any land (other than Agricultural Land) or any building or part of a building. It may be noted that the section will apply in both cases i.e. when the purchaser is purchasing the property as a capital asset or as stock-in-trade.

(ii) This section will apply to all assessees, whether resident or non-resident, who purchase any immovable property in India from a resident. In other words, the obligation for deduction of tax is on every purchaser of immovable property, whether he is required to get his books of accounts audited u/s. 44AB or not. It will not be necessary for the purchaser to obtain Tax Deduction Account Number (TAN) u/s. 203A.

However, the purchaser will have to file TDS Return and deposit TDS amount with the Government as provided in Section 200. The seller of the property must provide his PAN to the purchaser. If this is not done, tax on the sale consideration will have to be deducted at 20% as provided in section 206AA. It may be noted that the option of obtaining certificate from the A.O. u/s. 197 prescribing NIL rate or lower rate of TDS is not available in the above case.

(iii) If the purchase of the immovable property is from a non-resident, the tax will be deductible by the purchaser at the applicable rate u/s. 195 as at present. This new section will not apply to such a purchase. Similarly, this new section will not apply to payment of compensation on acquisition of immovable property to which the provisions of TDS u/s. 194LA are applicable.

(iv) It may be noted that a similar provision for TDS was proposed to be introduced by the insertion of section 194LAA in the Income-tax Act by the Finance Bill, 2012. Under this provision, it was proposed that the purchaser of an immovable property for a consideration exceeding Rs. 50 lakh in the specified area and Rs. 20 lakh in other areas shall deduct tax at source @ 1% of the consideration. For this purpose, the consideration was to be considered as specified in the Sale Deed or stamp duty valuation u/s. 50C whichever was higher. The registering authority was directed not to register the document unless the evidence for payment of TDS amount was produced before him. There was a lot of protest against the introduction of such a provision last year. Therefore, this provision was dropped before passing the Finance Act, 2012. A similar provision is again introduced this year and in the absence of any serious debate the same has been now brought into force from 01-06-2013.

(v) This new provision is likely to raise some issues as under:

(a) The definition of immovable property only covers land (other than agricultural land) or building or part of the building. This will mean that any right in a building such as tenancy right, leasehold right etc. will not be subject to this TDS provision. [Refer: Atul G Puranik vs. ITO 132 ITD 499 (Mum)]

(b) If a person has booked a flat in a building under construction, either the flat is booked before 01-06-
2013 or after that date, and makes payment for the same, a question will arise whether he is required to deduct tax at source under this section. It is possible to take the view that by the agreement with the builder the purchaser gets a right to get the flat when constructed. Therefore, when the instalment payments are made to the builder there is no transfer of immovable property. [Refer: ITO vs. Yasin Moosa Godil 147 TTJ 94 (Ahd)] The transfer of flat will take place only when possession is given.

Therefore, the obligation to deduct tax will arise under this section only when the last instalment is paid against possession of the flat. However, TDS @ 1% will have to be deducted on the entire consideration for the flat at that time.

(c) Since there is no specific mention in this section that if the amount of stamp duty valuation u/s. 50C is more than the actual consideration, the stamp duty valuation will be considered as consideration for TDS purposes, it can be concluded that tax is to be deducted from the actual consideration payable as per the sale deed. As stated earlier, in the Finance Bill, 2012 the proposed section 194LAA specifically provided for considering stamp duty valuation if that was more than the consideration stated in the Sale Deed. There is no such provision in this new section 194-1A.

(d) Section 199 of the Income-tax Act provides that credit for TDS amount will be given against the income in respect of which such tax is deducted. In a transaction of sale of immovable property, the seller will be showing income from such sale under the head “Capital Gains” or “Income from Business or Profession”. It may so happen that an individual selling his immovable property may claim exemption u/s. 54 or 54F due to reinvestment in another property or u/s. 54EC by reinvestment in Bonds. In all such cases, credit for TDS under this new section will be available even if the income computed under the head “Capital Gains” is NIL.

(e) If the property is purchased by two or more persons as co-owners, the tax will be deductible by each co-owner in respect of his/her share of the consideration paid if the total consideration for the property exceeds Rs. 50 lakh. This section also applies in respect of purchase of property from a relative.

(f) It may be noted that there is no provision for disallowance of purchase price of the property u/s. 40(a)(ia) in the case of a purchaser who has purchased the property as stock-in-trade.

3.3 tds from interest income of FII or qfi:

Section 194LD: This is a new Section inserted in the Income-tax Act w.e.f. 01-06-2013. This Section provides that any person paying interest to a Foreign Institutional Investor (FII) or a Qualified Foreign Investor (QFI) in respect of the following investment shall deduct tax at source at the rate of 5% plus applicable surcharge and Education Cess.

(a) Interest on a Government Security

(b) Interest on a rupee denominated bond of an Indian Company, provided that the rate of interest does not exceed the rate notified by the Central Government.

It may be noted that consequential amendments have been made in Sections 115A, 115AD, 195 and 196D. However, no consequential amendment is made in Section 206AA and, therefore, in the case of any FII or QFI, if PAN is not furnished tax will be deductible @ 20% plus applicable surcharge and Education Cess.

3.4 Section 206AA: This section is amended w.e.f. 01-06-2013. By this amendment, it is now clarified that in respect of interest paid to a non-resident or a foreign company on long term infrastructure bonds issued by an Indian Company in foreign currency as provided in section 194LC, the provisions of section 206AA will not apply from 01-06 -2013. Therefore, if such foreigner lender does not furnish PAN, the tax will be deducted at 5% plus applicable surcharge and Education Cess u/s. 194LC and not at the rate of 20% as provided in section 206AA.

It is surprising that similar concession is not given u/s. 206AA to tax deductible u/s. 194LD as discussed in Para 3.3 above.

3.5 Section 206C – Tax collection at source (TCS)

This section was amended last year w.e.f. 01-07-2012 by inserting s/s. (1D) in section 206C providing for TCS @ 1% of the sale consideration for bullion purchased by a buyer if the consideration exceeded Rs. 2 lakh and was paid in cash by the buyer. It was provided that for this purpose, the term “Bullion” shall not include any coin or any other article weighing 10 grams or less. This provision is now amended by the Finance Act, 2013, and it is provided that w.e.f. 01-06-2013, the exemption given from TCS provision to a coin or other article of bullion weighing 10 grams or less shall not be available. Therefore, tax will have to be collected @ 1% if the buyer of bullion (including any coin or other article) pays amount exceeding Rs. 2 lakh in cash.

4. Exemptions and Deductions:

4.1 Agricultural Land Section 2(1A) and 2(14):

These two sections of the Income tax Act have been amended w.e.f. A.Y. 2014-15.

(i) Section 2(14) defines the term “Capital Asset”.
As per the provisions of the section before the amendment, agricultural land situated within the jurisdiction of a Municipality, Cantonment Board etc. having population of more than 10,000 was considered as a Capital Asset. Similarly, agricultural land situated within the distance (not exceeding 8 kms) from the local limits of a Municipality, Cantonment Board etc. as notified was also considered as Capital Asset.

(ii) Section 2(14) has now been amended to provide that the agricultural land situated in any area within the following distance, measured aerially, from the local limits of any Municipality, Cantonment etc. shall be considered as a Capital Asset.

(a)    Within 2 kms having population of more than 10,000 but less than 1 lakh;
(b)    Within 6 kms having population of more than 1 lac but less than 10 lakh;
(c)    Within 8 kms having population of more than 10    lakh.

In other words, agricultural land situated outside the above territory will not be considered as Capital Asset u/s. 2(14).

(iii) The population for the above purpose is defined to mean population according to the last preceding census of which the relevant figures have been published before the first day of the Financial Year. The distance for the above purpose is to be measured “aerially”. This provision appears to have been made to settle the controversy about the method of measurement. In the case of CIT vs. Satinder Pal Singh 188 Taxman 54 (P&H) it was held that the distance should be measured by approach road and not by a straight line distance on a horizontal plane.

(iv) Section 2(1A) has similarly been amended w.e.f. A.Y. 2014-15.

Income derived from any building and situated in the immediate vicinity of the agricultural land is presently exempt as agricultural income, subject to certain conditions u/s. 2(1A). By amendment of this section, it is now provided that income from such building falling within the area specified in (ii) above will not qualify for exemption as agricultural income.

4.2 Keyman Insurance Policy – Section 10(10D)

(i) Section 10(10D) grants exemption to any sum received under a life insurance policy, subject to certain conditions. Amount received on maturity of Keyman Insurance Policy is not exempt u/s. 10(10D). There was a controversy whether the Keyman Insurance Policy assigned to the beneficiary continues to be a Keyman Insurance Policy. Delhi High Court held in the case of CIT vs. Rajan Nanda 349 ITR 8 that the Keyman Insurance Policy becomes an ordinary policy on the life of the beneficiary on assignment and therefore the amount received under this policy will be exempt if other conditions of section 10(10D) are complied with. To overcome this decision, Explanation 1 to the section is now amended w.e.f. A.Y. 2014-15 to provide that the Keyman Insurance Policy which has been assigned to the beneficiary during its term, with or without consideration, will be considered to be a Keyman Insurance Policy u/s. 10(10D) and exemption under that section will not be available in respect of the amount received on maturity. It may be noted that for A.Y. 2013-14 and earlier years the exemption can be claimed on the basis of Delhi High Court decision in the case of CIT vs. Rajan Nanda 349 ITR 8.

(ii) One of the conditions for granting exemption provided in section 10(10D)(d) is that the annual premium payable in respect to a life insurance policy should not exceed 10% of capital sum insured. This percentage of the premium is increased to 15% in the case of insurance policy issued on or after 01-04-2013 on the life of (a) a person with disability stated in section 80U or (b) a person who is suffering from a disease or ailment specified u/s. 80DDB. Consequential amendment is made in section 80C also.

4.3 Securitisation Trusts: New Sections 10(23DA), 10(35A), 115TA to 115TC

(i) New Scheme for taxation of Income of Securitisation Trust (Trust) has been introduced from A.Y. 2014-15. For this purpose, new sections 10(23D), 10(35A), 115TA, 115TB and 115TC have been added. The terms “Securitisation Trust”, “Securities”, “Securitised Debt Instrument”, “Instruments” “Investor” and “Special Purpose Vehicle” are defined in section 115TC. These terms have the same meaning as given to them in SEBI (Public Offer and

Listing of Securitised Debt Instruments) Regulations, 2008 or the Guidelines on the securitisation of standard assets issued by RBI.

(ii) Under the new scheme the provisions can be summarised as under:

(a) Any income of the Trust from the activity of securitisation will be exempt from tax u/s. 10(23DA);

(b) Income received by the Investor holding any securitised debt instrument or securities issued by the Trust will be exempt in the hands of the Investor u/s. 10(35A);

• In the case of Individual or HUF – 25% Income tax plus applicable surcharge and Education Cess;

• In the case of others – 30% Income tax plus applicable surcharge and Education Cess;

• In the case of a person who is not liable to pay tax on such income – No tax is payable by the Trust.

The provisions for payment of the above tax on income distributed to Investors are contained in section 115TA to 115TC. These provisions are similar to tax payable on distribution of dividend by a company and tax payable on distribution of income by a Mutual Fund.

(iii) Section 115TA also provides for filing of Statement of income distributed and tax paid thereon, charging of interest for the delayed payment of tax and treating a person responsible for compliance with these provisions as an assessee in default for the non-compliance with provisions of sections 115TA to 115TC.

(iv) If one compares the existing provisions with the above new scheme, it will noticed that under the above scheme the total tax liability of the trust and Investors, put together, will be more.

4.4 Investor Protection Fund: New Section 10(23ED)

This is a new section inserted w.e.f. A.Y. 2014-15. This section grants exemption to any income, by way of contribution received from a Depository by an Investor Protection Fund (Fund) set up in accordance with the regulations notified by the Central Government. It may be noted that Depositories (NSDL or CDSL) are required to set up Investor Protection Fund as provided in SEBI (Depositories and Participants) Regulations, 1996. The above exemption is now provided to the Fund in respect of contribution by the Depository. It is also provides that if the Fund shares any amount with the Depository in any year, out of such exempt income, the amount so shared will be taxable in its hands. This section is on the same lines as section 10(23EA) which grants exemption to amount contributed by a recognised Stock Exchange to its approved Investor Protection Fund.

4.5 Venture Capital Fund: Section 10(23FB):

This section provides for exemption to any income of Venture Capital Company (VCC) and Venture Capital Fund (VCF) from investment in Venture Capital Undertaking (VCU). Essentially, this section treats VCC and VCF as pass-through entities. U/s. 10(23FB), the income of VCC and VCF is exempt but is taxable directly in the hands of investors in these entities u/s. 115U. The SEBI (VCF) Regulations, 1996, have been replaced by the SEBI (Alternative Investment Funds) Regulations, 2012 w.e.f. 12-05-2012. By amendment of Section 10(23FB), w.e.f. A.Y. 2013-14, the existing explanation has been substituted to provide as under:

(i) The pass-through status can be enjoyed by VCC and VCF that has been granted registration as category I Alternative Investment Fund;

(ii) VCC and VCF registered and governed by old VCF Regulations will continue to enjoy the pass through status;

(iii) VCC/VCF will have to comply with the conditions stated in the Explanation. Shares of the VCC and Units of the VCF should not be listed on any recognised stock exchange. 2/3rd of the investible funds should be invested in unlisted equity shares or equity linked instruments of a VCU. Further, the VCC should not invest any funds in a VCU in which its directors and substantial shareholders (10% or more holding) hold more than 15% of paid-up equity share capital of the VCU. Similar conditions are provided for VCF also.

4.6 Section 10(48):

Under this section, any income received in India in Indian currency by a foreign company on account of sale of crude oil to any person in India is exempt from tax, subject to certain conditions. The scope of this exemption is now expanded w.e.f. A.Y. 2014-15 and it is now provided that this exemption can be claimed by a foreign company in respect of income from sale to any person in India of crude oil, any other goods or rendering of services as may be notified by the Central Government.

4.7 New Section 10(49):

This new Section is inserted in the Income -tax Act to provide for exemption from tax to any income of the National Financial Holding Company Ltd., a company set up by the Central Government on 07-06-2012. This exemption is granted for A.Y. 2013-14 and for subsequent years.

4.8 Recognised Provident Fund:

One of the conditions in Schedule IV – Proviso to Rule 3 of Part A is that a Provident Fund will be considered as recognised under the Income tax Act only if the establishment for which the Provident Fund is set up is also exempted u/s. 17 of the P.F. Act. The date for obtaining such exemption under the P.F. Act which expired on 31-03-2013 under Rule 3 has now been extended by amendment of Rule 3 to 31-03-2014.

4.9 Rajiv Gandhi Equity Savings Scheme (RGESS): Section 80CCG:

At present, a resident individual, who is a first time retail investor, investing in listed equity shares under RGESS Scheme, is allowed a one time deduction of 50% of the eligible investment upto Rs. 50,000/- in the A.Y. 2013-14. Thus, the maximum deduction allowable under this section is Rs. 25,000/- if the gross total income of such individual does not exceed Rs. 10 lakh.

Now this section is amended w.e.f. A.Y. 2014-15 to provide as under:

(i) Limit of gross total income of the individual is increased from Rs. 10 lakh to Rs 12 lakh.

(ii) The scope of investment in eligible investment is extended to include listed units of an equity fund specified in RGESS. This includes investment in eligible shares, ETFs and Mutual Fund Units which has such eligible shares as the underlying assets.

(iii) The deduction upto Rs. 25,000/- (50% of investment upto Rs. 50,000/-) will now be available for each of the 3 consecutive assessment years beginning with the year in which such investment was first made.

(iv) There is a lock-in period of 3 years for such investment.

(v) If the prescribed conditions of RGESS are violated, the deduction originally granted will be deemed to be the income of the year in which such violation takes place.

4.10 Contribution to Health Scheme: Section 80D:

At present deduction u/s. 80D can be claimed in respect of premium on Mediclaim Policy upto Rs. 15,000/- (Rs. 20,000/- for Senior Citizens) by an individual or an HUF. Such deduction is also allowable for any contribution made to the Central Government Health Scheme or for preventive health check-up subject to the above limit. By amendment of this section the above benefit is now extended w.e.f. A.Y. 2014 -15 to contribution to such other Health Schemes as may be notified by the Central Government.

4.11 Additional Deduction for Interest on Housing Loans: Section 80EE:

This is a new section inserted in the Income tax Act w.e.f. A.Y. 2014-15. Under this section, one time deduction upto Rs. 1,00,000/- will be allowed to an individual for interest paid on Housing Loan taken for acquiring a residential house. This deduction will be over and above the deduction allowed for interest paid for the housing loan u/s. 24(b) of the Income-tax Act. This deduction can be claimed subject to following conditions.

(i) Housing Loan should be taken from a Bank, Financial Institution or a Housing Finance Company as defined in Section 80EE (5);

(ii) Housing Loan should have been sanctioned between 01-04-2013 to 31-03-2014;

(iii) Housing Loan sanctioned should not exceed Rs. 25 lakh;

(iv) The value of the residential house should not exceed Rs. 40 lakh;

(v) The individual claiming this deduction should not own any residential house on the date of sanction of the housing loan;

(vi) If the interest payable on the above loan, in A.Y. 2014-15, is less than Rs. 1,00,000/-, the assessee can claim deduction for the balance amount paid in A.Y. 2015-16. In other words, deduction allowable for interest on the housing loan in the A.Y. 2014-15 and 2015-16 cannot exceed Rs. 1,00,000/-.

It may be noted that this deduction cannot be claimed by an HUF. Further, there is no condition that the residential house should be self occupied. The assessee can let out the residential house. It also appears that if a residential house is purchased by two or more co-owners, each co-owner can claim the deduction for interest under this section against his share of income from the joint property.

4.12 Donation u/s. 80G:

This section is amended w.e.f. A.Y. 2014-15. At present, donation to National Children’s Fund is eligible for deduction u/s. 80G at the rate of 50% of the amount of the donation. This section is now amended to provide that 100% of the donation to National Children’s Fund made on or after 01-04-2013 will be eligible for deduction u/s. 80G.

4.13 Donation to Political Parties: Sections 80GGB and 80GGC.

These two sections provide for deduction from gross total income of 100% of the amount donated by any company, individual, HUF, firm, LLP or other specified persons to recognised Political Parties or Electoral Trusts. Now, it is provided, by amendment of these sections, that no such deduction will be allowed if such donation is made in cash on or after 01-04-2013. It may be noted that in sections 80G and 80GGA donation to approved trusts can be made in cash upto Rs. 10,000/-. So far as Political Donations are concerned, it is now provided that no cash donations will be eligible for deduction under the above sections.

4.14 Power Sector undertakings: Deduction u/s. 80IA.

This section provides for deduction of income of certain undertakings. This includes undertaking which commences its business of generation and/or distribution, transmission or distribution of power, or substantial renovation and modernisation of the existing transmission or distribution lines on or before 31-03-2013. By amendment of this section, the above time limit for commencement of business by such an undertaking is extended upto 31-03-2014.

4.15 Additional deduction for wages paid to New Workmen: Section 80JJAA:

Under the existing section, deduction is allowed to an Indian Company of an additional amount equal to 30% of the wages paid to new regular workmen employed by the Company in an industrial undertaking engaged in the manufacture or production of an article or thing, subject to certain conditions specified in this section.

This section is amended w.e.f. A.Y. 2014-15 to provide as under:

(i) Now the above deduction can be claimed by an Indian company only if it is deriving income from the manufacture of goods in a factory. For this purpose, the word “Factory” shall have the same meaning as in section 2(m) of the Factories Act, 1948;

(ii) The new regular workmen should be employed by the company in such factory;

(iii) This deduction can be claimed by the company in the year in which appointment is made and for two subsequent assessment years;

(iv) Such deduction is not allowable to the company in case the factory is hived off, transferred from another existing entity or acquired as a result of an amalgamation.

5. Income from Business or Profession:

5.1 Investment Allowance: New Section 32AC: This is a new section inserted in the Income tax Act w.e.f. A.Y. 2014- 15. The section provides for a one time deduction (Investment Allowance) to a company. This deduction can be claimed if the following conditions are complied with:

(i) This deduction can be claimed by a company engaged in the business of manufacture or production of any article or thing.

(ii) Such a company should acquire and install specified new asset between 1-4-2013 to 31-3-2015 for an aggregate cost exceeding Rs. 100 crore. If the specified new asset is acquired before 1-4-2013, this deduction cannot be claimed.

(iii) The above deduction is allowable at the rate of 15% of the actual cost of the specified new asset acquired and installed during the accounting year 2013-14 (A.Y. 2014-15) if the actual cost of such asset exceeds Rs. 100 crore. If such actual cost is less than Rs. 100 crore no deduction will be allowed in A.Y. 2014-15.

(iv)The company can claim deduction of 15% of the actual cost of such new asset acquired and installed during accounting year 2014-15 (A.Y. 2015-16) if the aggregate cost of the new asset during the period 1-4-2013 to 31-3-2015 exceeds Rs. 100 crore.

In other words, deduction of 15% can be claimed as under:

v) The deduction allowed under this section will be over and above the normal depreciation and additional depreciation (20%) allowable u/s. 32(1)(ii) and (iia) on the above specified new assets.

(vi) This being a special incentive for encouraging industrial companies which invest more than Rs. 100 crore in specified new assets, the amount of deduction allowed is not to be deducted from W.D.V. of the block of assets.

(vii) Further, this deduction is not for depreciation and, therefore, for the purpose of carry forward of losses, it will form part of business loss and not “unabsorbed depreciation”.

(viii) Since no provision for this deduction of 15% (investment allowance) is required to be made in the books of the company, deduction for this amount cannot be claimed for computation of Book Profits u/s. 115 JB.

(ix) For the purpose of this section, specified new asset means new plant and machinery. This will not include (a) ship or aircraft, (b) second hand plant and machinery (whether imported or not), (c) plant and machinery installed in office premises or residential premises (including guest house), (d) office appliances, (including computers or computer software), (e) vehicles, and (f) plant and machinery in respect of which 100% deduction by way of depreciation or otherwise is allowed in any previous year. It may be noted that intangible assets are not excluded from the definition of specified new asset. Therefore, any intangible asset attached to a plant and machinery can be considered as a specified new asset.

(x) It may be noted that this deduction will not be allowable to companies engaged in the business of hotel, hospital, road, bridge and other construction businesses.

(xi) There is a lock-in period of 5 years for the above specified new assets. If such asset is sold or transferred within 5 years of the date of installation, then the amount allowed as deduction in the earlier years will be taxable as profit or gain from business in the year of such sale or transfer. This will be in addition to the taxability of capital gains (if any) arising on such sale or transfer of such assets.

(xii) The above provision of lock-in period as stated in (xi) above, will not apply if the transfer of such asset is as a result of an amalgamation or a demerger. However, the Amalgamated Company or the Resulting Company will have to ensure that such new asset is not sold or transferred by it within 5 years from the date of installation by the Amalgamating Company or the Demerged Company.

5.2 Deduction of Bad/Doubtful Debts to Indian Banks: Section 36(1)(vii) and 36(1)(viia) – (i) Under the existing provisions of section 36(1)(viia), banks and financial institutions, depending upon their categories, are entitled to claim deduction for provision for bad and doubtful debts made for Urban and Rural Branches at specified rates. Similarly, a bank/financial institution is also entitled to claim deduction for bad debts actually written off u/s. 36(1)(vii) to the extent it is in excess of the credit balance in Provision for Bad and Doubtful Debts A/c made u/s. 36(1)(viia). Some doubts had arisen about the interpretation of the provisions of these two sections. In the case of Catholic Syrian Bank Ltd v/s CIT 343 ITR 270 the Supreme Court held that banks are entitled to full benefit of write off bad debts, written off u/s. 36(1)(vii) in addition to the deduction for the provision for bad and doubtful debts made u/s. 36(1)(viia). It is also held that, in the case of rural advances, there will be no double deduction for provision made u/s. 36(1)(viia). The proviso to section 36(1)(vii) limits its application to the bank which has made such provision u/s.6(1)(viia). The provision of section 36(1)(vii) and 36(1)(viia) and 36(2)(V) should be construed together. Thus, they form a complete scheme for deduction and prescribe the extent to which deduction is available to banks.

(II) For removal of doubts, section 36(1)(vii) has been amended from A.Y. 2014-15 by adding an Explanation that for the purpose of proviso to this section, the account referred to therein shall be only one account in respect of provision for doubtful debts u/s. 36(1)(viia). In other words, no distinction will be made for provision for urban and rural advances made u/s. 36(1)(viia). Therefore, in such cases, the amount of deduction in respect of bad debts u/s. 36(1)(vii) shall be limited to the amount by which the same exceeds the credit balance of the provision made u/s. 36(1)(viia).

5.3 Commodities Transaction Tax (CTT): Section 36(1) has been amended from A.Y. 2014-15 and it is now provided in section 36(1)(xvi) that the amount equal to CTT paid by the assessee in respect of the taxable commodities transactions entered by it in the course of its business will be allowed as its business expenditure.

5.4 Disallowance of certain payments by State Government Undertakings: Section 40(a)(iib) -This new clause has been added in section 40(a) from A.Y. 2014-15. Disputes had arisen in income tax assessments of some State Government Undertakings (SGU) as to whether any amount paid by SGU to the State Government by way of Royalty, Licence Fees, Service Fee, Privilege Fee, Service charges or any similar Fee/charge is deductible as business expenditure. It is now provided by this amendment that any such fee or charge which is levied exclusively on the SGU or is directly or indirectly appropriated from the SGU by the State Government will not be allowed as business expenditure to SGU. For this purpose, Explanation to the section defines SGU. (It includes a company in which the State Government has more than 50% of equity).

5.5 Commodity Derivative Transactions:
Section 43(5) – This section defines a “Speculative Transaction”. At present, it excludes from this definition certain transactions, including eligible transactions in respect of derivative transactions carried out in a recognised Stock Exchange. In view of introduction of MCX as a recognised association for commodities transactions, this section is now amended from A.Y. 2014-15 to provide that eligible transactions in Commodity Derivatives entered into through a recognised association will not be considered as speculative transactions.

5.6 Full value of consideration of Immovable Property held as Stock-in-Trade: New section 43CA

– (i) This new section is inserted from A.Y. 2014-15. Therefore, it will apply to real estate transactions entered into on or after 1st April, 2013. U/s. 50C, in the case of transfer of an immovable property (land, building or both) which is held by the seller as a capital asset, if the consideration is less than the market value adopted (assessed or assessable) for the purpose of payment of stamp duty, such stamp duty valuation is considered as the full value of the consideration u/s. 50C. Thus, the capital gain in the hands of the seller is computed on that basis as provided u/s. 50C. This provision was not applicable to immovable property held by the seller as stock-in-trade.

(ii) By introduction of this new section 43CA, it is now provided that the above concept of section 50C of adopting stamp duty valuation as full value of consideration will apply for computation of business income in the hands of seller who holds such property as stock-in-trade. The provisions of section 50C are made applicable w.e.f. 01-04-2013, to the extent applicable, to such transactions. This new provision will apply to Builders, Developers and Dealers engaged in real estate transactions. The provision will apply according to the method of accounting followed by the assessee. It may be noted that this new provision will not apply when the assessee makes a slump sale of the business as a going concern.

(iii) It is also provided in this Section that if there is a time gap between the date of the agreement of sale and the date of registration. The full value of the consideration will be determined with reference to the stamp duty valuation assessable on the date of the agreement of sale provided that full or part of the consideration stated in the agreement was paid, otherwise than in cash.

(iv) It may be noted that the definition of immovable property for the purpose of this section or section 50C does not include any right in the immovable property such as leasehold or tenancy right etc. If the assessee has booked a flat in a property under construction, the right to get possession of the flat is not covered under the section. However, when the property is constructed and the possession of the flat is taken, the section will apply with reference to the Agreement for sale when executed.

(v) It may be noted that section 56(2)(vii)(b) has been amended as discussed in Para 6 below. Effect of this amendment is that w.e.f. 01-04-2013, in the case of a purchaser of an immovable property, if the difference between the stamp duty valuation and the actual consideration paid as per the agreement of sale is more than Rs. 50,000/-, such difference will be considered as “income from other sources” in the hands of such purchaser. However, this provision will not apply if the purchase is from a relative as defined in Explanation to section 56(2)(vii). From this provision, it will be noticed the difference between the stamp duty valuation and actual consideration will be taxable in the hands of the seller as well as the purchaser if such difference exceeds Rs. 50,000/-.

6. Income from other sources: Section 56(2)(vii)(b) – (i) This section is amended from A.Y. 2014-15. This section provides for levy of tax on certain gifts received from non-relatives. This amendment comes into force in respect of transactions relating to purchase of immovable property i.e. land, building or both made on or after 01-04-2013. Prior to 31-03-2013, if an immovable property was received by an Individual or HUF from a non-relative, without consideration, the market value (based on the stamp duty valuation) on the date of the gift, if it exceeds Rs. 50,000/-, was treated as income from other sources in the hands of the assessee. There is no change in this provision. However, it is now provided, w.e.f. 01-04-2013, that if the purchase of an immovable property by an Individual or HUF is made for consideration which is less than the stamp duty valuation assessed or assessable by the stamp duty authorities, the difference will be taxable as income in the hands of the purchaser. This provision will apply only if such difference is more than Rs. 50,000/-.

(ii) It is now also provided by this amendment that if there is a time gap between the date of the agreement for purchase of the property and date of registration of the agreement, the stamp duty valuation assessable on the date of the agreement will be considered for this purpose. This concession will apply only if the full or part of the consideration stated in the agreement is paid by the purchaser by any mode other than cash before the date of registration.

(iii) For this purpose, the term “Immovable Property” is defined to mean “Land, Building or Both”. This will mean that any right in the immovable property will not be covered by this provision. Therefore, any tenancy right, leasehold right or similar right will not be considered as Immovable Property. If a flat in a building under construction is booked by the individual or HUF, the right to get possession of the flat will not be considered as purchase of immovable property under this section. Therefore, the consideration paid for this right as per the agreement will not be covered by this section.

(iv) If the stamp duty valuation is disputed, the provisions of section 50C for reference to Valuation
Officer will apply.

(v) It may be noted that if the difference between the stamp duty valuation and actual consideration exceeds Rs. 50,000/- tax will be payable on such notional amount by the seller as well as the purchaser under the following sections:

(a) In the case of the seller who is holding the immovable property as stock-in-trade as business income under new section 43CA – w.e.f. 01-04-2013.

(b) In the case of the seller who is holding the property as a capital asset, as capital gain u/s. 50C.

(c) In the case of Individual or HUF purchaser, under amended section 56(2)(vii)(b) – w.e.f. 01-04-2013 as income from other sources.

(vi) It may be noted that in the hands of the individual or HUF, if such property is held as “Capital Asset”, then such an assessee will be entitled to claim that the stamp duty valuation of the property adopted for taxation u/s. 56(2)(vii)(b) should be deemed to be the cost of acquisition of such property. To this extent there will be some deferred benefit to such individual or HUF. This benefit is provided u/s. 49(4). This benefit will not be available to a person who purchases an immovable property and treats it as stock-in-trade of his business.

(vii) It may be noted that amendment similar to what has been made, as stated above, in section 56(2)(vii)(b) was made in section 50(2)(vii)(b) by the Finance (no.2) Act, 2009, w.e.f. 01-10-2009. When it was pointed out to the Government that such a provision is unjust as both the seller and the purchaser of the immovable property will have to pay tax on this same notional addition, it was realised by the Government and in the Finance Act, 2010, this provision for levying tax on the purchaser was deleted with retrospective effect from 01-10-2009. This year the same amendment is made to tax the purchaser w.e.f. 01-04-2013, which has the effect of levying tax on the seller as well as the purchaser on the same notional addition. No reasons are given in the Explanatory Statement issued with the Finance Bill, 2013, for reintroducing this provision.

7. Buy-back of shares and Dividend Distribution Tax: Sections 10 (34A), 115-O, 115 QA to 115QC and 115R:

7.1 (i) At present, when a company buys back its shares from shareholders u/s. 77A of the Companies Act the shareholder is liable to pay tax u/s. 46A on the difference between the amount received from the company and the cost of acquisition of shares as provided u/s. 48 under the head “Capital Gains”. This provision will continue to apply in the case of shares which are listed if such buy back is not through a Recognised Stock Exchange.

(ii) A new section 115QA is inserted w.e.f. 01-06-2013 which provides as under.

(a) This section applies to buy back of shares which are not listed by a domestic company (whether public or private) u/s. 77A of the Companies Act on or after 01-06-2013.

(b) The consideration paid by the company to its shareholders for such buy-back of shares will now be liable to additional tax in the hands of the company at the rate of 20% plus 10% surcharge on tax (i.e. 2%) and 3% Education Cess on the tax (i.e. 0.66%) (Aggregate 22.66%). This tax is to be paid on the amount of such consideration after deduction of the amount received on the issue of such shares.

(c) The shareholder receiving this consideration on buy back of shares will not be liable to pay capital gains tax u/s. 46A as provided in the new section 10(34A) introduced w.e.f. A.Y. 2014-15.

(d) The above tax is to be deposited with the Government within 14 days of the payment of the consideration by the company to the shareholders.

(e) No credit for such tax can be claimed by the shareholder or the company against any tax liability.

(f) The above provision is on the same lines as Dividend Distribution Tax payable u/s. 115-0.

(iii) New section 115QB is also inserted to provide that interest at the rate of 1% p.m. for each month or part of the month shall be payable for the delay in payment of tax as required u/s. 115QA. Further, under new section 115QC provision is made for considering the company as assessee in default if it does not comply with the provisions of section 115QA. These provisions are similar to existing sections 115P and 115Q.

(iv) In section 115QA, it is stated that from the consideration paid by the company for buy-back of shares, the amount received on issue of shares should be deducted and the tax @ 20% is to be paid on this net amount. The question for consideration is as to how the amount received on issue of shares will be worked out in the following cases:

(a) When shares are issued at a Premium.

(b) When shares are issued as Bonus shares.

(d) When shares are issued to employees at concessional rate under ESOP scheme.

(e) When shares are issued at a discount or there is reduction in face value of shares to write off losses under a High Court Order.

(f) When shares are issued on amalgamation or on demerger.

In all the above cases, it will not be possible to determine the exact amount received on the issue of a particular share which the shareholder has offered for buy-back. This practical difficulty will have to be resolved by the tax authorities by a issuing a clarification.

(v) In the above scheme of taxation of the net consideration paid on buy-back of shares, it will be noticed that the tax is payable by the company. However, at present, the shareholder holding shares as a Capital Asset, is pays tax on such buy-back on the surplus, after the following deductions, under the head capital gains, at applicable rate.

(a) Actual cost of shares or Indexed cost (if long term asset) is deductible from the consideration.

(b) Set off of other capital loss or brought forward loss can be claimed against such capital gain.

(c) Benefit of deduction u/s. 54EC or 54F is available if the consideration is invested in Bonds or purchase of a residential house.

Taking into consideration the above, it will be noticed that incidence of tax under the new section 115QA will be higher as compared to the present provisions. In the case of a person holding such shares as stock-in-trade he will not get benefit of deduction of actual cost or set off of business losses or set off of carried forward losses.

7.2 Section 115-0: This section deals with Dividend Distribution Tax (DDT) payable by a Domestic company on dividend distributed by it. Section 115-0 (1A) has now been amended w.e.f. 01- 06-2013 to provide that no DDT will be payable on the amount relatable to dividend received from a foreign subsidiary company on which tax is paid by the domestic company at 15% u/s 115 BBD.

7.3 Section 115R: (i) This section deals with the payment of additional tax by a Mutual Fund (other than an equity oriented mutual fund) on the income distributed to the unit holders. This section is amended w.e.f. 01-06-2013. Hitherto such additional tax payable in respect of income distribution to Individual or HUF unit holders (excluding Money Market Fund or liquid fund) was 12.5%. Now from 1-6-2013 such tax will be payable by Mutual Fund at the rate of 25%. This will mean that the amount to be distributed to such unit holders will be reduced.

(ii) There is also an amendment in the section from 1-6-2013 to the effect that the rate of tax payable in the case of income distribution by an Infrastructure Debt Fund Scheme to a Non-Resident (including foreign company) unit holder shall be 5% only.

(iii) Surcharge at the rate of 10% of tax and Education Cess at the rate of 3% of tax will also be payable on the above tax.

8. Tax Residency Certificate for Non-Residents(TRC): Sections 90 and 90A

(i)These two sections empower the Central Government to enter into Agreements with any foreign country, Specified Territory or certain specified/Notified Associations in Specified Territories for avoidance of double taxation (DTAA). The Finance Act, 2012, had amended section 90 by insertion of sub- section (2A) w.e.f. 01-04-2013 to provide that the provisions of new sections 95 to 102 dealing with General Anti Avoidance Rule (GAAR) will be applicable even if the provisions of DTAA are more favourable to the assessee. In other words, where GAAR is invoked the assessee cannot seek protection of beneficial provision of DTAA. Similar amendment was also made in section 90A.

(ii) These two sections have now been amended to provide that section 90(2A) as well as 90A(2A) will now apply w.e.f. A.Y. 2016-17 because applicability of the provisions of sections 95 to 102 dealing with GAAR has now been postponed to A.Y. 2016-17.

(iii) (a) In section 90(4) as well as 90A(4), last year an amendment was made to provide that a Non Resident cannot claim benefit of DTAA unless Tax Residency Certificate in the form prescribed is obtained from the foreign country/specified territory with which India has entered into DTAA. In this certificate, such Foreign Country/Territory was required to certify the place of residence and such other particulars which the Indian Tax Department may require to decide where the benefit claimed under a particular DTAA is available to the Non Resident assessee.

(b) Some doubts were expressed about the effect of the amendment on the evidential value of TRC. Subsequently, the CBDT issued a press release clarifying the issue as under. “The Tax Residency Certificate produced by resident of contracting state will be accepted as evidence that he is a resident of that contracting state and the Income tax Authorities in India will not go behind the TRC and question his residential status.”

(c) To give effect to the above assurance section 90(4) as well as 90A(4) have been amended and the requirements about the Tax Residency Certificate containing the prescribed particulars about the assessee being resident of the contracting foreign country/specified territory has now been removed with retrospective effect i.e. A.Y. 2013-14. After removal of the above requirements s/s. (5) has been added in section 90 as well as 90A to provide that the Non-Resident which has obtained TRC from the foreign country/specified territory shall provide such other documents and information as may be prescribed. This amendment is made w.e.f. A.Y. 2013-14.

9. Taxation of Non-Residents: Sections 115A and 115AD

9.1 Section 115A: This section deals with tax on Dividends, Royalty and Technical Service Fees in the case of a Non-Resident. This section is amended w.e.f. A.Y. 2014-15 as under :

(i) It is now provided that the tax on interest referred to in section 194LD from Rupee Denominated Bonds of Indian Company as discussed in para 3.3 above will be payable @ 5% plus applicable surcharge and the Education Cess.

(ii) Under the existing section 115A(i)(b), the rate of tax on Royalty and Fees for Technical services is 10%. With effect from 1-4-2013 (A.Y. 2014-15) that rate is increased to 25% plus applicable surcharge and the Education Cess.

9.2 Section 115AD : This section deals with taxation of Foreign Institutional Investors. By an amendment of this section, w.e.f. A.Y. 2014-15, it is now provided that the tax on interest referred to in section 194LD from Rupee Denominated Bonds of an Indian company, as discussed in para 3.3 above, will be payable @ 5% plus applicable surcharge and the Education Cess.

10. General Anti-Avoidance Rule (GAAR)

10.1 This was a new concept introduced in the Income tax Act by the Finance Act, 2012. Very wide powers were given to the tax authorities by these provisions. In new Chapter X–A, sections 95 to 102 were inserted. In para 154 of the Budget Speech, while introducing the Finance Bill, 2012, the Finance Minister had stated that “I propose to introduce a General Anti-Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, enabling review by a GAAR panel.”

10.2 The reasons for introducing GAAR provisions in the Income tax Act were explained in the Explanatory Notes attached to the Finance Bill, 2012 as under:

“The question of substance over form has consistently arisen in the implementation of taxation laws. In the Indian context, judicial decisions have varied. While some courts in certain circumstances had held that legal form of transactions can be dispensed with and the real substance of the transaction can be considered while applying the taxation laws, others have held that the form is to be given sanctity. The existence of anti-avoidance principles are based on various judicial pronouncements. There are some specific anti-avoidance provisions but general anti-avoidance has been dealt only through judicial decisions in specific cases.

In an environment of moderate rate of tax, it is necessary that the correct tax base be subject to tax in the face of aggressive tax planning and use of opaque law tax jurisdictions for residence as well as for sourcing capital. Most countries have codified the “substance over form” doctrine in the form of General Anti Avoidance Rule (GAAR).

In the above background and keeping in view of the aggressive tax planning with the use of sophisticated structures, there is a need for statutory provisions so as to codify the doctrine of “substance over form” where the real intention of the parties and effect of transaction and purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure that has been superimposed to camouflage the real intent and purpose. Internationally several countries have introduced, and are administering statutory General Anti Avoidance Provisions. It is, therefore, important that Indian taxation law also incorporates a statutory General Anti Avoidance Provisions to deal with aggressive tax planning. The basic criticism of statutory GAAR which is raised worldwide is that it provides a wide discretion and authority to the tax administration which at times is prone to be misused. This vital aspect, therefore, needs to be kept in mind while formulating any GAAR regime.”

10.3 There was large scale opposition to the introduction of this provision in the form suggested in the Finance Bill, 2012, and the DTC Bill, 2010, pending consideration of the Parliament. This opposition was voiced by various Trade and Industry bodies in India and abroad. The Finance Minister responded to the various suggestions made by members of the Parliament and various Trade and Industry bodies while replying to the debate in the Parliament on 7th May 2012, in the following words.

“Certain provisions relating to a General Anti-Avoidance Rules (GAAR) have also been proposed in the Finance Bill, 2012. After examining the recommendations of the Standing Committee on GAAR provisions in the DTC Bill, 2010, I propose to amend the GAAR provisions as follows:

(i) Remove the onus of proof entirely from the tax payer to the Revenue Department before any action can be initiated under GAAR.

(ii) Introduce an independent member in the GAAR approving panel to ensure objectivity and transparency. One member of the panel now would be an officer of the level of Joint Secretary or above from the Ministry of Law.

(iii) Provide that any tax payer (resident or non-resident) can approach the Authority for Advances Ruling (AAR) for a ruling as to whether an arrangement to be undertaken by the assessee is permissible or not under the GAAR provisions.

To provide greater clarity and certainty in the matters relating to GAAR, a Committee has been constituted under the Chairmanship of the Director General of Income Tax (International Taxation) to give recommendations for formulating the rules and guidelines for implementation of the GAAR provisions and to suggest safeguards so that these provisions are not applied indiscriminately. The Committee has already held several rounds of discussion with various stakeholders including the Foreign Institutional Investors. The Committee will submit its recommendations by 31st May, 2012.

To provide more time to both tax payers and the tax administration to address all related issues. I propose to defer the applicability of the GAAR provisions by one year. The GAAR provisions will now apply to Income of Financial Year 2013-14 and subsequent years.”

10.4 For the reasons stated above, special provisions relating to GAAR were made in sections 95 to 102 in the Income tax Act from A.Y. 2014-15 (Accounting Year ending 31-3- 2014) and onwards. These provisions applied to all assesses (Residents or Non-Residents) in respect of their transactions in India as well as abroad. Wide powers were given to the tax authorities to disregard any agreement, arrangement or any claim for expenditure, deduction or relief.

10.5 The GAAR provisions contained in sections 95 to 102 (chapter X-A) and in section 144-BA which were introduced by the Finance Act, 2012, w.e.f. A.Y. 2014-15 have now been withdrawn and replaced by another set of provisions in new chapter X-A (sections 95 to 102) and new section 144-BA by the Finance Act, 2013, w.e.f. A.Y. 2016-17 (Accounting year 01-04-2015 to 31-03-2016).

10.6 In para 150 of the Budget Speech while introducing the Finance Bill, 2013, the Finance Minister has stated as under:

“150. Hon’ble Members are aware that the Finance Act, 2012 introduced the General Anti Avoidance Rules, for short, GAAR. A number of representations were received against the new provisions. An expert committee was constituted to consult stakeholders and finalise the GAAR guidelines. After careful consideration of the report, Government announced certain decisions on 14-01-2013 which were widely welcomed. I propose to incorporate those decisions in the Income tax Act. The modified provisions preserve the basic thrust and purpose of GAAR. Impermissible tax avoidance arrangements will be subjected to tax after a determination is made through a well laid out procedure involving an assessing officer and an Approving Panel headed by the Judge. I propose to bring the modified provisions into effect from 01-04-2016.”

10.7 In the Explanatory Statement presented with the Finance Bill, 2013, the reasons for introducing the new provisions are explained as under:

“The General Anti Avoidance Rule (GAAR) was introduced in the Income tax Act by the Finance Act, 2012. The substantive provisions relating to GAAR are contained in Chapter X-A (consisting of section 95 to 102) of the Income tax Act. The procedural provisions relating to mechanism for invocation of GAAR and passing of the assessment order in consequence thereof are contained to section 144 BA. The provisions of Chapter X-A as well as section 144 BA would have come into force with effect from 1st April, 2014.

A number of representations were received against the provisions relating to GAAR. An Expert Committee was constituted by the Government with broad terms of reference including consultation with stakeholders and finalizing the GAAR guidelines and a road map for implementation. The Expert Committee’s recommendations included suggestions for legislative amendments, formulation of rules and prescribing guidelines for implementations of GAAR. The major recommendations of the Expert Committee have been accepted by the Government, with some modifications. Some of the recommendations accepted by the Government require amendment in the provisions of Chapter X-A and section 144 BA.”

GaarProvisions

10.8 In view of the above discussion, the existing sections 95 to 102 and 144BA have been now deleted. New set of Sections 95 to 102 and 144BA have been inserted in the Income tax Act w.e.f. F.Y.: 2015-16 (A.Y. 2016-17). These new provisions are discussed below broadly.

10.9 Section 95 : This section provides that an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement. The tax arising from such declaration by the tax authorities, will be determined subject to provisions of sections 96 to 102. It is also stated in this section that the provisions of sections 96 to 102 may be applied to any step or a part of the arrangement as they are applicable to the entire arrangement.

10.10 Impermissible Avoidance Arrangement (Section 96) :

(i) Section 96 explains the meaning of Impermissible Avoidance Arrangement to mean an arrangement, the main purpose of which is to obtain a tax benefit and it –

(a) Creates rights or obligations which would not ordinarily be created between persons dealing at arm’s length.

(b) Results, directly or indirectly, in misuse or abuse of the provisions of the Income-tax Act.

(d) is entered into or carried out, by means, or in a manner, which are not ordinarily employed for bonafide purposes.

(ii) An arrangement whereby there is any tax benefit to the assessee shall be presumed to have been entered into or carried out for the main purpose of obtaining tax benefits, unless the assessee proved otherwise. It will be noticed that this was a very heavy burden cast on the assessee. The Finance Minister has, however, declared on 07-05-2012 that the onus of proof will be on the department who has to establish that the arrangement is to avoid tax before initiating the proceedings under these provisions.

10.11 Lack of Commercial Substance (Section 97) :

(i) Section 97 explains the concept of Lack of Commercial Substance in an arrangement entered into by the assessee. It states that an arrangement shall be deemed to lack commercial substance if:

(a) The substance or effect of the arrangement, as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part of such steps; or

(b) It involves or includes:

–    Round Trip Financing
–    An accommodating party.
–    Elements that have the effect of offsetting Or cancelling each other; or
–    A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction.

(ii) It involves the location of an asset or a transaction or the place of residence of any party which is without any substantial commercial purpose. In other words, the particular location is disclosed only to obtain tax benefit for a party, or

(iii) It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.

(iv) For the above purpose, it is provided that round trip financing includes any arrangement in which through a series of transactions –

(a) Funds are transferred among the parties to the arrangement, and,

(b) Such transactions do not have any substantial commercial purpose other than obtaining tax benefit.

(iii) It is further stated that the above view will be taken by the tax authorities without having regard to the following:

(a) Whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement.

(b) The time or sequence in which the funds involved in the round trip financing are transferred or received, or

(c) The means by, manner in, or mode through which funds involved in the round trip financing are transferred or received.

(iv) The party to such an arrangement shall be treated as “Accommodating Party” whether or not such party is connected with the other parties to the arrangement, if the main purpose of, direct or indirect tax benefit under the Income tax Act.

(v) It is clarified in the section that the following factors may be relevant but shall not be sufficient for determining whether the arrangement lacks commercial substance.

(a) The period or the time for which the arrangement exists

(b)The fact of payment of taxes, directly or indirectly, under the arrangement.

(c) The fact that an exit route, including transfer of any activity, business or operations, is provided by the arrangement.

10.12 Consequence of Impermissible Avoidance Arrangement (Section 98) :

Under the newly inserted section 144BA, the Commissioner has been empowered to declare any arrangement as an impermissible avoidance arrangement. Section 98 states that if an arrangement is declared as impermissible, then the consequences, in relation to tax or the arrangement shall be determined in such manner as is deemed appropriate in the circumstances of the case. This will include denial of tax benefit or any benefit under applicable DTAA. The following is the illustrative list of consequences and it is provided that the same will not be limited to the list.

(i) Disregarding, combining or re-characterising any step in, or part or whole of the impermissible avoidance arrangement;

(ii) Treating, the impermissible avoidance arrangement as if it had not been entered into or carried out;

(iii) Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

(iv) Deeming persons who are connected persons in relation to each other to be one and the same person;

(v) Re-allocating between the parties to the arrangement, (a) any accrual or receipt of a capital or revenue nature or (b) any expenditure, deduction, relief or rebate;

(vi) Treating (a) the place of residence of any party to the arrangement or (b) situs of an asset or of a transaction at a place other than the place or location of the transaction stated under the arrangement.

(vii) Considering or looking through any arrangement by disregarding any corporate structure.

(viii) It is also clarified that for the above purpose that tax authorities may re-characterise (a) any equity into debt or any debt into equity, (b) any accrual or receipt of Capital nature may be treated as of revenue nature or vice versa or (c) any expenditure, deduction, relief or rebate may be recharacterised.

10.13 Section 99 : This section provides for treatment of connected persons and accommodating party.

The section provides that for the purposes of sections 95 to 102, for determining whether a tax benefit exists –

(i) The parties who are connected persons, in relation to each other, may be treated as one and same person.

(ii) Any accommodating party may be disregarded.

(iii) Such accommodating party and any other party may be treated as one and same person.

(iv) The arrangement may be considered or looked through by disregarding any corporate structure.

10.14 It is further provided in section 100 that the provisions of sections 95 to 102 shall apply in addition to, or in lieu of, any other basis for determination of tax liability. Section 101 gives power to CBDT to prescribe the guidelines and lay down conditions for application of sections 95 to 102 relating to General Anti-Avoidance Rules (GAAR). Let us hope that these guidelines will specify the type of arrangements and transactions in relation to which alone the tax authorities have to invoke the provision of GAAR. Further, it is necessary to specify that if the tax benefit sought to be obtained by any arrangement is, say Rs. 5 crore or more in a year, then only the tax authorities will invoke these powers.

10.15 Section 102 : This section defines words or expressions used in sections 95 to 102 as stated above. Some of these definitions are as under:

(i) “Arrangement” means any step in, a part or whole of any transaction, operations, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding.

(ii) “Connected Person”, in relation to a person who is an Individual, Company, HUF, Firm, LLP, AOP or BOI is defined in more or less the same manner as the term “Related Person” is defined in section 40A(2). It may be noted that, for this purpose, the definition of the word “Relative” is wider in as much as the definition of “Relative” given in Explanation to section 56(2)(vi) is adopted, whereas in section 40A(2) the narrower definition of “Relative” given in section 2(41) is adopted.

(iii) “Fund” includes (a) any cash, (b) cash equivalents and (c) any right or obligation to receive or pay in cash or cash equivalent.

(iv) “Party” means any person, including Permanent Establishment which participates or takes part in an arrangement.

(v) “Relative” has the same meaning as given in section 56(2)(vi) – Explanation. It may be noted that this definition is very wide as compared to the definition given in section 2 (41) which is adopted for the purpose of explaining related person in section 40 A (2).

(vi) The definition of a person having substantial interest in the company and other non-corporate bodies is the same as given in section 40A (2).

(vii) “Tax Benefit” includes (a) a reduction, avoidance or deferral of tax or other amount payable under the Income tax Act, (b) an increase in a refund of tax or other amount under the Act, (c) a reduction, avoidance or deferral of tax or other amount that would be payable under the Act, as a result of tax treaty, (d) an increase in a refund of tax or other amounts under the Act as a result of tax treaty, (e) a reduction in total income or (f) increase in loss in the relevant accounting year or any other accounting year.

(viii) “Tax Treaty” means Agreements entered into by the Government with any foreign country, territory or Association u/s. 90 or 90A.

10.16 Section 144 BA : Procedure for declaring an arrangement as impressible u/s. 95 to 102 is given in this section. This section will come into force from A.Y. 2016-17.

(i) The Assessing Officer can, at any stage of assessment or reassessment, make a reference to the Commissioner for invoking GAAR. On receipt of reference the Commissioner has to hear the tax payer. If he is not satisfied by the submissions of the taxpayer and is of the opinion that GAAR provisions are to be invoked, he has to refer the matter to an “Approving Panel”. In case the assessee does not object or reply, the Commissioner can issue such directions as he deems fit in respect of declaration as to whether the arrangement is an impermissible avoidance arrangement or not.

(ii) The Approving Panel has to dispose of the reference within a period of six months from the end of the month in which the reference was received from the Commissioner.

(iii) The Approving Panel can either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made. It can issue such directions as it thinks fit. It can also decide the year or years for which such an arrangement will considered as impermissible. It has to give hearing to the assessee before taking any decision in the matter.

(iv) The Assessing Officer (AO) can determine consequences of such a positive declaration of arrangement as impermissible avoidance arrangement.

(v) The final order, in case any consequences of GAAR are determined, shall be passed by the AO only after approval by Commissioner and, thereafter, first appeal against such order shall lie to the Appellate Tribunal.

(vi) The period taken by the proceedings before Commissioner and the Approving Panel shall be excluded from time limitation for completion of assessment.

(vii) The Central Government has to constitute one or more Approving Panels. Each Panel shall consist of 3 members, including a chairperson. The constitution of the Panel shall be as under.

(a) Chairperson – He shall be a sitting or retired judge of a High Court.

(b) Members – One member shall be IRS of the rank of CCIT or above.

– One member shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices.

The term of the Panel shall ordinarily be for one year and may be extended from time to time upto 3 years. The Panel shall have power similar to those vested in AAR u/s. 245U. CBDT has to provide office infrastructure, manpower and other facilities to the Approving Panel’s members. The remuneration payable to Panel members shall be decided by the Central Government.

(viii) In addition to the above, it is provided that the CBDT has to prescribe a scheme for efficient functioning of the Approving Panel and expeditious disposal of the references made to it.

(ix) Appeal against order of assessment passed under the GAAR provisions, after approval by the appropriate authority, is to be filed directly with the ITA Tribunal and not before CIT(A). Section 144C relating to reference before DRT does not apply to such assessment order and, therefore, no reference can be made to DRT when GAAR provisions are invoked.

10.17 The above GAAR provisions will have far reaching consequences for assessees engaged in the business with Indian or Foreign parties. GAAR is not restricted to only business transactions. Therefore, all assessees who are engaged in business or profession or who have no income from business or profession will be affected by these provisions. It appears that any assessee having any arrangement, agreement, or transaction with a connected person will have to take care that the same is at Arm’s Length Consideration. In particular, an assessee will have to consider the implications of GAAR while (a) executing a WILL or Trust, (b) entering into a partnership or forming an LLP, (c) taking controlling interest in a company, (f) entering into amalgamation of two or more companies, (c) effecting demerger of a company, (f) entering into a consortium or joint venture, (g) entering into foreign collaboration, or (h) acquiring an Indian or Foreign company. It may be noted that this is only an illustrative list and there may be other transactions which may attract GAAR provisions.

10.18 From the wording of the above provisions of sections 95 to 102 and 144BA it appears that the provisions of GAAR can be invoked even in respect of an arrangement made prior to 01-04-2015. The CIT or the Approving Panel can hold any such arrangement entered into prior to 01-04-2015 as impermissible and direct the AO to make adjustments in the computation of income or tax in the assessment year 2016-17 or any year thereafter. As stated in para 15.15 of the report of the Standing Committee on Finance on the DTC Bill, 2010 it would be fair to apply GAAR provisions prospectively so that it is not made applicable to existing arrangements/transactions. Even in the Press Note issued by the Central Government on 14-01-2013 it was stated that transactions entered into prior to 30-08-2010 will not made subject to GAAR provisions. This has not been provided in the above sections and, therefore, the above GAAR provisions will have a retrospective effect.

10.19 In section 101, it is stated that CBDT will issue guidelines to provide for the circumstances under which GAAR should be invoked. Let us hope that these guidelines will specify that GAAR provisions will apply to all arrangements or transactions entered into after 01-04-2015 and also the type of arrangements or transactions to which GAAR will apply. It is also necessary to specify that GAAR provisions will be invoked only if the tax sought to be avoided is more than Rs. 5 crore, in any one year. This is also suggested by the Standing Committee on Finance in their report on the DTC Bill, 2010. Even in the Press Note dated 14-01-2013, the Government had stated that there will be monetary threshold of Rs. 3 crore of tax benefit in a year for invocation of GAAR.

10.20 It may be noted that the above revised set of provisions for invoking of GAAR which will come into force on 01-04-2015 do not contain provisions relating to following decisions of the Government announced in the Government Press Note dated 14-1-2013.

(i) GAAR will not apply to an FII which does not avail treaty benefit.

(ii) GAAR will not apply to Non-Resident Investors in FII.

(iii) Where GAAR and SAAR are both in force, only one of them will apply subject to prescribed guidelines.

(iv) GAAR will be restricted to only “PART” of the arrangement which is impermissible and not to the whole arrangement.

Let us hope that these issues will be considered when CBDT issues the Guidelines for invocation of GAAR.

11. Assessments, Reassessments and Appeals:

11.1 Section 132B : This section, which deals with application of seized or requisioned assets, is amended w.e.f. 01 -06-2013. This section provides that the “existing liability” under the Income tax Act, Wealth tax Act, etc. and the amount of liability determined on completion of assessment under 153A and the assessment of the year relevant to the previous year in which search is initiated or requisition is made, or the amount of liability determined on completion of assessment for the block period (including any penalty levied or interest payable in connection with such assessment) may be recovered out of assets seized u/s. 132 or requisitioned u/s. 132A if such person is in default or is deemed to be in default. It was debatable as to whether the assets seized or requisitioned could be adjusted against advance tax payable. With effect from 01-06-2013, an Explanation 2 is inserted to this section to provide that the “existing liability” does not include advance tax payable in accordance with the provisions of the Income-tax Act.

11.2 Section 139(9) : This section explains when the return of income filed by the assessee u/s. 139 will be considered as defective. If these defects are not removed within the prescribed time, the A.O. will consider that the assessee has not filed the return. This section is now amended w.e.f. 01- 06- 2013. As per section 140A of the Act tax payable on the basis of return of income i.e. self assessment tax, along with interest payable, if any, is required to be paid by the assessee before furnishing the return of income. With effect from 1st June, 2013, non-payment of self assessment tax together with interest, if any, payable in accordance with the provisions of section 140A, before furnishing the return of income, shall make the return of income a defective return. This defect will have to be rectified on receipt of defect notice u/s. 139(9) within the prescribed time.

11.3 Section 142(2A) : This section empowers the CIT to order a Special Tax Audit of Accounts of the assessee in specified circumstances. At present, order for such audit can be passed having regard to the nature and complexity of the accounts of the assessee and taking into consideration the interest of the revenue. The scope of this section is now expanded w.e.f. 01-06-2013. By amendment of this section such order for Special Audit can be passed by the CIT having regard to –

(i) Volume of the accounts,

(ii) Doubts about the correctness of the accounts,

(iii) Multiplicity of transactions in the accounts and

(iv) Specialised nature of business activity of the assessee.

This new provision will cover a large number of assessees and although the accounts of large companies are audited by Statutory Auditors as well as Tax Auditors, they can be subjected to this Special Audit.

It may be noted that the CIT has to fix fees of the Chartered Accountant for such special audit on the basis of guidelines contained in Rule 14B and the same is payable by the Central Government.

11.4 Section 153 : This section deals with the time limit for the completion of Assessments and Reassessments. Some issues were arising in computation of this time limit. To resolve these issues the following amendments are made in this section with effect from different dates as stated below.

(i) If income of the assessee was first assessable in A.Y. 2009-10 or any subsequent year, and the matter is referred to the Transfer Pricing Officer (TPO) u/s. 92 CA, the time limit for completion of assessment will be 3 years from the end of the assessment year instead of 2 years. This amendment is effective from 01-07-2012.

(ii) In the case of reassessment where notice u/s. 148 is issued on or after 1-4-2010 and the case is referred to TPO u/s. 92CA, the time limit for completion of reassessment will be two years instead of 1 year. This is effective from 01-07-2012.

(iii) Where order of ITA Tribunal is received by CIT or where CIT has passed order u/s. 263 or 264 on or after 01-04-2010, and while passing the fresh assessment order, a reference is made to TPO u/s. 92CA, the time limit for completion of the fresh assessment will be two years instead of 1 year. This is effective from 01-07-2012.

(iv) Explanation 1(iii) to this section is amended from 01-06-2013. At present, in computing time limit for completion of assessment in a case in which AO has issued direction for special Audit u/s. 142(2A), the period from the date on which such direction is issued to the date on which the assessee is required to furnish report of the special Audit is to be excluded. It is now provided that, if the above direction is challenged in any court, the period upto the date on which such order is set aside by the court will also be excluded.

(v) Explanation 1(viii) to this section is amended w.e.f. 01-06-2013. It is now provided that while computing the time limit for completion of assessment the time taken for obtaining information from a foreign country/territory of foreign specified Association u/s. 90 or 90A will be excluded. This will be subject to a maximum of one year.

(vi) A new clause (ix) is added to Explanation 1 to the above section, effective from 01-04-2016. This relates to GAAR provisions as discussed in para 10 above. It is provided in this clause that the period from the date on which reference for declaration of an arrangement to be an impermissible avoidance arrangement is received by CIT u/s. 144BA and the date when direction from the CIT or the Approving Panel is received by the A.O. will be excluded for computing the period for completion of the assessment.

11.5 Section 153B : This section provides for time limit for completion of assessment in cases of Search and Seizure u/s. 153A. The section is amended from 01-07-2012, 01-04-2013 and from 01-04-2016 as stated in para 11.4 above. These amendments for computation of time limit for completion of the assessment or the reassessment are on the same lines as amendments in section 153 discussed in para 11.4 above.

11.6 Section 153D : This section provides for prior approval for assessment in cases of search or Requisition. This section is amended w.e.f. 01-04-2016. It is now provided that in cases of assessments or reassessments in respect of any of the years mentioned in section 153(1)(b) or the assessment year referred to in section 153B(1)(b), where the Assessing Officer has made a reference to the Commissioner to declare an arrangement as an impermissible avoidance arrangement and to determine the consequence of such an arrangement within the meaning of Chapter X- A, dealing with GAAR, the Assessing Officer shall pass the order of assessment or reassessment with the prior approval of the Commissioner. In such cases, the prior approval of the Joint Commissioner shall not be required.

11.7 Sections 167C and 179 : These sections deal with recovery of taxes due from partners of an LLP in liquidation and directors of a private limited company in liquidation respectively. These sections are amended w.e.f. 01-06-2013. Section 167C allows recovery from the partners of any tax due from an LLP in certain cases. Similarly, section 179 allows recovery from the directors of any tax due from a private company in certain cases. In certain decisions [e.g. Dinesh T. Tailor vs. TRO 326 ITR 85 (Bom.)] it has been held that the “Tax due” will not comprehend within its ambit a penalty or interest. Now, an Explanation is added to both these sections to provide that the expression “Tax due” shall include penalty, interest or any other sum payable under the Act. It would, therefore, be possible for tax authorities to recover not only the tax but also the penalty and the interest dues of an LLP or private company from its partners or directors respectively.

11.8 Sections 245N and 245R :(i) Section 245N(a) defines “Advance Ruling”. In view of the amendments relating to GAAR as discussed in para 10 above, section 245N(a)(iv) has been amended w.e.f. 01-04-2015 (A.Y.: 2016-17). It provides that a Non-Resident can obtain Advance Ruling under XIX-B in respect of determination or decision by Authority for Advance Ruling (AAR) whether an arrangement, which is proposed to be undertaken by a Resident or Non-Resident, is an impermissible avoidance arrangement as referred to in GAAR provisions. Consequential amendment is made in section 245N(b) also.

(ii) Section 245R is also amended effective 01-04-2015 to provide that AAR will not allow an application where it finds that the transaction is designed prime facie as arrangement which is impermissible avoidance arrangement.

11.9 Section 246A: This section provides for appeal to CIT(A). Clauses (1)(a)(b)(ba) and (c) of section 246A have been amended w.e.f. 01-04-2016 to provide that an assessment or reassessment order passed u/s. 143(3), 147 or 153A with the approval of CIT u/s. 144BA(12) or any order passed u/s. 154 or 155 in relation to such an order shall not be appealable before CIT(A). In all such cases, direct appeal before ITA Tribunal can be filed.

11.10 Section 252: This section deals with the constitution and appointment of the ITA Tribunal Members. This section is amended w.e.f. 01-06-2013. After this amendment, it is provided that the Central Government shall appoint a President of ITA Tribunal out of the following persons.

(i) A sitting or retired High Court Judge who has completed 7 years or more of service as such High
Court Judge.

(ii) Senior Vice President or one of the Vice Presidents of ITA Tribunal.

11.11 Section 253: This section provides for the list of orders against which appeal can be filed before the ITA Tribunal. Effective from A.Y. 2016 -17, it is now provided that such appeal can be filed directly before the ITA Tribunal against an assessment order passed u/s. 143(3) in regular case, in reassessment proceedings u/s. 147 or in search proceedings u/s. 153A with the approval of CIT u/s. 144BA. Even orders passed u/s. 154 or 155 to rectify mistakes in such proceedings u/s. 144BA will be subject to such appeals before ITA Tribunal u/s. 253.

11.12 Section 271FA: This section provides for levy of penalty for failure to furnish “Annual Information Return” (AIR). This section is amended effective from 01-04-2013 (A.Y. 2014-15). As per the existing provisions, in case of failure in furnishing AIR a penalty of Rs. 100 is leviable for each of day of default after the prescribed date. i.e. 31st August. If the Income tax authority issues notice requiring any person, who has failed to furnish an AIR to submit such return and such person does not furnish such return within the time provided in the notice then the enhanced penalty of Rs. 500 per day is now leviable for the period of such default after the expiry of time provided to furnish the return in the notice issued by AO.

12. Wealth tax act :

12.1 Section 2(ea): Explanation 1(b) defines “Urban land”. The existing definition is modified w.e.f. A.Y. 2014-15 in such a manner that Urban Land within the area as stated in the amended section 2(1A) of the Income tax Act (as discussed in para 4.1 above) will be included in the definition of Urban Land.

The Finance Minister has stated in his speech while replying to Budget discussion that no wealth tax will be levied on Agricultural Land as at present.

12.2 Sections 14A, 14B and 46 : These sections are amended w.e.f. 01-06-2013. So far provision for electronic filing of returns are applicable to returns filed under the Income tax Act.p Now, sections 14A, 14B & 46 of WT Act are inserted to facilitate electronic filing of annexure – less return of net wealth. Under these provisions, rules will be made for the following:

(i) The class of person who shall be required to furnish the return electronically.

(ii) The form and manner in which returns can be filed electronically.

(iii) The computer resource or the electronic record to which the return may be transmitted electronically.

(iv) The exemption from furnishing the documents, statements, reports, etc. along with the return filed in an electronic form.

13. Commodities transaction tax (ctt)

(i) The Finance Act, 2013 has introduced a new tax called Commodities Transaction Tax (CTT) to be levied on Taxable Commodities Transactions entered into in a recognised association. A transaction of sale of commodity derivatives in respect of commodities, other than agricultural commodities, traded in recognised associations is considered as Taxable Commodities Transaction.

(ii) CTT is leviable on sale of Commodities Derivatives at the rate of 0.01 per cent and the same is payable by the seller.

(iii) Section 36 of the Income-tax Act is amended to provide that CTT paid in the course of business shall be allowable as deduction if the income arising from such taxable commodities transactions is included in the income computed under the head “Profits and gains of business of profession”.

(iv) This tax is to be levied from the date on which Chapter VII of the Finance Act, 2013 relating to CTT comes in to force by way of notification by the Central Government.

(v) Sections 105 to 124 (Chapter VII) of the Finance Act, 2013, make detailed provisions for the levy of CTT, collection, filing of returns, assessments, appeals, rectifications, penalties etc. on the same lines as chapter VII of the Finance (No.2) Act, 2004 relating to STT.

14. Securities Transactions Tax (stt)

With effect from 1st June, 2013, the rates of STT have been revised as under:

15. General Observations:

15.1 This year’s budget being the last effective budget of the present Government can be considered as a soft budget. The provisions relating to GAAR which were to come into force from the current year have been postponed by two years. The provisions relating to the constitution of the Approving Panel and resolution of GAAR disputes have been strengthened. However, unless the mindset of the persons administering these provisions is changed, the tax payers will have to face hardships and they will face unending litigation. For implementing such complex provisions, the tax authorities have to implement these provisions by taking into consideration the ground realities of business and industry in our country. In implementing such provisions the tax authorities should not only consider the letter of the law but should consider the spirit behind this legislation. For this purpose, the CBDT will have to consider the business realities while framing the tax payer friendly guidelines for implementing these provisions.

15.2 As stated above, the Finance Minister has addressed the issue relating to GAAR to some extent. However, the provisions relating to taxation of Non-Residents introduced last year with retrospective effect have not been addressed. These provisions have affected our relationship with many foreign countries. This will affect our global trade in the long term. Disputes have arisen in some cases of large Multinationals and the Government is trying to resolve these disputes by enactment of separate legislation. When the Government has recognised that these disputes have arisen due to these retrospective amendments, it should have amended these provisions and given them only prospective effect.

15.3 One disturbing feature relates to the amendments made this year relating to TDS from consideration paid or payable on purchase of an Immovable Property under new section 194-IA. This will put tax payers and those who are not liable to pay tax into many practical difficulties of collecting 1% tax at source, depositing the same with the Government and filing return of TDS. There will be some issues relating to the date on which such tax is to be deducted when a flat is booked prior to 01-06-2013 or after that date in a building under construction and payments are made in instalments.

15.4 Amendment made in section 56(2)(vii)(b) levying tax on the notional amount of difference between stamp duty valuation of an immovable property sold and the actual consideration paid by an Individual or HUF (Purchaser). This will mean levying tax on the same notional amount in the hands of the seller as well as purchaser. It may be noted that such tax is not payable if the purchaser is a firm, LLP, company or persons other than individual or HUF. Similar tax was levied in 2009 but was withdrawn in 2010 with retrospective effect. It is unfortunate that the Government has again levied this type of tax which is payable by individual/HUF purchaser and seller of the property on the same notional amount. This is a very harsh and unjust provision in the Income-tax Act.

15.5 Provision made last year, effective from 01-04-2012 relating to “Specified Domestic Transactions” has increased the compliance cost of assessees. Transfer Pricing provisions have been made applicable to some domestic transactions. Although one year has passed since these provisions have come into force, there is no clarity about the type of transactions to which these provision will apply. No adequate data about comparable prices is available. In particular, there is no clarity as to how the assessing officers will compare the managerial remuneration paid to connected persons while making disallowance u/s. 40A(2). CBDT has not framed any separate Rule prescribing the information or documents required to be maintained by the assessee to whom this provision is applicable. No separate Form of Audit Report to be obtained u/s. 92E by the assessee to whom these provisions apply has been prescribed. We are informed that the provisions of Rule 10D and 10E and Form 3CEB of Audit Report prescribed for International Transactions can be used. If we refer to these Rules and the Form it will be noticed that there is no mention about Specified Domestic Transactions in these Rules or Form. It is not clear as to how specific requirements of these Domestic Transactions are to be reported in the Audit Report.

15.6 It may be noted that the present Finance Minister mooted the idea of replacing the present Income-tax Act and the Wealth Tax Act by Direct Taxes Code (DTC) in 2006-07. The DTC Bill, 2009 was circulated on 12.08.2009 for public debate. After considering the suggestions from various quarters, the DTC Bill, 2010, was introduced in the Lok Sabha and was to come into force w.e.f. 01.04.2012. The Bill was referred to the Standing Committee of the Finance. Since its report was delayed, DTC could not be passed in 2011 and hence its implementation was delayed. In Para 154 of the Budget Speech the Finance Minister has stated that DTC is work-in-progress. He has also stated that the report of the Standing Committee is received. The same is being examined and the revised Bill will be introduced in the budget session of the Parliament. This has not happened and it appears that this important legislation may not be passed during the present term of the UPA II Government.

15.7 Another legislation viz. Goods and Service Tax (GST) in the field of Indirect Taxes, was announced by the Finance Minister in 2007-08. He has referred to this in Para 186 of the Budget Speech this year. Due to differences in the views of various States, the required legislation has not been introduced in the Parliament. The Prime Minister has admitted that GST, which is to replace Excise Duty, Customs Duty, Service Tax and VAT laws in our Country may be enacted in 2014 after the elections by the new Government which may come to power.

15.8 Another major reform measure in the field of Corporate legislation relates to replacement of the Companies Act, 1956 by the Companies Bill, 2011. This Bill has been passed by the Lok Sabha in December, 2012. It is pending in the Rajya Sabha. The impression given to us was that this Bill will be passed in this year’s Budget Session and will come into force soon. This Bill is pending before the Rajya Sabha and this important legislation is also delayed.

15.9 The above three legislations are being discussed for the last more than five years but our Parliament is not able to legislate the same. We are assured that these new legislations will simplify our tax and Corporate Legislation and make the life of all stakeholders hassle free. Let us hope the Parliament in its wisdom legislates these provisions before the end of the current Financial Year.

(Acknowledgement: S.M. Jhaveri, Chartered Accountant and Dalpat H Shah, Chartered Accountant have assisted the Author in the preparation of this Article)

Nirav Shah

Dilip Sambhaji Shirodkar vs. ITO ITAT “D” Bench, Mumbai Before P.M.Jagtap (A.M.) and Dr S.T.M. Pavalan (J. M.) ITA No.8899/Mum/2010 Assessment Year: 2006-07. Decided on 12.06.2013 Counsel for Assessee/Revenue: Jitnedra Jain & Sachin Romani / Rajarshi Dwivedy

Section 69 – Acquisition of a flat in lieu of the surrender of a tenancy right – Existence of difference in value between consideration for tenancy right acquired and the value of the new flat received in lieu thereof not sufficient ground for making addition.

Facts:
The assessee was an individual engaged in the occupation of goldsmith. In his return of income he had declared a total income at Rs. 0.80 lakh. The AO, in assessment made u/s.143(3) found that during the year under consideration the assessee had purchased a property worth Rs. 50.35 lakh. The AO treated this impugned investment as unexplained and made an addition of Rs.50.35 lakh u/s.69. On appeal, the CIT(A) confirmed the action of the AO.

Before the tribunal, the assessee submitted that he had acquired tenancy right as per Agreement dated 09-04-2001 for a sum of Rs. 4 lakh. Thereafter, pursuant to the agreement dated 07-10-2005, the assessee was allotted a flat in another building in lieu of surrender of his tenancy right. The value of the flat allotted in lieu of surrender of tenancy right was Rs. 50.35 lakh as per the valuation done by the Stamp Duty Authorities, while registering the agreement. He further submitted that the consideration on the surrender of the tenancy rights, equal to the value of the new flat, stood fully invested in a residential flat, the Long Term Capital Gain arising on the said transaction was not chargeable to tax u/s.54F. The contention of the revenue was that the assessee had not been able to prove that he had received the flat by virtue of the surrender of tenancy rights.

Held:
The tribunal agreed with the assessee that the agreement dated 07-10-2005 clearly indicated that the new flat was acquired by the assessee in lieu of surrender of his tenancy right in the old building. The perusal of the agreement dated 09-04-2001, also indicated that the old tenants transferred the tenancy rights in respect of the said property to the assessee for a consideration of Rs. 4 lakh. Secondly, as regards the reasoning of the CIT(A) that the acquisition value of Rs. 4 lakh had not been paid by the assessee, the tribunal found merit in the contention of the assessee that the same had been by way of constructive payment made by the builder on behalf of the assessee, which according to it was not a new practice of the developer in business of construction industry. Thirdly, regarding the finding of the lower authorities as to the difference in values between the consideration for relinquishment of rights by the old tenant (Rs.4 lakh) and the market value of the new flat (more than Rs.50 lakh), the tribunal opined that it was beyond the purview of the lower authorities to suspect a transaction solely on the ground of adequacy/inadequacy of consideration in the absence of any other corroborating evidence and thereby making any adverse inferences. Further, the value as adopted by AO was based on the valuation determined by the stamp duty authorities while registering the agreement dated 07-10-2005. Therefore, it held that mere suspicion without evidence on record could not be the basis for making an addition to income u/s. 69 and hence, the addition made was deleted.

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Nirav Shah

MITC Rolling Mills P. Ltd. vs ACIT ITAT “B” Banch, Mumbai Before D. Manmohan, (V.P.) and Rajendra, (A. M.) ITA No.2789/Mum/2012 Assessment Year: 2009-10. Decided on 13.05.2013 Counsel for Assessee/Revenue: T. M. Gosher / Mohit Jain

Section 32(1)(iia) – Additional depreciation on Plant and Machinery – Where the plant and machineries were put into use for less than 180 days in the year of installation and hence, disentitled the assessee to the 50% of the additional amount of depreciation, the assessee was entitled to the balance 50% of the additional depreciation in the subsequent year.

Facts:
The assessee was engaged in the business of manufacture and sale of iron and steel. Assessee installed certain new plant and machinery after September, 2007. For the previous year relevant to A. Y. 2008-09 the plant and machinery having been put to operation for less than 180 days the assessee claimed only 50% of the additional depreciation and the balance 50% was claimed in the previous year relevant to A. Y. 2009-10, which is the year under appeal. The AO as well as the CIT(A) were of the opinion that the assessee was not entitled to claim balance 50% deprecation in the subsequent year u/s. 32(1)(iia) of the Act. The case of the assessee was that it is a onetime incentive allowed to the assessee under the Act where the object was to encourage establishment of industries and hence, balance 50% was allowable in the year under consideration.

Held:
The tribunal placed reliance upon the following decisions of the Delhi tribunal:

i. DCIT vs. Cosmo Films Ltd. 139 ITD 628

ii. ACIT vs. Sil Investment Ltd. 54 SOT 54

The tribunal noted that as per the Delhi tribunal, there was no restriction on allowing balance of one time incentive in the subsequent year if the provisions are constructed reasonably, liberally and in a purposive manner. According to it, the additional benefit was intended to give impetus to industrialisation and in that direction the assessee was entitled to get the benefit in full when there was no restriction in the statute to deny the benefit of balance 50% when the new plant and machinery was acquired and put to use for less than 180 days in the immediately preceding year. Accordingly, it was held that the assessee was entitled to depreciation in the subsequent year if the entire depreciation was not allowed in the first year of installation.

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Nirav Shah

Apollo Tyres vs. DCIT ITAT Cochin Bench Before N. R. S. Ganesan (JM) and B. R. Baskaran (AM) ITA No. 31/Coch/2010 A.Y.: 2006-07. Decided on: 29th May, 2013. Counsel for assessee/revenue: Percy J. Pardiwala, T. P. Ostwal and Indra Anand, Madhur Agarwal/M. Anil Kumar

Section 40(a)(ia) – Section 40(a)(ia) does not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) and therefore in case of short/lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the AO cannot be disallowed.

Facts:
The assessee made payments on which tax deductible at source was deducted at a rate lower than the rate at which tax ought to have been deducted. The short deduction was due to surcharge not being considered in some cases and in some cases rate applicable to sub-contractors was applied instead of applying the rate for payment to contractors. The AO disallowed a sum of Rs. 68,68,556 u/s. 40(a)(ia) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal after having considered the provisions of section 40(a)(ia) and section 201(1A) of the Act held as follows :

In section 201(1A) the legislature intended to levy interest even in case of short deduction of tax. In other words, if any part of the tax which was required to be deducted was found to be not deducted then interest u/s. 201(1A) can be levied in respect of that part of the amount which was not deducted whereas the language of section 40(a)(ia) does not say that even for short deduction disallowance has to be made proportionately. Therefore, the legislature has clearly envisaged in section 201(1A) for levy of interest on the amount on which tax was not deducted whereas the legislature has omitted to do so in section 40(a)(ia) of the Act. In other words, provisions of section 40(a)(ia) do not enable the AO to disallow any proportionate amount for short deduction or lesser deduction.

The Mumbai Bench found that short deduction of TDS, if any, could have been considered as liability under the Income-tax Act as due from the assessee. Therefore, the disallowance of the entire expenditure, whose genuineness was not doubted by the AO is not justified. A similar view was also taken by the Kolkatta Bench of the Tribunal in the case of CIT vs. S. K. Tekriwal. In this case, on appeal by the revenue, the Calcutta High Court confirmed the order of the Kolkatta Bench of the Tribunal (ITA No. 183 of 2012, GA No. 2069 of 2012 judgment dated 3.12.2012).

Section 40(a)(ia) does not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act. Therefore, in case of short/lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the AO cannot be disallowed.

This ground of appeal was decided in favour of the assessee.

levitra

Nirav Shah

S. 55A of the Income-tax Act, 1961 — Valuation report of Departmental Valuation Officer — To determine fair market value as on 1st April, 1981 whether reference to DVO can be made — Held, No.

New Page 1

part B: unreported decisions

1 ITO v. Surendra V. Shah

ITAT ‘E’ Bench, Mumbai

Before D. Manmohan (VP) and

Pramod Kumar (AM)

ITA No. 5667/Mum./2008

Decided on : 23-7-2010

Counsel for revenue/assessee
:

Naveen Gupta/Dr. Rashmi J.
Zaveri

Per Pramod Kumar :

Facts :

S. 55A of the Income-tax
Act, 1961 — Valuation report of Departmental Valuation Officer — To determine
fair market value as on 1st April, 1981 whether reference to DVO can be made —
Held, No.

The issue before the
Tribunal was whether the AO can resort to Departmental Valuation Officer’s (DVO)
report for ascertaining fair market value of an asset as on 1st April, 1981 and
for the purpose of computing cost of acquisition u/s.55(2)(b)(i).

Held :

According to the Tribunal a
reference to DVO can only be made u/s.55A. Further relying on the decision of
the Mumbai Bench of Tribunal in the case of Daulai Mohta (HUF) which decision
was subsequently approved by the Bombay High Court, the Tribunal upheld the
order of the CIT(A) to the effect that the reference to the DVO was invalid.

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Nirav Shah

Business expenditure: TDS: Disallowance u/s. 40(a)(ia): A. Y. 2009-10: Tax deducted at source on salaries of employees paid by another party on behalf of assessee: Assessee not required to deduct tax on reimbursement to that party: Disallowance u/s. 40(a) (ia) cannot be made:

CIT vs. Victor Shipping Services (P) Ltd.; 357 ITR 642
(All):

In the A. Y. 2009-10, M paid salary to the employees of the assessee on behalf of the assessee and also deducted tax at source as per law. The assessee reimbursed the amount to M. The Assessing Officer disallowed the payment made to M relying on the provisions of section 40(a)(ia), on the ground that no tax was deducted at source on such payment to M. The CIT(A) allowed the assessee’s appeal and held that since M had deducted tax at source on salaries paid by it on behalf of the assessee, the assessee was not required to deduct tax at source on reimbursement made by it to M, and when the expenses incurred by the assessee were totally paid and did not remain payable as at the end of the accounting period, the provisions of section 40(a) (ia) of the Act were not applicable. The Tribunal affirmed the decision of the CIT(A).

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

“i) Tax was deducted at source from the salaries of the employees paid by M, and the circumstances in which such salaries were paid by M for the assessee were sufficiently explained. For disallowing expenses from business and profession on the ground that tax has not been deducted at source, the amount should be payable and not which has been paid by the end of the year.

ii) The Tribunal had not committed any error in recording on facts, and no question of law arose for consideration in appeal.”

levitra

Nirav Shah

The scope of ‘services’ in the context of Section 44BB is not restricted and they need not be only those which are other than ‘technical services’ under Section 9(1)(vii).

New Page 2

17 Geofizyka Torun Sp Zo O, In
re [2009] 32 DTR (AAR) 139

Sections 9(1)(vii), 44BB, 44DA,
I T Act

7th December, 2009

Issue

The scope of ‘services’ in the context of Section 44BB is not
restricted and they need not be only those which are other than ‘technical
services’ under Section 9(1)(vii).

Facts

The applicant was a tax resident of Poland (“PolCo”). It was
in the business of providing geophysical services to the international oil and
gas industry. It conducted seismic surveys and provided onshore seismic data
acquisition and other associated services such as processing and interpretation
of such data to global and oil companies. Seismic surveys are used to identify
hydrocarbons, increase exploration success, maximise production, better target
the oil and gas reserves and to reduce the overall exploratory drilling risks.
The short question before AAR was whether income derived by PolCo in India was
covered under section 44BB of the Act.

Before the AAR, the tax authorities contested the
applicability of Section 44BB on the ground that the services contemplated in
Section 44BB were other than those coming within the purview of Explanation 2 to
Section 9(1)(vii) of the Act, whereas the services provided by PolCo were
covered under the said provision. Further, ‘fees for technical services’ under
Section 9(1)(vii) should be computed under Section 44DA where the service
provider has a PE in India. It was also contended that PolCo itself was not
undertaking any mining or like project (which was being undertaken by someone
else), and that Section 44BB would come into play only if the services were out
of the purview of Section 9(1)(vii).

The AAR observed that it was an undisputed and undeniable
fact that PolCo was engaged in business in India. The AAR then referred to
Sections 44BB, 44DA and 115A and proceeded to consider the meaning of the
expression ‘in connection with’.

Held

Having regard to the meaning of the expression ‘in connection
with’, it is clear that the services provided by PolCo were in connection with
the prospecting for or extraction of mineral oils and there was real, intimate
and proximate nexus between the services performed by PolCo in India and
prospecting for or extraction of mineral oils.

The expression ‘services’ should be understood in its plain
and ordinary sense and in the absence of any limitation or exclusion in the
statute. There was no reason to assign narrow and restricted meaning and confine
it to ‘services other than technical, consultancy or managerial services’.
Section 44BB and Section 44DA being competing provisions, and Section 44BB being
a more specific provision, it should prevail.

End notes:

1. In its decision, the Supreme Court did not
examine this issue. It reversed Gujarat High Court’s decision merely because of
retrospective amendment to section 10(15)(iv)(c) whereby usance interest was
exempted but, only in case of an undertaking engaged in the business of ship
breaking. Hence, it is doubtful whether the Supreme Court could be said to have
reversed the ratio of Gujarat High Court’s decision.

levitra

Nirav Shah

S. 45 read with S. 10(38) — Profit from delivery-based transactions in shares treated as capital gains and not as business income.

New Page 1

60. (2009) 29 SOT 117 (Mum.)

Gopal Purohit v. Jt. CIT

A.Y. : 2005-06. Dated : 10-2-2009

S. 45 read with S. 10(38) — Profit from delivery-based
transactions in shares treated as capital gains and not as business income.

During the relevant assessment year, the assessee entered
into transactions of sale and purchase of shares in two forms i.e.,
delivery-based transactions and non-delivery-based transactions. Non-delivery
based transactions had been treated by the assessee as business activity and
income earned by assessee from delivery-based transactions was treated as
capital gain. The assessee’s claim for exemption of long-term capital gain
u/s.10(38) was rejected by the Assessing Officer on the following grounds :

the frequency of the transactions carried on by the assessee was very high
with large volumes of shares.

the assessee had borrowed funds which were utilised for carrying out share
transactions.

transactions where no delivery was taken had been squared up on the same day
the profit/ loss resulting therefrom was shown as business income.

in respect of delivery-based transactions, as per the statement of capital
gains filed by the assessee, the period of holding was few days only.

The Assessing Officer, therefore, held that the entire
profit was to be assessed as income from business and profession.

Before the CIT(A) the assessee contended that in earlier
five assessment years on identical facts, the assessment had been completed
u/s.143(3) by accepting the assessee’s claim. Hence, on the basis of the
principle of consistency and in absence of any fresh material, the same
treatment should be given by the Revenue for this year also. The CIT(A) upheld
the Assessing Officer’s order.

The Tribunal, relying on the decision in the case of
Sarnath Infrastructure Pvt. Ltd. v. Asst. CIT, (2009) 120 TTJ 216 (Luck.),
held in favour of the assessee. The Tribunal noted as under :

1. The assessee had claimed himself both as a dealer as
well as an investor and offered income for taxation accordingly and he claimed
that such income had been accepted by the Revenue authorities in earlier
years. Hence, it becomes important to analyse the facts of earlier years. On
considering the facts of the earlier years, the following conclusions
emerged :

(i) The facts of the year under consideration with regard
to nature of income(s) earned by the assessee and the transactions were same
in all those years, except transactions in F & O segment in some of the
years, wherein this kind of activity was started by the stock exchange.

(ii) Interest on borrowed capital had been allowed as
business expenditure against the profit on jobbing activities shown by the
assessee as business profit.

(iii) The assessee had shown shares purchased on delivery
basis as investments at the end of the year and no stock-in-trade existed on
that date and the assessee had earned both long-term and short-term capital
gains which meant that the assessee had also held shares for the period of
more than 12 months.

Thus, the nature of activities, modus operandi of
the assessee, manner of keeping records and presentation of shares as
investments at the year end were the same in all the years and hence,
apparently, there appeared no reason as to why the claim made by the assessee
should not be accepted.

2. The Revenue authorities had taken a different view in
the year under consideration by holding that the principle of res judicata
was not applicable to the assessment proceedings. There could not be any
dispute on this aspect, but there is also another judicial thought that there
should be uniformity in treatment and consistency under the same facts and
circumstances and it was already found that facts and circumstances were
identical, even though a different stand had been taken by the Revenue
authorities.

3. On the facts and circumstances of the instant case, on
the basis of principle of consistency alone, the action of the Revenue
authorities was liable to be quashed.

4. On the basis of merits also, in view of the ratio of the
decision of Sarnath Infrastructure (P.) Ltd.’s case (supra), it was
held that the delivery-based transaction should be treated as of the nature of
investment transactions and profit therefrom should be treated as capital
gains.

5. The Revenue authorities had also held that borrowed
funds were utilised for making such investment. In earlier years, interest on
such loans had been allowed as business expenditure against profit on share
trading transaction shown as business income. In the year under consideration
also no nexus between the interest-bearing funds and investments had been
established and, hence, for this reason also, there was no merit in treating
the capital gains as business profit.

levitra

Nirav Shah

ITO vs. Zinger Investments (P) Ltd. ITAT Hyderabad `A’ Bench Before Chandra Poojari (AM) and Saktijit Dey (JM) ITA No. 275/Hyd/2013 A.Y.: 2007-08. Decided on: 21st August, 2013. Counsel for revenue/assessee: M. H. Naik/ Inturi Rama Rao.

Sections 2(42C), 50B—Transfer of undertaking, with all its assets and liabilities under a scheme of amalgamation, where no monetary consideration is involved, cannot be considered to be a slump sale within the meaning of section 2(42C).

Facts:
The assessee filed return of income declaring nil income. In the course of assessment proceedings u/s. 147 of the Act, the Assessing Officer (AO) noticed that under the scheme of amalgamation approved by the Andhra Pradesh High Court u/s. 391 and 394 of the Companies Act the manufacturing division of the assessee company was transferred to M/s. Novopan Industries Ltd. with all its assets and liabilities as per the terms of scheme of amalgamation approved by the High Court. The assessee in return for the transfer of assets and liabilities received the investments of Rs. 25,24,05,000 besides the allotment of 38 equity shares of Rs. 10 each to the shareholders of the assessee company for every 100 equity shares held in the assessee company. The net worth of the assessee company as on 31-3-2006 was Rs. 681.22 lakh.

The AO held the transfer of manufacturing division to M/s. Novopan Industries Ltd to be a `slump sale’ within section 50B attracting liability of capital gains. He computed long-term capital gain by adopting full value of consideration to be Rs. 31,52,12,500 being aggregate of Rs. 6,28,07,500 (being shares issued to shareholders) and Rs. 25,24,05,000. He considered Rs. 6,81,22,000 to be the cost of acquisition. Accordingly, he determined long-term capital gain to be Rs. 24,70,90,500. He rejected the contention of the assessee that there was no monetary consideration and therefore the transfer under consideration was not a slump sale.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held: The Tribunal, having noted the facts, observed that there is no monetary consideration received by the assessee company for transfer of manufacturing division. To qualify as a slump sale u/s. 2(42C), two conditions have to be satisfied viz., (1) there must be transfer of one or more undertaking as a result of sale and (2) the sale should be for a lumpsum consideration without values being assigned to the individual assets and liabilities. The Tribunal noted the ratio of the decisions of the Supreme Court in the case of CIT vs. Motors & General Stores Pvt. Ltd. 66 ITR 692 (SC) and also CIT vs. R. R. Ramakrishna Pillai 66 ITR 725 (SC) wherein it was held that where a person carrying on business transfers assets to a company in consideration of allotment of shares, it would be a case of exchange, but not sale.

The Tribunal held that since there is no monetary consideration involved in transferring the manufacturing division with all its assets and liabilities to M/s. Novapan Industries Ltd. under scheme of amalgamation approved by the Andhra Pradesh High Court, it cannot be considered to be a slump sale within the meaning ascribed u/s. 2(42C) of the Act so as to attract the liability of capital gains u/s. 50B of the Act. The Tribunal did not find any reason to interfere with the finding of CIT(A).

The appeal filed by the revenue was dismissed.

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Nirav Shah

ITO vs. Gope M. Rochlani ITAT Mumbai `G’ Bench Before Rajendra Singh (AM) and Amit Shukla (JM) ITA No. 7737/Mum/2011 A.Y.: 2008-09. Decided on: 24th May, 2013. Counsel for revenue/assessee: D. K. Sinha/ Dr. P. Daniel.

Explanation 5A to section 271(1)(c). The expression “due date” in Explanation 5A encompasses a belated return filed u/s. 139(4). Even a belated return filed u/s. 139(4) will be entitled to the benefit of immunity from penalty.

Facts: The assessee, a partner of the firm M/s. Madhav Constructions, in its return of income for assessment year 2008-09, filed u/s. 139(4), returned a total income of Rs. 1,31,19,140. The returned income included a sum of Rs. 1,25,00,000 declared by it in the statement recorded u/s. 132(4) of the Act in the course of search action on Madhav Group. In an order passed u/s. 143(3) r.w.s. 153A, the income returned by the assessee was accepted by the Assessing Officer (AO). Thereafter, the AO initiated proceedings u/s. 271(1)(c) on the ground that the income was offered only as a consequence of search and the return of income in which it was declared was filed after due date u/s. 139(1). He held that the assessee’s case was covered by Explanation 5A to section 271(1)(c). He rejected the assessee’s contention that the sum of Rs. 1,25,00,000 declared was offered voluntarily on an estimated basis and the same was accepted in the assessment order and hence the provisions of section 271(1)(c) are not applicable.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee on the ground that income was offered on an estimated basis and therefore the additional income so offered and accepted could not be held to be concealed income nor could it amount to furnishing of inaccurate particulars.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
In Explanation 5A, the legislature has not specified the due date as provided in section 139(1) but has merely envisaged the words “due date”. This “due date” can be very well inferred as due date of filing of return of income filed u/s. 139 which includes section 139(4). Where the legislature has provided the consequences of filing of return of income u/s. 139(4), then the same has also been specifically provided for eg., section 139(3). Thus, the meaning of the words “due date” sans any limitation or restriction as given in clause (b) of Explanation 5A cannot be read as “due date as provided in section 139(1)”. The words “due date” can also mean date of filing of the return of income u/s. 139(4).

The Tribunal also noted that in the context of sections 54F and 54(2), in the case of CIT vs. Rajesh Kumar Jalan (286 ITR 276)(Gau); CIT vs. Jagriti Aggarwal (339 ITR 610)(P & H) and CIT vs. Jagtar Singh Chawla (ITA No. 71 of 2012, order dated 20th March, 2013), it has been held that provisions of section 139(4) are actually an extension of due date of section 139(1) and therefore due date for filing return of income can also be reckoned with the date mentioned in section 139(4).

The Tribunal held that the assessee gets the benefit/ immunity under clause (b) of Explanation to section 271(1)(c), because the assessee has filed its return of income within “due date” and therefore, the penalty levied by the AO cannot be sustained on this ground. It held that it is not affirming the findings and conclusions of CIT (A). However, the penalty levied was deleted in view of the interpretation of Explanation 5A to section 271(1)(c).

The appeal filed by the revenue was dismissed.

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Nirav Shah

Om Stock & Commodities Pvt. Ltd. vs. DCIT ITAT Mumbai `C’ Bench Before Sanjay Arora (AM) and Vijay Pal Rao (JM) ITA No. 441/Mum/2011 A.Y.: 2008-09. Decided on: 10th July, 2013. Counsel for assessee/revenue: Prakash Jhunjhunwala/T. Roumuan Paite

Sections 44AB, 271B—Value of transactions of online trading in commodities through MCX without taking delivery do not constitute turnover for computing the limits u/s. 44AB of the Act. There is no element of turnover where there is no physical delivery of commodities given or taken.

Facts:
The assessee company, a member of Multi Commodity Exchange of India (MCX) was engaged in online business of trading in commodities. The transactions carried on by the assessee were speculative in nature. The bills issued by the Exchange on a daily basis represented mark to market bills and not actual sales/purchase turnover. The transactions were without taking delivery. The entire transaction was squared off at the end of the day or was carried forward to the subsequent day. The net amount, as per contract notes, was either debited or credited to the account of the assessee.

The Assessing Officer (AO), considering the value of the transactions carried out by the assessee on MCX to be the sales figure, invoked section 271B for violation of section 44AB. He held that the turnover of the assessee was more than Rs. 40 lakh, being the limit prescribed u/s. 44AB for getting the accounts audited and obtaining and furnishing the report as required by the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where it placed reliance on the following decisions:

Banwari Sitaram Pasari HUF vs. ACIT (29 Taxmann 137) (Pune ITAT)

Growmore Exports Ltd. vs. ACIT (72 TTJ 691) (Mum ITAT)

CIT vs. Growmore Exports Ltd. (Appeal No. 18 to 20 of 2001) (Mum HC).

Held:
The Tribunal noted that the Pune Bench of ITAT has in the case of Banwari Sitaram Pasari (supra), following the decision of Mumbai Bench of the Tribunal in the case of Growmore Exports Ltd. (supra) held that the transaction of buying and selling of commodities where no physical delivery is taken or given is a speculative activity and there is no element of turnover in such transactions.

The Tribunal also noted that the view taken by the Tribunal in the case of Growmore Exports Ltd. has been confirmed by the Bombay High Court vide decision dated 19-12-2007 and speaking order has been passed in the connected case of CIT vs. Harsh Estate Pvt. Ltd. where the Court has observed as under:

“In other words the finding by the Commissioner (Appeals) that the purchase was coupled with delivery has been reversed by the order of ITAT. Nothing has been brought to our attention from the record that the said finding of reversal is perverse warranting this court to take a view different from the view of the Tribunal. We, therefore, proceed on the footing that though there was transaction of shares it was not coupled with delivery. Once there was no delivery, the sale price of the shares could not have been considered as the turnover but only the difference between the price at which the shares were purchased and consequently sold by the broker…

Considering the findings on merits namely that there was no delivery and consequently the sales prices of the shares could not have been considered, it is not necessary to go into the other aspects. In the light of the above, we find no merit in this appeal which is accordingly dismissed.”

The Tribunal considering the above mentioned decisions held that the value of sale transaction of commodity through MCX without delivery cannot be considered as turnover for the purpose of section 44AB. It deleted the penalty levied u/s. 271B.

The appeal filed by the assessee was allowed.

levitra

Nirav Shah

Section 271(1)(c) r.w.s. 115JB of the Income-tax Act, 1961 — Penalty for concealment of income — Assessing returning income based on book profit — Pursuant to search action additional income declared — Total income as per normal provisions of the Act less

New Page 1

22 Ruchi Strips & Alloys Ltd. v. DCIT

ITAT ‘D’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

T. R. Sood (AM)

ITA No. 6940 & 6941/Mum/2008

A.Ys. : 2003-2004 & 2005-2006

Decided on : 21-1-2011

Counsel for assessee/revenue :

Bhupendra Shah/Jitendra Yadav

Section 271(1)(c) r.w.s. 115JB of the Income-tax Act, 1961 —
Penalty for concealment of income — Assessing returning income based on book
profit — Pursuant to search action additional income declared — Total income as
per normal provisions of the Act less than the book profit — Whether the penalty
can be imposed — Held, No.

Per N. V. Vasudevan :

Facts:

The assessee was a company. During the years under appeal it
offered to tax its income computed u/s.115JB as its taxable income under the
normal provisions of the law was nil (on account of setting off of brought
forward losses). There was action u/s.132 of the Act and based on certain
incriminating documents found, the assessee offered to tax an additional income
of Rs.12 lakh and Rs.2.84 crores in the two years. However, on account of the
un-adjusted carried forward losses, its income under the normal provisions of
the Act still remained nil and the same amount of income, which was returned
earlier u/s.115JB, was assessed u/s.153A. The issue before the Tribunal was
whether the AO was justified in levying of penalty for concealment of
particulars of income by the assessee.

Held:

According to the Tribunal, the addition, in respect of which
the penalty was imposed, was made while computing total income under the normal
provisions of law. While ultimately, the total income of the assessee was
determined on the basis of book profit u/s.115JB of the Act. Therefore, relying
on the decision of the Delhi High Court in the case of CIT v. Nalwa
Investment Ltd., [(2010) 322 ITR 233] the Tribunal cancelled the penalty
imposed by the AO.

levitra

Nirav Shah

Income-tax Act, 1961 — Section 271(1)(c). Penalty u/s.271(1)(c) is not leviable on addition arising u/s.50C.

New Page 1

21 Renu Hingorani v. ACIT

ITAT ‘D’ Bench, Mumbai

Before R. S. Syal (AM) and

Vijay Pal Rao (JM)

ITA No. 2210/Mum./2010

A.Y. : 2006-2007. Decided on : 22-12-2010

Counsel for assessee/revenue : Vipul Joshi/

Jitendra Yadav

Income-tax Act, 1961 — Section 271(1)(c). Penalty
u/s.271(1)(c) is not leviable on addition arising u/s.50C.

Per Vijay Pal Rao :

Facts:

The assessee inter alia sold a residential flat for
a consideration of Rs.63,00,000, whereas the value of this flat as per the Stamp
Valuation Authorities was Rs.72,00,824. Thus, there was a difference of
Rs.9,00,824. The assessee in her return of income computed capital gains with
reference to sale consideration as per sale agreement. In the course of the
assessment proceedings, upon being asked to show cause why the difference should
not be added back to the total income, the assessee agreed to the same.
Accordingly, the said sum of Rs.9,00,824 was added to the total income of the
assessee by applying the provisions of section 50C of the Act. The AO initiated
penalty proceedings u/s.271(1)(c) and vide order dated 20-3-2009 levied the
penalty of Rs.1,98,181 (being 100% of tax sought to be evaded).

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

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

Held :

The Tribunal having noted that — (i) the AO had not
questioned the actual consideration received by the assessee, but the addition
was purely on the basis of deeming provisions of section 50C of the Act; (ii)
the AO had not given any finding that the actual sale consideration was more
than the sale consideration admitted and mentioned in the sale agreement; and
(iii) the assessee had furnished all the relevant facts, documents/material
including the sale agreement, the genuineness and validity whereof was not
doubted by the AO, observed that the assessee’s agreement to an addition on the
basis of valuation by the Stamp Valuation Authority would not be a conclusive
proof that the sale consideration as per agreement was incorrect and wrong. It
held that the addition because of the deeming provisions does not ipso facto
attract penalty u/s.271(1)(c). In view of the decision of the Apex Court in the
case of CIT v. Reliance Petroproducts Pvt. Ltd., (322 ITR 158) (SC), the
penalty levied was held to be not sustainable.

The appeal filed by the assessee was allowed.

levitra

Nirav Shah

Section 271B r.w. s. 44AB of the Income-tax Act, 1961 — Penalty for non-furnishing of Tax Audit Report — Assessee who was property developer, was following project completion method of accounting — During the year the project was not completed — Whether A

New Page 1

20 Siroya Developers v. DCIT

ITAT ‘I’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

Asha Vijayaraghavan (JM)

ITA No. 600/Mum./2010

A.Y. : 2005-2006. Decided on : 12-1-2011

Counsel for assessee/revenue : B. V. Jhaveri/

S. K. Singh

Section 271B r.w. s. 44AB of the Income-tax Act,
1961 — Penalty for non-furnishing of Tax Audit Report — Assessee who was
property developer, was following project completion method of accounting —
During the year the project was not completed — Whether AO justified in holding
that since the advance received against the flats sold exceeded the prescribed
limit of Rs.40 lakh, the assessee was liable to get the accounts audited
u/s.44AB — Held, No.

Per Asha Vijayaraghavan :

Facts:

The issue before the Tribunal was whether on the
basis of the facts, the assessee was liable to get its accounts audited u/s.44AB
of the Act. The assessee, a property developer, was following project completion
method of accounting. As per its accounts, the work in progress as at the
beginning of the year was Rs.4.35 crores and as at the end of the year was
Rs.10.07 crores. During the year it had received advances against the sale of
flats of Rs.4.03 crores. Referring to the Board Circular (No. 387, dated 6-7-1984), the
authorities below contended that the legislative intent would be defeated if the
provisions were applied only in the year when the project was completed.
According to the Revenue, if the project takes the period as long as 10 years,
then as contended by the assessee, the audit report would be filed in the said
tenth year when it would not be possible for the AO to look into the details of
10 years. Secondly, during the year under appeal, the value of the work in
progress as well as the receipt of advances from the customers had exceeded the
prescribed limit of Rs.40 lakh.

Held:

According to the Tribunal, when the assessee was
following the project completion method of accounting, the advances received
against booking of flats could not be treated as sale proceeds/turnover/gross
receipts. For the purpose it relied on the Pune Tribunal decision in the case of
ACIT v. B. K. Jhala & Associates and the views of the Institute of Chartered
Accountants of India. Accordingly, the appeal filed by the assessee against the
order for levy of penalty u/s.271B was allowed.

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Nirav Shah

Income-tax Act, 1957, section 50 — Provisions of section 50 are not attracted in a case where on the asset transferred depreciation was neither claimed nor allowed.

New Page 1

19 Divine Construction Co. v. ACIT

ITAT ‘D’ Bench, Mumbai

Before R. S. Syal (AM) and

Vijay Pal Rao (JM)

ITA No. 5396/Mum./2009

A.Y. : 2006-2007. Decided on : 20-12-2010

Counsel for assessee/revenue : Dr. P. Daniel & S.
M. Makhija/Jitendra Yadav

Income-tax Act, 1957, section 50 — Provisions of
section 50 are not attracted in a case where on the asset transferred
depreciation was neither claimed nor allowed.

Per R. S. Syal :

Facts :

The assessee transferred office premises and
returned the gain arising therefrom as long-term capital gain. Upon being called
by the Assessing Officer (AO) to explain why the provisions of section 50 are
not applicable, the assessee submitted that though the property was included in
the block of assets but since no depreciation was ever claimed or allowed
thereon, the provisions of section 50 are not applicable. The AO held that in
view of the provisions of section 50 read with Explanation 5 of section 32, the
contention of the assessee is not acceptable. He computed the short-term capital gain and charged the same to tax.

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

Aggrieved the assessee preferred an appeal to the
Tribunal.

Held:

Section 50 gets activated only on satisfaction of
twin conditions mentioned therein viz. (i) the capital asset should be an asset
forming part of block of asset; and (ii) depreciation should have been allowed
on it under this Act or under the Indian Income-tax Act, 1922. The Tribunal
noted that the property was reflected in the Schedule of Fixed Assets at its
original purchase price. Since depreciation was never claimed, nor allowed on
this property, the Tribunal overturned the order passed by the AO and held that
the long-term capital gain declared by the assessee be accepted as such, since
no infirmity was pointed out by the AO in the calculation shown by the assessee.

The appeal filed by the assessee was allowed.

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Nirav Shah

Income-tax Act, 1961, section 244A — Interest u/s.244A(1)(b) is allowable and should be granted on refund of tax paid in pursuance of an order u/s.201 of the Act.

New Page 1

18 Reliance Infrastructure Ltd. v. DDIT

ITAT ‘D’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

V. Durga Rao (JM)

ITA No. 7509/Mum./2010

A.Y. : 1999-2000. Decided on : 28-1-2011

Counsel for assessee/revenue :

Jitendra Sanghavi/Dr. S. Senthil Kumar

Income-tax Act, 1961, section 244A — Interest
u/s.244A(1)(b) is allowable and should be granted on refund of tax paid in
pursuance of an order u/s.201 of the Act.

Per J. Sudhakar Reddy:

Facts:

The assessee hired M/s. Jardine Flemming as lead
managers for the GDR issue and paid commission to them as well as to their
associates without deducting tax at source u/s.195. The Assessing Officer (AO)
in an order passed u/s.201, after issuing the requisite notice and considering
the submissions made by the assessee, held that the assessee was liable to
deduct tax at source and accordingly directed the assessee to pay USD 26,76,750.
Aggrieved by the order of the AO the assessee preferred an appeal to the CIT(A)
who partly allowed the appeal. On further appeal to the Tribunal, the Tribunal
set aside the matter to the file of the AO. Consequently, the AO passed the
impugned order dated 7-3-2008 and determined a refund but did not grant interest
u/s.244A.

The CIT(A) rejected the claim by holding that the
assessee could not show that TDS was voluntarily deposited by it or under
protest u/s.195(2) and hence was not eligible for interest u/s.244A.

Aggrieved the assessee preferred an appeal to the
Tribunal.

Held:

The Tribunal held that the assessee is entitled to
interest u/s.244A. It was of the opinion that the issue stands covered in favour
of the assessee by the judgment of the Supreme Court in the case of ITO v. Delhi
Development Authority, (252 ITR 772) (SC) and also by the following orders of
the Tribunal, on which reliance was placed on behalf of the assessee :

(1) Tata Chemicals v. DCIT, 16 SOT 481
(Mum.)

(2) ADIT (IT) v. Reliance Infocomm Ltd.,
(ITA No. 6100 to 6110/M/2008)

(3) ADIT (IT) v. Reliance Infocomm Ltd.,
(ITA No. 5581/M/2008 and 5585/M/2008)

(4) DDIT (IT) v. Star Cruises (India) Travel
Services Pvt. Ltd., (ITA Nos. 6498 & 6500/M/06, C.O.os. 10 &
12/Mum./2009.)

The appeal filed by the assessee was allowed.

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Nirav Shah

Section 48 of the Income-tax Act, 1961 — Cost of acquisition for computation of Capital gains — Whether the payments of charges towards firefighting, generator and processing fees to a builder would be part of cost of acquisition — Held, Yes.

New Page 1

17 Praveen Gupta v. ACIT

ITAT ‘F’ Bench, New Delhi

Before G. E. Veerabhadrappa (VP) and

I. P. Bansal (JM)

ITA No. 2558/Del./2010

A.Y. : 2007-2008. Decided
on : 13-8-2010

Counsel for assessee/revenue
: Ved Jain, Rano Jain & Venkatesh Chourasia/Banita Devi Naorem

(1) Section 48 of the Income-tax Act, 1961 — Cost of acquisition for computation of Capital gains — Whether the payments of charges towards firefighting, generator and processing fees to a builder would be part of cost of acquisition — Held, Yes.

(2) Explanation (iii) to Section 48 of the Income-tax Act, 1961 — Indexed cost of acquisition — Whether the year of acquisition should be the year when the assessee entered into an agreement to purchase or the year when the conveyance deed was executed — Held that it is the year when the assessee entered into an agreement to purchase the flat.

Per I. P. Bansal:

Facts:

The assessee had sold a
flat and the following issues had arisen with reference to capital gains tax :

1. Whether the following payments made by the assessee to the builder with reference to the flat could form part of its cost of acquisition/improvement:

For firefighting charges Rs.0.35 lakh;

For generator charges Rs.0.47 lakh; and

For processing fees and other charges Rs.0.80 lakh.

2. Year from which the indexed cost of acquisition was to be computed. According to the assessee, the year should be 1995-1996 when he entered into an agreement with the builder. While as per the Revenue, the same should be the year when the conveyance deed was executed i.e., 2001-2002.

Held:

According to the Tribunal the different charges
paid by the assessee were in respect of the flat purchased and the same were
made to the builder who sold the flat to the assessee. Without making these
payments, the assessee could not have obtained the conveyance in his favour.
Therefore, it held that the AO was in error in taking the cost of acquisition as
the only the amount stated in the conveyance deed. Thus, it held that all these
charges would form part of cost of acquisition of the flat sold.

As regards the year of acquisition, according to
the Tribunal, the assessee by entering into an agreement to purchase a flat had
identified a particular property which he was intending to buy from the builder
and the builder was also bound to provide the applicant with that property.
Referring to the provisions of S. 2(14) defining the term ‘capital asset’, it
observed that it was not necessary that to constitute a capital asset, the
assessee must be the owner for computing the capital gain. According to it, the
assessee had acquired a right to get a particular flat from the builder and that
right itself was a capital asset of the assessee. Therefore, it held that the
benefit of indexation had to be granted to the assessee from the date he entered
into an agreement to purchase the flat.

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Nirav Shah

s. 10(38), 70(3), 74 — Non-exempt long-term capital loss cannot be set-off against exempt long-term capital gains.

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29 G. K. Ramamurthy vs JCIT

ITAT Mumbai `G’ Bench

Before N. V. Vasudevan (JM) and
A. L. Gehlot (AM)

ITA No. 1367/Mum/2009

A.Y.: 2005-06. Decided on: 9.2.2010

Counsel for assessee / revenue: K. Shivram & Paras Savla / K.
R. Das

s. 10(38), 70(3), 74 — Non-exempt long-term capital loss
cannot be set-off against exempt long-term capital gains.

Per A. L. Gehlot:

Facts:

The assessee had made a long-term capital gain of Rs.
33,01,57,200 on sale of certain shares between the period 1.10.2004 and
31.3.2005, in respect of which, security transaction tax (STT) was paid by him
and the same was exempted u/s 10(38) of the Act. The assessee was also having a
long-term capital loss in respect of redemption of units and other loss
pertaining to the period prior to 1.10.2004, amounting to Rs. 9,23,55,945. The
assessee claimed carry forward of long-term capital losses of Rs. 9,23,55,945 to
subsequent years.

The Assessing Officer (AO) held that there was a loss and
also a gain under the same head of income, i.e., Long Term Capital Gain, and
consequently the loss of Rs. 9,23,55,945 had to be set-off against exempt income
of Rs. 33,01,57,200.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

(i) It is clear from the scheme of the Act that incomes
which do not form a part of the total income as laid down in Chapter III of
the Act, do not enter the computation of total income at all.

(ii) The case of the revenue that long-term capital gain is
income notwithstanding the fact that it is exempt u/s 10(38) of the Act, is
based on a reasoning which is fallacious.

(iii) Since income which is exempt from tax does not enter
the computation of total income at all, the question of aggregating them under
Chapter VI at all does not arise. Therefore, the question of set-off of the
same u/s 70(3) of the Act also does not arise for consideration. Therefore,
the right of carry forward u/s 74(1) of the Act, in respect of the long-term
capital loss suffered by the assessee, remains unaffected by the provisions of
s. 70(3) of the Act.

(iv) Section 10(38) has been inserted with a particular
object: to grant exemption to such income, as tax has already been levied on
some different footings. If we accept the contention of the revenue to adjust
long-term capital loss against exempt income (long-term capital gain), it will
be contrary to the law and contrary to the intention, object and purpose of
the legislature in introducing clause (38) to s. 10 of the Act. Further,
acceptance of the revenue’s view on the issue, gives rise to an absurd outcome
of interpretation. If the facts are reversed, then, long-term capital loss
from taxable assets will have to be adjusted against the long-term capital
gains exempt u/s 10(38) of the Act.

The Tribunal allowed the appeal filed by the assessee.

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Nirav Shah

Gift Tax – Deemed Gift – Whether there is deemed gift of bonus shares (retained by the Donee) by the Donor in the year of revocation of gift of shares with proviso that gift shall not include bonus shares? – Matter remanded.

Satya Nand Munjal vs. CGT (2013) 350 ITR 640(SC)

On 20th February, 1982, the assessee, being the absolute owner of 6000 fully paid up equity shares of the face value of Rs. 25 each of M/s. Hero Cycles (P) Ltd., executed a deed of revocable transfer in favour of M/s. Yogesh Chandran and Brothers Associates (the transferee). Under the deed the assessee could, on completion of 74 months from the date of transfer but before the expiry of 82 months from the said date, exercise the power of revoking the gift. In other words, the assessee left a window of eight months within which the gift could be revoked.

The deed of revocable transfer specifically stated that the gift shall not include any bonus shares or right shares received and/or accruing or coming to the transferee from M/s. Hero Cycles (P) Ltd. (the company) by virtue of ownership or by virtue of the shares gifted by the assessee and standing in the name of the transferee. Effectively therefore, only a gift of 6,000 equity shares was made by the assessee to the transferee.

On 29th September, 1982, the company issued bonus shares and since the transferee was a holder of the gifted equity shares, 4,000 bonus shares of the said company were allotted to the transferee by the company. Similarly, on 31st May, 1986, another 10,000 bonus shares were allotted to the transferee by the company.

Thereafter, during the window of eight months, the assessee revoked the gift on 15th June, 1988, with the result that the 6,000 shares gifted to the transferee came back to the assessee. However, the 14,000 bonus shares allotted to the transfree while it was the holder of the equity shares of the company continued with the transferee.

Assessment proceedings for the assessment year 1982-83

For the assessment year 1982-83, the Gift-tax Officer passed an assessment order on 17th February 1987, in respect of the assessee. He held that the revocable transaction entered into by the assessee was only for the purpose of reducing the tax liability. As such, it could not be accepted as a valid gift. For arriving at this conclusion, the Assessing Officer relied upon McDowell and Co. Ltd. vs. CTO [1985] 154 ITR 148 (SC). Accordingly, the Assessing Officer, while holding the gift to be void, made the assessment on a protective basis.

Feeling aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Gift Tax (Appeals), but found no success. The Commissioner of Gift-tax (Appeals) however, held that since the gift was void, a protective assessment could not be made.

The assessee then preferred a further appeal to the Tribunal and by its order dated 23rd August 1991, allowing the appeal; the Tribunal held that the revocable gift to be valid. It was noted the concept of a revocable transfer by way of gift was recognised by section 6(2) of the Gift-tax Act, 1958 (“the Act”). The value of the gift in such a case was to to calculated in terms of rule 11 of the Gift-tax Rules 1958.

Feeling aggrieved by the decision of the Tribunal, the Revenue took up the matter in appeal before the Punjab and Haryana High Court. By its judgement and order in CGT vs. Satya Nand Munjal [2002] 256 ITR 516 (P&H) the High Court dismissed the appeal and held:

“It is a legitimate attempt on the part of the assessee to save money by following a legal method. If on account of a lacuna in the law or otherwise the assessee is able to avoid payment of tax within the letter of law, it cannot be said that the action is void because it is intended to save payment of tax. So long as the law exists in its present form, the taxpayer is entitled to take its advantage. We find no ground to accept the contention that merely because the gift was made with the purpose of saving on payment of wealth tax, it needs to be ignored.”

Assessment proceedings for the assessment year 1989-90

On 30th January, 1996, the Gift-tax Officer issued a notice to the assessee u/s. 16(1) of the Act to the effect that for the assessment year 1989-90 the gift made by the assessee was chargeable to gift-tax and that it had escaped assessment year. The assessee responded to the notice by simply stating that there is no gift that had escaped assessment.

On 24th March, 1998, the Assessing Officer passed a reassessment order for the assessment year 1989-90. While doing so, he framed two issues for consideration: firstly, whether the transferee becomes the owner of the bonus shares particularly because the shares have been received by it as a result of a revocable transfer; secondly, whether the bonus shares received by the transferee could be described as a benefit by the transferee from the transferred shares.

The Assessing Officer held that the transferee does not become the owner of the gifted shares until the transfer is an irrevocable transfer. Proceedings on this basis, it was held that the 14,000 bonus shares allotted to the transferee were a part and parcel of the gifted shares and the assessee only took back 6,000 shares from the transferee pursuant to the revocable gift. Consequently, it was held that the assessee had surrendered his right to get back 14,000 bonus shares which were treated as a gift by the assessee to the transferee in view of the provisions of section 4(1)(c) of the Act. The assessee was taxed accordingly.

Feeling aggrieved by the reassessment order, the assessee preferred an appeal to the Commissioner of Gift-tax (Appeals). By his order dated 8th September, 1998, the Commissioner held that since there was no regular transfer of the bonus shares, the transferee could not claim any ownership of the shares. The Commissioner also referred to McDowell and Co. Ltd. and held that the assessee had carefully planned his affairs in such a manner as to deprive the Revenue of a substantial amount of gift-tax. The reassessment order was accordingly upheld.

The assessee then took up the matter with the Tribunal which held in its order dated 23rd May, 2000, that in view of the assessment to gift-tax made in respect of the assessee for the assessment year 1982-83, the notice issued u/s. 16(1) of the Act was merely a change of opinion and, as such the reassessment proceedings could not have been taken up. On the merits of the case, it was noted that neither the dividend income on the bonus shares nor their value had been taxed in the hands of the assessee. Consequently, the assessee was liable to succeed on the merits of the case also. The gift-tax reassessment was accordingly quashed by the Tribunal. The Revenue then came up in appeal before the High Court with the following substantial question of law:

“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in quashing the gift tax assessment in the assessee’s case?”

In the impugned order, the High Court held that the assessee was liable to gift-tax on the value of the bonus shares which were a gift made by the assessee to the transferee. It was held that the bonus shares were income from the original shares by relying upon Escorts Farms (Ramgarh) Ltd. vs. CIT [1996] 222 ITR 509 (SC). Accordingly, the order of the Tribunal was set aside and the reassessment order upheld.

On appeal to the Supreme Court by the assessee, the Supreme Court observed that the fundamental question before the High Court was whether there was in fact a gift of 14,000 bonus shares made by the assessee to the transferee. According to the Supreme Court the answer to this question lay in the interpretation of section 4(1)(c) of the Act, but a perusal of the impugned judgment and order facially indicated that there had been no consideration of the provisions of section 4(1) (c) of the Act.

The submission of the learned counsel for the assessee is that on an interpretation of section 4(1)(c) of the Act, it could not be said by any stretch of imagination, that the assessee had made a gift of 14,000 bonus shares to the transferee in the previous year relevant to the assessment year 1989-90.

The Supreme Court however, was not inclined to decide this issue finally since it did not have the view of the High Court on the interpretation of section 4(1)(c) of the Act. Nor did it have the view of the High Court on the applicability or otherwise of the principle laid down in McDowell and Co. Ltd.

As far as the applicability of Escorts Farms is concerned, the Supreme Court observed that the question that arose for consideration in that case was the determination of the cost of acquisition of the original shares when bonus shares are subsequently issued. That is the second part of section 4(1)(c) of the Act and that question would arise (if at all) only after finding is given by the High Court on the first part of section 4(1)(c) of the Act.

Under the circumstances, the Supreme Court remanded the matter for de novo consideration by the High Court keeping in mind the provisions of section 4(1)(c) of the Act as well as the orders passed in the case of the assessee for the assessment year 1982-83.

Nirav Shah

Depreciation – Assessee is entitled to depreciation in respect of vehicles financed by it but registered in the name of third parties and is eligible to claim it at a higher rate where such vehicles are used in the business of running on hire.

I.C.D.S. Ltd. vs. CIT & Anr. (2013) 350 ITR 527 (SC)

The assessee a public limited company, classified by the Reserve Bank of India (RBI) as a non-banking finance company was engaged in the business of hire purchase, leasing and real estate, etc. The vehicles, on which depreciation was claimed, were stated to have been purchased by the assessee against direct payment to the manufactures. The assessee as a part of its business, leased out their vehicles to its customers and therefore, had no physical affiliation with the vehicles. In fact, lesse were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988 (hereinafter referred to as “the MV Act”).

In its return of income for the relevant assessment years, the assessee claimed, among other heads, depreciation in relation to certain assets, (additions made to the trucks) which, as explained above, had been financed by the assessee but registered in the name of third parties. The assessee also claimed depreciation at the higher rate on the ground that the vehicles were used in the business of running on hire.

The Assessing Officer disallowed claims, both of depreciation and higher rate, on the ground that the assessee’s use of these vehicles was only by way of leasing out to other and not as actual user of the vehicles in the business of running them on hire. It had merely financed the purchase of these assets and was neither the owner nor used of these assets. Aggrieved, the assessee preferred appeals to the Commissioner of Income-tax (Appeals). In so far as the question of depreciation at normal rate was concerned, the Commissioner (Appeals) agreed with the assessee. However, the assessee’s claim for depreciation at higher rate did not find favour with the Commissioner.

Being aggrieved, both the assessee and the Revenue carried the matter further in appeal before the Income-tax Appellate Tribunal (for short “the Tribunal”). The Tribunal agreed with the assessee on both the counts.

Being aggrieved, the Revenue preferred an appeal to the Bombay High Court u/s. 260A of the Act. The High Court framed the following substantial questions of law for its adjudication :

“Whether the appellant (assessee) is the owner of the vehicles which are leased out by it to its customers and whether the appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles, on the ground that they were hired out to the appellant’s customers.”

Answering both the questions in favour of the Revenue, the High Court held that in view of the fact that the vehicles were not registered in the name of the assessee, and that the assessee had only financed the transaction, it could not be held to be the owner of the vehicles, and thus, was not entitled do claim depreciation in respect of these vehicles.

On an appeal to the Supreme Court by the assessee, it was held that the provision on depreciation in the Act reads that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a successful claim u/s. 32 of the Act.

Before the Supreme Court, the Revenue attacked both legs of this portion of the section by contending: (i) that the assessee is not the owner of the vehicles in question, and (ii) that the assessee did not use these trucks in the course of its business. It was argued that depreciation can be claimed by an assessee only in a case where the assessee is both the owner and user of the asset.

The Supreme Court dealt with the second contention before considering the first. The Revenue argued before the Supreme Court that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation and not the assessee. The Supreme Court was not persuaded to agree with the argument. According to the Supreme Court, the section requires that the assessee must use the asset for the “purposes of business”. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilised for the purpose of business of the assessee, the requirement of section 32 will stand satisfied notwithstanding non-usage of the asset itself by the assessee. The Supreme Court held that in the present case, the assessee was a leasing company which leased out trucks that it purchased. Therefore, on a combined reading of section 2(13) and section 2(24) of the Act, the income derived from leasing of the trucks would be business income or income derived in the course of business, and has been so assessed. Hence, it fulfilled the aforesaid second requirement of section 32 of the Act, viz., that the asset must be used in the course of business. The assessee did use the vehicles in the courses of its leasing business. In the opinion of the Supreme Court, the fact that the trucks themselves were not used the assessee was irrelevant for the purpose of the section.

Dealing with the first requirement, i.e., the issue of ownership, the Supreme Court held that no depreciation allowance is granted in respect of any capital expenditure which the assessee may be obliged to incur on the property of other. Therefore, the entire case hangs on the question of ownership. If the assessee is the owner of the vehicles, then he will be entitled to the claim on depreciation, otherwise, not.

The Supreme Court noted that definitions of ‘owner’, ‘ownership’ and ‘own’ given in Black’s Law Dictionary (Sixth Edition) and observed that these definitions essentially made ownership a function of legal right or title against the rest of the world. However, as seen therein, it is “nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied.”

According to the Supreme Court scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer.

The Supreme Court noted that the Revenue’s objection to the claim of the assessee was founded on the lease agreement. It argued that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not exceeding 1 per cent of the original cost of the vehicle, making the assessee in effect a financier. However, the Supreme Court was not persuaded to agree with the Revenue. According to the Supreme Court as long as the assessee had a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law. A scrutiny of the sale agreement could not be the basis of raising question against the ownership of the vehicle. The clues qua ownership lie in the lease agreement itself, which clearly pointed in favour of the assessee.

The Supreme Court observed that the only hindrance to the claim of the assessee, which was also the lynchpin of the case of the Revenue, was section 2(30) of the Motor Vehicles Act, which defines ownership as follows:

‘Owner’ means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject or hire-purchase agreement, or a agreement of lease or an agreement of a hypothecation, the person in possession of the vehicle under that agreement.”

The Supreme Court noted that the general open-ing words of the aforesaid section 2(30) say that the owner of a motor vehicle is the one in whose name it is registered, which, in the present case, is the lessee. The subsequent specific statement on leasing agreements states that in respect of a vehicle given on lease, the lessee who is in possession shall be the owner. The Revenue before the Supreme Court thus, argued that in case of ownership of vehicles, the test of ownership is the registration and certification. Since the certificates were in the name of the lessee, they would be the legal owners of the vehicles and the ones entitled to claim deprecation. Therefore, the general and specific statements on ownership construe ownership in favour of the lessee, and, hence, were in favour of the Revenue.

According to the Supreme Court, there was no merit in the Revenue’s arguments for more than one reason:

(i) Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the Motor Vehicles Act. It defines ownership for the subsequent provisions of the Motor Vehicles Act, not for the purpose of law in general. It serves more as a guide to what terms in the Motor Vehicles Act mean. Therefore, if the Motor Vehicles Act at any point uses the term owner in any section, it means the one in whose name the vehicle is registered and in the case of a lease agreement, the lessee. That is all. It is not a statement of law on ownership in general. Perhaps, the repository of a general statement law on ownership may be the Sale of Goods Act;

ii) Section 2(30) of the Motor Vehicles Act must be read in consonance with s/s. (4) and (5) of section 51 of the Motor Vehicles Act. The Motor Vehicles Act in terms of s/s. (4) and (5) of section 51 mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of the lessor as owner. The section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee. Thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle; and

(iii) If the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Appellate Tribunal, was not done. It would be a strange situation to have no claim of depreciation in case of particular depreciable asset due to a vacuum of ownership. The entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the leassee. This reaffirms the posision that the assessee is in fact that owner of the vehicle, in so far as section 32 of the Act is concerned.

Therefore, in the facts of the present case, the Supreme Court held that the lessor, i.e., the assessee was the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of section 32 of the Act, and, hence, was entitled to claim depreciation in respect of additions made to the trucks, which were leased out.

With regard to the claim of the assessee for a higher rate of depreciation, the Supreme Court held that the import of the same term “purposes of business”, used in the second proviso to section 32(1) of the Act gained significance. According to the Supreme Court the interpretation of these words would not be any different from that which it ascribed to them earlier, u/s. 32(1) of the Act. Therefore, the assessee fulfilled even the requirements for a claim of a higher rate of depreciation, and hence, was entitled to the same.

In this regard, the Supreme Court inter alia endorsed the following observations of the Tribunal, which clinched the issue in favour of the assessee.

“15. The Central Board of Direct Taxes, vide Circular No.652, dated 14th June, 1993, has clarified that the higher rate of 40 per cent in case of lorries, etc., plying on hire shall not apply if the vehicle is used in a non-hiring business of the assessee. This circular cannot be read out of its context to deny higher appreciation in case of leased vehicles when the actual use in hiring business.

Perhaps, the author meant that when the actual use of the vehicle is in hire business, it is entitled for depreciation at a higher rate.”

Nirav Shah

Search and seizure – Block Assessment – Undisclosed Income – If the search is conducted after the expiry of the due date of filing return, payment of advance tax or deduction of tax at source is irrelevant in construing the intention of the assessee to disclose income – The ‘disclosure of income’ is disclosure of total income in a valid return u/s. 139.

CIT vs. A. R. Enterprises, (2013) 350 ITR 489 (SC)

The assessee firm came into existence on 25th June 1992. On 23rd February, 1996, a search operation u/s. 132 of the Act was carried out at the premises of another concern, viz., M/s. A.R. Mercantile P. Ltd. During the course of the search, certain books and documents pertaining to the assessee, i.e., M/s. A.R. Enterprises, were seized. On scrutiny, the Assessing Officer found that though the assessee had taxable income for the assessment year 1995-96, no return of income had been filed (due to be filed on or before 31st October, 1995) till the date of the search. Based on the material seized by virtue of the aforesaid search, the Assessing Officer was satisfied that the assessee had not disclosed its income pertaining to the assessment year 1995-96. Accordingly (without recording any reasons for his satisfaction), he initiated action u/s. 158BD of the Act requiring the assessee to file its return of income. The assessee, after filing return for the block period (ten years preceding the previous years), which covered the assessment years 1993-94 to 1995- 96, pointed out that it had already filed returns for the assessment years 1993-94 and 1994-95. It objected to action initiated under Chapter XTV-B of the Act on the ground that in relation to the assessment year 1995-96, advance tax had already been paid in three installments and, therefore, income for that period could not be deemed to be undisclosed.

Rejecting the plea of the assessee, the Assessing Officer formed the opinion that the assessee had failed to file the return as on the date of search, and the seized documents did show income, which had not been or would not have been declared. Accordingly, he proceeded to compute the total undisclosed income for the block period 1993-94 to 1995-96 (up to the date of search), treating the income returned by the assessee for the period 1995-96 as nil, as stipulated in section 158BB(1)(c) of the Act.

Against the said order, the assessee preferred an appeal before the Tribunal. Accepting the stand of the assessee, the Tribunal allowed the appeal, and held that having paid the advance tax, the assessee had disclosed his income for the relevant assessment year.

Aggrieved, the Revenue preferred an appeal before the High Court of Madras u/s. 260A of the Act, questioning the validity of the order of the Tribunal.

Before the High Court, the stand of the Revenue was that since the return for the assessment year 1995-96 had not filed by the due date, by filing the return after the search, the assessee could not escape the consequences as stipulated in Chapter XIV-B of the Act. It was contended that payment of advance tax by itself did not establish the intention to disclose the income.

The Revenue’s plea did not find favour with the High Court. It observed that payment of advance tax itself necessarily implies disclosure of the income on which the advance is paid.

The short question for consideration before the Supreme Court was therefore whether payment of advance tax by an assessee would by itself tantamount to disclosure of income for the relevant assessment year and whether such income can be treated as undisclosed income for the purpose of application of Chapter XIV-B of the Act?

The Supreme Court held that “undisclosed income” is defined by section 158B as that income “which has not been or would not have been disclosed for the purposes of this Act”. The Legislature has chosen to define “undisclosed income” in terms of income not disclosed, without providing any definition of “disclosure” of income in the first place. The Supreme Court was of the view that the only way of disclosing income, on the part of an assessee, is through filing of a return, as stipulated in the Act, and, therefore, an “undisclosed income” signifies income not stated in the return filed. According to the Supreme Court, it seemed that the Legislature had clearly carved out two scenarios for income to be deemed as undisclosed : (i) where the income has clearly not been disclosed, and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and, hence, subject to the machinery provisions of Chapter XIV-B. The second category viz, where income would not have been disclosed, contemplates the likelihood of disclosure, it is a presumption of the intention of the assessee since in concluding that as assessee would or would not have disclosed income, one is ipso facto making a statement with respect to whether or not the assessee possessed the intention to do the same. To gauge this, however, reliance must be placed on the surrounding facts and circumstances of the case.

One such fact, as claimed by the the assessee, is the payment of advance tax. However, in the opinion of the Supreme Court, the degree of its material significance depended on the time at which the search is conducted in relation to the due date for filing return. Depending on which side of the due date the search was conducted, material significance of payment of advance taxes vacillated in construing the intention of the assessee. If the search was conducted after the expiry of the due date for filing return, payment of advance tax was irrelevant in construing the intention of the assessee to disclose income. Such a situation would find place which the first category carved out by section 158B of the Act, i.e. where income has clearly not been disclosed. The existence of an intention to disclose did not arise since, as held earlier, the opportunity of disclosure had lapsed, i.e., through filing or return of income by the due date. If, on the other hand, search was conducted prior to the due date for filing return, the opportunity to disclose income or, in other words, to file return and disclose income still existed. In which case, payment of advance tax may be a material fact for deciding whether an assessee intended to disclose. An assessee is entitled to make the legitimate claim that even though the search or the documents recovered, show an income earned by him, he has paid advance tax for the relevant assessment year and has an opportunity to declare the total income, in the return of income, which he would file by the due date. Hence, the fulcrum of such a decision is the due date for filing of return of income visà- vis date of search. Payment of advance tax may be a relevant factor in construing the intention to disclose income or filing return as long as the assessee continues to have an opportunity to file return and disclose his income and not past the due date of filing return. Therefore, there can be no generic rule as to the significance of payment of advance tax in construing the intention of disclosure of income. The same depends on the facts of the case, and hinges on the positioning of the search operations qua the due date for filing returns.

Thus, according to the Supreme Court, the question that whether payment of advance by an assessee per se is tantamount to disclosure of total income, for the relevant assessment year, at the very outset had to be answered in the negative. On further scrutiny, according to the Supreme Court there was yet another reason to opine so. Payment of advance tax and filing of return are functions of completely different notions of income i.e. estimated income and total income respectively. The payment of advance tax is based on an estimation of the total income that is chargeable to tax and not on the total income itself. According to section 209(1)(a), the assessee shall first estimate his “current income” and thereafter pay income tax calculated on this estimated income on the rates in force in the relevant financial year. This income is an estimation that is made by the assessee and may not be the exact income, which may ultimately be declared u/s. 139 and assessed u/s. 143. The payment of advance tax does not absolve an assessee from obligation to file return disclosing total income u/s. 139. Hence, the ‘disclosure of income’ is the disclosure of the total income in a valid return u/ s. 139, subject to assessment and chargeable to tax under the provisions of the Act.

The Supreme Court noted that in the instant case, after the search was conducted on 23rd February 1996, it was found that for the assessment year 1995-96, the assessee had not filed its return of income by the due date. It was only when the block proceedings were initiated by the Assessing Officer, that the assessee filed its return for the said assessment year on 11th July, 1996 u/s. 158BC showing its total income at Rs. 7,02,768. The Supreme Court held that since the assessee had not filed its return of income by the due date, the Assessing Officer was correct in assuming that the assessee would not have disclosed its total income.

Note 1: During the course of hearing, the counsel for the assessee relying upon the decision in Asst. CIT vs. Hotel Blue Moon (2010) 321 ITR 362 (SC) for the first time contended that the Revenue did not have jurisdiction to invoke Chapter XIV-B against the assessee as the Assessing Officer had not recorded his satisfaction that any undisclosed income belonged to the assessee or that the assessee did not have the intention to disclose their income before initiating proceeding u/s. 158BD. The Supreme Court however was unable to appreciate the submission since the same was never urged before the High Court and the Tribunal and refrained from making any observations on it.

Note 2: In CIT vs. Nachammai [C.A. No.2580 of 2010], a companion appeal, the issue was whether tax deduction at source amounts to disclosure of income. The Supreme Court held that since the tax to be deducted at source is also computed on the estimated income of an assessee for the relevant financial year, such deduction cannot result in the disclosure of total income.

Nirav Shah

Deemed Registration and Time Limit for Disposal of Application for Registration of Charitable Trusts u/s.12AA

Issue for Consideration
Every charitable or religious trust, seeking exemption of its income under the provisions of sections 11 and 12 of the Income Tax Act, 1961, is required to be registered with the Commissioner of Income Tax u/s. 12AA. The procedure for such registration is laid down in section 12AA. S/s. (2) of section 12AA provides that every order, granting or refusing registration by the Commissioner, shall be passed before the expiry of 6 months from the end of the month in which the application u/s. 12A, made by the trust, was received by him.

Since the section does not specifically mention the consequences of non-disposal of the application by the Commissioner within the specified time limit, a controversy has arisen as to what would be the consequences in such a situation. One view is that the trust shall not be made to suffer for the inaction of the Commissioner and the registration shall be deemed to have been granted. The other view is that the trust shall not be granted the exemption from tax, since the same is not registered. One more view is that the time limit prescribed in section 12AA is not mandatory and the Commissioner can and should proceed with the application and take appropriate decision even after the expiry of the time limit and such decision shall have retrospective effect. While the Allahabad High Court has taken the view that in the event of such failure to pass an order, within the specified time by the Commissioner, registration shall be deemed to have been granted u/s. 12AA, as the time limit provided in the section is mandatory and no decision on the application can be taken on expiry of the time limit thereafter, a contrary view has been taken by the Madras and Orissa High Courts to the effect that such a time limit is not mandatory, and that non-disposal of the application shall not result in the deemed registration of the trust and till such time as registration is granted, the trust shall be treated as not registered and non-registration of the trust shall result in denial of the exemption from tax so however the Commissioner shall pass the appropriate orders on the application of the assessee at the earliest though after the expiry of the prescribed time. In short, according to the latest view, the registration cannot be deemed to have been granted and the Commissioner is empowered to deal with and should deal with the application even after the expiry of the time specified in section 12AA.

Society for the Promotion of Education Adventure Sport’s case:

The issue came up before the Allahabad High Court in the case of Society for the Promotion of Education Adventure Sport & Conservation of Environment vs. CIT 216 CTR (All) 167.

The assessee was a society running a school, whose income was entitled to exemption u/s. 10(22). On omission of section 10(22), it applied for registration u/s. 12A. No decision however was taken by the Commissioner on its application within the time limit of 6 months fixed by section 12AA (2), and in fact, no decision was taken, even after a lapse of almost 5 years. On account of such delay, large tax demands were raised on the assessee. The assessee filed a writ petition in the Allahabad High Court challenging the tax demands.

On behalf of the assessee, it was contended that the registration
should be deemed to have been granted after the expiry of the period
prescribed u/s. 12AA(2), if no decision had been taken on the
application for registration. Reliance was placed on various decisions
of the Allahabad High Court, which had held that where an application
for extension of time was moved, but was not decided, it would be deemed
to have been allowed; that given the fact that the CIT was required to
give an opportunity to the applicant before refusing registration and
that reasons for refusal were required to be given by the CIT in his
order, the absence of any such opportunity and the order of the CIT
should be taken to mean that he had not found any reason for refusing
registration;, that the legislative intent wasevident by the fact that the order of the CIT granting registration, was not appealable by the Income Tax Department and that the laches and lapses on the part of the Income tax Department could not be to its own advantage by treating the application for registration as rejected.

On behalf of the Department, reliance was placed on a decision of the Supreme Court in the case of Chet Ram Vashisht vs. Municipal Corporation AIR 1981 SC 653, where the Court examined the effect of the failure on the part of the Delhi Municipal Corporation to decide an application for sanction to a layout plan within the period specified in section 313(3) of the Delhi Municipal Corporation Act, 1957.

The Allahabad High Court observed that what had to be examined was the consequence of such a long delay on the part of the Income tax authorities in not deciding the assesssee’s application for registration. It noted that admittedly after the statutory limitation, the CIT would become functus officio, and he could not, on expiry of the time limit, thereafter pass any order either allowing or rejecting the registration. Obviously, the application could not be allowed to be treated as perpetually undecided. Therefore, the key question, in the opinion of the court, was whether upon lapse of the six-month period without any decision, the application for registration should be treated as rejected or it should be treated as allowed.

The Allahabad High Court distinguished the Supreme Court decision cited on behalf of the revenue, in Chet Ram Vashist’s case (supra), by pointing out that the said decision dealt with a different statute and that one of the important aspects considered by the Supreme Court for taking view in that case that the sanction of the layout was mandatory and could not be deemed to have been granted on expiry of the time limit, was the purpose and objective behind of the provision requiring sanction of the layout plans. The High Court noted that under the relevant provision of the said statute, there was involved an element of public interest, namely, to prevent unplanned and haphazard development or construction to the detriment of the public and any sanction or deemed sanction of a layout plan entailing constructions being carried out, would create an irreversible situation. The Allahabad High Court noted that in the case before it, there was no such element of public interest in the case before it under the provisions of section 12A; that taking a view that non-consideration of the registration application within the time limit would result in deemed registration might, at the worst, cause loss of some revenue or income tax, payable by that individual trust.

The Allahabad High Court compared the act of non-disposal of an application with a situation where the assessing authority failed to make assessment or reassessment within the prescribed limitation, which also led occasionally to loss of revenue from that individual assessee. It observed that taking the contrary view and holding that not taking of a decision within the time limit was of no consequence would leave the assessee totally at the mercy of the tax authorities, as the assessee had not been provided any remedy under the Act against non-decision by the Commissioner on an application by the assessee.

The Allahabad High Court observed that taking the view of deemed registration did not create any irreversible situation, because the CIT had the power to cancel registration u/s. 12AA(3) if he was satisfied that the objects of such trust were not genuine or the activities were not being carried out in accordance with its objects and the only drawback might be that such cancellation would operate only prospectively. The deemed registration, in the court’s view, furthered the object and purpose of the statutory provision.

Considering the pros and cons of the two views, the Allahabad High Court held that the non-consideration of the application for registration within the time fixed by section 12AA(2) led to the deemed grant of registration as there was no good reason to make the assessee suffer merely because the Income Tax Department was not able to keep its officers under check and control and take timely decisions in such simple matters such as consideration of applications for registration, even within the long six-month period provided by section 12AA(2).

The Allahabad High Court therefore directed the Commissioner to treat the assessee as an institution approved and registered u/s. 12AA, to recompute its income by applying the provisions of section 11, and to issue a formal certificate of approval forthwith.

Sheela Christian Charitable Trust’s case:
The issue later also came up before the Madras High Court in the case of CIT vs. Sheela Christian Charitable Trust 354 ITR 478 (Mad).

In this case, the trust created in August 2003, made a delayed application for registration u/s. 12AA in August 2005 without a specific request for condonation of delay being filed. It had not filed the accounts since its inception along with the application. Since details of activities and copy of accounts were not filed with the Commissioner, he merely lodged the application and did not process the same. A second application was made in April 2007, seeking retrospective registration from April 2005. This application was rejected by the Commissioner. On appeal, the Tribunal set aside the order of the Commissioner and remitted the matter back to the Commissioner to decide the matter afresh, after giving opportunity to the assessee.

The Commissioner, as directed by the tribunal, gave an opportunity to the assessee and considered the matter afresh. This time the Commissioner granted the registration to the trust but with prospective effect. He rejected the assessee’s request to grant registration with effect from April 2005, holding that there was no just and reasonable cause for delay in filing the application.

On appeal to the Tribunal, the Tribunal held that so far as condonation of delay was concerned, a pragmatic approach should be adopted and substantial cause of justice should not be denied merely on pedantic reasons. The Tribunal noted that the order granting or refusing registration should have been passed before the expiry of 6 months from the end of the month in which the application was received, and since the Commissioner kept the application pending beyond the permitted time, and it was neither accepted nor rejected within the period of 6 months, the registration should be assumed to have been granted. Reliance was placed by the Tribunal on the decision of the Allahabad High Court in the case of Society for Promo-tion of Education Adventure Sport and Conservation of Environment (supra). It therefore held that the original application of August 2005 was to be treated as accepted, and registration u/s. 12AA should be deemed to have been granted to the trust.

On behalf of the Department, on appeal against the said order of the tribunal, it was argued before the Madras High Court that the Tribunal ought to have held that the trust could not agitate the inaction of the Commissioner on its earlier application in a subsequent application filed by it for registration u/s. 12AA. It was further contended that the tribunal erred in holding that there was a deemed registration by relying on the decisions of the Orissa High Court in the case of Srikhetra, A. C. Bhakti-Vedanta Swami Charitable Trust vs. Asst. CIT (2006) 2 OLR 75 and of the Madras High Court in the case of Anjuman-E-Khyrkhah-E-Aam 354 ITR 474, for the proposition that there was no concept of deemed registration u/s. 12AA(2).

The Madras High Court analysed the provisions of section 12AA(2) and the decision of the Orissa High Court referred to above. It agreed with the Orissa High Court that the time frame laid down u/s. 12AA(2) was only directory and not mandatory and that the Commissioner could pass an order even after the expiry of the statutory time limit. It observed that section 12AA(1)(b)(i) and (ii) made it clear that there was a statutory mandate imposed on the Commissioner to pass an order in writing either registering the trust or refusing to register the trust. It noted that the Madras high court in Anjuman’s case (supra), where the Commissioner had passed an order on the last day of the time limit neither accepting nor rejecting the application but lodging the complaint instead, had rejected the concept of deemed registration and remitted the matter back to the Commissioner to afford an opportunity of hearing to the trust and to decide the matter afresh.

In view of the above, and noting that the counsel for the trust also fairly submitted to the Court that there was no question of “deemed registration” and that the matter be remitted back to the Commissioner for consideration of the matter afresh, the Madras High Court held that non-consideration of the registration application, within the prescribed time, did not amount to “deemed registration” of the trust. The Madras High Court therefore set aside the matter and remitted it back to the Commissioner for consideration of the application afresh, to pass orders after affording sufficient opportunity to the trust.

This decision of the Madras High Court was also followed by it in a subsequent decision in the case of CIT vs. Karimangalam Onriya Pengal Semipu Amaipu Ltd 354 ITR 483, where also a similar concession was given by the counsel for the trust and there also, the Madras High Court remitted the matter back to the Commissioner for consideration afresh.

Observations

The decisions of the Madras High Court seem to have been significantly influenced by the decision of the Orissa High Court in Bhakti-Vedanta Swami Charitable Trust’s case. In that case, the delayed application was made in August 2004, but was claimed to have been misplaced by the tax authorities and was made significantly without a request for condonation of delay. The Orissa High Court observed in that case, as under:

“In our view, the period of 6 months as provided in s/s. (2) of section 12AA is not mandatory. Though the word “shall” has been used, but it is well known that to ascertain whether a provision is mandatory or not, the expression “shall” is not always decisive. It is also well known that whether a statutory provision is mandatory or directory has to be ascertained not only from the wording of the statute, but also from the nature and design of the statute and the purpose which it seeks to achieve. Herein the time-frame under s/s. (2) of section 12AA of the Act has been so provided to exclude any delay or lethargic approach in the matter of dealing with such appli-cation. Since the consequence for non-compliance with the said timeframe has not been spelt out in the statute, this Court cannot hold that the said time limit is mandatory in nature, nor the period of six months has been couched in negative words. Most of the time, negative words indicate a mandatory intent. This Court is also of the opinion that when public duty is to be performed by the public authorities, the time limit which is granted by the statute is normally not mandatory but is directory in the absence of any clear statutory intent to the contrary. See Montréal Street Railway Company vs. Normandin AIR 1917 PC 142. Here, there is no such express statutory intent, nor does it follow from necessary implication.”

In this case, the Orissa High Court directed the authorities to complete the statutory exercise of deciding on the application within a period of six months from the date of the court order, and that if the registration was granted, it would relate back to the date of application. The court also levied costs on the officer for his careless attitude taken and the misleading stand taken before the court by the Department.

The Orissa High Court proceeded on the basis that the task being performed by the Commissioner was a public duty, and therefore took the view that it did that no time limit could be laid down in such a situation. On the other hand, the Allahabad High Court rightly distinguished the process of registration for a trust and noted that in such process, there was merely a tax liability of an individual trust involved, and no public element or public interest involved.

If one would take the decision of the Orissa High Court to its logical conclusion, it would mean that in every case where the time limit was exceeded, the trust would have to approach the High Courts for extending the time limits, since the Commissioner would take the stand that he cannot pass an order once the time limit has expired under the law. This would create untold difficulty for such trusts, for no fault of theirs.

The Orissa High Court decision also ignores the fact that the statute has expressly laid down a time limit for disposal of the application for registration — whereas the High Court’s view seems to be that such a time limit cannot be laid down, but is merely a guidance. As against this, the Allahabad High Court has rightly tried to sub- serve the purpose of laying down the time limit by the legislature, which is to avoid undue delays in processing of applications, which was the norm earlier.

A note may also be taken of the following observations in the decision of the Special Bench of the Income Tax Appellate Tribunal in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust vs. Commissioner of Income Tax 111 ITD 175, while upholding the concept of deemed registration on failure to pass an order within the specified period:

“If the application for registration is to abate because the CIT did not pass an order thereon and the assessee is asked to file another application again that would be putting, the assessee to the grind all over again for no fault of his. That consequence should be avoided. If the application is to be treated as pending, then again the CIT would be getting an extended period of limitation which the section does not allow. Further, it would be uncertain as to how long the period can be extended. The assessee cannot be kept waiting to the end of time. If it is held that the application must be deemed to have been refused, obviously the assessee must be in a position to file an appeal against the refusal to the Tribunal but it will not be able to do so in the absence of a written order containing the reasons for refusal; the appeal remedy would be rendered illusory. That consequence cannot be countenanced. Therefore by a process of exclusion, the conclusion is that the CIT must be deemed to have allowed the registration if he has not passed any order within the time prescribed. That way, the rights of the Department are also protected in the sense that it would be open to the CIT to cancel the deemed registration by invoking s/s. (3) to section 12AA, if it is otherwise permitted and the procedure prescribed therefor is followed. The assessee, if aggrieved by the cancellation of registration, has a right to appeal to the Tribunal u/s. 253(1)(c)…..

It would be incongruous to hold that while the condition that the trust or charitable institution must be registered with the CIT is mandatory or absolute, the provision that the CIT shall pass an order thereon within six months from the end of

the month in which the application was filed is merely directory, leaving it to the convenience of the CIT to pass the order at any time he likes disregarding the time-limit prescribed. That would introduce an element of uncertainty and con-fusion in the administration of the Act and may even compel trusts or institutions claiming exemption u/s. 11 to invoke Art. 226 of the Constitution. Such consequences have to be avoided. The assessments of the trust or charitable institution may in the meantime be completed rejecting the claim for exemption on the ground that it is not registered, even though the trust/charitable institution is found by the AO to satisfy the other conditions such as application of income, investment of the funds and so on. In other words, by not passing the order within the time-limit, the claim of the trust/charitable institution can be frustrated, albeit unintentionally. There is no good ground shown, nor does any appear to exist in the scheme of the Act, to hold that the time-limit within which the CIT has to pass an order on the application for registration of the trust or institution is merely directory. It is not merely a question of prejudice being caused to the assessee, but it is something which goes to the very root of good administration and obedience to the law. It could not have been the intention of the law that the CIT could pass the order granting or refusing registration at any time. Any provision has to be so interpreted as to advance the cause and suppress the mischief.”

The one thing that is clear is that an assessee cannot be altogether denied the benefit of tax exemption on account of the laches of the Commissioner in dealing with the assessee’s application in time; he also cannot refuse to pass an order on the application on the ground that the law prevents him in doing so after the statutorily prescribed time. In short he cannot take benefit of his lapses by inflicting punishment on the assessee. Even under the view of the Orissa and Madras High Courts, not so favourable to the assessees, the need for the Commissioner to dispose the application remaining undisposed, is not dispensed with. The courts have clearly hauled up the authorities for their inaction by awarding the costs and have directed the authorities to dispose the application within the extended time after affording opportunity to the assessee. Importantly, the courts have held that the decision of the authorities when taken shall have retrospective effect, thereby ensuring that no undue harm is caused to the assessee for no fault of his. What perhaps remains to be ensured is that the tax demand, if any, in the intervening period is not pursued and enforced and the assessee is saved the trouble of moving the courts to make the Commissioner act on his application.

The purposive interpretation adopted by the Allahabad High Court, that registration should be deemed to have been granted, however, seems to be the far better and practical view of the matter, fulfilling both the requirements of the provision and its intention. The view is strengthened by the presence of the Proviso to section 12AA(1) which provides for giving an opportunity of hearing to the assesseee, by the Commissioner, before rejecting his application for registration which in turn clearly conveys that the denial of registration on account of non disposal of application is altogether ruled out. This view has the effect of satisfying the law abiding assessee who has made the application in time and is otherwise equitous in as much as the law provides for no condonation of delay in application of the assessee.

Nirav Shah

(2011) 133 ITD 77 (Mum) RBS equities India Ltd. vs. Deputy Commissioner of Income Tax Assessment Year : 2004-05 Date of order: 26-08-2011

Section 271(1)(c) Explanation 7 – AO charged penalty for – Concealment in computation of Arm’s Length Price (ALP). The assessee – RBS equities India Ltd. had computed ALP as per Transactional Net Margin Method (TNMM) which resulted in reduced tax liability of Rs.2,13,25,474 and AO was of the view that the same should have been calculated as per Comparable Uncontrolled Price Method(CUP).

Facts

AO exercised option u/s. 92CA(1) to calculate ALP with reference to the transaction between the assessee and ABN Amro Asia (Mauritius) Ltd (Associated Enterprise). The assessee had provided stock broking services in respect of clearing house trade to Associated Enterprise (AE) and had earned brokerage at the rate of 0.24%. The assessee had provided the same service to FIIs @ 0.408% & to FIs @ 0.22%. The AO contended that AE being FII should have charged @ 0.408%. The AO levied penalty u/s. 271(1)(c) under Explanation 7 to section 271(1)(c). The AO rejected TNMM on the ground that CUP method could be applied to facts of case and accordingly rejected the method without any specific reasons for inapplicability of said method and on the ground that direct method was preferable.

Held:

ALP (Arms Length Price) was computed by assessee in accordance with section 92C in good faith and due diligence as per rule 10C. AO’s view is that ALP could be computed correctly by CUP method only and hence, it cannot be the proper ground to invoke provisions of section 271(1)(c). As the assessee was of the view that TNMM was the appropriate method to determine ALP and the same was derived by assessee in accordance with the provisions of section 92C and as per Rule 10C, deeming fiction under 271(1)(c) cannot be invoked.

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Nirav Shah

(2011) 132 ITD 604(Mum.) Momaya Investments (P) Ltd. vs. ITO AY : 1996-97 Date of order : 22-06-2011

Section 73 – Not applicable if the principal business of the company is banking or granting of Loans and Advances – The business of Banking need not be necessarily mentioned in the Memorandum of Association of the company – But the actual nature of the business is to be looked at.

Facts:

The assessee company was mainly engaged in the business of providing loans and advances that formed about 68% of the income. The original assessment dated 30th September, 1998 was passed assessing the total income at Rs. 8,58,522/- This was eventually followed by a revision order passed which stated that the assessee dealt in shares and hence Explanation to section 73 was attracted since the main income did not consist of “Interest on securities, income from House Property, Capital Gains or Income from Other sources.” The assessee had appealed to the tribunal which remanded the matter back to CIT to re-examine certain aspects. The matter was then remanded back to the AO. In the fresh assessment, the assessee submitted that it was mainly engaged in the business of providing loans and advances and rediscounting bill. And therefore, Explanation to section 73 was not applicable. The AO however, objected to assessee’s contention that it was in business of granting loans and advances on the basis that main object of the memorandum of association was only to acquire, hold or deal in stocks and shares. Further, he also held that the activity of bill rediscounting cannot be called as granting of loans and advances.

Held:

What is important is not the object stated in the memorandum of association, but it is also important to look at the actual activity of the assessee. Therefore, merely because the business of granting loans was not mentioned in the memorandum, would not mean that actual nature of business cannot be looked at. It was even concluded that the activity of bill rediscounting has to be treated as only granting of loans. This was because the word “discount”, in regard to financial transactions, represents interest.

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Nirav Shah

(2012) 80 DTR 23 (Mum) Genesys International Corporation Ltd. vs. ACIT A.Ys.: 2008-09 & 2009-10 Dated: 31-10-2012

Facts:

While computing tax liability u/s. 115JB, the assessee deducted income of its Mumbai unit which was a SEZ unit and eligible for tax benefit u/s. 10A. The Assessing Officer disputed the claim of the assessee on the ground that the Finance Act, 2007 amended section 115JB w.e.f. A.Y. 2008-09 for bringing the amount of income to which provisions of section 10A or 10B apply within the purview of MAT.

Held:

By SEZ Act, 2005 w.e.f. 10th February 2006, a new section 10AA has been inserted which provides exemption to the units located in SEZ. Section 2 of SEZ Act, defines SEZ as under:

“(za) Special Economic Zone means each Special Economic Zone notified under the proviso to s/s. (4) of section 3 and s/s. (1) of section 4 (including free trade and warehousing zone) and includes an existing Special Economic Zone.”

It is evident from the relevant provisions that an existing SEZ unit will also be governed by SEZ Act, 2005. Therefore, the benefits which are to be provided to the newly established unit in SEZ as per section 10AA will also be available to the existing units in SEZ. Moreover, section 4(1) of SEZ Act provides that an existing SEZ unit shall be deemed to have been notified and established in accordance with provisions of SEZ Act and the provisions of SEZ Act shall apply to such existing SEZ units. It is also observed that by the SEZ Act, s/s. (6) to section 115JB was also inserted providing that provisions of section 115JB shall not apply to the income accrued C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants Tribunal news or arisen on or after 1st April, 2005 from any business carried on, or services rendered, by an entrepreneur or a developer, in a unit or SEZ, as the case may be. Hence, income of units located in SEZ will not be included while computing book profit for the purpose of MAT as per section 115JB(6). In view of above, irrespective of the fact that amendment has been made in clause (f) of Explanation 1 to section 115JB(2) to apply the provisions of MAT in respect of units which are entitled to deduction u/s. 10A or section 10B, the units which are in SEZ will continue to get benefits from the applicability of provisions of MAT in view of s/s. (6). Section 115JB(6) does not refer section 10A or section 10AA but it only refers that provisions of section 115JB will not apply to the income accrued or arisen on or after 1st April, 2005 from any business carried on in a unit located in SEZ. Hence, the unit in SEZ will be covered by s/s. (6) to section 115JB irrespective of the fact that those units were claiming deduction u/s. 10A.

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Nirav Shah

Waiver of interest: Section 220(2A): Provision to be construed liberally: Application for stay of recovery proceedings cannot be construed as non-cooperation: Partial relief granted:

Arun Sunny vs. CCIT ; 350 ITR 147 (Ker):

For the A. Y. 2006-07, the Chief Commissioner rejected the assessee’s application for waiver of interest u/s. 220(2A) of the Income-tax Act, 1961 on the ground that the assessee blocked recovery by obtaining stay against attachment notices and the assessee had not cooperated in recovery proceedings and payment of interest would not cause any genuine hardship to the assessee.

On a writ petition challenging the rejection order, the Division Bench of the Kerala High Court directed the Assessing Officer to reduce 25% of interest and held as under:

“i) Section 220(2A) is an incentive to defaulter assessee to co-operate with the Department and to remit the tax voluntarily at the earliest and, therefore, compliance should be rewarded by taking a liberal view and approach. What is indicated by the provision is that relief to be granted u/s. 220(2A) should be proportionate to the extent of satisfaction of the conditions stated therein. In other words, if the conditions are partially satisfied, the assessee should be given partial relief, i.e. partial waiver which should be in proportion to the extent of satisfaction of the conditions.

ii) The right to move for stay against recovery during pendency of an appeal is a statutory right, exercise of which cannot be said to be an indication of assessee’s lack of co-operation. Lack of co-operation happens when the assessee makes recovery difficult for the Revenue by transferring or siphoning off his assets leading to protracted enquiry and continuation of recovery proceedings by the Department.

iii) The assessee voluntarily remitted the entire amount of tax before the Department started chasing the assessee with steps for recovery such as attachment of movables and immovables, sale thereof in public auction etc. In fact, the entire arrears were paid within six months from the date of payment based on the assessment. During the pendency of the stay, the assessee was not required to remit the tax which was contested in appeal. Therefore, all the three conditions were to some extent satisfied and the refusal of the Chief Commissioner to grant reduction in interest was not justified. Partial relief had to be granted, taking into account the amount of tax paid by the assessee on the interest earned on term deposits, the retention of which delayed payment of tax that led to levy of default interest.”

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Nirav Shah

Section 253 of the Income-tax Act, 1961 — Direct stay application filed before Tribunal is maintainable and it is not a requirement of law that assessee should necessarily approach Commissioner before approaching Tribunal for grant of stay.

(2012) 49 SOT 333 (Pune)
Honeywell Automation India Ltd. v. Dy. CIT
A.Y.: 2006-07. Dated: 24-2-2011

Section 253 of the Income-tax Act, 1961 — Direct stay application filed before Tribunal is maintainable and it is not a requirement of law that assessee should necessarily approach Commissioner before approaching Tribunal for grant of stay.

The assessee filed separate application for stay of demand before the Deputy Commissioner, before Additional Commissioner and finally before the Commissioner. None of these officials disposed of the assessee’s applications for stay of demand. The assessee-company thereupon filed application before the Tribunal for stay against the demand of arrears by the Revenue. The Revenue raised an objection that Tribunal had no jurisdiction to entertain directly stay application (DSA) without waiting for decision of the lower authorities.

The Tribunal dismissed the objections raised by the Revenue. The Tribunal noted as under:

(1) The Act has conferred certain powers on the Income Tax authorities for discharging and 158 (2012) 44-A BCAJ 9 10 one such power relates to matters of stay of the demand. The assessee filed the stay application before the Assessing Officer, but the Assessing Officer did not take any action, be it a case of rejection or otherwise. The same is the fate of application lying with the Additional Commissioner. The Commissioner merely passed on the responsibility to his deputies instead of either staying the demand or rejecting the request for stay of the same or otherwise.

(2) While there is inaction on part of the Revenue on the applications for stay, the assessee is busy in making application for stay of demand from time to time fearing ultimate coercive action by the AO and its likely adverse effects on the business operations of the assessee.

(3) Regarding the DSA by the assessee before the Tribunal, the decisions of the Tribunal are in favour of the assessee for the proposition that it is not necessary that the assessee should necessarily approach the Commissioner of Income-tax before approaching the Tribunal for grant of stay.

(4) Therefore, DSA filed before the Tribunal is maintainable and it is not the requirement of law that the assessee should necessarily approach the Commissioner before approaching the Tribunal for grant of stay.

(5) It does not make any difference whether the assessee filed any application before the Revenue and not awaited their decisions before filing application before the Tribunal or directly approached the Tribunal without even filing the applications before the Revenue authorities when there exists threat of coercive action by the Assessing Officer.

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Nirav Shah

Section 54F of the Income-tax Act, 1961 — Deduction allowable even if the building in which investment was made was under construction and assessee had paid entire amount as advance.

(2012) 49 SOT 90 (Mumbai)
ACIT v. Sudhakar ram
A.Y.: 2005-06. Dated: 31-10-2011

Section 54F of the Income-tax Act, 1961 — Deduction allowable even if the building in which investment was made was under construction and assessee had paid entire amount as advance.

The assessee earned long-term capital gain on sale of shares and claimed deduction u/s.54F in respect of investment in a new house. The Assessing Officer noted that the assessee had made investment in two new flats and the building was under construction stage and the assessee had chosen to pay the entire advance and, therefore, deduction u/s.54F could not be given.

The CIT(A) allowed the assessee’s claim. The Tribunal also held in favour of the assessee. The Tribunal noted that since the assessee has paid the full consideration before the statutory period of 2 years from the date of sale of shares and has acquired the right in the two flats which is being constructed by the builder, the benefit of deduction u/s.54F cannot be denied to the assessee.

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Nirav Shah

Sections 147, 154 — Once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act — In the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

(2012) TIOL 193 ITAT-Mum.
Binani Cement Ltd. v. DCIT
A.Y.: 2007-08. Dated: 27-1-2012

Sections 147, 154 — Once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act — In the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

Facts:

For A.Y. 2007-08, the assessment of total income of the assessee was completed vide order dated 23-3- 2007, passed u/s.143(3) of the Act. While assessing the total income, the Assessing Officer (AO) allowed a deduction of Rs.74,42,770 being the amount of interest on term loan from IDBI which was not paid as due, but was deferred by IDBI and such deferral was regarded as deemed payment.

Subsequently the Assessing Officer (AO) recorded the reasons which were supplied to the assessee vide letter dated 26-8-2009, and issued notice u/s.148. One of the reasons recorded was that on perusal of the assessment records it is noticed that in respect of the loan obtained by the assessee from IDBI, the assessee had not paid interest instalment amounting to Rs.74,42,770 which was deferred by IDBI. This had been treated as deemed payment of interest and was allowed as deduction. Upon receiving the copy of reasons recorded, the assessee objected to the issuance of notice u/s.148 on the ground that the time section 43B was amended after the assessee has filed its return of income, by Finance Act, 2006 with retrospective effect from 1-4-1989 to provide for disallowance of interest which has been converted into loan and also that since the amount under consideration has been paid in subsequent years it will not have any impact on the income-tax liability ultimately. The assessee consented that this can be rectified u/s.154 of the Act. The AO without disposing of the assessee’s objections proceeded to complete the reassessment and added the sum of Rs.74,42,770 to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO in reopening the assessment u/s.147 r.w.s. 148 of the Act on the ground that the assessee has admitted one of the reasons recorded for reopening the assessment. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that in view of the retrospective amendment of section 43B of the Act by the Finance Act, 2006, subsequent to the filling of the return, certain disallowance under this provision was called for, which was consented by the assessee by filing rectification petition vide letter dated 30-9-2009. The amendment was on the statute even at the time when the AO completed assessment u/s.143(3) of the Act. On behalf of the assessee, relying on the decision of the Bombay High Court in the case of Hindustan Unilever Ltd. v. DCIT, (325 ITR 102) (Bom.) it was contended that proceedings u/s.147 were being objected to as there was no escapement of income.
The Tribunal held that:

(1) Mere fresh application of mind to the same set of facts or mere change of opinion does not confer jurisdiction even after amendment in section 147 w.e.f. 1-4-1989.

(2) When a regular order of assessment is passed in terms of section 143(3), a presumption can be raised that such an order has been passed on application of mind. A presumption can also be raised to the effect that in terms of section 114(e) of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the AO to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take, benefit of its own wrong.

(3) Considering the ratio of the decisions of the Delhi High Court in the case of Jindal Photo Films Ltd. v. DCIT, 234 ITR 170 (Del.) and also the decision of the Full Bench of the Delhi High Court in the case of CIT v. Kelvinator India Ltd., (256 ITR 1) which has been affirmed by the Supreme Court in 320 ITR 561 (SC), in order to invoke the provisions of section 147, the AO is required to have some tangible material pinpointing escapement of income from assessment and in the absence of any fresh material, sufficient to lead inference of escapement of income, the AO cannot exercise jurisdiction u/s.147 r.w.s. 148 of the Act.

(4) The amendment to section 43B was available to the AO while framing assessment, even otherwise, based on the ratio of the decision of the Bombay High Court in the case of Hindustan Unilever Ltd. (supra) it can be safely concluded that once there is retrospective amendment to the statute, the earlier order which is not in conformity with the amended provisions, can be rectified u/s.154 of the Act.

The Tribunal held that the jurisdiction is to be assumed by the AO u/s.154 of the Act and not 148 of the Act. The Tribunal allowed this issue of the assessee’s cross-objections.

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Nirav Shah

Section 255(4) — The opinion expressed by the Third Member (TM) is binding on the member in minority — Questions framed by the member in minority while giving effect to the opinion of majority are outside the purview of section 255(4) of the Act and have no relevance.

(2012) TIOL 188 ITAT-Mum.-SB
Tulip Hotels Pvt. Ltd. v. DCIT
A.Ys.: 2004-05 & 2005-06. Dated: 30-3-2012

Section 255(4) — The opinion expressed by the Third Member (TM) is binding on the member in minority — Questions framed by the member in minority while giving effect to the opinion of majority are outside the purview of section 255(4) of the Act and have no relevance.

Facts:

In an appeal filed by the assessee, the Tribunal was considering taxability of certain amounts as cash credits u/s.68 of the Act and also allowability of certain expenditure as a deduction. In the course of hearing before the Tribunal, the assessee filed certain additional evidence. After considering the evidence filed by the assessee before the lower authorities and also the additional evidence filed before the Tribunal, the Judicial Member (JM) decided both the issues in favour of the assessee, while the Accountant Member (AM) decided both the issues in favour of the Department. The members formulated questions to be referred by the President to the Third Member. The TM agreed with the JM and decided both the issues in favour of the assessee. At the stage of giving effect to the opinion of the TM, the JM passed an order in conformity with the order of the TM, whereas the AM observed that it is not possible to give effect to the order of the TM on the ground that the order of TM was contrary to the opinion expressed by the TM himself in his own order and that the TM had not considered various points of differences arising from the dissenting orders. He raised certain new questions on merits of the dispute and directed that the matter be referred back to the President. The JM did not agree and raised an issue whether the Members of the Bench could comment on the order of the TM instead of merely passing a confirmatory order in terms of section 255(4). The President on a reference made by the Division Bench referred the following question to the SB for its consideration:

“Whether on a proper interpretation of s.s (4) of section 255 of the Income-tax Act, the order proposed by the learned AM while giving effect to the opinion of the majority consequent to the opinion expressed by the learned Third Member, can be said to be a valid or lawful order passed in accordance with the said provision.”

Held:

(1) There is no doubt that the Accountant Member while agreeing with the questions formulated at the time of the original reference to the President of the ITAT has again framed three new questions at the time of giving effect to the opinion of the majority de hors the provisions of section 255(4) of the Act as he had become functus officio after he passed his initial draft order;

(2) The opinion expressed by the Third Member was very much binding on the Accountant Member. The Accountant Member who is in minority was bound to follow the opinion of the Third Member in its true letter and spirit. It was necessary for judicial propriety and discipline that the member who is in minority must accept as binding the opinion of the Third Member;

(3) On a difference of opinion among the two Members of the Tribunal, the third Member was called upon to answer two questions on which there was difference of opinion among the two members who framed the questions and the third Member in a wellconsidered order, answered the reference by giving sound and valid reasons agreeing with the views of the Judicial Member. Thus, the majority view was in favour of the assessee;

(4) The proposed order dated 18-2-2010 of the Accountant Member who is in the minority and had become functus officio wherein he has expressed his inability to give effect to the opinion of the majority and proceeded to frame three new questions to be referred to the President, ITAT again for resolving the controversy cannot be said to be a valid or lawful order passed in accordance with the provisions of section 255(4) of the Act. The SB held that the said order dated 18-2-2010 proposed by the Accountant Member to be not sustainable in law. It answered the question referred to it in favour of the assessee.

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Nirav Shah

TDS related New forms and formats introduced – [Notification No.11/2013/F.No. 142/31/2012-SO (TPL)] dated 19th February 2013

CBDT has introduced Income tax(2nd Amendment) Rules, 2013 whereby amendments are made to procedural Rules pertaining to TDS as under:

• Rule 31A provides for an option of electronic filing of quarterly returns of TDS – with digital signature.

• Refund claim can be lodged by the deductor by filing Form 26B electronically with digital signature as prescribed.

• Details of TDS not deducted as per the provisions of Section 197A(1F) need to be furnished in the form.

Similar provisions are provided for rules pertaining to Tax Collection at Source u/s. 206C. Form 26A being certificate – of Accountant u/s. 201(1), Form 27BA being certificate of Accountant u/s. 206C(6A), Form 15G being declaration for no deduction of TDS by certain persons u/s. 197A(1) & 197A(1A), Form 15H being declaration for non deduction by individuals above the age of sixty years u/s. 197A(1C), Form No. 16 being TDS on Salary, Form 16A being TDS on other income, Form 24Q, Form 26Q,27Q, 27C, 27D and Form 27EQ being quarterly statement of TDS/TCS to be filed by deductors have been substituted. Further, a new Form 26B is notified for claim of refund.

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Nirav Shah

Section 14A and Rule 8D – Assessee engaged in the business of share trading – Shares held as stock-intrade – Held that the Rule 8D(2) (ii) & (iii) do not apply and only the direct expenses incurred by the assessee could be subjected to disallowance.

1. Deputy Commissioner of Income Tax vs.
Gulshan Investment Co. Ltd.
ITAT Kolkata ‘B’ Bench, Kolkata
Before Pramod Kumar (A. M.) and Mahavir
Singh (J. M.)
I.T.A. No.: 666/Kol./2012
Assessment year: 2008-09. Decided on
March 11, 2013
Counsel for Revenue / Assessee: L K S Dahiya
and K N Jana / Girish Sharma

Section 14A and Rule 8D – Assessee engaged in the business of share trading – Shares held as stock-intrade – Held that the Rule 8D(2) (ii) & (iii) do not apply and only the direct expenses incurred by the assessee could be subjected to disallowance.

Facts

The assessee was engaged in the business of share trading. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee had earned dividend income of Rs. 18.92 lakh, it had not made any disallowance u/s. 14A. The Assessing Officer computed the disallowance u/s. 14 A r.w.r. 8 D at Rs. 21.45 lakh. Being aggrieved, the assessee appealed before the CIT(A).

The CIT(A) in turn relied on the judgments of the Kerala High Court in CIT vs. Leena Ramchandran (ITA No.1784 of 2009) and of the Mumbai Tribunal in the case of Yatish Trading Co. P. Ltd. vs. ACIT (ITA No. 456/ Mum./2009 dt.10.11.2010) and held that Rule 8D was not applicable in the case of the assessee since there were no investments and all the shares were held as stock in trade. However, he held that since the assessee had earned exempt income, the provisions of section 14A were applicable. He estimated that expenditure equal to 10% of the dividend income was fair and reasonable and disallowed the sum of Rs. 1.89 lakh u/s 14A. The revenue did not agree with the CIT(A) and challenged his order before the tribunal.

Held:

According to the Tribunal, a plain reading of Rule 8D(2)(ii) & (iii) showed that the Rules can only be applied when shares are held as investments while in the case of the assessee, the shares were held as stock in trade. The tribunal came to this conclusion because it noted that, one of the variables on the basis of which the disallowance under the Rules are computed is “the value of investment, income from which does not form part of total income.” It further observed that when there are no investments, the Rule cannot have any application. According to it, when no amount can be computed in the light of the formula given in rule 8D (ii) and (iii), the computation provision fails and no disallowance can be made under the said Rules as held by the Supreme Court in the case of CIT vs. B C Srinivas Shetty (128 ITR 294). The tribunal further noted that where shares are held as stock in trade and not as investments, the disallowance, if any, would be restricted to the expenditure directly relatable to earning of exempt income.

Thus, the provisions of Section 14 A would be applicable, but the disallowance would be restricted to direct expenses incurred in earning of dividend income. For the said proposition, it also found support from the decision of the Special Bench of Tribunal in the case of ITO vs. Daga Capital Management Pvt. Ltd. (117 ITD SB 169).

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Nirav Shah

‘Turnover Filter’ in ‘Comparability Analysis’ for Benchmarking

Issue for Consideration
The transfer pricing provisions were introduced in India vide Finance Act, 2001 as a measure to prevent abuse and avoidance of tax by shifting the taxable income to a jurisdiction outside India. These transfer pricing provisions are contained in Sections 92 to 92F of the Income-tax Act, 1961 (‘the Act’) and Rules 10A to 10E of the Income-tax Rules, 1962 (‘the Rules’).

The term “arm’s length price (ALP)” is defined u/s. 92F(ii) as a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. The application of ALP is generally based on a comparison of the price, margin or profits from particular controlled transaction with the price, margin or profit from comparable transactions between independent enterprises. A comparison of transaction between the associated (related) enterprises (known as controlled transaction) with transaction between independent enterprises (known as uncontrolled transaction) is referred to as ‘comparability analysis’, which is at the heart of the application of the principle of ALP.

Rule 10B of the Rules provides for ‘comparability analysis’ wherein a comparison of a controlled transaction is undertaken with uncontrolled transaction. The controlled and uncontrolled transaction are comparable if none of the differences between the transactions could materially affect the factor viz, price, cost charged, profit arising, etc, being examined in the methodology, or if reasonably accurate adjustments can be made to eliminate the material effects of such differences. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm’s length conditions, it is necessary to compare the attributes of the transactions or enterprises that could affect conditions in arm’s length transactions. Some of the main attributes or comparability factors are as under:

• Characteristics of the property or services transferred;

• Functions performed by the parties (taking into account assets used and risk assumed);

• Contractual terms;

• Economic circumstances of the parties;

• Business strategies by the parties, etc.

While transfer pricing is not an exact science and is itself at a nascent and developing stage in India, therefore, there are bound to be controversies on various aspects of transfer pricing provisions. One of the recent controversies has been in respect of one of these attributes of the comparability analysis between the controlled and uncontrolled transaction, i.e. the relevance of ‘turnover filter’ in comparability analysis for determination of ALP.

‘Turnover filter’ in comparability analysis refers to filtration/truncation of the selected comparables vis-à-vis the company, on the basis of turnover, because the difference in turnover may affect the determination of ALP of the transaction. For instance, Company A with a turnover of Rs. 1,000 crore plus could not be considered as a comparable to Company B who has a turnover of Rs. 1 crore, since Company A shall have higher bargaining power, capacity to execute large contracts, risks assumed, skilled staff, etc vis-à-vis Company B who may not be able to undertake similar transactions. So, for determination of ALP of controlled transaction undertaken by Company B, whether ‘turnover filter’ can be applied in comparability analysis of service companies is the issue.

While the Hyderabad, Delhi and Bangalore benches of the Income-tax Appellate Tribunal have taken a stand in favour of the taxpayers allowing ‘Turnover Filter’ in comparability analysis of service companies, the Mumbai bench of the Tribunal has recently taken a contrary view on the subject.

Capgemini India’s case
In Capgemini India Pvt. vs. ACIT (ITA No. 7861/M/2011) (Mum.) dated 28th February 2013, the Appellant had rendered software programming services to its parent Company in US. The Appellant had applied Transactional Net Margin Method (‘TNMM’) as the most appropriate method for benchmarking this international transaction, which was duly accepted by the AO/TPO. Among the various disputes w.r.t. comparability analysis undertaken by the Appellant Company, the AO/TPO had denied the exclusion of comparables viz, Infosys and Wipro, and thereby refused the applicability of ‘turnover filter’.

It was argued before the Tribunal that even though the Appellant Company had considered these companies in its benchmarking exercise, however, the correct and right approach was to exclude such high turnover companies with turnover exceeding Rs. 13,000 crore, whereas the turnover of the Appellant was only around Rs. 558 crore. It was contended that these comparable companies enjoyed economies of scale and better bargaining power vis-à-vis the Appellant Company. Relying on the financials of these comparable companies, it was specifically submitted that the margins of these companies were exceptionally high vis-a-vis the Appellant Company and therefore, these comparables should have been excluded in the benchmarking exercise. Reliance was placed on the following decisions by the Appellant Company to contend that ‘turnover filter’ should be applied and the comparables viz, Infosys and Wipro should be excluded from the benchmarking exercise for want of high turnovers:

• Addl CIT vs. Frost and Sullivan India Pvt. Ltd. (2012) (50 SOT 517)(Mum);

• Dy CIT vs. Deloitte Consulting India (P) Ltd.(2011) (61 DTR 101)(Hyd)(Tri);

• Aginity India Technologies vs. ITO (ITA No. 3856/ Del/2010)(Del)(Tri);

• Genesis Integrating Systems India P. Ltd vs. Dy CIT (2011) (61 DTR 225)(Bang); and

• Brigade Global Services Pvt. Ltd vs. ITO (ITA No. 1494/Hyd/ 2010)(Hyd.)(Tri)

On the other hand, the Department argued that these comparables should not be excluded even though they have exceptionally high turnover and profit. It was argued that economies of scale is not relevant and applicable in case of service companies and the ‘turnover filter’ is relevant only in case of manufacturing companies.

Reliance was placed on the decision of Symantec Software Services Pvt. Ltd (ITA No. 7894/M/2010) [2011-TII-60-Mum-TP], in which the Tribunal had upheld the non-applicability of turnover filter in case of service companies. Further, reliance was also placed on the chart plotted with margin and turnover of the comparables, which concluded that there was no linear relationship between them.

The Tribunal held that turnover filters cannot be applied in case of service companies, since they do not have any high fixed costs and the employees are the only main assets, whose costs are directly related to manpower utilised. Relying on the chart produced by the Department, the Tribunal held that there was no linear relationship between margin and turnover and so the concept of economies of scale does not apply in case of service industry. As regard the contention of the Appellant w.r.t. skilled employees available with the comparables, the Tribunal held that margins of the comparables and the Appellant were not affected on account of such differences and all the companies and comparables had same level of risk as they operated in same field and similar environment. Referring to Rule 10B(2), the Tribunal observed functions performed, asset used and risks assumed [‘FAR’] by the comparable companies should be compared with the Appellant Company in the benchmarking exercise of the international transaction.

As regards the argument of the Appellant Company w.r.t. low bargaining power, it was held by the Tribunal that since the Appellant is a part of multinational group therefore, it cannot be said to have less bargaining power. The Tribunal therefore upheld the contention of the Department, that no turnover filter can be applied in case of service oriented companies.

A similar view has been taken by the Tribunal in the following cases, rejecting the use of turnover filter for comparability analysis of service companies:

• Vodafone India Services P. Ltd vs. DCIT (ITA No. 7140/M/2012) dated 26th April 2013; and

• Willis Processing Services India P. Ltd(ITA No. 4547/M/2012);

Genisys Integrating Systems case

In Genisys Integrating Systems India (P) Ltd vs. DCIT (64 DTR 225), the Bangalore Tribunal was opining on the determination of ALP of software development services provided by the Appellant Company to its AEs outside India. TNMM method which was selected as the most appropriate method for determination of ALP was accepted by the AO/ TPO. On the dispute of turnover filter with a range of Rs. 1 crore at the lower end and Rs. 200 crore at the high end, applied during the course of determination of ALP, the Tribunal upheld the following arguments of the Appellant Company:

• Enterprise level difference is an important facet in determination of ALP. Comparables should have something similar or equivalent and should possess same or almost the same characteristics;

• A Maruti 800 car cannot be compared to Benz car, even though both are cars only. Unusual pattern, stray cases, wide disparities have to eliminated as they do not satisfy the test of comparability;

• Companies operating on a large scale benefit from economies of scale, higher risk taking capabilities, robust delivery and business models as opposed to the smaller or medium sizes companies and therefore, size matters;

• Two companies of dissimilar size therefore, cannot be assumed to earn comparable margins and this impact of difference in size could be removed by a quantitative adjustment to the margins or prices being compared if it is possible to do so reasonably accurately;

•    Reliance was placed on the following decisions, wherein turnover/ quantitative filter was approved for determination of ALP:
–    Dy CIT vs. Quark Systems (P) Ltd (2010)(38 SOT 307)(Chd)(SB);
–    E-Gain Communication (P) Ltd vs. Dy. CIT (2008) (13 DTR 65)(Pune)(Tri);
–    Sony India (P) Ltd vs. Dy CIT (114 ITD 448)(Del);
–    Dy. CIT vs. Indo American Jewellery Ltd. (2010) (40 DTR 386)(Mum)(Tri);
–    Philips Software Centre (P) Ltd vs. Asst. CIT (119 TTJ 721)(Bang.); and
–    Asst. CIT vs. NIT (2011)(57 DTR 334)(Del)(Tri)

• Further, reliance was placed on the relevant ex-tracts of Para 3.43 of the OECD Transfer Pricing Guidelines, which are as under:

“Size criteria in terms of Sales, Assets or Number of employees. The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability.”

• NASSCOM also has categorized companies based on turnover, similar to Dun and Bradstreet.

The Tribunal specifically observed that there has to be lower limit and upper limit of range in applying turnover filter, since size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin.

The Tribunal therefore approved the use of turn-over filters in comparability analysis of a services company.

A similar view has been taken by the Tribunal, approving the use of turnover filter in comparability analysis of service companies:

•    Adaptec (India) (P) Ltd vs. DCIT (2013)(86 DTR 26)(Hyd.)(Tri);
•    Asst CIT vs. Maersk Global Services Centre (India) P. Ltd. (133 ITD 543)(Mum.);
•    M/s. Patni Telecom Solutions vs. ACIT (1846/ Hyd/2012) dated 25 April 2013;
•    Capital IQ Information Systems vs. Dy. CIT (ITA No. 1961/Hyd/2007);
•    Brigade Global Services (P) Ltd vs. ITO (supra);
•    Triniti Advanced Software Labs (P) Ltd vs. Asst. CIT (2011 TII 92 Tri Hyd-78);
•    Agnity India Technologies (P.) Ltd vs. Asst CIT (supra);
•    Addl CIT vs. Frost and Sullivan India (P) Ltd (supra);
•    Actis Advisors Pvt Ltd vs. DCIT (2012)(20 ITR 138) (Del.)(Tri.);
•    Continuous Computing India (P) Ltd. vs. ITO (2012) (52 SOT 45)(Bang)(URO); and
•    Centillium India P. Ltd vs. DCIT (2012)(20 ITR 69) (Bang)(Tri.)

Observations

On perusal of the contrary decisions discussed above, in all the cases, TNMM was selected and applied as the most appropriate method for bench-marking. TNMM puts more efforts on functional similarities than on product similarities. Functional analysis seeks to identify and compare the eco-nomically significant activities and responsibilities undertaken, assets used and risks assumed by the parties to the transaction. Generally, quantitative and qualitative filters/criteria are used to include or exclude the potential comparables. The choice and application of selection criteria depends on the facts and circumstances of each particular case. Turnover filters are a type of quantitative criteria.

On the touchstone of FAR analysis, the big service companies are generally found providing services to different customers simultaneously, performing additional functions, assuming risks and employing unique intangible assets, unlike small size service companies. Similarly, the goodwill and brands of these companies enjoy premium pricing and due to scale of operations, these companies enjoy economies of scale in lower cost of infrastructural facilities and employees. Employee costs are generally found to be semi-variable in nature, with higher proportion of fixed cost. Further, the big service companies have a capacity and are in a position to execute large service contracts, which may not be possible otherwise for small or medium size service companies. In such a scenario, the bigger companies would also be in a position to have a better bargaining power vis-à-vis other companies.

Economies of scale are the cost advantages that enterprises obtain due to size, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. Often operational efficiency is also greater with increasing scale, leading to lower variable cost as well. Even though services are different from products, but still they may achieve economies of scale in business operations by using the inputs, viz, process and technology efficiently, which are necessary to render the services. For instance, just as automakers invest in the latest manufacturing processes, service companies can use technology to improve efficiency. A carpet cleaning company may purchase powerful shampooers and vacuums that decrease the time it takes to complete a job by 25 percent, thereby, claiming the cost savings from economies of scale.

Economies of scale should not be confused with the economic notion of returns of scale, which is otherwise sought to be relied by the Department, by proving that there is no linear relationship between margins and turnover and therefore, no economies of scale exist in case of service industry.

Also, the findings of the decision of Symantec Software (supra) which is sought to be relied on by Capgemini India (supra) on the contrary support the applicability of turnover filter, but however, for want of specific facts of the case, it led to opining otherwise against the Appellant Company.

Accordingly, even in case of service oriented companies, if FAR analysis indicates wide disparities in the comparables vis-à-vis taxpayer’s international transaction, then quantitative viz, turnover filter and/or qualitative filters can be applied in comparability analysis for determination of ALP. Therefore, it appears that the ratio of the Mumbai Tribunal decisions requires reconsideration.

A Special Bench of the Income-tax Appellate Tribunal has also been constituted by the Delhi Bench in the case of M/s. Fiesecke and Devirent India Pvt Ltd (in ITA No. 5924/Del/2012) on the issue under consideration with the following questions:

“1. Whether for the purposes of determining the Arm’s length Price in relation to the international transactions, quantitative filter of high/low turnover is to be applied and accordingly, high/low turnover companies vis-à-vis the assessee company are to be excluded from the comparable selected for benchmarking the transaction; and

2. If the answer to question no. 1 is in affirmative then what should be the parameter, if any, for the exclusion of high/low turnover companies vis-à-vis the assessee company.”

Nirav Shah

S. 37(1) — Amount spent on the prizes given under the lottery system allowed as business expenditure

New Page 1

11 Eyetech Industries v.
ACIT

ITAT ‘G’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 1799/Mum./2005

A.Y. : 2001-02. Decided on : 31-7-2008

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

B. K. Singh

S. 37(1) of the Income-tax Act, 1961 — Business expenditure
— Amount spent on the prizes given under the lottery system allowed as
business expenditure.

Per P. Madhavi Devi :

Facts :

The assessee was trading in eye-testing equipments. During
the year under appeal it had claimed Rs.7.68 lacs as expenditure incurred
towards sales promotion campaign. The same was explained thus: The assessee
conducted lottery at the exhibition centre from 11-3-2000 to 15-1-2001. As per
the scheme, the purchaser of the assessee’s products during the defined period
was entitled to a lottery ticket. At the annual optical fair, a lucky draw was
announced in which three lucky winners were given the prizes. According to the
AO, this was a lottery business not related to the business of the assessee.
Hence, he disallowed the expenditure claimed. On appeal, the CIT(A) confirmed
the addition.

Held :

The Tribunal agreed with the assessee that the expenditure
was to attract customers and to encourage them to purchase the assessee’s
products. It disagreed with the AO who held such activity of the assessee as
in the nature of gambling. Accordingly, the expense claimed was allowed by the
Tribunal.

à
The flat in question was exclusively used for the purpose of the business of
the assessee. It was used for accommodating the business executives of various
suppliers, who visited the assessee’s shop for business purpose. Apart from
that, some senior staff of the assess was also residing in the flat;

à
No rent was paid by the assessee for the use of the flat;

à
The assessee had substantial amount of interest-free funds during both the
years under appeal;

à
The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.

In view of the above, the Tribunal upheld the order of the
CIT(A).

(iii) In the case of SCM Creation, which was the intervener
in the case of Rogini Garments before the Special Bench of Chennai Tribunal,
the Madras High Court relying on its own decision in the case of V.
Chinnapandi, had allowed the appeal filed by the assessee;

(iv) The Bombay High Court in the case of Nima Specific
Family Trust, which decision was again based on the decision of the M. P. High
Court in the case of J. P. Tobacco Products Pvt. Ltd., had held that both the
Sections were independent and hence, deduction could be claimed on the gross
total income, subject to ceiling of 100%.

Cases referred to :

1. Ifunik Pharma Ltd. (ITA No. 4389/M/02);

2. CIT v. V. Chinnapandi, (2006) 282 ITR 389 (Mad.);

3. J. P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR
123 (M.P.);

4. SCM Creation (Tax case Appeal No. 310 & 311 of 2008 —
Madras High Court);

5. Nima Specific Family Trust, 248 ITR 291 (Bom.)

6. ACIT v. Rogini Garments, (2007) 108 ITD 49 (SB)
(Chennai)

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Nirav Shah

Whether stock exchange membership card acquired after 1-4-1998 represents a commercial right/intangible asset and qualifies for depreciation u/s.32 — Held, Yes.

New Page 1

10 K. Damani Securities Pvt. Ltd.
v. ITO

ITAT ‘C’ Bench, Mumbai

Before G. E. Veerabhadrappa (VP) and

G. C. Gupta (JM)

ITA No. 2568/M/04

A.Y. : 2001-02. Decided on : 22-10-2007

Counsel for assessee/revenue : Hiro Rai/

B. K. Singh

Whether stock exchange membership card acquired after
1-4-1998 represents a commercial right/intangible asset and therefore
qualifies for depreciation u/s.32 of the Income-tax Act, 1961 — Held, Yes.

The assessee claimed depreciation on membership card of
Bombay Stock Exchange, acquired after 1-4-1998. The Assessing Officer did not
allow the claim of the assessee. The CIT(A) upheld the action of the Assessing
Officer. The assessee preferred an appeal to the Tribunal. In the appeal to
the Tribunal the contention of the assessee was that membership card of Bombay
Stock Exchange represents a commercial right/intangible asset and therefore
qualifies for depreciation u/s.32 of the Act. Reliance in this connection was
placed on the decision of the Division Bench in the case of Techno Shares &
Stocks Ltd. (ITA Nos. 778, 779 and 1951/Mum./2004 decided on 4-1-2006). On the
other hand the Departmental Representative pointed out that subsequent to the
decision in the case of Techno Shares & Stocks Ltd., the Tribunal, in another
case, has set aside the issue to the file of the Assessing Officer with a
direction to allow depreciation only after he finds that there is a diminution
in the value of the asset as a result of use.

Held :

The principle that the acquisition of Bombay Stock Exchange
Card after 1-4-1998 results in acquisition of a commercial asset in the form
of an intangible asset and therefore is entitled for depreciation in the light
of the amended provisions has been accepted by both the decisions. The
Tribunal in the light of the contention of the AR that S. 32 which grants
depreciation on various conditions itself does not spell out such diminution
to be the condition for allowance of depreciation and also having regard to
the ratio of Techno Shares & Stocks Ltd. decided the issue in favour of the
assessee. The Tribunal also stated that the decision rendered in the other
case where the matter has been restored to the Assessing Officer must be taken
to have been decided on the facts that existed in that case.

The flat in question was exclusively used for the purpose of the business of
the assessee. It was used for accommodating the business executives of various
suppliers, who visited the assessee’s shop for business purpose. Apart from
that, some senior staff of the assess was also residing in the flat;

No rent was paid by the assessee for the use of the flat;

The assessee had substantial amount of interest-free funds during both the
years under appeal;

The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.

In view of the above, the Tribunal upheld the order of the
CIT(A).

Nirav Shah

S. 37(1) — No interest held to be allowable where firm had advanced Interest free loan to a relative of a partner for purchase of a flat.

New Page 1

9 DCIT v. Parthas Power House

ITAT Cochin Bench

Before N. Barathwaja Sankar (AM) and N. Vijayakumaran (JM)

ITA No. 50 & 51/Coch./2007

A.Ys. : 2003-04 & 2004-05. Decided on : 12-6-2008

Counsel for revenue/assessee : T. R. Indira/

R. Srinivasan

S. 37(1) of the Income-tax Act, 1961 — Business expenditure —
Interest-free loan to a relative of a partner for purchase of a flat — The flat
used for the purpose of the business of the assessee — Whether AO justified in
disallowing interest paid by the assessee — Held, No.

Per N. Barathwaja Sankar :

Facts :

One of the issues before the Tribunal was regarding the
allowability of interest paid by the assessee. During the years under appeal,
the assessee had paid the sum of Rs.25.23 lacs to a builder towards the cost of
a flat purchased by the wife of the partner. In addition the assessee had also
paid interest of Rs.15.53 lacs on behalf of the said person to HDFC for the loan
received by her for the said flat. According to the AO, the assessee to the
extent of the said advances had diverted its fund for non-business purpose.
Therefore, he disallowed interest amount equal to the sum computed @ 14% of the
said advance. On appeal, the CIT(A) deleted the additions made by the AO.

Held :

The Tribunal noted the following facts considered by the
CIT(A) :

à
No rent was paid by the assessee for the use of the flat;

à
The assessee had substantial amount of interest-free funds during both the
years under appeal;

à
The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.

In view of the above, the Tribunal upheld the order of the
CIT(A).

Cases referred to :

1. Ifunik Pharma Ltd. (ITA No. 4389/M/02);

2. CIT v. V. Chinnapandi, (2006) 282 ITR 389 (Mad.);

3. J. P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR
123 (M.P.);

4. SCM Creation (Tax case Appeal No. 310 & 311 of 2008 —
Madras High Court);

5. Nima Specific Family Trust, 248 ITR 291 (Bom.)

6. ACIT v. Rogini Garments, (2007) 108 ITD 49 (SB)
(Chennai)

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Nirav Shah

S 50C and 69B– Provisions of S. 50C do not apply to the purchaser of property. S 69B requires collection of independent evidence to show that any undisclosed investment was made by the assessee in purchase of property failing which the buyer could not be

New Page 1

26 ITO v Smt. Kusum Gilani

ITAT Delhi `D’ Bench

Before A. D. Jain (JM) and K. G. Bansal (AM)

ITA No. 1576/Del/2008

Assessment Year: 2004-05. Decided on : 11th December, 2009.

Counsel for revenue / assessee: B. K. Gupta / Kapil Goel

S 50C and 69B– Provisions of S. 50C do not apply to the
purchaser of property. S 69B requires collection of independent evidence to show
that any undisclosed investment was made by the assessee in purchase of property
failing which the buyer could not be saddled with the liability on account of
undisclosed investment.

Per K. G. Bansal:

Facts:

While assessing the total income of the assessee, the
Assessing Officer made an addition of Rs 9,49,400 on account of investment made
by the assessee in the purchase of property. The amount of addition represented
the difference between the value of the property as determined by the stamp
valuation authorities and the purchase consideration paid by the assessee.

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

Aggrieved by the order of CIT(A) the Revenue preferred an
appeal to the Tribunal where it was contended that the addition was made u/s 69B
though the assessment order did not mention the section. The Revenue also
contended that the tribunal direct the AO to make a reference to the valuation
officer u/s 142A for determining the value of investment in the property during
the year.

Held:

The Tribunal following the order in the case of Smt. Chandni
Bhuchar held that, in the case of the purchaser of the property, –

(i) the provisions of S. 50C do not apply,

(ii) the AO ought to
collect evidence indicating that the assessee paid money over and above the
amount disclosed in the purchase deed.

The Tribunal noted that there was no such evidence on record.

Following the order in the case of Smt. Chandni Bhuchar, it
also held that it cannot issue directions to the Revenue in second appeal to
make a reference to the Valuation Officer.

The
Tribunal dismissed the appeal filed by the Revenue.

Cases referred to:

1 Smt. Suman Kapoor ITA No. 2193 (Del)/ 2009 dated
05.08.2009

2 Smt. Chandni Bhuchar ITA No. 1580 (Del)/2008 dated
27.02.2009

3 Shri Sharad Gilani (ITA No. 1577/ Del/ 2009dated
15.04.2009

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Nirav Shah

s. 74(1)(b) — The amendment to s. 74(1)(b) does not apply to long- term capital loss incurred prior to AY 2003-04—Long-term capital loss of an assessment year prior to AY 2003-04 can be set-off even against short-term capital gain of AY 2003-04 or thereaf

New Page 1

25 Geetanjali Trading Ltd. vs ITO

ITAT Mumbai `G’ Bench

Before R. K. Gupta (JM) and
J. Sudhakar Reddy (AM)

ITA No. 5428/Mum/2007

A.Y.: 2004-05. Decided on : 24.12. 2009.

Counsel for assessee / revenue: Hariram Gilda / A. K. Singh

s. 74(1)(b) — The amendment to s. 74(1)(b) does not apply to
long- term capital loss incurred prior to AY 2003-04—Long-term capital loss of
an assessment year prior to AY 2003-04 can be set-off even against short-term
capital gain of AY 2003-04 or thereafter.

Per J. Sudhakar Reddy:

Facts :

The assessee had brought forward its long-term capital loss
of AY 2002-03, which was set-off against the short-term capital gain of Rs.
4,34,330 of AY 2004-05. In view of the amendment to s. 74(1)(b) w.e.f. AY
2003-04, the AO held that long-term capital loss can be set-off only against
long-term capital gain.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

Prior to amendment of s. 74(1)(b), w.e.f. AY 2003-04, if the
net result of the computation was a loss under the head `Capital Gains’, the
law, as it stood then, gave a right of set-off to the assessee against future
capital gains income. This right to set-off vested in the assessee in the year
in which the loss was incurred. There is nothing in the amendment which withdrew
this vested right of the assessee. The Tribunal, after considering the ratio of
the decision of the Apex Court in the case of Govinddas and Others, and also the
ratio of the decision of the Bombay High Court in the case of Central Bank of
India, held that the amendment to s. 74(1)(b) is prospective and not
retrospective; and that the assessee is entitled to set-off long-term capital
loss incurred in AY 2002-03 against any income assessable under the head
`Capital Gains’ for any subsequent assessment year.

Cases referred to:

1 Govinddas and Others vs ITO 103 ITR 123 (SC)

2 CIT vs Farida Shoes Ltd. 235 ITR 560

3 CIT vs Devang Bahadur Ram Gopal Mills Ltd. 41 ITR 280
(SC)

4 CIT vs Ganga Dayal Sarju Prasad 155 ITR 618 (Pat)

5 ACIT vs Central Bank of India 159 ITR 756 (Bom)

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Nirav Shah

Proviso to s. 254(2A) — Tribunal can stay the proceedings before the AO in exercise of its incidental powers as well as in view of the proviso to S. 254(2A)—The Tribunal disposed the stay application by directing the AO to pass the assessment order by 31.

New Page 1

24 Pancard Clubs Ltd. vs DCIT

ITAT Mumbai `C’ Bench

Before S. V. Mehrotra (AM) and
D. K. Agarwal (JM)

SA No. 235/Mum/2009

A.Y.: 2004-05 and 2005-06. Decided on: 18.12.2009

Counsel for assessee / revenue: S. E. Dastur, Nitesh Joshi
and D. V. Lakhani / Vikram Gaur

Proviso to s. 254(2A) — Tribunal can stay the proceedings
before the AO in exercise of its incidental powers as well as in view of the
proviso to S. 254(2A)—The Tribunal disposed the stay application by directing
the AO to pass the assessment order by 31.12.2009 in accordance with law, but
not to serve the same on the assessee; and, thus, not to give effect to the same
for a period of six months from the date of passing of its order or till date of
passing of the appellate order by the Tribunal, whichever is earlier.

Per S. V. Mehrotra:

Facts :

For the assessment years 2004-05 and 2005-06, the CIT passed
orders u/s 263 of the Act directing the AO to: (i) Tax the advances towards sale
of room nights by the assessee from its card members under the Holiday
Membership schemes, in the year in which such advances are received; and (ii)
Not allow deduction for the provision in respect of the prorata amount relatable
to the difference between the offer price and the surrender value.

The assessee preferred an appeal to the Tribunal against the
orders passed by CIT u/s 263 of the Act. The appeals filed by the assessee came
up for hearing on 15.12.2009, but the Tribunal adjourned the hearing to
24.3.2010 to await the decision of the Special Bench constituted in Chennai in
the case of Mahindra Holiday Resorts Ltd.

The AO was required to complete the assessment proceedings by
31.12.2009 to give effect to the orders of the CIT. As a result of the said
additions/disallowances, there would be an addition to the total income of Rs
195,07,77,400, thereby creating a huge demand against the assessee. Accordingly,
the assessee filed an application for stay of the assessment proceedings before
the AO.

Held:

It is trite law that the Tribunal can stay the proceedings
before the AO in exercise of its incidental powers as well as in view of the proviso to s. 254(2A). The Tribunal noted that
similar power had been exercised by the Tribunal in the case of M/s Reliance
Communications Infrastructures Ltd. in S.A. No. 135/M/2009, for the assessment
year 2004-05, vide its order dated 24.4.2009. The Tribunal directed the AO to
pass the assessment order by 31.12.2009 in accordance with the law, but not to
serve the same on the assessee; and, thus, not to give effect to the same for a
period of six months from the date of its order or till the date of passing of
the appellate order by the Tribunal, whichever is earlier.

Cases referred to:

1 ITO vs M. K. Mohammed Kunhi, 71 ITR 8265 (SC)

2 Lipton India Ltd. vs ACIT, (1994) 95 STC 216 (Mad)

3 State of Andra Pradesh vs V.B.C. Fertilisers & Chemicals
Ltd., (1994) (2) ALT 487.

4 M/s. Reliance Communications Infrastructure Ltd. vs ACIT,
(S.A.No.133/M/09)

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Nirav Shah

S. 37(1) — Expenditure on new technology to replace existing one is revenue expenditure

New Page 2

Part B — Unreported Decisions

(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.)

33 Unidyne Energy Env System Pvt. Ltd.

v. ITO

ITAT ‘G’ Bench, Mumbai

Before P. Madhavi Devi (JM) and

D. Karunakara Rao (AM)

ITA No. 4007/Mum./2005

A.Y. : 2001-02. Decided on : 10-9-2008

Counsel for assessee/revenue :

Prakash Jhunjhunwala/T. Diwakar Prasad

S. 37(1) of the Income-tax Act, 1961 — Capital or Revenue
expenditure — Expenditure incurred in acquiring new technology to replace the
existing technology — Whether allowable as expenditure — Held, Yes.

Per D. Karunakara Rao :

Facts :

The assessee was engaged in the business of manufacturing and
trading of boilers and installation of thermal engineering systems. During the
year the assessee had claimed expenditure of Rs.41.4 lacs incurred in improving
its existing technology. The expenditure incurred included payments made to IIT
for technology acquired. In its accounts, the as-sessee
had shown the expenditure so incurred as capital work in progress. According to
the assessee, it was done so in order to disclose to IDBI about its fund
involved for seeking grant/reimbursement from USAID. According to the AO as well
as the CIT(A), the expenditure incurred was to develop technology for new
product, which has an enduring benefit hence, they disallowed the assessee’s
claim.

Held :

The Tribunal found that the assessee had incurred expenditure
on development and design of the technology for substituting the existing
technology. According to it, the expenditure was undisputedly spent wholly and
exclusively for business purpose and the same was aimed at the development of
new variant product with enduring benefit. However, relying on the Mumbai High
Court decision in the case of Kirloskar Tractors Ltd., it noted that the
enduring advantage of the expenditure was not the final test and it has
exceptions. Further it also noted that the assessee did not acquire any
exclusive ‘right to use’ the said technology, nor did it acquire the ‘right to
transfer’. In the opinion of the Tribunal, in the absence of such rights, the
said expenditure was in the nature of revenue. Further, it noted that the object
of the expenditure was aimed at meeting the ever changing needs on the
technological frontiers. Therefore, relying on the Supreme Court decision in the
case of Alembic Chemical Works Co. Ltd., it held that the expenditure incurred
was revenue in nature.

Cases referred to :

(1) Kirloskar Tractors Ltd., 98 Taxman 112 (Mum);

(2) Alembic Chemical Works Co. Ltd., 177 ITR 377 (SC)

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Nirav Shah

S. 2(24) – Notional value of advance licences/DEPB credited to P&L account not income

New Page 2

Part B — Unreported Decisions

32 National Leather Mfg. Co. v. JCIT

ITAT ‘E’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

R. S. Padvekar (JM)

ITA No. 8294/Mum./2003

A.Y. : 2000-01. Decided on : 13-6-2008

Counsel for assessee/revenue : Mayur Shah/

Somogyan Pal

S. 2(24) of the Income-tax Act, 1961 — Income — Assessee
notionally computing the value of advance licences/DEPB and crediting the same
to Profit and Loss account — In its return of income filed, the said amount
excluded from its income — Whether the assessee justified in doing so — Held,
Yes.

Per R. S. Padvekar :

Facts :

The assessee, an exporter, was holding licences/ DEPB, which
were transferable. Hitherto, it was providing for the benefit under the said
licences/ DEPB only on the basis of its actual utilisation. However, during the
year under consideration, it changed its method of accounting, and made the
valuation of the benefit receivable in respect of the unutilised licences/DEPB,
and a sum of Rs.167.67 lacs was credited to Profit and Loss account. But while
filing return of income, the said amount was not considered as income of the
previous year and its loss was enhanced to that extent. However, the AO as well
as the CIT(A) did not agree with the said treatment, and the same was considered
as the income of the current year.

Held :

The Tribunal noted that the assessee had not transferred the
said licences, nor were the same utilised in paying import duty. The assessee
had merely calculated the notional value for the purpose of suppressing the huge
losses reflected in the books of account. According to it, merely because book
entries were passed and when there was no real income accrued to the assessee,
there was no justification to support the addition. Further, relying on the
Bombay Tribunal decision in the cases of Jamshi Ranjitsing Spg. & Wvg. Mills
Ltd. and of the Amritsar Tribunal in the case of Dera Singh Sham Singh, it
allowed the appeal of the assessee.

Cases referred to :

(1) Jamshi Ranjitsing Spg. & Wvg. Mills Ltd. v. IAC,
41 ITD 142 (Bom.);

(2) JCIT v. Dera Singh Sham Singh, 96 ITD 235 (Asr)

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Nirav Shah

S. 194J — Payments for network services cannot be Technical services’ liable to TDS

New Page 2

Part B — Unreported Decisions

31 Pacific Internet (India) Pvt. Ltd. v.

ITO — TDS

ITAT ‘D’ Bench, Mumbai

Before R. S. Padvekar (JM) and

Rajendra Singh (AM)

ITA Nos. 1607 to 1609/Mum./2006

A.Y. : 2003-04 to 2005-06

Counsel for assessee/revenue : Anil Sathe/

Sanjay Agrawal

S. 194J Income-tax Act, 1961 — TDS on Fees for Professional
or Technical services — Whether payments for bandwidth and network services
could be said to be ‘Technical services’ liable to TDS — Held, No.

Per R. S. Padvekar :

Facts :

The assessee was engaged in the business of providing
internet services to its clients. For the same it acquired bandwidth and network
operating infrastructure services from MTNL/VSNL. According to the AO, such
services availed were in the nature of technical services covered u/s.194J and
treated the assessee in default u/s.201(1). The CIT(A) on appeal, confirmed the
AO’s order. Before the Tribunal the Revenue submitted that the decision of the
Madras High Court in the case of Skycell Communications Ltd. was not applicable
to the facts of the assessee’s case, as bandwidth and network operating
infrastructure services were nothing but technical services and accordingly,
relied on the orders of the lower authorities.

Held :

The Tribunal did not agree with the contention of the Revenue
and held that since the services availed were standard facility, the case of the
assessee was not only covered by the decision in the case of Skycell
Communications Ltd., but also by the Delhi High Court decision in the case of
Estel Communication Pvt. Ltd. Accordingly, it was held that the payments made to
MTNL/VSNL for availing the services of bandwidth and network operating
infrastructure cannot be said to be technical services within the meaning of S.
195J read with Explanation 2 to S. 9(1)(vii) of the Act.

Cases referred to :

(1) Skycell Communications Ltd., 251 ITR 59 (Mad.)

(2) CIT v. Estel Communication Pvt. Ltd., 217 CTR
(Del.) 102

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Nirav Shah

Whether violations of Rules & Regulations of NSE by members could be offence or act prohibited by law — Held, No. Whether fine paid by member to NSE can be disallowed under Explanation to S. 37(1) — Held, No.

New Page 2

Part B — Unreported Decisions

30 Goldcrest Capital Markets Ltd. v. ITO

ITAT ‘B’ Bench, Mumbai

Before K. C. Singhal (VP) and

Abraham P. George (AM)

ITA Nos. 1240 & 1241/Mum./2006

A.Y. : 2003-04. Decided on : 21-1-2009

Counsel for assessee/revenue : Ajay Gosalia/

Pitamber Das

Explanation to S. 37(1) of the Income-tax Act, 1961 — A.Y.
2003-04 — Whether violations of the Rules & Regulations of National Stock
Exchange by its members could be termed as an offence or as an act prohibited by
law — Held, No. Whether amount paid as fine by a member of National Stock
Exchange to NSE can be disallowed under Explanation to S. 37(1) of the Act —
Held, No.

Per Abraham P. George :

Facts :

The assessee, a member of the National Stock Exchange (NSE),
debited its profit & loss account with a sum of Rs.3,85,511 on account of bad
delivery and other charges. In the course of assessment proceedings the assessee
explained that this amount represents payments to NSE (a) Rs.2,50,000 for
violation of Capital Market Segment Trading, (b) Rs.1,00,000 for change in
shareholding pattern, and (c) Rs.35,511 — for miscellaneous. According to the
AO, Stock Exchanges were regulated by SEBI which was a statutory body
constituted by an Act of the Parliament and such Rules & Regulations of SEBI
having been framed in public interest, fine for violation could be considered as
penalty. He disallowed Rs.3,85,511 on the ground that these fines were penal in
nature and could not be allowed as deduction in view of the Explanation to S.
37(1).

The CIT(A) upheld the disallowance of Rs.3,50,000 on the
ground that the fine of Rs.2,50,000 imposed for violation of Rules fell under
the heading ‘unfair trade practice’ and such violations being for breach of
public policy, fine imposed was in the nature of penalty and as regards the fine
of Rs.1,00,000 he was of the view that violation of clause 30 of Membership
undertaking for capital market segment of the Exchange was also a violation of
Rule 4(c) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that NSE is not a statutory body on par
with SEBI. Fines & penalties levied for violation on account of ‘unfair trading
practice’ as specified in 4.6 of NSE regulations and ‘un-business like conduct’
as specified in IV(4)(e) of the NSE Rules cannot be equated with violation of
statutory rule or law. Since there was no violation of law, the fine paid for
non-observance of internal regulations of Stock Exchange was held to be
allowable. The Tribunal stated that its reasoning gets support from the decision
of the co-ordinate Bench in the case of CFL Ltd.

Case referred to :

1. ACIT v. CFL Ltd., (ITA No. 2656/M/2006) order
dated 5th December 2008.

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Nirav Shah

Whether delay of more than 19 months in issuance of notice after completion of assessment order in case of person searched and satisfaction required u/s.158BD not recorded by AO of person searched, proceedings are vitiated and null and void — Held, Yes.

New Page 2

Part B — Unreported Decisions

29 Bharat Bhushan Jain v. ACIT

ITAT ‘A’ Bench, New Delhi

Before Rajpal Yadav (JM) and

K. G. Bansal (AM)

ITA No. IT(SS) A. No. 13/Del./2007

A.Ys. : 1991-92 to 2001-02. Decided on : 7-11-2008

Counsel for assessee/revenue : Rano Jain/

B. Koteshwara Rao

S. 158BD of the Income-tax Act, 1961 — Whether in view of the
fact that there was a delay of more than 19 months in issuance of notice
u/s.158BD of the Act after the completion of the assessment order in the case of
the person searched and also because the satisfaction required u/s.158BD of the
Act was not recorded by the Assessing Officer (‘AO’) of the person searched, the
proceedings are vitiated and need to be declared as null and void — Held, Yes.

Per Rajpal Yadav :

Facts :

On 30th August 2002 a search u/s.132 of the Act was conducted
at the business premises of M/s. Friends Portfolios (P) Ltd. and the residential
premises of its director Shri Manoj Aggarwal. Assessment u/s. 158BC of the Act,
in the case of Manoj Aggarwal was completed on 29th August 2002. On 15th July
2003, the DCIT, Central Circle 3, New Delhi, who assessed Shri Manoj Aggarwal
informed the AO of the assessee that during the course of search on Shri Manoj
Aggarwal, documentary evidence was found indicating the fact that Shri Manoj
Aggarwal was giving bogus accommodation entries to various persons. He also
informed that the present assessee is one of the mediators who has played a
crucial role in providing accommodation entries to various entities and
individuals from Shri Manoj Aggarwal and therefore he needs to be assessed
u/s.158BD of the Act. Accordingly, the AO of the present assessee issued a
notice u/s.158BD of the Act on 31-3-2004. In response to this notice, the
assessee filed return of income for the block period on 27-5-2004 declaring nil
income. The AO assessed undisclosed income of the assessee at Rs.3,52,25,105.
The CIT(A) observed that only commission income earned by the assessee in
helping Shri Manoj Aggarwal needs to be assessed in the hands of the assessee
and accordingly the commission income on the total transaction was computed at
Rs.5,20,568 which was confirmed by the CIT(A). Aggrieved, the assessee preferred
an appeal to the Tribunal challenging the proceedings on the ground that there
was a huge delay of 19 months in issue of notice from the time of
completion of block assessment u/s.158BC in the case of Shri Manoj Aggarwal and
also on the ground that no satisfaction was recorded by the AO who passed
assessment order u/s.158BC of the Act in the case of the person searched. The
satisfaction note was supplied to the assessee by the DCIT, Central Circle 37
under the signature of Shri Jatender Kumar, the AO of the present assessee.
Relying on the decision of the Supreme Court in the case of Mahinsh Maheshwar
(289 ITR 341) it was contended that in the absence of satisfaction recording
that incriminating material was found indicating the fact that the assessee has
undisclosed income, no proceedings u/s.158BD of the Act could be initiated.

Held :

The Tribunal found that the issue of delay in issuance of
notice u/s.158BD has been considered by the co-ordinate Bench of ITAT in the
case of Shri Radhey Shyam Bansal to which Accountant Member was a party. The
Tribunal after extracting lucid enunciation of the law from the decision in the
case of Radhey Shyam Bansal came to the conclusion that the Tribunal has in the
case of Radhey Shyam Bansal considered the fact that the provisions of S. 158BD
of the Act do not provide for a time limit for issue of a notice. The Tribunal
in that case came to the conclusion that the notice needs to be issued within a
reasonable time. The Tribunal noted that the principle of consistency demanded
it to follow the decision of the co-ordinate Bench in the case of Radhey Shyam
Bansal. As regards the second contention, the Tribunal went through the alleged
satisfaction and found it to be an office note, which very office note was
considered by the Tribunal in the case of Radhey Shyam Bansal, which did not
even have reference of any seized material relatable to the assessee. This
alleged satisfaction note spoke of the general modus operandi of various
persons in carrying out giving bogus accommodation entries. The Tribunal after
considering the facts and circumstances of the case, allowed the appeal of the
assessee and quashed the assessment order.

Cases referred to :

1. Shri Radhey Shyam Bansal v. ACIT, IT (SS) A No.
12/Del./07

2. Kandhubhai Vasanji Desai v. DCIT, 236 ITR 73 (Guj.)

3. Vikrant Tyres v. 1st ITO, 247 ITR 821 (SC)

4. Ambika Prasad Mishra v. State of UP, AIR 1980
(SC) 1762

5. Manoj Aggarwal and Ors., 113 ITD 377 (Del.) (SB)

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Nirav Shah

s. 254 — A request made at the time of hearing, which has not been dealt with in the order of the Tribunal, constitutes an error in the order—The action of the Tribunal in setting aside the order of CIT(A) and upholding the action of the AO in a case wher

New Page 1

28 Puja Agencies Pvt. Ltd. vs ACIT

ITAT Mumbai `C’ Bench

Before N. V. Vasudevan (JM)
and Rajendra Singh (AM)

MA No. 452/Mum/2009

A.Y.: 2003-04. Decided on: 6.1.2010

Counsel for assessee / revenue: Vijay Mehta /
L. K. Agarwal

s. 254 — A request made at the time of hearing, which has not
been dealt with in the order of the Tribunal, constitutes an error in the
order—The action of the Tribunal in setting aside the order of CIT(A) and
upholding the action of the AO in a case where the CIT(A) has not adjudicated on
the specific grounds raised by the assessee and also on alternate grounds
raised, constitutes a mistake apparent on record.

Per Rajendra Singh:

Facts :

The assessee filed a miscellaneous application requesting
amendment of the order dated 20.4.2009 of the Tribunal, in ITA No. 1483/M/2007.
The facts of the case and the mistakes pointed out by the assessee in the order
of the Tribunal were as follows:

The assessee had shown a loss of Rs. 1,35,88,144 on account
of trading in shares which the AO had treated as speculative loss in terms of
Explanation to s. 73. Aggrieved, the assessee preferred an appeal to CIT(A).

In an appeal to the CIT(A), the assessee, inter alia,
contended that its case was covered by the exceptions provided in Explanation to
s. 73; and an alternate ground was raised regarding apportionment of expenses
towards speculative businesses, in case the claim of the assessee was not
accepted. The CIT(A) held that the provisions of Explanation to s. 73 were
applicable only in case of purchases and sales of shares of group companies. And
since the assessee was not trading in shares of group companies, the CIT(A),
following the decision of the SMC Bench of the Tribunal in the case of Aman
Portfolio, directed the AO to treat the loss as business loss. He did not
adjudicate on the issue as to whether the assessee was covered by the exceptions
provided in Explanation to s. 73. He also did not deal with the alternate ground
raised by the assessee.

The revenue filed an appeal against the order of the CIT(A).
The assessee did not prefer an appeal to the Tribunal.

The Tribunal, while disposing the revenue’s appeal, noted
that the decision of the SMC Bench of the Tribunal in the case of Aman
Portfolio, had been reversed by the SB of the Tribunal in the case of AMP
Spinning and Weaving Mills Pvt. Ltd (100 ITD 142), in which it was held that
Explanation to s. 73 was applicable to all transactions of purchases and sales
of shares.

It also observed that the main business of the assessee was
trading in shares and that loss had arisen on account of trading in shares.

The assessee contended that in the course of
hearing, the members had expressed an opinion that the issue be set aside to the
file of the AO, to be decided afresh after considering various decisions
regarding applicability of Explanation to s. 73. The assessee was accordingly
asked to file a letter mentioning the issues that required to be considered
afresh before the AO. In compliance, the assessee filed a letter dated
18.3.2009. Therefore, the order of the Tribunal setting aside the order of the
CIT(A) and confirming the order of the AO was contrary to the views expressed at
the time of hearing; and, therefore, there was an apparent mistake.

Held:

(i) The log book of hearing maintained by the Accountant
Member did not show that the bench had expressed any view in the matter. The
notings did show that the AR had made a request for restoring the matter to
the AO, but the bench did not express any view in the matter. The log book of
the Judicial Member was not available. In view of these facts, the Tribunal
did not accept the point made in the MA that the members of the bench had
expressed any view in the matter. However, since the request made by the AR
for restoring the matter was not dealt with, there was an error in the order
to that extent.

(ii) The Tribunal noted that the assessee had specifically
mentioned to the CIT(A) that its case is covered by the exceptions provided to
Explanation to s. 73, and had also raised an alternate ground regarding
apportionment of expenses towards speculative businesses, in case the claim of
the assessee was not accepted. Since the CIT(A) had decided the issue in favor
of the assessee on technical grounds, he had not adjudicated on these issues.
In spite of these facts, the Tribunal had stated in para 3 of its order that
according to the findings by the AO, that the main business was trading in
shares had become final, because the assessee had not appealed against the
order of the CIT(A). This finding of the Tribunal constituted a mistake,
apparent on record.

(iii) It is a settled legal position that the assessee, as
a respondent, can support the order of the CIT(A) on alternate grounds also.
The only limitation is that the assessee, as a respondent, cannot argue
against the finding of the CIT(A) which is in favour of the revenue. In the
present case, the CIT(A) had not given any finding on whether the case was
covered by exceptions provided in Explanation to s. 73 and also regarding
apportionment of expenses.

(iv) Once the Tribunal did not accept the technical ground,
it was required to restore the matter to the file of the CIT(A) for deciding
the issue on merits.

The order passed by the Tribunal was modified by holding that
the order of the CIT(A) had been set aside and the matter restored back to him
for adjudicating the specific grounds raised by the assessee with him. The
miscellaneous application of the assessee was allowed.

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Nirav Shah

Whether order of reassessment u/s.147 r.w. S. 143(3) without valid notice u/s.143(2) is null & void — Held, Yes. Whether amendment to S. 148 saves reassessment done without notice u/s.143(2) — Held, No. Whether provisions of S. 292BB are retrospective — H

New Page 2

Part B — Unreported Decisions

28 Chandra R. Gandhi v. ITO

ITAT ‘K’ Bench, Mumbai

Before M. A. Bakshi (VP) and

Rajendra Singh (AM)

ITA No. 6006/Mum./2007

A.Y. : 2000-01. Decided on : 23-12-2008

Counsel for assessee/revenue : G. P. Mehta/

Ankur Garg

Income-tax Act, 1961 — S. 143(2), S. 147, S. 148 and S. 292BB
— A.Y. 2000-01 — Whether an order of reassessment passed u/s.147 r.w. S. 143(3)
of the Income-tax Act, 1961 without issue of a valid notice u/s.143(2) of the
Act is null and void — Held, Yes. Whether the amendment to S. 148 by the Finance
Act, 2006 saves the reassessment done without issue of notice u/s.143(2) — Held,
No. Whether provisions of S. 292BB of the Act are retrospective — Held, No.

Per M. A. Bakshi :

Facts :

The assessee filed his return of income on 18-12-2001.
Assessment u/s.143(3) r.w. S. 147 was made vide order dated 19-3-2004 at an
income of Rs.1,54,070 as against the returned income of Rs.43,970. The addition
made was on account of disallowance of interest of Rs.1,10,100.

The assessee challenged the validity of proceedings on the
ground that (a) no notice u/s.143(2) had been issued; and (b) that the assessee
having filed the return of income in respect of which no assessment was made,
notice u/s.148 could not be issued as the assessee’s return was to be considered
as pending on the date of issue of notice u/s.148.

The CIT(A) dismissed the appeal of the assessee. Aggrieved,
the assessee preferred an appeal to the Tribunal.

Held :

(a) In view of the ratio laid down by the Apex Court in the
case of Rajesh Jhaveri Stock Brokers Pvt. Ltd., the contention of the assessee
that since no regular assessment was made in this case, the AO was precluded
from issuing notice u/s.148 is not based on correct appreciation of law, as
amended w.e.f. 1-4-1998.

(b) In the case of Raj Kumar Chawla, the Special Bench of
the Tribunal has held that issue of notice u/s.143(2) within the prescribed
time is also mandatory in the proceedings initiated u/s.147 and in the absence
of the same, the reassessment made shall be null and void.

(c) The Tribunal followed the decision of the Special Bench
of the Tribunal in the case of Raj Kumar Chawla and held that reassessment
made in the absence of service of notice u/s. 143(2) is invalid. It was of the
view that the Division Bench of the Tribunal is bound by the decision of the
Special Bench of the Tribunal until it is superseded by any superior
authority. Since the decision of the Madras High Court in the case of Areva T
& D India Ltd. was not a decision of jurisdictional High Court, either of
Bombay (being jurisdictional High Court in the present case) or of Delhi
(Special Bench decision being of Delhi jurisdiction), the Tribunal followed
the decision of the Special Bench of Delhi Tribunal though this decision of
the Special Bench was contrary to the decision of Madras High Court in the
case of Areva T & D India Ltd.

(d) The Tribunal held that the amendment to S. 148 by
Finance Act, 2006 w.e.f. 1-10-1991 does not save the reassessment u/s.147 in
this case, since the amendment precludes the assessee from raising the issue
of validity on the ground of late service of notice u/s.143(2). It noted that
in the present case no notice has been issued.

(e) The Tribunal noted that S. 292BB has been incorporated
by the Finance Act, 2008 w.e.f. 1-4-2008. This provision is applicable w.e.f.
1-4-2008 and is not retrospective and hence the same has got to be ignored.

The Tribunal quashed the reassessment and allowed the appeal
of the assessee.

Cases referred to :

1. Raj Kumar Chawla v. ITO, 94 ITD 1 (Del.) (SB)

2. Areva T&D India Ltd. v. ACIT, 294 ITR 233 (Mad.)

3. ACIT v. Rajesh Jhaveri Stock Brokers P. Ltd., 291
ITR 500 (SC)

4. CIT v. K. M. Pachayappan, 304 ITR 264 (Mad.)

5. CIT v. Jai Prakash Singh, 219 ITR 737 (SC)

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Nirav Shah

(2013) 88 DTR 150 (Mum) Windermere Properties (P) Ltd. vs. DCIT A.Y.: 2006-07 Dated: 22.03.2013

Section 24(b) – Prepayment charges paid for closure of loan are covered under the definition of interest and hence deductible u/s. 24(b).

Facts:
The assessee had claimed deduction of Rs. 11.05 crores u/s. 24(b) of the Act. Out of the same, the AO did not allow deduction of Rs. 1.56 crore paid as prepayment charges for the closure of the loan which was taken for acquisition of the property. The CIT(A) upheld the claim of the AO. The assessee went into further appeal.

Held:
The Honourable Tribunal held that the prepayment charges paid on account of closure of loan account are deductible u/s. 24(b). Section 24(b) provides deduction of interest payable on borrowed capital in computation of income under the head “Income from House Property”. The term “interest” has been defined in section 2(28A) to mean interest payable in any manner in respect of any moneys borrowed or debt incurred and includes service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. The definition of interest has basically two components viz. first the amount paid by whatever name called in respect of the money borrowed or debt incurred and secondly, any charge paid by whatever name called in relation to such debt incurred both qualify for deduction.

The assessee had made early repayment against its bank loan. By such repayment, the assessee managed to wipe out its interest liability in respect of the loan, which would have otherwise qualified for deduction u/s. 24(b) during the continuation of loan. It is obvious that these prepayment charges have live and direct link with the obtaining of loan which was availed for acquisition of property. The payment of such prepayment charges cannot be considered as de hors the loan obtained for acquisition or construction or repair etc of the property on which interest is deductible u/s. 24(b). Both the direct interest and prepayment charges are species of the term ‘interest’. Hence the prepayment charges paid by the assessee for closure of loan qualify for deduction us/s. 24(b).

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Nirav Shah

Penalty: Concealment: Section 271(1)(c): Sale of immovable property for Rs. 2,51,50,000 which was valued at Rs. 5,19,77,000 for stamp duty: Assessee computed capital gain by taking actual consideration of Rs. 2,51,50,000: AO applied section 50C and also imposed penalty u/s. 271(1)(c): Penalty not justified:

CIT vs. Madan Theatres Ltd.; 260 CTR 75 (Cal):

The assessee had sold an immovable property for a consideration of Rs. 2,51,50,000. The said property was valued at Rs. 5,19,77,000 for the purpose of stamp duty. The assessee computed the capital gain by taking actual consideration of Rs. 2,51,50,000. The Assessing Officer computed the capital gain taking deemed consideration u/s. 50C at Rs. 5,19,77,000 being the stamp duty valuation. The assessee did not dispute the said computation as it would not have made any difference because the capital gain still remained a loss. The Assessing Officer also imposed penalty u/s. 271(1)(c) for concealment of income. The Tribunal cancelled the penalty.

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

“Revenue having failed to produce any evidence to the effect that the assessee has actually received more amount than that shown by it on the sale of property, penalty u/s. 271(1)(c) cannot be levied simply because the Assessing Officer has worked out the capital gain by taking into account deemed sale consideration by invoking section 50C(1) instead of actual sale consideration shown by the assessee.”

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Nirav Shah

Section 28 — Non realisability of balances lying with a bank in FD and current accounts held to be allowable as business loss.

New Page 1

27 Mehul H. Mehta vs ITO

ITAT ‘B’ Bench, Mumbai

Before R. K. Gupta (J. M.)
and Rajendra Singh (A. M.)

ITA No. 8531 / M / 2004

A. Y.: 2001-02. Decided on 15.06.09

Counsel for Assessee / Revenue: Pradip Kapasi / Malathi R.
Sridharam

Section 28 — Non realisability of balances lying with a bank in
FD and current accounts held to be allowable as business loss.

Per Rajendra Singh:

Facts:

The assessee was conducting business as a proprietor. His
banker was Madhavpura Mercantile Co-op. Bank Ltd. From the balance in his
current account with the bank, on 12.03.2001, he received a pay order of Rs.
6.75 lakhs favouring a company in which he was a director. On the very next day,
the bank collapsed due to a securities scam and the RBI suspended all its
operations with immediate effect. Consequently, the pay order was not cleared.
In addition, the assessee also had fixed deposits worth Rs. 4 lakhs with the
bank with provision for availing credit facilities for business purposes. As
there was no hope to recover any money, he claimed sum of Rs. 0.3 lakhs towards
balance in his current account, the Rs. 6.75 lakhs pay order and the fixed
deposit worth Rs. 4 lakhs as a business loss.

The AO disallowed the claim for the following reasons:

• The bank had not denied its liability to pay while
confirming the above balance in May 2001;

• On 7.9.2001, the assessee himself had applied for
revalidation of the pay order;

• The fixed deposit was a surplus fund withdrawn from the
business by the assessee.

The CIT (A) confirmed the AO’s order, as according to him,
the amount claimed as loss was out of the loans received by the assessee just a
few days prior to the collapse of the bank. Further, he observed that even if it
was accepted that the FDRs had been pledged for business, based on the decision
of the Madras High Court in the case of Menon Impex Ltd., it did not show any
direct nexus of the FDR with business.

Before the Tribunal, the revenue justified the orders of the
lower authorities and submitted that the amounts written-off were in fact loans
taken; and hence, it was a loss of capital and not a business loss.

Held:

According to the Tribunal, though the money in the bank
account was accountable as mainly loans received by the assessee, there was no
dispute that the current account was being operated for the purpose of carrying
on business. Therefore, according to the Tribunal, the money lost was during the
course of carrying on business. Hence, the loss was a business loss. Further,
relying on the decision of the Mumbai High Court in the case of Goodlass Nerolac
Paints Ltd. that once it was established that an amount related to trade and had
become bad, the decision of the assessee to write-off the amount in a particular
year should not be interfered with, it allowed the claim of the assessee.

Cases referred to:

1. Goodlass Nerolac Paints Ltd. 188 ITR 1 (Mum)

2. Menon Impex Ltd. 259 ITR 406 (Mad)

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Nirav Shah

S. 40A(2)(b) — Discount on sales given to sister concern not covered.

New Page 1

Part B — Unreported Decisions

20 DCIT v. Orgo Chem Guj. Pvt.
Ltd.

ITAT ‘H’ Bench, Mumbai

Before K. C. Singhal (JM) and

A. K. Garodia (AM)

ITA No. 7872 /Mum./2004

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

Counsel for revenue/assessee : D. K. Rao/

Mayur A. Shah

S. 40A(2)(b) of the Income-tax Act, 1961 — Payments to
relatives — Discount on sales given to sister concern — Whether covered under
the provisions — Held, No.

Per K. C. Singhal :

Facts :

The assessee had given sales discount of Rs. 19.3 lacs to its
sister concern. Since no such discount was given to other parties, the AO
treated the same as unreasonable and disallowed it u/s.40A(2)(b). On appeal, the
CIT(A) noted that the sales to other parties were only of meager amount, while
the sale to sister concern was in bulk. Accordingly, the assessee’s appeal was
alllowed.

Held :

According to the Tribunal, a bare reading of the provisions
reveals that such provision could be invoked only where an expenditure was
incurred in respect of which, payment was to be made to the sister concern. In
case of discount on sales, no payment was made by the assessee as it only
reduced the sale price. Therefore, relying on the Madhya Pradesh High Court
decision in the case of Udhaji Shrikrishanadas, it held that the assessee’s case
was not covered u/s.40A(2)(b).

Case referred to :

Udhaji Shrikrishanadas, 139 ITR 827 (M.P.)

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Nirav Shah

S. 14A — Whether any part of expenses claimed against remuneration from a partnership firm can be disallowed on account of exempt share of profit — Held, No.

New Page 1

Part B — Unreported Decisions

19 Hitesh D. Gajaria v. ACIT,
11(2)

ITAT ‘H’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavidevi (JM)

ITA No. 993/Mum./2007

A.Y. : 2003-04. Decided on : 14-11-2008

Counsel for assessee/revenue : Arvind Sonde/Mayank
Priyadarshi

S. 14A of the Income-tax Act, 1961 (‘the Act’) — Whether
expenditure can be disallowed out of expenses claimed against business income
being remuneration from a partnership firm in which assessee is a partner on the
ground that share of profit received from the firm is claimed as exempt u/s.
10(2A) of the Act — Held, No.

Per Sudhakar Reddy :

Facts :

The assessee while filing his return of income claimed a
deduction of Rs.3,90,268 against his business income being remuneration from a
partnership firm in which he was a partner. The assessee had claimed share of
income from partnership firm as being exempt u/s.10(2A). The Assessing Officer
(AO) apportioned the expenditure claimed and disallowed a sum of Rs.1,16,752 by
invoking provisions of S. 14A of the Act. The CIT(A) upheld the action of the
AO. On an appeal by the assessee to the Tribunal.

Held :

The Tribunal found that similar issue was considered and
decided in favor of the assessee by Mumbai Bench of the Tribunal in the case of
Sudhir Kapadia (ITA No. 7888/Mum./2003 and Bharat S. Raut (ITA No.
9212/Mum./2004). Following these two precedents the tribunal deleted the
disallowance.

Cases referred to :

1. Sudhir Kapadia v. ITO — Mum. ‘C’ Bench, ITA No.
7888/M/03 dated 26-2-2003

2. Bharat S. Raut — Mum ‘E’ Bench, ITA No.
9212/Mum./2004 and CO No. 212/Mum./2005

Note :

In the case of Sudhir Kapadia (ITA No. 7888/Mum./2003) the
Tribunal after considering various decisions concluded that it is not possible
to hold the view that share income in the hands of a partner of a partnership
firm is altogether tax free. It held that share of profit in the hands of a
partner is income which has suffered tax in the hands of the firm and found that
the share of profit from the firm is exempt from tax u/s.10(2A) not in absolute
sense but with a view to avoid double taxation. Accordingly, it concluded that
S. 14A is not applicable to the facts of the case.

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Nirav Shah

S. 139(5) read with S. 132(9) — Defects in Return filed cured during extended period requested for by assessee — AO not justified in treating Return as defective

New Page 1

Part B — Unreported Decisions

18 ITO v. PIC (Gujarat) Ltd.

ITAT Ahmedabad Bench ‘B’

Before I. S. Verma (JM) and

N. S. Saini (AM)

ITA No. 3058/Ahd./2002

A.Y. : 1990-91. Decided on : 4-1-2008

Counsel for revenue/assessee : R. I. Patel/

Jitendra Jain and Sachin Romani

S. 139(5) read with S. 132(9) of the Income-tax Act, 1961 —
Return of loss filed based on un-audited accounts considered as defective —
Assessee asked to file audited accounts within 15 days and rectify the defect —
Assessee requested for two months time and filed the accounts within the time
requested for — Without rejecting the assessee’s request, AO treated the
original return filed as defective and the revised return filed as belated
return — Whether AO justified — Held, No.

Per I. S. Verma :

Facts :

For the year under appeal the return of income, declaring
loss of Rs.12 lacs, was filed based on the basis of the un-audited accounts,
which according to the AO, was defective return. Hence, by notice u/s.139(a),
dated 22-1-1991 (served on 1-2-1991), the assessee was asked to file the audited
accounts within 15 days and rectify the defect. By its letter dated 15-2-1991,
the assessee requested the AO to extend the time for rectifying the defect by
two months. Thereafter, the audited accounts were filed on 15-3-1991 and the
revised (loss) return was also filed on 25-3-1991. The revised return was
processed u/s.143(1) and the refund due to the assessee was granted.

Later on, the return was processed u/s.143(3) and the loss
claimed by the assessee was rejected, on the ground that the original return
filed was defective, hence invalid. And the revised return filed was treated as
original and since it was filed late, the carry forward of loss was disallowed.
On appeal, the CIT(A) directed the AO to consider the assessee’s revised return
as valid.

Held :

The Tribunal noted that the assessee’s request for extension
of time was if rejected by the AO, the order of rejection was never intimated to
the assessee. Therefore, it held that the CIT(A) was quite justified in
accepting the assessee’s plea that the original return was a valid return and,
and therefore, revised return was also valid.

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Nirav Shah

S. 28(iv) & 145 —(i) Dividend on shares held in assessee’s name pending settlement of dispute cannot be taxed in the assessee’s hand u/s.28(iv). (ii) In the absence of trading during the year shares held as stock-in-trade can still be valued at lower of

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Part B — Unreported Decisions

17 ACIT v. Pal Enterprises
Pvt. Ltd.

ITAT ‘H’ Bench, Mumbai

Before M. A. Bakshi (VP) and

V. K. Gupta (JM)

ITA No. 1994/Mum./2005

A.Y. : 2001-02. Decided on : 20-10-2008

Counsel for revenue/assessee : Anadi Nath Mishra/ Jayesh
Dadiya

(i) S. 28(iv) of the Income-tax Act, 1961 — Dividend
on shares held in assessee’s name pending settlement of dispute — Whether such
receipt could be taxed in the assessee’s hand u/s.28(iv) — Held, No.

(ii) S. 145 of the Income-tax Act, 1961 — Shares held
as stock-in-trade valued at lower of cost or market price — In the absence of
trading during the year whether loss on account of lower market price could be
disallowed — Held, No.

Per V. K. Gupta :

Facts :

(A) Re : Dividend received on shares :

In terms of the family settlement certain shares held by the
assessee were to be transferred to Walchand & Co. Pvt. Ltd. However, on account
of certain reasons, the same could not be transferred. However, the physical
possession of the share certificates was handed over to the solicitors. The
dividend received by the assessee during the intervening period was shown as
liability in its accounts. According to the AO, had there been a dispute, the
same would have been so disclosed in the accounts of the assessee. Therefore, in
the absence thereof, the AO treated the same as benefit or perquisite chargeable
to tax u/s.28(iv) of the Act.

On appeal the CIT(A) held that the provisions of S. 28(iv)
could be applied only in a case where benefit or perquisite was received in kind
or when the assessee had credited such amount in the profit and loss account.
Accordingly, the addition made was deleted.

(B) Re : Loss arising on account of valuation of shares held as
stock-in-trade at market value :

The assessee was holding shares of Premier Automobile Ltd. —
both as investment and as stock-in-trade. As per its method of valuation, the
stock was valued at lower of cost or market price. On account of fall in the
market price of the shares, the shares held as stock were valued at the lower
figure which was claimed as loss. According to the AO, the assessee who belonged
to the promoter group of Premier Automobiles, would be holding the shares with
the sole motive of retaining the control. Therefore, it cannot be recognised as
stock-in-trade.

On appeal the CIT(A) noted that the assessee was an
investment company and these shares were held as stock-in-trade which were
valued at lower of cost or market price in accordance with the method
consistently followed, hence there was no justification in making addition on
account of the same.

Before the Tribunal, the Revenue justified the order of the
AO, on the ground that the shares held as stock-in-trade, without any
transaction of sale and purchase, could not be a proper source of loss, hence
the same was not allowable.

Held :

(A) The Tribunal noted that the impugned sum represented
dividend which was received from the year starting from F.Y. 1995-96 and
secondly, in some of those years, dividend income was exempt. Further,
according to the Tribunal, the provisions of S. 28(iv) could be applied only
in a case where an actual income was received by the assessee in the garb of
some benefits or perquisites and which were not shown as chargeable to tax.
According to the Tribunal, that was not so in the case of the assessee.
Accordingly, the order of the CIT(A) was upheld and the addition made on this
account was deleted.

(B) The Tribunal noted the facts that the assessee was
having shares — both as investment as well as stock-in-trade. The method of
valuation of stock was one consistently followed and accepted. Further, it
noted that the assessee was having substantial brought forward loss. Hence,
the practice followed cannot be termed as tax saving device. In view thereof,
the order of the CIT(A) was upheld.

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Nirav Shah

(2013) 90 DTR 197 (Chennai) Madras Motor Sports Club vs. DIT (Exemptions) A.Y.: 2009-10 Dated: 21-12-2012

S/s. 2(15) & 12AA – Registration of a charitable trust cannot be cancelled only on the ground that its aggregate receipts of the nature mentioned in the first proviso to section 2(15) exceeded threshold limits provided in second proviso to section 2(15).

Facts:

The assessee, a motor sports club, registered as a society, was also having registration under erstwhile section 12A(a). The objectives of the assessee, inter alia, were to promote sports of motor car and motorcycle and conduct motor races competitions, etc. As per DIT (Exemptions), though the objects and activities were covered under the category of “advancement of general public utility” coming within the ambit of section 2(15), assessee’s receipts were in the nature of business receipts and were more than Rs. 10 lakh (this limit is now raised to Rs. 25 lakh w.e.f. 01-04-2012). Therefore, the objects and activities of the assessee could no more be considered as charitable in nature as per the first and second provisos to section 2(15). In this view of the matter, he cancelled registration granted to the assessee u/s. 12A(a).

Held:

A harmonious reading of both the provisos to section 2(15) will only mean that in the years in which the receipts of nature mentioned in first proviso exceeded Rs. 10 lakh, the assessee will not be eligible for exemption u/ss 11 and 12. It will not mean that an otherwise charitable object of general public utility will become a non-charitable one merely because its aggregate receipts of the nature mentioned in the first proviso to section 2(15) exceeded Rs. 10 lakh. Therefore, registration granted to the assessee u/s. 12A(a) cannot be cancelled only on that ground. If in the very next year, assessee’s receipts are less than Rs. 10 lakhs, then it will have to be granted the exemption available u/ss. 11 and 12, if other conditions are satisfied. In other words, nature of objects of the assessee cannot fluctuate in tandem with the quantum of receipts mentioned in the first proviso.

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Nirav Shah

(2013) 90 DTR 350 (Mum) ACIT vs. Jaimal K. Shah A.Y.: 2007-08 Dated: 30-05-2012

Section 2(29A) – Capital gains on subsequent sale of flats received by the land owner from the developer under a development agreement needs to be computed separately for transfer of land and suprestructure.

Facts:

The assessee, owner of land since 1962, entered into an agreement with a developer in 2001. Under the agreement, while transferring interest in the land to the extent of 45 % for a consideration of Rs. 61 lakh, assessee retained the balance 55 % of land together with right to corresponding built up area thereon. As regards transfer of 45 % of land, assessee paid capital gains tax in A.Y.: 2002-03. Assessee was handed over possession of the built up area vide occupation certificate dated 24-2-2005. During A.Y.: 2007-08, assessee sold two flats and returned capital gains on sale of flats as long-term capital gains on the plea that it was under the right created under agreement of 2001 that assessee acquired and sold the flats. The Assessing Officer did not accept the computation of capital gain made by the assessee taking gain as long term capital gain. The Assessing Officer observed that the assessee had taken possession of the flats as per full occupation certificate dated 24-02-2005 and therefore, assessee was holding the said flats from the said date and since flats were sold in A.Y.: 2007- 08, the period of holding was less than three years and therefore capital gain had to be treated as short term capital gain.

Held:

Right to claim the flat as per agreement in the year 2001 was an asset but the assessee had not sold the right to acquire the flats. The assessee had sold the flats of which he was owner. The right to acquire the flats, no longer subsisted once the assessee acquired the flats and took possession of the same on 24-02- 2005. The right to acquire the flats and ownership of the flats are two different assets. The capital gain had therefore to be computed in respect of sale of flats and not in respect of right to acquire the flats.

However the assessee alongwith flats had also sold his right in the land which was an independent asset and which was being held by him since 1962 as an owner. Therefore sale consideration also included price paid in respect of right in the land in addition to price for superstructure. It would be reasonable to adopt a profit margin of 25% on the cost of construction of the flats to arrive at the sale consideration pertaining to the superstructure. The balance sale consideration of the flats will be appropriated towards the sale price for the transfer of right in the land.

Thus, the capital gain in respect of transfer of right of assessee in the land has to be computed separately as long term capital gains and gain in respect of sale of superstructure has to be treated as short term capital gain.

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Nirav Shah

(2013) 90 DTR 289 (Bang)(SB) Biocon Ltd. vs. DCIT A.Ys.: 2003-04 to 2007-08. Dated: 16-07-2013

Facts:

The assessee-company floated an ESOP scheme, under which it granted option of shares with face value of Rs. 10 at the same rate by claiming that the market price of such shares was Rs. 919, thereby claiming the total discount per option at Rs. 909. The difference between the alleged market price and the exercise price, at Rs. 909 per option was claimed as compensation to the employees to be spread over the vesting period of four years on the strength of the SEBI Guidelines and accounting principles. The assessee claimed that the employee stock option compensation expense was deductible u/s. 37(1).

The revenue did not accept the assessee’s contention of the supremacy of the accounting principles and SEBI Guidelines for the purposes of computation of total income on ground that it was a short capital receipt and a contingent liability. The revenue also canvassed a view that expenditure denotes “paying out or away” and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction u/s. 37.

A Special Bench was constituted by the Division bench to decide whether discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head profits and gains of business.

Held:

The Special Bench analysed this issue by sub-dividing it into three questions , viz.,

I. Whether any deduction of such discount is allowable?

When a company undertakes to issue shares to its employees at a discount on a future date, the primary object of this exercise is not to raise share capital, but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the revenue that by issuing shares to employees at a discount, the company got a lower capital receipt, is bereft of any force.

From the stand point of the company, the options under ESOP vest with the employees at the rate of 25 % only on putting in service for one year by the employees. Once the service is rendered for one year, it becomes obligatory on the part of the company to honour its commitment of allowing the vesting of 25 % of the option. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. It is, therefore, held that the discount in relation to options vesting during the year cannot be regarded as a contingent liability.

When the definition of the word “paid” u/s. 43(2) is read in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure, but also incurring of the expenditure which entails deduction u/s. 37(1) subject to the fulfillment of other conditions. Thus discount on shares under the ESOP is an allowable deduction.

II. If deductible, then when and how much?

Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the liability which it incurred over the vesting period by obtaining their services. Thus, the liability is neither incurred at the stage of the grant of options nor when such options are exercised.

The company incurs liability to issue shares at the discount only during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period.

III. Subsequent adjustment to discount

The company incurs a definite liability during the vesting period, but its proper quantification is not possible at that stage as the actual amount of employees cost to the company, can be finally determined at the time of the exercise of option or when the options remain unvested or lapse at the end of the exercise period. It is at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the time of grant of options, needs to be suitably adjusted with the actual amount of discount.

As regards the adjustment of discount when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and hence there can be no deduction of discount qua such part of unvested or lapsing options. But, as the amount was claimed as deduction by the company, such discount needs to be reversed and taken as income.

In the second situation in which the options are exercised by the employees after putting in service during the vesting period, the actual amount of remuneration to the employees would be only the amount of actual discount at the time of exercise of option. After certain changes to the relevant provisions in this regard , the position which now stands is that the discount on ESOP is taxable as perquisite u/s. 17(2)(vi). The position has been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount with respect to the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be with respect to the same base.

The amount of discount at the stage of granting of options with respect to the market price of shares at the time of grant of options is always a tentative employee cost because of the impossibility in correctly visualising the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employee cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options.

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Nirav Shah

2013-TIOL-831-ITAT-MUM Administrator of Estate of late Mr. E F Dinsha vs. ITO ITA No. 3019/Mum/2008 Assessment Year: 2005-06. Date of Order: 14-08-2013

Section 50C – Section 50C cannot be applied to sale agreements entered into before the introduction of the said provisions i.e. before 01-04-2003 specially when delay in execution and registration of conveyance is sufficiently explained and there is no allegation of suppression of actual consideration.

Facts:

The assessee, an administrator to the Estate of Late Mr. E. F. Dinshaw held landed properties and other tenanted properties with EF Dinshaw Trust & EF Dinshaw Charities jointly. During the previous year relevant to the assessment year 2005-06, two properties of the estate whose stamp duty value was Rs. 5,95,78,500 were sold for Rs. 42,55,045 and profit arising from the sale was computed by considering the consideration as per sale deed to be full value of consideration. The profit so computed was declared under the head `long term capital gain’. The assessee had not disputed the stamp duty value adopted by the stamp valuation authorities.

In the course of assessment proceedings, the assessee was asked to explain the vast difference between the sale consideration and the stamp duty value of the properties sold. The assessee explained that the properties were agreed to be sold in the year 1997 and 1999 and the completion of sale was delayed due to delay in obtaining the requisite permissions from the Charity Commissioner and RBI and under UL(C&R) Act. The difference in value had arisen because of a long time gap between the date when the properties were agreed to be sold and the date of actual sale. The explanation offered by the assessee was substantiated with requisite evidence in the form of correspondence, permissions, etc. The AO worked out the profit by considering the stamp duty value to be consideration and following the past practice assessed the income under the head `profits and gains of business or profession’.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that profit on sale was to be charged to tax under the head `Capital Gains’ and section 50C applied to the transaction under consideration. He rejected the contention that the agreement was entered into before the date of section 50C becoming effective. He held that section 50C applied to transactions after 01-04-2003.

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that in the facts and circumstances involved in the case of the assessee, provisions of section 50C have to be read with reference to the date of agreement instead of date of transfer and accordingly the value of the properties made for the purpose of stamp duty as on date of agreement should be taken and not as on the date of execution of conveyance deed.

Held:

The Tribunal noted that (i) for a property agreed to be sold to Avadh Narayan Singh & Ors on 12-03-1999 for Rs. 25 lakh the entire consideration was received upto 03-05-1999 and assessee had moved an application to the Charity Commissioner for sale on 05-04-1999; and (ii) the delay in executing the final conveyance of the property was because of delay in getting the required clearances from the concerned authorities, which was beyond the control of the assessee. It also noted that in respect of the other property the agreement was executed on 07-02- 1997 and the consideration of Rs 10 lakhs was partly received by the assessee on the date of agreement itself. The Tribunal mentioned that the delay in execution of conveyance was satisfactorily explained with reference to sequence of events that occurred with the supporting evidence which was beyond the control of the assessee.

The Tribunal noted that in the case of M. Siva Parvathi & Ors vs. ITO (37 DTR 124)(Vishakapatnam)(ITAT) similar issue arose. In the said case both the parties confirmed having entered into a sale agreement in August 2001 and the vendors had received part payment of total consideration in August 2001 itself. The delay in registering the sale deed was on account of the fact that vendors were under an obligation to obtain urban land clearance permission and were also under an obligation to settle certain disputes and the explanation offered by the assessee was supported by documentary evidence. There was no material brought on record by revenue to show that there was any suppression of actual sale consideration. In these facts, the Tribunal held that the provisions of section 50C could not be applied to the sale agreement as the section was not available in the statute at the time when the transaction was initially entered into. The Tribunal held that the final registration of the sale agreement was only in fulfillment of the contractual obligation and the provisions, which did not apply at the time of entering into the transaction initially could not be applied at the time the transaction was completed. It held that section 50C cannot be applied to sales agreement entered into before the introduction of the said section especially when delay in registration of sale deed was sufficiently explained and there was no suppression of actual consideration.

Following the above mentioned decision, the Tribunal held that section 50C cannot be applied to the sale agreement entered into before the introduction of the said section especially when delay in registration of sale deed was sufficiently explained and there was no suppression of actual consideration. The addition made by the AO and confirmed by CIT(A) was deleted. The appeal filed by the assessee was allowed.

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Nirav Shah

2013-TIOL-827-ITAT-PUNE GKN Sinter Metal Pvt. Ltd. vs. ACIT ITA No. 3465/M/2010 Assessment Years: 2003-04. Date of Order: 06-05-2013

Section 37 – Payment of pre-closure charges, though not a contractual obligation, to the Bank, in respect of debentures issued are expenses incurred by the assessee for the purpose of business and are allowable. By incurring pre-closure charges the assessee is relieved of further financial obligation.

Facts :

The assessee with an objective to raise funds for general corporate purposes issued unsecured, redeemable, non-convertible debentures to Mahindra & Mahindra Ltd on private placement basis. The principal terms and conditions of the placement specified only the Tenor/Maturity & Coupon Rate. There was no mention for payment of any pre-closure charges. Mahindra & Mahindra Ltd. sold these debentures to Deutsche Bank. Pending utilisation of funds, the proceeds of debenture issue were deposited in short term deposit with Standard Chartered Bank. Upon realising that the company is paying heavy interest on debentures for a period of 3 years, the debentures were cancelled and money paid back to Deutsche Bank. However, in the process, the Company had to pay pre-payment charges of Rs. 43,34,000.

The Assessing Officer (AO) held that the expenditure was not contractual but voluntary since there was no provision in the terms of issue of debentures for payment of pre-closure charges. He held the payment to be discretionary decision by the assessee who was not under any legal compulsion to make the payment. He disallowed the pre-payment charges.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO by relying on the decision of the Punjab & Haryana High Court in the case of Associated Hotels of India Ltd. vs. CIT (231 ITR 134)(P & H). Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that there was no dispute about genuineness of the expenditure. The only dispute was as regards its allowability. The Tribunal did not find any merit in the contentions on behalf of the revenue that there was no contractual obligation to pay the amount under consideration. Also, that the assessee had not incurred the expenditure for raising the money but had incurred it to return the money already raised and that issue of debentures is not the business of the assessee. The Tribunal found merit in the contention of the assessee that the assessee had to incur the expenditure to relieve it from further financial burden and this was a commercial decision.

The Tribunal held that the decision relied upon by the CIT(A) was not applicable to the facts of the present case. In that case the debentures were redeemed before maturity by paying bonus and fresh debentures were issued before maturity. In the instant case, the assessee has not issued fresh debentures after prepayment of the debentures.

The Tribunal held that the sum of Rs. 43,34,000 incurred by the assessee towards prepayment charges in respect of debentures issued to be an expenditure incurred for the purpose of business and therefore allowable.
This ground was decided in favour of the assessee.

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Nirav Shah

Sections 4, 28(i), 36(1) (iii) and 37(1) — Gross interest received from the Income-tax Department and not the net interest remaining after the set-off of the interest paid to the Income-tax Department is to be included in assessable income.

(2012) 143 TTJ 528 (Pune) (TM)
Sandvik asia Ltd. v. Dy. CiT
A.Y.: 1992-93. Dated: 13-9-2011

Sections 4, 28(i), 36(1) (iii) and 37(1) — Gross interest received from the income-tax Department and not the net interest remaining after the set-off of the interest paid to the income-tax Department is to be included in assessable income.

The assessee had credited only the net interest received from the Income-tax Department i.e., the interest paid to the Income-tax Department was deducted from the interest received on income-tax refund. This claim was made by the assessee on the basis of the following two Tribunal decisions:

(1) R. N. Aggarwal v. ITO, [ITA Nos. 3913 & 3914 (Delhi) of 1980 and 620 (Delhi) of 1981, dated 21-8-1981].

(2) Cyanamide India Ltd. v. ITO, [ITA No. 4561 (Bom.) of 1982, dated 23-5-1984].

The Assessing Officer rejected the assessee’s claim. He was of the view that interest charged on late payment of tax by the Department is not a business expense deductible for the purpose of computing income under the Income-tax Act and, therefore, interest charged by the Department was added to the income of the assessee. The CIT(A) directed the Assessing Officer to tax only the net interest in view of the above Tribunal decisions. Before the Tribunal, there was a difference of opinion between the two Members and the matter was referred to the third Member u/s.255(4). The third Member, did not concur with the decisions of the Tribunal (stated above) and relying on the decisions in the following cases, held that the assessee is assessable to tax on the gross interest received from the Department:

(1) Bharat Commerce and Industries Ltd. v. CIT, (1998) 145 CTR (SC) 340/(1998) 230 ITR 733 (SC).

(2) CIT v. Dr. V. P. Gopinathan, (2001) 166 CTR (SC) 504/(2001) 248 ITR 449 (SC).

(3) Aruna Mills Ltd. v. CIT, (1957) 31 ITR 153 (Bom.).

The third Member noted as under:

(1) Interest paid cannot be allowed u/s.36(1) (iii) because there is no borrowing by the assessee. There can be no two opinions on the same.

(2) The interest cannot also be claimed as a deduction u/s.37(1). Thus, the interest paid to the Income-tax Department under the provisions of the Act cannot be deducted while computing the business income of the assessee.

(3) The assessee’s argument based on the theory of real income has to be rejected. The rule of netting does not apply to the instant case and the assessee is assessable on the gross interest.

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Nirav Shah

Sections 80, 139(1), 139(3) and 139(5) — Where the assessee had filed original return u/s.139(1) declaring positive income and claim for carry forward of long-term capital loss was made only in the revised return filed u/s.139(5), carry forward of loss cannot be denied.

(2012) 143 TTJ 166 (Mumbai)
Ramesh R. Shah v. ACIT
A.Y.: 2005-06. Dated: 29-7-2011

Sections 80, 139(1), 139(3) and 139(5) — Where the assessee had filed original return u/s.139(1) declaring positive income and claim for carry forward of long-term capital loss was made only in the revised return filed u/s.139(5), carry forward of loss cannot be denied.

The assessee filed original return of income showing positive income on 28-10-2005.
This return was processed u/s.143(1) on 15-12-2005. Thereafter, on 28-3-2006, he filed a revised return claiming longterm capital loss Rs.182.27 lakh which he claimed was to be carried forward u/s.74. The Assessing Officer, relying on the decision in the case M. Narendranath (Indl.) v. ACIT, (2005) 94 TTJ 284 (Visakha) and as per the provisions of section 80, declined to allow carry forward of the long-term capital loss.

The CIT(A) upheld the order passed by the Assessing Officer. The Tribunal allowed the carry forward of the long term capital loss claimed by the assessee in the revised return of income. The Tribunal noted as under:

(1) Correct interpretation of section 80, as per the language used by the Legislature, is that condition for filing revised return of loss u/s.139(3) is confined to cases where there is only a loss in the original return filed by the assessee and no positive income and assessee desires to take benefit of carry forward of the said loss.

(2) Section 80 is a restriction on the right of the assessee when the assessee claims that he has no taxable income but only a loss, but does not file the return of income declaring the said loss as provided in s.s (3) of section 139.

(3) The Legislature has dealt with two specific situations (i) u/s.139(1), if the assessee has a taxable income chargeable to tax, then he has a statutory obligation to file the return of income within the time allowed u/s.139(1) and (ii) so far as section 139(3) is concerned, it only provides for filing the return of loss if the assessee desires that the same should be carried forward and set off in future. As per the language used in s.s (3) of section 139, it is contemplated that when the assessee files the original return, at that time, there should be loss and the assessee desires to claim the said loss to be carried forward and set off in future assessment years.

(4) Ss. (1) and (3) of section 139 provide for the different situations and there is no conflict in applicability of both the provisions as both the provisions are applicable in different situations.

(5) Once the assessee declares positive income in the original return filed u/s.139(1), but he subsequently finds some mistake or wrong statement and files a revised return declaring loss, then he cannot be deprived of the benefit of carry forward of such loss.

(6) In the present case, the assessee filed the return of income declaring the positive income and even in the revised return the assessee has declared positive income since the loss in respect of the sale of shares could not be set off inter-source or inter-head u/s.70 or 71.

(7) As per the provisions of s.s (5) of section 139, in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time-limit prescribed and, subsequently, files the revised return, then the revised return is treated as valid return.

(8) In the present case, as the assessee filed its original return declaring positive income and hence, subsequent revised return is also valid return and the assessee is entitled to carry forward of long-term capital loss. Therefore, there is no justification to deny the assessee the carry forward the loss.

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Nirav Shah

Waiver of interest: Section 220(2A) of Income-tax Act, 1961: A.Y. 1989-90: Power to waive should be exercised judiciously: Finding that all conditions for waiver were satisfied: Waiver of part interest is not valid.

[E. M. Joseph v. CCIT, 342 ITR 379 (Ker.)]

For the A.Y. 1989-90, the assessee made an application for waiver of interest of Rs.1,95,570 u/s.220(2A) of the Income-tax Act, 1961. The Chief Commissioner gave the finding that all the three conditions regarding genuine hardship to the assessee, default in tax being not due to the circumstances attributable to the assessee and the co-operation of the assessee were satisfied. However, the Chief Commissioner limited the waiver to an amount of Rs.24,408 which was the balance amount due from the assessee.

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

(i) The Commissioner had found that all the three conditions were satisfied. In the order, the Commissioner merely said that “payment of further interest will cause hardship to them” and did not state any reason for limiting or reducing the waiver.

(ii) The discretion has not been properly exercised by the Commissioner. His order was liable to be quashed to the extent it failed to consider waiver of the amounts already paid.

(iii) The Chief Commissioner was to pass fresh order in accordance with the observations.”

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Nirav Shah

Speculative loss: Section 73: A.Y. 1996-97: Service charges Rs.2.25 crore, share trading loss Rs.2.23 crore and dividend income Rs.4.7 lakh: Exception in Explanation to section 73 applicable: Assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).

[CIT v. Darshan Securities (P) Ltd., 249 CTR 199 (Bom.)]

For the A.Y. 1996-97, the assessee returned an income of Rs.2.25 crore from service charges, share trading loss of Rs.2.23 crore: and dividend income of Rs.4.7 lakh. The assessee claimed that in computing the gross total income for the purpose of Explanation to section 73 of the Income-tax Act, 1961, the income from service charges have to be adjusted against the loss in share trading. The Assessing Officer did not accept the claim and disallowed the share trading loss as speculation loss. The Tribunal accepted the assessee’s claim.

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

(i) Explanation to section 73 is designed to define a situation where a company is deemed to carry on speculation business. It is only thereafter that s.s (1) of section 73 can apply.

(ii) In computing the gross total income the normal provisions of the Income-tax Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation. In the present case, both the income from service charges of Rs.2.25 crore and the share trading loss of Rs.2.23 crore, would have to be taken into account in computing the income under the head business, both being sources under the same head.

(iii) The assessee had a dividend income of Rs.4.7 lakh. The Tribunal was therefore justified in coming to the conclusion that the assessee fell within the purview of the exception carved out in the Explanation to section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of section 73(1).”

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Nirav Shah

Set-off of loss of EOU: Exemption or deduction: Sections 10B, 70, and 80-IA(5) of Incometax Act, 1961: A.Y. 2005-06: Section 10B as amended w.e.f. 1-4-2001 is not a provision for exemption but a provision for deduction: Loss sustained from such an eligible unit can be set off against business income from other units.

[CIT v. Galaxy Surfactants Ltd., 343 ITR 108 (Bom.); 249 CTR 38 (Bom.)]

In the previous year relevant to the A.Y. 2005-06, the assessee’s EOU which was eligible for deduction u/s.10B of the Income-tax Act, 1961 incurred loss. The assessee claimed the set-off of the said loss against the profits of the other units. The Assessing Officer disallowed the claim for set-off of the loss holding that the loss sustained by the eligible units cannot be set off against the profits of the other units. The Tribunal allowed the assessee’s claim.

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

(i) Section 10B as it stands after substitution by the Finance Act, 2000 w.e.f. 1-4-2001, is not a provision for exemption, but a provision which enables an assessee to claim a deduction.

(ii) The loss which is sustained by an eligible unit can be set off against the income arising from other units under the same head of profits and gains of business or profession.”

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Nirav Shah

Revision: Section 263 of Income-tax Act, 1961: A.Y. 1996-97: Limitation: Order of assessment does not merge in orders of reassessment as regards issues not forming subject-matter of reassessment: Limitation for revision of assessment in respect of those issues runs from date of original assessment order and not from date of reassessment orders.

[CIT v. ICICI Bank Ltd., 343 ITR 74 (Bom.)]

For the A.Y. 1996-97, the assessment order u/s.143(3) of the Income-tax Act, 1961 was passed on 10-3-1999 allowing the deduction claimed u/ss. 36(1)(vii) and (viia) and the foreign exchange rate difference. Subsequently, a reassessment order u/s.147 was passed on 22-2-2000 reworking the deduction u/s.80M. An appeal against the order u/s.143(3) was decided by the Commissioner (Appeals) on 28-3-2001. Thereafter, another reassessment order u/s.147 was passed on 26-3-2002, for reworking of the deduction u/s.36(1) (viii). On 28-3-2003, the Commissioner passed an order u/s.263 for disallowance u/s.36(1)(vii) and (viia) and in respect of foreign exchange rate difference. The Tribunal set aside the order as barred by limitation.

On appeal by the Revenue, it was contended that when the Assessing Officer passed the reassessment order on 26-3-2002, the Explanation to clause (vii) of section 36(1) had been introduced on the statute book and the Assessing Officer was duty bound to apply the law as amended, which he failed to do, and that Explanation 3 to section 147 of the Act having been amended to provide that the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment and coming to his notice subsequently in the course of the proceedings.

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

(i) Where the jurisdiction u/s.263(1) is sought to be exercised with reference to an issue which is covered by the original assessment order u/s.143(3) and which does not form the subject-matter of reassessment, limitation must necessarily begin to run from the order u/s.143(3).

(ii) Neither in the first reassessment, nor in the second reassessment was any issue raised or decided in respect of the deductions u/s.36(1) (vii), (viia) and the foreign exchange rate difference. The order of the Commissioner u/s.263(2) had not been passed with reference to any issue which had been decided either in the order of the first reassessment or in the order of second reassessment, but sought to revise issues decided in first order of assessment u/s.143(3) dated 10-3-1999.

(iii) The order dated 10-3-1999, did not merge with the orders of reassessment in respect of issues which did not form the subject-matter of the reassessment. Consequently, Explanation 3 to section 147 would not alter that position. Explanation 3 only enables the Assessing Officer, once an assessment is reopened, to assess or reassess the income in respect of any issue, even an issue in respect of which no reasons were indicated in the notice u/s.148(2). This, however, will not obviate the bar of limitation u/s.263(2). The invocation of the jurisdiction u/s.263(2) was barred by limitation.”

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Nirav Shah

Export profit: Deduction u/s.80HHC: A.Y. 2001-02: Assessee purchasing goods from one foreign country and transporting it to another foreign country: No condition that exports must be from India: Receipt on sale proceeds in convertible foreign exchange: Assessee entitled to deduction u/s.80HHC.

[Anil Kumar v. ITO, 343 ITR 30 (Karn.)]

The assessee was engaged in purchase and sale of non-ferrous metals, etc. The purchases were made from one country and exported to another country at a margin of profit by arranging direct shipment from the selling country to the purchasing country. The bills were settled through Bank of Baroda in India. The proceeds were through convertible foreign currency and payments were made on convertible foreign currency. For the A.Y. 2001-02, the assessee claimed deduction u/s.80HHC of the Income-tax Act, 1961 in respect of such exports. The Assessing Officer and the Tribunal held that the assessee was not entitled to the deduction. The Tribunal held that to be eligible for the benefit of section 80HHC, foreign exchange is to be earned by exporting goods from India.

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

(i) Section 80HHC is an incentive to an assessee to carry on export business so that in turn, the country earns foreign exchange. While interpreting this provision, if two views are possible, it is settled law that the view which is favourable to the assessee is to be preferred by the courts.

(ii) Now section 80HHC provides that to an assessee who is engaged in the business of export out of India of any goods or merchandise, to which the section applies deduction to the extent of profits referred to in s.s (1)(b) is allowed. In the entire provision, there are no express words which provide that the export of such goods is to be from India.

(iii) The Explanation read with the main section does not in any way indicate that, to be eligible for the benefit of deduction u/s.80HHC, the goods or merchandise has to emanate from India. In section 80HHE the words used are ‘export out of India’. But to be eligible for deduction under the aforesaid provision mere export out of India is not sufficient. What is to be exported out of India should be from India to a place outside India by any means. Such a wording is conspicuously missing in section 80HHC.

(iv) The stress in section 80HHC is only on earning of foreign exchange, not the goods and merchandise to be exported out of India. They do not necessarily have to be from India. Therefore, the law does not require the goods to be physically exported out of India. There need not be a two-way traffic of bringing the goods from a foreign country into the Indian shores and thereafter exporting those goods from Indian shores.”

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Nirav Shah

Export of computer software: Exemption/ deduction u/s.10A r.w.s 80-I: A.Ys. 1995-96 to 1998-99: No material to show that assessee indulged in arrangement with foreign buyer so as to produce higher profits to assessee: AO not entitled to presume such arrangement and determine reasonable profits.

[CIT v. H. P. Global Soft Ltd., 342 ITR 263 (Karn.)]

The assessee company carried on the business of manufacture of hardware and software and exported its products. For the A.Ys. 1995-96 to 1998-99, the assessee claimed exemption u/s.10A in respect of two units. The Assessing Officer took the view that the exemption claimed in respect of the two units involved in creation of software was not merely unusually high in comparison to the assessee’s other business, but having regard to the close relationship between the assessee company and its foreign buyer the provisions of section 80-I(9) were to be applied in terms of 10A(6) of the Act. He, therefore, allowed exemption at the percentage of profit in respect of the entire turnover of the assessee inclusive of the export turnover. The Tribunal allowed the assessee’s claim.

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

(i) While there did exist a close connection between the assessee and the foreign buyer the other requirement as to the nature of the arrangement and the manner of rejection of the profits margin due to export sales as inflated profits attributable to export activities, had not been disclosed by the Assessing Officer.

(ii) The finding of the Appellate Authority was that the profit margin as revealed by the assessee was a reasonable profit margin in comparison to other similar units.

(iii) There being no material to indicate that the course of business had been so arranged as to inflate profits, i.e., to show a higher profit margin to the two export units of the assessee, the Tribunal was justified in holding that the Assessing Officer could not presume the existence of close connection or arrangement for the purpose of invoking section 80-I(9) of the Act.”

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Nirav Shah

Business expenditure: Section 37(1): A.Y. 1997-98: Expenditure on higher education of two directors: Disallowance on ground that directors are children of managing director: Not proper.

[Krishna Fabrications Ltd. v. JCIT, 343 ITR 126 (Karn.)]

The assessee company was engaged in the business of manufacture and supply of automobile components. The assessee sponsored two of its directors for higher education in connection with the specialised intensive training in the field of general management, marketing, finance and information technology, including project strategy, with a condition that after securing higher education, they should serve the assessee as directors. The claim for deduction of the expenditure was disallowed by the Assessing Officer and the Tribunal on the ground that they were the children of the managing director.

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

(i) Just because the two directors were the children of the managing director of the company, that could not be the ground for the Assessing Officer to reject the claim of the assessee, until and unless it was established that these two children of the managing director, sponsored to acquire higher education were not connected with the business of the assessee, even though they were directors.

(ii) Since the issue had not been considered by the Assessing Officer and such a mistake was committed by the Commissioner (Appeals) as well as the Tribunal, the matter was remanded to the Assessing Officer for fresh consideration.”

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Nirav Shah

Business expenditure: Bad debts: Section 36(1)(vii) and 36(2) of Income-tax Act, 1961: A.Y. 1998-99: Assessee share-broker: Nonrecovery of amount receivable from clients against purchase of shares: Non-recoverable amount is bad debt deductible u/s.36(1)(vii) r.w.s 36(2).

[CIT v. Shreyas S. Morakhia, 249 CTR 30 (Bom.); 19 Taxman.com 64 (Bom.)]

The assessee was a share-broker. For the A.Y. 1998-99, the assessee claimed deduction of Rs. 28.24 lakh representing an amount due to him by his clients on account of transactions of shares effected by the assessee on their behalf, u/s.36(1)(vii) claiming that the amount has become irrecoverable. The Assessing Officer disallowed the claim. The CIT(A) allowed the assessee’s claim. The Revenue filed appeal before the Tribunal and contended that since the assessee had credited only the amount of the brokerage to the P&L a/c, the amount of bad debts claimed was not taken into account in computing the total income of the relevant previous year or any earlier previous year and accordingly, the condition stipulated in section 36(2) was not satisfied. The Tribunal upheld the decision of the CIT(A).

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

(i) Brokerage from the transaction of the purchase of shares has been taxed in the hands of the assessee as its business income. Brokerage as well as the value of the shares constitute a part of the debt due to the assessee, since both arise out of the same transaction.

(ii) Value of the shares transacted by the assessee as a stock-broker on behalf of his clients is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. Brokerage having been credited to the P&L a/c of the assessee, it is evident that a part of the debt is taken into account in computing the income of the assessee. Since both form a component part of the debt, the requirements of section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee.

(iii) The assessee was therefore entitled to deduction u/s.36(1)(vii) if the Act.”

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Nirav Shah

Assessment: Change of status: Validity: A.Y. 1972-73: If the status of the assessee is required to be modified, the only option is to assess the income in the appropriate status, if permitted by law: CIT(A) modifying the status of assessee: Not valid.

[Gutta Anjaneyulu v. CIT, 249 CTR 106 (AP)]

For the A.Y. 1972-73, assessment was made in the status of AOP consisting of 3 persons.

In appeal, the CIT(A) modified the status from AOP to BOI comprising 2 persons. The Tribunal upheld the decision of the CIT(A). On appeal by the assessee, the Andhra Pradesh High Court reversed the decision of the Tribunal and held as under:

“If the status of the assessee is required to be modified, the only option available to the ITO is to assess the income in the appropriate status, if permitted by law, by issuing a notice to the assessee in that particular status. The CIT(A) was not justified in modifying the status from AOP to BOI.”

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Nirav Shah

Appeal to CIT(A): Additional ground: A.Y. 2001-02: Claim for benefit of proviso to section 112(1) not made in the return: Could be accepted by CIT(A): Assessee is entitled to raise the legal issue before the first Appellate Authority, which possessed co-terminus powers similar to the AO.

[Smt. Raj Rani Gulati v. CIT, 249 CTR 51 (All.)]

For the A.Y. 2001-02, the assessee had not made the claim for the benefit of proviso to section 112(1) , while computing the capital gains tax. The claim was first time made before the CIT(A). The CIT(A) allowed the assessee’s claim. By relying on the ratio laid down by the Supreme Court in the case of Goetze India Ltd. v. CIT, (2006) 204 CTR 182 (SC); (2006) 284 ITR 323 (SC) the Tribunal allowed the appeal filed by the Department and set aside the order of the CIT(A).

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

(i) Needless to mention that the proviso to section 112(1) was introduced w.e.f. 1-4-2000 by the Finance Act, 1999. In other words, it was introduced during the assessment year under consideration and the assessee was not aware about latest amendment introduced by the Finance Act, 1999 w.e.f. 1-4-2000.

(ii) Though ignorance of law has no excuse, but it can be excused in tax matters. It is not expected that the Department shall take the advantage of the assessee’s ignorance as per CBDT Circular No. 14(XL-35) of 1955, dated 11- 4-1955. Even under the bona fide belief, the assessee has shown the long-term capital gain @ 20%, but it was expected from the Assessing Officer to know the latest amendment.

(iii) The mistake might have been corrected by passing an order u/s.154. The question of law which arose from the fact as found by the IT authority and legal issue can be raised at any stage. The assessee was entitled to raise the legal issue before the first Appellate Authority, which possessed co-terminus powers similar to the Assessing Officer.

(iv) The CIT(A) has rightly adjudicated the statutory right of the assessee and directed to allow the longterm capital gain at 10%.”

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Nirav Shah

2013-TIOL-800-ITAT-MUM ITO (TDS) vs. Jet Airways (india) Ltd. ITA No. 7439, 7440 and 7441/Mum/2010 Assessment Years: 2009-10, 2007-08 and 2008-09. Date of Order: 17-07-2013

S/s. 194H, 195(3) and Rule 29B(5) – Section 194H does not apply to amounts retained by bank while making payments to assessee for tickets booked through credit card. Amounts retained by the bank are fees and not commission. Certificates issued u/s. 195(3) are effective for the concerned financial year i.e. from the first day of the financial year and not with effect from the date of issuance thereof.

Facts I:

On 05-01-2009, there was a survey action u/s. 133A of the Act on the assessee. The assessee engaged in the business of aviation i.e. transportation of passengers and goods by air, received payments from banks for tickets booked through credit cards. The assessee received from the banks only the net amounts after retention of service charges. The Assessing Officer (AO) noted that the amounts retained by the banks for the assessment years 2007-08, 2008-09 and 2009-10 was Rs. 1,21,61,091; Rs. 4,23,31,210; and Rs. 18,24,57,871 respectively. The AO rejected the contention of the assessee that the amounts retained by the banks are in the nature of discounting charges in consideration of the immediate payment made by the banks to the assessee. He held that these amounts constituted commission u/s. 194H and since the assessee had not deducted tax on these amounts he held the assessee to be an assessee-in-default and directed the assessee to pay the amount of TDS along with interest u/s. 201(1A) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who decided the issue in favor of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Facts II:

Two banks viz. American Express Bank Ltd. and Citibank NA had obtained from the AO a certificate u/s. 195(3) for receiving payments without deduction of tax at source. The certificate mentioned that it was applicable for the financial year. However, the AO held that the certificate would apply only from the date of its issuance though the specified period mentioned in the certificate is the financial year.

The CIT(A) held that the AO is not justified in applying the certificate from the date of its issuance and bringing to tax the amount retained by the bank to tax for the concerned month by applying the provisions of section 194H of the Act. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held I:

The Tribunal agreed with the contention on behalf of the assessee that the issue is square covered in favor of the assessee by the decision of the Jaipur Bench of the Tribunal in the case of M/s. Gems Paradise vs. ACIT (ITA No. 746/Jp/2011)(AY 2008-09)(order dated 02-12-2012) which was followed by the same bench of the Jaipur Tribunal in Shri Bhandari Jewellers vs. ACIT (ITA No. 746/Jp/2011)(AY 2008-09)(order dated 02- 12-2012). It also observed that similar issue was also considered by the Bangalore Bench of the Tribunal in the case of Tata Teleservices Ltd. vs. DCIT (140 ITD 451)(Bang) which has been decided by following the decision of the Hyderabad Bench of the Tribunal in the case of DCIT vs. Vah Magna Retail (P) Ltd. (ITA No. 905/Hyd/2011)(AY 2007-08)(order dated 10-04-2012) where it has been held that payments made to the banks on account of utilisation of credit card facilities would amount to bank charges and not commission within the meaning of section 194H of the Act.

Following the ratio laid down by these decisions, the Tribunal held that section 194H is not applicable to amounts retained by the bank out of payments made by it to the assessee for tickets booked by credit card.

Held II:

The Tribunal observed that the assessee had filed copies of certificates issued by AO u/s. 195(3)( dated 27-04-2006, 30-03-2007, 31-03-2008 and 31-03-2008 which were addressed to Citibank NA for financial year 2006-07 to 2008-09 respectively. It noted that the said certificates specifically mention that the said bank is authorised to receive the payments, interest without deduction of income-tax u/s. 195(1) in the respective financial years. The Tribunal considered Rule 29B(5) of the Rules and held that the certificates issued u/s. 195(3) of the Act are applicable for the concerned financial years and will not be effective only from the date of issuance thereof. The Tribunal upheld the order of CIT(A) for all the three assessment years.

The appeals filed by the department were dismissed.

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Nirav Shah

Export — Deduction u/s.80HHC — Only ninety percent of the net amount of any receipt of the nature mentioned in clause (1), which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining ‘profits of the business’ of the assessee under Explanation (baa) to section 80HHC.

[ACG Associated Capsules P. Ltd. v. CIT, (2012) 343 ITR 89 (SC)]

For the A.Y. 2003-04, the assessee filed a return of income claiming a deduction of Rs.34,44,24,827 u/s.80HHC of the Act. The Assessing Officer passed the assessment order deducting 90% of the gross interest and gross rent received from the profits of business while computing the deduction u/s.80HHC and accordingly restricted the deduction u/s.80HHC to Rs.2,36,25,053. The assessee filed an appeal against the assessment order before the Commissioner of Income-tax (Appeals), who confirmed the order of the Assessing Officer excluding 90% of the gross interest and gross rent received by the assessee while computing the profits of the business for the purposes of section 80HHC. Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). The Tribunal held, relying on the decision of the Delhi High Court in CIT v. Shri Ram Honda Power Equip, (2007) 289 ITR 475 (Delhi), that netting of the interest could be allowed if the assessee is able to prove the nexus between the interest expenditure and interest income and remanded the matter to the file of the Assessing Officer. The Tribunal also remanded the issue of netting of the rent to the Assessing Officer with the direction to find out whether the assessee has paid the rent on the same flats against which rent has been received from the staff and if such rent was paid, then such rent is to be reduced from the rental income for the purpose of exclusion of business income for computing the deduction u/s.80HHC. Against the order of the Tribunal, the Revenue filed an appeal before the High Court and the High Court has directed that on remand the Assessing Officer will decide the issue in accordance with the judgment of the High Court in CIT v. Asian Star Co. Ltd., (2010) 326 ITR 56 (Bom.) in which it has been held that while determining the profits of the business as defined in Explanation (baa) to section 80HHC, 90% of the gross receipts towards interest and not 90% of the net receipts towards interest on fixed deposits in banks received by the assessee would be excluded for the purpose of working out the deduction u/s.80HHC of the Act.

Against the order of the High Court, the assessee filed a Special Leave Petition before the Supreme Court wherein leave was granted. The Supreme Court observed that Explanation (baa) states that ‘profits of the business’ means the profits of the business as computed under the head ‘profits and gains of business or profession’ as reduced by the receipts of the nature mentioned in clauses (1) and (2) of Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the heads ‘profits and gains of business or profession’ in accordance with the provisions of sections 28 to 44D of the Act. In the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business u/s.28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable u/s.30 to u/s.44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head ‘profits and gains of business or profession’ from which deductions are to made under clauses (1) and (2) of Explanation (baa).

Under clause (1) of Explanation (baa), 90% of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head ‘profits and gains of business or profession’. The expression ‘included any such profits’ in clause (1) of Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt, which are included in profits of the business as computed under the head ‘profits and gains of business or profession’.

The Supreme Court therefore held that only 90% of the net amount of any receipt of the nature mentioned in clause (1), which is actually included in the profits of the assessee is to be deducted form the profits of the assessee for determining ‘profits of the business’ of the assessee under Explanation (baa) to section 80HHC. For this interpretation of Explanation (baa) to section 80HHC of the Act, the Supreme Court relied on its judgment of the Constitution Bench in Distributors (Baroda) P. Ltd. v. Union of India, (1985) 155 ITR 120 (SC).

Since the High Court had set aside the order of the Tribunal and directed the Assessing Officer to dispose the issue in accordance with the judgment of the Bombay High Court in CIT v. Asian Star Co. Ltd., (2010) 326 ITR 56 (Bom.), it examined the reasons given by the High Court in its judgment and noted the fallacies therein.

In the result, the Supreme Court allowed the appeal and set aside the impugned order of the High Court and remanded the matter to the Assessing Officer to work out the deductions from rent and interest in accordance with this judgment.

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Nirav Shah

[2012] 137 ITD 163 (Panaji) DCIT vs. Jayalakshmi Mahila Vividodeshagala Souharda Sahakari Ltd. AY 2007-08 to 2009-10 Dated: 30th March, 2012

Section 80P and section 5(b), 5(cci) and 5(ccv) of Banking Regulation Act,1959–assessee society engaged in business of providing credit facilities to its members and collecting deposits–section 80P was amended w.e.f. 01-04-2007 and hence AO denied deduction as assessee was a co-operative bank– Held that principal business of assessee was not to accept deposits from the public for the purpose of lending or investment—hence, principal business was not banking business–assessee society entitled to deduction u/s. 80P(2)(a)(i).

Facts:
The assessee-society was engaged in business of providing credit facilities to its members by granting loans for various purposes. It also collected deposits. It availed deduction u/s. 80P. However, section 80P was amended w.e.f. 01-04-2007 whereby s/s. (4) was introduced which denied the deduction u/s. 80P to co-operative banks (other than primary agricultural credit society or a primary rural development bank). The AO denied deduction to assessee holding assessee as being a co-operative bank. The CIT(A) allowed deduction to assessee.

Held:
As per explanation to s/s. (4) of 80P, co-operative bank as defined in section 5(cci) of the Banking Regulation Act, 1959 means a state co-operative bank, a central co-operative bank and a primary cooperative bank. Assessee is not a state or central co-operative bank. The primary co-operative bank as defined in section 5(ccv) means a co-operative society (other than agricultural credit society) (1) the primary object or principal business of which is transaction of banking business, (2) the paid-up share capital and reserves of which are not less than one lakh of rupees and (3) the bye-laws of which do not permit admission of any other co-operative society as a member. The conditions No. (2) and (3) are applicable to assessee.

Banking business as defined u/s. 5(b) means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

Going through the aims and objects of the assessee society, it is observed that none of the aims and objects allows the assessee to accept deposits of money from the public for the purpose of lending or investment. The assessee is therefore held as not to be a primary co-operative bank and in consequence thereof, it cannot be a co-operative bank as defined in the Banking Regulation Act, 1949. Thus the assessee is entitled to deduction u/s. 80P.

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Nirav Shah

S/s. 2(15), 12A, 12AA(3) – In proceedings u/s. 12AA(3) it is not open to the DIT(E) to re-examine the objects of the trust to see if the same were charitable in nature.

9. 2013-TIOL-256-ITAT-BANG
Kodava Samaj vs. DIT(e)
ITA No. 200/Bang/2012
Assessment Year: 2009-10.
Date of Order: 08-02-2013

S/s. 2(15), 12A, 12AA(3) – In proceedings u/s. 12AA(3) it is not open to the DIT(e) to re-examine the objects of the trust to see if the same were charitable in nature.

Facts
The assessee, a society registered under the Societies Registration Act, was granted certificate of registration u/s. 12A vide order dated 27-06- 1980. As per the Memorandum of Association, the main objects for which the assessee was formed were to preserve, protect and maintain, the traditional customs, culture, heritage and language of the Kodavas; to promote and advance the social, cultural, economic, educational, physical and spiritual progress and development of the members of the Samaja; etc. The DIT(E), in view of the proviso to section 2(15) which came into effect from 01-04-2009, was of the view that the certificate of registration granted to the assessee u/s. 12A should be cancelled by invoking the provisions of section 12AA(3), because, according to him, the assessee society was carrying on activity in the nature of trade, commerce or business. He held this view for the reason that the assessee was running schools & colleges but its predominant object was not education. Also, the assessee was running a recreation club having a liquor bar and provided tables for playing cards. He held that such activities cannot be called “charitable”. He also held that the assessee cannot take the plea that it is a charitable organisation since it is running a school and surplus, if any, generated from other activities is utilised for the development of education. For these reasons, the DIT(E) cancelled the registration by passing an order u/s 12AA(3).

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal noted that the power to cancel registration already granted u/s. 12AA of the Act is contained in section 12AA(3) of the Act which states that the registration which has already been granted can be cancelled only in two situations mentioned in the section viz. (i) that the activities of the trust or institution are not genuine; and (ii) the activities of the trust or institution are not being carried out in accordance with the objects of the trust or institution. The Tribunal noted that there is no finding in the order of DIT(E) on the satisfaction of any of the two conditions mentioned in section 12AA(3). The Tribunal observed that from the facts noted by DIT(E) it does not follow that the activities of the trust are not genuine or that the activities are not being carried out in accordance with the objects. It also noted that the second proviso to the definition of “charitable purpose” provides that even if there are receipts from commercial activities below Rs. 25 lakh, it will still be considered to be a “charitable purpose”. It held that it is not open to the DIT(E) in an action u/s. 12AA(3) of the Act to examine the objects of the trust to see if the same were charitable in nature. That has already been done when registration was granted to the assessee u/s. 12AA(1) of the Act. It is not open to the DIT(E) to re-examine the objects of the trust in proceedings u/s. 12AA(3) of the Act. It noted that this proposition is supported by the following decisions, relied upon by the assessee –

(i) CIT v Sarvodaya Ilakkiya Pannai 343 ITR 300 (Mad)
(ii) Chaturvedi Har Prasad Educational Society v CIT 46 DTR (Lucknow)(Trib) 121
(iii) Bharat Jyoti v CIT 63 DTR (Lucknow)(Trib) 409. (iv) Karnataka Badminton Association v DIT(E) ITA No. 1272/Bang/2011, order dated 22.11.2012

The Tribunal quashed the order passed by DIT(E) u/s. 12AA(3).

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Nirav Shah

Section 271(1)(c) – Penalty cannot be levied when the dispute is not about the genuineness of the expenditure or the bonafides of the claim but only about the year of its allowability.

8. 2013-TIOL-265-ITAT-MUM
Silver Land Developers Pvt. Ltd. vs. ITO
ITA No. 8444/Mum/2010
Assessment Year: 2005-06.
Date of Order: 08-03-2013

Section 271(1)(c) – Penalty cannot be levied when the dispute is not about the genuineness of the expenditure or the bonafides of the claim but only about the year of its allowability.

Facts
The assessee company was engaged in the business of development of land and construction of buildings. In the course of assessment proceedings the assessee was confronted with certain expenses claimed by it in the return of income which were incurred in relation to projects which have not yet commenced and not in relation to the project whose income was offered for taxation. Upon being so confronted the assessee revised its return of income, though the revision was beyond the time limit prescribed in section 139, and disallowed a sum of Rs. 31,58,467. The AO, however, further found certain other expenses amounting to Rs. 6,47,000 which were not related to the project of the assessee in respect of which profits were offered for taxation but were relating to a project which had not yet commenced. The AO, disallowed Rs. 6,47,000 on account of expenses relating to project not yet commenced. He also initiated penalty proceedings. The CIT(A) confirmed the disallowance in quantum proceedings. The AO levied penalty in respect of total disallowance of Rs. 38,05,470 made on account of expenses relating to projects yet to be commenced by holding that the assessee has furnished inaccurate particulars of income.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held The Tribunal noted that the genuineness of the expenditure was not doubted by the AO and there was nothing in the orders of the lower authorities to doubt the bonafides of the assessee in claiming the said expenses as per the practice consistently followed. All the material particulars relating to the claim were furnished by the assessee and there was no allegation by the AO that such particulars were found to be incorrect or inaccurate. The Tribunal noted that the Supreme Court has in the case of Reliance Petro Products Ltd. observed that mere making of the claim, which is not sustainable in law, by itself will not amount to furnishing inaccurate particulars regarding the income of the assessee and merely because the assessee’s claim has not been accepted, penalty cannot be attracted specially when there is no allegation that any particulars filed by the assessee in relation to his claim were found to be incorrect or inaccurate. The Tribunal noted that the dispute was only relating to the year in which the said expenses are allowable and not about the very deductibility of the expenses as the genuineness was not doubted at any stage. Considering all these facts, the Tribunal held that the penalty cannot be levied. The Tribunal cancelled the penalty levied by the AO and confirmed by the CIT(A).

The appeal filed by the assessee was allowed.

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Nirav Shah

Sections 50C , 55(2)(b), 251(1)(c): Fair Market value as on 1st April 1981 should be adopted as cost of acquisition while computing the capital gains during the course of assessment even when the assessee has not filed a revised return for the said claim.

7. (2011) 133 ITD 172 (Mum)
Mrs. Gopi Shivani vs. ITO
A.Y 2005 -06
Dated: 30-11-2010

Sections 50C , 55(2)(b), 251(1)(c): Fair Market value as on 1st April 1981 should be adopted as cost of acquisition while computing the capital gains during the course of assessment even when the assessee has not filed a revised return for the said claim.

Facts
The assessee had sold office premises for a consideration of Rs. 21,00,000/-. While computing the capital gains for his return of income the assessee had taken the cost as on 1st September 1968 as the cost of acquisition i.e the original cost for which property was acquired.

During the course of assessment the A.O replaced the full value of consideration with the stamp duty value (i.e Rs. 42, 27,104) of the property for the purpose of section 50C .

The assessee then submitted a valuation report stating the value as on 01-04-1981 as Rs. 3,80,000. He filed a revised calculation of capital gains claiming indexed cost of acquisition to be Rs. 18,40,000.

The A.O rejected the claim on the ground that no revised return had been filed. The CIT(A) upheld the order of the A.O and rejected the claim of the assessee.

Aggrieved, the assessee filed an appeal to the Honourable ITAT.

Held
Section 55(2)(b) permits the assessee to adopt either the cost of acquisition or the fair market value as on 01-04-1981. The A.O chose to modify the capital gains calculation by replacing the full value of consideration with the stamp duty value ignoring the fact that the assessee had invested more than the capital gains derived in the NABARD bonds taking the original cost of acquisition.

Since the value under 50C was being increased and the capital gains sought to be reworked, the assessee chose to exercise the option given in the Act to adopt the fair market value. The A.O has not rejected the valuation by the registered valuer.

Thus, A.O had erred in not considering the claim of the assessee even without a revised return. Also CIT(A) had erred in not considering the claim of the assessee which is a legally permissible claim as per Section 251(1)(C) which empowers him to dispose of the appeal by passing any order as he deems fit.

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Nirav Shah

Penalty: Section 271(1)(c): Short term capital gains assessed as business income: Penalty u/s. 271(1)(c) not justified:

CIT vs. Amit Jain; 351 ITR 74 (Del):

The assessee had declared an income of Rs. 2,60,73,558/- from short term capital gains in the return of income. The Assessing Officer assessed it as income from business. He also levied penalty of Rs. 58,45,899/- u/s. 271(1)(c). The Tribunal deleted the penalty.

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

“i) The amount in question, which formed the basis for the Assessing Officer to levy penalty, was in fact truthfully reported in the return. In view of this circumstance, that the Assessing Officer chose to treat the income some other head could not characterise the particulars reported in the return as “inaccurate particulars” or as suppression of facts.

ii) Therefore, the Tribunal was not in error in deleting the penalty.”

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Nirav Shah

Export profit: Deduction u/s. 80HHC: A. Y. 2003-04: Computation: Scrap is by-product of manufacturing activity: There were no expenses which could be excluded from sale of scrap:

R. N. Gupta Co. Ltd. vs. CIT; 213 Taxman 85(P&H): 30 Taxman.com 424 (P&H):

The assessee is engaged in manufacturing of goods for export. In the process of manufacturing, the scrap is generated, which is a by-product of manufacturing activity. The assessee included the receipts on sale of scrap as business income for computing the deduction u/s. 80HHC of the Income-tax Act, 1961. The Assessing Officer rejected the claim for deduction in respect of scrap sales. The CIT(A) allowed the assessee’s appeal and also held that no expenditure is incurred in generation and sale of scrap. Accordingly, the whole of the sale proceeds was includible in the business profit. The Tribunal held that only the profit on sale of scrap is includible and estimated such profit at 7.5%.

On appeal by the assessee, the Punjab and Haryana High Court held as under:

“i) Mr. Katoch, learned counsel for the revenue has argued that the scrap value has to be included in the total turn-over but cannot be included in business profit as only the profit after deducting the expenses of generation of scrap can be added in the business profit.

ii) We find that the argument raised by Mr. Katoch is wholly untenable. The expenditure is incurred by the assessee not for generation of the scrap but for generation of the finished product. There is and cannot be any expenses which are incurred for generation of scrap. Scrap is by-product of the manufacturing activity. Therefore, there are no expenses which could be excluded from the sale of scrap.

iii) Since the question of law stands answered by this Court in favour of assessee in the above mentioned judgments, therefore, the first substantial question of law is answered in favour of the assessee and against the Revenue.”

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Nirav Shah

Educational Institution: Exemption u/s. 10(23C) (vi): A. Y. 2011-12: Institution should exist wholly for education: Government grant, incidental surplus, upgrading facilities of college including for purchase of library books and improvement of infrastructure: Not a ground for denial of exemption:

Tolani Education Society vs. DDIT(Exemption); 351 ITR 184 (Bom):

The assessee, an educational institution, made an application for approval for exemption u/s. 10(23C) (vi) of the Income-tax Act 1961. The Chief Commissioner rejected the application on the ground that the assessee was in receipt of the Government grant which formed a substantial part of the total receipt and, consequently, the case of the assessee would not fall within the purview of section 10(23C)(vi) for the reason that an institution which is wholly or substantially financed by the Government falls within the ambit of sub-clause (iiiab). Sub-clause (vi) applies to those institutions which do not fall within the ambit of sub-clause (iiiab) or sub-clause (iiiad). He was of the view that an institution which was in receipt of substantial grants from the Government would consequently not fall within the ambit of sub-clause (vi). The Chief Commissioner held that the fees which were collected by the assessee for the year ending 31-03-2011, would indicate that the assessee did not exist solely for educational purposes. He had also noted that the assessee had collected from students utility fees, project work fees, industrial visit fee and a magazine fee from which it was sought to be deduced that the assessee did not exist solely for educational purposes. Moreover, there was an increase in the asset base with the generation of surplus which indicated that the activities of the assessee were not devoted solely for educational purposes.

The Chief Commissioner held on that basis that the assessee existed for the purposes of profit. The Bombay High Court allowed the writ petition challenging the order and held as under:

“i) The Income-tax Act, 1961, does not condition the grant of an exemption u/s. 10(23C) on the requirement that a college must maintain the status quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption u/s. 10(23C).

ii) Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions. Knowledge in contemporary times is technology driven. Educational institutions have to modernise, upgrade and respond to the changing ethos of education. Education has to be responsive to a rapidly evolving society. The provisions of section 10(23C) cannot be interpreted regressively to deny exemptions.

iii) Though the Chief Commissioner inquired into the question for the purposes of his determination under sub-clause (vi) of section 10(23C), the requirement that an institution must exist solely for educational purposes and not for the purposes of profit is common both to sub-clause (iiiab) as well as sub-clause (iiiad). Hence, the grievance of the assessee was that while on the one hand the Chief Commissioner had held that sub-clause (vi) would not be applicable to an institution which was in receipt of substantial grants from the Government (such an institution being governed by sub-clause (iiiab)), at the same time, the finding that the assessee did not exist solely for educational purposes and not for the purposes of the profit would, in effect, not merely lead to the rejection of the exemption under sub-clause (vi) but would also affect the claim of the assessee to the grant of an exemption under sub-clause (iiiab) as well.

iv) The sole and dominant nature of the activity was education and the assessee existed solely for the purposes of imparting education. An incidental surplus which was generated, and which had resulted in additions to the fixed assets was utilised as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant.

v) The assessee was entitled to exemption u/s. 10(23C)(vi).”

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Nirav Shah

S/s. 32, – Depreciation is allowable on paintings which form part of furniture and fixture.

Section 40(a)(ia) is not applicable to a case where tax has been deducted u/s. 194C instead of u/s. 194I or u/s. 194J.

Facts I:

The assessee was in the business of production and distribution of advertising films. It also provided other assistance like making available locations, equipments, models and crew to the foreign as well as domestic companies. The assessee claimed depreciation on certain paintings purchased by it on the ground that these are utilised in the said preparation/advertising films, etc.

The AO was of the view that the presence of paintings is immaterial for the conduct of business. He, accordingly, disallowed depreciation claimed by the assessee on paintings. Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held I:
The Tribunal agreed with the contentions made by the assessee viz. that hiring of the painting for original shoots was unaffordable. Considering the nature of the assessee’s business, they have purchased and utilised the paintings which were either hung in the office or given to the producer for the original shoots, or used in various settings. Therefore, the paintings were also part of furniture. The Tribunal relied on the decision of Chennai Bench of ITAT in the case of Tribunal news Burnside Investments & Holdings Ltd. vs. DCIT (61 ITD 601) where it was held as under

“From the dictionary meaning of the word `furniture’ it is clear that all articles of convenience or decoration used for the purpose of furnishing a place of business or an office are articles of furniture. In the instant case, there was no dispute that these paintings were used as decorations in the office and the office was used for the purpose of business. Therefore, these paintings constitute interior decoration to give a good look to the place of business. Therefore, the assessee was entitled to depreciation on these paintings.”

Following the ratio of the above mentioned decision, the Tribunal decided the issue in favour of the assessee. This ground of appeal was allowed.

Facts II:
In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had in respect of certain items of expenditure deducted tax u/s. 194C whereas the applicable provision, according to the AO, was section 194I or section 194J. The AO held that the assessee has short deducted tax. The AO relying on the decisions in the case of CIT vs. Prasar Bharti (292 ITR 580)(Del) and Chambers of Commerce of Income-tax Consultant vs. CBDT 75 Taxman 669 (Bom) and All Gujarat Federation vs. CBDT (214 ITR 2) disallowed the expenditure on which there was short deduction. Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal where interalia relying on the ratio of Calcutta High Court decision in the case of CIT vs S. K. Tekriwal (2012-TIOL-1057-HC-KOL-IT) it was contended that provisions of section 40(a)(ia) can be only invoked if there is no deduction of tax but not in a case where there was short deduction.

Held II: Section 40(a)(ia) can be invoked only when tax has not been deducted or has not been paid as per the provisions. Since the assessee had deducted tax u/s. 194C instead of section 194I or section 194J, the Tribunal held that it is not a case of non-deduction of tax. The Tribunal held that when tax was deducted by the assessee, even under bonafide impression under wrong provisions of TDS, provisions of section 40(a) (ia) cannot be invoked. It observed that this principle is being uniformly followed by various co-ordinate Benches and has approval of Calcutta High Court in the case of CIT vs. S. K. Tekriwal (supra). Therefore, disallowance u/s. 40(a)(ia) cannot be upheld. It was also observed that the revenue had not taken any steps u/s. 201 wherein the issue whether the deduction has to be made u/s. 194I or 194J or 194C can be considered /examined. This ground was decided in favour of the assessee.

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Nirav Shah

S. 37(1) — Provision for service warranty expenses on actuarial basis allowed as expense.

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62. (2009) 29 SOT 167 (Delhi)

Dy. CIT v. LG Electronics (I) Ltd.

A.Y. : 2002-03. Dated : 30-1-2009

S. 37(1) — Provision for service warranty expenses on
actuarial basis allowed as expense.

The assessee-company, which was providing a one year
service warranty on sale of its electronics products, made a provision towards
services warranty expenses on actuarial basis and claimed deduction in respect
of the same u/s.37(1), which was disallowed by the Assessing Officer. On
appeal, the CIT(A) allowed the assessee’s claim.

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

(a) CIT v. Indian Transformers Ltd., (2004) 270
ITR 259; (2005) 142 Taxman 429 (Ker.)

(b) Bharat Earth Movers v. CIT, (2000) 245 ITR
428; 112 Taxman 61 (SC)

(c) Calcutta Co. Ltd. v. CIT, (1959) 37 ITR 1 (SC)

(d) IRC v. Mitsubishi Motors New Zealand Ltd.,
(1996) 222 ITR 697 (PC)

(e) CIT v. Vinitek Corpn. (P.) Ltd., (2005) 278
ITR 337; 146 Taxman 313 (Delhi )

The Tribunal noted as under :

1. In the light of plethora of judgments of both of the
Supreme Court as well as various High Courts it is well settled that once
the assessee is maintaining its accounts on the mercantile system, the
liability already accrued in a year though to be discharged at a future
date, would be a proper deduction while working out the profit and gains of
business, regard being had to the accepted principle of commercial practice
and accountancy. It is not as if such deduction is permissible only in the
case of amounts actually expended or paid.

2. The expression ‘the liability already accrued in the
year’ signifies that a business liability must have definitely arisen in
that accounting year. In other words, for allowing the deduction of a
liability while working out the profits and gains of business, a business
liability should have definitely arisen in that accounting year. What should
be certain is the incurring of the liability. The definite liability must be
in praesenti and not de futuro. The liability must have arisen under a
definite obligation. The obligation of the trader must not be of a purely
contingent nature for it to be a permissible outgoing or allowance or
deduction in the year of account.

3. The other condition to be satisfied is that the
definite liability in praesenti should also be capable of being estimated
with reasonable certainty though the actual quantification may not be
possible.

4. In the instant case, the issue related to the
assessee’s claim of deduction towards warranty liability under a condition
or stipulation made in the sale document imposing a liability upon the
assessee to discharge its obligation under warranty clause for the period of
warranty.

5. The assessee had made the provision of warranty
liability having regard to the past factor of actual expenses incurred by it
towards warranty liability. It had worked out the amount of liability by
applying a multiplying factor on the total sales made during the year on the
basis of past results. This method had been followed by the assessee
uniformly right from the first year of commencement of production.

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Nirav Shah

S. 28(iv) — Revaluation of assets by firm before conversion into a Company — Value of shares received by partners in excess of their capital was not taxable.

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61. (2009) 29 SOT 138 (Mum.)

Dy. CIT v. Mahesh M. Chheda

A.Y. : 1999. Dated : 29-1-2009

S. 28(iv) — Revaluation of assets by firm before conversion
into a Company — Value of shares received by partners in excess of their
capital was not taxable.

The assessee was a partner in a firm which revalued its
assets before conversion into a Company which allotted shares to the partners
of the firm against their revalued capitals. The Assessing Officer taxed the
value of shares received by the partners in excess of their capital before the
revaluation of assets by the firm as value of perquisite or benefit arising to
the partners in terms of S. 28(iv). The CIT(A) upheld the assessment order.

The Tribunal, relying on the decision of the Gujarat High
Court in CIT v. Smt. Chetanaben B. Sheth, (1993) 203 ITR 24, deleted
the addition. The Tribunal noted as under :

1. One of the conditions necessary for applicability of
S. 28(iv) is that the benefit or perquisite sought to be taxed must be
arising in the course of business carried on.

2. The Gujarat High Court has held in the above-mentioned
case that the amount received by an assessee-partner of a firm towards
valuation of goodwill and assets of the firm at the time of retirement from
the firm does not attract provisions of S. 28(iv), since the same cannot be
said to be a perquisite arising from the business and that even otherwise it
would not partake the character of income. Besides the above, increase in
capital of a partner as a result of revaluation of assets of the firm has no
nexus with the business of firm and, therefore, it cannot be brought within
the ambit of S. 28(iv). Therefore, the provisions of S. 28(iv) could not be
applied to bring the sum in question to tax in the hands of the partners of
the firm.

On the issue whether there was any capital gains as a
result of increase in capital of the partners consequent to revaluation of
assets of the firm, the Tribunal noted as under :

1. The stand taken by the Revenue in the grounds of
appeal was that partner’s interest in the firm was transferred to the
Company at a higher value and, hence, the benefit should be taxed in the
hands of the partners. It had been further contended in the grounds of
appeal that the definition of ‘transfer’ as given in S. 2(47) is an
inclusive definition and, therefore, de hors the provisions of S.
45(4) capital gains can be brought to tax in the hands of the partners.

2. There was no transfer whatsoever by the partners. It
was the firm which got converted into a Company. On such conversion, capital
gain on such transfer could be brought to tax only in the hands of firm and
not in the hands of the partner. This was clear from the provisions of S.
45(4). Consequently, no ‘capital gain’ arose in the hands of the partners by
reason of revaluation of assets of the firm and the consequent increase in
capital account of the partners of the firm.

3. Transfer by the firm or consequent succession of the
firm by a Company should not be brought to tax in view of the provisions of
S. 47(xiii). The fact that such transfer and the resultant capital gains
could not be brought to tax was no ground to explore the possibility of
taxing capital gain in the hands of partners on the ground that there was
capital gain consequent to revaluation of assets and increase in capital of
the partners.

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Nirav Shah

Explanation (b) to S. 6(1)(c) : (i) Not applicable in case of permanent return (ii) period of visit to India to be excluded (iii) fraction of a day to be excluded.

Part C — Tribunal & International Tax Decisions

    Shri Manoj Kumar Reddy v. ITO

    ITA No. 1020/Bang./2008

    S. 6(1)(c) [Explanation (b)], Income-tax Act;

    Article 4, India-USA DTAA

    A.Y. : 2005-2006. Dated : 3-4-2009

    Explanation (b) to S. 6(1)(c) : (i) Not applicable in case of permanent return (ii) period of visit to India to be excluded (iii) fraction of a day to be excluded.

Facts :

The assessment pertains to previous year 2004-05 (A.Y. 2005-06). The appellant was an employee of an Indian company. On 23rd January 2004, the employer issued a deputation letter to the appellant relocating him to the USA and directed him to work on specified projects of the customers of its US parent company. However, the appellant continued to be an employee of the Indian company.

The appellant left India on 1st February 2004. He returned to India on 31st January 2005 at 4.00 a.m. The number of days of stay in India by the appellant during the preceding previous years 2000-01 to 2006-07 were as follows :

As the appellant was in India for more than 365 days or more during the four preceding previous years and during the previous year 2004-05 and he was in India for more than 60 days, the AO concluded that in terms of S. 6(1)(c) of the Act, the appellant was resident in India. The AO also referred to Article 4(1) of India-USA DTAA which defines ‘resident of a contracting state’ and held that the residential status of the appellant is to be decided in terms of the domestic law. As appellant is resident under the Act, he would also be resident in terms of DTAA.

The AO referred to Article 16 of India-USA DTAA which states that the salary derived by an Indian resident in respect of an employment shall be taxable only in India unless certain conditions are fulfilled. As AO held that the salary from rendering services in the USA was taxable in India as the appellant was resident in India.

Before CIT(A), the appellant contended that Clause (b)1 of Explanation to S. 6(1)(c) applies in case the appellant comes on a visit to India and the fact that appellant had come to India permanently was not relevant. Hence, the appellant should be considered as non-resident. In support of its contention, the appellant relied on the decision of AAR in British Gas India P. Ltd., (2006) 285 ITR 218, wherein the AAR held that the term ‘for the purposes of employment outside India’ would also cover a case where an assessee is deputed outside India by an Indian employer.

Before the Tribunal the appellant raised the following contentions :

(i) Clause (b) of Explanation to S. 6(1)(c) applies in case the appellant comes on a visit to India and the fact that the appellant had come to India permanently was not relevant. Hence, the appellant’s status should be taken as non-resident.

(ii) As he had arrived on 31st January 2005 at 4.00 a.m., the fraction of the day should not be counted while determining the period. He further contended that if 31st January 2005 is excluded, his stay in India was only 59 days. Hence, he would be non-resident. The appellant relied on Delhi High Court’s decision in Praveen Kumar and Another v. Sunder Singh Makkar.

Held :

(i) The Tribunal referred to the legislative history and the purpose of the amendment and relying on the Punjab & Haryana High Court’s decision in V. K. Ratti v. CIT, (2008) 299 ITR 295 (P& H), held that if the appellant has come to India permanently after leaving his employment outside India, Explanation (b) will not be applicable.

(ii) For computing the period of 60 days mentioned in S. 6(1)(c), the period of visit to India should be excluded.

(iii) Referring to the Delhi High Court’s decision in Praveen Kumar and Another v. Sunder Singh Makkar, Law Lexicon and S. 9 of the General Clauses Act, the Tribunal held that as per the General Clauses Act, the first in a series of a day is to be excluded if the word ‘from’ is used. Since for computation of the period, one has to necessarily import the word ‘from’, the first day should be excluded.

Clause (b) relaxes the rigour of S. 6(1)(c) by substituting 182 days in place of 60 days

Held:

i) The Tribunal referred to the legislative history and the purpose of the amendment and relying on the Punjab & Haryana High Court’s decision in V. K. Ratti v. CIT, (2008) 299 ITR 295 (P& H), held that if the appellant has come to India permanently after leaving his employment outside India, Explanation (b) will not be applicable.

ii) For computing the period of 60 days mentioned in S. 6(1)(c), the period of visit to India should be excluded.

iii) Referring to the Delhi High Court’s decision in Praveen Kumar and Another v. Sunder Singh Makkar, Law Lexicon and S. 9 of the General Clauses Act, the Tribunal held that as per the General Clauses Act, the first in a series of a day is to be excluded if the word ‘from’ is used. Since for computation of the period, one has to necessarily import the word ‘from’, the first day should be excluded.

Nirav Shah

No tax is required to be deducted from commission paid to agent outside India if no services performed in India or no fixed place of business in India.

New Page 1

Part C — Tribunal & International Tax Decisions

Spahi Projects Pvt. Ltd., in re

AAR No. 802 of 2009

S. 9(1), Income-tax Act; Article 7,

India-South Africa DTAA

Dated : 29-7-2009

No tax is required to be deducted from commission
paid to agent outside India if no services performed in India or no fixed
place of business in India.

Facts :

The applicant was an Indian company engaged in
the business of manufacture and sale of industrial pesticides. The applicant
appointed a South African company (‘SA Co’) to promote and market its products
in South Africa. In consideration of its services, SA Co was to receive
commission from the applicant in respect of completed transactions. SA Co was
to : (i) procure orders from different buyers; (ii) negotiate price and other
terms and intimate the same to the applicant; (ii) re-negotiate the
terms/price if necessary, based on the instructions of the applicant; (iv)
follow up in getting purchase orders from customers and forward the same to
the applicant; (v) follow up regarding LC opening, shipment and payment; (vi)
attend to queries in regard to shipment. The orders were to be directly
executed by the applicant. Sale consideration would also be directly received
by the applicant in India. After receipt of the sale consideration, the
applicant would remit commission to SA Co.

The applicant had raised the following issues for
ruling by AAR :

(i) Whether amount paid to SA Co was liable to
tax deduction u/s.195 of the Act read with India-South Africa DTAA.

(ii) As SA Co did not have permanent
establishment in India, whether amount paid to it was liable to tax
deduction.

(iii) Whether amount paid to SA Co could be
treated as ‘fees for technical services’ under the Act.

The applicant contended that : SA Co rendered all
its services outside India; it did not maintain any establishment in India;
the income received by SA Co was its business income; and hence, the income
cannot be taxed under the Act as SA Co did not have any business connection or
permanent establishment in India. The applicant also clarified that SA Co has
no authority to conclude contracts on its behalf or to take any decision
without referring to the applicant.

In support of its contention, the applicant
relied on CBDT’s Circular No. 23, dated 23rd July 1969, Circular No. 786 of
7th February 2000 and also on the decisions in CIT v. R. D. Aggarwal & Co.,
(1965) 56 ITR 20 and CIT v. T.I. and M. Sales Ltd., (1987) 166 ITR 93.

The AAR referred to Article 7 of India-South
Africa DTAA. The AAR also cited with approval certain observations of the
Supreme Court in CIT v. Toshoku Ltd., (1980) 125 ITR 525 (SC).

Held :

(i) As no business operations are carried out
in India by SA Co, no income can be attributed under Explanation (a) and
therefore no income can be deemed to accrue or arise in India.

(ii) SA Co has no fixed place of business in
India and hence, none of the sub-clauses of Article 5(2) are applicable.
Accordingly, the business profits of SA Co for services rendered as
commission agent in SA Co could not be brought to tax in India.

(iii) As SA Co will not be rendering services
of a managerial, technical or consultancy nature, provisions dealing with
fee for technical services cannot be invoked.

(iv) As commission paid by the applicant to SA
Co is not chargeable to tax in India by virtue of Art.7 of DTAA and S.
9(1)(i) read with the Explanation thereto, the applicant is not obliged to
deduct tax u/s.195 of the Act..

levitra

Nirav Shah

Liability to deduct tax — Payer not an assessee in default u/s.201 if payee has paid tax on income but payer liable to interest u/s.201(1A).

New Page 1

Part C — Tribunal & International Tax Decisions

ITO v. Intel Tech India Pvt. Ltd.

ITA No. 71/Bang./2009

S. 195, S. 197, S. 200, S. 201, S. 248,

Income-tax Act

A.Y. : 2004-2005. Dated : 9-4-2009

Liability to deduct tax — Payer not an assessee in default
u/s.201 if payee has paid tax on income but payer liable to interest
u/s.201(1A).

Facts :

US Co. is an American company. US Co. was carrying on
business in India through a branch (‘Indian branch’). The appellant is an
Indian company. On 15th March 2003, the appellant entered into an agreement
with US Co. for acquisition of the entire assets and liabilities of the Indian
branch. In terms of the agreement, on 1st April 2003, US Co. transferred all
the assets and the liabilities of the Indian branch to the appellant. The
consideration for the transfer was the difference between the WDV of the
assets and the liabilities. The appellant accounted for the purchase price by
debiting the assets and accounted for the consideration payable by crediting
US Co.

Being depreciable assets, in terms of S. 50 of the Act, the
sale proceeds were chargeable to tax as short-term capital gains. In terms of
S. 195 of the Act, the appellant was required to deduct tax from the purchase
consideration, which it failed to do. Hence, the AO issued the notice to the
appellant to show cause why u/s.201(1) it should not be treated as an assessee
in default, and further that why interest should not be levied u/s.201(1A).

In reply to the notice, the appellant submitted that :

à The
provisions of S. 195 are not applicable in a case where the non-resident or
foreign company has presence in India and is assessed to tax.

à The
transfer of the assets has resulted in a ‘loss’ in the hands of US Co.
Therefore there was no requirement to deduct tax at source u/s.195(1). In
its support, the appellant submitted valuation report dated 1st November
2003.

à Though
tax was not deducted, the Indian branch had deposited the tax. Therefore, in
terms of Explanation to S. 191, the appellant cannot be treated as an
assessee in default u/s.201(1).

The AO rebutted the submissions in the following manner and
concluded that the appellant was required to deduct tax from gross
consideration :

à S. 195
does not exempt a foreign company from the purview of S. 195 on the ground
that the foreign company is assessed to tax in India.

à The
appellant credited the consideration on April 1, 2003 and therefore,
liability to deduct tax arose on that date. As the valuation report was
subsequent to the date of credit, the appellant did not have any material to
reach the conclusion that the transaction will result in a loss.

à The
deductee paid tax on other income and not on the transactions on which tax
was to be deducted.

Before CIT(A), The appellant relied on the Supreme Court’s
decision in Hindustan Coca Cola Beverage P. Ltd. v. CIT, (2007) 293 ITR
226 (SC), wherein it was held that if the deductee/recipient had already paid
taxes on the amount received, tax cannot be recovered again from the
defaulting deductor. The appellant further relied on the following decisions :

à
Singapore Airlines Ltd. v. ITO, (2006) 7 SOT 84 (Chennai)

à AP
Power Generation Corporation Ltd. v. ACIT, (2007) 11 SOT 221 (Hyd.)

à
Golkonda Engineering Enterprises Ltd. v. ITO, (2008 TIOL 169 ITAT Hyd.)

The CIT(A) held that : deductee was a regular assessee
under the Act is not a relevant consideration u/s.195; as the appellant and US
Co were related, the appellant was aware that the transaction will result in a
loss; as the deductee has filed its return of income and has paid due tax,
deductor cannot be treated as assessee in default; and therefore, the
appellant was not liable to any interest u/s.201(1A) of the Act.

Before the Tribunal, the tax authorities argued that if the
deductee has not obtained certificate u/s.197, the deductor is required to
deduct tax. Alternatively, after deducting tax, the deductor could have filed
an appeal u/s.248 and could have claimed that tax was not deductible. The
appellant argued before the Tribunal that purpose of S. 195 was to prevent
remittance to a non-resident without payment of tax and where the non-resident
was assessed to tax in India, S. 195 was not intended to apply. IndCo. also
relied on Circular No. 7/2003, dated 5th September 2003 and stated that if the
deductee has duly discharged his tax liability, deductor would not be treated
as assessee in default due to non-deduction and as a corollary, he would not
be chargeable interest u/s.201(IA).

The Tribunal observed that S. 195 nowhere provides that a
foreign company assessed to tax in India is exempt from S. 195. It supported
this observation with its order dated July 11, 2008 in Madura Coats Pvt. Ltd.
[ITA No 1403/Bang/07]. US Co. had not applied u/s.197 for non-deduction of
tax. If the appellant denied its liability for tax deduction u/s.195 and 200,
it could have filed an appeal u/s.248, which it did not. The appellant had
also not made any application u/s.195(2). The appellant credited the amount on
1st April 2003, whereas valuation report was of 1st November 2003. Hence, on
the date of credit, the appellant did not know that the amount paid will
result in loss and that the deductor cannot make an assessment of income in
the hands of the deductee. Therefore, the appellant was obliged to deduct tax
@ 40%. The Tribunal also referred to the observations of the Supreme Court in
Transmission Corporation of AP Ltd. & Another v. CIT, (1999) 239 ITR
587 (SC) to the effect that the assessee has to file an application
u/s.195(2), u/s.195(3) and u/s.197 in case the sums being paid are not
chargeable to tax in the hands of the recipient.

The deductee had filed the return of its income on 1st
November 2004 and as per the return, no tax was payable on the consideration
from which the appellant was required to deduct tax. Hence, liability of the
appellant ended on the date when the Indian branch filed the return. The Tribunal referred to the Supreme Court’s decision in CfT v. Eli Lilly Company (India) Pvt. Ltd., (2009) 312 ITR 225 (sq, wherein it was held that the object underlying S. 201(1) is to recover the tax. As far as the period of default is concerned, it starts from the date when the tax should have been deducted and lasts up to the date of actual payment. As the appellant was required to deduct tax but had not deducted it, it was an assessee in default. Since the Indian branch had filed the return, disclosed the consideration and the return showed that no tax was payable on the consideration, the default ended on the day the Indian branch filed the return. Hence, there would be no deduction u/s.201, but the appellant will be liable to interest u/s.201(lA) up to the date of filing the return by the Indian branch.

Held:

i) S. 195 does not exempt a foreign company assessed to tax in India from its provisions.

(ii) In the absence of certificate issued u/ s.197 or determination u/s.195 or order u/s.248, the deductor is required to deduct tax u/s.195. If however, the deductor has not deducted tax but the deductee has paid tax on his returned income, the deductor cannot be considered an assessee in default.

(iii) Even if the deductee has paid tax, the deductor would be liable to charge of interest u/s. 201(lA) up to the date of filing the return by the deductee.

Nirav Shah

S. 14A — Disallowance u/s.14A can be made even in the year in which no exempt income has been earned or received — Disallowance u/s.14A in respect of interest expenditure is to be made with reference to gross interest expenditure and not with reference to

New Page 1

Cheminvest Ltd. v. ITO

ITAT Special Bench New Delhi — ‘B’ Bench

Before R. P. Garg (VP) and A. D. Jain (AM) and
Rajpal Yadav (JM)

ITA No. 87/Del./2008

A.Y. : 2004-05. Decided on : 5-8-2009

Counsel for assessee/revenue : Ajay Vohra, Rohit
Jain, Gaurav Jain & Rohit Garg/S. D. Srivastava, Rajesh Tuteja, & Manish Gupta

S. 14A — Disallowance u/s.14A can be made even in
the year in which no exempt income has been earned or received — Disallowance
u/s.14A in respect of interest expenditure is to be made with reference to
gross interest expenditure and not with reference to interest expenditure as
reduced by interest receipt.

Per R. P. Garg :

Facts :

The assessee had invested Rs.17,36,89,230 in
purchase of shares. Some of the shares were held by the assessee as its
capital assets, whereas the others were held as its stock-in-trade. The
assessee had taken unsecured loans of Rs.8,51,65,000. It had paid interest of
Rs.1,21,02,367 on unsecured loans borrowed by it. Of the borrowed funds a sum
of Rs.6,88,70,000 was invested in shares. During the previous year relevant to
the assessment year 2004-05, the assessee did not earn any dividend income.

In the course of assessment proceedings before
the Assessing Officer (AO), the assessee contended that since it had not
earned or received exempt income the question of disallowance of interest does
not arise. The AO did not accept the contention of the assessee and disallowed
interest on a proportionate basis i.e., a sum of Rs.97,87,570 was
disallowed out of total interest.

Aggrieved by the disallowance of interest the
assessee preferred an appeal to CIT(A) who confirmed the action of the AO in
disallowing proportionate interest pertaining to investment for earning
dividend, though exempt income was not earned during the year. The CIT(A),
however, agreed with the alternative contention of the assessee that the
disallowance be computed with reference to the net interest amount debited to
the Profit & Loss Account and not the gross interest expenditure. The CIT(A)
directed the AO to work out disallowable interest on pro rata basis of
the net interest i.e., interest payment as reduced by receipt of
interest.

The assessee preferred an appeal on the ground
that disallowance was not warranted since the assessee had neither earned nor
received any exempt income during the previous year relevant to the assessment
year under consideration. The Revenue preferred an appeal on the ground that
the proportionate gross interest expenditure ought to have been held to be
disallowable.

In view of the contrary decisions on the issue
under consideration, the President, ITAT constituted a Special Bench (SB) to
dispose of the appeal and decide the following question :

“Whether disallowance u/s.14A of the Act can be
made in a year in which no exempt income has been earned or received by the
assessee ?”

Held :

The Special Bench held that —

(a) when the expenditure of interest is
incurred in relation to income which does not form part of total income, it
has to suffer the disallowance, irrespective of the fact whether any income
is earned by the assessee or not. S. 14A does not envisage any such
exception;

(b) when prior to introduction of S. 14A, an
expenditure both u/s.36 and u/s.57 was allowable to an assessee without such
requirement of earning or receipt of income, such a condition cannot be
imported when it comes to disallowance of the same expenditure u/s.14A of
the Act;

(c) in the case of Rajendra Prasad Moody the SC
held that irrespective of dividend receipt, expenditure has to be allowed.
Applying the ratio of this decision in the reverse case since dividend is
exempt, expenditure has to be disallowed. The fact that during the year
dividend has neither been earned nor has it been received would be
irrelevant;

(d) the allowance of expenditure in relation to
dividend income would thus be not admissible in computing the income of an
assessee under this Act, irrespective of whether the shares are held as
investment or they are held on trading account as stock-in-trade;

(e) S. 57 allows the expenditure incurred for
making or earning the income, whereas S. 14A disallows the expenditure ‘in
relation to income which does not form part of total income’. The term
‘expenditure in relation to’ is wider in scope and provides for disallowance
if it is related to income not forming part of total income;

(f) the disallowance has to be of the entire amount of the
expenditure so related and cannot be reduced by the receipt of interest which
has no relation to such expenditure.

levitra

Nirav Shah

S. 115JA, S. 244A — While computing tax liability u/s.115JA credit for tax paid in foreign country is allowable — Grant of interest u/s.244A can not be denied on the ground that the TDS certificate was filed in the course of assessment proceedings and not

New Page 1

ACIT v. L. & T. Ltd.

ITAT Mumbai ‘A’ Bench

Before R. S. Syal (AM) and

Asha Vijayaraghavan (JM)

ITA No. 4499/Mum/2008

A.Y. : 2000-01. Decided on : 22-7-2009

Counsel for revenue / assessee : Mayank Priyadarshi/Arvind Sonde

S. 115JA, S. 244A — While computing tax liability u/s.115JA
credit for tax paid in foreign country is allowable — Grant of interest
u/s.244A can not be denied on the ground that the TDS certificate was filed in
the course of assessment proceedings and not along with the return of income.

Per R. S. Syal :

Facts :

The assessment of total income of the assessee was
completed u/s.143(3) of the Act on 31-3-2003 assessing the total income at
Rs.97,09,81,536 u/s.115JA. Subsequently, the AO observed that the assessee was
allowed double tax relief while assessing the income u/s.115JA. Notice u/s.154
of the Act was issued and the credit for foreign tax given was denied on the
ground that intention behind S. 115JA is that assessee should pay minimum tax
in India on 30% of book profits and credit for taxes paid in foreign country
could not be allowed against tax liability in India when income was assessed
u/s.115JA of the Act.

In the rectification proceedings the AO did not allow
interest in respect of TDS certificates on the ground that such certificates
were not submitted along with the return of income, but were submitted in the
course of assessment proceedings.

The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the income on which tax has been
paid abroad was included in ‘book profit’ for the purpose of S. 115JA. The
Tribunal held that once taxable income is determined either under the normal
provisions or as per S. 115JA, subsequent portion relating to the computation
of tax has to be governed by the normal provisions of the Act. It also held
that there is no provision in the Act debarring granting of credit for tax
paid abroad in case income is computed u/s.115JA. It held the assessee cannot
be denied the set-off of tax relief of Rs.22,88,464 against the tax liability
determined u/s.115JA. It upheld the order of CIT(A) on this ground.

The Tribunal noted that tax was deducted at source at the
right time. It was also deposited into the exchequer in time. The Tribunal
noted that the AO had given credit for TDS, but had denied interest thereon
u/s.244A. The Tribunal held that interest u/s.244A cannot be denied only on
the ground that TDS certificates were not furnished along with the return of
income. It upheld the order of CIT(A) on this ground.

levitra

Nirav Shah

S. 80IB(10) — Amenities provided by the assessee at the time of construction itself, though by way of a separate agreement, are to be treated as part of the housing project undertaken by the assessee — Deduction u/s.80IB(10) is allowable in respect of rec

New Page 1

Dy. CIT. v. Vimal Builders and
Vimal Builders v. Dy. CIT

ITAT ‘F’ Bench, Mumbai

Before M. A. Bakshi (VP) and

R. K. Panda (AM)

ITA No. 3646/Mum./2007 & 2730/Mum./2007

A.Y. : 2003-04. Decided on : 28-7-2009

Counsel for revenue/assessee : J. V. D. Lanstich/

R. R. Vora and Manoj Anchalia

S. 80IB(10) — Amenities provided by the assessee at the
time of construction itself, though by way of a separate agreement, are to be
treated as part of the housing project undertaken by the assessee — Deduction
u/s.80IB(10) is allowable in respect of receipts for amenities — When there is
direct nexus between the funds borrowed and funds advanced to sister concerns
interest received on amounts advanced can be netted off against interest paid.

Per R. K. Panda :

Facts :

The assessee was engaged in the business of constructing
residential buildings. During the assessment year under consideration the
assessee had claimed deduction of Rs.3,15,40,268 u/s.80IB(10). The Assessing
Officer (AO) noted that the assessee had considered receipts for amenities as
part of total sales and had claimed deduction u/s.80IB on the profit element
contained in receipts for amenities. He observed that the amenities included
superior quality flooring, false ceiling, fans and tubes, superior quality
fittings in toilets, box grills and pipe gas from Mahanagar Gas Limited. The
AO did not consider profit derived from providing amenities as part of total
sales and accordingly denied benefit of deduction on an amount of Rs.22,12,360
being the profit on amenities receipts of Rs.55,34,797.

The CIT(A) held that provision of amenities should be
treated as part of the housing project undertaken by the assessee and since
these amenities are provided by the assessee at the time of construction
itself, though by way of a separate agreement, the profit element in receipts
for amenities qualifies for deduction u/s.80IB(10). He allowed the appeal of
the assessee.

The CIT(A), in the course of appeal proceedings before him,
noted that the assessee had advanced monies to its sister concerns and had
received interest of Rs.16,27,802 which interest was netted off against
interest paid. After giving an opportunity to the assessee, he held that
interest receipts should be excluded for the purpose of calculating deduction
u/s.80IB(10) of the Act. He directed AO to recompute the deduction
u/s.80IB(10) by excluding interest receipts.

Aggrieved, the Revenue and the assessee preferred appeals
to the Tribunal.

Held :

The Tribunal noted that the extra amenities are provided
only to purchasers of the flats at the time of purchase of flat itself and no
such activity has been undertaken for any other person; the agreement for sale
of flat and for provision of extra amenities were both entered on the same
date; work for extra amenities was carried out through the same contractor at
the time of construction of the flat itself. It found merit in the submission
that extra amenities given to the buyer cannot be provided in isolation as the
same are inextricably connected with the housing project and the decision of
providing such extra amenities to the buyer was a commercial decision and
within the conditions of S. 80IB(10) of the Act. Accordingly, this ground was
decided in favor of the assessee.

As regards the exclusion of interest receipts for computing
deduction u/s.80IB(10) the Tribunal after considering the submissions made on
behalf of the assessee (viz. that the funds were borrowed from banks
and private parties for the purpose of its housing project; the borrowings
from the banks were for a specified period and prepayment would have resulted
into levy of penalty interest and therefore funds were advanced to sister
concerns on a temporary basis so as to recoup part of the interest costs)
directed the AO to give an opportunity to the assessee to prove the nexus that
borrowed funds were used for giving advances on which interest has been earned
and if the assessee can prove such nexus then netting may be allowed.

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Nirav Shah

S. 80HHC — Entire amount received on sale of DEPB entitlements does not represent profit chargeable u/s.28(iiid). Computation of profit on sale of DEPB entitlements requires an artificial cost to be interpolated.

New Page 1

Topman Exports v. ITO

ITAT Special Bench, Mumbai

Before D. Manmohan (VP),

R. S. Syal (AM) and N. V. Vasudevan (JM)

ITA No. 5769/Mum./2006

A.Y. : 2002-03. Decided on : 11-8-2009

Counsel for assessee/revenue : Rajan Vora/

G. C. Srivastava and Anil Kumar

S. 80HHC — Entire amount received on sale of DEPB
entitlements does not represent profit chargeable u/s.28(iiid). Computation of
profit on sale of DEPB entitlements requires an artificial cost to be
interpolated.

Per R. S. Syal :

Facts :

The assessee, a manufacturer and exporter of
fabric/garments, filed its return of income declaring total income of
Rs.36,24,230. While computing its total income, the assessee had claimed
deduction of Rs.83,69,303 u/s.80HHC of the Act. The assessee had reduced a sum
of Rs.3,01,93,428 being sale proceeds of DEPB licence from its total purchases
of Rs.16,96,83,882 and had shown net purchases of Rs.13,94,90,454. The profit
on transfer of DEPB licence was only Rs.14,35,097 and profit on transfer of
DFRC licence was Rs.19,902. Before the Assessing Officer (AO) the assessee
justified its action by submitting that the profits on sale of DEPB licence
was an export incentive covered u/s.28(iiia) for the purpose of claiming
deduction u/s.80HHC. The AO held that the net profit after reduction of export
incentive of Rs.3.01 crores was a loss of Rs.1.82 crores. The AO denied the
deduction claimed u/s.80HHC of the Act.

The CIT(A) held that since the assessee did not satisfy the
two conditions mentioned in the third proviso to S. 80HHC(3), it is not
entitled to deduction in respect of amounts received under DEPB and DFRC
schemes. As regards the assessee’s contention that only the profit on transfer
of DEPB and DFRC licences was covered by the provisions of S. 28(iiid) and S.
28(iiie) and not the sale proceeds, the CIT(A) held that the cost of these
entitlements/certificates to the assessee was Rs.Nil and hence, the entire
sale consideration of the licences was profit on transfer. The CIT(A) directed
the AO to treat the entire amount of sale consideration of DEPB and DFRC
licences as profit on transfer for the purpose of working out deduction
u/s.80HHC as per the amended provisions. The CIT(A) did not give any finding
regarding the eligibility of duty drawback for deduction u/s.80HHC.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The President of the Tribunal constituted a Special Bench (SB) and
referred the following question to the SB for its consideration and decision :

“Whether the entire amount received on sale of DEPB
entitlements represents profit chargeable u/s.28(iiid) of the Income-tax Act
or the profit referred to therein requires any artificial cost to be
interpolated ?”

Briefly stated, Explanation (baa) to S. 80HHC defines the
term ‘profits of the business’ to mean the profits under the head ‘profits and
gains’ as reduced by 90% of the sum referred to in S. 28(iiid). The 2nd and
3rd provisos to S. 80HHC(3) provide that the profits computed thereunder shall
be increased by the said 90% amount computed in the proportion of export
turnover to total turnover. S. 28(iiid) refers to “any profit on the transfer
of Duty Entitlement Pass-book Scheme (‘DEPB’). The Special Bench had to
consider whether the entire amount received on sale of DEPB entitlement
represents ‘profits’ chargeable u/s.28(iiid) or the profit referred to therein
requires any artificial cost to be imputed.

Held :

The SB decided the appeal in favour of the assessee and
while so deciding it held that :

(i) the argument of the Revenue that DEPB is a
post-export event and has no relation with the purchase of goods cannot be
accepted. There is a direct relation between DEPB and the customs duty paid
on the purchases. For practical purposes, DEPB is a reimbursement of the
cost of purchase to the extent of customs duty;

(ii) the DEPB benefit (face value) accrues and becomes
assessable to tax when the application for DEPB is filed with the concerned
authority. Subsequent events such as sale of DEPB or making imports for
self-consumption, etc. are irrelevant for determining the accrual of income
on account of DEPB;

(iii) on a harmonious construction of clauses (iiia), (iiib)
and (iiic) of S. 28 it is evident that clauses (iiia) and (iiic) deal with
specific species of incentives, clause (iiib) is a residual clause which
brings within its sweep all forms of export incentives other than those
specifically set out in clauses (iiia) and (iiic);

(iv) the face value of DEPB benefit falls within the
ambit of S. 28(iiib);

(v) S. 28(iiid) which refers to the ‘profits on transfer
of the DEPB’, obviously refers only to the ‘profit’ element and not the
gross sale proceeds of the DEPB. If the Revenue’s argument that the sale
proceeds should be considered is accepted, there would be absurdity because
the face value of the DEPB will then get assessed in the year of the DEPB
and also in the year of its transfer;

(vi) profit on sale of DEPB representing the excess of
sale proceeds of DEPB over its face value is liable to be considered
u/s.28(iiid) at the time of sale;

(vii) only the ‘profit’ (i.e., the sale value less
the face value) is required to be considered for the purposes of S. 80HHC;

(viii) whatever has been said about DEPB also holds good
for DFRC, on both its components, viz. the face value of DFRC and
profit on its transfer, except for the fact that the profit on sale of DFRC
shall be charged to tax u/s.28(iiie);

(ix) Duty drawback shall be chargeable to tax at the time
of accrual of income u/s.28(iiie) when application is filed with the
competent authority after making exports.

levitra

Nirav Shah

S. 115JA — Stock borrowing charges not debited to P & L Account as required under Schedule VI of the Companies Act can be claimed as revenue expenditure even in the case of an assessee who is mandatorily bound to follow the accounting standards as prescri

New Page 1

ITO v. Cyril Traders Pvt. Ltd.

ITAT ‘G’ Bench, Mumbai

Before A. L. Gehlot (AM) and

R. S. Padvekar (JM)

ITA No. 5297/Mum/2004

A.Y. : 1998-99. Decided on : 28-7-2009

Counsel for revenue/assessee : S. B. Prasad/

J. D. Mistry

S. 115JA — Stock borrowing charges not debited to P & L
Account as required under Schedule VI of the Companies Act can be claimed as
revenue expenditure even in the case of an assessee who is mandatorily bound
to follow the accounting standards as prescribed.

Per R. S. Padvekar :

Facts :

The total income of the assessee, assessed u/s.143(3) of
the Act, was a loss of Rs.55,37,760. Subsequently vide order passed u/s.143(3)
r.w. S. 147 the AO inter alia disallowed Rs.53,55,000 towards stock
borrowing charges incurred by the assessee and claimed in its computation of
total income but were not debited to its Profit & Loss Account. The AO held
that not debiting the expenditure to P & L Account was in violation of clause
(xii)(b) of Rule 3 of Part II of Schedule VI and hence the same was not
allowable.

The CIT(A) allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the provisions of Minimum
Alternate Tax as contained in S. 115J were considered by the Apex Court in the
case of Apollo Tyres Ltd. It observed that the scheme of S. 115JA is identical
with that of S. 115J. It held that if the P & L Account prepared by the
assessee was not in accordance with the provisions of Part II and Part III of
Schedule VI to the Companies Act, 1956, then to that extent the AO can make
the corrections and adjustments, but the AO cannot make disallowance in
respect of expenses which are otherwise allowable but are not debited to P & L
Account. The Tribunal held that the stock borrowing charges were rightly
allowed as a deduction by the CIT(A).

The appeal filed by the Revenue was dismissed.

Cases referred to :

1. Kedarnath Jute Manufacturing Co. Ltd. v. CIT,
(82 ITR 363) (SC)

2. Tuticorin Alkali Chemcials and Fertilisers Ltd. v.
CIT, (227 ITR 172) (SC)

3. DCIT, Cir 3(1) Mumbai v. Adbhut Trading Co. Pvt
Ltd., (ITA No. 3597/Mum./2002), dated 25-7-2005

4. ITO v. Adbhut Trading Co. Pvt Ltd., (ITA No.
2869/Mum./2004), dated 25-4-2007

5. ITO v. Vicraze Investments & Trdg. Co. P. Ltd.,
(ITA No. 6276/M/2004), dated 24-4-2007.

6. Apollo Tyres Ltd. v. CIT, (255 ITR 273) (SC)

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Nirav Shah

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