BCAJ | Bombay Chartered Accountant Journal

S. 68 — Cash credit — Loan amount received in earlier year converted into gift — Valid gift.

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Haresh A. Dhanani v. ACIT

ITAT ‘SMC’ Bench, Mumbai

Before A. L. Gehlot (AM)

ITA No. 5850/M/2008

A.Y. : 2002-03. Decided on : 22-5-2009

Counsel for assessee/revenue : R. Ajay Singh/

Malati Sridharan

S. 68 — Cash credit — Loan amount received in earlier year
converted into gift — Valid gift.

Facts :

During the year under appeal the assessee had claimed to
have received gift of Rs.2.5 lacs from his uncle on the occasion of his
marriage anniversary. As per the facts noted, the said amount had been shown
by the assessee in his balance sheet as loan from his uncle up to 31-3-2001.
During the year under consideration, the said loan was converted into gift
vide gift deed dated 6-1-2002. The assessee passed necessary journal entry and
the amount was transferred to his capital account from the loan account.
According to the AO since the gift was not received by actual delivery of
cash/cheque, it cannot be considered as valid gift and he treated the said
amount as unexplained cash credit in the hands of the assessee u/s.68 of the
Act. The CIT(A) on appeal relied on the decision of the Apex Court in the case
of Dr. R. S. Gupta and upheld the order of the AO.

Held :

According to the Tribunal, the case relied on by the CIT(A)
was distinguishable on the facts. In the case of Dr. R. S. Gupta, the amount
was deposited with a third person while in the case of the assessee, the loan
amount was with him only which was converted as gift. Further, it observed
that even if the gift was not considered as genuine gift, the addition of
Rs.2.5 lacs was not warranted u/s.68 because the credit entry as loan was
there as on 31-3-2001 with the assessee himself and there was no fresh cash
credit during the year.

Case referred to :

CIT v. Dr. R. S. Gupta, 165 ITR 36 (SC)

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Nirav Shah

S. 37(1) — Capital or revenue expenditure — Expenditure incurred on launching of a new model of car — Held as revenue expenditure.

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Premier Ltd. v. DCIT

ITAT ‘C’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

Asha Vijayaraghvan (JM)

ITA No. 2091/Mum./2008

A.Y. : 2004-05. Decided on : 30-6-2009

Counsel for assessee/revenue : Jayesh Dadia/

Yeshwant V. Chavan

S. 37(1) — Capital or revenue expenditure — Expenditure
incurred on launching of a new model of car — Held as revenue expenditure.

Per S. V. Mehrotra :

Facts :

The assessee was carrying on the business of manufacture
and sale of automobiles and machine tools. During the year under appeal, it
had incurred expenditure of Rs.2.93 crore on van project. In its return of
income the same was claimed as revenue expenditure though in its books of
account, the same was capitalised and shown as ‘Capital work in progress’. The
AO rejected the claim of the assessee for reasons amongst others, as under :

The expense incurred was for development of a new car and hence cannot be
termed as revenue expenditure;

As per the Annual Report of the assessee — the project was under
implementation and ready to launch. Therefore, the expense incurred up to the end of the previous year
had rightly been capitalised by the assessee in its books of accounts.

The CIT(A) on appeal confirmed the action of the AO,
observing that the project was new business and not the expansion of an
existing business.

Before the Tribunal, the Revenue justified the orders of
the lower authorities and further contended that :

The assessee had enhanced the capacity by installing new assembly line; and

The expenditure was for manufacturing of altogether a different car.

Held :

According to the Tribunal the moot point for consideration
was whether the expenditure incurred in launching a new model could be treated
as expansion of same business or a new business. It referred to the CIT(A)’s
observation that if the assessee had incurred expenditure for expansion of the
production capacity of its Premier Padmini car or any of the cars which it was
already manufacturing, it would amount to a case of expansion. According to
the CIT(A), the product sought to be manufactured was a totally new product,
even if it was a car. The Tribunal did not agree to it. According to it, the
test to be applied for deciding whether a particular project was an expansion
of the existing line of business or a new business was to determine whether
there was unity of control and management and interlacing of funds or not. It
noted that those two aspects in the case of the assessee had not been disputed
by the Revenue. Therefore, it held that the expenditure incurred on the van
project was revenue in nature being for expansion of the business.
Accordingly, the appeal filed by the assessee on this ground was allowed.

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Nirav Shah

Interest u/s. 234B and 234C—Credit for minimum alternate tax has to be set off from the tax payable before levy of interest u/s. 234B and 234C of the Act.

CIT vs. Sage Metals Ltd. (2013) 354 ITR 675 (SC)

In a group of appeals filed by the Revenue before the Delhi High Court a common issue was involved, namely, whether interest u/s. 234B and 234C is to be charged before the tax credit (commonly referred to as MAT credit) available u/s. 115 JAA is set off against tax payable on total income or after it is set off? And additional issue was whether this question was debatable and therefore, the provisions of section 154 could not have been invoked.

The High Court dismissing the appeals of the Revenue held that interest u/s. 234B and 234C is to be charged after the tax credit (MAT credit) available u/s. 115JAA is set off against tax payment on total income of the year in question. The High Court further held that the decision of Benches of the Tribunal at Chandigarh and Chennai did indicate that the Tribunal was correct in law in holding that rectification could not be made by the Assessing Officer u/s. 154 of the Act as the issue regarding charging of interest u/s. 234B of the Act without giving set off of the MAT credit available to the assessee was highly debatable.

On a Special Leave Petition being filed before the Revenue before the Supreme Court, the Court noted that a short question which arose for its determination in the appeals before it was, whether the Department was entitled to charge interest u/s. 234B of the Act on the assessee bringing forward the tax credit balance into the year of account relevant to the assessment year 2001-02. According to the Supreme Court this question has been answered in favour of the assessee by its judgment in the case of CIT vs. Tulsyan NEC Ltd., (2011) 330 ITR 226 (SC). Consequently, the Supreme Court dismissed the appeals filed by the Department.

Note: Sections 234A/234B/234C have been amended to provide such set-off by the Finance Act, 2006 w.e.f. Asst.Year 2007-08.

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Nirav Shah

Due Date of Payment for Allowability of Employee PF Contribution

Issue for Consideration

Under the provisions of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, an eligible employee as well as his employer are required to make periodic contributions to the provident fund (PF) account of the employee. The employer deducts the employee’s contribution from his salary, and pays both the employer’s as well as the employee’s contribution together to the PF account of the employee. Similar provisions are contained under the Employees State Insurance Act, 1948 and Scheme (ESIC).

The employer’s contribution to the PF, etc., being a business expenditure, is an allowable deduction in computing the income of the employer under the head “Profits & Gains of Business or Profession” u/s.36(1)(iv) of the Income-tax Act, 1961. The employee’s PF and ESIC contribution, on deduction by the Employer, is deemed to be the income of the employer in the first place by virtue of section 2(24)(x), but is an allowable business deduction u/s. 36(1)(va). However, in order to claim either the employer’s PF contribution or the employee’s PF contribution as a deduction, the payment of such contribution has to be made by a specified date. While the time limit for the deduction of the expenditure, under the Income-tax Act, of the employer’s contribution is governed by section 43B(b), the employee’s contribution is governed by section 36(1)(va) of the Act.

Section 43B(b) provides that the expenditure would be allowed only in the year of actual payment. Till Assessment Year 2003-04, the proviso to section 43B provided that the deduction of employer’s PF contribution would be allowed only if the amount had actually been paid before the due date referred to in section 36(1)(va). Section 36(1)(va) provides that the employee’s contribution shall be allowed as a deduction if the amount is credited by the employer to the employee’s account on or before the due date by which the employer is required to credit the employee’s contribution under the relevant Act .

Therefore, till Assessment Year 2003-04, both employer’s as well as employees’ PF contributions were allowable as deductions only if the amounts were paid before the due date under the PF law. The proviso to section 43B has however been amended with effect from Assessment Year 2004-05 to provide that section 43B would not apply to payments made before the due date of filing of the return of income u/s. 139(1). In effect therefore, employer’s PF contribution is now allowed as a deduction in the same previous year in which the liability to pay the amount is incurred, so long as the payment is made before the due date of filing of the return of income for that year. No corresponding amendment has been made in section 36(1)(va).

The question has arisen before the tribunal and the courts as to whether the due date of filing of the return of income as applicable to the employer’s PF contribution under the proviso to section 43B can also be taken as the due date for the purposes of allowability of the employees’ PF contribution. Can the amended provisions of section 43B relaxing the time for payment of employer’s contribution be extended and applied even for claiming deduction for employees’ contribution? While the Mumbai and the Kolkata benches and the Special bench of the Tribunal have taken the view that the due date under the PF law is the relevant date for employees’ PF contribution and any payment beyond that date shall defer the deduction to the year of payment, the Delhi and Hyderabad benches of the Tribunal have taken the view that it is the due date of filing of the return of income which is the relevant date and the making of the payment by that date will enable the employer to claim deduction for the employees’ contribution. The latter view has also been the unanimous view of the Karnataka, Delhi, Himachal Pradesh and Uttarakhand High Courts.

Sudhir Genset’s case:
The issue came up for consideration of the Delhi bench of the tribunal in the case of DCIT vs. Sudhir Genset Ltd. 45 SOT 63 (URO).

In this case, pertaining to assessment years 2005- 06, 2006-07 and 2007-08, the assessing officer had made disallowances of employees’ contributions to PF and ESIC on the ground that the assessee failed to make the payment of employees’ contributions within the due dates as provided in those Acts. The Commissioner (Appeals) deleted the disallowance on the ground that though these payments were not made within the limitation provided in the PF Act and ESIC Act, these were paid before the due date of filing of the returns of income in all the three assessment years.

The Delhi bench of the tribunal was of the view that the issue was covered by the decision of the Delhi High Court in the case of CIT vs. P.M. Electronics Ltd., 313 ITR 161, where it had been held that if the assessee made payment in the PF and ESIC account, including the employees’ contribution, before the due date of the filing of the return u/s. 139 of the Income-tax Act, then no disallowance of such payment could be made by virtue of section 43B.

Since all the payments were made before the due date of filing of the return of income, the Delhi bench of the tribunal upheld the deletion of disallowance of the employees’ PF contribution.

A similar view was taken by the Hyderabad bench of the Tribunal in the cases of Imerys Ceramics (India) (P) Ltd 24 taxmann.com 320 and Patni Telecom Solutions (P) Ltd 35 taxmann.com 87 (Hyd), where the Tribunal followed the decisions of the Karnataka High Court in the cases of CIT vs. Sabari Enterprises 298 ITR 141 and CIT vs. ANZ Information Technology (P) Ltd. 318 ITR 123.

Besides these two Karnataka High Court decisions, the Delhi High Court in the case of CIT vs. AIMIL Ltd.321 ITR 508, the Karnataka High Court in the case of Spectrum Consultants India (P) Ltd 215 Taxman 597, the Himachal Pradesh High Court in the case of CIT vs. Nipso Polyfabriks Ltd. 350 ITR 327 and the Uttarakhand High Court in the case of CIT vs. Kichha Sugar Co Ltd. 35 taxmann.com 54 have all taken the view that employees’ PF contribution could not be added back to income or disallowed, even if the payment was made after the due date under the PF Act, so long as the payment was made before the due date of filing of the income-tax return u/s. 139.

LKP Securities’ case:
The issue came up recently before the Mumbai bench of the tribunal in the case of ITO vs. LKP Securities Ltd. ITA No 638/Mum/2012 dated 17th May 2013.

In this case, the assessee made delayed payments of employees’ PF and ESIC contributions, beyond the stipulated dates of 15th and 21st of the following month under the respective Acts. The PF payment was, however, made within the 5 days of grace permitted under PF law. The assessing officer disallowed such payments on the ground that the grace period was only for the purposes of not charging penal interest and other penalties under the PF Act, and was not an extension of the due date under that Act. The Commissioner (Appeals) deleted the disallowance on the ground that the payments were made before the due date of filing of the return of income, following the decision of the Delhi High Court in the case of AIMIL Ltd. (supra).

Before the tribunal, on behalf of the revenue, reliance was placed on the Kolkata bench tribunal decision in the case of DCIT vs. Bengal Chemicals and Pharmaceuticals Ltd., 10 taxmann.com 26, where the tribunal after considering the decisions of the Supreme Court in the case of Alom Extrusions Ltd 319 ITR 306 and the decision of the Karnataka High Court in the case of CIT vs. Sabari Enterprises (supra), has held that employees’ contributions were not governed by section 43B. It was also argued that the same view was taken by the Bombay High Court in the case of CIT vs. Pamwi Tissues Ltd. 215 CTR 150. It was therefore argued that employees’ contribution to PF/ESIC was not allowable if not paid before the due dates under the respective Acts.

On behalf of the assessee, reliance was placed on the Delhi High Court decision of AIMIL Ltd. (supra), where the court after considering the decision of the Supreme Court in the case of Vinay Cement Ltd 213 CTR (SC) 268, had clarified that the amendment to section 43B with effect from assessment year 2004-05 would apply to the employer’s as well as the employees’ contribution to the various welfare funds. The Delhi High Court had also held that the decision of the Bombay High Court in the case of Pamwi Tissues (supra) was no longer a good law after the Supreme Court decision of Vinay Cements (supra), and that there was no scope for any doubt after the Supreme Court decision in the case of Alom Extrusions (supra). It was therefore argued that any payment by the employer, whether in respect of the employer’s or the employees’ contribution, made before the due date of filing of the return of income would qualify for being allowed as a deduction for the relevant year.

After analysing the provisions of section 43B and the amendments carried out with effect from assessment year 2004-05, the tribunal noted that section 43b(b) covered only the employer’s contribution to such welfare funds, and that the employees’ contribution was not covered by section 43B(b). After considering the provisions of sections 37(1), 2(24)(x), 36(1)(va) and 43B(b), the tribunal noted that while the due date for payment of both employer’s and employees’ contribution under the PF Act was the same, the deductibility of the employer’s contribution under the Income-tax Act was governed by section 37(1) while the employees’ contribution was deemed to be income u/s. 2(24)(x) and governed by section 36(1)(va).

According to the tribunal, even if one overlooked the clear language of section 2(24)(x) read with section 36(1)(va) (on one hand) and section 43B(b) (on the other hand), which clearly concerned separate and distinct sums, and consider for the sake of argument, section 43B(b) as applicable to section 36(1) (va) payments, it would be rendered otiose . This was on account of the fact that the sum had to be otherwise allowable under the relevant provision for section 43B to apply, and since the payment had not been made before the due date specified in section 36(1)(va), it was not allowable under that section, and therefore section 43B did not apply to the case of employees’ contribution. On the other hand, if the payment was made before the due date specified u/s. 36(1)(va), section 43B had no functional relevance.

The Mumbai tribunal also relied on the Kolkata Special Bench tribunal decision in the case of Jt. CIT vs. ITC Ltd. 112 ITD 57, where the Special Bench had held that section 43B did not apply to payment of the employees’ contribution. The tribunal further noted that the decisions of the Supreme Court in the cases of Vinay Cement (supra) and Alom Extru-sions (supra) related to the provisions of section 43B, which did not govern the deductibility of the employees’ contribution, and related merely to the retrospectivity of the amendment in section 43B. This aspect, according to the tribunal, had been explained by the Bombay High Court in the case of Pamwi Tissues ( supra ). Though this decision of Pamwi Tissues has been reversed by the Supreme Court in the case of Alom Extrusions, the reversal was only in respect of the subject matter of retro-spectivity of the amendment. The tribunal observed that the Bombay High Court in Pamwi Tissues’ case endorsed its decision in CIT vs. Godaveri (Mannar) Sahakari Sakhar Karkhana Ltd 298 ITR 149, wherein issues other than those relating to the amendment to section 43B were also referred to. According to the tribunal, the question of applicability of the amendment in section 43B to the employees’ contribution remained unanswered or unaddressed by the Supreme Court in Alom Extrusions’ case (supra). The Supreme Court in that case did not consider or give any finding that the employees’ contribution, deduction of which was subject to section 36(1)(va), was further subjected to section 43B or that section 43B would apply even if the sum was otherwise not allowable.

As regards the decision of the Delhi High Court in the case of AIMIL Ltd., the Mumbai tribunal noted that the said decision was considered by the Kol-kata bench of the tribunal in the case of DCIT vs. Bengal Chemicals and Pharmaceuticals Ltd., 10 tax-mann.com 26 while deciding the issue against the assesssee. Though AIMIL’s decision covered payment of employees’ contribution to EPF and ESIC, according to the tribunal, the entire deliberation in that decision, as well as the subject matter of the decision was qua section 43B, including the amend-ments thereto. According to the tribunal, the High Court moved on the premise that the employees’ contribution was subject to section 43B(b), and accordingly interpreted the section as well as the nature of the amendments. Further, according to the Mumbai tribunal, the decision of the tribunal which was approved of by the Delhi High Court in AIMIL’s case did not consider the decision of the Special Bench of the Tribunal in the case of ITC Ltd (supra), and was also inconsistent with the decision of the jurisdictional Bombay High Court in Godaveri (Mannar) Sahakari Sakhar Karkhana’s case (supra), in so far as it related to the inapplicability of section 43B to payments specified u/s. 36(1)(va). Further, as per the tribunal, the absence of the relevant findings in Alom Extrusions’ case(supra), the decision in the case of AIMIL Ltd. was not the one that had considered all facts of the issue of deductibility of the employees’ contribution. The Mumbai bench of the tribunal therefore preferred not to follow the decision in the case of AIMIL Ltd. on the ground that it was not applicable or germane to the issue under consideration before the tribunal, but opted to follow the decision of the Special Bench of the tribunal in ITC Ltd. (supra) and the decision in the case of Bengal Chemicals and Pharmaceuticals (supra), since both of these were consistent with the jurisdictional High Court on the material aspect before the Mumbai bench.

Therefore, the Mumbai tribunal held that the due date for the purposes of allowability of employees’ PF contribution meant the relevant date under the PF Act, and not the due date of filing of the return of income under the Income-tax Act. Following the decision of the jurisdictional High Court in Godaveri (Mannar) Sahakari Sakhar Karkhana’s case (supra), the Mumbai tribunal however held that the benefit of the grace period had to be considered in computing the due date, and therefore held that any payments of the employees’ contribution made within the grace period was allowable as deduction.

Observations

The Delhi High Court in deciding the issue in favour of the assessee in AIMIL Ltd.’s case, clearly observed that if the employees’ contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only paid interest on delayed payment but also attracted penalties, for levy of which specific provisions are made in the Provident Fund Act as well as the ESI Act. The court noted that those Acts permitted the employer to make the deposit with some delays, subject to the penal consequences. This aspect of the respective laws permitting delayed payment of the dues prevailed on the High Court in taking the view that it did. It is therefore respectfully submitted that had the Mumbai tribunal appreciated that the decision of the Delhi court was a well considered decision that took into account the comprehensive gamut of the provisions of all the statutes relevant to payment of the dues, including the provisions of the Income tax Act, it would have followed the AIMIL Ltd. decision instead of dissenting from it.

The decision of the Mumbai bench of the tribunal, as stated by it, seems to have been mainly swayed by the decision of the Bombay High Court in the case of Godaveri (Mannar) Sahakari Sakhar Karkhana. On going through this decision, while one notes that one of the issues that came up before the Bombay High Court was relating to employees’ contribution, the Bombay High Court has nowhere expressly discussed or highlighted or noted the distinction between the employees’ contribution and the employer’s contribution. The court merely took a note of the provisions of sections 43B and 36(1)(va) and the amendments to section 43B. The Bombay High Court, in that case, was primarily concerned with the issue of the retrospectivity of the amendments to section 43B, just as the Delhi High Court was in the case of AIMIL Ltd. In both the cases, the courts were mainly concerned with the applicability of the amendments in section 43B and if that was so, the Mumbai tribunal did not have much to choose between the said decisions as neither of them perhaps laid down any law as far as the deduction of the employees’ contribution was concerned. Further, the said decision of the Bombay High Court in Godaveri (Mannar) Sahakari Sakhar Karkhana’s case stood overruled by the Supreme Court decision in Alom Extrusions’ case.

The Special Bench decision in the case of ITC has been rendered on the basis of the specific language of the sections and not by keeping in mind the intention of the legislature and the spirit behind the amendments. In that case, the impact of the permission to make delayed payments under the PF and ESIC Acts on payment of interest and penalty was not examined in depth.

Nirav Shah

Interest u/s. 234A: A. Y. 1996-97: Tax paid before due date but return filed late: Interest u/s. 234A not leviable

Bharatbhai B. Shah vs. ITO; 255 CTR 278 (Guj):

The due date for filing of the return of income for the A. Y. 1996-97, was 31-8-/1996. The assessee had filed the return of income late, on 27-3-1998. However, he had paid tax of Rs. 10 lakh u/s. 140A of the Income Tax Act, 1961 on 30-8-1996. The Assessing Officer processed the return u/s. 143(1)(a) of the Act and assessed the tax at Rs. 15,08,474/- and after deducting the TDS of Rs. 25,533/-, determined the tax liability at Rs. 14,82,941/-. He also levied the interest u/s. 234A of the Act on the said amount ignoring the amount of Rs. 10 lakh paid on 30-8-1996.

The assessee filed a writ petition contending that interest u/s. 234A could be levied not on the entire amount of Rs. 14,82,941/-, but only on the amount of Rs. 4,82,941/- after reducing the amount of Rs. 10 lakh paid before the due date.

The Gujarat High Court allowed the petition and held as under:

“i) If the Revenue is allowed to recover interest on the tax which is already paid within the due date, merely because the return was not filed in time, would make the provision penal in nature and expose it to challenge of its vires.

ii) In the present case, the assessee had already deposited tax of Rs. 10 lakh before the due date of filing return. The return, of course, was filed belatedly. While framing the assessment of such belated return, the Assessing Officer held that the assessee should pay further tax of Rs. 4,82,941/-. Thus, the Revenue’s demand for interest for the entire amount of Rs. 14,82,941/- u/s. 234A would fall foul to the ratio of the decision of the Delhi High Court in the case of Dr. Prannoy Roy vs. CIT; 254 ITR 755 (Del) which has been confirmed by the Supreme Court in CIT vs. Pranoy Roy; 309 ITR 231 (SC).

iii) Revenue can collect interest u/s. 234A only on the additional sum of Rs. 4,82,941/- and not on the entire amount.”

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Nirav Shah

Housing project: Deduction u/s. 80-IB: A. Ys. 2004-05 to 2008-09: Built-up area of some flats exceeding 1500 sq.ft.: Within a composite housing project, where there are eligible and ineligible units, the assessee can claim deduction in respect of eligible units in the project and even within the block, the assessee is entitled to claim proportionate relief in the units satisfying the extent of the built-up area

Viswas Promoters (P) Ltd. vs. ACIT; 255 CTR 149 (Mad)

The assessee was engaged in the business of development and construction of flats. The assessee was eligible for deduction u/s. 80-IB(10). Out of its four projects, two projects had all the flats of the specified built-up area less than 1500 sq.ft. In respect of these two projects, the Assessing Officer allowed the claim for deduction u/s. 80-IB(10) of the Act. In the remaining two projects, there were 32 flats of built-up area more than 1500 sq.ft. in one project and one flat of built up area more than 1500 sq. ft. in the other project. The assessee claimed deduction u/s. 80-IB(10) in respect of these two projects on proportionate basis corresponding to the flats of built-up area of less than 1500 sq. ft. The Assessing Officer disallowed the claim in respect of these two projects, on the ground that the condition as regards the built-up area of the flats is not satisfied. The CIT(A) allowed the assessee’s claim. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

“i) Going by the definition of the “housing project” under Explanation to section 80HHBA as the construction of “any building” and the wordings in section 80-IB(10), the question of rejection in entirety of the project on account of any one of the blocks not complying with the conditions, does not arise.

ii) In respect of each of the blocks, the assessee is entitled to have the benefit of deduction in respect of residential units satisfying the requirement of built up area of 1500 sq.ft. u/s. 80-IB(10)(c). The assessee would be entitled to the relief on a proportionate basis.”

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Nirav Shah

Deduction u/s. 80JJA: A. Ys. 2003-04 and 2004- 05: Business of making fuel briquettes from bagasse: Bagasse is a biodegradable waste and the same is collected on consideration by assessee from sugar factory: Assessee entitled to deduction u/s. 80JJA

CIT vs. Smt. Padma S. Bora; 255 CTR 1 (Bom)

Assessee was engaged in the business of manufacturing fuel briquettes from bagasse purchased from sugar factory for consideration. For the A. Ys. 2003- 04 and 2004-05, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80JJA of on the following grounds:

“i) Bagasse is not a waste;

ii) It is not generated in municipal/urban limits i.e., by local authorities;

iii) It is not collected but it is purchased; and

iv) The process does not involve any treatment or recycling of a biodegradable waste.

The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) Bagasse is a biodegradable waste and the same is collected on consideration by the assessee from the sugar factory. Term “waste” has to be understood contextually i.e., place where it arises and the manner in which it arises during the processing of some article. The fact that the sugar industry regards bagasse as waste is evident from circular dated 4-2-2006, issued by the Sugar Commissioner, Maharashtra State. Besides, the ITC classification of Exim Policy also classifies bagasse as a waste of sugar industry under Chapter 23, Heading 23.20 thereof. Further, Central Excise Teriff Act, 1985 also regards bagasse as waste of sugar manufacture and has classified the same under Chapter 23, Heading 23.01.

ii) Contention of the Revenue that collection means collecting free of charge and not by purchasing is not tenable. Word “collecting” means to gather or fetch. It is a neutral word and does not mean collection for consideration or collection without consideration. In the instant case, the assessee has collected bagasse from sugar factories after making payment for the same. Thus, the requirement of collecting biodegradable waste as provided u/s. 80JJA is satisfied.

iii) Circular No. 772 dated 23rd December, 1998 does not restrict its benefits only to local bodies. In any event, the circular cannot override the clear words of section 80JJA which provides deduction in respect of profits and gains derived from the business of collecting and processing/treating of biodegradable waste for making briquettes for fuel.

iv) Therefore, Tribunal was justified in allowing deduction u/s. 80JJA on the profits derived from the business of manufacturing fuel briquettes from bagasse.”

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Nirav Shah

Charitable or religious trust: Section 11: A. Ys. 1998-99 to 2000-01: Exemption of income from property held under trust: Accumulation of income: For purposes of section 11(2), Form No. 10 could be furnished during reassessment proceedings

Association of Corporation & Apex Societies of Handlooms vs. Asst. DIT; 30 Taxman.com 22 (Del)

The Tribunal rejected the assessee’s claim for accumulation of income u/s. 11(2) of the Income Tax Act, 1961 on the ground that Form No. 10 had not been furnished along with the return, but was filed during the course of reassessment proceedings.

On appeal by the assessee, the assessee contended as under:

“i) The assessment included reassessment as was evident from section 2(8).

ii) Whether the assessment was an original assessment or a part of reassessment, it would not make any difference and it would be entitled to file Form No. 10 in either of the two proceedings and the revenue would have to take the said form into account.

The contention of the Department was that in view of the judgment of the Supreme Court rendered in the case of CIT vs. Nagpur Hotel Owners Association [2001] 247 ITR 201/ 114 Taxman 255 (SC) during reassessment proceedings the Form No. 10 could not be furnished by an assessee.

The Delhi High Court reversed the decision of the Tribunal, allowed the assessee’s appeal and held as under:

“i) One has to keep in mind the fact that while reopening of an assessment cannot be asked for by the assessee on the ground that it had not furnished Form No. 10 during the original assessment proceedings, this does not mean that when the revenue reopens the assessment by invoking section 147, the assessee would be remediless and would be barred from furnishing Form No. 10 during those assessment proceedings.

ii) Therefore, Form No. 10 could be furnished by the assessee-trust during the reassessment proceedings.”

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Nirav Shah

Investment Allowance – Whenever the assessee claims investment allowance u/s. 32A of the Act, it has to lead evidence to show that the process undertaken by it constitutes “production”.

Vijay Granites Pvt. Ltd. v. CIT (2012) 349 ITR 350(SC)

The assessee, a company engaged in the business of raising granites from mines, polishing them and exporting them outside India as also in purchasing granite blocks and after subjecting granite blocks to further processing, exporting them outside India, claimed investment allowance in respect of cranes for assessment year 1986-87 and 1987-88 and allowance u/s. 32A for the assessment year 1988-89.

The Assessing Officer disallowed the claim, firstly on the ground that cranes were transport vehicles and further on the ground that no manufacturing process was involved in cutting the granites and polishing them. On appeal, the appellate authority accepted the contention of the assessee to the effect that the machinery was not a transport vehicle and the assessee was engaged in the manufacture or production of articles and therefore entitled to deduction. On appeal by the Department, the Tribunal confirmed the aforesaid conclusion. On the basis of application filed u/s. 256(1) the Tribunal referred the questions of law to the High Court. The High Court held that the act of cutting and polishing granite slabs before exporting them, did not involve any process of manufacture or production and the assessee was not entitled to the deduction u/s. 32A.

On appeal by the assessee to the Supreme Court, the Supreme Court found that the assessee had not led evidence before the Assessing Officer as to the exact nature of activities undertaken by it in the course of mining, polishing and export of granites. The Supreme Court observed that it has repeatedly held that, whenever the assessee claims investment allowance u/s. 32A, it has to lead evidence to show that the process undertaken by it constistutes “production”. The Supreme Court remitted the case to the Assessing Officer for fresh determination within three months from the date of receipt of the record, after giving opportunity to the assessee to produce relevant evidence.

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Nirav Shah

Rectification of mistakes – Issue involving moot question of law at the relevant time – Rectification not permissible.

Dinosaur Steels Ltd. v. Jt. CIT (2012) 349 ITR 360 (SC)

The assessee, an industrial undertaking engaged in the manufacturing of steel products, filed its return of income for assessment year 1999-98 disclosing an income of Rs.3,31,188 as under:

Gross Total Income Rs. 34,92,097
Less: Deduction u/s. 80IA @ 30% Rs. 10,47,629
————————
Rs. 24,44,468

Less: Brought forward losses
   of earlier assessment year             Rs. 21,13,280
                                                 ————————-
Total Income                                   Rs. 3,31,188
                                                    ============
The return was processed u/s. 143(1)(a).

Subsequently, the Assessing Officer issued a notice u/s. 154 of the Act, calling for objections on the ground that there was a mistake in the assessment order, namely, the claim of deduction u/s. 80-IA had been allowed inadvertently before setting off the earlier years’ losses from the profits and gains of the industrial undertaking. The assessee objected to the proposal of restricting its claim u/s. 80-IA, by placing reliance on the judgment of the Madhya Pradesh High Court in the case of CIT v. K. N. Oil Industries reported in [1997] 226 ITR 547 (MP), in which the High Court held that losses of earlier years were not deductible from the total income for purposes of computation of special deduction u/s. 80HH and 80-I (predecessors of section 80-I). Further, according to the assessee, in any event, section 154 of the Act was not applicable as there was no patent error in the order passed by the Department u/s. 143(1)(a). In this connection, reliance was placed by the assessee on the judgment of this case of T.S. Balaram, ITO v. Volkart Brothers reported in (1971) 82 ITR 50 (SC). These contentions were rejected by the Assessing Officer. Aggrieved by the order passed by the Assessing Officer u/s. 154, the assessee filed an appeal to the Commissioner of Incometax (Appeals). The Commissioner of Income-tax (Appeals) dismissed the appeal by following the judgment of the Supreme Court in the case of CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. reported in (1997) 224 ITR 604(SC). Aggrieved by the said order, the assessee filed an appeal to the Income-tax Appellate Tribunal which was also dismissed, saying that deduction u/s. 80-IA can be allowed only after setting off the carry forward losses of the earlier years in accordance with section 72 of the Act, particularly when the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year was only from the industrial undertaking. According to the Tribunal, this was the law which was well settled by the judgment of the Supreme Court in the case of Kotagiri Industrial Co-operative Tea Factory Ltd. (supra). Therefore, according to the Tribunal, there was a patent mistake in the assessment order passed u/s. 143(1)(a) and consequently the Assessing Officer was right in invoking section 154 of the Act. This decision of the Tribunal has been upheld by the Court.

On an appeal by the assessee to the Supreme Court, the Supreme Court observed that the provisions of Chapter VI-A, particularly those dealing with quantification of deduction have been amended at least eleven times. Moreover, even section 80-IA, was earlier preceded by section 80HH and 80-I, which resulted in a plethora of cases. The Supreme Court noted that some of the amendments have been enacted even after the judgment of the Supreme Court in the case of Kotagiri Industrial Co-operative Tea Factory Ltd. (supra) delivered on 5th March, 1997. In the circumstances, the Supreme Court was of the view that one cannot say that this was a case of a patent mistake. The assessee had followed the judgment of the Madhya Pradesh High Court in K.N. Oil Industries (supra). Hence, the assessee was right in submitting that the issue involved a moot question of law, particularly at the relevant time (assessment year 1997-98).

For the above reasons, the Supreme Court held that section 154 of the Act was not applicable.

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Nirav Shah

Bad Debt – Prior to 1-4-1989 – Allowable as deduction even in cases in which the assessee(s) made only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor.

Kerala State Industrial Development Corporation v. CIT (2012) 349 ITR 365 (SC)

The assessee, the Kerala State Industrial Development Corporation Ltd., a limited company wholly owned by the Government of Kerala, had advanced large amounts to Vanchinad Leather Ltd., a joint sector company promoted by the assessee in the year 1974 for processing hides and skins. The company started commercial production in 1977. However, it was closed down in 1980. Later it was reopened in September, 1982 and again closed down in January, 1983.

During the assessment year 1988-89, the assessee claimed deduction of Rs.55,70,949 as a provision for bad debts as in February, 1988 a declaration was made by BIFR that Vanchinad Leather Ltd. had become a sick company. The claim was disallowed on the ground that no reasonable steps had been taken for recovery of the debts and further, no part of the outstanding amount had been assessed as the income of earlier years. Also, the amount was not written off in the assessee’s accounts in claiming bad debts. The Commissioner of Income Tax (Appeals) confirmed the disallowance. The Tribunal dismissed the appeal, taking the view that the assessee could not prove that the debt had become irrevocable during the previous year and that the condition for claiming deduction u/s. 36(2)(i)(b) were not satisfied.

The following question of law was referred to the High Court u/s. 256(1) of the Act:
“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the claim of bad debts in respect of Vanchinad Leather Ltd. was not legally sustainable and allowable?”

The High Court answered the question in favour of the revenue and against the assessee, holding that in the profit and loss account the assessee had made only a provision for bad and doubtful debt and the debt had not been written off as bad debts.

On an appeal to the Supreme Court by the assessee, the Supreme Court noted that till the end, the company could not be revived and it had been wound up. In the circumstances, applying the commercial test and business exigency test, the Supreme Court held that both the conditions u/s. 36(1)(vii) read with section 36(2)(i)(b) of the Act were satisfied observing that in Southern Technologies Ltd. v. CIT (320 ITR 577) it had held that prior to 1-4-1989 even in cases in which the assessee(s) made only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction u/s. 36(1) (vii). According to the Supreme Court, there was no reason to deny to the assessee the claim for deduction of bad debt.

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Nirav Shah

[2012] 138 ITD 278 (Pune) Ramsukh Properties vs. DCIT A.Y. 2007-08 Dated: 25th July, 2012

Assessee entitled to benefit u/s. 80(IB)(10) in respect of partially complete housing project if project could not be completed in specified time for reasons beyond its control.

Facts:
The assessee was a firm engaged in the business of builders and promoters. Its housing project consisted of six buildings having 205 flats. The housing project was not fully completed in time as specified under 80(IB)(10)(a) and hence it received completion certificate for 173 flats only. The assessee claimed deduction u/s. 80-IB(10) in respect of all the 205 flats as the project has been substantially completed and as such the completion certificate was obtained. The Assessing Officer rejected the claim of the assessee for granting whole deduction in respect of whole project as well as alternative claim with regard to the proportionate deduction on the ground that the project was not completed within the stipulated period of time. On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer.

Held:
Out of 205 flats, completion certificate was obtained and furnished before the AO for 173 flats only. The request for granting whole deduction in respect of whole project has rightly been rejected because deduction u/s. 80-IB(10) could not be granted to assessee on incomplete construction at relevant point of time. However, the fault of noncompletion of construction was not attributable to assessee. In case such a contingency emerges which makes the compliance with provisions of section 80- IB(10) impossible, then benefit bestowed on an assessee cannot be completely denied. Such liberal interpretation should be used in favour of assessee when he is incapacitated in completing a project in time for reasons beyond his control. The phrase “completion” is a relative and not absolute term. Accordingly, even part completion must be construed as completion. The provisions of taxing statute should be construed harmoniously with the object of statue to effectuate the legislative intention.

Hence, it was held that the assessee is entitled for benefit u/s. 80IB(10) of the Act in respect of 173 flats completed before prescribed limit.

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Nirav Shah

Deemed income: section 41(1): A.Y. 1995-96: Cheques not presented by creditors within validity period: No remission of liability: Amount not assessable u/s.41(1).

For the A.Y. 1995-96, the assessee credited to its profit and loss account a sum of Rs.5,02,646 as liabilities no longer required to be written back since the cheques for the amounts issued to the creditors were not presented within the validity period. The assessee claimed that the sum is liable to be excluded from the profit and could not be taxed u/s.41(1) of the Income-tax Act, 1961. The Assessing Officer treated the amount as the assessee’s income u/s.41(1) of the Act. The Commissioner (Appeals) and the Tribunal upheld the addition.

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

“(i) The words ‘obtained, whether in cash or in any other manner, whatsoever, any amount in respect of such loss or expenditure’ incurred in any previous year in section 41(1)(a) of the Income-tax Act, 1961, refers to the actual receiving of cash of that amount. The amount may be actually received or it may be adjusted by way of any adjustment entry or a credit note or in any other form when the cash or the equivalent of the cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the Legislature when it used the words ‘has obtained, whether in cash or in any other manner, whatsoever, any amount in respect of such loss or expenditure in the past’.

(ii) The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone, but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of debt even after expiry of the normal period of limitation as provided in the limitation Act.

(iii) It has not been established that due to nonencashment of cheques in question, the money involved had become the money of the assessee because of limitation or by any other statutory or contractual right. The amount was not assessable u/s.41(1).”

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Nirav Shah

Receipt — Whether sales tax incentive is a capital receipt is a substantial question of law which ought to have been considered by the High Court.

The assessee-company derived income from the manufacture of yarn, synthetic fabrics, etc. In the earlier assessment year, it had also commenced manufacture of polyester staple fibre in its unit in Patalganga. In the return of income filed by the assessee for the A.Y. 1986-87 in computing the total income a sum of Rs.14,70,40,220 was reduced from the net profit of Rs.71,33,74,748 being subsidy (notional sales tax liability) in the nature of capital receipt. According to the assessee, to encourage setting of new industrial units in backward areas of Maharashtra, the State Government instead of giving cash subsidy, allowed the assessee to retain sales tax payable to the State Government. The Assessing Officer disallowed the claim for the reasons given in the assessment order and first Appellate order for A.Y. 1984-85, in which it was held that the assessee had already got remission by way of exemption of sales tax and there was no ground for taking notional sales tax liability as notional receipt. On appeal, the Commissioner (Appeals) following his earlier order rejected the ground of appeal on the above issue. The Tribunal referred the matter to the Special Bench, since the Tribunal in the earlier orders in the assessee’s own case for the A.Ys. 1984-85 and 1985-86 had held that the sales tax incentive was a capital receipt, but thereafter after considering the above judgments, the Bombay Bench of the Tribunal, in the case of Bajaj Auto Ltd. (ITA Nos. 49 and 1101 of 1991, dated 31-12-2002) had rejected the assessee’s claim that the incentive was a capital receipt on various grounds. The Special Bench of the Tribunal held as under:

“The Scheme framed by the Government of Maharashtra in 1979 and formulated by its Resolution dated 5-1-1980 has been analysed in detail by the Tribunal in its order in RIL for the A.Y. 1985-86 which we have already referred to the extenso. On an analysis of the Scheme, The Tribunal has come to the conclusion that the thrust of the Scheme is that the assessee would become entitled for the sales tax incentive even before the commencement of the production, which implies that the object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area. The Tribunal has at more than one place, stated that the thrust of the Maharashtra Scheme was the industrial development of the backward districts as well as generation of employment, thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the Scheme was oriented towards and was subservient to the investment in fixed capital assets. The sale tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area.”

On appeal, the High Court noting the above held that a finding has been recorded that the object of the subsidy was to encourage the setting up of industries in the backward area by generating employment therein. In our opinion, in answering the issue, the test as laid down by the Supreme Court in Commissioner of Income-tax v. Ponni Sugars and Chemicals Ltd., (2008) 306 ITR 392 (SC) will have to be considered. The Supreme Court has held that the test of the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect of the purpose for which the subsidy is granted. The Supreme Court further observed that in such cases, what has to be applied is the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. Form of subsidy is material. The Supreme Court then proceeded to observe as under:

“The main eligibility condition in the Scheme with which we are concerned in this case is that the incentive must be utilised for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On these aspects there is no dispute. If the object of the subsidy Scheme was to enable the assessee to run the business more profitably than the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit than the receipt of the subsidy was on capital account.”

The High Court applying the purpose test based on the findings recorded by the Special Bench observed that the object of the subsidy was to set up a new unit in a backward area to generate employment. The High Court therefore held that the subsidy was clearly on capital account.

On an appeal by the Revenue, the Supreme Court held that the High Court ought not to have dismissed the appeal without inter alia considering the following question, which did arise for consideration:

“Whether on the facts and in the circumstances of the case and in law the Hon’ble Tribunal was right in holding that sales tax incentive is a capital receipt?”

The Supreme Court allowed the civil appeals and set aside the impugned order of the High Court and remitted the matter back to the High Court to decide the question, formulated above, in accordance with the law.

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Nirav Shah

Bad debts: Deduction u/s. 36(1)(vii): A. Y. 2004- 05: Where books of account are not closed and not signed by Board of Directors and not adopted by shareholders as per Companies Act, it is legally permissible to make adjustments before they are finally adopted: Where accounts of assessee were open and subject to correction by auditors, bad debts could be written off even after closure of accounting period, as there is neither any condition nor any provision u/s. 36(1)(vii), that writing off of

CIT vs. U.P. Rajkiya Nirman Nigam Ltd.; [2013] 36 taxmann.com 96 (All):

For the A. Y. 2004-05, the assessee’s claim for deduction of bad debts u/s. 36(1)(vii) of the Income-tax Act, 1961 was disallowed by the Assessing Officer on the ground that the decision to write off bad debt was not taken in the relevant previous year. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the following questions were raised before the High Court:

“i) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that assessee can keep his accounts open for an indefinite period and pass an entry at a later stage even after 12 months from the closure of the accounting period?

ii) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing the claim of bad debts of the assessee on the ground that it has been written off in the accounts of the relevant previous year while failing to appreciate that decision to write off bad debt was not taken in the relevant previous year and the same were actually not done in the previous year by 31st March?”

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

“i) On perusal of the provisions, it reveals that the only requirement for allowing the bad debt u/s. 36 (1) (vii) of the Income-tax Act, is that any bad debt or part thereof is written off as irrecoverable and secondly, they should be written off in the accounts of the assessee for the previous year. In the instant appeal, neither the department nor the assessee disputes that the debt had become bad and it was written off.

ii) The prescription as provided is to write off bad debt by the assessee in the accounts ‘for the previous year’, but it does not say to write off bad debt ‘in the previous year’. Thus, there is a vast difference if the word ‘in’ would have been there in place of ‘for’. Further, the words ‘accounts of the assessee’ are qualified with further words ‘for the previous year’. Thus, it only means that the accounts in which the Act of writing off is to be done by the assessee should be for the previous year. Therefore, the law requires to write off the bad debt in the accounts of the assessee in the relevant accounting year. There is neither any condition nor any provision that the writing off should be done in the previous year, i.e. before end of the financial year.

iii) In the present case, debts relating to the period 1987-88 and 1998-99 claimed in the accounts which were prepared up to 31-03-2004 and as the accounts of the assessee are open and subject to corrections by the Auditors, as per the Companies Act, then such writing off can be done in those account books. No new legal proposition has been brought to our notice for treating the debt as bad or irrecoverable should be taken in the previous year itself. In other words, where account books are not closed and not signed by the Board of Directors and not adopted by the shareholders as per the Companies Act, it is legally permissible to make adjustments before they are finally adopted.

iv) Further, it is admitted that the original return, on the basis of unaudited accounts, was filed on 01-11-2004. After audit had taken place and report of the Auditors was accepted, revised return was filed on 18-08-2005 and it is only in the revised return, the debts to the tune of Rs. 2 crore and odd had been declared as bad. The ground taken by the Assessing Authority and Appellate Authority for not accepting the said bad debts during the assessment year under consideration, i.e. 2004-05 is contrary to the provisions of section 36 (1) (vii) of the Income-tax Act, and further in view of the interpretation as stated here-in-above. Therefore, the Tribunal has rightly allowed the appeal of the assessee.

v) In view of above, the questions are answered in the negative, i.e., against the Revenue and is in favour of the assessee.”

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Nirav Shah

Appellate Tribunal: Power and scope: Section 80-IA: A. Ys. 2002-03 to 2008-09: CIT(A) holding rental income from towers constructed in industrial park was business income and eligible for deduction u/s. 80-IA: Revenue not challenging this finding before Tribunal: Tribunal cannot pass remand order for further enquiry on issue of character of receipt:

R. R. Industries Ltd. vs. ITO; 356 ITR 97 (Mad):

The assessee constructed towers in the industrial park and let them out to software concerns providing a platform with plug and play infrastructure. It claimed deduction u/s. 80-IA of the Income-tax Act, 1961, treating the rental income as business income. The Assessing Officer assessed the income as income from house property and disallowed the assessee’s claim for deduction u/s. 80-IA. The Commissioner (Appeals) held that the assessee had complied with section 80-IA(4)(iii) and accordingly was eligible for deduction u/s. 80-IA. He held that the income received by the assessee was to be assessed as income from business. He also agreed in principle that the deduction u/s. 80-IA would be allowed, even if the rental income was assessed as income from house property.

Before the Tribunal the Revenue challenged the view of the Commissioner (Appeals) only on his holding the income derived from letting out of industrial park buildings as income from business as against the finding made by the Assessing Officer that it was to be treated as income from house property. No question was raised on the view of the Commissioner (Appeals) that irrespective of the character of the receipt, the deduction was available. On considering the nature of the receipt, the Tribunal agreed with the submission of the assessee that income derived by developing and operating or maintaining an industrial park was assessable under the head “profits and gains of business and profession” as could be inferred from the provisions of section 80-IA(4)(iii) of the Act. The Tribunal held that the assessee as well as the Revenue had not brought out any materials to show that the facilities developed by the assessee after completion of the development was treated as an industrial park by any authority and it was not clear whether the alleged industrial park was so notified by the Central Government or not. In the absence of any material to show that what was predominant in the letting out in the building and whether the facilities were incidental, the Tribunal viewed that it was necessary to restore the issue back to the Assessing Officer for proper verification.

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

“i) When the Revenue had accepted the view of the Commissioner (Appeals) on section 80-IA that the assessee had complied with section 80-IA(4)(iii), nothing remained for an enquiry either as to the nature of the receipt or for that matter the facilities developed to be treated as an industrial park to consider the question of deduction u/s. 80-IA(4)(iii).

ii) The view of the Commissioner (Appeal) in this regard did not call for any interference. The Revenue did not challenge the order of the Commissioner on the section 80-IA deduction before the Tribunal.

iii) Thus, when the character of the receipt was not a question to be gone into in the matter of considering the claim of deduction u/s. 80-IA(4)(iii), no useful purpose would be served for the Revenue to again insist on a decision on the character of the receipt.

iv) The order of the Tribunal was set aside and the appeals filed by the assessee are allowed.”

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Nirav Shah

Set-off of Brought Forward Busines Losses against Capital Gains u/s.50

Issue for consideration

Under the provisions relating to set-off of brought forward business losses u/.s72, a brought forward business loss can be set off only against business profits of the current year, and not against income from any other source, including capital gains of the current year. Gains arising on sale of depreciable business assets forming part of a block of assets, though arising in the course of business, is taxable under the head ‘Capital Gains’ as a deemed shortterm capital gains on account of the specific provisions of section 50.

Section 50 reads as under:

“50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications:

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely:

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;

(ii) the written down value of the block of assets at the beginning of the previous year; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,

such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written-down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.”

The issue has arisen as to whether brought forward business losses can be set off against deemed shortterm capital gains, arising on transfer of depreciable assets, taxable u/s.50, since such gain is really a type of business income. While the Bangalore and Rajkot Benches of the Tribunal have held that unabsorbed business loss cannot be set off against the gains arising u/s.50, the Mumbai Bench of the Tribunal has held that the business loss brought forward from earlier years can be set off against such capital gains chargeable u/s.50.

Kampli Co-operative Sugar Factory’s case

The issue had come up before the Bangalore Bench of the Tribunal in the case of Kampli Co-operative Sugar Factory Ltd. v. Jt. CIT, 83 ITD 460. In this case relating to A.Y. 1997-98, the assessee sold the assets of its sugar factory, including the depreciable assets but excluding investments and deposits and the liabilities. The assessee claimed that the sale was a slump sale and the gains thereon was not taxable, since section 50B introduced with effect from A.Y. 2000-01 was not applicable to the year under consideration.

The Assessing Officer broke up the consideration into two parts — one for the land, which was held taxable as a long-term capital gains after deducting the indexed cost of the land, and the other for the depreciable assets, which was held taxable as deemed short-term capital gains after deducting the written-down value of the block of assets. He also did not set off the brought forward business losses against such capital gains.

The Commissioner (Appeals), upheld the order of the Assessing Officer and denied the set-off of the unabsorbed business losses against the capital gains.

The Tribunal confirmed that the sale was not a slump sale and bifurcation of the consideration was justified but proceeded to further examine the issue as to whether the unabsorbed business loss could be set off against the short-term capital gains arising u/s.50. The Tribunal held that the business assets were also capital assets as defined u/s.2(14), giving rise to capital gains on their sale chargeable u/s.45. The Tribunal observed that prior to 1st April, 1988, a component of capital gains arising from the sale of business assets was treated as a business profit by the legal fiction of the then prevailing section 41(2) while section 50 charged the whole amount under the head ‘capital gains’. The Tribunal further noted that the deeming capital gains u/s.50 of the Act is restricted to the capital gains being short-term capital gains and did not deem a business income to be the capital gains u/s.50 of the Act. The Tribunal therefore held that the unabsorbed business losses could not be set off against the capital gains.

A similar view was taken by the Rajkot Bench of the Tribunal in the case of Master Silk Mills (P.) Ltd. v. Dy. CIT, 77 ITD 530, where the Tribunal held that unabsorbed business losses could not be set off against sales proceeds of scrap of building that was taxable u/s.50 as a short-term capital gains. In that case the business had been closed and the income could not be said to have arisen in the course of business.

Digital Electronics’ case

The issue recently came up before the Mumbai Bench of the Tribunal in the case of Digital Electronics’ Ltd. v. Addl. CIT, 135 TTJ (Mum.) 419.

In this case, the assessee sold the factory building and plant and machinery, and claimed set-off of unabsorbed depreciation and brought forward business loss against such short-term capital gains taxable u/s.50. It was claimed that though the income was taxable as capital gains, its character remained that of business income inasmuch as the gains arose on transfer of a business asset on which depreciation was allowed. Reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of J. K. Chemicals Ltd. v. ACIT, 33 BCAJ (April 2001) page 36 [ITA No. 3206/Bom./89 dated 1st November 1993], where the Tribunal had held on similar facts [though in the context of section 41(2) and capital gains] that the character of such income that arose on transfer of depreciable assets remained that of business income, though it was taxed as capital gains under a deeming fiction.

The Assessing Officer however disallowed such setoff. The Commissioner (Appeals) upheld the stand of the Assessing Officer, taking the view that there was no ambiguity in section 72, and that reliance could not be placed on erstwhile provisions of section 41(2).

The Tribunal, analysing the provisions of section 72, observed that the said section 72 stated that the losses incurred under the head ‘Profits and Gains of Business or Profession’ which could not be set off against income from any other head of income, had to be carried forward to the following assessment year and was allowable for being set off “against the profits, if any, of that business or profession carried on by him and assessable for that assessment year.” In other words, according to the Tribunal, there was no requirement of the gains being taxable under the head ‘Profits and gains of business or profession’ and thus, as long as gains were ‘of any business or profession carried on by the assessee and assessable to tax for that assessment year’, the same could be set off against loss under the head profits and gains of business or profession carried forward from earlier years. According to the Tribunal, the gains arising on sale of the business assets was in the nature of business income, though it was taxed under the head ‘Capital Gains’.

The Tribunal therefore held that the unabsorbed business losses could be set off against the capital gains charged to tax u/s.50.

Observations

The income from transfer of a depreciable asset, used for business, has its origin in business and is primarily characterised as a business income. This position in law was acknowledged specifically by old section 41(2) that is deleted w.e.f. 1-4-1988. Even the new section 41(2) provides for the similar treatment for taxing income on sale of depreciable assets used for generation and distribution of power under the head ‘profits and gains of business’.

The Income-tax Act contains provisions, for example, sections 8 and 22, which provide for an income to be taxed under a specific head of income though the same otherwise may have a different character. These provisions contain a deeming fiction and it is understood that they have a limited application.

The Supreme Court following its decisions in the cases of United Commercial Bank Ltd., 32 ITR 688 and Chhugandass & Co., 55 ITR 17, in the case of CIT v. Radhaswami Cocanada Bank Ltd., 57 ITR 306, had established this principle in the context of set-off of business losses against dividend income, which was then taxable under the head ‘Income from Other Sources’. It was noted by the Supreme Court that while one set of provisions, i.e., the nature of loss incurred by the assessee, classified the same on the basis of income being taxable under a particular head for the purpose of computation of the net income, the other set of provisions was concerned only with the nature of gains being from business and not with the head of tax. Their Lordships held that as long as the profits and gains were in the nature of business profits and gains, and even if these profits were liable to be taxed under a head other than income from business and profession, the loss carried forward could be set off against such profits of the assessee. The ratio of these decisions was again confirmed by the Supreme Court in the case of Western States Trading Co. Pvt. Ltd., 80 ITR 21.

Even in the context of section 50 gains, the Courts have consistently held that such gains, though taxed under a deeming fiction as short-term capital gains, are eligible for the benefit of exemption from taxation u/s.54E, 54EC, 54F, etc. on its reinvestment in the specified assets [see Assam Petroleum Industries Ltd., 262 ITR 587 (Gau.) Rajiv Shukla, 334 ITR 138 (Del.) and Ace Builders Pvt. Ltd., 281 ITR 210 (Bom.)]. The SLP against the last decision has been dismissed by the Supreme Court.

It is accordingly a fairly settled position in law that a benefit otherwise allowed in law under one provision shall not be denied by extending a fiction contained in any other provision of law unless specifically provided for. No such provision is found to be contained in the provisions of sections 70, 71 and 72 of the Act.

On a closer reading of section 72 one finds that it does not mandate that the income that is sought to be adjusted against the brought forward loss should be the one that is taxable under the head ‘profits and gains of business’. This precisely is brought out by the Mumbai Bench of the Tribunal by explaining that there is a distinct difference in the language employed in section 72 in the context of the loss that is to be carried forward, where the loss under the particular head of income is referred to, as against the context of the loss which it can be set off against, where the nature of income is referred to.

Looked at it from one more angle, the income that is sought to be taxed u/s.50 is to a large extent nothing but recoupment of depreciation that has been allowed as a deduction in computing the income under the head ‘profits and gains of business or profession’ and to the extent of the amount representing the recoupment should be considered as the business income.

The Mumbai Tribunal in the above-referred decision in J. K. Chemicals’ case was also impressed by the fact pointed out to the Tribunal that even the form of the Return of Income for the relevant year under consideration in that case provided for a set-off of brought forward business losses against the deemed short-term capital gains.

It is thus clear that in the case of capital assets of a business, the source of the income is really the business itself. It is by virtue of the fact that a business had been carried on that gains arises on sale of assets of that business. The character of the income is therefore that of business income, though there are specific provisions for taxing such gains as capital gains. Even a businessman would regard the character of such income as arising from his business.

Therefore, the view taken by the Mumbai Bench of the Tribunal in Digital Electronics case seems to be the better view of the matter.

Nirav Shah

Motor Accident–Compensation on account of death–In law the presumption is that the employer at the time of payment of salary deducts income tax on the estimated income of the deceased employee from the salary and in the absence of any evidence to the contrary the salary as shown in the last pay certificate should be accepted for calculating the compensation payable to the dependent(s).

Vimal Kanwar And Ors. vs. Kishore Dan And Ors. [2013] 354 ITR 95 (SC)

On 14th September, 1996, one Mr. Sajjan Singh Shekhawat, Assistant Engineer with the Public Works Department, was sitting on his scooter which was parked on the side of the road and was waiting for one Junior Engineer, N. Hari Babu, and another whom he had called for discussion. At that time, a driver of a Jeep No. RJ10C0833 came driving from the railway station side with high speed, recklessly and negligently and hit the scooter. Sajjan Singh along with his scooter came under the jeep and was dragged with the vehicle. Due to this accident, fatal injuries were caused to him and on reaching the hospital he expired. The scooter was also damaged completely. The wife of the deceased was aged about 24 years; the daughter was aged about 2 years and the mother was aged about 55 years at the time of death of the deceased. They jointly filed an application to the Tribunal alleging that negligent and rash driving by the driver of the jeep caused the death of Sajjan Singh and claimed compensation of Rs. 80,40,160.

The Tribunal determined the compensation to be granted in favour of the appellants at Rs. 14,93,700 jointly.

Though the High Court noticed certain mistakes in determination of the compensation it upheld the same. In determining the compensation, a notional deduction of income tax was made by the High Court from the salary of the deceased apart from the deduction of annual pension and came to the conclusion that the award passed by the Tribunal was just and proper.

Before the Supreme Court, the grievance of the appellants was as follows:

(i) No amount can be deducted towards provident fund, pension and insurance amount from the actual salary of the victim for calculating compensation.

(ii) In the absence of any evidence, the court suo motu cannot deduct any amount towards income tax from the actual salary of the victim.

(iii) On the facts of the present case, the Tribunal and the High Court should have doubled the salary by allowing 100% increase towards the future prospects, and

(iv) The Tribunal and the High Court failed to ensure payment of just and fair compensation.

The first issue therefore was “whether provident fund, pension and insurance receivable by the claimants come within the periphery of the Motor Vehicles Act to be termed as ‘pecuniary advantages’ liable for deduction”. The Supreme Court observed that the aforesaid issue fell for consideration before it in Mrs. Helen C. Rebello vs. Maharashtra State Road Transport Corporation reported [1999] 1 SCC 90. In the said case, it was held that provident fund, pension, insurance and similarly any cash, bank balance, shares, fixed deposits, etc., are all “pecuniary advantages” receivable by the heirs on account of one’s death but all these have no correlation with the amount receivable under a statue occasioned only on account of accidental death. Such an amount will not come within the periphery of the Motor Vehicles Act to be termed as “pecuniary advantage” liable for deduction.

The second issue was “whether the salary receivable by the claimant on compassionate appointment comes within the periphery of the Motor Vehicles Act to be termed as ‘pecuniary advantage’ liable for deduction”. The Supreme Court held that “Compassionate appointment” can be one of the conditions of service of an employee, if a scheme to that effect is framed by the employer. In case the employee dies in harness, i.e., while in service leaving behind the dependents, one of the dependents may request for compassionate appointment to maintain the family of the deceased employee died in harness. This cannot be stated to be an advantage receivable by the heirs on account of one’s death and has no correlation with the amount receivable under a statute occasioned on account of accidental death. Compassionate appointment may have nexus with the death of an employee while in service but it is not necessary that it should have a correlation with the accidental death. An employee dies in harness even in normal course, due to illness and to maintain the family of the deceased one of the dependents may be entitled for compassionate appointment but that cannot be termed as “pecuniary advantage” that comes under the periphery of the Motor Vehicles Act and any amount received on such appointment is not liable for deduction for determination of compensation under the Motor Vehicles Act.

The third issue was “whether the income tax is liable to be deducted for determination of compensation under the Motor Vehicles Act”. The Supreme Court observed that in the case of Sarla Verma vs. Delhi Transport Corporation (2009) 6 SCC 121, it was held that “generally the actual income of the deceased less income tax should be the starting point for calculating the compensation”. It was further observed that “where the annual income is in taxable range, the words “actual salary” should be read as “actual salary less tax”.

The Supreme Court noticed that in the present case, none of the respondents brought to the notice of the court that the income tax payable by the deceased Sajjan Singh was not deducted at source by the employer State Government. No such statement was made by Ram Avtar Parikh, an employee of the Public Works Department of the State Government who placed on record the last pay certificate and the service book of the deceased. The Tribunal or the High Court on perusal of the last pay certificate, did not notice that the income tax on the estimated income of the employee was not deducted from the salary of the employee during the said month or financial year. In the absence of such evidence, it was to be presumed that the salary paid to the deceased Sajjan Singh as per the last pay certificate was paid in accordance with law, i.e., by deducting the income tax on the estimated income of the deceased Sajjan Singh for that month or the financial year. The appellants had specifically stated that assessment year applicable in the instant case was 1997-98 and not 1996-97 as held by the High Court. They had also taken specific plea that for the assessment year 1997-98 the rate of tax on income more than Rs.40,000 and up to Rs.60,000 was 15% and not 20% as held by the High Court. The aforesaid fact was not disputed by the respondents. In view of the finding as recorded above and the provisions of the Income-tax Act, 1961, as discussed, the Supreme Court held that the High Court was wrong in deducting 20% from the salary of the deceased towards income tax for calculating the compensation. As per law, the presumption would be that the employer State Government at the time of payment of salary deducted income-tax on the estimated income of the deceased employee from the salary and in the absence of any evidence, the Supreme Court held that the salary as shown in the last pay certificate at Rs. 8,920 should be accepted which if rounded of came to Rs. 9,000 for calculating the compensation payable to the dependent(s).

The fourth issue was “whether the compensation awarded to the appellants was just and proper”. According to the Supreme Court for determination of this issue, it was required to determine the percentage of increase in income to be made towards prospects of advancement in future career and revision of pay.

According to the Supreme Court, admittedly, the date of birth of the deceased Sajjan Singh being 1st February, 1968; the submission that he would have continued in service upto 1st February, 2026, if 58 years is the age of retirement or 1st February, 2028, if 60 years is the age of retirement required to be accepted. The Supreme Court observed that he was only 28 years 7½ months old at the time of death. In normal course, he would have served the State Government minimum for about 30 years. Even if one does not take into consideration the future prospect of promotion which the deceased was otherwise entitled and the actual pay revisions taken effect from 1st January, 1996, and 1st January, 2006, it cannot be denied that the pay of the deceased would have doubled if he would have continued in the services of the State till the date of retirement. Hence, this was a fit case in which 100% increase in the future income of the deceased should have been allowed by the Tribunal and the High Court which they failed to do. The Supreme Court having regard to the facts and evidence on record, estimated the monthly income of the deceased Sajjan Singh at Rs. 9,000 x 2 = Rs. 18,000 per month. From this his personal living expenses, which should be one-third, there being three dependents, were deducted. Thereby, the ‘actual salary’ came to Rs. (18,000-6,000=12,000) per month or Rs. 12,000 x 12 = 1,44,000 per annum. As the deceased was 28½ years old at the time of death the multiplier of 17 was applied, which was appropriate to the age of the deceased. The normal compensation would then work out to be Rs. 1,44,000 x 17 = Rs. 24,48,000 to which the Supreme Court added the usual award for loss of consortium and loss of the estate by providing a conventional sum of R. 1,00,000; loss of love and affection for the daughter Rs. 2,00,000; loss of love and affection for the widow and the mother at Rs. 1,00,000 each, i.e., Rs. 2,00,000 and funeral expenses of Rs. 25,000.

Thus, according to the Supreme Court, in all a sum of Rs. 29,73,000 was a fair, just and reasonable award in the circumstances of this case. The rate of interest of 12% was allowed from the date of the petition filed before the Tribunal till payment is made.

Nirav Shah

Disallowance of an expenditure ‘Payable’ u/s. 40(a)(ia)

Issue for Consideration
Section 40(a)(ia) is placed in Chapter IV D that deals with computation of profits and gains of business or profession. The said section lists out various expenditures that are not deductible in computing such profits and gains notwithstanding anything to the contrary contained in sections 30 to 38.

The part, relevant for the discussion of the issue under consideration here, reads as under:

“Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head ‘profits and gains of business or profession” –

(a) In the case of any assessee

(i) —————–

(ia)any interest, commission or brokerage, rent, royalty fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid, on or before the due date specified in sub-section (1) of section 139:

Provided …………………………………………………..
Provided further ………………………………………
Explanation: …………………………………………….

On an apparent reading of the provision, it appears that an expenditure of the nature specified in the section, payable to a resident, shall not be allowed to be deducted where tax is deductible at source but has not been paid.

Since its introduction by the Finance (No.2) Act, 2004, w.e.f. assessment year 2005-06, this provision has been the subject matter of one or more controversies, some of them grave, including the challenge to the constitutionality of the provisions. The resistance of the taxpayers attracts sympathy on account of the fact that the provisions are very harsh as they call for disallowance of a genuine business expenditure, in its entirety, simply on account of non-deduction or non-payment of a miniscule amount. This torturous treatment attracts fierce opposition from the taxpayers and provides a breeding ground for an endless spate of litigation involving innovative contentions.

One such proposition, that found favour with the tribunal, is that the disallowance u/s. 40(a)(ia) be restricted to the amount that remained unpaid or payable at the end of the year on which tax is not deducted or is deducted but has not been deposited with the Government. The tribunal based its finding on the use of the term ‘payable’ in section 40(a)(ia) to hold that the said term conveyed that the expenditure that is ‘ paid’ during the year is not disallowable even where the tax is not deducted or is not deposited after deduction. In short, the disallowance is to be restricted to the expenditure that is ‘payable’ and is not to be extended to cover an expenditure that has been ‘paid’.

The Special Bench of the tribunal in Merilyn Shipping & Transports vs. Addl. CIT, 136 ITD 23 (Vishakhapatnam) accepted this line of thinking by holding that the provisions of section 40(a)(ia) were not applicable in respect of such expenditure, the payment for which was made during the year without deducting tax at source. It held that the disallowance was possible only in respect of such expenditure, the payment for which was outstanding at the end of the year.

This decision of the special bench has subsequently been expressly overruled by two decisions of the Calcutta High Court and also by a decision of the Gujarat High Court. In contrast, the Allahabad High Court recently noted that the provisions of section 40(a)(ia) applied only to such expenditure, the payment for which had remained outstanding at the year end. In the meanwhile, the operation of this decision of the special bench was put under an interim suspension by the Andhra Pradesh High Court. However, it is believed that the operation of such suspension was limited to Merilyn Shipping & Transports or at the most to the assesses in the state of Andhra Pradesh.

Any issue concerning section 40(a)(ia) assumes importance, as the said provision seeks to disallow a genuine business expenditure, for non-deduction or payment of an insignificant amount of tax.

2. Crescent Export Syndicate’s case

The issue arose before the Calcutta High Court, for the first time, in the case of CIT vs. Crescent Export Syndicate, 33 taxmann.com 250. In this case, the court was concerned with two appeals involving a common issue. In both the cases, the tribunal, relying on the decision of the Special Bench in the case of Merilyn Shipping & Transports, deleted the disallowance by the AO by holding that:

“If all the amounts have been paid, then obviously following the principles laid down by the Hon’ble Special Bench of this Tribunal in the case of Merilyn Shipping & Transports, no addition shall be made. If any amount is found to be payable as on the year end, then the Assessing Officer shall give the assessee adequate opportunity to substantiate his case as to why the disallowance, if any, should not be made by invoking the provisions of section 40(1) (ia) of the Act”.

“As the issue claimed by the assessee is that there is nothing payable as on 31-03-2006 and this expenditure of Rs. 1,08,80,559/- is paid during the year and nothing remains payable, it means that the issue is covered. Principally, we have agreement with the assessee’s counsel and are of the view that the issue is squarely covered in favour of the assessee. Principally, we allow this issue of the assessee but subject to the verification by AO that these expenses are paid within the year i.e., up to 31-03-2006 and nothing remains payable. Hence, this appeal of assessee in principle is allowed in favour of the assessee but subject to verification.”

The revenue filed appeals in both the matters requesting the Calcutta High Court to set aside the orders of the tribunal.

On behalf of the assessee, the following important contentions were placed for the consideration of the court;

• The Legislature has replaced the words “amounts credited or paid” used in the Finance Bill with the word “payable” in the final enactment. The change clearly conveyed the legislative intent of restricting the scope of the disallowance to the amounts ‘payable’ by excluding those amounts that were ‘paid’ during the year.

• Such change was not without any purpose. By changing the words from “credited or paid” to “payable”, the legislative intent has been made clear that only the outstanding amount or the provision for expense liable for TDS was sought to be disallowed in the event there was a default of TDS. Reliance was placed on the decision in the case of CIT vs. Kelvinator of India, 320 ITR 561 wherein the court, in the context of section 147, examined the implications of the deletion of the word ‘opinion’ used in the Finance Bill with the words “reason to believe” on enactment of the Bill, on receipt of representations against the omission of the words “reason to believe”,

• A construction which required, for its support, addition or substitution of words or which resulted in rejection of words, had to be avoided, unless it was covered by the rule of exception, including that of necessity. In the present provision of section 40(a) (ia) of the Act, there was no such exception and the only word used by the legislature was “payable”.

• The legislative intent had been made clear by consciously replacing the words “credited or paid” with “payable”, that only the outstanding amount or the provision for expenses were liable for TDS were to be disallowed in the event there was default in not following the TDS provisions under Chapter XVII-B of the Act.

• Sections 194 L and 194 LA provided that tax was to be deducted only at the time of payment. The language in these sections therefore showed that the legislature, where desired, had used different language in different sections.

• Reference was made, for explaining the scope and effect of section 40(a)(ia), to the circular No.5 of 2005, dated 15th July, 2005, issued by the CBDT to show that the intention to introduce the provision was to curb bogus payments by creating bogus liability.

• Section 40(a)(ia) created a legal fiction for the amounts outstanding or remained payable i.e. at the end of every year as on 31st March and such fiction could not be extended for taxing the amounts already paid.

• Section 201 took care of tax to be collected in the hands of the payee and other TDS provisions under

Chapter XVIIB of the Act. No further legal fiction from elsewhere in the statute could be borrowed to extend the field of section 40(a)(ia) for disallowing the genuine and reasonable expenditure on the amounts of expenditure already paid.

• That there might be two possible constructions. However, the construction that the word ‘payable’ was interchangeable with the word ‘paid’ made the position of the assessee, who had already paid his dues, without deducting tax, worse than the assessee who had not as yet paid his dues. In the case of the assessees, who had paid the dues without deduction of tax, disallowance of the expenditure was permanent and they had no means of deducting the tax later on relatable to the amount already paid in the earlier year and thus the relief contemplated by the proviso could never be availed by them.

• While the income in the hands of the recipient was taxed, the payer did not get the benefit thereof. A second proviso to clause (ia), effective from 1st April, 2013, was enacted to lessen the rigour of clause (ia).

The Calcutta High Court, on hearing the rival contentions, observed and held as under:

• The main thrust of the majority view, in the decision of the special bench, was based on the fact that the legislature had replaced the expression “amounts credited or paid” with the expression “payable” in the final enactment.

• The tribunal fell into an error in not realising that a comparison between the pre-amendment and post-amendment law was permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment which precisely was what was done by the Apex Court in the case of CIT vs. Kel-vinator of India Ltd. 187 Taxman 312. But the same comparison between the draft and the enacted law was not permissible. Nor could the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It was the finally enacted law which was the will of the legislature.

• The tribunal once having held “that where the language is clear the intention of the legislature is to be gathered from the language used”, then it was not open to seek to interpret the section on the basis of any comparison between the draft and the section actually enacted nor was it open to speculate as to the effect of the so-called representations made by the professional bodies.

• The tribunal having held that “Section 40(a)(ia) of the Act created a legal fiction by virtue of which even the genuine and admissible expenses claimed by an assessee under the head ‘income from business and profession,’ if the assessee does not deduct TDS on such expenses, are disallowed”, was it open to the tribunal to seek to justify that by stating that “this fiction cannot be extended any further and, therefore, cannot be invoked by Assessing Officer to disallow the genuine and reasonable expenditure or the amounts of expenditure already paid”? Did that not amount to deliberately reading something in the law which was not there?

• The tribunal sought to remove the rigour of the law by holding that the disallowance should be restricted to the money which was yet to be paid. What the Tribunal by majority did was to supply the casus omissus which was not permissible and could only have been done by the Supreme Court in an appropriate case as was done in the case of Bhuwalka Steel Industries vs. Bombay Iron & Steel Labour Board , 2 SCC 273.

The Calcutta High Court thereafter endeavoured to show that no other interpretation was possible in the following words:

• The key words used in section 40(a)(ia), according to the court, were “on which tax is deductible at source under Chapter XVII –B”. If the question was “which expenses are sought to be disallowed?”, the answer was bound to be “those expenses on which tax is deductible at source under Chapter XVII –B”.

Once that was realised, nothing turned on the basis of the fact that the legislature used the word ‘payable’ and not ‘paid or credited’. Unless any amount was payable, it could neither be paid nor credited. If an amount had neither been paid nor credited, there could be no occasion for claiming any deduction.

• The language used in the draft was unclear and susceptible to giving more than one meaning. By looking at the draft it could be said that the legislature wanted to treat the payments made or credited in favour of a contractor or sub-contractor differently than the payments on account of interest, commission or brokerage, fees for professional services or fees for technical services because the words “amounts credited or paid” were used only in relation to a contractor or sub-contractor. This differential treatment was not intended. Therefore, the legislature provided that the amounts, on which tax was deductible at source under Chapter XVII-B, payable on account of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services or to a contractor or sub-contractor should not be deducted in computing the income of an assessee in case he had not deduced, or after deduction had not paid, within the specified time. The language used by the legislature in the finally enacted law was clear and unambiguous whereas the language used in the bill was ambiguous.

• There could be no denial that the provision in question was harsh. But that was no ground to read the same in a manner which was not intended by the legislature. The law was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It was not the case of an inadvertent error. The suggestion that the second proviso inserted to be made effective from

1st April, 2013 should be held to have retrospective effect, could also not be acceded to for the same reason indicated above.

For the reasons discussed above, the court held that the majority views expressed in the case of Merilyn Shipping & Transports were not acceptable and the appeal was allowed in favour of the revenue.

3. Vector Shipping Services (P) Ltd.’s case

The issue again came up for consideration of the Allahabad High Court in the case of CIT vs. Vector Shipping Services (P) Ltd. in ITA No. 122 0f 2013, copy available on www. itatonline.org.

The assessee, a shipping service company, engaged the services of another company for ship management work, on its behalf, for which it paid an amount of Rs. 1.17 crore, without deduction of tax at source, on the ground that the said payment represented the reimbursement of expenses incurred by the service provider. The AO disagreed with the view of the assessee company and disallowed the entire payment u/s 40(a)(ia).

On appeal against the order of the AO, the CIT (A) held that “In the light of the above facts ——————– , when such type of expenses incurred by the appellant were totally paid and not remained payable as at the end of the relevant accounting period, provisions of section 40(a)(ia) of the Act are not applicable ………………………………. it is held that the AO was not justified in making addition of Rs.1,17,68,621/- on account of disallowance made under section 40 (a) (ia) of the I.T. Act, 1961. The same is directed to be deleted. Grounds Nos. 2 & 3 are allowed.”

The Tribunal, besides upholding the assessee’s claim that no tax was required to be deducted on a reimbursement, held that section 40(a)(ia) applied only to amounts that were “payable” as at the end of the year and not to amounts that had already been “paid” during the year relying on the decision of the Special Bench in the case of Merilyn Shipping and Transport Ltd 136 ITD 23 (SB) where a similar view was taken.

On appeal by the Income-tax Department, the Allahabad High Court was asked to answer the following:

“(a) Whether on the facts and in the circumstances of the case, the Hon’ble ITAT has rightly confirmed the order of the CIT (A) and thereby deleting the disallowance of Rs. 1,17,68,621/- made by the Assessing Officer under section 40(a)(ia) of the I.T. Act, 1961 by ignoring the fact that the company M/s Mercator Lines Ltd. had performed ship management work on behalf of the assessee M/s Vector Shipping Services (P) Ltd. and there was a Memorandum of Understanding signed between both the companies and as per the definition of memorandum of understanding, it included contract also.”

The Allahabad High Court, vide an order dated 09-07-2013, observed that the Revenue could not take any benefit from the observations made by the Special Bench of the tribunal in the case of Merilyn Shipping and Transport Ltd. to the effect that section 40 (a) (ia) was introduced in the Act with a view to augment the revenue through the mechanism of tax deduction at source and the provision was brought on statute to disallow the claim of even genuine and admissible expenses under the head ‘Income from Business and Profession’ in case the assessee did not deduct tax on such expenses and that the default in deduction of tax would result in disallowance of expenditure.

The court, importantly, in the context, noted that for disallowing expenses from business and profession on the ground that tax had not been deducted, the amount should be payable and not which had been paid by the end of the year.

4. Observations

Clarity breeds confusion. The Special Bench of the tribunal in the case of Merilyn Shipping & Transports, 136 ITD 23 (SB) (Vishakhapatnam) held that the language of section 40(a)(ia) was clear and the Calcutta High Court in Crescent Exports Syndicate’s case (supra) also held that the language was clear and unambiguous, to arrive at the conflicting decisions. Now, if the language is clear how could there have been different and importantly diverse views on the meaning of the word ‘payable’? Either one of the views is wrong or there is a genuine possibility of two views on the issue under consideration. We would prefer the latter view to hold that the term ‘payable’, when read in the context and in the background of the circumstances that surrounded its use and also the subsequent insertion of the second proviso for granting relief on payment of tax by the payee, is capable of conveying two views, both of which are possible. Needless to say that when two views are possible, a view beneficial to the taxpayer should be adopted, Vegetable Products 88 ITR 192 (SC). There are no two views on this aspect of the law of interpretation.

The Calcutta High Court’s observations on the legislative intent, if there ever was one, are interesting and so are its observations bordering on the strictures when it held that the language of the law was clear and the tribunal was wrong in gathering the legislative intent. Having said so, the court itself tried to support what in its view was clear with deductive logic supported by analytical tools to provide a harmonious interpretation. No harmony is required to be infused where the language is clear. With utmost respect, it appears that the time is ripe to altogether give up on using the tool of legislative intent as an aid to interpretation. A grave notice is required to be taken of the fact that most of these legislations are passed without any debate and even understanding of the law and it may be that the persons voting in favour of passing the legislation may not even be aware of the subject matter of the vote and of the fact that such a law is being passed with their votes. There is a strong case for the courts, in the present times, to be in tune with the times and supply such interpretation which is just and harmonious and more importantly the one that identifies with common sense.

The situation has the effect of putting the tribunal in an unenviable situation. The conflicting decisions of the High Courts have once again paved the pathway for a fresh consideration of the subject by the tribunal. Usually in such cases, the tribunal charts its own course and is allowed to do so. However, the interesting part is that in the case under consideration, there already is a special bench view, not in one case but in two cases. Merilyn Shipping & Transports, 136 ITD 23 (SB) (Vishakhapatnam) and reiterated in Rajamahendri Shipping & Oilfields Pvt. Ltd. 19 ITR(T) 616 (SB) (Vishakhapatnam). Can a division bench of the tribunal ignore the decision of the special bench to take a view contrary to what has been laid down by a special bench? While the benches of the tribunal functioning within the jurisdiction of the Calcutta and Gujarat High Courts shall follow the judgments in favour of the revenue, it will be most apt for the benches in other jurisdictions to take note of the controversy and decide the case in favour of the taxpayer by following the beaten track that requires the adoption of the view that is favourable to him, applying the principle of interpretation that requires favouring the taxpayer in cases of doubt.

A view is being expressed that the decision in Vector Shipping’s case cannot be considered to be laying any law on the subject of allowability of an expenditure where no tax is deducted, once it is shown that the payment for such an expenditure is made during the year, as was held by the special bench. It is contended by the holders of this view that the question put up for consideration of the court was primarily concerned with the liability of the assessee to deduct tax at source and the court confirmed the tribunal’s findings that the assessee was not liable to deduct tax at source and refused to admit the appeal of the revenue on the ground that no question of law was involved.

Under this view, the observations of the Allahabad High Court should be treated as the obiter dicta and not a binding decision. At this point, it is apt to reproduce the exact words of the Allahabad High Court, to the extent relevant, which read as “It is to be noted that for disallowing expenses from business and profession on the ground that TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year.” These words are not words that can be taken lightly by anyone seriously dealing with the interpretation of law by consigning it to the status of irrelevant observations made out of context. The court in that case has taken a detailed notice of the order of the CIT(A) and of the tribunal, both of which directly and expressly dealt with the issue of the meaning of the term ‘payable’. In fact, the issue of liability to TDS was an issue of lesser importance to the appellate authorities and perhaps to the AO, as well. The only other thing the court noted in the order, was also about addressing the argument of the revenue to the effect that the provisions of section 40(a)(ia) should be read in a manner so as to advance the case of recovery of tax. The court strongly rejected any such contention which was directly surrounding the interpretation of the word ‘payable’. These facts clearly confirmed that the issue under consideration here was duly addressed by the court in the said case, as well.

We are fully conscious that, in the times when the courts and the tribunals are more in favour of deciding an issue by following a decision of the higher court, on an application of the law of precedent, it may be difficult for a taxpayer to persuade a tribunal not to follow the Calcutta and Gujarat High Courts’ comprehensive decisions and to consider the case on merits independently. This is evident in the decision of the Tribunal in Rishti Stock & Shares Pvt. Ltd.‘s case decided by the Mumbai tribunal on 02-08-2013 in CO No. 263/M/2012 arising out of the appeal ITA 112/M/2012, where the Tribunal preferred to follow the Calcutta and Gujarat High Court decisions.

The Calcutta High Court, in Crescent Export Syndicate’s case, delivered its judgment on 03-04-2013 and followed it up in yet another decision delivered on 04-04-2013 in CIT vs. Md. Javed Hossein Mondal, 33 taxmann.com 123. The Gujarat High Court examined the issue in CIT vs. Sikandarkhan N. Tunwar, 295 CTR 75 and vide an order dated 02-05-2013 decided the issue in favour of the revenue independent of the aforesaid two decisions of the Calcutta High Court. The Allahabad High Court in Vector Shipping’s case delivered the decision on 09-07-2013, once again independent of the aforesaid three decisions. Before all this, the Andhra Pradesh High Court had stayed the operation of the Special Bench’s decision in Merilyn Shipping‘s case. Maybe the benefit of ‘2G speed’ was not available to the Department’s counsel in Vector Shipping’s case .

The decision of the Calcutta High Court, like the decision of the special bench, is an erudite decision that has comprehensively analysed the different aspects touching the issue. In comparison, the decision of the Allahabad High Court does not reveal in detail the basis that led it to hold that no disallowance was to be made of an expenditure, the payment of which was made before the year-end without deducting tax at source. The court in that case has confirmed the findings of the tribunal that the assessee was not liable to deduct tax at source on such payments. This however cannot be construed to mean that the court had not applied its mind to the law on the subject or that it had not taken a conscious note of the issue at hand. To distinguish and ignore the express observa-tions and findings on law of a High Court under the pretext that it does not represent the verdict of the court is not a very attractive proposition to any serious student of law. Such a decision deserves equal respect, more so when the reading of the contents confirms that the only issue that was discussed was about the interpretation of section. 40(a)(ia), as otherwise the court concurred with the finding of the fact of the tribunal that the tax was not deductible in the case before it .

The position on the issue under consideration has assumed significance with the decision of the Allahabad High Court in Vector Shipping’s case which has restored the issue for a fresh consideration. The issue should be taken as one that is wide open till such time as it is addressed by the apex court of the land. The Supreme Court has recently allowed the transfer of case for examining the constitutional validity of the provisions of section 40(a)(ia). Please see Maruthi Tubes (P) Ltd., 37 taxmann.com 31.

Nirav Shah

Y. P. Trivedi vs. JCIT ITAT Mumbai `G’ Bench Before Vijay Pal Rao (JM) and Rajendra (AM) ITA No. 5994/Mum/2010 A.Y.: 2005-06. Decided on: 11th July, 2012. Counsel for assessee/revenue: Usha Dalal/A K Nayak

Delay in filing appeal due to CA’s fault is bonafide and must be condoned. Courts should take a lenient view on the matter of condonation of delay provided the explanation and the reason for delay is bonafide and not merely a device to cover an ulterior purpose or an attempt to save limitation in an underhand way.

Facts: The appeal filed by the assessee before the Tribunal was delayed by 496 days. The assessee filed an application for condonation of delay as well as affidavit of the assessee and his CA explaining the reasons for delay in filing the appeal. It was explained that the CA of the assessee on receiving the order of CIT(A) gave it to the person maintain records of appeal matters for taking photocopy and sending to assessee’s office for filing appeal. The said order got mixed up with other papers and the appeal could not be filed in time. Upon the same being noticed the appeal was filed after tracing the order. It was submitted that the delay is neither deliberate nor willful but due to misplacement of the order in the office of the CA and therefore, it was a bonafide mistake. Relying on the decision of the SC in the case of Collector, Land Acquisition v. Mst. Kajiji (167 ITR 471)(SC) it was contended that Justice oriented approach has to be taken by the Court while deciding the matter of condonation and the case should be decided on merits and not on technicalities.

Held: The Tribunal observed that the facts of the case do not suggest that the assessee had acted in a malafide manner or the reasons explained is only a device to cover an ulterior purpose. It is settled proposition of law that the Court should take a lenient view on the matter of condonation of delay. However, the explanation and the reason for delay must be bonafide and not merely a device to cover an ulterior purpose or an attempt to save limitation in an underhand way. The Court should be liberal in construing the sufficient cause and should lean in favour of such party. Whenever substantial Justice and technical considerations are opposed to each other, cause of substantial Justice has to be preferred.

Since the appeal could not be filed due to bonafide mistake and inadvertence, the Tribunal, in the interest of Justice, condoned the delay in filing the appeal.

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Nirav Shah

(2013) 87 DTR 346 (Bang) Tata Teleservices Ltd. vs. DCIT A.Y.: 2006-07 to 2008-09 Dated: 27th November 2012

Section 194H – Service fees against credit cards is not commission and hence provisions of section 194H not applicable

Facts:
The assessee, a company engaged in the business of telecom services has arrangement with several banks whereby the customers of the assessee holding credit card can make payment for services utilised by them through credit card. When a customer makes payment by credit card, bank processes payment after retaining fees for processing payment. The Assessing Officer treated such processing charges as commission and raised demands u/s. 201(1) and 201(1A). The CIT(A) rejected the Assessing Officers stand and upheld the claim of the assessee. The Department went into appeal.

Held:
The Honourable Tribunal held that commission paid to the credit card companies cannot be considered as falling within the purview of section 194H. Even though the definition of the term “commission or brokerage” used in the said section is an inclusive definition, it is clear that the liability to make TDS under the said section arises only when a person acts on behalf of another person. In the case of commission retained by the credit card companies however, it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transactions for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchant establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission or brokerage for acting on behalf of the merchant establishment.

Thus there is no requirement for making TDS on the commission retained by the credit card companies since payments to bank on account of utilisation of credit card facilities would be in the nature of bank charges and not commission within meaning of section 194H.

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Nirav Shah

[2012] 134 ITD 463 (Mum.) Siam Commercial Bank PCL vs. DCIT (International taxation)-2(1), Mumbai A.Y. 2000-2001 Date of Order – 25th February 2011

Section 5 – Accrual of income – Discounting charges of next year shall not accrue as income in current year. Section 36(1)(vii) – Section 36(1)(viia) – Claim of bad debts is to be restricted by amount of opening balance in ‘provision for bad and doubtful debts’ account instead of closing balance and then deduction u/s. 36(1)(viia) is to be allowed

Facts I:
The assessee, a foreign bank, following mercantile system of accounting did not offer discount received on bills discounted which were relating to period after 31-03-2000, for A.Y. 2000-01. The same was brought under tax by A.O. in A.Y. 2000-01.

Held I:
The period of bill is relevant as it requires the divesting of funds by the lender for such period entailing the incurring of interest expenditure for such period. The quantum of discounting charges has direct nexus with the due date of the bill, which, in turn, determines the period for which the bank is deprived of its funds in discounting the bill. As the interest cost, of funds invested, for the subsequent year shall not become deductible in the current year, naturally the corresponding income in the form of discounting charges for the next year shall also not accrue as income in the current year.

Facts II:
For A.Y. 2000-01, the assessee claimed deduction of Rs. 1,57,46,917/- for bad debts u/s. 36(1)(vii), being the amount of bad debts written off in current year at Rs. 1,88,87,553/- less provision allowed u/s. 36(1)(viia) of A.Y. 1999-2000 at Rs. 31,40,636/-. It also claimed separate deduction in respect of provision for bad and doubtful debts of Rs. 35,02,564/- made during the current year. The AO held that the bad debts deduction should be allowed only in excess of the balance at the end of the year and not at the beginning of the year.

Held II:
In each year ordinarily there are two types of deductions, viz., firstly on account of provision made at the end of the current year by limiting it to the adjusted total income for the year and secondly the amount of bad debts actually written off. The Commissioner (Appeals) was justified in directing the AO to restrict the claim of bad debts by the amount of opening balance in the provision for bad and doubtful debts account as at the beginning of the instead of closing balance and then allowing deduction u/s. 36(1)(viia).

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Nirav Shah

(2012) 134 ITD 269 (Visakha) Transstory (India) Ltd. vs. ITO Assessment Year: 2006-07 Date of order: 14th July, 2011

Section 80 IA – Assessee was acting through joint venture and consortium for executing eligible contracts, whether eligible to claim deduction u/s 80 IA. Joint venture was only a de jure contractor but the assessee was a de facto contractor – Joint venture or the consortium was only a paper entity and has not executed any contract itself – Assessee is entitled for the deductions u/s. 80-IA(4) on the profit earned from the execution of the work awarded to JV and consortium.

Facts:
The assessee is a company and it formed joint venture named “Navayuga Transtoy (JV)” which bid for the contract. The Irrigation Department of Andhra Pradesh awarded the contract to JV, which became entitled to execute works worth Rs. 664.50 crore. As per the terms of the JV, the assessee was to execute 40 per cent of the work in the JV, the other constituent partner was to execute 60 per cent of the works awarded. Both the constituent partners of the JV raised bills on the JV for quantity of work as certified by technical consultant appointed by the State Government. The JV in turn raised a consolidated bill on the Irrigation Department of Andhra Pradesh Government without making any additions. The Irrigation Department makes the payments to the JV, which shares the payment in accordance with the bills raised by each. The JV files its IT returns separately but does not claim any deduction u/s. 80-IA(4).

The assessee had also formed a consortium along with one M/s Corporation Transtroy, OJSC, Moscow, with the understanding that the assessee would execute 100 per cent of the works which were awarded to the consortium by the Government of Karnataka. During the year assessee executed works valued worth Rs. 31.09 crore. The assessee claimed deduction u/s. 80- IA(4) on the profits derived out of the aforesaid works. But it was disallowed by the AO on the ground that the work was not awarded to the assessee.

Held:
The joint venture and consortium was formed to obtain contract from Government Bodies. As per the joint venture, the project awarded to the joint venture was to be executed by the joint venturers or the constituents. Once the project was awarded to the joint venture or consortium it was to be executed by venturers or constituents in the ratio agreed upon by them. It was the assessee who executed the work contract or project given to the joint venture. Whatever bills were raised by the assessee for the work executed on JV and consortium, the joint venture and consortium in turn raised the further bill of the same amount to the Government. Whatever payment was received by the joint venture, it was accordingly transferred to their constituents. The joint venture is an independent identity and has filed the return of income and was also assessed to tax but neither offered any profit/ income earned nor claimed any exemption/deduction u/s. 80 IA. The joint venture was contractor only as per law, in factual terms the assessee was the contractor. All other conditions u/s. 80IA have been fulfilled. The dispute arose only with the fact of the contract being awarded only to the joint venture and not the assessee and therefore the assessee was not allowed the deduction. U/s. 80-IA the legislature has also used the word consortium of such companies meaning thereby the legislature was aware about the object of formation of consortium and joint venture. Therefore, the mere formation of the consortium or joint venture for obtaining a contract cannot debar the venture from claiming exemption.

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Nirav Shah

Software Technology Park: Exemption u/s. 10A: A. Y. 2003-04: Approval by Director of Software Parks of India is valid: Approval by Inter-Ministerial Standing Committee not necessary:

CIT vs. Technovate E Solutions P. Ltd.; 354 ITR 110 (Del):

For the A. Y. 2003-04, the assessee claimed exemption u/s. 10A and furnished a registration issued by a director of the Software Technology Parks of India in support of the claim. The Assessing Officer rejected the claim on the ground that the approval of the director of the Software Technology Parks of India was not a valid approval from a specified authority. He held that only the Inter-Ministerial Standing Committee was competent to grant approval to units functioning within the Software Technology Park for the purposes of exemption u/s. 10A. The Tribunal allowed the assessee’s claim.

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

i) The CBDT in Instruction No. 1 of 2006, dated 31-03- 2006, clarified that the claim of deduction u/s. 10A should not be denied to the software technology park units only on the ground that the approval/ registration to such units had been granted by the Director of Software Technology Parks of India. In the Instruction, the Board also made a reference to the Inter-Ministerial communication dated 23-03-2006, issued by the Secretary, Minister of Communications and Technologies to the effect that the approvals issued by the director of the Software Technology Parks of India had the authority of the Inter-Ministerial Standing Committee and that all approvals granted by director of the Software Technology Parks of India were, therefore, deemed to be valid.

ii) The position was also clear from a letter dated 6th May, 2009, issued by the Board to the Joint Secretary, Minister of Commerce and Industry wherein a distinction had been drawn between the provisions of sections 10A and 10B and in which it had been clarified that a unit approved by a director under the Software Technology Park Scheme would be allowed exemption only u/s. 10A as a software technology park unit and not u/s. 10B as 100% export oriented unit.

iii) Therefore, approval granted by the director of the Software Technology Parks of India would be deemed to be valid in as much as the directors were functioning under the delegated authority of the Inter-Ministerial Standing Committee.

iv) Thus the Tribunal was right in coming to the conclusion that the approval granted by the director of the Software Technology Parks of India was sufficient approval so as to satisfy the conditions relating to approvals u/s. 10A.”

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Nirav Shah

Reassessment: Reason to believe: Change of opinion: S/s. 147 and 148: A. Y. 2007-08: Information regarding bogus companies engaged in providing accommodation entries to which assessee was allegedly a beneficiary was in possession of AO while making assessment u/s. 143(3): In response to query raised by AO the assessee furnished all information including alleged accommodation entry providers with their confirmations: Subsequent notice u/s. 148 and the consequent reassessment are not valid:

Pardesi Developers & Infrastructure (P) Ltd. vs. CIT: 258 CTR 411 (Del):

For the A. Y. 2007-08, the assessment was originally completed by an order u/s. 143(3) dated 30-12-2009. Subsequently, a notice u/s. 148 dated 30-08-2011 was issued for reopening the assessment. The Delhi High Court allowed the writ petition challenging the notice and held as under:

“i) It is an admitted position that the information regarding the alleged accommodation entry providers had been circulated to all the AOs on 30-04-2009 which included the AO of the assessee. In other words, the AO of the assessee had received the said information with regard to the alleged accommodation- entry providing companies. Thereafter, on 09-11-2009, the assessee furnished a reply to the questioner which had been issued on 18-02-2009. In that reply, the assessee gave details of share capital raised by the assessee. These details included the sums received from the alleged accommodationentry providers. Along with the said reply dated 09-11-2009, confirmations from the said parties were also furnished. A similar reply was again furnished on 27-11-2009. Despite the furnishing of these details, the AO, in order to further verify and confirm the said facts, issued notices u/s. 133(6) to the said companies directly, on 27-30th November 2009. All the concerned parties responded to those notices and affirmed their respective confirmations, which they had earlier provided to the AO. It is only subsequent thereto that the assessment was framed.

ii) In the backdrop of these facts, it is difficult to believe the plea taken in the purported reasons that the said information was “neither available with the Department nor did the assessee disclose the same at the time of assessment proceedings”. From the aforesaid facts it is clear that the information was available with the Department and it had been circulated to all the AOs. There is nothing to show that the AO did not receive the said information. And, there is nothing to show that the AO had not applied his mind to the information received by him. On the contrary, it is apparent because he was mindful of the said information that he issued notices u/s. 133(6) directly to the parties to confirm the factum of application of shares and the source of funds of such shares.

iii) Therefore, the very foundation of the notice u/s. 148 is not established even ex facie. Consequently, it cannot be said that the AO had the requisite belief u/s.147 and, as a consequence, the impugned notice dated 30-08-2011 and the order on objections dated 03-08-2012 are liable to be quashed.”

Nirav Shah

Reassessment: S/s. 147 and 148: A. Y. 2000-01: Notice u/s. 148 at the instance of the audit party: Not valid:

Gujarat Fluorochemicals Ltd. vs. ACIT; 353 ITR 398 (Guj):

For the A. Y. 2000-01, the assessment was originally completed u/s. 143(3). Subsequently, a notice u/s. 148 was issued at the instance of the audit party.

The Gujarat High Court allowed the writ petition filed by the assessee challenging the validity of the notice and held as under:

“i) Though an audit objection may serve as information, on the basis of which the Income-tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the Income-tax Officer on his own.

ii) It was contended on behalf of the assessee that the Assessing Officer held no independent belief that income chargeable to tax had escaped assessment. He submitted that the Assessing Officer was under compulsion by the audit party to issue for reopening of assessment though she herself held a firm belief that no income had escaped assessment. The assessing Officer in her affidavit did not deny this.

iii) In the affidavit what was vaguely stated was that the Department was apprehensive about the source of information on the basis of which such averments were made. Inter-departmental correspondence was strictly confidential. On a direction from the Court the Revenue made a candid statement that the file containing exchanges between the Assessing Officer and the audit party was not traceable.

iv) The Revenue not having either denied the clear averments of the asessee made in the petition on oath nor having produced the original files to demonstrate the independent formation of the opinion by the Assessing Officer though sufficient time was made available, the issue stood firmly concluded in favour of the assessee. The reassessment notice was not valid.”

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Nirav Shah

Income: Lottery: Sections 2(24)(ix) and 115BB : Assessee was allotted a Contessa car as the first prize under the National Savings Scheme: Not a lottery: Not income liable to tax:

CIT vs. Dr. S. P. Suguna Seelan; 353 ITR 391 (Mad):

The assessee was allotted a Contessa car as the first prize under the National Savings Scheme. The Assessing Officer treated the prize as winnings from lotteries within the meaning of section 2(24) (ix), 1961, and subjected to the special rate u/s. 115BB. The Tribunal held that the prize won by the assessee was not covered by section 2(24)(ix) and allowed the assessee’s appeal.

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

“The car won by the assessee on draw of lots under the incentive scheme of the National Savings Scheme was not a lottery and was not liable to tax.”

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Nirav Shah

Deemed dividend: Section 2(22)(e): A.Y. 1999-00: Gratuitous loan deemed to be dividend: Shareholder permitting his immovable property to be mortgaged to bank enabling company to obtain loan: Loan by company to shareholder not deemed dividend.

The assessee holding substantial shareholding in a private company permitted his immovable property to be mortgaged to the bank for enabling the company to take the benefit of loan. In spite of request of the assessee, the company was unable to release the property from mortgage. Consequently, the board of directors of the company passed a resolution authoring the assessee to obtain from the company interest-free deposit up to Rs.50,00,000 as and when required. In the A.Y. 1999-00, the assessee obtained from the company a sum of Rs.20,75,000 by way of security deposit. A sum of Rs.20,00,000 was subsequently returned by the assessee to the company. For the A.Y. 1999-00, the Assessing Officer added the sum of Rs.20,75,000 as deemed dividend u/s.2(22)(e) of the Income-tax Act, 1961. The Tribunal upheld the addition.

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

“(i) The phrase ‘by way of advance or loan’ appearing in sub-clause (e) of section 2(22) of the Incometax Act, 1961, must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares . . . . . ; but if such loan or advance is given to such shareholder as a consequence of any further consideration which is beneficial to the company received from such shareholder, in such case, such advance or loan cannot be said to be deemed dividend within the meaning of the Act.

(ii) Thus gratuitous loans or advance given by a company to those class of shareholders would come within the purview of section 2(22), but not cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.

(iii) For retaining the benefit of loan availed from the bank if decision was taken to give advance to the assessee, such decision was not to give gratuitous advance to its shareholder, but to protect the business interest of the company. The sum of Rs.20,75,000 could not be treated as deemed dividend.”

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Nirav Shah

Trademark/Brand registered in India and nurtured and used in business in India represents property situated in India — Capital gain arising on its transfer taxable in India.

New Page 2

11 Fosters Australia Ltd., In re

170 Taxman 341 (AAR)

S. 9(1)(i) of the Act

India-Australia Treaty

A.Y. : 2007-08. Dated : 9-5-2008

Issues :

l
Trademark/Brand registered in India and nurtured and used in business in India
represents property situated in India. Capital gain arising on transfer of
such property is taxable in India in the hands of non-resident transferor,
irrespective of the situs of the execution of contract and irrespective of
situs of delivery of such IPR.

l
Gain arising on transfer of technology and intellectual property in the form
of technology manuals, brewing IP, process, etc. vesting in NR transferor
abroad and delivered outside India is not taxable in India.

l
The assessee can rely on independent valuation report for determination of
that part of the composite consideration which is taxable in India.

Facts :

The applicant Australian Company (herein called FAL or Ausco)
was engaged in the business of brewing, processing, marketing and promoting and
selling beer products in Australia and abroad. Ausco owned various brands
including Foster’s brand and related logo which were in use in the marketing of
products. The technology and know-how, including recipe and brewing
specifications, were also owned by Ausco.

Ausco had registered its brand ‘Foster’ in India in the year
1993. Later on, some further brands were also registered in India.

Somewhere in 1997, Ausco entered into Brand Licence Agreement
with Foster India (ICO), a Group Company in India. Entire share capital of ICO
was held by companies in Mauritius which in turn were held by another group
company in Mauritius called Dismin. ICO was given an exclusive right to use
various brands of Ausco and was also given access to brewing technology and
know-how. For such licence, ICO was paying royalty after deducting suitable tax
at source.

On 4-8-2006, Ausco and Dismin entered into Sale & Purchase
(S&P) Agreement with SAB Miller Ltd., a UK Company, (herein SAB). The S&P was a
composite agreement for sale of Mauritius companies which held shares of ICO by
Dismin and sale by Ausco of trademarks, brand and assignment of contract for
grant of exclusive and perpetual licence in respect of brewing technology for
the territory of India. For all these (including for shares of ICO) items, SAB
was required to pay a sum of US $ 120 M.

In terms of the S&P Agreement, SAB UK nominated SKOL India,
subsidiary of SAB Group as the entity which purchased all the assets which were
subject matter of the S&P Agreement. The S&P Agreement was actually implemented
by execution of certain definitive agreements which included transfer of shares
by Dismin of its holding in the other Mauritius companies which held shares of
ICO. Ausco executed assignment agreement in September 2006 for transfer of
brands and trademark for use by SKOL in the territory of India. It also gave
perpetual licence for use of brewing intellectual property by delivery of
brewing manual and other related literature also for use within territory of
India. The assignment agreement was executed in Australia. It was claimed that
all deliverables in terms of the agreement were given to SKOL at Australia. A
nominal consideration of US $ 100 was stated to be the consideration of
assignment.

The applicant Ausco filed application before the AAR, seeking
advance ruling on the question whether receipt arising to it from the transfer
of its right, title and interest in and to the trademarks, brand IP and for
grant of exclusive perpetual licence of brewing technology was taxable in India.
The other related question raised before the AAR was that if the amount was held
taxable, whether the applicant was required to pay tax on the gain computed,
based on consideration as per independent valuation obtained by the applicant.

At the outset, the applicant’s counsel made it clear that
taxability of income arising from transfer of shares effected by Dismin (Mauco)
was not an issue before AAR.

On the aspect of non-taxability of gain arising from transfer
of brand and technology IPR, the applicant contended that these intangibles were
located at the domicile of the owner (i.e., at Australia). The applicant
relied on the terms of original brand licence agreement of 1997 signed by it
with ICO to contend that soon upon contemplated change of ICO’s ownership, the
licence agreement stood terminated. As a consequence, the assets reverted back
and were not situated in India as on the date on which
the same were transferred to SKOL. The applicant also contended that since
assets situated outside India stood transferred outside India, no part of
capital gains was chargeable to tax in India. By relying on decision of the
Supreme Court in the case of CIT v. Finlay Mills Ltd., (AIR 1951 SC 464),
it was the claim of the applicant that registration of trademark was merely for
protection of IPR and did not impact the situs or location of IPR. The assessee
also relied on AAR ruling in the case of Pfizer Corporation, in. Re
(2004) (271 ITR 101). In this case, Pfizer Corporation had granted access and
licence of technology use and trademark to another group company in India. The
licence agreement was terminated by paying compensation to ICO. After such
termination, Pfizer Corporation had transferred technology dossier to a Danish
company. The AAR had in that case accepted Pfizer’s contention that this
represented transfer of asset located outside India.

Nirav Shah

Capital gain: Sections 10B and 50(2): A.Y. 1993- 94: Assessee eligible for exemption u/s.10B sold assets to sister concern after expiry of period of exemption. Purchase of assets of same rate of depreciation: Assessee entitled to benefit u/s.50(2).

The assessee had an export-oriented unit. After expiry of the term of benefit u/s.10B, in the A.Y. 1993-94, the assessee transferred the unit to a closely held company. There was a difference of Rs.71,42,904 between the value of the assets, as shown in the balance sheet as on date of transfer and the value of the assets adopted by the company. The Assessing Officer treated the difference as short term capital gains without allowing the benefit u/s.50(2). The Tribunal confirmed the order of the Assessing Officer.

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

“(i) The assessee carried on the same line of business, both as an export undertaking as well as in domestic trade. The assessee made an addition of 25% in the block of assets, viz., plant and machinery, during the previous year. Given the fact that the depreciation in respect of the assets transferred and purchased carried the same rate of depreciation and, hence, fell under ‘block of assets’, the assessee was justified in his claim on capital gains, that with the cost of the machinery added to the written down value of the machinery and the sale of the machinery during the relevant previous year, he was entitled to relief u/s.50(2).

(ii) Going by the provisions u/s.10B, the Revenue would not be justified in treating the assets of an export-oriented unit in isolation on the expiry of the tax holiday period, particularly when section 10B(4)(iv) recognises deemed grant of the depreciation allowance during the currency of the tax holiday, which means that at the expiry of the period of five years, the written down value of the plant and machinery continues to be available for the business of the assessee, which goes for normal assessment under various provisions of the Act.”

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Nirav Shah

Business expenditure: Section 43B: In A.Y. 1996- 97 the assessee paid a sum of Rs.322.46 lakh on account of excise duty being the liability for the A.Y. 1997-98: Assessee is entitled to the deduction in the A.Y. 1996-97 in view of section 43B(a) r/w. Expl. 2.

During the previous year relevant to the A.Y. 1996-97, the assessee paid a sum of Rs.322.46 lakh on account of excise duty, the liability for payment of which was incurred in the previous year relevant to the A.Y. 1997-98. Relying on the provisions of section 43B of the Income-tax Act, 1961, the assessee claimed the deduction of the said amount in the A.Y. 1996-97. The Assessing Officer disallowed the claim. The Tribunal upheld the disallowance.

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

“The assessee cannot be deprived of the benefit of deduction of excise duty actually paid during the previous year, although in advance, according to the method of accounting followed by him. Section 43B(a) r/w. Expln. 2 allows deduction in such cases.”

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Nirav Shah

Interest u/s.220(2): A.Y. 1994-95: Original assessment order set aside by Tribunal: Interest u/s.220(2) to commence after thirty days from the date of service of demand notice pursuant to fresh assessment order.

For the A.Y. 1994-95, the assessment was completed u/s.143(3) of the Income-tax Act, 1961 on 28-2-1997 determining the total income at Rs.2.05 crores. By a demand notice dated 28-2-1997 a demand of Rs.1.76 crore was raised. The assessment order was set aside by the Tribunal. Fresh assessment order was passed on 24-12-2006 computing the income at Rs.44.88 lakhs and raising a demand of Rs.22.02 lakhs. The Assessing Officer held that the assessee was liable to pay interest u/s.220(2) of the Act commencing from the day after thirty days from the date of service of the original demand notice dated 28-2-1997. The CIT(A) and the Tribunal accepted the claim of the assessee that the liability to pay interest u/s.220(2) commences from the day after thirty days from the date of service of the demand notice dated 24-12-2006 pursuant to the fresh assessment order.

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

“(i) The argument of the Revenue is that even though the original assessment order dated 28-2-1997 was set aside by the ITAT, once the fresh assessment order is passed, the demands arising therefrom would relate back to the date of service of the original demand notice dated 28-2-1997.

(ii) We see no merit in the above contention. U/s.156 of the Act, service of the demand notice is mandatory. Section 220(2) of the Act provides that if the amount specified in any notice of demand u/s.156 is not paid within the period prescribed u/ss.(1) of section 220, then, the assessee shall be liable to pay simple interest at the rate prescribed therein.

(iii) As per section 220(1) of the Act, the assessee was liable to pay the demand within thirty days from the service of the demand notice dated 24-12-2006. It is only if the assessee fails to pay the amount demanded, within thirty days of service of the demand notice dated 24-12-2006, the assessee was liable to pay interest u/s.220(2) of the Act. If the liability to pay interest u/s.220(2) arises after thirty days of service of the demand notice dated 24-12-2006, the question of demanding interest for the period prior to 24-12-2006 does not arise at all.

(iv) From the facts of the present case, the decision of the ITAT in holding that the assessee is liable to pay interest u/s.220(2) of the Act, from the end of thirty days after the service of notice of demand dated 24-12-2006 till the date on which the amount demanded was paid cannot be faulted.”

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Nirav Shah

Capital gains: Exemption u/s.54F: Purchase of two adjacent flats, interconnected and used as one residential house: Assessee entitled to exemption u/s.54F

“It has been shown to us that investment was made by the assessee himself from his bank account in respect of both the flats i.e., flat Nos. 301 and 302 at Cozy Dwell Apartments at Bandra, Mumbai. However, this needs verification by the Assessing Officer. Further the fact whether these two apartments are being used as one residential house or not is also to be verified. Accordingly, the order of the CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to — (1) verify the fact whether investment in flat Nos. 301 and 302 was made by the assessee from his own funds, and (2) whether such flats are adjacent to each other having common passage and are being used as one residential house. After ascertaining these facts the Assessing Officer shall allow the exemption in respect of both the flats if it is found that both the flats are being used as one residential house and the investment was made by the assessee himself.”

The Bombay High Court upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue.

Note: The Supreme Court has dismissed the SLP No. 12607 of 2009 filed by the Revenue, by order dated 7-9-2009.

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Nirav Shah

Capital gains: Exemption u/s.54F: Purchase of two adjacent flats, interconnected and used as one residential house: Assessee entitled to exemption u/s.54F.

The assessee had purchased two adjacent flats which were interconnected and used as one residential house. On the assesee’s claim for exemption u/s.54F of the Income-tax Act, 1961 the Tribunal passed the order as under: “It has been shown to us that investment was made by the assessee himself from his bank account in respect of both the flats i.e., flat Nos. 301 and 302 at Cozy Dwell Apartments at Bandra, Mumbai. However, this needs verification by the Assessing Officer. Further the fact whether these two apartments are being used as one residential house or not is also to be verified. Accordingly, the order of the CIT(A) is set aside and the matter is restored to the file of the Assessing Officer to — (1) verify the fact whether investment in flat Nos. 301 and 302 was made by the assessee from his own funds, and (2) whether such flats are adjacent to each other having common passage and are being used as one residential house. After ascertaining these facts the Assessing Officer shall allow the exemption in respect of both the flats if it is found that both the flats are being used as one residential house and the investment was made by the assessee himself.” The Bombay High Court upheld the decision of the Tribunal and dismissed the appeal filed by the Revenue. Note: The Supreme Court has dismissed the SLP No. 12607 of 2009 filed by the Revenue, by order dated 7-9-2009.

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Nirav Shah

Salary: Perquisites: S/s. 17(2), r.w.s. 10(10CC): Assessees were employees of a foreign company, working in India: Tax arising in India on income of employees was borne by foreign employer: Amounts paid directly by employer to discharge employees’ incometax liability is exempt u/s. 10(10CC): Not a perquisite: Social security, pension and medical insurance contributions paid by employer are not taxable as perquisites: Where tax is deposited in respect of non-monetary perquisite, it is exempt u/s<

Yoshio Kubo vs. CIT; [2013] 36 taxmann.com 1 (Delhi)

The
assessees were employees of a foreign company who were seconded to
India to serve in the Indian subsidiary. The foreign employers bore the
tax arising in India on the income of the employees. The foreign
employer also made contributions towards social security, pension and
medical insurance in compliance with the legal requirements in the
country of its incorporation. The revenue sought to bring to tax such
contributions as well as the tax paid by the employer as perquisite u/s.
17(2), in the hands of the employees. The revenue also contended that
the tax borne by the employer was a monetary perquisite and further tax
should be added to the salary by a multiple stage grossing up process.
The revenue also included the tax refunds in the income of the assessee
employees, as the tax had been borne by the employer.

In appeals
before the High Court the assessee contended that such perquisites were
exempt u/s. 10(10CC). The Delhi High Court held as under:

”1. Whether income tax paid by employer on behalf of assessee was exempted non-monetary perquisite:

1.1
A plain reading of section 10(10CC) reveals that if the perquisite that
is – ‘not provided for by way of monetary payment’ – u/s. 17 (2), the
tax paid on such income would be excluded from the calculation of income
altogether; it would not be deemed a perquisite.

1.2 Section
17(2) has not undergone any substantial change by the amendment of 2002.
The only change is in the introduction of section 10(10CC) which states
that tax actually paid by the employer to discharge an employee’s
obligation – ‘not amounting to a monetary benefit’ would not be included
as the employees’ income. If seen from the context of section 17(2),
and the previous history to that provision, as well as the pre-existing
provision of section 10(5B) and the interpretation placed on section
17(2), read with other provisions which disallow payments made on behalf
of the employee, by the employer, so long as the benefit is not
expressed in monetary terms in the hands of the employee, in the sense
that it is not funded as part of the salary, but paid in discharge of
the obligation, of any sort, either contractual (i.e., rent, services,
etc . availed of by the employee) or legal (tax) directly by the
employer, it should not be treated as a monetary benefit. The reason for
this is that section 10(10CC) is neutral about the kind of benefit
availed by the employee.

1.3 Parliament was aware of the
pre-existing law, and therefore, stepped in to clarify that only a
monetary benefit directly in the hands of the employee as a payment by
the employer would be excluded from section 10(10CC). This may be in the
form of any benefit to pay rent, or discharge any manner of obligation,
tax not excluded. This intention is manifest from the expression –
‘tax’ on such income actually paid. To construe this newly introduced
provision in any other manner would be to defeat the Parliamentary
intent. Section 40(a)(v) fortifies the interpretation of this court in
providing that while calculating income of the employer, the tax paid by
the employer on non-monetary perquisites is not deductible. This
provision too was introduced in 2002. The logic of excluding, as a
non-monetary perquisite, amounts paid to discharge obligations of the
employee, from the meaning of income, by virtue of section 10(10CC) is
that now, with the introduction of section 40(c)(v), such amounts are
not deductible in the employer’s hands.

1.4 In the light of the
above discussion, it is held that amounts paid directly by the employer
to discharge its employees’ income tax liability do not fall within the
excluded category of monetary benefits payable to the employee; they
fall within the included category, u/s. 10(10CC) as amounts paid
directly as taxes. Correspondingly, they cannot now be claimed as
deductions by virtue of section 40(c)(v ). The revenue’s appeals on this
aspect fail.

2. Whether social security, pension and medical insurance contributions by employer are perquisites:

2.1
The revenue’s contentions are insubstantial and meritless. The assessee
does not get a vested right at the time of contribution to the fund by
the employer. The amount standing to the credit of the pension fund
account, social security or medical or health insurance would continue
to remain invested till the assessee becomes entitled to receive it. In
the case of medical benefit, the revenue could not support its
contentions by citing any provision in any policy or scheme which was
the subject matter of these appeals, where the vesting right to receive
the amount under the scheme or plan occurred. One cannot be said to
allow a perquisite to an employee if the employee has no right to the
same. It cannot apply to contingent payments to which the employee has
no right till the contingency occurs. The employee must have a vested
right in the amount. In the case of CIT vs. Mehar Singh Sampuran Singh
Chawla [1973] 90 ITR 219 (Delhi), it was held that the contribution made
by the employer towards a fund established for the welfare of the
employees would not be deemed to be a perquisite in the hands of the
employees concerned as they do not acquire a vested right in the sum
contributed by the employer.

2.2 When the amount does not result
in a direct present benefit to the employee, who does not enjoy it, but
assures him a future benefit, in the event of contingency, the payment
made by the employer, does not vest in the employee.

2.3 In view
of the above discussion, it is held that the revenue’s appeals have to
fail; amounts paid by employers to pension, or social security funds or
for medical benefits, are not perquisites within the meaning of the
expression, u/s. 17(2)(v), and therefore, the amounts paid by the
employer in that regard are not taxable in the hands of the
employee-assessee.

3. Regarding grossing up:

3.1
It has been discussed and concluded that what is not exempt u/s.
10(10CC), is perquisite in the shape of monetary payment to the
employee. If it is a payment to a third party like payment of taxes to
the government, it would be exempt u/s. 10 (10CC).

3.2 The
Tribunal in the present cases, held that tax paid by the employer on
behalf of the employee is a non-monetary perquisite. In other words,
taxes paid by the employer can be added only once in the salary of the
employee. Thereafter, tax on such perquisites is not to be added again.

3.3
Whenever tax is deposited in respect of a non-monetary perquisite, the
provision of section 10(10CC) applies, thus excluding multiple stage
grossing up. The purpose and intent of introducing the amendment to
section 10(10CC) was to exclude the element of income, which would have
arisen otherwise, as a perquisite, and as part of salary. Once that
stood excluded, and option was given to the employer u/s. 192(1A) to
honour the agreement with the employee, Parliament could not have
intended its inclusion in any other form, even for the purpose of
deduction at source. Doing so would defeat the intent behind section
10(10CC). This court, therefore, answers the question in favour of the
assessee and against the revenue.

4. Regarding assessability of TDS refunds

4.1 In this case, it is clear that the amount was not paid to the employee or due to him, from the employer, according to the terms of the contract governing the relationship. It was paid to the Government, over and above the tax due on the salary. It was not for benefit of the assessee. It never, therefore, bore the characteristic of salary or perquisite. Till assessment was made, the amount could not be refunded to the assessee.

4.2 The revenue’s position overlooks that all receipts are not taxable receipts. Before a receipt is brought to tax, the nature and character of the receipt in the hands of the recipient has to be considered. Every receipt or monetary advantage or benefit in the hands of its recipient is not taxable unless it is established to be due to him. If the amount is not due, the recipient, in this case, the employee is obliged to pay back the sum to the person, to whom it belongs. A perquisite or such amount, to be taxed, should be received under a legal or eq-uitable claim, even contingent.

4.3 The receipt of money or property, which one is obliged to return or repay to the rightful owner, as in the case of a loan or credit, cannot be taken as a benefit or a perquisite. The amounts paid in excess by the employer, and refunded to the employee never belonged to the latter; he cannot be therefore taxed. The question of law is therefore, answered against the revenue, and in favour of the assessees.”

Nirav Shah

Provisional attachment: Section 281B: A. Y. 2011-12: Provisional attachment should be commensurate with claim of revenue:

KDH Properties P. Ltd. vs. ACIT; 356 ITR 1 (Mad):

For the A. Y. 2011-12, the assessee company had filed return of income computing loss of Rs. 2,67,00,000. Subsequently, pursuant to survey u/s. 133A of the Income-tax Act, 1961, the Assessing Officer impounded books of account and documents. The Assessing Officer also passed provisional attachments of properties and also the debts and security deposits due from third parties.

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

“i) The provisional attachment made in terms of section 281B of the Income-tax Act, 1961, should be commensurate with the claim of Department, more particularly to safeguard the interests of the Revenue. The Assessing Officer should form an opinion as to what extent of property is required to protect the interest of the Revenue. It cannot be an arbitrary claim based on no materials. It should stand the test of reasonableness and avoid arbitrariness.

ii) If the petitioner were able to establish the valuation of the property as stated by cogent and proper materials acceptable to the Department subject to final assessment, the property could continue to be under provisional attachment as per section 281B and all other debts and security deposits due from third parties could be released from the provisional attachment.”

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Nirav Shah

Housing Project: Income from: Deduction u/s.80-IB(10): Interest on delayed payment by purchasers due from contractors and suppliers: Part of income derived from development of housing project: Entitled to deduction u/s. 80-IB(10):

CIT vs. Pratham Developers: 355 ITR 507 (Guj):

The assessee was in the business of developing and building housing projects and accordingly was entitled to deduction u/s. 80-IB (10) of the Income-tax Act, 1961. The Assessing Officer made an addition of Rs. 11,05,556 ( Rs. 4.36 lakh – interest received from purchasers on delayed payments and Rs. 8.70 lakh – balances written off in case of contractors and suppliers) by way of disallowance out of the claim for deduction u/s. 80-IB(10). The Assessing Officer held that these sums did not represent the assessee’s income from the development of housing project. The CIT(A) and the Tribunal allowed the assessee’s claim and deleted the addition.

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

“i) Interest received on delayed payments by the purchasers was part of income derived from the business of the assessee. It was entitled to special deduction u/s. 80-IB (10) in respect of the amount.

ii) During the course of the business in developing the housing project, the assessee had made payments to suppliers towards various purchases made. On such payments, the assessee would occasionally deduct sum amounts and pay the bill. The difference between the bill amount and the payment actually made would be the amount generated during the course of business. The assessee was entitled to special deduction u/s. 80-IB(10) in respect of such sum.”

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Nirav Shah

Educational institution: Exemption u/s. 10(23C)(vi); Rule 2CA of I. T. Rules, 1962: Assessee society running a degree college made application for approval u/s. 10(23C) (vi) for A. Y. 2009-10 onwards: Commissioner rejected application on grounds that (i) approval u/s. 10(23C)(vi) was available only to an educational institution existing solely for educational purposes while memorandum of assessee stipulated other objects as well,

Neeraj Janhitkari Gramin Sewa Sansthan vs. CCIT; [2013] 36 taxmann.com 105 (All):

The assessee, a society, was registered under the Societies Registration Act, 1860. It was running a degree college in Mainpuri. It was also registered with the Income-tax Department. It made an application for approval for exemption u/s. 10(23C)(vi) for assessment year 2009-10 onwards. The Commissioner rejected the said application on the grounds that (i) the approval u/s. 10(23C)(vi) was available only to an educational institution existing solely for educational purposes while the memorandum of the assessee-society stipulated other objects as well, and (ii) the application for approval should have been filed by the educational institution while it had been made by the society.

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

“i) The first and foremost question which is required to be considered is whether the application for approval u/s. 10(23C)(vi) at the instance of the assessee-society was maintainable or not. The Supreme Court in the case of American Hotel & Lodging Association Educational Institute vs. CBDT [2008] 301 ITR 86/ 170 Taxman 306 had considered the effect of insertion of clause (vi) in section 10(23C) by the Finance (No. 2) Act, 1998, w.e.f. 01-04-1999 and held that the provisions of clause (vi) of section 10(23C) are analogous to provisions of section 10(22). The Punjab and Haryana High Court had the occasion to consider the effect of section 10(23C)(vi) in the case of Pinegrove International Charitable Trust vs. Union of India [2010] 327 ITR 73/ 188 Taxman 402 and while replying to a specific question whether a society registered under the Societies Registration Act, 1860 was eligible to apply for approval u/s. 10(23C)(vi) held that the application for approval u/s. 10(23C)(vi) was maintainable at the instance of a society. Similar view had been taken by the Delhi High Court in the case of Digember Jain Society for Child Welfare vs. DGIT (Exmp.) [2010] 329 ITR 459/185 Taxman 255. Therefore, the application filed by the assessee-society cannot be rejected on the ground that it is not at the instance of ‘educational institution’ as referred to u/s. 10(23C)(vi) and rule 2CA.

ii) The next question which now arises for consideration is whether the assessee’s application for approval u/s. 10(23C)(vi) can be rejected on the ground that the memorandum of association provides for various other objects apart from educational activities. In this regard, the argument of the assessee is that even though under the unamended bye-laws of the society various other aims and objects were mentioned, but according to application for approval the society is only carrying on educational activities. In the application, there is a specific assertion that the only source of income of the society is the nominal fees being charged from students and it has no other source of income. The assessee has placed strong reliance on the judgment of the Allahabad Court in the case of C.P. Vidya Niketan Inter College Shikshan Society vs. Union of India [Writ petition No. 1185 of 2011, dated 16-10-2012].

iii) Perusal of the impugned order shows that the pleading in this regard has not been taken into consideration. Further in the impugned order although there is a finding that the assesseesociety is having many objects other than educational, but there is no application of mind to the assertion made by the society that it is only pursuing the educational activity and no other. Where a society is pursuing only educational objects and no other activity, then the application by such a society for grant of approval u/s. 10(23C)(vi) cannot be rejected on the ground that its aims and objects contain several other objects apart from educational and application by such a society is perfectly maintainable.

iv) Therefore, the impugned order passed by the Commissioner was liable to be quashed. The matter required to be sent back to the Commissioner for a fresh decision in accordance with the observations made above.”

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Nirav Shah

Capital gains: Section 50C: r.w.ss. 16A and 24 of W. T. Act, 1957: Sale of immovable property for consideration of Rs. 2,06,18,227: Stamp duty value – Rs. 4,04,48,000: Value as per DVO – Rs. 2,83,19,289: Value as per Registered valuer of assessee – Rs. 2,23,41,000: AO adopted value of Rs. 2,83,19,289 as per DVO: Tribunal adopted value of Rs. 2,23,41,000 as per registered valuer without giving opportunity to DVO: Tribunal not justified in doing so:

CIT vs. Prabhu Steel Industries Ltd.: [2013] 36 taxmann. com 393 (Bom):

The assessee admitted long-term capital gains from sale of immovable property and adopted actual sale consideration of Rs. 2,06,18,227 as basis for computation. The Assessing Officer found that as per concerned Stamp Valuation Authority, the market value of the property was Rs. 4,04,48,000. On reference, the valuation officer estimated the fair market value on the date of transfer to be Rs. 2,83,19,289. Meanwhile, the assessee submitted a report of Registered Valuer disclosing fair market value on the date of transfer to be Rs. 2,23,41,000. The Assessing Officer worked out long-term capital gain on basis of report of valuation officer and made addition. The Tribunal held that the fair market value worked out by the assessee’s registered valuer alone should have been used for computing the longterm capital gain, as it was reasonably arrived at after making allowances for various encumbrances attached to the subject property and rejected the valuation arrived at by the Valuation Officer after noting that the Valuation Officer treated stamp duty valuation as base rate, instead of actual sale instance value. Further, it held that though such report is binding on Revenue Authorities, it is not binding on the Tribunal.

The Bombay High Court allowed the appeal filed by the Revenue and held as under:

“i) It is apparent from section 16A of Wealth Tax Act that these provisions mandate that after the Assessing Officer receives report of Valuation Officer u/s. 50C, he has to act in conformity with the valuation of the capital asset worked out therein. Thus, an order of Valuation Officer determining the market value of the asset on the date of transfer u/s. 50C(2) is made appealable even for the purpose of Income-tax Act, 1961 as per scheme in section 23A of Wealthtax Act. S/s. (6) of section 23A stipulates that when the valuation of any asset is objected to in an appeal, the Commissioner (Appeals) has to extend an opportunity of hearing to the Valuation Officer, who has made order u/s. 16A. It therefore, follows that when in an appeal, such exercise of valuation officer is disputed, the Appellate Authority has to extend an opportunity of hearing to the Valuation Officer.

ii) Section 24 speaks of further appeals to the Appellate Tribunal. As per section 24(5) of the Wealth Tax Act, 1957; the Appellate Tribunal has to extend opportunity of hearing to the Valuation Officer, and this provision is pari materia with section 23(6) above. Therefore, when order of CIT (Appeal), is questioned in further appeal before the Tribunal, the Tribunal has to keep in mind the provisions of section 24(5) of the Wealth Tax Act, 1957 and has to extend an opportunity of hearing to the Valuation Officer.

iii) As per the statutory scheme when the report/order of Valuation Officer u/s. 50C(2) is objected to by assessee, the CIT (Appeals) or Tribunal are obliged to extend an opportunity of hearing to such Valuation Officer.

iv) The Tribunal has found faults with the report/ order of District Valuation Officer. Admittedly, the said Valuation Officer had not been heard and no opportunity was extended to him. This is contrary to obligation cast upon it by the proviso of section 24(5) of the Wealth Tax Act, 1957 as attracted by section 50C(2).

v) In this situation, a mandatory requirement of law has been violated in present matter. Hence, the impugned order of the Tribunal is hereby quashed and set aside and the proceedings are restored back to the file of the Tribunal for taking decision afresh, in accordance with law.”

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Nirav Shah

Business expenditure: Capital or revenue expenditure: Section 35DDA: A. Y. 2007-08: Payment to employees under voluntary retirement scheme: Compliance with Rule 2BA is for benefit u/s. 10(10C): No such compliance mandatory for deduction in the hands of employer u/s. 35DDA: Deduction allowable:

CIT vs. State Bank of Mysore; 356 ITR 468 (Kar):

For the A. Y. 2007-08, the assessee, a public sector bank, had claimed deduction of Rs. 7,09,53,323.23 as deductible expenditure incurred to meet the claims of employees who had taken voluntary retirement. The Assessing Officer allowed the deduction as revenue expenditure. Exercising the powers u/s. 263 of the Income-tax Act, 1961, the Commissioner held that the expenditure was in the nature of capital expenditure and disallowed the amount on the ground, inter alia, that even applying the provisions of section 35DDA the voluntary retirement scheme was not in consonance with rule 2BA of the I. T. Rules 1962. The Tribunal held that this was a case where the scheme was covered u/s. 35DDA. The condition imposed in Rule 2BA with reference to the recipient for the purpose of section 10(10C) was not attracted to the provisions of section 35DDA. Since under the provisions u/s. 35DDA the entire amount could not be allowed as deduction, but it could be spread over a period of five years, one-fifth of the expenditure could be allowed and the balance spread over the following four assessment years.

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

“i) There was no mention of any rule in section 35DDA. On the other hand, in rule 2BA there is a specific reference to section 10(10C). The language of rule 2BA made it clear that the amount received is by the employee and for the purpose of claiming the benefit u/s. 10(10C). This has nothing to do with the employer’s claim, which is a different claim u/s. 35DDA.

ii) The Tribunal rightly took the view that rule 2BA is attracted and applicable only to a circumstance, where the benefit u/s. 10(10C) is sought for and not in a situation where the provisions of section 35DDA are called in aid.”

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Nirav Shah

Section 2(22)(e) – Share application money is not “loan or advance” for the purpose of section 2(22)(e).

4. DCIT vs. Vikas Oberoi
ITAT Mumbai `F’ Bench
Before D. Karunakara rao (AM) and Vivek Verma (JM)
ITA Nos. 4362/M/2011 and 4 other appeals
A.Y.: 2002-03 and 2004-05 to 2007-08.
Decided on: 20th March, 2013.
Counsel for assessee/revenue: Murlidhar/A P Singh

Section 2(22)(e) – Share application money is not “loan or advance” for the purpose of section 2(22)(e).

Facts
The assessee, was a partner/director/shareholder in various Oberoi Group entities. There was a search action on the assessee on 19-07-2007. In response to the notice issued u/s. 153A, the assessee filed return of income with no additional income as compared to return filed u/s. 139.

During the assessment proceedings u/s. 153A, the AO noticed that the assessee was a beneficial shareholder in both M/s Kingston Properties Pvt. Ltd (KPPL) and New Dimensions Consultants P. Ltd. (NDCPL). NDCPL had reserves and had contributed share application money into KPPL. KPPL was not the beneficial shareholder of NDCPL but the assessee was there in both the companies. NDCPL did not allot shares but the share application money was returned after the period of three years. The AO held that the assessee being a beneficial shareholder, had chosen this route to enrich his wealth by increasing net worth of KPPL, where he had beneficial interest. He rejected the book entries of both the companies by mentioning that it was a case of lifting of corporate veil. The AO assessed the sum of Rs. 1,40,03,700 as deemed dividend u/s. 2(22)(e) of the Act.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held
Share application money or share application advance is distinct from ‘loan or advance’. Although share application money is one kind of advance given with the intention to obtain the allotment of shares/equity/preference shares etc, such advances are innately different form the normal loan or advances specified both in section 269SS or 2(22)(e) of the Act. Unless the mala fide is demonstrated by the AO with evidence, the book entries or resolution of the Board of the assessee become relevant and credible, which should not be dismissed without bringing any adverse material to demonstrate the contrary. It is also evident that share application money when partly returned without any allotment of shares, such refunds should not be classified as ‘loan or advance’ merely because share application advance is returned without allotment of share. In the instant case, the refund of the amount was done for commercial reasons and also in the best interest of the prospective share applicant. Further, it is self explanatory that the assessee being a ‘beneficial share holder’, derives no benefit whatsoever, when the impugned ‘share application money/advance’ is finally returned without any allotment of shares for commercial reasons. In this kind of situations, the books entries become really relevant as they show the initial intentions of the parties into the transactions. It is undisputed that the books entries suggest clearly the ‘share application’ nature of the advance and not the ‘loan or advance’. As such the revenue has merely suspected the transactions without containing any material to support the suspicion. Therefore, the share application money may be an advance but they are not advances which are referred to in section 2(22)(e) of the Act. Such advances, when returned without any allotment or part allotment of shares to the applicant/subscriber, will not take a nature of the loan merely because the same is repaid or returned or refunded in the same year or later years after keeping the money for some time with the company. So long as the original intention of payment of share application money is towards the allotment of shares of any kind, the same cannot be deemed as ‘loan or advance’ unless the mala fide intentions are exposed by the AO with evidence.

The appeal filed by the Revenue was dismissed.

Cases Relied upon :
1 Ardee Finvest (P) Ltd. vs. DCIT ITA No. 218/Del/2000 (AY 1996-97)(Del)
2 Direct Information P. Ltd. ITA No. 2576/M/2011 order dated 31.1.2012 (Mum)
3 CIT vs. Sunil Chopra ITA no. 106/2011 judgment dated 27-04-2011 (Del)(HC)
4 Subhmangal Credit Capital P Ltd. ITA No.7238/ Mum/2008 dtd 19-01-2010 (Mum)
5 Rugmini Ram Gagav Spinners P. Ltd 304 ITR 417 (Mad)(HC)

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Nirav Shah

Business expenditure: Disallowance u/s. 43B(b) r/w.s. 36(va): Contribution to provident fund: Due date mentioned in section 36(va) is due date mentioned in section 43B(b): Contribution made after due date specified by Provident Fund Authority but before due date for filing return: Amount deductible:

CIT vs. Kichha Sugar Co. Ltd.: 356 ITR 351 (Uttarakhand):

The assessee employer, had deposited the employees’ contribution towards provident fund before the due date for filing of the return but after the due date specified by the Provident Fund Authority. The Assessing Officer disallowed the claim for deduction and treated the amount as income relying on the provisions of section 36(1)(va) of the Income-tax Act, 1961. The CIT(A) and the Tribunal allowed the assessee’s claim.

On appeal, the Revenue contended that in view of section 36(1)(va) r.w.s. 2(24)(x), such payment though made to the provident fund authorities, should be treated to be income of the assessee. The Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The due date as mentioned in section 36(1) (va) is the due date as mentioned in section 43B(b), i.e. payment/contribution made to the provident fund authority any time before filing the return for the year in which the liability to pay accrued along with the evidence to establish the payment thereof.

ii) The Assessing Officer proceeded on the basis that “due date” as mentioned in section 36(1) (va) is the due date fixed by the provident fund authority, whereas in the matter of culling out the meaning of the word “due date”, as mentioned in the section, the Assessing Officer was required to take note of section 43B(b) and by not taking the note of the provisions contained therein committed a gross error, which was correctly rectified by the Commissioner (Appeals) and rightly confirmed by the Tribunal.

iii) The appeal fails and the same is dismissed.”

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Nirav Shah

S/s. 148, 150, 153, 254 – A notice u/s. 148 may be issued at any time for the purpose of making a reassessment in consequence of or to give effect to any finding or direction contained in an order. For the purpose of section 150(2), the “order which was the subject matter of appeal” is the assessment order and not the order of CIT(A). Reassessment may be completed at any time where the reassessment is made in consequence of or to give effect to any finding/direction of an order passed u/s. 254(<

3. Sandhyaben A. Purohit vs. ITO
ITAT Ahmedabad `C’ Bench
Before Mukul Kr. Shrawat (JM) and Anil
Chaturvedi (AM)
ITA No. 1536/Ahd/2011
A.Y.: 2004-05. Decided on: 8th February, 2013.
Counsel for assessee / revenue: M. K. Patel / D. K. Singh

S/s. 148, 150, 153, 254 – A notice u/s. 148 may be issued at any time for the purpose of making a reassessment in consequence of or to give effect to any finding or direction contained in an order. For the purpose of section 150(2), the “order which was the subject matter of appeal” is the assessment order and not the order of CIT(A). reassessment may be completed at any time where the reassessment is made in consequence of or to give effect to any finding/direction of an order passed u/s. 254(1) of the Act i.e. an order of the ITAT.

Facts
The assessee sold a piece of land vide sale deed dated 21-05-2001. The consideration of sale was received before execution of the sale deed and possession was given simultaneous with the execution of the sale deed. However, the sale deed was registered on 30-07-2003. The Assessing Officer (AO) on getting information from the records of the purchaser, issued notice u/s. 148 for assessment year 2004-05. The AO collected information from the office of the Registrar and completed the assessment u/s. 144 by adopting the market value of the property sold.

Aggrieved the assessee preferred an appeal to CIT(A) who noted that the assessee had not offered capital gains on sale of property even in AY 2002-03. CIT(A) held that since the property was registered with the Registrar on 30-07-2003, transfer took place in AY 2004-05 and was correctly taxed by the AO.

Aggrieved the assessee preferred an appeal to the Tribunal and contended that the transfer u/s. 2(47) had taken place in the financial year relevant to assessment year 2002-03 and not 2004-05. Reliance was placed on decision in Arundhati Balkrishna & Anr. vs. CIT 138 ITR 245 (Guj) for the proposition that transfer is effective from the date of execution of the document and not from the date of registration. Revenue relied on the decision of the Apex Court in the case of Suraj Lamp & Industries 14 taxmann. com 103 (SC) for the proposition that transfer of an immovable property is enforceable only from the date of registration of the document.

On the possibility of making the assessment for AY 2002-03, it was submitted on behalf of the assessee that provisions of section 150 can only be attracted in respect of an order which is a subject matter of appeal and in this case order which is the subject matter of appeal is the order of cit9a0 which was dated 25-03-2011, hence the period of six years is to be computed considering the date of pronouncement of the order of CIT(A). Revenue contended that the assessment order is the subject matter of appeal which is dated 28-12-2007, hence direction can be given after considering the said date of assessment order.

Held
Considering the provisions of section 2(47)(v) and following the ratio of the decision of Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia v CIT 260 ITR 491 (Bom) the tribunal held that transfer had taken place in previous year relevant to assessment year 2002-03. It observed that since the decision of the Apex Court in the case of Suraj Lamps (supra) has been decided in a different context and the income-tax provisions were not adjudicated upon, the reliance placed by the revenue on the said precedent was misplaced.

The Tribunal noted the ratio of the decision of the Gujarat High Court in the case of Kalyan Ala Barot vs. M. H. Rathod 328 ITR 521 (Guj) and also the provisions of section 150 and observed that a notice u/s. 148 may be issued at any time for the purpose of making a reassessment in consequence of or to give effect to any finding or direction contained in an order. Further, in s/s. (v) of section 150, a limitation is prescribed that the clause of re-opening in s/s. (1) of section 150 shall not apply where any such reassessment relates to an assessment year in respect of which an assessment could not have been made at the time of order, which was subject matter of appeal, or as the case may be, was made by reason of any other provision of limiting the time within which any action for reassessment may be taken. The Tribunal held that assessment order is the order which is the subject matter of appeal. It also clarified that a co-joint reading with section 153(3) reveals that a reassessment may be completed at any time where the reassessment is made in consequence or to give effect to any finding / direction of an order passed u/s. 254(1) of the Act i.e. an order of the ITAT.

The appeal filed by the assessee was allowed subject to the direction mentioned above.

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Nirav Shah

Exports – Special deduction – Leasing right are ‘goods’ and transfer of such rights constitute ‘sale’ of merchandise / goods and the profits thereon are eligible for deduction u/s. 80HHC.

Commissioner of Income-tax vs. Romesh Sharma [2013] 354 ITR 229 (SC).

The High Court had dismissed the appeal of the revenue following its decision in Abdulgafar A. Nadiadwala (2004) 267 ITR 488 (Bom).

On appeal, the Supreme Court noted that issue involved was whether leasing rights could be considered to be ‘goods’ and whether transfer of such rights would constitute ‘sale’. The Supreme Court dismissed the appeal of the revenue following its decisions in CIT vs. B. Suresh (2009) 319 ITR 149

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Nirav Shah

Chafer VI-A – Special Deduction – Duty drawbacks is not derived from industrial undertaking and thus is not eligible for deduction u/s. 80 IA.

Commissioner of Income-tax vs. Orchev Pharma P. Ltd. [2013] 354 ITR 227 (SC)

The High Court dismissed the appeal of the revenue on the following question of law following its decision in CIT vs. India Gelatin and Chemicals Ltd. (2005) 275 ITR 284 (Guj).

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in allowing the deduction u/s. 80-IA of the Income-tax Act, 1961, by including the amount of duty drawback?”

The Supreme Court allowed the appeal of the Department in view of its decision in Liberty India vs. CIT (2009) 317 ITR 218 (SC).

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Nirav Shah

Assessment – Supreme Court dismissed the Special Leave Petition arising from the order of the High Court in view of concurrent finding of facts where the High Court had held that statements recorded during survey operation do not have any evidentiary value when the same are subsequently retracted and no addition could be made solely on the basis of such statement.

Commissioner of Income-tax vs. S.Khader Khan Son [2013] 352 ITR 480 (SC)

A survey action was conducted u/s. 133A of the Act on 24th July, 2001, in the premises of the assessee at 90, Syed Mada Street, Shevapet Salem, and one of the partners of the firm, by name Asif Khan. In his sworn statement Asif Khan offered an additional income of Rs. 20,00,000 for the assessment year 2001-02 and Rs. 30,00,000 for the assessment year 2002-03. However, the said statement was retracted by the assessee through its letter dated 3rd August 3, 2001, stating that the partner Asif Khan, from whom a statement was recorded during the survey operation u/s. 133A, was new to the management and he could not answer the enquiries made and as such, he agreed to an ad hoc addition, which could never be achieved by the business owing to the competition and to the legislation by the Government prohibiting smoking in public places.

The assessee filed its return of income for assessment year 2001-02 on 29th October, 2001, disclosing an income of Rs. 12,640/-.

The Assessing Officer found that certain books were not produced during the course of survey action and that certain entries in the books were made subsequent to the survey action and at the time of survey action, the assessee had come forward with the admission. The Assessing Officer rejected the book, viz., “branch contractors’ agent book” produced after the survey to support the claim of manufacturing process and based on the admission made by the assessee, which according to him were directly relatable to the defects noticed during the action u/s. 133A of the Act, recomputed the assessment by his assessment order dated 30th March, 2004.

Aggrieved by the said assessment order dated 30th March, 2004 the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), who, by order dated 30th November,2006, held the issue in favour of the assessee. On appeal, at the instance of the Revenue, the Appellant Tribunal holding that there was no infirmity in the order of the Commissioner, dismissed the Revenue’s appeal.

The High Court dismissed the appeal of the revenue holding that no substantial question of law arose since the Commissioner and Tribunal had followed Circular of CBDT dated 10th March, 2003 for arriving at the conclusions that the material collected and the statement obtained u/s. 133A would not automatically bind upon the assessee.

The Supreme Court dismissed the SLP in view of concurrent findings of fact.

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Nirav Shah

Business expenditure- Amount lying credited in the Modvat account at the end of the accounting year was expenditure allowable u/s. 37 read with section 43B.

CIT vs. Shri Ram Honda Power Equipment Ltd. [2013] 352 ITR 481 (SC)

The Delhi High Court answered the following question of law in favour of the assessee and against the department in view of its decision in CIT vs. Modipon Ltd. (2002) 303 ITR 438(Del).

“Whether the Income-tax Appellate Tribunal was right in holding that the amount lying credited in the Modvat account at the end of the accounting year is expenditure allowable u/s. 37 read with section 43B of the Income-tax Act, 1961?”

The appeal pertained to the assessment year 1995-96.

On further appeal by the revenue, the Supreme Court observed that the judgment of the Bombay High Court in CIT vs. Indo Nippon Chemicals Co. Ltd. (2000) 245 ITR 384 (Bom) squarely applied to this case and the said decision was affirmed by the Supreme Court in (2003) 261 ITR 275(SC). The Supreme Court held that since the assessee followed net method of valuation of closing stock, the authorities below were right in coming to the conclusion that Modvat credit is excise duty paid.

Note: The above decision was followed in Asst. CIT vs. Torrent Cables Ltd. (2013) 354 ITR 163(SC) which also pertained to the assessment year 1995-96.

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Nirav Shah

Substantial Question of Laws – Whether gains on forward currency contract is not to be excluded from the profits eligible for deduction u/s. 80HHC, is a substantial question of law.

CIT vs. Mitsu Pvt. Ltd. [2013] 354 ITR 89 (SC)

In the appeal filed to the High Court the Revenue inter alia had raised following two questions.

1. Whether, on the facts of the case and in law, the Appellate Tribunal was justified in granting relief u/s. 80HHC of the Act to the assessee on the issue of gain on forward currency contract without appreciating the fact that the gain on exchange difference is nothing but speculation profit and not related to the business of the assessee?

2. Whether, on the facts of the case and in law, the Appellate Tribunal was justified in directing the Assessing Officer not to exclude this income from the profits eligible for deduction u/s. 80HHC without appreciating the fact that when the assessee enters into a forward contract, as in this case, the assessee stands to benefit by the fluctuations in foreign exchange irrespective of the fact whether the trade agreement exist or not?

The High Court held that no question of law arose in view of finding given by the Tribunal that the foreign exchange contract was entered into by the assessee only with a view to realise the amount due on sale of goods and was related to the business of the assessee.

On an appeal, the Supreme Court was of the opinion that the above question required consideration and decision by the High Court. The Supreme Court therefore without expressing any opinion on the merits of the aforesaid questions, remanded the matter to the High Court for examination.

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Nirav Shah

Industrial undertaking: Deduction u/s. 80-IA/80-IB: Computation: A.Ys. 1997-98 to 1999-00, 2003-04 and 2004-05: Assessee printing and publishing magazines: Four units: One unit doing job work of printing for publishing unit: Expenses attributable to publishing unit not to be allocated to printing unit for computation of the amount deductible u/s. 80-IA/80-IB:

CIT vs. Delhi Press Patra Prakashan Ltd. (No. 1); 355 ITR 1 (Del):

The assessee was engaged in the business of printing and publishing magazines. It had four units. One unit was doing the job work of printing for the publishing unit. The assessee had maintained separate accounts in respect of which deduction u/s. 80-IA/80-IB was claimed. Relying on sections 80-IA(8), (9) and (10), the Assessing Officer held that profits of the printing unit are required to be recomputed by allocating to the printing unit the expenses relating to the cost of paper and other expenses of the publishing unit inasmuch as section 80-IA(7) requires that the profits from the eligible business must be computed as if the eligible business was the only source of income for the assessee. Accordingly, he recomputed the profits of the printing unit and the amount deductible u/s. 80-IA/80-IB. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) There was no material to support the view that the job work charges charged by the printing units from the publishing unit were not at market rates. In the absence of any defect or manipulation found by the Assessing Officer in the books maintained for the printing unit and in the absence of any material to indicate that the amounts charged by the printing unit from the publishing unit was not at comparable market rates, it would not be open for the Revenue to disregard the profits of the printing unit as disclosed by the assessee only on the basis that the profits were significantly higher than the profits earned by the assessee from other undertakings.

ii) The printing unit carried on job work of printing only and the expenses attributable to the publishing unit which relate to the publishing business could not be allocated to the printing unit. Only those expenses which related to the printing work carried on by the assessee in the printing unit were liable to be deducted from the job charges to arrive at the profits eligible for deduction u/s. 80-IA/80-IB, as the case may be.”

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Nirav Shah

Income: Accrual: Retention money: Sections 4 and 5: A. Y. 2003-04: Amount retained to ensure satisfactory performance of contract does not accrue: Not income of that year:

DIT vs. Ballast Nedam International; 355 ITR 300 (Guj):

The assessee executed contracts. In terms of the contracts, the amounts at the rate of 10% on the onshore activities, and at the rate of 15% on the construction and erection activities, were withheld by the principal towards retention money. For the A. Y. 2003-04, the assessee claimed that the retention money of Rs. 14.31 crore did not accrue and accordingly cannot be assessed as income. However, the Assessing Officer held that the amount is the accrued income and made addition. The Commissioner and the Tribunal allowed the assessee’s claim.

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

“i) Unless and until a debt is created in favour of the assessee, which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that the income has accrued to him.
ii) The amount retained had not accrued to the assessee in the accounting year relevant to the A.Y. 2003-04.”

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Nirav Shah

Depreciation: Actual cost: Subsidy: Section 43(1), Expln. 10: A.Ys. 2001-02 and 2002-03: Assessee a Government Company took over the telecommunication business from Government Department: Assets transferred at book value: Consideration in form of shares, debts and reserves: Reserve not a subsidy, grant or reimbursement for meeting cost of assets transferred: Reserves not to be reduced from fixed assets to arrive at actual cost: Reopening of the assessment for reducing the actual cost by reserve<

BSNL vs. Dy. CIT; 355 ITR 188 (Del):

The assessee company was incorporated to provide the telecommunication services which were being provided earlier by the Department of Telecommunications of the Government of India. The assets were transferred at book value. Consideration was paid in the form of shares, debts and reserves. The Assessing Officer found that the consideration included reserves. He held that the cost of assets was being met by the reserves and therefore held that the reserve is required to be reduced from the cost of the assets in terms of Explanation 10 to section 43(1). He therefore reopened the assessments for the A.Ys. 2001-02 and 2002-03 and recomputed the depreciation by reducing the reserve from the cost of assets.

On a writ petition filed by the assessee, the Delhi High Court accepted the assessee’s claim and held as under:

“i) There was no basis for the Assessing Officer’s assumption that whereas value of share capital issued to the Government as part consideration for transfer of business to the assessee was limited only to the face value of the shares, reserves represented a subsidy, grant or reimbursement for meeting the cost of assets transferred.
ii) Free reserves and surpluses of a company could not be considered anything but part of shareholders’ funds. The book value of equity share consists of not only the paid up capital but also the reserves and surpluses of the company. The scheme of hiving off the business of telecommunication services by the Government of India to a corporate entity entailed incorporation of a wholly owned Government company (i.e., the assessee) and the transfer of the business as a going concern along with all its assets and liabilities to the company. Reserves was an integral part of the shareholders funds.
iii) The Government of India had transferred the assets to the assessee company at their book value and the book value of the Government of India’s holding on the assessee company as shareholder and a creditor aggregated the book value of the assets transferred. The configuration of the capital structure of the assessee had no impact on the value of the Government’s holding in the assessee as reserve(s) of a company are subsumed in the book value of its capital.
iv) There is no plausible reason to assume that the value of shareholders’ holding in a company is limited to the face value of the issued and paid up share capital and the reserves represent subsidy or a grant or reimbursement by the shareholders from which directly or indirectly the cost of the assets in the hands of the company are met.

v) We are thus of the view that the reasons as furnished by the Assessing Officer for reopening the assessments could not possibly give rise to any belief that income of the petitioner had escaped assessment and the proceedings initiated on the basis of such reasons are liable to be quashed.”

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Nirav Shah

Charitable institution: Exemption u/s. 10(23C) (iv): Sections 2(15) and 10(23C)(iv): A.Ys. 2006- 07 to 2011-12: Charitable purpose: Applicability of proviso to section 2(15): Assessee’s activities fall in section 2(15) as existed prior to 01-04-2009 under the category of advancement of any other object of general public utility: Activity of assessee in conducting coaching classes is integral to its activity of conducting course in accountancy: Cannot be equated with private coaching classes:

Assessee entitled to exemption u/s. 10(23C)(iv): ICAI Vs. DGIT; 260 CTR 1 (Del):

The petitioner Institute was constituted under the Institute of Chartered Accountants Act, 1949, with the object to regulate the profession of Chartered Accountants in India and to ensure that the standards of professional knowledge and skill are met and maintained. Up to the

A.Y. 2005-06, the petitioner was granted approval for exemption u/s. 10(23C)(iv). Subsequent applications for approval were rejected on the ground that the Petitioner was holding coaching classes for preparing students for the examinations conducted by the Petitioner and was charging fees for the same.
The Delhi High Court allowed the writ petition filed by the petitioner against the said denial and held as under:

“i) Assessee’s activities fall within the definition of ‘charitable purpose’ in section 2(15) as it existed prior to 01-04-2009, under the category of ‘advancement of any object of general public utility’.
ii) The activity of the assessee in conducting coaching classes is integral to its activity of conducting the course in accountancy and the same cannot be equated with private coaching classes being conducted by organisations on commercial basis for preparing students to take entrance or other examinations in various professional courses.
iii) The reasoning of the DGIT that conducting interviews for a fee for the purposes of placement of its students by the assessee amounts to carrying on of a business is not sustainable. Campus interview is only a small incidental activity carried on by the assessee Institute like Universities for the placement of their students in gainful employment. This too is an activity ancillary to the educational programme being conducted by the assessee and cannot be considered as a business.
iv) The reasoning of the DGIT that since the assessee institute charges a uniform fee from all students it cannot be said to be carrying on a charitable activity is also erroneous. It is well settled that eleemosynary is not an essential element of ‘charitable purpose’ as defined under the Act. If the object or purpose of an institution is charitable, the fact that it collects certain charges does not alter the character of the institution.
v) Expression “trade”, “commerce” and “business” as occurring in the first proviso to section 2(15) must be read in the context of the intent and purport of section 2(15) and cannot be interpreted to mean any activity which is carried on in an organised manner. Purport of the first proviso is not to exclude entities which are essentially for charitable purpose but are conducting some activities for a consideration or a fee. Thus, where the dominant object of an organisation is of charitable nature, any incidental activity for furtherance of the object would not fall within the expression “business”, “trade” or “commerce”.
vi) Impugned orders passed by the DGIT refusing to grant exemption u/s. 10(23C)(iv) are set aside and he is directed to recognise the assessee as eligible for exemption u/s. 10(23C)(iv) as an institution established for charitable purposes.”

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Nirav Shah

Business expenditure: Payment to related person: Disallowance u/s. 40A(2)(b): A.Y. 1995-96: Payment to subsidiary company: Section 40A(2)(b) not applicable:

CIT vs. Raman Boards Ltd.: 355 ITR 305 (Kar):

The assessee, a manufacturer of insulation paper boards, entered into an agreement with its subsidiary company for manufacture of footwear soles. Under the agreement, the assessee was to pay to the subsidiary management fees of Rs. 4 lakh per month. In the A. Y. 1995-96, the assessee claimed deduction of Rs. 48 lakh so paid to the subsidiary. The Assessing Officer allowed 50% of the claim and disallowed Rs. 24 lakh u/s. 40A(2)(b). The Tribunal held that the genuineness of the agreement and the services rendered by the subsidiary company were not doubted and there being no finding that the payment made by the assessee was excessive u/s. 40A(2)(b) the Tribunal deleted the disallowance.

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

“i) To attract the provisions of section 40A(2), the assessee has to incur an expenditure by making payment to the person referred to in clause (b). The assessee was a company. The person to whom it had to make the payment in order to attract the provision was any director of the company or any relative of director.

ii) Admittedly, the payment was made to the subsidiary company and not to any director or any relative of director. Therefore, the requirement of section 40A(2)(b) was not fulfilled. The Tribunal was justified in directing the deletion of the disallowance.”

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Nirav Shah

Business expenditure: Disallowance u/s. 14A: A. Y. 2005-06 and 2006-07: Investment in subsidiaries: In respect of part of investment dividends were taxable: In respect of balance, assessee had sufficient interest free funds: No disallowance could be made u/s. 14A:

CIT vs. Suzlon Energy Ltd: 354 ITR 630 (Guj):

The assessee had made investments in subsidiaries. The Assessing Officer made disallowance of interest expenditure and administrative expenditure u/s. 14A in respect of such investment. The Commissioner (Appeals) deleted the disallowance. The Tribunal found that in respect of part of investment, dividends were taxable and in respect of the balance the assessee had sufficient interest free funds of its own. The Tribunal confirmed the decision of the Commissioner (Appeal).

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

“The Tribunal was right in law and on facts in deleting disallowance u/s. 14A in respect of interest expenses incurred for investment in subsidiaries and administrative expenses such as staff salary of corporate office, audit fees, building rent and communication expenses.”

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Nirav Shah

Business expenditure: Disallowance u/s. 40(a) (ia) : Deduction of tax at a lesser rate due to difference of opinion: Disallowance u/s. 40(a)(ia) not justified:

CIT vs. S. K. Tekriwal; 260 CTR 73 (Cal):

The assessee deducted tax @ 1% u/s. 194C(2) from the payments made to sub-contractors. The Assessing Officer held that the payments are in the nature of machinery hire charges falling under the head ‘Rent’ and the provisions of section 194-I are applicable as per which tax was deductible @ 10%. The assessing Officer, therefore, disallowed the payment proportionately by invoking the provisions of section 40(a)(ia). The Tribunal deleted the disallowance holding that no disallowance can be made by invoking the provisions of section 40(a)(ia), if there is any shortfall in deduction of tax at source due to any difference of opinion as to the taxability of any item or the nature of payment falling under various TDS provisions.

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

“We find no substantial question of law involved in this case and therefore, we refuse to admit the appeal. Accordingly, the appeal is dismissed.”

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Nirav Shah

DTAA between India and Malaysia – Notification no. 7 dated 29th January, 2013

1: DTAA between India and Malaysia – Notification no. 7 dated 29th January, 2013 –

DTAA between India and Malaysia signed on 9th May, 2012 shall enter into force on 26th December, 2012

2: Income tax (First amendment) Rules, 2013 Notification No- 8 dated 31st January, 2013–

New Rule 17CA has been inserted to enumerate the functions of an electoral trust. Form 10BC has been prescribed as an Audit Report for such electoral trusts.

3: Electoral Trusts Scheme 2013 notified under Section 10(22AAA) – Notification No- 9 dated 31st January, 2013

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Nirav Shah

Section 50C and Tolerance Band

Issue for consideration

Section 50 C has been introduced by the Finance Act, 2002, with effect from 01-04-2003, to provide for substitution of the full value of consideration with the stamp duty valuation, in cases where such valuation happens to be more than the agreed value. As a result in computing the capital gains, on transfer of land or building or both, as per section 48, the assessee, in ascertaining the full value of consideration, is required to adopt the higher of the agreed value or the stamp duty valuation. The objective behind the introduction of section 50C is to eliminate or reduce the possibility of unaccounted element in the real estate transactions and it is on this account that the provision has been found to be constitutional by a number of high courts.

The provision contains an in-built safeguard, for authorising the assessee to seek a reference to the Valuation Officer, in a case where he is of the opinion that the stamp duty value does not represent the fair market value of the asset transferred by him. In spite of this statutory safeguard , it is usual to come across numerous cases where the assessee genuinely is aggrieved on the valuation put forth by the Valuation Officer.

It is also usual to come across instances, where the assessee is subjected to the additional taxes and interest in cases involving a marginal or insignificant difference. This difference, howsoever insignificant, arises mainly on account of the inherent element of estimation in valuation that is unavoidable. Realising this handicap in the past, while dealing with the similar provisions, the Supreme court held that a tolerance band of 15% be read in to such provisions by the authorities while applying such provisions, with the idea that no taxpayer is unjustly punished for the difference.

It is on this touchstone of avoiding unjust outcome of the literal reading of a statutory provision, one has to test the provisions of section 50C to ascertain,

whether it is possible to read therein, the existence of a tolerance band, to save the tax payers in cases of marginal differences form the noose of additional taxation. The Pune bench of the tribunal is in favour of reading such a tolerance band in the provisions of section 50C while the Kolkata bench holds a contrary view.

Rahul Constructions’ case
The issue first came up for consideration of the Pune bench of the tribunal, in the case of Rahul Constructions vs. DCIT, reported in 38 DTR at page 19, for assessment year 2004-05. In that case, the assessee firm had sold two units in the basement for the total sale consideration of Rs. 19 lakh. The stamp valuation authorities had adopted the value of Rs. 28.73 lakh for the said units. The AO invoking the provisions of section 50C, made a reference to the DVO, u/s. 50C(2), for valuation as per the law. The DVO valued the said units at Rs. 20.55 lakh. The AO adopting the said value of Rs. 20.55 lakh, substituted the full value of consideration and computed the capital gains at a higher amount than the one returned by the assesssee firm.

The explanations advanced by the firm to the AO and the DVO to the effect that the basement in rear building had no “commercial” value, the height was 8-1/2’ only, the units got waterlogged during the rainy season, they were old premises and were used by tenant/lessee and were sold on as is where is basis and the booking was in February, 2001, so valuation of 2001 be considered, were all rejected by them.

The said contentions were reiterated before the CIT(A) and in addition he was asked to apply the tolerance band due to insignificant difference between the agreed value and the DVO’s valuation. It was submitted that there was a marginal difference of Rs. 1,55,000 only, which was 8.5 per cent of the estimated sale value which was within the tolerance limit of 15 per cent for variation as was held by the Supreme Court in the case of C.B. Gautam vs. UOI, 199 ITR 530 (SC) under Chapter XX-C of the Act. The CIT(A) rejected the contentions of the firm to dismiss the appeal by observing that

the provisions of section 50C(1) of the Act were unambiguous and the AO was bound to take the rate as per the stamp valuation authorities and he was not empowered to go beyond the valuation made by the DVO. He distinguished the decision in the case of C.B. Gautam (supra) on the ground that the said decision concerned itself with the case of a purchase of property under Chapter XX-C of the Act. He upheld the action of the AO.

The firm aggrieved with such order of the CIT(A), appealed to the tribunal, inter alia, on the ground that on the facts and in law the learned CIT(A) erred in not appreciating that the difference between the sale consideration shown by the assessee and the value determined by the DVO was marginal and therefore, no addition was justified on account of the valuation determined by the DVO.

The counsel for the assessee reiterated the submissions as were made before the AO and the CIT(A). Referring to the DVO’s report he submitted that the difference between the value adopted by the DVO and the sale consideration received by the firm was less than 10 per cent and submitted that the consideration received by the firm should be considered as representing the fair market valuation and no addition was justified on account of the valuation by the DVO.

In reply the Departmental Representative submitted, that once the matter was referred to the DVO and the valuation adopted by the DVO was found to be less than the value determined by the stamp valuation authorities, the AO was bound to substitute the value determined by the DVO as the deemed sale consideration and the assessee could not challenge the same.

On due consideration of the rival submissions made by both the sides, the tribunal held that the valuation adopted by the DVO was subject to appeal and the same was not final. The value adopted by the DVO was also based on some estimate and that the difference between the sale consideration shown by the assessee at Rs. 19,00,000 and the FMV determined by the DVO at Rs. 20,55,000 was only Rs. 1,55,000 which was less than 10 per cent. It observed that the courts and the tribunals were consistently taking a liberal approach in favour of the assessee where the difference between the value adopted by the assessee and the value adopted by the DVO was less than 10 per cent.

The tribunal noted that the Pune bench of the tribunal in the case of ACIT vs. Harpreet Hotels (P) Ltd. vide ITA Nos. 1156-1160/Pn/2000 had dismissed the appeal filed by the Revenue, where the CIT(A) had deleted the addition made on account of the unexplained investment in house construction on the ground that the difference between the figure shown by the assessee and the figure of the DVO was hardly 10 per cent. Similarly, the Pune bench of the tribunal in the case of ITO vs. Kaaddu Jayghosh Appasaheb, vide ITA No. 441/Pn/2004, for the asst. yr. 1992-93, following the decision in the case of Honest Group of Hotels (P) Ltd. vs. CIT 177 CTR (J&K) 232 had held that when the margin between the value as given by the assessee and the Departmental valuer was less than 10 per cent, the difference was liable to be ignored. In the result, the appeal of the assessee was allowed by the tribunal.

Heilgers’ case

The issue again came up recently, for consideration of the Kolkata tribunal, in the case of Heilgers De-velopment & Construction Co. (P) Ltd. vs. DCIT, 32 taxmann.com 147 by way of appeal by the assessee, for the assessment year 2008-09, on the ground that the ld. CIT(A) erred in confirming the addition made on account of capital gains based on the value determined by the Stamp Valuation Authority that was higher than the sale consideration declared by the assessee which was wrong and needed to be deleted.

In that case, the assessee had sold two commercial premises admeasuring 3265 sq.ft. in aggregate, for the stated aggregate consideration of Rs. 2.12 crore against the stamp duty valuation of about Rs. 2.23 crore, in aggregate. The difference was attributed by the assessee to the long gap of 7 to 9 months between the date of agreement and the date of conveyance. It was argued that considering the difference in market value when compared with the consideration received by the assessee was less than 10%. And therefore the net difference of Rs. 10,98,980 should be ignored in computing the long term capital gains. None of these submissions found favour with the AO and the CIT(A).

In the further appeal before the tribunal, the assesssee’s counsel’s first and basic contention was that the provisions of section 50C could not be invoked at all where the difference in stamp duty valuation vis-a-vis stated sales consideration was less than 15% of the stamp duty valuation; that every valuation was at best an estimate and therefore under valuation could not be presumed when there was only a marginal difference between such an estimate and the apparent consideration declared in the sale document; that the Honourable Supreme Court, in the case of C.B. Gautam vs. Union of India, 199 ITR 530, had recognised a tolerance limit for pre-emptive purchase of property under Chapter XXC, at 15% of variation, mainly for a similar reason, even though no such tolerance band was prescribed in the statute.

Quoting from certain observations in “Sampat Iyen-gar’s Law of Income Tax” (Volume 3; 10th Edition) at page 4362, it was submitted that by the same logic that was employed by the Honourable Supreme Court in Gautam’s case (supra), section 50C was also subject to similar tolerance for the cases with the marginal difference. It was pleaded that the difference in valuation as per the sale deed vis-a-vis the stamp duty valuation being much less than 15% in the present case, the provisions of section 50C did not come into play at all.

The submissions of the assesssee failed to con-vince the tribunal. It noted that the submissions, howsoever attractive as they seemed at the first blush, were lacking in legally sustainable merits. The tribunal observed that ; when a provision for tolerance band was not prescribed in the statute, it could not be open to tribunal to read the same into the statutory provisions of section 50 C- no matter howsoever desirable such an interpretation was; what the provisions of section 50C clearly required was that when stated sales consideration was less than the stamp duty valuation for the purposes of transfer, the stamp duty value, subject to the safeguards built in the provision itself, should be taken as the sales consideration for the purposes of computing capital gains; casus omissus, which broadly referred to the principle that a matter which had not been provided in the statue but should have been there, could not be supplied by the tribunal as laid down in the case of Smt. Tarulata Shyam vs. CIT, 108 ITR 345(SC); the tribunal was itself a creature of the Income-tax Act and it could not, therefore, be open to it to deal with the question of correctness or otherwise of the provisions of the Act.

The tribunal also did not find any merits in the assessee’s claim of undue hardship being caused to the taxpayers and to avoid that a tolerance band be read into the provisions of the section 50C. The safeguard built in section 50C, the tribunal noted, did envisage a situation that whenever an assessee claimed that the fair market value of the property was less than the stamp duty valuation of the property and allowed for a reference to the DVO and at which point all the issues relating to valuation of the property – either on the issue of allowing a reasonable margin for market variations, or on the issue of time gap , could be taken up, before the DVO and, therefore, before subsequent appellate forums as well. This inherent flexibility, the tribunal held might rescue the assessee particularly in the case of marginal differences however, challenging the very application of section 50C was something which tribunal found to be devoid of legally sustainable merits.

Observations

The avowed legislative intention behind the introduction of section 50C is to bring to tax the unaccounted funds, used in the real estate transactions, involving land and/or building. There is no dispute about this aspect. The objective is certainly not to tax a tax payer in respect of the sterile transactions. In this background, any attempt to tax a clean transaction amounts to penalising the person for having entered in to a transaction and such attempt becomes punishing in a case where the difference is marginal.

The valuation, including the valuation by the stamp duty authorities, without doubt involves an element of estimation and can never be precise. Such a valuation, as has been repetitively held by the courts, is, at the most, a guiding factor and cannot be conclusive of the fact of the use of unaccounted funds. Interestingly, the ready reckoner rate, so famously applied by the authorities and blindly relied upon by the AOs, are nothing but the standard and generic rates annually prescribed by the stamp authorities. The prescribed rate is not even the ‘valuation’ of a specific asset. This rate is prescribed for an entire locality or an area and does not take in to consideration several factors that have a direct bearing on the price and therefore the valuation. Hardly does one come across a case where the transaction value exactly matches with the prescribed rates; it is either less or more and in most of the cases more. The values do match only in those transactions where it is so designed to match to avoid the attending issues.

It is therefore essential for the revenue to appreciate and concede that the stamp duty valuation or the DVO’s valuation is essentially an estimation that requires to be adjusted by some tolerance band. Once this wisdom, based on the ground reality, is allowed to percolate, resulting litigation or the fear or the threat thereof shall rest at least in half the cases.

One of the main reasons advanced by the Kolkata bench, for not allowing the case of the assessee, was the inability of the tribunal, as a body, to read down the provisions of the law. The bench stated in clear terms that their powers are circumscribed and the tribunal as a creature of the Income-tax Act cannot read down the provisions of the law so as to permit the application of a tolerance band. The bench expressed its helplessness and explained that such powers were vested with the courts. This also confirms that the last word on the possibility of applying the tolerance band is yet to be said.

The better course, with respect, in our considered view, for the tribunal should have been to accept that the agreed value, considering the insignificant difference, represented the fair market value.

On a careful reading of the provisions of section 50C, one gathers that a reference to the DVO is possible on the primary assumption that the stamp duty valuation exceeds the fair market value. It is also gathered that the job of the DVO is to ascertain the fair market value. The fair market value, so ascertained by the DVO, is subject to the scrutiny of the appellate authorities whose word about the correctness of the fair market value is the final word. In this background of the facts, we are of the considered view that the tribunal, in all such cases involving the marginal difference, shall accept the agreed value as the fair market value, independent of the statutory tolerance band.

Nirav Shah

Section 28 – Merely by initiating the compensation suit, the amount claimed therein cannot be treated as assessee’s income unless the other party admits the liability to pay compensation or there is a decree in favour of the assessee.

17. ACIT v. Trident Textile Mills Limited
ITAT Chennai `A’ Bench
Before Abraham P. George (AM)
and S. S. Godara (JM)
ITA No. 1169/Mds/2012
A.Y.: 2008-09. Dated: 17-12-2012.
Counsel for revenue/assessee: Shaji P. Jacob /M. Karunakaran

Section 28 – Merely by initiating the compensation suit, the amount claimed therein cannot be treated as assessee’s income unless the other party admits the liability to pay compensation or there is a decree in favour of the assessee.

Facts

The assessee, manufacturer and domestic seller of grey fabric, filed its return of income for the AY 2008-09 declaring a loss of Rs. 31,31,568. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had acquired a 1250 MW windmill, from M/s Suzlon Energy, for captive consumption. The purchase order contained compensation clause, which provided that the assessee was entitled to compensation in case of any loss of generation on account of non-availability of the machine below 95% @ 3.67/ KWH or as per the TNEB tariff during the warranty period. He also noticed that the generation of power unit did not touch the assured level of 37 lakh units. The assessee had filed a compensation case before the Jurisdictional High Court raising claim of Rs. 17,58,014 upto 15-9-2007 for shortfall in generation of power. Since the other party had not accepted the assessee’s claim for compensation and also the case was pending before the Court, the assessee had not declared the amount claimed as its income. The AO held that, since the assessee was entitled to compensation as per the agreement, he taxed the sum of Rs. 17,58,014 as the income of the assessee. Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the addition made by the AO. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the capacity assured was never achieved and the assessee had initiated compensation proceedings before the Honourable High Court. The High Court had referred the case to the Sole Arbitrator, who expired during the pendency of the arbitration proceedings. The Tribunal held that it is unable to concur with the stand of the Revenue that merely by initiating the compensation suit, the amount claimed therein is liable to be assessed as assessee’s income. It also noted that the other party has not admitted any compensation or its part as payable to the assessee nor there any decree in favour of the assessee so as to realise the amount. It held that once the arbitration proceedings are pending, the outcome of the assessee’s claim involved still hangs in balance. It observed that when there is no actual receipt of any amount or accrual, the same cannot be taken as income of the assessee. It held that the amount claimed by the assessee as compensation cannot be taken to be its income. The Tribunal upheld the order of CIT(A). The appeal filed by the Revenue was dismissed.

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Nirav Shah

Section 80 HHE – Deduction respect of profits from export of computer software – For the purpose of computation of deduction only the total turnover and export turnover of the eligible business is to be considered.

2. Datamatics Technologies Ltd. vs. DCIT
ITAT Mumbai benches “D”, Mumbai
Before D. Manmohan (V.P.) and Sanjay Arora (A.M.)
ITA No. 5557 / Mum / 2011
Asst Year 2003-04. Decided on 08-03-2013
Counsel for Assessee/revenue: J. P. Bairagra /rupinder Brar

Section 80 HHE – Deduction respect of profits from export of computer software – For the purpose of computation of deduction only the total turnover and export turnover of the eligible business is to be considered.

Facts
The assessee had claimed deduction of Rs. 55.99 lakh u/s. 80 HHE. The AO restricted the assessee’s claim to Rs. 8.02 lakh by taking into account the turnover of all the units of the assessee instead of the turnover of only the eligible units u/s. 80 HHE as claimed by the assessee. On appeal, the CIT(A) confirmed the AO’s order.

Before the tribunal, the revenue justified the orders of the lower authorities on the ground that if the contentions of the assessee were to be accepted, the whole premise or basis of the allocation of profits as prescribed per s/s. (3) of section 80 HHE would stand defeated inasmuch as the turnover of the assessee’s export unit would be its total turnover, rendering the apportionment as of no consequence. It also relied on the decisions of Kerala high court in the case of CIT vs. Parry Agro Industries Ltd. (257 ITR 41) and Mumbai tribunal decision in the case of Ashco Industries Ltd. vs. JCIT (ITA no. 2447 /Mum/2000 dt. 14-01-2003). The decisions in the above two decisions were rendered in the context of the provisions of section 80HHC. However, the revenue justified its reliance on the said two decisions on the ground that the two sections viz., 80 HHC and 80 HHE, are para material prescribing the same computational formula to compute profit attributable to the eligible export business.

Held
According to the tribunal, the issue to be decided was whether the ‘total turnover’ for the purpose of deduction u/s. 80 HHE would be the total turnover of only the eligible units or the total turnover of all the units.

The tribunal noted that unlike the provisions in section 10A, 10B, 80 IA, 80 IB, 80HH, etc. the deduction u/s. 80 HHE is not unit specific but is business specific, i.e. the business of export of computer software. Further, it referred to a decision of the Mumbai tribunal in the case of Tessitura Monti India Pvt. Ltd. (ITA No. 7127/Mum/2010 dt. 11- 01-2013 which decision was rendered in the context of section 10B. Relying on the said decision, the tribunal observed that the qualifying profit for the purpose of computing ‘profits and gains of business or profession’ as per Explanation (d) to the section would be the profits of the computer software business and correspondingly, it would be the export and the total turnover of the said business only that would stand to be considered for apportionment u/s. 80 HHE(3).

As regards the revenue’s contention that the formula to compute profit of the business should be given the same meaning as is given u/s. 80 HHC, the tribunal noted that the provisions of section 80 HHC also requires the adjustment of sales turnover of mineral resources from the total turnover or the adjusted total turnover, in case the assessee is also engaged in the said business. Further, referring to the various legislative amendments carried out in section 80 HHC, the tribunal observed that the same were only to neutralise the anomalies that arose in the wide variety of business situations.

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Nirav Shah

Section 40(A)(3) – Once the addition has been made by increasing the gross profit rate then there is no further scope of making separate additions.

14. ITO vs. Nardev Kumar Gupta
ITAT Jaipur Bench ‘A’ Jaipur
Before B. R. Mittal (J. M.) and B. R. Jani (A. M.)
ITA No. 829/JP/2012
A. Y.: 2009-10.
Dated: 23-01-2013
Counsel for Revenue/Assessee: Roshanta
Meena/Mahendra Gargieya

Section 40(A)(3) – Once the addition has been made by increasing the gross profit rate then there is no further scope of making separate additions.

Facts

The assesse derives income from newspaper agency. During the assessment, the AO rejected the books of accounts u/s. 145(3). While making the best judgment, the AO accepted the sales as declared by the assesse but applied the higher gross profit rate and made addition of Rs. 3.19 lakh. Besides, the addition of Rs. 21.6 lakh was also made u/s. 40A(3) on account of payments made in cash for purchase of newspaper. On appeal, the CIT(A) deleted the addition made u/s. 40A(3) and the addition of Rs. 3.19 lakh made by the AO was restricted to Rs. 1 lakh.

Before the tribunal, the revenue justified the order of the AO and placed reliance on the Gujarat high court decision in the case of CIT vs. Hynoup Food & Oil Ind. Pvt. Ltd. (290 ITR 702) and justified the disallowance made by the AO for the payments made in cash exceeding the prescribed limit u/s. 40A(3).

Held

The tribunal noted the ratio laid down in the decisions listed below, viz. that, once the addition has been made by increasing the gross profit rate then there is no further scope of making separate additions under different provisions. Based thereon, the tribunal upheld the decision of the CIT(A).
The decisions relied on by the tribunal were as under:
1. CIT vs. G. K. Contractor (19 DTR 305)(Raj);
2. CIT vs. Pravin & Co. 274 ITR 534 (Guj);
3. Choudhary Bros. (ITA No. 1177/JP/2010 dt. 31-5- 2010;
4. CIT vs. Banwari Lal Banshidhar 229 ITR 229 (All)

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Nirav Shah

S/s. 40(a)(ia), 80IB(10), – In case of an undertaking qualifying for deduction u/s. 80IB(10), amount disallowed u/s. 40(a)(ia) is allowable as deduction u/s. 80IB(10).

34. 2013-TIOL-146-ITAT-MUM
ITO vs. Dharti Enterprises
A. Y.: 2007-08, Dated: 18- 1-2012

S/s. 40(a)(ia), 80IB(10), – In case of an undertaking qualifying for deduction u/s. 80IB(10), amount disallowed u/s. 40(a)(ia) is allowable as deduction u/s. 80IB(10).

Facts

The assessee was in the business of construction. It filed return of income declaring total income at Rs. Nil after claiming deduction u/s. 80IB(10) of the Act. In the course of assessment proceedings, the AO noticed that the profit as per P & L Account was Rs. 51,34,648 and to this, the assessee had added the amount of Rs. 13,35,990 being the amount of expenditure on which TDS was deposited later than the due date and Rs. 81,81,030 being amount of expenditure on which TDS was not deposited as per tax audit report. Thus, on a gross total income of Rs. 1,46,51,668, the assessee claimed deduction u/s. 80IB(10) of Rs. 1,46,51,668.

On being asked as to why deduction u/s. 80IB(10) should not be disallowed on Rs. 95,17,020 the assessee submitted that no disallowance u/s. 40(a)(ia) was called for and even if the amount is disallowed the assessee is eligible for deduction u/s. 80IB(10) on the entire amount of profit derived from the housing project as computed under the Act, which is included in the gross total income of the assessee.

The AO after considering the decision of the Apex Court in Liberty India vs. CIT 317 ITR 218 (SC) held that the assessee has wrongly claimed the deduction u/s. 80IB(10) on the amount of Rs. 95,17,020 which is not a profit of the eligible enterprise, but has to be taxed because of the violation of the provisions of section 40(a)(ia) of the Act. He disallowed the claim of deduction u/s .80IB(10) on the amount of Rs. 95,17,020.

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

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted the ratio of the following decisions –

(i) S B Builders & Developers vs. ITO (ITA No. 1245/ Mum/2009)(AY 2006-07) order dated 14-5-2010;

(ii) ITO vs. Shri Ganesh Developers and Builders (ITA No. 4328/Del/2009)(AY 2006-07) order dated 11-3-2011; and

(iii) ACIT vs. Sri Lakshmi Builders and vice versa in ITA No. 244/Vizag/2008 and in ITA No. 323/Vizag/2010 (AY 2005-06) order dated 22-11-2010.

It noted that in the case of Sri Lakshmi Builders (supra) on the issue of disallowance of deduction u/s. 80IB(10) on the amount disallowed u/s. 40(a)(ia) it has been held by the Tribunal that the disallowance so made can only be treated as income derived from the impugned business activity, when the income after making the said disallowance is subjected to tax as the business profit.

Applying the ratio of the abovementioned decisions to the facts of the assessee’s case, the Tribunal held that since the AO had treated the disallowance u/s. 40(a) (ia) of Rs. 95,17,020 as income from business and it is not the case of the Revenue that the income derived by the assessee is other than the business income from developing and building housing project, the assessee is entitled to deduction u/s. 80IB(10) in respect of total profits including the profits of Rs. 95,17,020 computed as business profits of the housing project for the year under appeal. The Tribunal upheld the order of the CIT(A).

The appeal filed by the Revenue was dismissed.

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Nirav Shah

Block assessment: Limitation: Special audit: Sections 142(2A) and 158BC: Direction for special audit without giving opportunity to assessee: Direction given to extend period of limitation: Assessment barred by limitation:

CIT vs. Subboji Rao C. H.; 355 ITR 320 (Kar):

Pursuant to a search, block assessment proceedings were initiated by issuing a notice u/s. 158BC of the Income-tax Act, 1961 on 15-05-1998. The assessee computed the undisclosed income at Rs. 24,18,360 and the Assessing Officer computed the undisclosed income at Rs. 70,00,246. The Commissioner (Appeals) reduced the addition. He rejected the contention of the assessee that the assessment was barred by limitation since the direction for special audit u/s. 142(2A) was not valid. The Tribunal held that there was no complexity in the accounts requiring an audit u/s. 142(2A). It further held that invoking the provisions u/s. 142(2A) was bad in law and the assessment was barred by limitation.

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

“The assessee was not heard before the order passed u/s. 142(2A). Such a procedure was resorted to extend the period of limitation. Therefore, the assessment order was void as being barred by limitation.”

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Nirav Shah

S/s. 50C, 271(1)(c) – The mere fact that the AO had invoked section 50C(2) and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for imposing penalty.

33. 2013-TIOL-39-ITAT-MAD
C Basker vs. ACIT
A. Y.: 2007-08, Dated: 12-10-2012

S/s. 50C, 271(1)(c) – The mere fact that the AO had invoked section 50C(2) and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for imposing penalty.

Facts

The assessee filed its return of income which return of income was subsequently revised. In the original return of income as also in the revised return of income, the assessee had computed and offered for taxation capital gains arising on sale of land. The capital gains were computed by adopting the consideration as per sale agreement to be full value of consideration. In the course of assessment proceedings, the AO noticed that the sale consideration as per agreement was Rs. 28,54,200, whereas the value of the property as per guideline value was Rs. 95,40,000. He assessed total income by computing capital gains by adopting the guideline value to be full value of consideration. He also initiated penalty proceedings. The assessee did not file any appeal against the application of guideline value by the AO. The AO levied penalty u/s. 271(1)(c) of the Act inter alia on the ground that but for information obtained by him from AIR data, correct capital gains would have escaped assessment as the assessee failed to disclose the same either in original return of income or in the revised return of income filed subsequently.

Aggrieved by the levy of penalty, 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

The Tribunal noted that it was not the case of the AO that the assessee has received consideration in excess of the amount stated in the sale deed. The mere fact that the AO had invoked section 50C(2) of the Act and adopted guideline value for computing capital gains ignoring what was disclosed by the assessee ipso facto cannot be the sole basis for the purpose of computing capital gains. The Tribunal noticed that the Mumbai Bench of the Tribunal in the case of Renu Hingorani vs. ACIT has held that penalty merely on the basis of invoking section 50C(2) of the Act cannot be sustained. It further observed that the same law has been reiterated in the case of Shri Chimanlal Manilal Patel vs. ACIT (ITA No. 508/Ahd/2010) and DCIT vs. Japfa Comfeed India Private Limited (2011-TIOL-703-ITAT-DEL). The Tribunal held that section 50C(2) is only a deeming provision which cannot be taken as to be an understatement for the purpose of imposing penalty. In order to attract imposition of penalty, the assessee must be held to have concealed particulars of income or furnished inaccurate particulars. In the instant case, there were no such allegations against the assessee. The Tribunal held that the CIT(A) erred in confirming the penalty imposed by the AO. The Tribunal decided the appeal in favour of the assessee.

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Nirav Shah

S/s. 139(1), 139(5), 142(1), 143(2), 145 – Even in cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income. Even in the case of an assessee following cash system of accounting, return of income can be revised and the amount received and offered as income can be eliminated to give effect to the decision of the High Court, rendered after the end of the financial year, holding that the said amount is not taxable.

32. 2013-TIOL-141-ITAT-DEL
ACIT vs. Dexterity Developers A. Y. : 2008-09, Dated: 18-1-2013

S/s. 139(1), 139(5), 142(1), 143(2), 145 – Even in cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income. Even in the case of an assessee following cash system of accounting, return of income can be revised and the amount received and offered as income can be eliminated to give effect to the decision of the High Court, rendered after the end of the financial year, holding that the said amount is not taxable.

Facts

The assessee firm, following cash system of accounting, had filed its return of income, declaring the total income to be Rs. 5,36,83,629. In the original return filed, the assessee had disclosed profit of Rs. 9,73,36,034 on sale of land for a total consideration of Rs. 20,55,78,119 on 11-2-2008. contention of the DR that since the The plot of land under consideration originally belonged to Ambika Mills Ltd., a company under liquidation. The Gujrat High Court constituted a committee, headed by the Official Liquidator as the Chairman, for disposal of the assets of the company in liquidation. On the basis of the report of the Official Liquidator and the open bid in the Court, the highest bid of Rs. 14.30 crore made by M/s Bheruji Estate, was accepted by the Court by order dated 23-12-2003. As the auction purchaser subsequently could not make the full payment, he requested that the freehold land be registered in the name of his nominee, Mr. Manubhai M. Patel, who would make the balance payment. However, M/s Bheruji Estate subsequently went back on this request. On 8-8-2005, the Honourable Court directed the Official Liquidator to execute sale deed in favour of Manubhai Patel, subject to the outcome of the appeal filed by M/s Bheruji Estate. On 19-10-2007, the assessee entered into an MoU with Shri Manubhai Patel for sale of freehold land, and also acted as a mediator between the two parties i.e. M/s Bheruji Estate and Shri Manubhai M. Patel. The consent terms between the disputing parties were taken on record by the Appellate Court, and the final order was passed on 23-1-2008 disposing of the appeal by M/s Bheruji Estate. In the meantime, on 29-10-2007, the Official Liquidator executed the sale deed of the freehold land in favor of Shri Manubhai M. Patel. On 11-2-2008, a registered sale deed was executed by Shri Manubhai Patel, as vendor, the assessee as confirming party and M/s Sential Infrastructures Ltd., as purchaser for a consideration of Rs. 55,67,78,119, out of which Rs. 21,60,28,119 was to be received by the assessee.

Subsequently, one of the original bidders of the auction sale of 2003, Shri Jayesbhai Patel filed an appeal against the original sale made by the Official Liquidator in favour of M/s Bheruji Estate, and on his appeal, the Gujrat High Court vide order dated 9-3-2009 held that the sale effected on 11-2-2008 should be treated to have been made by the Official Liquidator in favour of M/s Sential Infrastructure Ltd., and the intervening parties, i.e. M/s Bheruji Estate, Shri Manubhai Patel and the assessee were only entitled to their expenditure to the extent of actual investments, services rendered and cost of litigation. It was directed that the assessee was liable to return the amount of Rs. 20 crore to the Official Liquidator within one month from the date of the order, retaining only Rs. 1,60,28,119. On the basis of this High Court order dated 9-3-2009, the assessee firm filed its revised return of income showing nil income, enclosing a profit & loss account in which no sale of land was disclosed and the liability of Rs 20 crore was disclosed in its balance sheet.

The Assessing Officer held that the assessee was not entitled to revise its return on the basis of events which had occurred after the close of the previous year as it followed cash system of accounting. He held that the effect of the Court order dated 9-3-2009 could only be reflected in AY 2009-10.

Aggrieved, the assessee preferred an appeal to CIT(A) who accepted the assessee’s contention and directed the AO to accept the revised return which was filed within time and was within four corners of law.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held

The Tribunal noted that the only dispute of the Revenue was that there was no omission or wrong statement in the original return which may be revised. The Tribunal noted that the High Court had held that the assessee was not entitled to the profit on sale of land, but was entitled only to the expenditure to the extent of actual investment and the cost of litigation. Therefore, the assessee was not entitled to the amount credited to its profit & loss account towards profit on sale of land. The Tribunal held that there was certainly an omission in the original return of income. Though the order of the High Court was subsequent to the end of the relevant previous year, it effected the transaction entered into during the previous year which was liable to be taxed in the assessment year under consideration. Since the assessment of the said year was still pending, the Tribunal held that the assessee was fully justified in revising its return in the light of the decision of the Honourable Jurisdictional High Court.

As regards the AO’s reliance on the method of accounting followed by the assessee being cash, the Tribunal held that after the order of the High Court, when the assessee is not entitled to any profit from the sale of land, the nature of the amount received from the buyer of the land cannot be considered as sale proceed or profit in the hands of the assessee, but its nature would be only an amount received in trust which the assessee is liable to refund as per the direction of the Court. Even in the cash method of accounting, every receipt is not income but the receipt which is in the nature of income is liable to be assessed as income.

As regards the contention of the DR that since the assessee had preferred an appeal against the order of the High Court, in the event of the decision being reversed in appeal, how would the Department be able to recover the tax on such income from sale of land, the Tribunal held that if any such event happens, the Revenue would be at liberty to take appropriate action in accordance with law. The Tribunal noted that as on date of its decision, the decision of the Jurisdictional High Court holds good and is binding on the parties. The assessment of the income of the assessee cannot be made, ignoring the above decision of the Honourable Jurisdictional High Court.

The Tribunal held that the CIT(A) was justified in directing the AO to consider the revised return. It upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue.

The appeal filed by the revenue was dismissed.

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Nirav Shah

Amount received on transfer of carbon credits is a capital receipt

31. (2013) 81 DTR 173 (Hyd)
My Home Power Ltd. vs. DCIT A.Y.: 2007-08, Dated: 2-11-2012

Amount received on transfer of carbon credits is a capital receipt

Facts

The company, engaged in the business of power generation, received carbon emission reduction certificates (CERs) popularly known as ‘carbon credits’ for the project activity of switching off fossil fuel from naphtha and diesel to biomass. The part of CERs was sold and sale proceeds of Rs. 12.87 crore were treated as capital in nature and not taxable. The Assessing Officer held the same to be a revenue receipt, since the CERs are a tradable commodity and even quoted in stock exchange. The CIT(A) confirmed the order of the Assessing Officer.

Held

The carbon credit is in the nature of “an entitlement” received to improve world atmosphere and environment by reducing carbon, heat and gas emissions. The entitlement earned for carbon credits can, at best, be regarded as a capital receipt and cannot be taxed as a revenue receipt. It is not generated or created due to carrying on business, but it accrues due to “world concern”. It has been made available assuming character of transferable right or entitlement only due to world concern. The source of carbon credit is world concern and environment. Due to that, the assessee gets a privilege in the nature of transfer of carbon credits. Thus, the amount received for carbon credits has no element of profit or gain and it cannot be subjected to tax in any manner under any head of income. It is not liable for tax for the assessment year under consideration in terms of sections 2(24), 28, 45 and 56. Carbon credits are made available to the assessee on account of saving of energy consumption and not because of its business. Further, carbon credits cannot be considered as a by-product. It is a credit given to the assessee under the Kyoto Protocol and because of international understanding. Thus, the assessees who have surplus carbon credits can sell them to other assessees to have capped emission commitment under the Kyoto Protocol. Transferable carbon credit is not a result or incidence of one’s business and it is a credit for reducing emissions.

The persons having carbon credits get benefit by selling the same to a person who needs carbon credits to overcome one’s negative point carbon credit. The amount received is not received for producing and/or selling any product, by-product or for rendering any service for carrying on the business. Carbon credit is entitlement or accretion of capital and hence, income earned on sale of these credits is capital receipt. The carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business, but it is generated due to environmental concerns. It does not increase profit in any manner and does not need any expenses. It is a nature of entitlement to reduce carbon emission. However, there is no cost of acquisition or cost of production to get this entitlement. Carbon credit is not in the nature of profit or in the nature of income.

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Nirav Shah

Assessment giving effect to the order of revision: Scope: Sections 143(3) and 263: A. Y. 2006-07: Assessee carrying on two businesses; i) Mentha business and ii) Cattle feed and green vegetable business: Separate accounts maintained: Assessment set aside u/s. 263 by finding errors in cattle feed and green vegetable business: Pursuant assessment is restricted to Cattle feed and green vegetable business: Queries concerning mentha business are beyond the scope and power:

Smt. Shobha Govil vs. Add. CIT: 354 ITR 668 (All):

The assessee was carrying on two businesses; i) Mentha business and ii) Cattle feed and green vegetable business. Separate accounts were maintained for the two businesses. The accounts of mentha business were audited. For the A. Y. 2006-07, the assessment was completed u/s. 143(3). The Commissioner found mistakes as regards the cattle feed and green vegetable business and accordingly, exercising the powers u/s. 263 set aside the assessment order and restored the matter back to the Assessing Officer. The Commissioner had not found any mistake as regards the mentha business. After remand, the Assessing Officer served a questionnaire making inquiries with regard both the businesses. The assessee resisted the questionnaire on the ground that the remand order passed by the Commissioner u/s. 263 was confined to the determination of income of the cattle feed and green vegetable business and the income from mentha business has become final as it has not been interfered with u/s. 263 of the Act. The Assessing Officer rejected the contention of the assessee.

The Allahabad High Court allowed the writ petition filed by the assessee challenging the said stand of the Assessing Officer and held as under:

“i) The entire discussion in the order u/s. 263 was confined to the question of determination of income and expenditure of the cattle feed and green vegetable business. The discussion, paragraph after paragraph, was with regard to the cattle feed and green vegetable business, viz. its sales, sale bills, absence of addresses of the purchasers of bhusa, truck expenses and freight outward expenses, salary of the staff, all related to the cattle feed and green vegetable business.

ii) There was nothing in the order of the Commissioner suggesting that the entire assessment order was being set aside. The Assessing Officer was not justified in coming to the conclusion that he was also required to pass a fresh assessment order for the mentha business.

iii) To this extent, the order cannot be allowed to stand and was liable to be set aside.”

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Nirav Shah

High Court—Matter remanded for de novo consideration as no reasons were given for dismissal of the writ petition.

Parvez Nazir Hussein Jafri vs. CIT (2013) 354 ITR 235 (SC)

The High Court dismissed the writ petition filed by the assessee challenging the validity of the notice dated 26th July, 2010 issued u/s. 148 for reopening the assessment for the assessment year 2006-07 holding that there was no error in issuing notice u/s. 148 and noting that the income-tax return submitted by the Petitioner was processed u/s. 143(1) on 10th March, 2007.

On appeal, the Supreme Court set aside the order of the High Court and remitted the matter back to the High Court for de novo consideration in accordance with law since the High Court had not given any reasons for not setting aside the reopening of the assessment.

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Nirav Shah

Settlement of cases: Chapter XIXA: A. Ys. 2001- 02 to 2006-07: Order passed by Settlement Commission is final: No Income Tax Authority can initiate proceedings in respect of period and income covered by such order: Settlement Commission cannot delegate its power

CIT vs. Smt. Diksha Singh; 350 ITR 157 (All)

The Settlement Commission passed an order u/s. 245D(4), whereby the undisclosed income of the assessee was settled at Rs. 43 lakh for the assessment years under consideration. While passing the order, the Settlement Commission observed in paragraph 7 as follows:

“The Commissioner of Income-tax/Assessing Officer may take such action as appropriate in respect of the matter not placed before the Commission by the applicant, as per the provisions of section 245F(4) of the Income Tax Act, 1961”

The Assessing Officer issued notice and finally estimated the income at Rs. 75,84,900/- in addition to the agricultural income of Rs. 1,75,000 and made the additions accordingly. The CIT(A) and the Tribunal deleted the addition.

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

“i) A plain reading of section 245D r.w.s. 245F makes it clear that once a matter falls within the domain of the Settlement Commission, no authority of the Income-tax Department will have jurisdiction to asses tax for the same financial year and the finding of the Settlement Commission shall be conclusive and final u/s. 245-I.

ii) A mere observation of the Settlement Commission will not empower the assessing or appellate authority to reassess on any ground, whatsoever, for the same financial year with regard to which the Settlement Commission had exercised jurisdiction and given a finding.

iii) The Legislature in its wisdom had conferred power on the Settlement Commission to reopen the proceedings in certain circumstances and to deal with the situation in the event of commission of fraud. Once power has been conferred on the Settlement Commission itself to deal with the contingency, such power cannot be delegated directly or indirectly to any authority of the Income-tax Department. The discretionary administrative power entrusted by the statute to a particular authority cannot be further delegated except as otherwise provided in the statute. In other words, when the Act prescribes a particular body or officer to exercise a power, it must be exercised by that body or officer and none else unless the Act by express words or necessary implication permits delegation, in which event, it may also be exercised by the delegate if delegation is made in accordance with the terms of the Act but not otherwise.

iv) The Settlement Commission cannot make an observation delegating its power to the assessing authority to reopen the case in certain circumstances for the same financial year, when it had been conferred wide power to deal with the situation under the statutory provisions.

v) The Tribunal has rightly decided the appeal on the sound principles of law. The appeal being devoid of merit is hereby dismissed.”

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Nirav Shah

Co-operative Society—Deduction u/s. 80P(2) (a)(iii)—Matter remanded to the Commissioner of Income-tax (Appeals) to determine whether the activity of obtaining sugar from the sugar cane constituted manufacture?

Morinda Co-operative Sugar Mills Ltd. vs. CIT (2013) 354 ITR 230 (SC)

The
assessee, a co-operative sugar mill, bought sugarcane grown by its
members. It undertook a particular operation whose outcome was a final
product in the form of sugar. The question before the Supreme Court was
whether the final product (sugar) would make the assessee entitled to
claim to benefit of section 80P(2)(a)(iii) in respect of marketing of
the agricultural produce grown by its members?

According to the
Supreme Court, the crucial issue was, whether at the time of marketing
of sugar, the same could be said to have retained the character of
agricultural produce (sugarcane) grown by members of the society or did
it represent an independent commercial commodity which no longer had the
character of agricultural produce? In short, the controversy was,
whether the operation undertaken by the assessee constituted
“manufacture”?

According to the assessee, the process undertaken
was not a “manufacture”. Broadly, according to the assessee, sugar
(also called “sucrose”) is synthesised by the sugarcane plant from water
and atmospheric carbon dioxide by the method of photosynthesis.
Sugarcane, according to the assessee, is produced in the agriculture
fields. In the sugar factory, after juice is extracted from the
sugarcane, it is boiled. Microscopic crystals coalesce together to form
macroscopic crystals and molasses.

This, according to the
assessee, did not constitute “manufacture”. In this connection, reliance
was placed by the assessee on the opinion given by the technical
advisor at the request of the National Federation of Co-operative Sugar
Factories Ltd.

According to the Department, the above operation/
activity constituted “manufacture”. In this connection, the Department
placed reliance on paragraph 10 of the judgment in the case of CIT vs .
Oracle Software India Limited reported in (2010) 320 ITR 546 (SC), where
it was observed as follows (page 551):

“The term ‘manufacture’
implies a change, but every change is not a manufacture, despite the
fact that every change in an article is the result of a treatment of
labour and manipulation. However, this test of manufacture needs to be
seen in the context of the above process. If an operation/process
renders a commodity or article fit for use for which it is otherwise not
fit, the operation/process falls within the meaning of the word
‘manufacture’.”

According to the Supreme Court, the above test
had to be applied and adjudicated on a case-tocase basis. It depended on
the type of product which ultimately emerged from a given operation. In
its view, this aspect had not been examined by the courts below.

For
the above reasons, the Supreme Court remitted the case back to the
Commissioner of Income-tax (Appeals) to re-examine the matter, directing
that (i) Commissioner of Income-tax (Appeals) would give an opportunity
to the assessee to put forth the opinion of an independent expert who
shall not be from the society or federation; (ii) A copy of the written
opinion shall be given to the Department; (iii) The Department would be
free to engage its own expert who, in turn, will give his opinion; (iv)
The parties be given liberty to cross-examine the experts. The
Commissioner of Income-tax (Appeals) would thereafter decide the case
and ascertain whether the operation undertaken by the assessee is or is
not “manufacture”. The Supreme Court disposed of the civil appeals
accordingly.

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Nirav Shah

Section 14A, Rule 8D – No disallowance can be made in respect of expenses in relation to dividend received from trading in shares. In view of the judgment of Karnataka High Court in the case of CCI Ltd vs. JCIT, the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. cannot be followed.

16. Vivek Mehrotra v. ACIT
ITAT Mumbai `F’ Bench
Before Rajendra Singh (AM) and Amit Shukla (JM)
ITA No. 6332/Mum/2011 A.Y.: 2008-09.
Dated: 11-1-2013
Counsel for assessee/revenue: Rajiv Mehrotra/Om Prakash Meena

Section 14A, Rule 8D – No disallowance can be made in respect of expenses in relation to dividend received from trading in shares. In view of the judgment of Karnataka High Court in the case of CCI Ltd vs. JCIT, the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. cannot be followed.

Facts

The assessee received exempt income in the form of dividend from personal investments and also from shares held for trading. It also received tax free interest from relief bonds. The assessee maintained separate accounts including separate bank accounts and balance sheets for personal investments and trading activities in which expenses relating to these two activities were shown separately.

In the course of assessment proceedings, on being asked to show cause as to why expenses relating to such income should not be disallowed u/s. 14A of the Act, the assessee submitted that from the separate accounts maintained, it is clear that personal investments were made out of profit earned in the past and not from borrowings. It also contended that no expenses were incurred in respect of such investment. As regards shares held for trading it was contended that the provisions of section 14A are not applicable. The AO relying on the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd. (ITA No. 8057/Mum/2003) held that section 14A does apply even to shares held as stock-in-trade. The AO disallowed the expenses in respect of both shares held as personal investment as well as shares held for trading.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that, on facts, no disallowance was to be made in respect of shares held as personal investments. As regards shares held for trading he held that the provisions of section 14A are applicable and disallowance made by the AO was confirmed by him.

Aggrieved, both the assessee and the Revenue, preferred an appeal to the Tribunal.

Held

The Tribunal noted that the CIT(A) had given a clear finding that the assessee maintained separate accounts including separate bank accounts and balance sheets for the two activities. He gave a finding that the personal investments were made out of own funds, investments in RBI Relief Bonds and LIC had been made in earlier years and since the assessee was having vast experience in these matters, he was personally handling these investments, there were no expenses required. Similarly, the shares which were of unlisted group companies held for the purpose of retaining control over these companies, did not require any day to day expenses. The Tribunal confirmed the action of the CIT(A) in holding that no disallowance is called for in relation to shares held as personal investments.

As regards the shares held for trading, the Tribunal noted that subsequent to the decision of the Special Bench of ITAT in the case of Daga Capital Management Pvt. Ltd. (supra), in which it has been held that section 14A would apply even to dividend income for trading in shares, the Karnataka High Court in the case of CCI vs. JCIT (250 CTR 290)(Kar) has in relation to trading shares held that the assessee had not retained shares with the intention of earning dividend income which was only incidental to shares which remained unsold by the assessee. The High Court held that no disallowance of expenses was required in relation to dividend from trading shares. The Tribunal also noted that the Mumbai Bench of the Tribunal in the case of DCIT vs. India Advantage Securities Ltd. (ITA No. 6711/Mum/2011, Assessment Year: 2008-09; order dated 14-9-2011) held that in view of the judgment of the Karnataka High Court in the case of CCI Ltd. vs. JCIT, the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd., could not be followed and no disallowance could be made of expenses in relation to dividend received from trading in shares. The Tribunal set aside the order of CIT(A) and deleted the disallowance upheld by him in relation to trading in shares.

The appeal filed by the assessee was allowed and the appeal filed by the Revenue was dismissed.

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Nirav Shah

Search and seizure: Authorisation u/s. 132(1) of I. T. Act, 1961: Validity: Reason to believe: Affidavit of Dy DIT stating that he got information that there was a “likelihood” of the documents belonging to the DS Group being found at the residence of the assessee: Would amount only to surmise or conjecture and not to solid information: Warrant of authorisation not valid and is liable to be quashed

Madhu Gupta vs. DIT(Inv).; 350 ITR 598 (Del): 256 CTR 21 (Del) The assessee challenged the validity of the search action u/s. 132 of the Income Tax Act, 1961 by filing a writ petition.

The Delhi High Court allowed the petition and held as under:

“i) The warrant of authorisation can only be issued by competent person in consonance of information in his possession and after he has formed a reason to believe that the conditions stipulated in cls. (a), (b) and (c) of section 132(1) existed. The information must be credible information and there must be a nexus between the information and the belief. Furthermore, the information must not be in the nature of some surmise or conjecture, but it must have some tangible backing. Until and unless information is of this quality, it would be difficult to formulate a belief because the belief itself is not just an ipse dixit, but is based on reason and that is why the expression used is “reason to believe” and not simply “believes”.

ii) In the present case, the so-called information is undisclosed and what exactly that information was, is also not known. At one place in the affidavit of Dy. Director of IT, it has been mentioned that he got information that there was a “likelihood” of the documents belonging to the DS Group being found at the residence of the petitioner. That by itself would amount only to a surmise and conjecture and not to solid information and since the search on the premises of the petitioner was founded on this so-called information, the search would have to be held to be arbitrary. It may also be pointed out that when the search was conducted on 21-1-2011, no documents belonging to the DS Group were, in fact, found at the premises of the petitioner.

iii) With regard to the argument raised by the counsel for the Revenue that there was no need for the competent authority to have any reason to believe and a mere reason to suspect would be sufficient, it may be pointed out that the answer is provided by the fact that the warrant of authorisation was not in the name of DS Group but was in the name of the petitioner. In other words, the warrant of authorisation u/s. 132(1) had been issued in the name of the petitioner and, therefore, the information and the reason to believe were to be formed in connection with the petitioner and not the DS Group.

iv) None of the clauses (a), (b) or (c) mentioned in section 132(1) stood satisfied. Therefore, the warrant of authorisation was without any authority of law. Therefore, the warrant of authorisation would have to be quashed.

v) Once that is the position, the consequence would be that all proceedings pursuant to the search conducted on 21/01/2011 at the premises of the petitioner would be illegal and, therefore, the prohibitory orders would also be liable to be quashed. It is ordered accordingly. The jewellery/other articles/ documents are to be unconditionally released to the petitioner.”

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Nirav Shah

Exports—Exemption u/s. 10A—Matter remanded to the Tribunal to consider the transaction of earning of interest on foreign currency deposit in detail to determine whether there existed any nexus between interest and industrial undertaking.

India Comnet International vs. ITO (2013) 354 ITR 673 (SC)

The assessee, a private limited company established under the Madras Export Processing Zone, a 100% export oriented unit, engaged in the business of development and export of software filed its return of income for the assessment year 2002- 03 on 31st October, 2002, admitting “nil” income after claiming exemption u/s. 10A amounting to Rs. 8,34,84,900. The assessment was completed u/s. 143(3) of the Act by adding to income, the interest on deposits amounting to Rs. 92,06,602. The Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer, namely that the interest income of Rs. 92,06,602 did not qualify for exemption u/s. 10A of the Act and the same had to be assessed to tax under the head “Income from other sources”. The Tribunal following the order of the jurisdictional High Court in the case of CIT vs. Menon Impex P. Ltd. (2003) 259 ITR 403 (Mad) dismissed the appeal filed by the assessee. The High Court confirmed the order of the Tribunal holding that the interest income was earned out of the export realisation and kept in the foreign currency deposit account, as permitted by the FERA under the banking regulations and that there was no direct nexus between the interest earned and the industrial undertaking since the interest was received on deposit made in banks and it was that deposit which was the source of income.

On further appeal, the Supreme Court held that the impugned judgment of the High Court was based on the judgment of the Madras High Court in the case of CIT vs. Menon Impex P. Ltd. (supra). The Supreme Court observed that in that case, the Madras High Court examined in detail the transaction in question and found that the assessee had set up a new industrial undertaking in Kandla Free Trade Zone for manufacturing light engineering goods. The goods therein were exported during the assessment year 1985-86. In the course of business, the assessee was required to open a letter of credit. On such deposit, the assessee earned interest. Under the said circumstances, the High Court held, following the judgment in the case of CIT vs. Sterling Foods reported in [1999] 237 ITR 579 (SC), that the interest received by the assessee was on deposit made by it in the banks; that such deposit was the source of income; and that, the mere fact that the deposit was made for obtaining letter of credit which letter was, in turn, used for the purpose of business undertaking did not establish a direct nexus between the interest and industrial undertaking. According to the Supreme Court, the judgment of the Madras High Court in Menon Import P. Ltd. ( supra) was based on the examination of the transaction in detail which exercise had not been undertaken in the present case.

For the above reasons, the Supreme Court set aside the impugned judgment and remitted the case to the Income-tax Appellant Tribunal for deciding the matter afresh after examining the transaction in question, as done by the Madras High Court in the case of Menon Import P. Ltd. (supra).

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Nirav Shah

Provisional attachment u/s. 281B: A. Y. 2008-09: Provisional attachment remains in operation only till the passing of the assessment order

Motorola Solutions India (P) Ltd. vs. CIT; 254 CTR 569 (P&H)

In the course of the assessment proceedings for the A. Y. 2008-09, the Assessing Officer passed the provisional attachment order u/s. 281B and issued letters/ notices on 2-1-2012 to the Standard Chartered Bank and sundry debtors not to make payment to the assessee petitioner. The assessee challenged the validity of the order by filing a writ petition. In the mean while, on 8-11-2012, assessment order was passed raising a demand of Rs. 2,10,57,87,648/-. The Petitioner contended that the provisional attachment order u/s. 281B of the Act ceases to operate after passing of the assessment order on 8-11-2012. The contention of the Department was that the provisional attachment order will be in operation for a period of six months.

The Punjab and Haryana High Court accepted the contention of the Petitioner assessee and held as under:

“i) According to section 281B, during the pendency of any assessment proceeding or proceedings in pursuance to reassessment that in order to safeguard the interests of the Revenue, after recording the reasons for the same in writing and seeking the approval from the concerned authority, an order for provisional attachment can be passed. Circular No. 179 dated 30-9-1975 clearly envisages that where during the pendency of any proceeding for assessment or reassessment of any income, the raising of demand is likely to take time due to investigations and there is apprehension that the assessee may thwart the collection of that demand to be made. This supports the interpretation that it is only till actual demand is created by passing an assessment order that the provisional attachment order will remain in operation.

ii) There are sufficient provisions in the Act, like section 220(1), proviso to safeguard the interest of the Revenue in case the Assessing Officer has apprehension that the assessee by adopting extraneous method may thwart the recovery of the legitimate tax dues of the State. In view of the above, the interpretation put by the Revenue that even after passing of the assessment order, provisional attachment order shall still remain in force for six months, does not merit acceptance and is, thus, rejected.”

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Nirav Shah

Business expenditure: Disallowance u/s. 40(a) (ia): A. Y. 2008-09: Amendment of section 40(a)(ia) by Finance Act, 2010 is retrospective and is applicable for the A. Y. 2008-09 also:

CIT vs. Naresh Kumar; 262 CTR 389 (Del):

In respect of the A. Y. 2008-09, the Tribunal allowed the assessee’s claim that no disallowance u/s. 40(a) (ia) should be made in view of the amendment of section 40(a)(ia) by the Finance Act, 2010.

In appeal, the Revenue contended that the amendment is w.e.f 01-04-2010 and is not
retrospective, and accordingly, the amendment is not applicable for the A. Y. 2008-09. The Delhi High Court upheld the decision of the Tribunal and held as under:

“The Tribunal was justified in holding that the amendment made to section 40(a)(ia) by the Finance Act, 2010 should be given retrospective effect and applicable to A. Y. 2008-09 in question”

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Nirav Shah

Business expenditure: Bonus: Section 36(1) (ii): A. Ys. 2005-06 and 2006-07: Bonus paid to director as per Board resolution: Directors rendering valuable services to company: Bonus not related to shareholding: Bonus deductible:

CIT vs. Career Launcher India Ltd.; 358 ITR 179(Del):

For the A. Ys. 2005-06 and 2006-07, the Assessing Officer disallowed the claim for deduction of the bonus paid to the directors on the ground that it would have been payable to the directors as dividend had it not been paid as bonus. The Tribunal allowed the assessee’s claim and deleted the addition. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) It was not disputed regarding bonus (a) that payment was supported by board resolutions, and (b) that none of the directors would have received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding.

ii) Further, the directors were full-time employees of the company receiving salary. They were all graduates from IIM, Bangalore. Taking all these facts into consideration, the bonus was a reward for their work, in addition to the salary paid to them and was in no way related to their shareholding. It was deductible u/s. 36(1)(ii).”

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Nirav Shah

Assessment: Limitation: Section 158BC: Block Period ending on 14-09-2002: Exclusion of period during which assessment stayed by Court: Limitation resumes on date of vacation of stay and not from date of receipt of order by Department: Assessment barred by limitation:

CIT vs. Drs. X-Ray and Pathology Institute Pvt. Ltd.;358 ITR 27(All)

On 14-09-2002, search was conducted at the assessee’s premises and a notice u/s. 158BC was issued on 29-04-2003. The assessee filed the return on 16-06-2003. The assessee filed writ petition and challenged the validity of search. By order dated 12-02-2004, the High Court stayed the assessment proceedings. The stay was vacated on 26-08-2009 and the copy of the order was received by the Assessing Officer on 09-11-2009. The Assessing Officer passed the assessment order on 22-06-2010. The Tribunal held that the limitation resumes on the date of vacation of the stay and accordingly the assessment was barred by limitation.

In appeal, the Revenue contended that the limitation resumes from the date of receipt of the order by the Department i.e. 09-11-2009 and accordingly the assessment was within the limitation period. The Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) The provisions of the Act for filing of the appeal from the date of service of the order would not be attracted to calculate the period of limitation to complete the assessment. This was not a case of a particular act to be performed, but the arrest of the limitation by an interim order passed by the High Court.

ii) As soon as the order was vacated, the limitation would restart and exhaust itself on the period of limitation provided under the Act. The assessment was clearly barred by limitation.”

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Nirav Shah

Reassessment – Reason to believe that income had escaped assessment – The subsequent reversal of the legal position by the judgment of the Supreme Court does not authorise the Department to reopen the assessment [beyond a period of four years in a case where original assessment is made u/s. 143(3)], which stood closed on the basis of law, as it stood at the relevant time.

DCIT vs. Simplex Concrete Piles (India) Ltd. (2013) 358 ITR 129 (SC)

The Respondent-assessee was engaged in the business of civil construction works on contract basis and had claimed deduction u/s. 32A, 32AB, 80HH and 80HHB as under:

n the original orders of assessment for the said assessment years reliefs, inter-alia, u/s. 32A as claimed, were allowed in full for the assessment years up to 1989-90 and u/s. 32AB for the assessment year 1988-89 and 1989-90. The Respondent-assessee’s claim for relief u/s. 80HH and 80HHB was also allowed in the assessment order for assessment year 1984-85 but the claim for reliefs u/s. 80HHB for the assessment year 1985-86, 1987-88, 1988-99 and 1989-90 was not allowed in the assessments but the same were allowed in appeals by the appellate authority.

Later on, 6 notices all dated 29th July, 1994 were issued by the Petitioner u/s. 148 for reopening the assessments u/s. 147 for the assessment years 1984-85 to 1989-90, in view of the decision of the Apex Court in N.C. Budharaja and Co. (1993) 204 ITR 412, where the Supreme Court had held that an “article or “things” used in section 32A, 32AB and 80HH refers only to a movable asset and the words “manufacture or construction of an article” cannot be extended to construction of road, building, dam or bridge, etc. and Respondent-assessee was therefore not entitled to deduction u/s. 32A, 32AB or 80HH.

The Respondent-assessee filed a writ petition before the Calcutta High Court challenging all the six notices issued u/s. 148. The single bench of Judge of the Calcutta High Court (255 ITR 49) dismissed the writ petitions holding that the Assessing Officer had prima facie reason to believe that income had escaped assessment. On appeal, the Division Bench of the Calcutta High Court (262 ITR 605) allowed the appeal of the Respondent-assessee. The Division Bench noted that the assessee had claimed benefit u/s. 32A/32AB and section 80HH/80HHB for the relevant assessment years. The Assessing Officer had allowed the benefit under those sections, having regard to the law as it stood then governing these provisions. But there was divergence of opinion in the decision of the various High Courts. Those benefits would be available only to an industrial undertaking. The assessee had claimed itself to be an industrial undertaking. But this question when came to be considered by the apex court in N.C. Budharaja and Co.’s case (supra), it held that the nature of business as were carried on by Respondent-assessee was not that of an industrial undertaking. The Division Bench held that this decision was rendered in September, 1993. Therefore, admittedly, this was the information on the basis reopening was permissible u/s. 147 but subject to proviso thereunder. Admittedly, there was no allegation that amounts now sought to be made taxable were not disclosed and therefore it could not be said that there was any omission or failure to disclose fully and truly the materials necessary for assessment. The Petitioner had proposed to reopen the assessment only on the basis of the information derived by it from the decision in N.C. Budharaja’s case and as such the question of four years embargo would not be overcome by the Petitioner.

On appeal to the Supreme Court by the Petitioner, the Supreme Court held that there was no error in the observation made by the Division Bench of the High Court that once limitation period of 4 years provided in section 149/149(1A) expires then the question of reopening by the Department does not arise. The Supreme Court further held that in any event, at the relevant time, when the assessment order got completed, the law as declared by the jurisdictional High Court, was that the civil construction work carried out by the Respondent-assessee would be entitled to the benefit of section 80HH which was later reversed in the case of CIT vs. N.C. Budharaja and Co. The subsequent reversal of the legal position by the judgement of the Supreme Court does not authorise the Department to reopen the assessment, which stood closed on the basis of the law, as it stood at the relevant time. The Supreme Court dismissed civil appeals accordingly.

Nirav Shah

Appeal to High Court – Substantial Questions of Law framed for consideration by court – The High Court’s power to frame substantial question(s) of law at the time of hearing of the appeal other than the questions on which appeal has been admitted remains u/s. 260A(4) but this power is subject, however, to two conditions, (one) the court must be satisfied that appeal involves such questions, and (two) the court has to record reasons therefor

CIT vs. Mastek Ltd. [2013] 358 ITR 252 (SC)

The appeal filed by the Revenue u/s. 260A of the Income-tax Act, 1961 (the “Act”) had been admitted by the High Court and following two substantial questions of law were framed for consideration of the appeal;

“(A) Whether the Appellate Tribunal has substantially erred in law and on facts in reversing the order passed by the Assessing Officer and thereby deleting the adjustment while computation of the arm’s length price of the international transactions of software services distributed by MUK (Associated Enterprise) by making an upward adjustment of Rs. 18,62,45,100?

(B) Whether the Appellate Tribunal has substantially erred in law and on facts in reversing the order passed by the Assessing Officer and thereby deleting the adjustment by way of human resource management services of Rs. 2,92,22,683 treating the same as an international transaction?”

The grievance of the Revenue before the Supreme Court was that by necessary implication, the other questions raised in the memo of appeal before the High Court stood rejected.

The Supreme Court observed that the Revenue was under some misconception. The Supreme Court noted that proviso following the main provision of section 260A(4) of the Act states that nothing stated in s/s. (4), i.e., “The appeal shall be heard only on the question so formulated” shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

According to the Supreme Court, the High Court’s power to frame substantial question(s) of law at the time of hearing of the appeal other than the questions on which appeal has been admitted remained u/s. 260A(4). This power was subject, however, to two conditions, (one) the court must be satisfied that appeal involves such questions, and (two) the court has to record reasons therefor.

In view of the above legal position, according to the Supreme Court, there was no justifiable reason to entertain the special leave petition.

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Nirav Shah

Writ – When an alternative remedy is available to the aggrieved party it must exhaust the same before approaching the writ court—order of High Court quashing the notices issued u/s. 153C as being without jurisdiction set aside by the Supreme Court.

CIT vs. Vijaybhai N. Chandrani [2013] 357 ITR 713 (SC)

The respondent-assessee purchased a plot of land from “Samutkarsh Co-operative Housing Society” (for short “the society”) being developed by one Savvy Infrastructure Ltd. In 2008, a search was conducted u/s. 132 of the Act, 1961, in the premises of the society and also at the office of Savvy Infrastructure Ltd. During the search certain documents were seized. Upon scrutiny, it was found that the seized documents reflected names of certain individuals including the assessee. Accordingly, for further proceedings the assessing authority had transmitted the seized documents to the jurisdictional assessing authority in whose jurisdiction the assessee was being assessed. After receipt of the said information/documents, the assessing authority has recorded a satisfaction note dated 7th October 2009, that, he has reason to believe that a case of escapement of income may exist and, therefore, the assessee’s case requires to be reassessed for the assessment years 2001-02 to 2006-07 u/s. 153C of the Act, 1961.

Accordingly, the assessing authority issued six show-cause notices u/s. 153C of the Act, 1961, to the assessee for assessment of income of the aforesaid six assessment years and directed him to furnish return of income in respect of the said assessment years in the prescribed form within 30 days of the receipt of the said notices, dated 7th October 2009.

Upon receipt of the notice, the assessee by letter dated 11th November, 2009, requested the assessing authority to furnish him with the copies of the seized documents on the basis of which the said notices were issued. The assessing authority had provided the said documents to the assessee, whereafter the assessee has approached the High Court in a writ petition questioning the six showcause notices dated 7th October, 2009.

The High Court elaborately examined the case at hand and delved into the statutory scheme for assessment in the case of search and requisition as prescribed u/s. 153A, 153B and 153C of the Act, 1961, and reached the conclusion that the documents seized by the assessing authority did not belong to the assessee and, therefore, the condition precedent for issuance of the notice u/s. 153C was not fulfilled. Accordingly, the High Court allowed the writ petition filed by the assessee and quashed the said notices issued by the assessing authority.

Aggrieved by the aforesaid judgement and order passed by the High Court, the assessing authority was before the Supreme Court.

The Supreme Court observed that the jurisdictional assessing authority, upon having a reason to believe that the documents seized indicated escapement of income, had issued show-case notices u/s. 153C to the assessee for reassessment of his income during the assessment years 2001-02 to 2006-07. Thereafter, upon request of the assessee, the assessing authority had furnished him with the copies of documents seized. The assessee being dissatisfied with the said documents instead of filing his explanation/reply to the show-cause notices, had filed a writ petition before the High Court.

According to the Supreme Court, at the said stage of issuance of the notices u/s. 153C, the assessee could have addressed his grievances and explained his stand to the assessing authority by filing an appropriate reply to the said notices instead of filing the writ petition impugning the said notices. The Supreme Court remarked that it is settled law that when an alternative remedy is available to the aggrieved party, it must exhaust the same before approaching the writ court.

The Supreme Court held that in the present case, the assessee had invoked the writ jurisdiction of the High Court at the first instance without first exhausting the alternative remedies provided under the Act. According to the Supreme Court, at the said stage of proceedings, the High Court ought not have entertained the writ petition and instead should have directed the assessee to file reply to the said notices and upon receipt of a decision from the assessing authority, if for any reason it is aggrieved by the said decision, to question the same before the forum provided under the Act.

In view of the above, without expressing any opinion on the correctness or otherwise of the construction that was placed by the High Court on section 153C, the Supreme Court set aside the impugned judgement and order of the High Court. Further, the Supreme Court granted time to the assessee, if it so desired, to file reply/objections, if any, as contemplated in the said notices within 15 days time from the date of order. If such reply/ objections were filed within time granted by this court, the assessing authority would first consider the said reply/objections and thereafter direct the assessee to file the return for the assessment years in question. The Supreme Court clarified that while framing the assessment order, the assessing authority would not be influenced by any observations made by the High Court while disposing of the writ petition and if, for any reason, the assessment order went against the assessee, he/it would avail of and exhaust the remedies available to him/it under the Income-tax Act, 1961.

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Nirav Shah

Whether Assessee is Entitled to Interest on Delayed Payment of Interest on Refund? – Section 244A – Part I

Article 265 of the Constitution provides that no tax shall be levied or collected except by the authority of law. The Article provides that not only levy but also the collection of a tax by the Government must be under the authority of law. In pursuance of such law, the refund claims are regulated under the provisions of Chapter XIX of the Income-tax Act, 1961 (the Act). Section 237 effectively provides for refund of excess tax paid by the assessee. This is a general provision for claim of refund. A provision is also made in section 240 which effectively provides for refund of any amount that becomes due to the assessee as a result of any order passed in appeal or other proceedings under the Act. This is a special provision dealing with refund which imposes an obligation on the Assessing Officer (AO) to refund such amount for which the assessee is not required to make any claim. All the above provisions relating to payment of interest on refund provide for payment of simple interest at the specified rate and for the period specified therein. Section 241 authorising the AO to withheld refund in certain cases has been omitted from 1st June, 2001. Section 245 provides for adjustment of the amount of refund or part thereof against any sum remaining payable under the Act after giving an intimation in writing to the assessee for the proposal of such adjustment.

The Act also provided for payment of interest on refund due to the assessee under various provisions such as section 214 (excess payment of advance tax), section 243 (interest on delayed refunds), section 244 (interest on refund where no claim is needed) etc. Section becomes due to the assessee in pursuance of an order referred to in section 240. Certain amendments were made from time to time in these provisions with which we are not concerned in this write-up and hence the same are not referred to. Only relevant broad provisions dealing with interest on refunds are noted for this purpose. These provisions relating to interest on refunds are applicable in respect of assessment year 1988-89 and earlier years (old provisions of interest).

The interest u/s. 214 was payable on the excess payment of advance tax for the period from the first day of the assessment year upto the date of regular assessment. The regular assessment is defined in section 2(40) to mean the assessment made in section 143(3) or section 144. In this context, the issue had come up before the Apex Court in the case of Modi Industries Ltd. [216 ITR 759] to decide the meaning of the expression ‘regular assessment’ as High Courts had taken different views on the same. In a detailed judgment analysing various relevant provisions providing for interest on refund, and the views expressed by various High courts in that respect, the Apex Court approved the view expressed by certain High courts such as Bombay, Allahabad, Andhra Pradesh etc. which effectively held that the expression ‘regular assessment’ in section 214 means the original assessment. In the process of deciding the above issue and the impact of the provisions of section 214 as well as section 244 dealing with interest to be granted on refund, the Court also expressed the view that there is no right to get interest on refund except as provided by the statute. The Court also stated that interpretation of section 214 or any other section of the Act should not be made on the assumption that interest has to be paid whenever an amount which has been retained by the Revenue in exercise of the statutory power becomes refundable as a result of any subsequent proceeding.

Accordingly, the interest on excess payment of advance tax u/s. 214 is not payable from the date of payment of tax but from the first day of relevant assessment year nor it is payable till the date of refund but it is payable upto the date of ‘regular assessment’. Interest u/s. 243 or section 244(1) was payable upto the date of refund but only in cases where the refund was not made within the stipulated period. Interest u/s. 244 (1A) was payable in cases where the amount paid by the assessee is found in excess of his liability as result of appeal or other proceedings under the Act and such interest was payable on the excess amount from the date of payment of such amount to the date of the grant of refund. The Court also held that for the purpose of section 244(1A), the amount of advance payment of tax and the amount of tax deducted at source (TDS) must be treated as payment of income-tax pursuant to an order of assessment on and from the date when these amounts were set off against the tax demand raised in the assessment order, in other words the date of the assessment order. The Court also dealt with the other aspects of granting interest on refund with which we are not concerned in this write-up.

From the assessment year 1989-90, the provisions for interest on refund are made in section 244AA. This section effectively provides for payment of interest on any amount of refund that becomes due to the assessee under the Act to be calculated in the manner provided therein which effectively provides for payment of interest upto the date on which the refund is granted.

All the provisions relating to interest provide for the simple interest on refund amount at the specified rate which has undergone change from time to time.

In practice, in many cases, the payment of refund gets delayed for one or the other reasons and the refunds are made to the assessee without payment of interest on such delayed payment of refunds and in such cases, the payment of such interest gets delayed and the period of such delayed payment of interest sometime runs into years. In such cases, the issue has come up in the past as to whether the assessee can claim interest on such delayed payment of interest or any compensation for unjustified delay in payment of such interest.

The issue referred to in para above has been considered by the Courts in the past with different set of facts but with a common factor of inordinate delay in payment of interest that becomes due to the assessee under the provisions of the Act. In large number of cases, the Courts had found their way to compensate the assessee for the unjustified delay in payment of interest. It seems that Courts have attempted to decide such cases bearing in mind the principle of equity and fairness. In fact, the Gauhati High Court in the case of Jwala Prasad Sikaria [175 ITR 535] has gone to the extent of clearly stating that the assessee is entitled to payment of such interest due to delay even if there is no statutory provision in this regard.

1.4.1 In this context, the judgment of the Gujarat High Court in the case of D. J. Works [195 ITR 227] is worth noting. In this case, while giving effect to the appellate orders for the assessment years 1983-84 to 1985-86, the refunds were granted without interest to the assessee on different dates. The assessee had filed writ petition before the Gujarat High Court for non-payment of interest and pending this petition, the interest for all the three years was paid with some difference in the amount which is not relevant for the issue under consideration. The assessee had contended before the Court that the AO illegally withheld the payment of interest and since the retention or withholding of interest was without the authority of law, the Revenue is liable to pay interest on the amounts of interest wrongfully withheld. The Revenue had contended that there is no provision in the Act for payment of interest on interest. On these facts, the Court took the view that section 214(1) itself recognises in principle the liability of the Government to pay interest on excess tax paid by the assessee. The Court noted that the legislature itself has considered it fair and reasonable to avoid interest on excess tax paid by the assessee and retained by the Government. According to the Court, the same principle should be extended to the payment of interest, which has been wrongfully withheld by the AO or the Government. It is the duty of the AO to pay interest while granting refund of excess amount paid by the assessee. If the excess tax paid cannot be retained without payment of interest, so also the interest which is payable thereon cannot be retained without payment of interest. Though there is no specific provision for payment of interest on such interest, on general principle, the Government is liable to pay interest which had been due to the assessee u/s. 244(1) at the same rate at which the refund amount carries the interest. It seems that this judgment of the Gujarat High Court was followed by the Tribunal in the case of Narendra Doshi and this decision was affirmed by the M.P. High Court (Indore Bench). The question raised before the M.P. High Court was `Whether Appellate Tribunal was justified in law in directing to allow interest on interest, when the law points for grant of simple interest only?’ This was answered in affirmative and in favour of the assessee. This judgment of the M. P. High Court (dated 3rd May, 1999 in ITR No. 5 of 1996) has been affirmed by the Apex Court [254 ITR 606] stating that the said judgment of the Gujarat High Court had been followed by the same High Court in the case of Chimanlal S. Patel [210 ITR 419] and both these decisions held that “the Revenue is liable to pay interest on the amount of interest which it should have paid to the assessee but has unjustifiably failed to do so.” Having noted these facts, the Apex Court held that “The Revenue has not challenged the correctness of the two decisions of the Gujarat High Court. They must, therefore, be bound by the principle laid down therein. Following that principle, the question has, as we find, been rightly answered in the affirmative and in favour of the assessee.” Based on this, the appeal of the Revenue against the judgment of the M. P. High Court was dismissed. As such, the judgments of the Gujarat High Court in this respect were impliedly approved.

1.4.2 The issue referred to in para 1.3 also came up before the Apex Court in the case of Sandvik Asia Ltd. [280 ITR 643] in which the Court dealt with the issue in detail and in a reasoned order, decided the issue in favour of the assessee. In this case, the Court also took the view that even assuming that there is no provision in the Act for payment of compensation, the compensation for delay is required to be paid in view of the decision of this Court viz, Narendra Doshi (supra). The similar view also emerges from the observation of the Apex Court in the case of H.E.G Ltd. [324 ITR 331].The High Courts and the Tribunal have followed these judgments in many cases and the position on this regard was largely getting settled.

1.5 In the last year, the division bench of the Apex Court in the case of Gujarat Flouro Chemicals [252 CTR 237] doubted the correctness of the judgment of the Apex Court in the case of Sandvik Asia Ltd. (supra). Accordingly, the Court recommended that the issue should be referred to a larger bench. Recently, the Apex Court in the case of Gujarat Flouro Chemicals Ltd., has, in principle, decided the issue referred to it and considering its impact, it is thought fit to consider the same in this column.

Sandvik Asia Ltd. vs. CIT – 280 ITR 643 (SC)

2.1 In the above case, the relevant facts were : the assessee was entitled to certain refunds for the assessment years 1977-78, 1978-79, 1981-82 and 1982-83. After receiving the refund, the issue for non/ short grant of interest remained for which the assessee had filed a revision petition u/s. 264 before the Commissioner of Income-tax (CIT) on 27th February, 1987 which was rejected by order dated 28th February, 1990. Against this order, it appears that the assessee had moved the Apex Court and common order dated 30th April, 1997 was passed by the Apex Court under which the matter was remanded to the CIT for considering the claim of interest in accordance with the principle laid down by the Apex Court in the case of Modi Industries Ltd. (supra). Under these circumstances, the interest u/s. 214/ 244 was determined by the Revenue at Rs. 40,84,906 vide order dated 27th March, 1998 which appears to have been paid. In this case, there was a delay in payment of interest for various periods ranging from 12 to 17 years.

2.1.1 As a result of the above, the assessee filed a revision petition dated 3rd July, 1998 before the CIT asking for interest on delayed payment of interest upto the date of payment thereof which was rejected against which he assessee had filed writ petitions before the Bombay High Court on 7th June, 2001 without any success. On these facts, the issue referred to in para 1.3 above came up for consideration before the Apex Court at the instance of the assessee.

2.2 For dealing with the appeals of the assessee, the Court noted that substantial and important questions of law of great general public importance as well as under the Act pertaining to those four assessment years have been raised. The Court then stated that [Page No. 646] :

“ The main issue raised in these appeals is whether an assessee is entitled to be compensated by the Income-tax Department for the delay in paying to the assessee amounts admittedly due to it? ”

2.3 On behalf of the assessee, it was, interalia, contended that the High Court ought to have held that the assessee is entitled to compensation by way of interest for the delay in payment of amounts lawfully due to it and which were withheld wrongly and contrary to the law for an inordinately long period. The interest u/s. 214/ 244 is also a refund as contemplated in section 240 and hence, the Revenue is liable to pay interest u/s. 244 in respect of delay in payment of such interest. The High Court has failed to appreciate that during this period, the Department has enjoyed the benefit of the funds while the assessee was deprived of the same. It was further contended that the High Court erred in the purporting to distinguish/explain the decision of the Apex Court in the case of Narendra Doshi (supra) based on various decisions which were neither cited in the course of hearing nor were put to the counsel appearing and as such, the assessee had no opportunity to deal with the same. It was also contended that the High Court’s decision was erroneous as it rejected assesses claim on the sole ground that as the ‘amount due’ to the assessee was of interest, no compensation could be paid to it even when gross delay in payment was admittedly made by the Revenue contrary to the law. The case of the assessee is covered by section 240 which refers to `any amount’ which becomes due to the assessee which should include interest payable under the Act. It was further contended that in the case of Narendra Doshi (supra), the Court had set out two issues before itself, viz., whether when Revenue had not challenged the correctness of the Gujarat High Court decisions it was bound by the principle laid down therein and whether the Gujarat High Court had rightly laid down the principle that assessee would be entitled to interest on interest. The Apex Court had decided both the issues in favour of the assessee. The Bombay High Court erred in distinguishing this decision based on various decisions which were never cited during the course of hearing and which were never put to the counsel appearing for the assessee.

2.4 On behalf of the Revenue, it was, interalia, contended that none of the provisions of the law contained in the Act provided for payment of interest on interest and certainly not section 244(1). In the matter of interpretation of taxing statute, there is no scope for considerations of equity or intendment and what is expected is strict interpretation. When the statute does not permit grant of interest, it would be inappropriate to grant interest in exercise of writ jurisdiction. Strongly relying on the judgment of the Apex Court in the case of Modi Industries Ltd. (supra), it was further contended that in that case the Court clarified two factors, namely, the amount on which the interest is to be granted and the time period for which it is to be granted u/s. 214/section 244. This decision does not refer to interest on interest. Considering the overall facts and in particular, the fact that the Apex Court in its earlier order passed on 30th April 1997 directed the Revenue to decide the revision petition in accordance with the law laid down by the Apex Court in the case of Modi Industries Ltd. (supra), the Revenue had not wrongfully withheld the assessee’s money without any authority of law. It was also contended that the interest payable on the refund amount u/s. 244 is a simple interest and neither compounded interest nor interest on interest is payable. It was also contended that in the case of Modi Industries Ltd. (supra), the scope of section 214 of the Act was discussed and it was held that there is no right to get interest on refund except as provided by the statute and as such, the Bombay High Court was justified in rejecting the alternative claim of the assessee on this basis.

2.5 After considering the contentions raised by both the sides, the Court noted the relevant provisions of the Act and observed as under [Page 658] :

“ We have given our anxious and thoughtful consideration to the elaborate submissions made by counsel appearing on either side. In our opinion, the High court has failed to notice that in view of the express provisions of the Act an assessee is entitled to compensation by way of interest for the delay in the payment of amounts lawfully due to the appellant which were withheld wrongly and contrary to the law by the Department for an inordinate long period of upto 17 years. “

2.6 The Court then noted the judgment of the Gujarat High Court in the case of D. J. Works (supra) referred to in para 1.4.1 above and noted the fact of the view taken therein. The Court then also noted the judgment of the M. P. High Court in the case of Narendra Doshi and the question referred to before the High Court in that case and the fact that the said judgment of the M. P. High Court is affirmed by the Apex Court. The Court also noted the relevant observations from the Apex Court referred to in para 1.4.1 in that regard. The Court then stated that in the case of Narendra Doshi (supra) the Apex Court has held as under [Page No. 660]:

“The Revenue has not challenged the correctness of the two decisions of the Gujarat High Court. They must, therefore, be bound by the principle laid down therein. Following that principle, the question has, as we find, been rightly answered (by the Madhya Pradesh High Court) in the affirmative and in favour of the assessee.

The civil appeal is dismissed. No order as to costs.”

2.7 Dealing with the contention of the Revenue that section 244 provides for a simple interest and there is no provision in the Act for payment of interest on interest, the Court stated as under [Pages 663/ 664]:

“This contention, in our opinion, has no merit. Learned counsel for the assessee cited the decision Jwala Prasad Sikaria [1989] 175 ITR 535 (Gauhati) in support of his contention wherein the Gauhati High Court held that a citizen is entitled to payment of interest due to delay even if there is no statutory provision in this regard.

……… The High Court held that where an assessment is made under the Act of 1922 after the commencement of the 1961 Act and refund is granted to the assessee, interest is payable on such refund. The High Court has further held (head-note):

“The interest would, however, be deemed to have accrued after expiry of three months from the end of the month in which refund had become payable. The rate applicable would be that applicable to grant of refund under the Act of 1961 at the relevant time.”

The above decision was cited before the Bombay High Court. The High Court very conveniently omitted to consider the decision holding that the decision in Jwala Prasad Sikaria vs. CIT [1989] 175 ITR 535 (Gauhati) was in the peculiar facts of the case.”

2.8 The Court then dealt with the contentions of the Revenue that the High Court was right in law in rejecting the assesse’s claim on the sole ground that as the ‘amount due’ was of interest, no compensation could be made even when gross delay in payment was admittedly made by the Revenue. In this respect, the Court referred to the judgment of the Madras High Court in the case of Needle Industries Pvt. Ltd. [233 ITR 370] in which the Court held that the expression “amount” in section 244(1A) of the Act would include the amount of interest levied and paid u/s. 139(8) and 215 of the Act and collected in pursuance of an order of assessment which was refunded. For this, the Madras High Court agreed with the view taken by the M. P. High Court in the case of Sardar Balwant Singh Gujaral [86 CTR 64] wherein also the Court held that liability to pay interest is on the amount of refund due and the assessee would be entitled to interest on the amount of refund due which includes interest paid u/s. 139(8) and 215 of the Act.

2.9: The Court then further took the view that assuming there is no provision in the Act for payment of compensation, compensation for delay is required to be paid in view of the decision of this Court in the case of Narendra Doshi referred to in para 1.4.1 above. In this regard, the Court further stated as under [Page 669] :

“………This is clearly a decision of this court on the merits of the matter, albeit proceeding on the assumption that there was no provision in the Act granting interest on unpaid interest, in favour of the appellant’s contentions.

In the impugned order, the Bombay High Court has held that the Madhya Pradesh High Court was not on the point of payment of interest on interest, a view which is ex facie erroneous and clearly impossible to sustain as a plain reading of the question before the Madhya Pradesh High Court will show.”

2.10: Referring to the contentions of the Revenue that the delay in the present case was justified, the Court observed as under [Page 670] :

“ In our view, there is no question of the delay being “justifiable” as is argued and in any event if the Revenue takes an erroneous view of the law, that cannot mean that the withholding of monies is “justifiable” or “not wrongful”. There is no exception to the principle laid down for an allegedly “justifiable” withholding, and even if there was, 17 (or 12) years delay has not been and cannot in the circumstances be justified.”

2.11: Dealing with the issue as to whether the Act provides for payment of compensation for delayed payments of amounts due to an as-sessee in a case where these amounts include interest, the Court took the view as follows [Page 671] :

“In our view, the Act recognises the principle that a person should only be taxed in accordance with law and hence where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without author-ity of law the Revenue must compensate the assessee.”

2.11.1: The Court also did not agree with the view of the Bombay High Court that the word “refund” must mean an amount previously paid by an assessee and does not relate to an amount payable by the Revenue by way of interest on such sums. The Court also dealt with the phrase ‘any amount becoming due to an assessee’ used in section 240 of the Act and stated that section 240 provides for refund by the Revenue on appeal etc. and accordingly deals with all subsequent stages of proceedings and therefore, this phrase is used. Referring to the judgment of the Delhi High Court in the case of Good Year India Ltd., [249 ITR 527], the Court stated that in this case the Delhi High Court has held that this phrase would include interest and hence the assessee was entitled to further interest on interest wrongfully withheld. The Delhi High Court also referred to the judgment of the Gujarat High Court in the case of D. J. Works (supra) and read it as taking the same view. Similar view is also taken by the Madras High Court in the case of Needle Industries Pvt. Ltd. ( supra) as well as by the Kerala High Court in the case of Ambat Echukutty Menon [173 ITR 581]. The Court then held as under [Page 672] :

“In our opinion, the appellant is entitled to interest u/s. 244 and/ or section 244A of the Act in accordance with the terms and provisions of the said sections. The interest previously granted to it has been computed upto March 27, 1981 and March 31, 1986 (under different sections of the Act) and its present claim is for compensation for periods of delay after these dates.”

2.11.2 The Court then further stated as under [Page 673] :

“In the present appeal, the respondents have argued that the compensation claimed by the appellant is for delay by the Revenue in paying of interest, and this does fall within the meaning of refund as set out in section 237 of the Act. The relevant provision is section 240 of the Act which clearly lays down that what is relevant is whether any amount has become due to an assessee, and further the phrase any amount will also encompass interest. This view has been accepted by various High Courts such as the Delhi, Madras, Kerala High Court, etc.”

2.12 Considering the observations in the case of Modi Industries Ltd. (supra) that there is no right to receive interest except as provided by the statute on which the Bombay High Court had relied to decide the issue against the assessee, the Court stated as under [Page 672] :

“…… The decision in Modi Industries Ltd.’s case [1995] 216 ITR 759 (SC), has no bearing whatsoever on the issue in hand as the issue in that case was the correct meaning of the phrase “regular assessment” and as a consequence under which provision an assessee was entitled to interest for the period up to the date of regular assessment and thereafter. The matter of what was due to it in terms of the decision in Modi Industries Ltd.’s case [1995] 216 ITR 759 (SC) is over, concluded, no longer in dispute and was agreed/ accepted on March 27, 1998 when the second respondent gave effect to the previous order of this court dated April 30, 1997. The working of the respondents itself conclusively shows, further the interest received is admittedly in accordance with the Act. The decision in Modi Industries Ltd.’s case [1995] 216 ITR 759(SC), in our view, has no bearing whatsoever on the matter in hand. The main issue now is whether an assessee is entitled to be compensated by the Revenue for the delay in paying to the assessee’s amounts admittedly due to it?”

2.13: The Court then also dealt with the issue as to whether on general principles the assessee ought to have been compensated for the inordinate delay in receiving monies properly due to it. In this context, the Court also referred to Circular dated 2nd January, 2002 issued by the Central Excise Department on the subject of refund of deposits and noted that the Revenue has decided to view cases of the delay beyond the period of three months in the cases referred to therein adversely and decided to initiate appropriate disciplinary ac-tion against the concerned defaulting officer. The Board has also decided to implement the order passed by the Tribunal for payment of interest and the interest payable shall be paid forthwith.

2.13.1: Referring to the facts of the case of the assessee the Court observed as under [Page 676] :

“Interest on refund was granted to the appellant after a substantial lapse of time and hence it should be entitled to compensation for this period of delay. The High court has failed to appreciate that while charging interest from the assesses, the Department first adjusts the amount paid towards interest so that the principal amount of tax payable remains outstanding and they are entitled to charge interest till the entire outstanding is paid. But when it comes to granting of interest on refund of taxes, the refunds are first adjusted towards the taxes and then the balance towards interest. Hence as per the stand that the Department takes they are liable to pay interest only up to the date of refund of tax while they take the benefit of the assesses funds by delaying the payment of interest on refunds without incurring any further liability to pay interest. This stand taken by the respondents is discriminatory in nature and thereby causing great prejudice to lakhs and lakhs of assesses. A very large number of assessees are adversely affected inasmuch as the Income-tax Department can now simply refuse to pay to the assesses amounts of interest lawfully and admittedly due to them as has happened in the instant case. …………. Such actions and consequences, in our opinion, seriously affect the administration of justice and the rule of law.”

2.13.2: The Court then referred to the dictionary meaning of the word ‘compensation’. The Court then stated as under [Page 677] :

“ There cannot be any doubt that the award of interest on the refunded amount is as per the statute provisions of law as it then stood and on the peculiar facts and circumstances of each case. When a specific provision has been made under the statute, such provision has to govern the field. Therefore, the court has to take all relevant factors into consid-eration while awarding the rate of interest on the compensation.”

2.14: Considering a manner in which the mat-ter was handled by the Department, the Court found it necessary to send the copy of the judgment to the Finance Minister for taking appropriate action against the erring officers and in this context to the Court stated as under [Page 677] :

“ This is a fit and proper case in which action should be initiated against all the officers concerned who were all in charge of this case at the appropriate and relevant point of time and because of whose inaction the appellant was made to suffer both financially and mentally, even though the amount was liable to be refunded in the year 1986 and even prior thereto. A copy of this judgment will be forwarded to the hon’ble Minister for Finance for his perusal and further appropriate action against the erring officials on whose lethargic and adamant attitude the Department has to suffer financially.”

Apart from issuing general instruction (No.2, dated 28th March 2007) for granting interest alongwith refund , it is not known wheter any serious action is taken by the Government on the above recommendation of the Court.

2.15: Finally, the Court decided the appeals in favour of the assessee and reversed the judgment of the Bombay High Court and held as under [Page 678] :

“ The assessment years in question in the four appeals are the assessment years 1977-78, 1978-79, 1981-82 and 1982-83. Already the matter was pending for more than two decades. We, therefore, direct the respondents herein to pay the interest on Rs. 40,84,906 (rounded off to Rs. 40,84,900) simple interest at 9 % per annum from March 31, 1986 to March 27, 1998 within one month from today failing which the Department shall pay the penal interest at 15 % per annum for the above said period. “

2.16: From the above judgment, it would appear that the Court has taken a view that the expression ‘amount’ appearing in setion 244(1A) refers not only to the tax but also to the interest and it cannot be limited to the tax paid in pursuance of the assessment order. As such, in view of the express provisions of the Act, an assessee is entitled to compensation by way of interest for delay in the payment of amounts lawfully due to the assessee which are withheld wrongfully and contrary to law. Even assuming that there is no provision for payment for compensation, compensation for delay is required to be paid as the Act itself recognizes the principle that the Revenue is liable to pay interest when excess tax was retained and the same principle should be extended to cases where interest was retained. The Court has also explained that Narendra Doshi’s case (supra) was clearly a decision on the merit though it proceeded on the assumption that there was no provision in the Act granting interest on unpaid interest.

[ To be Concluded]

Nirav Shah

Whether Assessee is Entitled to Interest on Delayed Payment of Interest on Refund? – Section 244A – Part II

Introduction

3.1 As stated in PART 1 of this write-up, the apex court in the case of Sandvik Asia Ltd. [Sandvik] took the view that the expression ‘amount’ appearing in section 244(1A) refers not only to the tax but also to the interest and it cannot be limited to the tax paid in pursuance of the assessment order. Accordingly, the Court held that in view of the express provision of the Act, an assessee is entitled to compensation by way of interest for delay in payment of amounts lawfully due to the assessee which are withheld wrongfully and contrary to law. The Court also further took the view that even if there is no provision in the Act for payment of compensation, the compensation for delay is required to be paid as the Act itself recognises the principle that the Revenue is liable to pay interest when excess tax was retained and the same principle should be extended to the cases where interest was retained. For this, the Court also relied on the judgment of the Apex Court in the case of Narendra Doshi referred to in para 1.4.1 of PART 1 of this write-up.

3.1.1 Subsequent to the judgment of the Apex Court in Sandvik’s case, the CBDT issued Instruction No. 2 dated 28th March, 2007 which is worth noting and hence the relevant part thereof is reproduced hereunder [209 CTR (Statute) 17]:

“Sub: Section 244A of the Income-tax Act, 1961 – Refunds – Interest on – Grant of interest on refunds under section 244A simultaneously with issue of refund.

In terms of section 244A of the Income-tax Act, 1961 (Act), an assessee is entitled to receive interest calculated in the manner provided in the said section on the amount of refund due under the Act. The interest is to be granted simultaneously with the refund and there should normally be no reason to grant refund without adding the entitled interest. In the case of Sandvik Asia Ltd. vs. CIT (2006) 200 CTR (SC) 505 : (2006) 280 ITR 643 (SC), the Hon’ble Supreme Court, inter alia, adversely commented upon the delay in grant of interest on refund and awarded compensation to the assessee for the said delay by the Department. While taking this view, the Supreme Court referred to the judgment of the Gujarat High Court in the case of D.J. Works vs. Dy. CIT (1992) 102 CTR (Guj) 2 : (1992) 195 ITR 227 (Guj) wherein the High Court had held that though there is no specific provision for payment of interest on interest, but if interest on the refund is wrongfully retained, interest on interest would be payable. The Court further held that even assuming that there was no provision in the Act for payment of compensation, on general principles, compensation was payable to the assessee for the delayed payment of interest. The Court also recommended that action be initiated against the officers responsible for the delay.

2. It is necessary to remind all Assessing Officers that while granting refund to the assessee, care should be taken to ensure that any interest payable u/s. 244A on the amount of refund due should be granted simultaneously with the grant of refund and there should, in no case, be any omission or delay on the grant of such interest. Failure to do so will be viewed adversely and the officer concerned will be held personally accountable, inviting appropriate action.

3. These instructions may be brought to the notice of all officers working in your region for strict compliance. The Range Officers should be directed to carry out periodic test checks of cases within their jurisdiction to ensure that provisions of section 244A are scrupulously implemented. ………………”

3.1.2 After the above judgment of the Apex Court, the High Courts as well as the Tribunal have followed/ explained the same in various cases such as Motor General Finance Ltd. [320 ITR 881 (Del)], Gujarat Fourochemicals Ltd. [300 ITR 328 (Guj)], State Bank of Travancore [292 ITR (AT) 56 – Cochin), Delhi Tourism Transportation Corp. [(2012) 35 CCH 046 – Del Trib], Deutsche Bank AG [ITA Nos. 3789, 3790 & 4282/Mum/2010], etc. In these cases, the judgment of the apex court in Sandvik’s case is understood as laying down the prin-ciple that the assessee is also entitled to interest on unpaid interest receivable by him on the refund due to him. When the correct interest is paid by the Revenue along with the refund, this issue was not considered as relevant. It may also be noted that the Ahmedabad Bench (TM) of the Tribunal in the case of Nirma Chemical Works Ltd. [125 TTJ 487] did not follow Sandvik’s case on the ground that it was a case prior to the assess-ment year 1989-90 (i.e., it was not rendered in the context of the provisions of section 244A) and also on the basis that it was a case where the interest has been granted in a writ as compensation and not as interest on interest under the Act. According to the Tribunal, section 244A(1)(a) grants interest only on that amount of refund which is out of the tax paid by the assessee by way of advance tax/TDS/TCS and not on the amount of interest due to the assessee but withheld by the Revenue. Section 244A(1)(b) provides for interest on refund in any other case in which case the interest has to be calculated from the ‘date of payment of the tax or penalty’. The Tribunal also stated that the Apex Court also considered certain deci-sions laying down a ratio that “the amount of refund” includes refund of tax as well as interest. According to the Tribunal, even in such a case the assessee will not be entitled to interest as unlike section 244 which grants interest on any amount of refund, section 244A provides for grant of interest on the amount of refund out of any tax/penalty paid by the assessee or collected from him and in any case, otherwise it requires the date of payment by the assessee. Even if the inter-est due to an assessee is considered to be a ‘refund of any amount’ u/s. 240 or under the opening part of section 244A(1) as held by the courts in certain cases, ‘it would not entitle an assessee to further interest on that amount of interest either under Clause (a) of section 244A(1) as it was not a refund out of any tax paid by him or collected from him; nor under Clause (b) of section 244A(1) as the interest is to start from the date of payment of tax or penalty and in the case of refund of interest, there cannot be the date of payment by an assessee’. Further, according to the Tribunal, the Supreme Court made it clear in para 40 of the judgment that there cannot be any doubt that the amount of interest on the refunded amount is as per the provisions of law as it then stood and on the peculiar facts and circumstances of the case. When a specific provision has been made under the statute, such provision has to govern the field. The Tribunal then further stated that the AO is the statutory author-ity. The Tribunal, as an appellant authority, is likewise a statutory authority. It is not a court of equity. Therefore, it has to act as per the provisions of the Act and if a benefit or a relief is not available to an assessee under the Act, it cannot be granted on the grounds of equity or the general provisions of law as can be granted by the courts in their writ jurisdiction. Referring to the full Bench Judgment of the Bombay High Court in the case of Carona Sahu Co. Ltd. [146 ITR 452], the Tribunal held that though interest is compensatory in character, yet there is no right to receive interest other than by right created under a statute. According to the Tribunal, section 244A apparently reveals that there is a liability to pay interest on delayed payment of refund amount but the section does not provide for payment of any interest on interest, even though there is a delay in payment of such interest. Finally, the Tri-bunal held that looking to the language of section 244A, the assessee was not entitled to any interest on interest as it was not a case of the refund of amount out of any tax paid by or collected from the assessee nor it has a date of payment by the assessee from which it can run. It may also be noted that the phrase ‘date of payment of tax or penalty’ is also defined in the Explanation to section 244A(1) to mean that ‘the date on and from which the amount of tax or penalty specified in the notice of demand issued under section 156 is paid in excess of such demand’. However, it is worth not-ing that even u/s. 244(1A), the interest was required to be calculated from the date of excess payment and still the Apex Court in Sandvik’s case took the view that assessee is entitled to interest on unpaid amount of interest as mentioned in para 3.1 above. Under the circumstances, to what extent the distinction drawn by the Tribunal in the context of section 244A(1)(b) should hold good could be a matter of debate. It may also be noted that in this case the Tribunal did not have the benefit considering the judgment of the apex court in the case of H.E.G Ltd. and its effect referred to in para 3.1.3 to 3.1.3.3 as the same was delivered subsequently. As such, the view taken by the Tribunal in this case may not be necessarily regarded as correct.

3.1.3 The judgment of the apex court in the case of HEG Ltd. [324 ITR 331] is also worth noting. In this case, the Court was dealing with batch of appeals. At the outset, the Court stated that if a question is not properly framed then, at times, confusion arises resulting in wrong answers and the present batch of appeals is an illustration thereof. For this purpose, the Court noted the facts of the case of one of the appeals [SLP(SC) No. 18045/2009] for the assessment year 1993-94 and stated that the question framed by the Revenue with regard to the entitlement of the assessee to claim interest on interest u/s. 244A is erroneous. As such, the Court clarified that this is not a case where the assessee is claiming com-pound interest or interest on interest as is sought to be made out by the Revenue. The Court then dealt with a question as to what is the meaning of the words “refund of any amount becomes due to the assessee” in section 244A? In this context, the Court rejected the argument of the Revenue that the words “any amount” will not include the interest which accrued to the assessee for delay in refunding the amount and held as under [Page No. 333]:

“………….We see no merit in this argument. The interest component will partake of the character of the “amount due” under section 244A. It becomes as integral part of Rs. 45,73,528 which is not paid for 57 months after the said amount became due and payable. As can be seen from the facts narrated above, this is the case of short payment by the Department and it is in this way that the assessee claims interest u/s. 244A of the Income-tax Act. Therefore, on both the aforestated grounds, we are of the view that the assessee was entitled to interest for 57 months on Rs. 45,73,528. The principal amount of Rs. 45,73,528 has been paid on 31st December, 1997 but net of interest which, as stated above, partook of the character of “amount due” u/s. 244A.”

3.1.3.1 From the available facts in the above judgment, it seems that the total tax paid had two components, viz., TDS (Rs. 45,73,528) and tax paid after the original assessment (Rs. 1,71,00,320). It seems that the assessee was entitled to refund of Rs. 2,16,73,848 consisting of the above two components from which, it appears that refund of Rs. 45,73,528 (TDS component) was delayed by 57 months and the assessee had claimed statutory interest u/s. 244A for this delayed refund of Rs. 45,73,528 for a period from 1st April, 1993 to 31st December, 1997. Therefore, it appears that the amount of Rs. 45,73,528 represents the principal amount and does not seem to include any interest. As such, there is no clarity on the facts in the context of the above view expressed by the apex court.

3.1.3.2 It may be noted that in the above case, in the Head Notes of the ITR, references are given to various appeal numbers and it is also mentioned that such appeals are arising out of the judgment of the MP High Court in the case of CIT vs. H.E.G. Ltd. reported in 310 ITR 341 and of the Madras High Court in the case of Cholamandalam Investment and Finance Co. Ltd. reported in 294 ITR 438. There seem to be some confusion in this regard. The facts dealt with in the text of the judgment of the apex court are, it is stated, for the assessment year 1993-94 [seems to be in the case of H.E.G. Ltd.] and it appears that this assessment year was not covered in the judgment of the MP High Court reported in 310 ITR 341 in which the High Court has held that grant of interest on interest is permis-sible and this position does not change u/s. 244A. The judgment of the MP High Court for the assessment year 1993-94 could not be verified as the same was not available. Accordingly, in view of lack of clarity on the factual position, it seems difficult to take a view that the judgment of the MP High Court reported in 310 ITR 341 has been affirmed by the apex court as mentioned in the Head Notes of the ITR. This position gets further clarified by the fact that the apex court has also stated that the question does not relate to interest on interest. Notwithstanding this position, this judgment of the apex court supports the view that the words ‘amount due’ appearing in section 244A include interest and the interest component will partake of the character of the ‘amount due’ under section 244A. Similar view was also taken in Sandvik’s case in the context of section 244(1A) as mentioned in para 2.16 of PART 1 of this write-up.

3.1.3.3 The effect of the judgment of the apex court in H.E.G. Ltd. (supra) has been explained by the Delhi High Court in a recent judgment dated 6th September, 2013 in the case of India Trade Promotion Organisation [ITA Nos. 167 & 168 of 2012]. This judgment has been delivered in the context of claim of interest u/s. 244A on account of delayed payment of interest after granting the refund of the principal amount. The High Court explained that if the refund does not include interest due and payable on the amount refunded, the Revenue would be liable to pay interest on the shortfall. This does not amount to payment of interest on interest. The Court has also explained this with example. According to the Court, the claim of such interest is on account of the shortfall in payment of the amount due and payable (including interest) and not a claim of interest on interest.

Gujarat Flourochemicals Ltd. vs. CIT – 300 ITR 328 (Guj)

4.1 The issue with regard to the entitlement of interest on interest also came up before the Gujarat High Court in the above case after Sandvik’s case. In this case, the brief facts were: The assessee had made certain payment to a foreign company (non-resident) and in that context on making an application for non-deduction of tax, the Assessing Officer (AO) had directed the assessee to deduct tax @ 30% on the basis which the assessee had deducted certain amount of tax and paid to the Government (it seems – somewhere in June 1987). Subsequently, the assessee realised that tax deducted and paid was excess on account of non-application of the principle of grossing up to its case at the relevant time and accordingly, claimed refund for such excess payment of tax which was granted (Rs. 10,26,868) by the AO vide order dated 30th November, 1990. Subsequently, the assessee claimed interest on such refund for a period from 1st July, 1987 to 30th November, 1990. There is some confusion in facts on terminal date i.e., 30-11-1990 or 13-11-1990. However, this is not relevant. The claim of the assessee was rejected by the CIT, CCIT as well as the CBDT. On these facts, the issue of grant of interest on such refund of excess tax paid came up before the Gujarat High Court in a writ petition filed by the assessee.

4.1.1 For the purpose of deciding the issue, the Court noted that the question as to whether the assessee is entitled to compensation by way of interest for delay in payment of amount lawfully due to the assessee which are withheld wrongly and contrary to law stands concluded by the apex court in Sandvik’s case. The Court also noted the subsequent instruction (referred to in para 3.1.1) issued by the CBDT in this regard. Based on this, the Court took the view that the assessee is entitled to interest as claimed and directed the Revenue to pay interest at the rate of 9% from 1st July, 1987 to 30th November, 1990. The Court also further directed to pay running interest at the rate of 9% on the amount of interest which may be granted to the assessee in pursuance of the judgment of the High Court.

4.1.2 It may be noted that in the above case, the Gujarat High court took the view that the assessee is entitled to interest on the amount refunded to the assessee as well as interest on such interest on general principles effectively relying on the judgment of the Apex Court in Sandvik’s case.

CIT vs. Gujarat Flourochemicals – 348 ITR 319 [SC – Division Bench]

5.1 It seems that the above judgment of the Gujarat High Court came up for consideration before the Division Bench of the apex court at the instance of the Revenue. The facts are not given in the case before the apex court. The Court also stated that this controversy arises in number of cases pending before the apex court. While dealing with this case, the Court noted that the short point which arises in the present case is: “What is the character of Tax Deductible at Source (TDS)/ Advance Tax under the Income-tax Act, 1961.” The Court further stated that the question which arises in this case is, whether interest is payable by the Revenue to the assessee if the aggregate of installments of Advance Tax/TDS paid exceeds the as-sessed tax? The Court also mentioned that this controversy arises in a number of cases pending before the Apex Court. Interestingly, it seems that, this question does not refer to liability of the Revenue to pay interest on interest but only refers to the liability of the Revenue to pay interest on excess payment of tax (i.e. Advance Tax/ TDS). However, it is also worth noting that the High Court had directed the Revenue to pay running interest on the amount of interest as mentioned in para 4.1.1.

5.1.1 In the above case, the assessee had relied on the judgment of the apex court in Sandvik’s case. Referring to this, the Court stated that the main issue which arose for determination in Sandvik’s case was whether the assessee was entitled to be compensated by the Rev-enue for delay in paying to it the amounts admittedly due. The Court also doubted the correctness of the judgment in Sandvik’s case. In this context, the Court stated as under:

“The argument in Sandvik Asia [supra] on behalf of the assessee was that it was entitled to compensation by way of interest for the delay in payment of the amounts lawfully due to it which were wrongly withheld for a long period of seventeen years. Vide Paragraph (23) of Sandvik Asia [supra], the Division Bench held that, in view of the express provisions of the Act, the assessee was entitled to compensation by way of interest for the delay in payment of the amounts lawfully due to the assessee, which were withheld wrongly by the Revenue. With due respect, section 214 of the Act does not provide for payment of compensation by the Revenue to the assessee in whose favour a refund order has been passed. Moreover, in Sandvik Asia [supra], interest was ordered on the basis of equity. It was also ordered to be paid on the basis of Article 265 of the Constitution. We have serious doubts about the correctness of the judgment in Sandvik Asia [supra]. In our view, the judgment of this Court in the case of Modi Industries Limited vs. Commissioner of Income Tax, 1995 (6) S.C.C. 396 correctly holds that Advance Tax or TDS loses its identity as soon as it is adjusted against the liability created by the Assessment Order and becomes tax paid pursuant to the Assessment Order. If Advance Tax or TDS loses its identity and becomes tax paid on the passing of the Assessment Order, then, is the assessee not entitled to interest under the relevant provisions of the Act?…”

5.1.2 The Court then referred to the relevant provisions of the Act [viz. sections 195, 195A, 214, 243, 244 etc.] and took the view that Sandvik’s case has not been correctly decided and referred the above issue arising in the above case as well as in other appeals to the Hon’ble Chief Justice for decision by a Larger Bench.

Gujarat Flourochemicals – 358 ITR 291 (SC – Larger Bench)

6.1 Based on the view of the Division Bench of the apex court referred to in para 5.1.2, the question of law involved in many cases [which, it seems, included the judgment of the Gujarat High Court in Gujarat Flouro-chemicals Ltd. (supra)] was referred to the Larger Bench (consisting of 3 judges) for consideration and authoritative pronouncement. In the context of the issue to be decided, the Court noted as under:

‘The question which arises in this case is, whether interest is payable by the Revenue to the assessee if the aggregate of installments of Advance Tax or TDS paid exceeds the assessed tax?’

6.2: Referring to the judgment in Sandvik’s case, the Court stated as under:

“We would first throw light on the reasoning and the decision of this Court on the core issue in Sandvik case (supra). The only issue formulated by this Court for its consideration and decision was whether an assessee is entitled to be compensated by the Income-tax Department for the delay in paying interest on the refunded amount admittedly due to the assessee. This Court in the facts of the said case had noticed that there was delay of various periods, ranging from 12 to 17 years, in such payment by the Revenue. This Court had further referred to the several decisions which were brought to its notice and also referred to the relevant provisions of the Act which provide for refunds to be made by the Revenue when a superior forum directs refund of certain amounts to an assessee while disposing of an appeal, revision etc.

Since there was an inordinate delay on the part of the Revenue in refunding the amount due to the assessee this Court had thought it fit that the assessee should be properly and adequately compensated and therefore in paragraph 51 of the judgment, the Court while compensating the assessee had directed the Revenue to pay a compensation by way of interest for two periods, namely; for the Assessment Years 1977-78, 1978- 79, 1981-82, 1982-83 in a sum of Rs.40,84,906/- and interest @ 9% from 31.03.1986 to 27.03.1998 and in default, to pay the penal interest @ 15% per annum for the aforesaid period.”

6.2.1 The Court then stated that the said judgment has been misquoted and misinterpreted to say that in that case the Court had taken a view that the Revenue is obliged to pay interest on interest in the event of its failure to refund the interest payable within the statutory period.

6.2.2 Finally, explaining the effect of Sandvik’s case, the Court stated as under:

“As we have already noticed, in Sandvik case (supra) this Court was considering the issue whether an assessee who is made to wait for refund of interest for decades be compensated for the great prejudice caused to it due to the delay in its payment after the lapse of statutory period. In the facts of that case, this Court had come to the conclusion that there was an inordinate delay on the part of the Revenue in re-funding certain amount which included the statutory interest and therefore, directed the Revenue to pay compensation for the same not an interest on interest.”

6.3 After explaining the effect of the judgment of Sandvik’s case as above, to decide the question of law referred to it, the Court held as under and referred back all the matters before a Division Bench to consider each case independently and take appropriate decision one way or the other:

“Further it is brought to our notice that the Legislature by the Act No. 4 of 1988 (w.e.f. 01.04.1989) has inserted section 244A to the Act which provides for interest on refunds under various contingencies. We clarify that it is only that interest provided for under the statute which may be claimed by an assessee from the Revenue and no other interest on such statutory interest.”

6.4 From the above decision of the Court, one may get an impression that the Court seems to have taken a view that Sandvik’s case was decided under pre-1989 provisions and from assessment year 1989-90, the interest on refund is payable u/s. 244A. As no reasonings are available in this judgment for the view taken by the Court, there is no clarity on this aspect. However, it would appear that the Larger Bench of the Court has not overruled the judgment in Sandvik’s case. The Larger Bench of the Court also does not seem to have approved the view expressed by the Division Bench (referred to in para 5.1.2) that Sandvik’s case has not been correctly decided. Instead, the Court has explained the view taken in Sandvik’s case and the effect thereof that in that case the Court had directed the Revenue to pay compensation for inordinate delay in refunding certain amount due to the assessee which included statutory interest and in that case, the Court had not decided that the Revenue is liable to pay interest on interest.

Conclusion
7.1 From the judgment of three judge Bench of the Apex Court (Larger Bench) in the above case, it becomes clear that the assessee can claim only that interest which is provided under the Act and no other interest can be claimed by the assessee on statutory interest for delay in payment thereof. The similar approach was adopted by the three judge Bench of the Apex Court in the case of Panchanatham Chettiar [99 ITR 579]. As such, the assessee is not entitled to claim interest on interest unless there is a provision in the Act for the same.

7.1.1 It is unfortunate that Larger Bench of the Apex Court has taken such a strict technical view of the issue which, in many cases, may involve the issue of equity and justice. In fact, with this judgment, some Revenue Officials may be tempted to delay payment of interest as that does not create any liability to pay further interest on the amount of interest wrongly withheld. This may happen in cases involving large amount of interest in this era of unjustified pressure for meeting unrealistic revenue collection targets. This possibility was noted by the Apex Court in Sandvik’s case referred to in para 2.13.1 of Part 1 of this write-up wherein the Court has also opined that such actions and consequences seriously affect the administration of justice and the rule of law. It appears that this was also one of the factors considered by the Court to decide the issue in favour of the assessee in Sandvik’s case. Similar approach is found in the judgment of the Delhi High Court in the case of India Trade Promotion Organisation referred to in para 3.1.3.3. Otherwise also, this position may be open to abuse and that is not in the long term interest of fair administration of tax laws. Somehow, the Larger Bench of the Court in the above case has not appreciated this ground reality. To be fair to the assessee, appropriate provision should be made in the Act itself to compensate the assessee in cases of delay in payment of interest due to the assessee. We only hope that the Revenue Officials will strictly follow the directions contained in the Instruction No. 2 dated 28th March, 2007 (referred to in para 3.1.1) issued by the CBDT after the judgment of the apex court in Sandvik’s case.

7.2 From the above judgment, it seems to us that the Larger Bench in the above case has not decided that the assessee will not be entitled to claim compensation from the Revenue even if there is inordinate delay in payment of amount due to the assessee which may include statutory interest. As mentioned in para 6.4, in the above case, the Court has not held that Sandvik’s case was wrongly decided. As such, as held in Sandvik’s case, in case of delay in payment of ‘amount due’ to the assessee it may be possible for the assessee to claim compensation on such amount even if such amount includes statutory interest. Such a claim of the assessee should not be regarded as claim of interest on interest. It also appears that the claim for such compensation may be considered by the Courts and, as held by the Tribunal (TM) in the case of Nirma Chemicals (referred to in para 3.1.2), such a claim may not be entertained by the Tribunal or the lower authorities.

7.3 In the above context, it is worth noting that as mentioned in para 3.1.3.2, the Apex Court in the case of H.E.G. Ltd has held that the words ‘amount due’ appearing in section 244A include interest and the interest com-ponent will partake of the character of the ‘amount due’ u/s. 244A. It seems that this position is not disturbed by the judgment of the Larger Bench in the above case as this has not been considered in the above case. This was also not the issue before the Larger Bench in the above case. It is also worth noting that the judgment of the apex court in H.E.G Ltd was also delivered by a three judge Bench of the apex court. With this position, the claim of interest u/s. 244A on the interest component of the ‘amount due’ may be regarded as claim of interest on shortfall in payment of ‘amount due’ and not as claim of interest on interest. As such, such a claim may be regarded as the claim under the provisions of the Act. This needs consideration even after the judgment of the Larger Bench in the above case. In this context, the judgment of the Delhi High Court in the case of India Trade Promotion Organisation ( supra) is worth noting. At the same time, in this context, the view expressed by the Tribunal (TM) in the case of Nirma Chemicals (supra) may also be borne in mind.

7.4 In the cases of D. J. Works [195 ITR 227] and Chimanbhai S. Patel [210 ITR 419], the Gujarat High Court had taken a view that the assessee is entitled to interest on interest. As mentioned in para 1.4.1 of Part 1 of this write- up, the judgment of the Gujarat High Court was followed by the M. P. High Court in the case of Narendra Doshi and the judgment of the M. P. High Court in the case of Narendra Doshi has been affirmed by the apex court [254 ITR 606]. This is also relied on in Sandvik’s case to take a view that even if there is no provision in the Act for payment of compensation, the compensation for delay is required to be paid. In Sandvik’s case, as mentioned in para 2.9 of Part 1 of this write-up, a view was also taken that the decision of the apex court in Narendra Doshi’s case is on the merits of the matter, though it proceeded on the assumption that there was no provision in the Act grating interest on unpaid interest. Even this judgment in the case of Narendra Doshi was delivered by a three judge Bench of the Apex Court. It is worth noting that this judgment has also not been considered by the Larger Bench in the above case. The implication of this factual position may need consideration and we will have to wait and watch for the position which may ultimately emerge from this situation.

7.4.1 When the Division Bench of the apex court finally decides the issue on merit in the case of Gujarat Flourochemicals [or in any other case from the set of appeals forming part of the judgment of the Larger Bench in the above case], some light may be thrown on the above. Let us hope for the development/ clarity in this regard at that stage.

Nirav Shah

WRIT PETITION MAINTAINABILITY

SYNOPSIS

When an alternative remedy is
available under the Act, writ petition is not maintainable. However, in
various decisions the Hon’ble Supreme Court and High Courts have held
that if a issued is patently illegal or without jurisdiction,
notwithstanding the alternative remedy, writ is maintainable. In this
article, the author analyses of the recent SC ruling in the case of
Vijaybhai N. Chandrani which in his view is inconsistent with this
position and therefore requires reconsideration.

Brief Factual Background of the case before the Hon’ble Supreme Court:

Recently,
the Hon’ble Supreme Court in the case of CIT vs. Vijaybhai N. Chandrani
[Civil Appeal No. 5888 to 5903 of 2013 dated 18.7.2013] has held that
writ petition before the Hon’ble High Court is not maintainable when
alternate remedy is available under the Income-tax Act, 1961 (‘the
Act’). The brief background of the case is given hereunder:

In
the case of Vijaybhai (supra), the assessee purchased a plot of land
from Samutkarsh Co-operative Housing Society being developed by Savvy
Infrastructure Ltd. In 2008, a search was conducted u/s. 132 of the Act
in the premises of the Society and Savvy Infrastructure Ltd. During the
search, Assessing Officer (‘AO’) seized certain documents u/s. 132A of
the Act. One of the documents was loose sheet of paper containing list
of members under the heading “Samutkarsh Members Details”. One of the
names was that of the assessee and certain details were mentioned
against each name in different columns. On the basis of these documents
the AO issued notices u/s. 153C to the assessee to furnish his returns
of income for assessment years 2001-2002 to 2006-2007. Upon receipt of
the said notice, the assessee requested the AO to provide copies of the
seized material. The AO supplied copies of three loose sheets of paper
which, according to the assessee, did not belong to him. Under these
circumstances, the assessee moved a writ petition before the Hon’ble
Gujarat High Court challenging the aforesaid notices.

The
Hon’ble Gujarat High Court quashed the notices by holding that as the
said documents undoubtedly did not belong to the assessee the condition
precedent for issuance of notice was not fulfilled and therefore the
action taken u/s. 153C of the Act stood vitiated. Though the Hon’ble
Supreme Court did not express any opinion on the correctness or
otherwise of the construction that was placed by the High Court on
Section 153C of the Act, it held that as alternate remedy was available
to the assessee, the High Court ought not to have entertained the writ
petition and instead should have directed the assessee to file reply to
the said notices. Upon receipt of a decision from the AO, if for any
reason assessee was aggrieved by the said decision, the same could be
questioned before the forum provided under the Act. Accordingly, the
order of the Hon’ble Gujarat High Court was reversed.

Supreme
Court decisions on maintainability of writ petition – against
action/notice without jurisdiction – when alternative remedy is
available

It is a settled position that, generally, when
alternative remedy is available under the Act, writ petition is not
maintainable. However, in various decisions the Hon’ble Supreme Court
and High Courts have held that if the notice issued is patently illegal
or without jurisdiction, notwithstanding the alternative remedy, writ is
maintainable. Some key decisions laying down the said ratio are quoted
hereunder:

• Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC)

“Mr.
Sastri mentioned more than once the fact that the company would have
sufficient opportunity to raise this question, viz., whether the
Income-tax Officer had reason to believe that under-assessment had
resulted from non-disclosure of material facts, before the Income-tax
Officer himself in the assessment proceedings and, if unsuccessful
there, before the Appellate Officer or the Appellate Tribunal or in the
High Court under section 66(2) of the Indian Income-tax Act. The
existence of such alternative remedy is not however always a sufficient
reason for refusing a party quick relief by a writ or order prohibiting
an authority acting without jurisdiction from continuing such action.” (Emphasis supplied).

• Foramer vs. CIT [2001] 247 ITR 436 (All) affirmed by Supreme Court in [2003] 264 ITR 566 (SC)

“As
regards alternative remedy, we are of the opinion since the notice
under section 148 is without jurisdiction, the petitioner should not be
relegated to his alternative remedy vide Calcutta Discount Co. Ltd. v.
ITO [1961] 41 ITR 191 (SC)…. .”

• UOI & Anr vs. Kunisetty Satyanarayana [2007] 001 CLR 0067 (SC)

“No
doubt, in some very rare and exceptional cases the High Court can quash
a charge-sheet or show-cause notice if it is found to be wholly without
jurisdiction or for some other reason if it is wholly illegal.”

From
the above decisions, it is very clear that as a matter of practice writ
petition is not maintainable if alternative remedy is available under
the Act. However, in exceptional cases when the notices issued are
patently illegal or without jurisdiction, the Hon’ble Supreme Court has
held that writ petition is maintainable.

Notice u/s. 153C in the case of Vijaybhai (supra) – without jurisdiction – liable to be quashed

In
the case of Vijaybhai (supra), the Hon’ble Gujarat High Court drew
distinction between the provisions of section 153C and section 158BD.
Whereas section 158BD seeks to tax any “undisclosed income” which “belongs”
to a person other than the person in whose case search has been carried
out, section 153C seeks to tax such other person only where “money, bullion, jewellery or other valuable article or thing or books of account or documents seized” “belongs” to him. The Hon’ble High Court held “….it is an admitted position as emerging from the record of the case, that the documents
in question, namely the three loose papers recovered during the search
proceedings do not belong to the petitioner. ….it is nobody’s case that
the said documents belong to the petitioner. It is not even the case of
Revenue that the said three documents are in the handwriting of the
petitioner. In the circumstances, when the condition precedent for
issuance of notice is not fulfilled any action taken under s. 153C of
the Act stands vitiated.” In the instant case, since it was an
admitted fact that the documents seized did not belong to the assessee,
the High Court held the notices issued u/s. 153C to be without
jurisdiction. In light of the above, having regard to the judgments
noted earlier, it is respectfully submitted that the Hon’ble Supreme
Court should have upheld the judgment of the Gujarat High Court.

An
alternate remedy against an order passed pursuant to a notice cannot be
considered as an alternate remedy available against the notice which is
patently without jurisdiction

The Hon’ble Supreme Court did
not affirm the decision of Hon’ble Gujarat High Court supposedly on the
ground that the assessee had alternate remedies under the Act against
the notices issued. The Hon’ble Supreme Court held:

“…… at the
said stage of issuance of the notices under Section 153C, the assessee
could have addressed his grievances and explained his stand to the
Assessing Authority by filing an appropriate reply to the said notices
instead of filing the Writ Petition impugning the said notices. ….

In the present case, the assessee has invoked the Writ jurisdiction of the High Court at the first instance without first exhausting the alternate remedies provided under the Act. In our considered opinion, at the said stage of proceedings, the High Court ought not have entertained the Writ Petition and instead should have directed the assessee to file reply to the said notices and upon receipt of a decision from the

Assessing Authority, if for any reason it is aggrieved by the said decision, to question the same before the forum provided under the Act. ….

Further, we grant time to the assessee, if it so desires, to file reply/objections, if any, as contemplated in the said notices within 15 days’ time from today. If such reply/objections is/are filed within time granted by this Court, the Assessing Authority shall first consider the said reply/objections and thereafter direct the assessee to file the return for the assessment years in question. We make it clear that while framing the assessment order, the Assessing Authority will not be influenced by any observations made by the High Court while disposing of the Writ Petition. If, for any reason, the assessment order goes against the assessee, he/it shall avail and exhaust the remedies available to him/it under the Act, 1961. ….”

It is respectfully submitted that if the underlined portion of the judgment was not forming part of it, the said judgment of the Hon’ble Supreme Court would have been on the lines of its earlier judgment in the case of GKN Driveshafts (India) Ltd vs. ITO [2003] 259 ITR 19 (SC) wherein the Hon’ble Supreme Court in a writ challenging notice u/s. 148 had directed the assessee/AO as under:

Thus, in the absence of the underlined part in the aforesaid judgment, as has happened in several writs challenging notices u/s. 148, the assessee would be able to approach the High Court after the AO’s order dealing with or rejecting the objections of the assessee against issue of notices u/s. 153C. As evident from the underlined part of the judgment quoted above, it is respectfully submitted that it appears that the Hon’ble Supreme Court:

a) was either under an impression that there is a remedy under the Act against issue of notice u/s. 153C; or

b) has failed to appreciate the difference between an alternate remedy available against an order passed pursuant to a notice in contradistinction with an alternate remedy available against the issuance of the notice itself.

Conclusion:
In the light of the above, it is most humbly and respectfully submitted that the aforesaid judgment of Hon’ble Supreme Court requires reconsideration as:

(i) the notice issued u/s. 153C was clearly without jurisdiction.

(ii) there is no alternate remedy available under the Act against the issuance of notice u/s. 153C.

(iii) in any case, as held by the Hon’ble Supreme Court in number of cases notwithstanding the availability of an alternate remedy, a writ is clearly maintainable against an action/notice which is issued patently without jurisdiction.

Nirav Shah

Activities Relating to Purchase of Goods from India by a Liaison Office

Synopsis
Under Section 9, income of a non-resident (NR) from a “business connection” in India would be deemed to accrue or arise in India. However, if the activities of NR are confined to purchase of goods in India for the purpose of export the deeming fiction does not apply.

The scope of the phrase “operations which are confined to the purchase of goods in India” has been a subject matter of controversy, with the Tax Department generally adopting a fairly narrow interpretation. In this feature the authors analyse the various judicial pronouncements in this regard.

Issue for consideration

An income of a foreign company or part thereof, attributable to its operations in India, is taxable in India provided such operations or activities are construed to be a ‘business connection’ within the meaning of the term as defined in Explanation 2 to section 9(1) of the Income-tax Act. Such an income is deemed to accrue or arise in India where it is found to be through or from any business connection in India, whether directly or indirectly. The said Explanation 2 provides that a business connection shall inter alia include any business activity, carried out through a person who habitually exercises an authority to conclude contracts in India on behalf of the non-resident, unless his activity is limited to the purchase of goods or merchandise for the non-resident.

Explanation 1(b) provides that income shall not be deemed to accrue or arise in India, where operations are confined to purchase of goods in India for the purpose of export.

An issue has arisen in cases where an Indian liaison office of a foreign company purchases goods from India for its head office and carries out several activities incidental thereto. The courts have been asked, under the circumstances, to define the true meaning of the term ‘confined to purchase of goods in India’ and explain whether the activities that are carried out for effecting purchase of goods in India could be considered as an independent activity or as an integral part of the purchase of goods in India. In case of the latter, the activity shall not attract Indian taxation and in case of the earlier, it may expose the income attributable to such activity to taxation in India. Recently, the Karnataka High Court has held that such activities constitute purchase of goods in India, while the Authority for Advance Ruling has held the same to be not forming part of purchase.

Columbia Sportswear Co.’s case

The issue arose before the Authority for Advance Rulings In Re Columbia Sportswear Co, 12 taxmann. com 349. The company in this case was incorporated under the laws of the USA, a multinational wholesaler and retailer of outdoors apparel with global operations. It conducted research and development to develop marketable products outside India. In the year 1995, the company established a liaison office in Chennai for undertaking liaison activities, in connection with purchase of goods in India, which activities had subsequently been expanded to Bangladesh and Egypt. Besides coordinating purchase of goods from India, the Indian liaison office also assisted the company in purchase of goods from Egypt and Bangladesh and engaged in quality monitoring and production monitoring of goods purchased from these countries. The goods procured from Egypt and Bangladesh were directly sold to the company in the United States from those countries. In the year 2000, a support office was opened by the Indian liaison office in Bangalore with the approval of the Reserve Bank of India.

The company claimed that;

• its products were produced by independent suppliers worldwide including India.

• the Indian liaison office was involved in activities relating to purchase functions for the company and incidentally was engaged in vendor identification, review of costing data, vendor recommendation, quality control and uploading of material prices into the internal product data management system of the company besides monitoring vendors for compliance with its policies, procedures and standards related to quality, delivery, pricing and labour practices.

• the Indian liaison office did not have any revenue streams; it did not source products to be sold locally in India.

• it did not sell any goods in India and therefore no income arose from its Indian operations.

• no income could be deemed to have accrued or arose in India within the meaning of section 9(1) of the Act.

• its case was covered by Explanation 1(b) of s.9(1) (i) and could not be construed as a case of business connection.

• it did not undertake any activity of trading, commercial or industrial in nature in India.

• the expenditure of the liaison office was entirely met by remittances made by the company.

On these facts, the company approached the Authority seeking a ruling on the question whether, given the nature of the activities carried on by the liaison office, any income accrues or arises in India as per section 5(2)(b) of the Act? Whether the applicant can be said to have a business connection in India as per the provisions of section 9(1)(i) of Act read with Explanation 2? Whether various activities carried out by the India LO, as listed in the Statement of relevant facts (Annexure-III), are covered under the phrase, ‘through or from operations which are confined to the purchase of goods in India for the purpose of export’ as stated in part (b) of Explanation 1 to section 9(1)(i) of the Act?

The Authority in paragraph 8 of the decision noted the following facts surrounding the activities of the LO;

“The liaison office of the applicant in India is engaged in vendor identification, review of costing data, vendor recommendation, quality control and uploading of material prices into the internal product data management system of the applicant. The liaison office monitors vendors for compliance with its policies, procedures and standards related to quality, delivery, pricing and labour practices. The liaison office is engaged in quality monitoring and production monitoring for goods purchased from Egypt and Bangladesh. It coordinates, ascertains, monitors and verifies with the vendors to develop the material in line with the quality and aesthetic requirements of the product as provided by the applicant’s product design team. It undertakes laboratory testing of fabrics/garments in India in addition to inspecting the quality of the products. It reviews production and quality assurance including the monitoring of the labour practices compliance and periodic performance reviews. It conveys the orders placed by the applicant on to the suppliers and interacts with the suppliers in relation to capacity utilisation, quality assurance, on-time delivery performance and so on. The role of the quality control team in the liaison office includes executing pre-sourcing factory evaluations to determine the vendor’s ability to manufacture the product to the expectations of the applicant. The quality control team also gives quality training to the newly selected vendors and is responsible for communicating the quality processes of the applicant and expectations to suppliers. The team also ensures that standard methods, tools, machinery and layouts are used. The liaison office also summarises seasonal vendor quality performance for the consideration of the applicant. The liaison office also ensures compliance with the quality process including seeking to ensure that the targeted defect percentage is maintained. It also ensures that the requirements of environmental laws and labour laws of the country are obeyed by the suppliers.”

The Authority concluded that the applicant could not take benefit of Explanation 1(b) to section 9(1) (i) as, in its opinion, the activities carried out by the assessee were not confined to purchase of goods in India. The following findings and observations of the Authority are pertinent;

• The liaison office had about 35 employees divided into 5 teams dealing with material management, merchandising, production management, quality control and administration support, constituting teams from finance, human resources and information systems.

• Activities carried on by the liaison office related to ensuring the choosing of quality material, occasionally testing them for quality, conveying of requisite design, picking out of competitive sellers, the ensuring of quality, the ensuring of adherence to the policy of the applicant in the matter of procurement and employment, in the matter of compliance with environmental and other local regulations by the manufacturers – suppliers and in ensuring that the payments made by the applicant reach the suppliers.

• In the matter of manufacturing of products as per design, quality and in implementing policy, the liaison office was actually doing the work of the applicant, which actually was in the business of designing, manufacturing and selling branded products, brands over which it had exclusive right.

• The activities of the liaison office were not confined to India. It also facilitated the doing of business by the applicant with entities in Egypt and Bangladesh.

• A person in the business of designing, manufactur-ing and selling could not be taken to earn a profit only by a sale of goods. The goods as designed and styled by the applicant could not be sold without it being got manufactured and procured in the manner designed and contemplated by the applicant.

• It would be unrealistic to take the view that all the activities other than the actual sale of the goods are not an integral part of the business of the applicant and have no role in the profit being made by the applicant by the sale of its branded products. It was difficult to accept the argument that what was done in India by the liaison office of the applicant was only to expend money and all its income accrued outside India by the sale of the products.

• All activities other than the actual sale could not be divorced from the business of manufacture and sale especially in a case like that of the applicant, where the sale was of a branded product, designed and got made by the applicant under supervision, under a brand owned by the applicant. Therefore, the argument on behalf of the applicant that all the activities carried on in India were confined to the purchase of goods in India, could not be accepted.

• ‘Confined’ meant, ‘limited, restricted’. ‘Purchase’ meant ‘get by payment, buy’.

The Authority observed that what section 9(1)(i), Explanation 1(b) deemed in the case of a non-resident, was that no income arose in India to a person through or from operations which were confined to the purchase of goods in India for the purpose of export but, in the case before it, the activities of the liaison office of the applicant in India were not confined to the purchase of goods in India for the purpose of export. It further observed that the applicant, in fact, transacted in India its business of designing, quality controlling, getting manufactured consistent with its policy and the laws, the branded products it sold elsewhere and that those activities could not be understood as activities confined to purchase of goods in India for export from India.

Income resulting from manufacture, purchase and sale, in the opinion of the Authority, could not be compartmentalised and confined to one arising out of a sale only, and that the whole process of procurement and sale had to be completed to generate income. Getting manufactured and purchasing formed integral parts of the process of generating income and the liaison office acted as the arm of the applicant regarding that part of the activity, and its functions were not confined to purchase or mere purchase.

Another aspect that influenced the Authority’s decision was the fact that the activities of the liaison office of the applicant in India, was not confined to India but extended to Egypt and Bangladesh. Since the activities of the applicant in India included its business in Egypt and Bangladesh, it could not be stated that the operations of the applicant in India were confined to the purchase of goods in India for the purpose of export.

The Authority therefore took the view that the activities of the liaison office gave rise to taxable income in India, not being exempt under explanation 1(b) to section 9(1)(i).

Nike Inc.’s case

The issue recently came up for consideration before the Karnataka High Court in the case of CIT vs. Nike Inc., 34 taxmann.com 170. The company in this case was engaged in the business of sports apparel with its main office in the USA and had globally located associated enterprises or subsidiaries. From its office in the USA, the company arranged for all its subsidiaries the supply of various brands of sports apparel for sale to various customers. It did not carry on any manufacture by itself. It engaged various manufacturers all over the world on a job-to-job basis and made arrangements with its subsidiaries for purchase of the manufactured goods directly and payment for the same to the respective manufacturers.

With a view to procure various apparel from manufacturers from various parts of the world, the company opened a liaison office in India and;

• employed persons in various categories.

• the rate or price for each apparel was negotiated by the liaison office with the manufacturer.

• the quality of each apparel was also indicated and the samples so developed were forwarded to the US office.

• the liaison office proposed and gave its opinion about the reasonability of the price, etc. and the US office decided about the price, quality, quantity, to whom to be shipped and billed.

• the local manufacturer in India was conveyed of the decision by the office in the USA and once it was accepted, the local manufacturer carried on his activity.

• the liaison office kept a close watch on the progress, quality, etc. at the manufacturing workshop and also kept a watch on the time schedule to be followed and rendered such assistance as may be required in the dispatch of the goods, including the actual buyer and the place for export.

For all these activities in India, the liaison office was receiving funds through banking channels from the USA.

For the relevant assessment years, the company filed returns of income declaring nil income. It contended that its activities were to carry on activities that were ancillary and auxiliary to the activities of its head office and other group companies and to act as a communication channel between the head office and parties in India. It claimed that in terms of Explanation 1(b) to section 9(1)(i), no income shall be deemed to accrue or arise in India to a non-resident from operations which were confined to the purchase of goods in India for the purposes of export. In terms of Circular No. 20, dated 7-7-1964, a non-resident would not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident had an office or an agency in India for the purpose, or the goods were subjected to any manufacturing process before being exported from India. Therefore, no income shall be deemed to accrue or arise in India to it, as its operations were restricted to purchase of goods in India for the purpose of export, even though it had a liaison office to facilitate sourcing of products from Indian suppliers.

The Assessing Officer held that the activities of the company were actually beyond its activities required as a liaison office and a part of the entire business was done in India through the liaison office and therefore, the income had accrued or arisen or deemed to have accrued or arisen to the company in India in view of clause (b) of s/s. (2) of section 5. He, therefore, held that the income of the company was chargeable to tax to the extent of income, which was attributable to the activities done in India or accruing or arising in India on its behalf by its liaison office. He further held that 5% of the export value could reasonably be considered as income attributable to India operations, i.e., income accruing or arising in India to the company.

On appeal, the Commissioner (Appeals) held that it was an admitted fact that the company was not involved in the purchase of goods in India for the purpose of export, which would have involved transfer of title of goods purchased from the seller to the purchaser and as no purchase took place in the name of the liaison office, it was not entitled to the exemption enumerated in section 9(1). He, therefore, upheld the order of the Assessing Officer.

On second appeal, the tribunal held that the case before it was a case of purchase of the goods for the purpose of export by the assessee. It observed that in the absence of there being any prima facie contract between the assessee and the local manufacturer, the status of the liaison office was that of buyer’s agent, more so when the local manufacturer knew it only as the agent of the buyer i.e., the company had placed the orders on it with a view to buy the goods in the course of export and, as directed, export it to various affiliates of the company. It held that the Explanation 1(b) to section 9(1)(i) clearly applied to the company and hence, no income was derived by the company in India through its operations of the liaison office in India. It accordingly, set aside the orders of the lower authorities and granted relief to the company.

On appeal to the High Court by Revenue, the Karnataka High Court upheld the decision of the tribunal and held that the activities of the assesssee were confined to purchase of goods in India and could not be construed to represent any business connection nor could it be said that it resulted in any deemed accrual or arising of any income in India.

In the context of the income accruing or arising from ‘business connection’, the court observed that till 2004, the word ‘business connection’ had not been defined. However, by the Finance Act, 2003, Explanation 2 was inserted in section 9(1)(i), which, though it came into effect from o1-04-2004, was clarificatory in nature. It further took note of the deletion of the Proviso to Explanation 1(b) to section 9(1)(i) by the Finance Act, 1964, with effect from 01-04 -1964, which deletion had the effect of exempting a non-resident from tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident had an office or agency in India for the purpose, or even though the goods were subjected by him to any manufacturing process before being exported from India.

In the instant case, the court noted that the as-sessee was not carrying on any business in India though it had established a liaison office in India whose object was to identify the manufacturers, give them the technical know-how and see that they manufactured goods according to its specifications, which would be sold to its affiliates. It further noted that the person who purchased the goods paid the money to the manufacturer and in the said income the assessee had no right; the said income could not be said to be an income arising or accruing in India vis-à-vis the assessee; the evidence on record showed that the assessee paid the entire expenses of the liaison office.

According to the court, the payment by the non-resident buyer of some consideration to the assessee outside India, as per the contract between the as-sessee and the buyer entered outside India, was an irrelevant factor in deciding the accrual of income in India and in any case, even if any income arose or accrued to the assessee, it was outside India.

Noting the provisions contained in Explanation 2 to section 9(1)(i) concerning the business connection and that the saving for the activities was limited to the purchase of goods or merchandise, the court observed that no income should be deemed to ac-crue or arise in India. The court observed that once the entire operations were confined to the purchase of goods in India for the purpose of export, the income derived therefrom should not be deemed to accrue or arise in India u/s. 9. It also observed that the activities of the assessee in assisting the Indian manufacturer to manufacture the goods according to its specification was to see that the said goods manufactured had an international market, and could therefore be exported. The Court concluded that the assessee was not earning any income in India, and, if at all it was earning an income outside India under a contract which was entered into outside India, no part of its income could be taxed in India either u/s. 5 or section 9.

In arriving at the conclusion in favour of the assessee, the court was guided by the decisions of the Supreme Court in the cases of Anglo-French Textile Co. Ltd. vs. CIT ,23 ITR 101 (SC) (para 15) and CIT vs. R.D. Agarwal & Co. 56 ITR 20 (SC).

Observations

Clause (b) of Explanation 1 to section 9(1)(i) clarifies that no income shall be deemed to accrue or arise in India, in the case of a non-resident, through or from operations which are confined to the purchase of goods in India for the purpose of export. It clearly conveys that a non-resident can carry an activity in India and such activity may signify a business connection so however the income through or from such activity, if confined to purchase, shall not be deemed to accrue or arise in India.

An activity that travels beyond purchase of goods in India shall expose the income, pertaining to such an activity, to taxation in India under the deeming fiction contained in section 9(1)(i) of the Act. Such an activity may be carried out by a non-resident himself or through his agent or a liaison office.

It therefore is essential, for an exemption from tax, that the activity is confined to purchase of goods for export. The term ‘confined’ to is not defined in the Act and, as has been seen, has been the subject matter of intense conflict. One view of the matter is that the term ‘purchase’ signifies placing of an order for purchase of such goods that are exported. The other view is that the term connotes carrying out all such activities that lead to placing an order of purchase of goods for export, i.e., all activities that precede the placement of an order are ‘purchase’. In the narrowest possible view of the term ’purchase’, the activity is restricted to placing the purchase order, while taking a broader view, even the activities leading to placing an order for purchase of goods shall be included in ‘purchase’ of goods.

The term ‘confined’, in the context, is defined to mean “restrict within certain limits of scope” by the Oxford Dictionary. An activity or activities whose scope is restricted to purchase of goods can be said to be confined under the meaning supplied by the Oxford Dictionary. A plain reading explains that the dictionary does not narrow down or limit a ‘purchase’ to the activity of placing the order of purchase. Isolating activities leading to purchase from its scope is not even implied.

The important thing is to ascertain that can an order for purchase be placed without necessarily undertaking the activities that lead to such an order, such as; identifying the product and its quality, short-listing a vendor, giving product specifications, negotiating the price and fixing it, defining the logistics and specifying the delivery schedule? If the answer, in the context of clause(b) is no, then carrying on the pre- purchase activities shall not result in any deemed accrual of income.

The dictionary meaning of the term ‘purchase’ is to acquire on payment or for a consideration. It needs to be appreciated that an acquisition is not limited to placing an order of purchase but involves the series of acts carried out to successfully acquire a thing and includes the act of payment effected, post purchase, for an acquisition. It is significant to note that the word ‘purchase’ is preceded by the word ’to’, collectively reading ‘to purchase’ and so read, it sets any doubts to rest about the true un-derstanding of the law. To purchase without doubt, shall rope in all activities that enables the placement of a purchase order leading in turn to purchase or acquisition of goods.

The Authority in Columbia Sportswear Co.’s case has refused to appreciate that the activities considered by it to be constituting a business nonetheless were part of an activity of purchase without which it was not possible to purchase goods, and in that view of the mater, such activities were confined to purchase of goods alone and that they were not to be isolated from the purchase of goods as was being represented by the revenue authority.

In contrast, the Karnataka High Court in Nike Inc.’s case took a pragmatic view by holding that the pre-purchase activities were activities that were part of purchase of goods and carrying on such activities did not amount to travelling beyond the scope of the exemption contained in clause (b).

One needs to appreciate that the Reserve Bank of India while permitting a foreign company to set up a liaison office in India ensures that the operations of such an office are restricted in its scope and does not include carrying on of the business in which case, the company shall be required to set up a branch in India. In fact, carrying on of the pre- purchase activities by a liaison office is within the scope of the permission of the Reserve Bank of India.

Another aspect that requires appreciation is that pre-purchase activities and purchase represent an expenditure and not an income and therefore, even on this account, it is difficult to hold that these activities by themselves can lead to any income or even a deemed income. A right must have emerged to enable the assessee to demand and receive an income before it can be taxed in the hands of the assessee. No such right can be said to have emerged for carrying out pre-purchase activities. The Supreme court in the case of Anglo-French Textiles Co. Ltd., 23 ITR 101(SC) held that no profit could be said to have arisen on mere purchase of goods in India. For some incoherent reason this aspect was not appreciated by the Authority. Secondly, for the purpose of bringing even a deemed income to taxation, it is essential that the income pertaining to such an activity is defined and it is only then that a deemed income could be brought to taxation, as was held by the Supreme Court in the case of Anglo-French Textiles Co. Ltd., 25 ITR 27(SC). The principle so laid down by the apex court has a legislative acceptance in the form of clause (a) of Explanation 1 to section 9(1)(i) of the Act. In the said case, the court held that distribution of profits over different business operations or activities ought only to be made for sufficient and cogent reasons. The principle was reiterated in the case of R.D. Agarwala & Co. 56 ITR 20 and was expressly relied upon by the Karnataka High Court in Nike Inc.’s case and was ignored in Columbia Sportswear co’s case by the Authority.

The following observations and findings of the court in Nike Inc.’s case are helpful in appreciating the intent of the lawmakers; “If we keep the object with which the proviso to clause (b) of Explanation 1 to s/s. (1)(i) of section 9 of the Act was deleted, the object is to encourage exports thereby the Country can earn foreign exchange. The activities of the assessee in assisting the Indian manufacturer to manufacture the goods according to their specification is to see that the said goods manufactured has an international market, therefore, it could be exported. In the process, the assessee is not earning any income in India. If at all he is earning income outside India under a contract which is entered outside India, no part of their income could be taxed in India either u/s. 5 or section 9 of the Act.”

The Authority seems to have been largely influenced by the fact that the Indian office of the foreign company undertook activities of similar nature in Egypt and Bangladesh which in its opinion was outside the scope of exemption granted under clause(b) of Explanation 1 of section 9(1)(i) of the Act. This is clear from the following observations and findings; ‘There is another aspect. The activities of the liaison office of the applicant in India, is not confined to India. It also takes up the identical activities as in India, in Egypt and Bangladesh. The applicant has only pleaded that the goods procured from Egypt and Bangladesh are not imported into India and are sold only to the applicant in the US. Whether products of the applicant are sold in Egypt and Bangladesh is not clear. Whatever it be, since the activities of the applicant in India takes in, its busi-ness in Egypt and Bangladesh, it cannot be stated that the operations of the applicant in India are confined to the purchase of goods in India for the purpose of export.”

The very same Authority in IKEA Trading (Hong Kong) Ltd., 176 Taxman 344 held that re-purchase activities were a part of the purchase of goods and did not take away the benefit of clause (b) of the said Explanation. It however chose not to follow the ratio of the said decision by observing that it was delivered on the facts of that case. In that case, on a finding that the applicant therein, a foreign com-pany having a liaison office in India was engaged only in purchase operations in India for export, it was held that no income was generated by such an activity in India to be taxed in India either from the standpoint of section 5(2) or section 9(1)(i) read with Explanation 1(b) of the Income-tax Act. The AAR in Columbia Sportswear co.’s case confirmed that it was true that the activities undertaken by the applicant therein included some of the activities undertaken by the applicant before it.

The Authority, with respect, was unduly swayed by the proposition that all activities other than the actual sale cannot be divorced from the business of manufacture and sale especially in a case where the sale is of a branded product, designed and got made by the applicant under supervision, under a brand owned by the applicant. What the Authority failed to appreciate is that while what was stated by it was otherwise true but was rendered irrelevant, in the context, by virtue of clause (b) of Explanation 1 to section 9(1)(i) of the Act, which clause specifically excluded an activity of purchase from being labeled as business connection. In that view of the matter, the conclusion of the authority based on the decisions delivered without the benefit of analysing the said clause(b) cannot, with respect, be said to be laying down a good law. It was incorrect to have rejected the contention of the applicant that the decision of the Supreme Court in Anglo-French Textile Co. Ltd’s case (supra) did not govern the situation, anymore, in view of the addition of Expla-nation 1(b) to section 9(1)(i) of the Income-tax Act, taking out activities of purchase while deeming the accrual of income.

The Authority, instead of appreciating the change in law, went on to hold that the activity of purchase cannot be totally divorced from the activity of sale leading to income and this principle, in its opinion, is not affected by the Explanation which only seeks to exclude income from activities limited to purchase of goods in India for the purpose of export. The principle that a purchase of raw material, getting goods manufactured and selling the product form an integral activity remains unshaken in the opinion of the Authority and hence a deemed income arose in the hands of the applicant even on purchase of goods for export form India.

The decisions in the cases of CIT vs. N.K. Jain, 206 ITR 692 (Del.) and Mustaq Ahmed, In 307 ITR 401 (AAR) were also relied on by the applicant in Columbia Sportswear co.’s case to argue that the effect of the Explanation as understood therein supported the position adopted by the applicant. These decisions in our opinion are relevant to the issue being considered here in as much as the issue in those cases was about what constituted a business conncection in cases where the Indian arm of the non-resident was carrying out activities that preceded placing an order for purchasing goods. The Authority, however, chose to ignore these decisions on the ground that can be best explained by reproducing the words of the Authority; “There was no argument based on the decision of the Supreme Court before the High Court. There was no reference to that decision and there was no consideration of an argument that a purchase could not be totally divorced from a sale in such cases. There is no ra-tio emerging that by virtue of the addition of the Explanation, the principle set down by the Supreme Court in Anglo-French Textile Co. Ltd.’s case (supra) is no more relevant or binding.”

The Authority rather relied upon the decision In Mustaq Ahmed’s case (supra), to hold that the Authority, in that case, after noting the decision of the Supreme Court in Anglo-French Textiles’ case and the history of the Explanation to section 9(1) (i) of the Act, confirmed after a detailed discussion on the question, that the ratio of the decision in that case remained unaffected by the addition of clause (b) to Explanation 1 in the present Act and the principle enunciated in the decision applied with equal vigour, irrespective of Explanation 1(b). Yet another decision relied upon by the applicant In Angel Garment Ltd., In 287 ITR 341, concerning the purchase of goods by a liaison office was held by the Authority to be delivered on the facts of that case and was not applied.

It is true that the activity of purchase contributes to eventual profit and therefore it may not be correct to say that such an activity does not contribute to any income. But what is needed to be appreciated is that the income attributable to such activity of purchase has been specifically excluded from the purview of taxation by the legislature on insertion of clause(b). It is this fact which appears to have been missed by the Authority when it relied on the decision in the Anglo-French Textiles’ case that was rendered on a law that did not have any such exclusion. The whole process of procurement and sale has to be completed to generate income and surely purchasing goods forms an integral part of the process of generating income, but the income, if any, pertaining to such an activity requires to be excluded by the law contained in clause(b) of Explanation 1 to section 9(1).

It is our considered view that the conflict on the issue discussed is not only avoidable but should be avoided by the Revenue by taking a pragmatic stand to include the activities leading to placing an order for purchase of goods in purchase of goods for export. In our opinion, the term purchase of goods is wide enough and should be so construed, in the present days, to include even manufacturing of goods for export out of India, more so when such goods are used for captive consumption by a non-resident.

The discussion here is valid in the context of the provisions of the Income tax Act. The taxation of the assessees governed by a Double Tax Avoidance Agreement will be determined largely by the provisions of such agreement.

Nirav Shah

Interest-free loans advanced to overseas wholly-owned subsidiaries cannot be regarded as quasi equity capital.

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Tribunal News

Part C — Tribunal & AAR International Tax Decisions

Geeta Jani
Dhishat B. Mehta
Chartered Accountants

20 Perot Systems vs DCIT

2010-TIOL-51-ITAT-DEL

Section 92,

Dated: 30.10.2009

Issues:

Interest-free loans advanced to overseas
wholly-owned subsidiaries cannot be regarded as quasi equity capital.

Notional arm’s length interest on a loan to
an AE can be taxed having regard to applicable transfer pricing provisions.

Facts:

The assessee, a company
incorporated in India, is engaged in the business of developing and designing
technology for business solutions and also providing business consultancy
services.
The assessee advanced
interest-free foreign currency loans to its two wholly-owned subsidiaries (WOS)
situated in Bermuda and Hungary. The funds were used by the WOS for making
long-term investments in step down operating subsidiaries.
During the course of the
assessment proceedings, the tax authorities held that the loan was an
international transaction and grant of interest-free loan was inconsistent
with the arm’s length principles of section 92 of the Income Tax Act.
The assessee resisted the
notional assessment by contending that:

(a) The overseas entities were 100% subsidiaries. The
assessee had neither any intention nor had earned any interest, and that it
was commercially expedient to extend such interest-free loans to WOS.

(b) Interest-free loans were in the form of quasi equity as
the subsidiaries had very small capital base. Further, unavailability of easy
borrowing means to the newly set up WOS was one of the main reasons for the
funding.

(c) Requisite approval of the RBI was obtained by the
assessee for such remittance. The Income Tax Act and the OECD Guidelines
support the contention that the effect of government control/intervention
should be considered while determining ALP

(d) Reliance was placed on Para 1.37 of 1995 OECD
Guidelines to support proposition that it is legitimate to consider the
economic substance of a transaction. The thin capitalisation rules of Hungary
were also referred to support the view that debt in excess of three times the
equity of the subsidiary is to be treated as equity.

(e) Relying on the Supreme Court’s Judgments in CTV. KRMTT
Thiagaraja Chetty & Co. 24 ITR 525 and Morvi Industries Ltd v CIT 82ITR835 it
was contended that the term income includes real income and not fictitious
income, and notional income assessment was not justified.

Held:

The ITAT upheld the contentions of the tax department and
held:

(a) The agreements between the parties indicate that the
assistance to the WOS was in the nature of loans and not in the nature of
capital.

(b) The concept of real income cannot be applied in respect
of international transactions covered by transfer pricing provisions.

(c) Reliance by the assessee on OECD guidelines and thin
capitalisation norms of the source country was not apt as they dealt with the
issue from the perspective of the borrower and the recipient country, and not
from the perspective of the lender. In any case, the thin capitalisation norms
of Hungary only regulated admissibility of interest expenditure in the hands
of the payer.

(d) Interest-free loans granted in Bermuda (situated in a
tax haven) would result in higher income in the hands of the AE and the
taxpayer’s income in India would reduce by the corresponding amount. This
would result in reduction of the overall tax incidence of the group, resulting
in a case of violation of the TP norms where profits are shifted to lower tax
regimes to bring down the aggregate tax incidence of multinational groups.

(e) The approval of the Reserve bank of India does not
validate or approve the true character of the transaction from a TP
perspective. RBI regulations could not be applied for the purpose of TP under
the Income Tax Act.

(f) Based on the above, the ITAT upheld the order of the
CIT(A) and held that the transaction to provide interest-free loans was an
international transaction subject to the TP guidelines, and income thereof,
arising from such transaction, should be determined under the provisions of
Income Tax Act.

levitra

Nirav Shah

Payments received from the supply of software products cannot be considered as ‘royalties’, taxable under the provisions of the Income-tax Act, 1961 or under India-Japan tax treaty.

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19 Dassault Systems K. K

2010-TIOL-02-ARA-IT

Articles 5, 7 and 12, India-Japan DTAA; Section 9(1)(vi),
Dated: 29.01.2010

Issues:

Payments received from the supply of software
products cannot be considered as ‘royalties’, taxable under the provisions of
the Income-tax Act, 1961 or under India-Japan tax treaty.
In absence of a Permanent Establishment (PE)
of non-resident in India, business income from distribution of software
through independent distributors cannot be taxed in India.

Facts:

The applicant, a company
incorporated in Japan, was engaged in the business of providing ‘Products
Lifecycle Management’ (PLM) software solutions, applications and services. The
applicant was marketing software products through a distribution channel
comprising of Value Added Resellers (VAR).
The VAR were independent
third party resellers engaged in the business of selling software to
end-users. The applicant entered into a General VAR Agreement (GVA) with the
VAR, authorising them to act as resellers of the products on a non exclusive
basis. As per the business model, software solutions were sold to VAR for a
consideration based on the standard list price, after deducting the agreed
discount. The VAR, in turn, sold the products to end-users at a price
independently negotiated between them and the end-users. Upon receipt of the
order from end user, the VAR placed a back-to-back order on the applicant. The
end-users entered into End User License Agreement with the applicant (with the
VAR being a party) containing the terms of software license. The applicant
thereupon provided a license key via e-mail so that the customer could
download the product, hosted on a server located outside India through the web
link. After download of the product, the end-user activated the software on
the customer’s designated machine, using the license key.
The issue before the AAR
was whether the payments received by the applicant on sale of the software
products were taxable as business profits under Article 7 of the tax treaty or
‘royalty’ as defined in article 12 of the tax treaty.
The applicant contended
that:

(a) What was transferred to the end-user was copyrighted
software. The copyright of the software continued to be with the applicant and
was neither made available to the VAR or end-users.

(b) Limited right to use the copyrighted products is not
equivalent to use of copyright for commercial exploitation — and consideration
for use of copyright for commercial exploitation alone could constitute
royalty.

(c) Each VAR was a distinct legal and independent entity
who acted as a non- exclusive distributor on a principal-to-principal basis.
Such entity did not constitute agency PE.

The tax authority claimed
that the payments by the VAR were royalty payments by contending that:

(a) The payments made by the end-users were for transfer of
rights in respect of the copyright of the software, i.e., for use of the
computer programme.

(b) The Copyright Act makes a distinction between the
copyright of a literary work like a book and a computer programme. The right
to sell, in relation to a computer programme, is specifically treated as the
use of copyright under the Copyright Act.

(c) The concept of “copyrighted article” is apt for a book
or music CD, but is inapt for software where one or more rights in copyright
need to be necessarily transferred to make the same workable

(d) The End User License Agreement (EULA) makes it clear
that software use is licensed for a fee.

(e) In any case, consideration can be treated as royalty as
it is for the right to use the process.

(f) The VAR constituted agency PE as they were
substantially controlled and directed by the applicant.

Held:

The AAR accepted the contentions of the applicant and held
that there was no payment of royalty as:

(a) Computer software enjoys protection under the Copyright
Act. The term copyright needs to be understood as per the Copyright Act.

(b) Assignment of a right of the owner of a copyright is
essential to trigger royalty taxation. A non-exclusive and non-transferable
license for enabling the use of the copyrighted product is not equivalent of
the authority to enjoy the rights of the copyright owner.

(c) Parting of the IPR, inherent and attached to the
software product, in favour of the licensee is a mandatory requirement of the
Income Tax Act and the tax treaty to trigger royalty taxation.

(d) The right to copy, reproduce or store given to the
end-user is incidental to providing use of the copyrighted product. The
end-user has to use the license within the limitation of non-exclusive
self-user license. Section 52(aa) of the Copyright Act does specifically
permit the lawful possessor of the copy of computer programme to use the same
for self use, take back-up for archival purposes or protect against loss,
destruction, etc. This also supports the view that the license to the end-user
offered a limited right of use of the copyrighted product and was not meant
for commercial exploitation.

(e) The payments for the software could not be construed as
royalty, as the use of the programmes contained in the software could be
construed as the use of the process or acquisition of any rights in relation
thereto.

Nirav Shah

Capital gains arising on transfer of Indian assets by way of amalgamation of overseas companies with an Indian company, is exempt from tax in the hands of the overseas amalgamating companies under section 47(vi), read with section 2(1B) of the Act.

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18 Star Television Entertainment Limited

(AAR) (2010–TIOL-01-ARA-IT)

Sections 47(vi), 47(vii), 2(1B)

Dated: 21.01.2010

Issues:

Capital gains arising on transfer of Indian
assets by way of amalgamation of overseas companies with an Indian company, is
exempt from tax in the hands of the overseas amalgamating companies under
section 47(vi), read with section 2(1B) of the Act.
Shareholders of overseas amalgamating companies
are entitled to exemption under section 47(vii), read with section 2(1B) of
the Act.
Taxpayers are entitled to plan affairs so as to
avail of the benefit of tax exemptions and are not precluded from minimising
their tax burden. Only a sham or a nominal transaction or a transaction which
is a contrived device, solely for tax avoidance, can be ignored.

Facts:

The applicants — three
group entities of the Star Group — were foreign companies registered in UAE/BVI.
These companies (herein Amalgamating Companies) owned Indian telecasting
channel rights, as also certain overseas assets. The Amalgamating Companies
disposed of their non-Indian assets and proposed a scheme of amalgamation with
another group company in India (viz. SIPL). SIPL is held by two Mauritius
companies.
The main reason for the
amalgamation was stated to be to obtain operational synergies, enhanced
flexibility and to create a strong base for future growth of the entities.
Upon amalgamation, SIPL was to issue shares to the shareholders of the
Amalgamating Companies, based on a fair swap ratio determined by the valuer.
The scheme of amalgamation
was filed with the Bombay High Court for approval, as required under the
provisions of sections 391 and 394 of the Companies Act, 1956. The application
to the AAR was filed at the time when the amalgamation petition was pending
before the High Court for approval.
The issue before AAR was
whether the scheme of amalgamation would result in any capital gains tax
liability in the hands of the Amalgamating Companies or their shareholders.
The applicant’s
contentions before the AAR were:

(a) The conditions stipulated for exemption under sections
47(vi) and (vii), read with section 2(1B) were fulfilled and, hence, capital
gains were exempt from tax.

(b)
The scheme of amalgamation
had specifically provided that all liabilities including arrears of tax dues
of the Amalgamating Companies would vest in and would be ultimately recovered
from the assets of the amalgamated Indian company. As a result, the interests
of the tax department were not likely to be prejudiced.

The tax
department contended that the application was to be rejected as:

(a) The object of the scheme of amalgamation was to avoid
capital gains tax arising on the transfer of business by the Amalgamating
Companies.

(b) Had the parties directly transferred the shares of the
amalgamating companies to the amalgamated company, capital gains arising on
such transfer would have attracted tax in India.

(c) The scheme of amalgamation should be kept on hold until
the high court has accorded its sanction, as the tax department would then be
able to present its case before the court on the adverse financial
repercussions of merger.

(d) There was no business or commercial purpose for the
proposed amalgamation. The object of the scheme was primarily to avoid payment
of taxes and it was a plan to artificially inflate profits and reduce
liability of the amalgamating companies.

Held

The AAR accepted the applicant’s contentions and held:

(a) Capital gains arising due to the proposed amalgamation
would be exempt from tax in the hands of the Amalgamating Companies as well as
their shareholders, as the conditions prescribed under section 47 (vi)/(vii)
of the Income Tax Act would be fulfilled.

(b) The contention of the tax department that acceptance of
the application should be kept in abeyance until the high court has accorded
its approval, cannot be accepted as it would lead to the AAR, a statutory
authority, refusing to exercise jurisdiction vested in it by law. The Ruling
was sought and was also provided on the basis that the scheme will have
approval of the Court. The ruling would take effect only after the court’s
approval. The AAR can provide its ruling on the proposed transaction in the
interest of providing a firm idea of tax implications in India.

(c) The scheme is not
likely to jeopardize the interests of the tax department as all tax dues of
the amalgamating companies vest in and can be recovered from SIPL.

(d) The application cannot be rejected on the ground that
it is a pure and simple design to avoid capital gains tax. Relying on the Apex
Court’s decision in the case of Azadi Bachao Andolan and the Gujarat High
Court’s decision in the case of Sakarlal Balabhai , the AAR held that it was
possible for a taxpayer to enter into a transaction in such a manner that
legitimate tax exemptions are availed of and the tax liability is reduced. The
AAR also observed that:

Nirav Shah

Consolidated return filed after due date in S. 139(1), held valid as in substance, a relevant provision complied with

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Part C — Tribunal and International Tax Decisions

21 Nicholas Applegate South East Asia Fund
Ltd. v. ADIT

(2009 TIOL 74 ITAT Mum-TM]

S. 139, 292B, Income-tax Act

A.Y. : 2001-02. Dated : 9-1-2009

Issue :

On facts, consolidated return filed after the date prescribed
in S. 139(1), held valid as in substance and in effect the relevant provision
was complied with.

Facts :

The assessee was a company incorporated in Mauritius under
the Protected Cells Companies Act. It had four Cells. For A.Y. 2001-02, it filed
separate returns of income of four Cells. These returns were filed on 30th
October 2001, i.e., within the time prescribed u/s.139(1) of Income-tax
Act. The assessee subsequently realised that being a single entity (company), it
was required to file consolidated return at entity level i.e., for all
four Cells. Accordingly, on 29th October 2002 it filed a consolidated return for
all four Cells.

The assessee had derived income from dividend (which was
claimed exempt u/s.10(33) of the Income-tax Act) and short-term capital loss,
which the AO had found in order. However, the AO issued show-cause notice to the
assessee to explain why consolidated return filed on 29th October 2002 should
not be considered as original return and four separate returns filed on 30th
October 2001 should not be considered invalid.

The assessee explained that it filed separate returns for
four Cells as it was of the view that the Cells had separate legal existence.
Further, the original returns of four Cells did not suffer from any defect
mentioned in S. 139(9) of the Income-tax Act and hence the subsequent
consolidated return filed on 29th October 2002 was only a revised return. The
AO, however, held that the earlier returns were invalid and only the subsequent
return was valid. Therefore, he did not allow carry forward of loss. The CIT(A)
upheld the order of the AO.

On account of differences in the views of Tribunal members,
the case was referred to the Third Member. The assessee put forth the following
propositions :

(i) Provisions of S. 139(1), S. 139(3) and S. 139(4) must
be harmoniously construed.

(ii) S. 139 is a machinery provision as against a fiscal
provision, and must be interpreted in a liberal and equitable manner.

(iii) The original returns filed by the Cells have only
been consolidated in the subsequent returns dated October 29, 2002 and as
observed by this Tribunal, there is no mala fide intention on the part
of the appellant in doing so.

(iv) Benefit u/s.139(5) cannot be denied on technical
grounds.

(v) The information contained in the revised return dated
October 29, 2002 is congruent to the information provided in the four separate
returns filed by the Cells and there is no variance whatsoever, hence there is
no loss of revenue. Further, information contained in the belated return
cannot be held as invalid so as to be overlooked by the Assessing Officer.

(vi) It is provided u/s.292B of the Income-tax Act that no
return of income furnished or made shall be invalid or shall be deemed to be
invalid merely by reason of any mistake, defect or omission in such return of
income, if such return of income is in substance and effect in conformity with
or according to the intent and purpose of this Act.

(vii) The ‘purpose’ of the Income-tax Act, as is evident
from S. 292B of the Income-tax Act, is to achieve/determine the correct total
income and when correct total income was given in four returns filed
simultaneously and later in the return consolidating figures were given, the
original four returns filed were valid.

The tax authorities contended that there was difference,
though minor, between the earlier four returns and the subsequent consolidated
return. Further, u/s.139(3) of the Income-tax Act, only a valid return can be
revised.

Held :

The Tribunal referred to the decisions in CIT v. Kulu
Valley Transport Co. P. Ltd., (1970) 77 ITR 518 (SC) and State Bank of
Patiala v. S. K. Sharma, (1996) 3 SCC 364 and held that as all the relevant
and correct information was given in prescribed time, the four Cells filing four
separate returns had complied in substance and in effect with the intent and
purpose of the Income-tax Act and that the subsequent consolidated return was
not revised return but mere consolidation of the four earlier returns.

Compilers note :

The issue whether a Protected Cell Company should file a
consolidated return or different returns for each cell was neither raised before
the Tribunal, nor was it examined by the Tribunal.

levitra

Nirav Shah

Concept of economic employer — Reimbursement under Secondment Agreement to legal employer on actual cost basis represented salary paid to secondee — No tax was required to be deducted at source.

New Page 1

Part C — Tribunal and International Tax Decisions

20 IDS Software Solutions (India) Pvt Ltd
v. ITO

(2009 TIOL 82 ITAT Bang.)

S. 195, S. 9(1)(vii), Income-tax Act; Article 12(4),

India-USA DTAA

A.Y. : 2006-07. Dated : 21-1-2009

Issue :

Concept of economic employer and that reimbursement under
Secondment Agreement to legal employer on actual cost basis represented salary
paid to secondee, wherein no tax was required to be deducted at source.

Facts :

The assessee was wholly-owned subsidiary of an American
company. The assessee was engaged in software development business. To assist it
in its business, the assessee executed Secondment Agreement with its parent
company (which was an American company) for providing services of certain
personnel (‘secondee’). The secondee was to report to, and be responsible to,
the assessee and was to act in accordance with assessee’s instructions and
directions. Though the American company remained the legal employer of the
secondee as per the agreement, the secondee was appointed as per the articles of
association of the assessee and was to act in accordance with reasonable
requests, instructions and directions of the assessee. The assessee was obliged
to reimburse to the American company the entire remuneration (including bonus
and other incidental costs) of the secondee on actual cost basis without any
mark-up. The assessee was also obliged to indemnify the American company for all
claims that may arise as a consequence of any act or omission committed by the
secondee. The American company hired a qualified person and seconded him as
managing director to the assessee.

The assessee applied u/s.195 to the AO for reimbursement of
remuneration to the American company without deduction of tax, on the ground
that for all practical purposes, the secondee was assessee’s employee and salary
received by him from the American company was offered to tax in India in his
individual capacity. The AO held that payment by the assessee to the American
company cannot be considered as mere reimbursement exempt from tax and further
that in absence of employer-employee relationship, the proposed remuneration
cannot be considered as salary. Accordingly, remuneration would be considered as
Fees for Technical Services (‘FTS’) in terms of Explanation 2 to S. 9(1)(vii) of
the Income-tax Act. The assessee’s contention that no technical services were
made available was rejected by the AO who directed it to deduct tax @10%. The
CIT(A) upheld the order of the AO.

Before the Tribunal, the assessee contended that for all
practical purposes, the secondee was an employee of the assessee and
employer-employee relationship existed between the assessee and the secondee.
Accordingly, payment made by the assessee to the American company was only
reimbursement of ‘salary’ cost. The assessee relied on the decisions in CIT
v. Lady Navajbai R. J. Tata, (1947) 15 ITR 8 (Bom.), K. R. Kothanda-raman
v. CIT, (1966) 62 ITR 348 (Mad.), Lakshmi-narayan Ram Gopal and Son Ltd.
v. Government of Hyderabad, (1954) 25 ITR 449 (SC), Anderson v. James
Sutherland, (1941) SC 203 (Scottish Court of Sessions) and Ram Prashad v.
CIT, (1972) 86 ITR 122 (SC) and also certain extracts from Professor Klaus
Vogel’s Commentary to support its contention of employer-employee relationship.

On facts of the assessee’s case, the Tribunal observed that
the assessee was ‘economic employer’ of the secondee. The secondee was rendering
services to the assessee under the control and supervision of the assessee, the
salary costs were borne by the asseesse by way of cross charge, the asseesee
could have terminated the services of the secondee as per articles and the
assessee could regulate the powers and duties of the secondee.

The Tribunal then considered the issue whether the amount
paid to the American company could be considered as FTS. The Tribunal held that
certain terms in Secondment Agreement, like indemnification and duties of the
secondee being mentioned clearly indicated that the secondee was an employee and
— usually not found in an agreement for rendering technical services. These
facts went against the tax authorities’ contention that the payment was FTS.

Held :

Payment by the assessee to the American company under
Secondment Agreement was not FTS, but represented reimbursement of salary paid
by the American company to the secondee. The agreement represented an
independent contract of service in respect of employment of the secondee even
though the agreement was per se between the assessee and the American
company. Since tax was deducted at source from salary and was remitted to the
tax authorities in India, the assessee was not liable to deduct tax from the
amount reimbursed to the American company.

levitra

Nirav Shah

Although services under Secondment Agreement constituted provisions of services of technical personnel, as the essence of transaction was for mutual business development and not to derive income for service, no FTS can be said to have accrued to foreign

New Page 1

Part C — Tribunal and International Tax Decisions

19 Cholamandalam MS General Insurance Co.
Ltd. In re

(2009 TIOL 02 ARA IT)

S. 9(1)(vii), Income-tax Act; Article 13.4,

India-Korea DTAA

Dated : 29-1-2009

Issue :

Although services under Secondment Agreement constituted
provisions of services of technical personnel, as the essence or substance of
transaction was for mutual business development and not to derive income for
service and the parties never contemplated payment of FTS, no income in the
nature of FTS can be said to have been accrued to the foreign employer.

Facts :

The applicant is an Indian company, which is engaged in
non-life insurance business. It is interested in developing business
relationship with Indian affiliates of Korean and Japanese companies. For this
purpose, it requires persons who are well-versed with insurance business,
respective language, etc.

To this end, the applicant executed Secondment Agreement with
a Korean company for deputation of Korean company’s employee (‘secondee’) for a
period of two years. The terms of the arrangement for secondment were for mutual
interests. As far as the applicant was concerned, it would benefit from the
services of seconded employees, whereas from the perspective of Korean provider
company, the arrangement would not only promote its business in India but also
that wherever possible, the reinsurance business would be placed with the Korean
company.

In terms of the agreement, the applicant was to reimburse
Korean company for only a part of the salary and other benefits and no payment
was to be made by the applicant to the secondee. The Korean company continued to
remain legal employer of the secondee and pay salary to him. It also deducted
tax from his salary and the tax was deposited with the tax authorities.

The services to be performed by the secondee were defined to
mean : (a) introduce applicant to potential business contacts; (b) assist
applicant to develop insurance products for Indian market; (c) furnish applicant
with necessary expertise to establish and develop business; and (d) to provide
applicant with inputs on design of reinsurance programmes.

Secondment Agreement provided for consideration by way of
reimbursement of the secondee’s salary and benefits, which was not to exceed
those applicable to the applicant’s employees of the same or equivalent grade.
AAR noted that the secondee had no right or authority to conclude any contract
on behalf of the applicant and that the Korean company was not in the business
of supply of manpower.

The tax authorities had initially contended that the secondee
could be regarded as the Korean company’s agent and consequently, it had an
agency PE in India. However, this contention was not pursued. Factually, it was
noticed that reimbursement by the applicant constituted about 55% of salary,
house rent, etc. paid by the Korean company to the secondee.

The AAR referred to definition of Fees for Technical Services
(‘FTS’) in Explanation 2 to S. 9(1)(vii) and Article 13.4 of India-Korea DTAA
and observed that the definitions were substantially similar.

In this background, the issues before the AAR were :

(i) Whether amount payable by the applicant to the Korean
company was in the nature of income requiring deduction of tax at source under
Income-tax Act ?

(ii) If answer to (i) is in affirmative, what should be the
rate of tax to be deducted at source ?

(iii) Whether the Korean company could be considered to
have PE in India requiring attribution of income to that PE ?

The AAR admitted that it is debatable whether the term
‘including provision of services of technical or other personnel’ is independent
of, or integral part of, the term ‘managerial, technical or consultancy
services’. Applying the ratio of decisions in Intertek Testing Services India P
Ltd. In re (2008) 307 ITR 418 (AAR) and G V K Industries Ltd. v.
Income-tax Officer, (1997) 228 ITR 564 (AP), it held that the secondee’s
services were technical in nature involving specialised knowledge and expertise
in insurance business. Accordingly, the Korean company did provide services of
technical personnel.

The AAR then considered the question whether amount paid by
the applicant could be construed as ‘consideration’ for the provision of
services of technical personnel. It observed that the agreement represented a
mutually beneficial arrangement and its essence or substance was not to derive
income by way of fee for service, but only partial reimbursement of the cost.
Thus, no income in the nature of FTS was generated. Viewed in this light, the
parties never contemplated payment of FTS, either under Income-tax Act or under
DTAA.

The AAR examined the ratio of the decisions in CIT v.
Dunlop Rubber Co Ltd., (1983) 142 ITR 493 (Cal.) and CIT v. Industrial
Engineering Projects (P) Ltd., (1993) 202 ITR 1014 (Del.) wherein nature of
receipt of reimbursement of expenses were considered and the respective Courts
had, on facts, held that reimbursement of expenses did not constitute income.

The tax authorities had relied on AAR’s rulings in A T & S
India P Ltd., In re (2006) 287 ITR 421 (AAR) and Danfoss Industries P
Ltd., In re (2004) 268 ITR 1 (AAR), wherein similar payment for
deputation of technical personnel under secondment agreement and for rendering
services to group companies was considered as FTS. The AAR distinguished these
rulings on facts and particularly because in the present case the details
furnished showed that it was only partial reimbursement of cost incurred by the
Korean company.

Nirav Shah

Purpose of DTAA may be relevant also in cases involving discrimination. (ii) India-Germany DTAA, Indian subsidiary of German parent company listed on German Stock Exchange considered ‘company in which public are substantially interested’.

New Page 1

Part C — Tribunal and International Tax Decisions

18 Daimler Chrysler India (P) Ltd. v.
DCIT

(2009) 120 TTJ 803 (Pune)

S. 2(18), S. 79, S. 90(1)(a), Income-tax Act; Article 24(4),
India-Germany DTAA

A.Y. : 1999-2000. Dated : 21-1-2009

Issues :

(i) Purpose of tax treaty may be relevant not only in
case of double taxation and prevention of fiscal evasion, but also in cases
involving discrimination.

(ii) Due to ‘ownership non-discrimination’ protection
under Article 24(4) of India-Germany DTAA, Indian subsidiary of German parent
company listed on German Stock Exchange would be considered a ‘company in
which public are substantially interested’.

Facts :

The assessee is an Indian company (‘I Co’) in which Daimler
Benz AG (‘DBAG’), a German company held 81.33% equity share capital. DBAG was
listed on stock exchange in Germany.

During the relevant year, DBAG and Chrysler Corporation USA,
an American company decided to merge their respective businesses. Hence, a new
company, namely, Daimler Chrysler AG (‘DCAG’) was incorporated in Germany. DBAG
and Chrysler Corporation became wholly-owned subsidiaries of DCAG. Thereafter,
DBAG merged into DCAG. Thus, all the assets and liabilities of DBAG were
transferred to DCAG. Inter alia, these included DBAG’s shareholding in I
Co.

In terms of S. 2(18) of the Income-tax Act, I Co was not a
‘company in which public are substantially interested’.

S. 79 of Income-tax Act disentitles carry forward of losses
of a company in case shares having not less than 51% of the voting power are
transferred.

I Co had suffered loss in its business for several years and
had substantial carried-forward losses. Since DBAG’s shareholding in I Co was
transferred to DCAG, and since DBAG was not listed on stock exchange in India,
the AO proposed to apply provisions of S. 79 to I Co. In respect of the
immediately succeeding year, S. 79 was amended with a view to exempt all cases
similar to that of I Co from the rigours of S. 79. I Co contended that the
amendment was clarificatory and having retrospective effect and requested the AO
to hold that S. 79 was not attracted. The AO however did not accept the
contention and held that I Co was not entitled to carry forward and set off the
accumulated losses. The CIT(A) confirmed the decision of the AO.

Before the Tribunal, I Co also put forth the additional
ground for invoking of ‘ownership non-discrimination’ under Article 24(4) of
India-Germany DTAA.

The tax authorities contended that there was no question of
treaty override or treaty applicability since there was no double taxation of
any income. The Tribunal referred to S. 90(1)(a) of the Income-tax Act and noted
that Clause (a) of S. 90 was substituted with effect from 1st April 2004, to
grant relief even in respect of income only in one jurisdiction and the relief
could be with a view to ‘promote mutual economic relations, trade and
investment’.

The next issue before the Tribunal was whether a resident
assessee could qualify to access protection under DTAA. The Tribunal referred to
Article 24 of India-Germany DTAA and observed that excepting the case of
invoking of PE non-discrimination, it is not necessary that the assessee seeking
treaty protection in one country must belong to or be resident of or be national
of the other country.

To seek protection under Article 24(4) in India, it is
necessary that taxation or any requirement connected therewith in India should
not be other or more burdensome (for a company which is wholly or partly owned
or controlled by a German resident) than the taxation and connected requirements
to which similar Indian enterprises may be subjected. This requires examination
of a ‘similar Indian company’ and ‘taxation or any requirement connected
therewith’ applicable to such similar Indian company. The Tribunal noted that
the basis of differentiation was the stock exchange on which the shares of DBAG
were listed, since if they were listed on a stock exchange in India, S. 79 would
not be attracted. Further, considering that S. 21 of the Securities (Contract)
Regulation Act, 1956 and draft listing agreement indicate that listing agreement
is possible only with ‘a company duly formed and registered under the Indian
Companies Act’, it would not be possible for the German parent company to list
its shares on a stock exchange in India. The Tribunal thereafter observed that
while there were no judicial precedents in India, there were several judgments
by foreign judicial bodies. While such precedents cannot have binding values,
they do deserve due and careful consideration. The Tribunal did refer to these
decisions.

Held :

(i) Provisions of tax treaty may be relevant even when
income is not taxed in the hands of assessee. Substitution of Clause (a) of S.
90(1) reflects the ground realities and rightly indicates that in today’s
world, the role of treaties is not only confined to avoiding double taxation
or to give relief in respect of doubly taxed income. Tax treaties are seen as
instruments of fostering economic relations, trade and investment. Treaty
override, even before amendment in 2004, covered all the provisions of the tax
treaties, including the provisions relating to non-discrimination.

(ii) It is not necessary that the assessee seeking treaty
protection in one country must belong to or be resident of or be national of
the other country, and a resident assessee would qualify for protection under
DTAA. As per Article 24(4) of the treaty, it is not necessary that the
taxpayer, in whose cases non-discrimination is invoked, should be a resident
of the other contracting state. Since the capital of the taxpayer is
substantially owned by a resident of Germany, the coverage criteria under the
enterprise non-discrimination clause of the treaty is satisfied.

(iii) Having regard to the provisions of Article 24(4), the
disability [u/s.79 read with S. 2(18)], of carry forward and set off of
accumulated losses on account of change in shareholding pattern, cannot be
extended to Indian subsidiaries of German parent companies so long as German
parent companies are listed on a German stock exchange recognised under their
domestic laws. To this extent, the rigours of the domestic law relating to
carry forward of losses must stand relaxed due to treaty overriding domestic
tax.

Nirav Shah

Fees received by non-resident for performing services in India through a PE are taxable in accordance with Article 7 of DTAA. If Article 7 applies, S. 9(1)(vii), S. 44D and S. 115A would not apply.

New Page 1Part C : Tribunal & AAR
International Tax Decisions

12 Rio Tinto Technical Services v.
DCIT [Unreported]
[ITA No. 3399/Del./2002, 5372/Del./2003& 4742/Del./2004]
Article 7, India-Australia DTAA; S. 5, S. 9(1)(vii), S. 44D, S. 115A, Dated :
19-3-2010

Counsels : Salil Kapoor & Ors. (for taxpayer)
Y. S. Kakkar & Other (for Revenue)

Fees received by
non-resident for performing services in India through a PE are taxable in
accordance with Article 7 of DTAA. If Article 7 applies, S. 9(1)(vii), S. 44D
and S. 115A would not apply.

Facts :

The taxpayer was
PE in India of an Australian Company (‘AusCo’). AusCo had entered in to contract
with an Indian Company for evaluation of coal deposit and feasibility study for
transportation of extracted coal. The taxpayer received approval of RBI for
establishing a project office in India. After completion of that project, AusCo
entered into another contract with another Indian company for evaluation of iron
ore deposit and feasibility study for transportation of iron ore. The taxpayer
received approval of RBI for establishing project office for this contract.

The PE received
consideration for performing the services under the contracts. The AO held that
the consideration was in nature of fees for technical services. The AO
considered it to be subject to S. 9(1)(vii) and accordingly, he taxed it @20% of
the gross receipts of the PE. In appeal, the CIT(A) upheld the order of the AO.

The Tribunal
perused the agreement between AusCo and Indian Company and noted that the
services to be provided were not simple technical and consultancy services, but
specific activities required to be done on site. Hence, AusCo had established a
PE in India.

Held :

When taxing a
non-resident, it should be first ascertained whether income is taxable u/s.5 or
9. If it is so taxable, and if the taxpayer qualifies to access DTAA, the option
would be with the taxpayer whether to prefer to be governed by provisions of
DTAA or the Income-tax Act.

Income of the PE
was taxable u/s.5(2) and AusCo had opted to be taxed as per India-Australia DTAA.
Income of the PE was ‘Business Profits’. Hence, Article 7 would apply. Article
7(2) provides that the PE should be treated as a distinct and independent
enterprise, and Article 7(3) provides that deductions in accordance with the
Income-tax Act shall be allowed. Since Articles 7 applies, S. 9(1)(vii), S. 44D,
S. 115A would not apply.

levitra

Nirav Shah

Execution of a contract for transportation and installation work for mineral oil exploration platforms—Whether receipts for services outside India, taxable in India u/s 44BB. Presumptive income can be taxed only if it is otherwise taxable under Income-tax

New Page 1Part C : Tribunal & AAR
International Tax Decisions

11 DCIT v. J Ray McDermott Eastern
Hemisphere Ltd.
(2010) TII 41 ITAT (Mum.-INTL)
S. 44BB

Execution of a contract for transportation and
installation work for mineral oil exploration platforms—Whether receipts for
services outside India, taxable in India u/s 44BB. Presumptive income can be
taxed only if it is otherwise taxable under Income-tax Act.

Facts :

The taxpayer was a company incorporated in, and tax
resident of, Mauritius (‘MCo’). MCo was engaged in the business of designing,
fabrication, construction and installation of platforms, docks, pipelines,
jackets and other similar services which are used in the exploration and
production of mineral oil. MCo undertook and executed a contract for
transportation and installation work for certain well platforms to be used in
mineral oil exploration. While furnishing its tax return, MCo did not offer for
tax receipts pertaining to activities carried on outside India.

S. 44BB provides for presumptive taxation @10% of
the gross receipts in respect of the services that are used in prospecting,
extraction or production of mineral oil. The AO concluded that u/s.44BB, income
is computed on presumptive basis, w.r.t. all receipts and therefore the
distinction between activities carried on in India and those carried on outside
India is not relevant. He accordingly applied presumptive rate to entire gross
receipts of the contract for determining taxable income.

The CIT(A), accepted contentions of the taxpayer.

Before the Tribunal, MCo contended that the income
pertaining to installation and transportation activities carried on outside
India is not taxable under the Income-tax Act. Alternatively, the income
pertaining to such activities or work carried on outside India cannot be
attributable to a PE in India.

Held :

The Tribunal referred to the following decisions
wherein it was held that before computing income on presumptive basis, it should
be ensured that such income falls within the scope of charging provisions :

Saipem SPA v. DCIT,
(2004) 88 ITD 213 (Delhi)

McDermott ETPM Inc v.
DCIT, (2005) 92 ITD 385 (Mum.)

The Tribunal held
that only the income which is reasonably attributable to operations carried on
in India is taxable in India. Therefore, income computed on presumptive basis
can be taxed in India only if such income is otherwise chargeable to tax under
general provisions of the Income-tax Act.

levitra

Nirav Shah

Mauritius company executing 3 contracts in India. Whether the duration of each contract should be considered separately or should be aggregated —DTAA applied test of PE to each construction site separately—The 3 contracts were not inextricably interconnec

New Page 1Part C : Tribunal & AAR
International Tax Decisions

10 ADIT v. Valentine Maritime Mauritius Ltd. (2010)
TIOL 195 (ITAT-Mum.)
Article 5(2)(i), India-Mauritius DTAA
A.Y. : 2001-02. Dated : 5-4-2010

Mauritius company executing 3 contracts in India.
Whether the duration of each contract should be considered separately or should
be aggregated —DTAA applied test of PE to each construction site separately—The
3 contracts were not inextricably interconnected and interdependent—Hence, the
duration of 3 sites cannot be aggregated—Since none of the contracts exceeded
the threshold period, there was no PE.

Facts :

The taxpayer was a company incorporated in
Mauritius (‘MCo’). The Mauritius tax authority had issued tax residency
certificate to MCo, which qualified MCo to access India-Mauritius DTAA (‘the
DTAA’). MCo was engaged in the business of marine and general engineering and
construction. During the relevant assessment year, the taxpayer executed the
following three different contracts in India :

Contract	Activity	Duration
1.	Replacement of main deck with temporary deck	100 days
2.	Charter of barge for accommodation	137 days
3.	Charter of barge for power project together with technical personnel	225 days

In respect of contract 2, the taxpayer had applied
for lower withholding of tax order u/s.197. The AO considered the hire charges
as income u/s.44B. Accordingly, the taxpayer accepted the liability @7.5% on
gross basis.

Subsequently, the taxpayer contended that in terms
of Article 5(2)(i) of the DTAA, a building site or a construction or assembly
project or supervisory activities in connection therewith, would constitute a PE
(Construction PE), only if it continues for a period of 9 months. Since income
from the contracts was ‘business profits’ of MCo, under Article 7 of the DTAA,
such income could be taxed in India only if MCo had a PE in India. As none of
the 3 contracts continued for more than 9 months, no Construction PE of MCo was
constituted in India. Accordingly, the profits from the execution of the 3
contracts were not taxable in India.

The AO concluded that to determine existence of a
Construction PE, time spent on all contracts should be aggregated. As aggregate
time spent on the 3 contracts was more than 9 months, MCo had a PE in India and
its income from all the contracts was taxable in India.

The CIT(A), however, held that to determine the
existence of a Construction PE, the time spent on each contract should be
separately considered.

The main issue before the Tribunal was, whether MCo
had a Construction PE in India.

The Tribunal considered the relevant provisions of
the DTAA, OECD Commentary and various case laws.

Held :

As regards ‘fixed place PE’ :

To constitute a fixed place PE, there must be a
fixed place through which business of the enterprise is carried on. The business
of MCo is that of giving barge on hire and business activity is not carried on
at the barge hired out. Since the business is not carried on at a fixed place,
the barge cannot be held to be a PE of MCo.

As regards relationship between ‘fixed place PE’
and ‘Construction PE’ :

In terms of the specific treaty provision, PE,
inter alia, includes a building or construction project if such project
continues for a period of more than 9 months. Thus, the ‘duration test’ for a
Construction PE limits the general principle of permanence under the fixed place
PE rule.Hence, even if a PE is constituted under the fixed place PE rule, if the
activity is that specified in Article 5(2)(i), the PE would not be constituted
if the specified activity does not cross the prescribed time threshold.

As regards ‘duration test’ for a ‘Construction PE’
:

For the following reason, activity of each
site/project should be considered separately and all the activities in a country
are not to be aggregated :

Reference to
Construction PE is in singular and the DTAA does not specifically provide for
aggregating number of days spent on all sites/projects. Also, activities of
MCo at different locations are not so inextricably interconnected that they
should be viewed as a coherent whole.

Large number of India’s
DTAAs specifically provide for aggregation of sites/projects for computing
threshold time period under ‘duration test’.

If DTAA does not
specifically mention aggregation principle, the same cannot be inferred or
applied.

Both OECD and UN Model Commentaries provide for application of ‘duration
test’ to each site/project.

OECD Commentary recognises possible abuse of duration test by
splitting of one contract into several parts. However, the onus is on the tax
authorities to establish artificial splitting of contract.

OECD Commentary recognises that even if a building site is based on
several contracts, it should be regarded as a single unit if commercially and
geographically it forms a coherent whole.

The test of geographical coherence and commercial coherence are only
vague tests. They cannot be applied universally or conclusively due to various
ambiguities. They are also unworkable in practical situation.

The true
test is, (in addition to geographical proximity and commercial nexus,)
interconnection and interrelationship.

The Tribunal did not
find that the 3 contracts were inextricably interconnected, interdependent or a
coherent whole in conjunction with each other. Hence, it held that as the
duration of the 3 contracts executed by MCo cannot be aggregated for
determining the existence of a PE, no PE of MCo in India was constituted.

Nirav Shah

(2012) 54 SOT 44 (Hyd.) J.V.Krishna Rao vs. Dy. CIT ITA Nos.1866 & 1867 (Hyd.) of 2011 A.Y.2008-09. Dated 15-06-2012

Sections 54F – Exemption is available even if borrowed funds are used for investment.

Facts

For the relevant assessment year, the assessee’s claim for exemption u/s. 54F was denied by the Assessing Officer on the ground that the assessee’s deposit in the `Capital Gains Accounts Scheme’ included borrowed funds. The CIT(A) upheld the disallowance.

Held

The Tribunal, relying on the decisions in the following cases, allowed the exemption u/s. 54F :

a. Muneer Khan V. ITO (2010) 41 SOT 504 (Hyd.)

b. Sita Jain V. Asst. CIT (IT Appeal Nos.4754, 4755 and 5036 (Delhi) of 2010, dated 20-5-2011

c. Bombay Housing Corpn. vs. Asst. CIT (2002) 81 ITD 545 (Mum.) d. Mrs.Prema P.Shah vs. ITO (2006) 100 ITD 60 (Mum.)

The Tribunal noted as under :

The capital gains earned by the assessee can be utilised for other purposes and as long as the assessee fulfils the condition of investment of the equivalent amount in the asset qualifying for relief u/s.54F by securing the money spent out of the capital gains from other sources available to him, either by borrowing or otherwise, he is eligible for relief u/s. 54F in respect of the entire amount of capital gains realised.

In this case, even though part of those capital gains were utilised for other purposes, the assessee made deposits of the amounts equivalent to the capital gains in Capital Gains Account Scheme, by borrowing the amount equivalent to such utilised funds. Therefore, he is entitled to relief u/s. 54F as ultimately the assessee deposited the requisite amount in the Capital Gains Account Scheme within the time stipulated by the statute.

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Nirav Shah

Checklist received from CIT (TDS), Mumbai listing basic details to be submitted alongwith the application u/s. 197 for lower deduction/ Nil deduction of tax at source.

(a) Projected Profit and Loss Account for Financial Year 2013-14

(b) Annual Report for AY 2011-12, 2012-13 and 2013-14 (if not finalised, submit unaudited results)

(d) Wherever there is delay in payment of TDS as per Tax Audit Report, attach proof of payment of interest.

(e) List of parties included in the projected receipts with their TAN and expected amount.

(f) If there is fall in net profit for Financial Year 13-14 as compared to earlier three years then reasons for fall in net profit.

(g) Copies of Provisional TDS statement of FY 2010-11, 2011-12 and 2012-13.

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Nirav Shah

Clarification regarding conditions relevant to identify development centres engaged in contract R & D services with insignificant risk – Circular 3/2013 dated 26th March, 2013

Development centre in India may be treated as a contract R & D service provider with insignificant risk if the following conditions are cumulatively complied with:

(a) Foreign principal performs most of the economically significant functions involved in research or product development cycle whereas Indian development centre would largely by involved in economically insignificant functions;

(b) The principal provides funds. capital and other economically significant assets including intangibles for research or product development and Indian development centre would not use any other economically significant assets including intangibles in research or product development;

(c) Indian development centre works under direct supervision of foreign principal who not only has capability to control or supervise, but also actually controls or supervises research or product development through its strategic decisions to perform core functions as well as monitor activities on regular basis;

(d) Indian development centre does not assume or has no economically significant realised risks. If a contract shows the principal to be controlling the risk but conduct shows that Indian development centre is doing so, then the contractual terms are not the final determinant of actual activities. In the case of foreign principal being located in a country/territory widely perceived as a low or no tax jurisdiction, it will be presumed that the foreign principal is not controlling the risk. However, the Indian development centre may rebut this presumption to the satisfaction of the revenue authorities; and

(e) Indian development centre has no ownership right (legal or economic) on outcome of research which vests with foreign principal, and that it shall be evident from conduct of the parties.

Further, it has been clarified that all the above conditions should be actually proved by conduct of parties and not mere contractual terms.

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Nirav Shah

Clarification regarding selection of profit split method as most appropriate method – Circular 2/2013 dated 26th March, 2013

The circular lists the factors to be borne in mind while selecting Profit Split method as most appropriate method, while determining the arms length price for transfer pricing purpose.

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Nirav Shah

(2012) 150 TTJ 159 (Mumbai) BSEL Infrastructure Realty Ltd. vs. Asst. CIT ITA No.6559 (Mum.) of 2011 A.Y.2007-08 Dated 13-04-2012

Section 271(1)(c) of the Income-tax Act 1961 – Penalty cannot be levied when additions were made while computing the total income under normal provisions of the Income-tax Act but finally the assessee’s income was determined on the basis of book profit u/s. 115JB.

Facts

For the relevant assessment year, the Assessing Officer made disallowances/additions to the assessee’s income as per normal provisions of the Income Tax Act. Finally, however, income was determined and tax was computed u/s. 115JB. The Assessing Officer, thereafter, levied penalty on all the disallowances/additions. The CIT(A) deleted the penalty on certain additions, while confirming the same on other additions.

Held

The Tribunal, relying on the decisions in the following cases, deleted the penalty:
a. CIT vs. Nalwa Sons Investments Ltd.(2010) 235 CTR (DEL.) 209/(2010) 45 DTR (Del.) 345/(2010) 327 ITR 543 (Del.)
b. Ruchi Strips & Alloys Ltd. vs. Dy. CIT ITA Nos.6940 & 6941 (Mum.) 2008 The Tribunal noted as under:

1. If book profits are deemed to be the total income of the assessee in terms of section 115JB and is more than income under the normal provisions of the Act, then by legal fiction such a book profit will be deemed to be the total income of the assessee.

2. Therefore, if tax has been imposed and collected on the deemed income u/s. 115JB in the assessment, then the tax under the normal provisions/computation is not leviable or charged.

3. Therefore, if any addition or disallowance has been made in the normal provisions/computation of the Income Tax Act and finally assessment has not been completed or tax has not been levied on such normal computation, then such additions/disallowances cannot be a subject matter of penalty because no tax has been levied on such additions/disallowances.

4. When income tax is paid on the book profits by a legal fiction, such a legal fiction has to be taken to its logical conclusion and it cannot be held that for the purpose of penalty, normal computation would be considered even though tax has not been levied under the normal provision/ computation. Therefore, penalty u/s. 271(1)(c) cannot be imposed because there was no tax sought to be evaded.

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Nirav Shah

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

2 JDIT v. M/s. Krupp Uhde Gmbh
(2009 TIOL 78 ITAT Mum.)
Article 5(2)(i) of India-German Double Tax Avoidance Agreement (treaty)
A.Y. : 1998-99. Dated : 7-1-2009

Issue :

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

The assessee, a German company (herein GermanCo), was engaged in the business of providing technical know-how/licence, basic engineering services, and supervisory services in connection with construction or installation of specified machineries/assembly projects. The assessee rendered services to various Indian companies. A large part of the services was rendered on offshore basis. In connection with on-shore supervisory activities involving various projects, personnel of the GermanCo were present in India in aggregate for more than 6 months duration — though, presence in respect of each project was of less than 6 months. The GermanCo offered the amount for taxation as fees for technical services chargeable @ 10% on gross basis in terms of Article 12 (2) of India-Germany DTAA.

The Assessing Officer (AO) rejected the contention of the assessee and held that the GermanCo had PE in India. In view of the AO, for determining whether or not Supervisory PE emerged, duration of all the projects in a particular year had to be aggregated. In view of the AO, since the German Co had PE in India, the benefit of concessional rate of 10% provided in the treaty was not available and the amount had to be assessed under domestic law @ 30% by applying provisions of S. 115A of the Act.

On further appeal, the CIT(A) accepted GermanCo’s contention that offshore services are not chargeable to tax in India. The Department did not object to this aspect in further appeal before the Tribunal. The controversy before the Tribunal was therefore confined to taxation of onshore services.

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

(ii) since none of the project sites involved presence of more than 6 months, no PE emerged for GermanCo; (iii) in absence of PE, the fees for Supervisory activities was chargeable @ 10% in terms of Article 12 of DTAA.

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

(a) The Tribunal referred to Construction and related PE provisions of India-Germany DTAA. It also referred to similar provisions of India’s treaties with China, USA, Canada and Italy. It concluded that unlike similar treaty provisions of India with China, USA, Canada and Italy, there is nothing in the language of India-Germany treaty to indicate that different sites on which work is carried on by the assessee can be considered together in determining whether or not the Construction/Supervisory PE has emerged for the German Co.

(b) Reference was made to commentary of Klaus Vogel and the book ‘Principles of International Taxation’ to conclude that each project site duration needs to be considered separately, particularly when different contracts have no effective interconnection with each other.

(c) The Tax Department contended that overall project duration needs to be considered for determining length of supervisory project of GermanCo. The Tribunal rejected the contention of the Revenue that the date of commencement or the duration of the project should be considered for determining trigger of supervision PE for the assessee. According to the Tribunal, such reckoning would lead to absurd results since there could be instances where contracts for construction of building, supply of plant and machinery, installation, commissiong in respect of a project may be awarded to independent parties and each party may have involvement of differing duration.

(d) After considering the language of the treaty, the Tribunal held that the intervening period caused on account of factors such as seasonal shortage of material, labour difficulties, time needed for material to dry, etc cannot be excluded.

(e) One of the contentions of the taxpayer was that since income-tax is linked to a given assessment year, the threshold of construction PE needs to be considered for each year separately. The assessee claimed that Supervisory PE was not triggered if work during a given tax year involved period of less than 6 months though the overall project duration exceeded 6 months. The Tribunal rejected the contention and held that the prescribed period of 6 months has to be computed, irrespective of the tax years involved. For instance, where an activity starts in January and ends in July, total period is 6 months – though period falling in each of the two financial years is less than 6 months.

Nirav Shah

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

2 JDIT v. M/s. Krupp Uhde Gmbh
(2009 TIOL 78 ITAT Mum.)
Article 5(2)(i) of India-German Double Tax Avoidance Agreement (treaty)
A.Y. : 1998-99. Dated : 7-1-2009

Issue :

Supervisory PE threshold as prescribed in India-Germany treaty needs to be reckoned w.r.t each separate project.

In absence of emergence of PE, onshore technical services are liable to tax @ 10% of gross fee.

Facts :

As regards on-shore supervisory activities, the CIT

(A) accepted the assessee’s contention and held that : (i) threshold of 6 months provided in the treaty is required to be applied to each project separately;

Against the above finding, the Department filed further appeal to the Tribunal, primarily objecting that the CIT(A) erred in applying 6 months threshold to each project separately.

Held :

The ITAT held :

Nirav Shah

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