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Category: Direct Taxes

S. 80-IA — Deduction in respect of profit of the power-generating undertaking — Power generated by the eligible unit captively consumed — Valuation at market price — Rates charged by the State Electricity Board, including the electricity tax levied thereo

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New Page 1

Part B :
Unreported
Decisions

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

 

 


7 DCW Ltd. v. ACIT
ITAT ‘D’ Bench, Mumbai
Before A. L. Gehlot (AM) and P. Madhavi Devi (JM)
ITA No. 126/Mum./2008
A.Y. : 2003-04. Decided on : 29-1-2010

Counsel for assessee/revenue : Salil Kapoor/R. N. Jha

S. 80-IA — Deduction in respect of profit of the
power-generating undertaking — Power generated by the eligible unit captively
consumed — Valuation at market price — Rates charged by the State Electricity
Board, including the electricity tax levied thereon, adopted as a benchmark to
arrive at the market value — Whether the CIT(A) was right in excluding the
electricity tax to arrive at the market value — Held, No.

Per A. L. Gehlot :

Facts :

One of the issues before the Tribunal was with reference to
the claim for deduction u/s.80-IA in respect of income from power plant. The
assessee was using power generated by its power plant for its own consumption.
In terms of the Explanation to S. 80-IA(8) — the assessee applied the rate
charged by the State Electricity Board and arrive at the market price of the
power used for captive consumption. The rate charged by the State Electricity
Board also included electricity tax levied by the State Government. According to
the CIT(A), since the electricity tax was a statutory payment, the same cannot
form part of the market price. For the purpose he relied on the decision of the
Mumbai Tribunal in the case of West Coast Paper Mills Ltd.

Held :

According to the Tribunal the issue before the Mumbai
Tribunal in the case of West Coast Paper Mills Ltd. was different than the case
of the assessee. In the case of the former, the issue was which rate was to be
adopted out of the two rates available on record. Referring to the Explanation
to S. 80-IA(8) defining the term ‘market value’, it observed that, the market
value could be understood by the simple fact viz., if the assessee was not
producing the electricity by itself and if it was purchased from the State
Electricity Board, the amount paid would be the market price which includes the
taxes levied by the authority. Therefore, it held that there was no reason for
exclusion of tax for the purpose of calculation of market price.

Case referred to :

West Coast Paper Mills Ltd. v. ACIT, 103 ITD 19 (Bom.).

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Explanation to S. 73 — For the purpose of deciding whether the case of the assessee is covered by exceptions provided in Explanation to S. 73, speculation loss is to be excluded while computing business income and arriving at the gross total income.

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New Page 1

Part B :
Unreported
Decisions

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

 

 


6 Paramount Information Systems Pvt. Ltd. v. ITO
ITAT ‘K’ Bench, Mumbai
Before P. Madhavi Devi (JM) and B. Ramakotaiah (AM)
ITA No. 921/Mum./2008
A.Y. : 1993-94. Decided on : 24-2-2010

Counsel for assessee/revenue : Jayesh Dadia/Anil K. Mishra

 

Explanation to S. 73 — For the purpose of deciding whether
the case of the assessee is covered by exceptions provided in Explanation to S.
73, speculation loss is to be excluded while computing business income and
arriving at the gross total income.

Per P. Madhavi Devi :

Facts :

The assessee incurred speculation loss of Rs.22,728. This
speculation loss was in addition to the loss on trading in shares amounting to
Rs.6,66,971 separately shown in P & L Account. While assessing the total income
u/s.143(3) of the Act, in order to ascertain whether the Explanation to S. 73
applies, and therefore the loss of Rs.6,66,971 on trading in shares is to be
regarded as speculation loss, the Assessing Officer (AO) treated speculation
loss of Rs.22,728 as such and excluded it from computation under the head
‘Profits and Gains of Business’. In the computation filed by the assessee, there
was a carried forward speculation business loss of Rs.22,728 and unabsorbed
depreciation of Rs.36,992 which was to be carried forward. The assessee
contended that depreciation on business premises of Rs.38,881 on new office
which was not put to use needs to be excluded since the same was claimed wrongly
and is not allowable since the new office has not been put to use. The ITAT
remanded this matter (of depreciation being not allowable) along with the issue
of application of S. 73 to the AO.

In reassessment proceedings, AO reiterated the contentions in
original assessment but the CIT(A) after admitting additional evidences and
remanding the matter back to the AO gave a finding that the assessee had not put
to use the office premises and the AO was directed to withdraw the depreciation
on the new building and recompute business loss. However, the CIT(A) worked out
gross total income by treating speculation loss of Rs.22,728 as part of business
income. He rejected the assessee’s contention that for computing gross total
income, speculation loss of Rs.22,728 should not form part of business income
and therefore also for arriving at gross total income.

Aggrieved, the assessee preferred an appeal to the Tribunal.
The question for consideration being whether the speculation loss of Rs.22,728
is to be included as part of gross total income or to be excluded while
computing business income and arriving at the gross total income.

Held :

The Tribunal after referring to the judgment in the case of
IIT Invest Trust Ltd. 107 ITD 257, held that under the scheme of the Act
whenever there is a separate loss which cannot be set off in the computation
under each head, the same cannot be included in the gross total income and it
does not enter in the computation of gross total income being a loss, unless set
off against income under any other head. The Tribunal held that the speculation
loss was to be treated separately under the provisions of the Act. Explanation 2
to S. 28 makes it mandatory that where speculative transactions carried on by
the assessee are of such a nature as to constitute the business, the business
shall be deemed to be distinct and separate from any other business. The
Tribunal held that the speculation loss of Rs.22,728 constituted a separate
business and it cannot be set off from other business loss or profit including
income from other sources. Accordingly, it was held that the same be excluded
while working out gross total income. Upon excluding the speculation loss of
Rs.22,728 the gross total income became a positive figure of Rs.2,957 and
accordingly income from other sources was more than business profits and
assessee’s loss on trading in shares was not attracted by provisions of S. 73.
The assessee’s case was held to be covered by first exception in Explanation to
S. 73. The Tribunal observed that this principle is also laid down in IIT Invest
Trust Ltd. 107 ITD 257 and also in Concord Commercial Pvt. Ltd. 95 ITD 117 (SB).

The Tribunal allowed the appeal filed by the assessee.

It observed that the judgment of the Madras High Court is a
case of liability arising on account of a retrospective amendment, as in the
present case. It held that levy of interest in respect of the amount of deferred
tax deducted while arriving at the book profit in the return is invalid.

As regards the argument raised at the time of hearing that since powers of reduction/waiver are vested in the CBDT whether the Tribunal can examine the validity of the levy of interest, the Tribunal having noted that the Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961) held that if the assessee denies his liability to pay interest the appeal on that point was maintainable. Based on the ratio of the decision of the Apex Court and also having noted that there is no express or implied restriction on the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is maintainable. It further held that the fact that the administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with a valid appeal before it.

 
The appeal filed by the assessee was partly allowed.

S. 234B — Assessee is not liable to pay interest u/s.234B when by retrospective amendment made later the amount becomes taxable. The fact that administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with

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New Page 1

Part B :
Unreported
Decisions

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

 

 


5 Sun Petrochemicals Pvt. Ltd. v. ITO
ITAT ‘D’ Bench, Ahmedabad
Before R. V. Easwar (VP) and D. C. Agarwal (AM)
ITA No. 1010/Ahd./2009


A.Y. : 2006-07. Decided on : 5-6-2009 Counsel for assessee/revenue
: S. C. Jalan/ Abani Kanta Nayak

S. 234B — Assessee is not liable to pay interest u/s.234B
when by retrospective amendment made later the amount becomes taxable. The fact
that administrative relief can be obtained by the assessee cannot erode the
powers of the Tribunal while dealing with a valid appeal laid before it.

Per R. V. Easwar :

Facts :

The assessee company while computing book profit u/s.115JB of
the Act deducted the deferred tax amounting to Rs.4,94,21,478 and fringe benefit
tax of Rs.62,279. At the time when the assessee filed the return of income,
there was no specific provision in the Section to the effect that deferred tax
was not deductible while arriving at the book profit. However, by the Finance
Act, 2008 an amendment was made to the Section with retrospective effect from
1-4-2001, that is, w.e.f. A.Y. 2001-02, that the deferred tax cannot be deducted
in arriving at the book profit.

The Assessing Officer (AO) in the order passed u/s.143(3) of
the Act computed the book profits by adding back the amount of deferred tax and
fringe benefit tax to book profits computed by the assessee and gave a direction
to charge interest accordingly. Aggrieved the assessee filed an appeal to the
CIT(A) on the ground that levy of interest was illegal since the amount of
deferred tax became liable to be added to the book profit only because of the
retrospective amendment made to the Section which could not be anticipated by
the assessee.

The CIT(A) was of the view that levy of interest was
mandatory and power was vested with the CBDT to waive or reduce the same,
subject to certain conditions, one of which is that no interest can be charged
if addition or disallowance is due to a retrospective amendment in law. He
upheld the levy but held that it was open to the assessee to seek
waiver/reduction from the CCIT/DGIT.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that the following judgments support the
case of the assessee :

(1) CIT v. Revathi Equipment Limited, (298 ITR 67) (Mad.)

(2) Haryana Warehousing Corporation v. DCIT, (75 ITD 155)
(TM)

(3) Priyanka Overseas Ltd. v. DCIT, (79 ITD 353) (Del.)

(4) ACIT v. Jindal Irrigation Systems Ltd., (56 ITD 164) (Hyd.)

It observed that the judgment of the Madras High Court is a
case of liability arising on account of a retrospective amendment, as in the
present case. It held that levy of interest in respect of the amount of deferred
tax deducted while arriving at the book profit in the return is invalid.

As regards the argument raised at the time of hearing that
since powers of reduction/waiver are vested in the CBDT whether the Tribunal can
examine the validity of the levy of interest, the Tribunal having noted that the
Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961)
held that if the assessee denies his liability to pay interest the appeal on
that point was maintainable. Based on the ratio of the decision of the Apex
Court and also having noted that there is no express or implied restriction on
the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is
maintainable. It further held that the fact that the administrative relief can
be obtained by the assessee cannot erode the powers of the Tribunal while
dealing with a valid appeal before it.

The appeal filed by the assessee was partly allowed.

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Section 254 — Ex-parte order passed for non-appearance as the assessee’s representative went to attend phone call when the matter came up for hearing – Whether reasonable and sufficient ground for non-appearance — Held : Yes.

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  1. Ajanta Offset & Packaging Ltd. vs. DCIT

ITAT
Delhi Bench ‘Friday’ New Delhi

Before I. P. Bansal (J.M.) and R. C. Sharma (A.M.)

MA No.459/D/08 in ITA No.1510/Del./2007

A. Y.
2001-02. Decided on 27.03.2009


Counsel for Revenue/Assessee : V. P. Gupta and Basant Kumar/B. K. Gupta

 

Section 254 — Ex-parte order passed for non-appearance as
the assessee’s representative went to attend phone call when the matter came
up for hearing – Whether reasonable and sufficient ground for non-appearance —
Held : Yes.

Per I. P. Bansal

Facts :

Vide
miscellaneous application the assessee has sought recall of the ex-parte
order passed by the Tribunal. According to the assessee, its director was
present in the Court for taking adjournment, as the counsel of the assessee
was busy in the High Court waiting for his turn. When the case of the assessee
was to come for hearing, the director had gone out of the Courtroom to attend
to the phone call and when he came back, the case was already decided as
ex-parte.

Held :

The
Tribunal was satisfied with the explanation and held that the assessee was
prevented by reasonable and sufficient cause for non-appearance before the
Tribunal. Accordingly, as per Rule 24 of the Appellate Tribunal Rules, 1983,
the ex-parte order passed was set aside.

Note :

All the decisions
reported above are selected from the website www.itatindia.com.

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Section 36 (i)(iii) — Allowance of interest paid — Where interest-free fund was more than the alleged investment in non-business assets, whether the interest paid could be disallowed —Held : No.

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  1. Almona Investment & Marketing Pvt. Ltd. vs.
    ITO

ITAT Mumbai
Bench ‘A’ Mumbai.

Before R. S. Syal (A.M.) and Asha Vijayaraghavan (J.M.)

ITA No. 4908/Mum/2006

A. Y.
2003-2004. Decided on : 30.03.2009

Counsel for
Assessee/Revenue : Hiro Rai/Sanjeev Jain.

Section 36 (i)(iii)
— Allowance of interest paid — Where interest-free fund was more than the
alleged investment in non-business assets, whether the interest paid could be
disallowed —Held : No.

 

Per R. S. Syal

Facts :

The assessee was a non-banking finance company.
As per its accounts, the accumulated loss was of Rs.52.2 lacs. It had claimed
deduction of Rs.4.37 lacs towards interest. The AO noted that the assessee had
invested Rs.40 lacs in shares, which according to it, was not for the purpose
of the business activity of the assessee company. Therefore, the entire amount
of interest of Rs.4.37 lacs was disallowed. On appeal the CIT(A) upheld the
order of the AO.

Held :

From the accounts of the assessee the Tribunal
noted that the assessee had interest-free loan and share capital aggregating
to Rs.1.26 lacs and after adjusting the debit balance in the Profit and Loss
account, the net interest free funds available at the disposal of the assessee
was of around Rs.53 lacs. As against this, the investment in the shares was
only to the tune of Rs.40 lacs. The Tribunal referred to the decision of the
Mumbai High Court in the case of Reliance Utilities & Power Ltd. where it was
held that if there were funds, both interest-free and interest bearing, then a
presumption would be that the investment would be out of the interest-free
fund generated or available with the company, if the interest-free funds were
sufficient to meet the investments. Relying on the same, it held that since in
the case of the assessee, the interest-free funds were more than the
investment made in shares, the sustenance of disallowance of interest by the
CIT(A) was not justified.

Case referred to :

CIT vs. Reliance Utilities & Power Ltd.,
(2009) 18 DTR (Bom) 1.

Editor’s Note :

During the relevant
assessment year, dividend income was taxable.

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Section 32 — Depreciation — Income assessed applying the net profit rate of 8% to the turnover — Whether the assessee’s claim for allowance of depreciation from the income so determined tenable — Held : Yes.

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New Page 1ACIT vs. Keshav Kumar Tiwari


ITAT Delhi
Bench ‘H’ New Delhi

Before G. C. Gupta (J.M.) and K. G. Bansal (A.M.)

ITA No.1386/Del/2005

A. Y.
1999-2000. Decided on : 13.03.2009

Counsel for
Revenue/Assessee : Jagdeep Goel/O. P. Sapra

Section 32 —
Depreciation — Income assessed applying the net profit rate of 8% to the
turnover — Whether the assessee’s claim for allowance of depreciation from the
income so determined tenable — Held : Yes.

 

Per G. C. Gupta

Facts :

The assessee
failed to produce books of account and supporting vouchers before the AO. He
applied the provisions of Section 44AD and assessed the income. He rejected
the assessee’s claim to allow depreciation out of the income estimated. Before
the CIT(A) the assessee contended that since his turnover was more than Rs.40
lacs, the provisions of Section 44AD were not applicable, hence its claim for
depreciation was justifiable. The CIT(A) accepted the assessee’s contention
and allowed the appeal of the assessee.

Before the
Tribunal the Revenue accepted the fact that the turnover was above Rs.40 lacs.
However, it justified the action of the AO in applying the provisions of
Section 44AD, as according to it, the correctness of the accounts statement
filed by the assessee was not verifiable and all the conditions for
application of the said provisions were present and satisfied. For the same,
it relied on the Board Circular no. 684, dt. 10.06.1994.

Held :

The Tribunal
accepted the contention of the assessee and held that since the turnover of
the assessee was more than Rs. 40 lacs, the provisions of Section 44AD were
not applicable. It also held that the Revenue was justified in rejecting the
book result and in applying a flat rate of 8%, though the issue admittedly was
not before it. However, as regards the allowance of depreciation, it held in
favour of the assessee by relying on the decision of the Allahabad high court
in the case of Bishambhar Dayal & Co. and upheld the order of the CIT(A).

Cases referred to :

CIT vs.
Bishambhar Dayal & Co., 210 ITR 118 (All.)

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Section 41(1) — Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the assessee as on 31.3.1996 and thereafter carried forward in all subsequent balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys. 1995-96 and 1996

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New Page 1ACIT vs. Amit Anil Biswas


ITAT ‘F’ Bench, Mumbai.

Before Sunil Kumar Yadav (JM) and D. Karunakara
Rao (AM)

ITA No. 1019/Mum/2006 and ITA No. 5762/Mum/2006

A.Ys. : 1997-98 and
2003-04. Decided on : 30.3.2009.

Counsel for Revenue/Assessee : None/Arvind
Sonde

Section 41(1) —
Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the
assessee as on 31.3.1996 and thereafter carried forward in all subsequent
balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys.
1995-96 and 1996-97, could be taxed in AY 2003-04 on the ground that upon
transfer to capital account during the financial year 2002-03 it has assumed
the character of income, as it was no more payable and did not represent
liability as falsely disclosed in the accounts by the assessee — Held : No.

 

Per Sunil Kumar Yadav :

Facts :

The assessee had received professional fees for
executing off-shore project during the financial years 1994-95 and 1995-96.
The gross bills raised in relation to the work were to the tune of
Rs.2,46,95,375 and after setting off various expenses and amounts written off,
the net professional fees were to the tune of Rs.1,77,27,681. This sum was
grouped under ‘current liabilities’ as off-shore project advances in the
balance sheet as on 31.3.1996 and then carried forward to subsequent years
till 31.3.2002. During the financial year 2002-03, this amount of
Rs.1,77,27,681 was transferred by the assessee to his capital account.

The Assessing Officer (AO) added this sum on a
protective basis to the income of the assessee for the AY 1997-98, after
reopening the assessment on the ground that the assessee had earned this
income in that assessment year and also made an addition on substantive basis
in AY 2003-04 on the ground that this amount had assumed the character of
taxable income, as it was no more payable and did not represent any liability
as falsely disclosed in the accounts by the assessee. The AO invoked the
provisions of S. 41(1) of the Act. He also held that the opening balance was a
Revenue receipt which was transferred to capital account in financial year
2002-03 and therefore this amount was taxed by him on a substantive basis as
income of AY 2003-04.

The CIT(A) decided the issue in favour of the
assessee and held that the income had accrued during the financial year
relevant to A.Y.s 1995-96 and 1996-97 and only because of transfer of receipt
to the capital account in the year relevant to AY 2003-04, it cannot be held
to be taxable in AY 2003-04.

Aggrieved, the Revenue preferred an appeal to the
Tribunal.

Held :

On perusal of the documents filed, the Tribunal
noted the following facts :

The agreement for rendering particular services
was executed on 23rd Feb., 1995 between the assessee and Mazgaon Docks Ltd.
and according to the work schedule, the required work was to be completed
pre-monsoon 1995. The invoices were raised between 23rd March, 1995 to 26th
April, 1995. The work was completed before start of the monsoon. The payments
were received by the assessee between 6.4.1995 to 1.6.1995. While making
payments, the payer had deducted TDS. Accounts were finally settled within
financial year 1996-97.

Based on the above facts, the Tribunal held that
as per mercantile system of accounting the income was earned by the assessee
in AY 1996-97, though the assessee had grouped this receipt as current
liability. The Tribunal observed that any nomenclature given to a Revenue
receipt would not change its character. It observed that it is unfortunate
that this income generated by the assessee was not noticed by the Revenue and
the treatment given by the assessee to this receipt was accepted by them. In
AY 2003-04 when the assessee transferred the amount to capital account, the
Revenue realised its mistake and tried to tax this as income in AY 2003-04 or
in AY 1997-98 by reopening the assessment. The Tribunal held that since the
income was not generated in those assessment years it cannot be taxed by
applying any method of accounting. The Tribunal observed that the Revenue
should be more vigilant to keep a check and make necessary verification if
they have any doubt, but they have no power to tax the income of a different
assessment year in a year in which they notice the mischief committed by the
assessee. The Tribunal held that the law in this regard is very clear that the
Revenue can make the assessment of any undisclosed income within the
permissible limit, but they cannot tax the income of different assessment
years in a year in which they notice it.

The Tribunal confirmed the order of the CIT(A).

Case referred :


1 CIT vs.
T. V. Sundaram Iyengar & Sons Ltd., 222 ITR 344 (SC).

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India-Australia DTAA; S. 9(1)(vii) — Receipts for monitoring and supervision of project work — Not royalties — Business income, chargeable to the extent attributable to PE

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10 WorleyParsons Services Pty Ltd. (AAR)
(Unreported)

Articles 5, 7, 12 of India-Australia DTAA; S. 9(1)(vii)(b) of
the Act

A.Y. : 2004-05. Dated : 30-4-2008

 

Issue :

Characterisation of receipts for monitoring and supervision
of project work.

Facts :

The applicant was an Australian company, which was tax
resident of Australia. It was in the business of providing professional services
such as engineering, procurement and object management. It executed a contract
with an Indian company for monitoring a gas pipeline project as project
monitoring consultant. The applicant had to carry out various responsibilities
that were set out in the tender document under the section titled as
“consultant’s scope of work”.

The AAR considered the following issues :

(a) Whether the receipts under the contract were
‘royalties’ in terms of Article 12 of India-Australia DTAA ?

(b) If answer to (a) is in negative, whether such receipts
were to be taxed as business profits taxable in India in terms of Article VII
of India-Australia DTAA and if so, to what extent ?

The applicant had submitted that most of the services
relating to the work assigned to it were performed in India; its employees were
present in India for 165 days during the relevant year; nearly 90 to 95% of the
work related to the contract was performed in India; and hence, it should be
deemed to have have construction supervisory PE in India within the meaning of
Article 5(2)(k) of India-Australia DTAA. The applicant also contended that the
payments received by it under the contract were not in the nature of royalty
under Article 12 of India-Australia DTAA, but were attributable to its PE and
taxable as business profits in terms of Article 7 of India-Australia DTAA — a
contention not disputed by the Department.

The AAR then referred to the definition of ‘royalties’ in
Article 12(3) of India-Australia DTAA. In particular, AAR referred to clause (g)
of Article 12(3), in terms of which payment made as consideration for “the
rendering of any services (including those of technical or other personnel),
which make available technical knowledge, experience, skill, know-how or
processes or consist of the development and transfer of a technical plan or
design” ‘royalties’. The AAR observed that monitoring and supervision of project
work with a view to ensure its timely completion within the approved cost does
not amount to ‘making available’ technical knowledge, experience, etc. which can
be subsequently used by the Indian company on its own. Hence, by rendering the
services the applicant had not ‘made available’ any technical knowledge,
experience, skill or know-how to the Indian company.

The Department had contended that the contractual receipts
were in the nature of fees for technical services in terms of S. 9(1)(vii)(b) of
the Act. The AAR rejected this contention on the ground that the receipts cannot
be taxed under the Act in derogation of DTAA provisions and since the income
could be brought within the purview of Article VII, which deals with business
profits, only that provision was relevant. The AAR noted that in its reply, the
Department had admitted the applicability of Article 7(1) of India-Australia
DTAA. Further, no Article other than Article 12 dealt with ‘fees for technical
services’. Hence, the receipts of the applicant were business profits and since,
admittedly, the applicant carried on its business through a PE, profits
attributable to that PE were taxable in India in terms of Article 7.

The AAR then referred to Article 5(2)(k) and agreed with the
applicant’s contention that it constituted a PE in India in terms of Article
5(2)(k), since the activities were carried on in India for more than six months
during financial year 2003-04.

Held :

(i) The applicant’s receipts under the contract were not
‘royalties’ in terms of Article 12(3)(g) of India-Australia DTAA, since
monitoring and supervision project work does not amount to making available
technical knowledge, experience, etc.

(ii) The applicant had construction supervisory PE in India
in terms of Article 5(2)(k) of India-Australia DTAA.

(iii) Since the payment is not covered by specific Article 12
dealing with royalties, it is business income to be taxed in terms of Article 7
of India-Australia DTAA, but only to the extent of the profits attributable to
the applicant’s PE in India and in accordance with the provisions of the Act.

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Section 36(1)(vii) r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit given for taking godown on rent is allowable as a business loss — Held : Yes.

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  1. ACIT vs. Foseco India Ltd.

ITAT ‘F’ Bench, Mumbai

Before R. S. Syal (AM) and V. Durga Rao (JM)

ITA No. 7307/Mum/2007 and CO No. 63/Mum/2008

A.Y. : 2003-04. Decided
on : 25.3.2009.

Counsel for Revenue/Assessee : J.
V. D. Langstich/H. P. Mahajani.

Section 36(1)(vii)
r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit
given for taking godown on rent is allowable as a business loss — Held : Yes.

Per R. S. Syal :

 

Facts :

The assessee had given a security deposit of
Rs.5,00,000 to one Mr. Agrawal for taking his godown on rent. The assessee
stated that the owner had not returned the money and accordingly claimed the
same as ‘bad debt’. This amount was written off by the assessee. The Assessing
Officer (AO) held that since the provisions of S. 36(2) were not fulfilled the
claim for bad debt could not be allowed. No relief was allowed in the first
appeal. On an appeal to the Tribunal,

Held :

Sub-Section (2) of Section 36 provides that no
deduction for bad debt shall be allowed unless such debt or part thereof has
been taken into account in computing the income of the assessee of the
previous year in which the amount of such debt or part thereof is written off
or of an earlier previous year, or represents money lent in the ordinary
course of business of banking or money lending which is carried on by the
assessee.

The Tribunal noted that this amount was not taken
into account in computing the income of the assessee of an earlier or current
year.

Satisfaction of the provisions of S. 36(2) is a
pre-condition for claiming deduction u/s. 36(1)(vii). Since the assessee had
not satisfied the provisions of S. 36(2), it was not entitled to claim
deduction u/s 36(1)(vii).

However, the Tribunal noted that the amount was
given as security for acquiring godown for carrying on the business. The
Tribunal noted that the Apex Court has in the case of Mysore Sugar Co. held
that loss due to irrecoverable advance/security given for the purpose of trade
is allowable. The Tribunal also noted that the Bombay High Court had in the
case of IBM World Trade Corporation held that the money advanced by the
assessee to the landlord for the purposes of and in connection with the
acquisition of the premises on lease was not recoverable, such loss of advance
was a business loss.

The Tribunal found the facts of the present case
to be on all fours with the facts of the case before the Bombay High Court. It
accordingly allowed this ground of the cross-objection.

Cases referred :



1 CIT vs. Mysore Sugar Co. Ltd., 46 ITR
649 (SC)

2 IBM World Trade Corporation Ltd. vs. CIT,
186 ITR 412 (Bom).

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Section 199 – Assessee entitled to TDS credit based on the evidences even if the same is not shown in Form 26AS

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Section 199 – Assessee entitled to TDS credit based on the evidences even if the same is not shown in Form 26AS

Facts:

In the original return filed the assessee claimed TDS of Rs. 165.21 crore. In the revised return, the assessee made further claim of TDS of Rs. 1.43 crore. Thereafter, during the course of the assessment proceedings, it claimed further sum of TDS of Rs. 3.57 crore by its letter dated 28-12-2010. The AO, however, gave credit of TDS only to the extent of Rs. 11.9 crore, the amount as appearing in Form 26AS. On appeal, the CIT(A) directed the AO to give credit of TDS as per original challans available and/ or the details available in the computer system of the department.

The assessee had also claimed petitioned that it is entitled to interest on excess amount of TDS and in case the interest is not granted by due date, it was entitled to interest on delayed payment of interest.

Held:

The tribunal referred to the Bombay high court decision in the case of Yashpal Sawhney vs. ACIT (293 ITR 539) where it was held that even if the deductor had not issued a TDS certificate, the claim of the assessee has to be considered on the basis of the evidence produced for deduction of tax at source. Further, the tribunal noted that the Delhi High Court has also in Court On Its Own Motion vs. CIT 352 ITR 273 directed the department to ensure that credit is given to the assessee even where the deductor had failed to upload the correct details in Form 26AS, on the basis of evidence produced before the department. Therefore, the tribunal allowed the appeal of the assessee on this point and held that the department is required to give credit for TDS once valid TDS certificate had been produced or even where the deductor had not issued TDS certificates on the basis of evidence produced by assessee regarding deduction of tax at source and on the basis of indemnity bond.

As regards the claim for interest on delayed payment of interest, the tribunal relying on the decision of the Supreme court in the case of Sandvik Asia Ltd. vs. CIT (280 ITR 643) held in favour of the assessee.

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Reassessment: Limitation: Exclusion from limitation: S/s. 147, 148, 149 and 150: A.Ys. 1999-00 to 2002-03: Reassessment pursuant to order of appellate authority in case of third party: Condition precedent for exclusion of limitation: Assessee must be given opportunity to be heard: Order of Tribunal in case of third party holding that interest income belonged to assessee: Notice for reassessment beyond six years to assessee without giving opportunity to be heard: Notice barred by time:

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Rural Electrification Corporation Ltd. vs. CIT; 355 ITR 345 (Del):

The assessee advanced loans to a co-operative society which created a special corpus fund. The society earned interest on the special fund but did not disclose it in its return of income on the ground that the money actually belonged to the assessee and that any income earned thereon was on behalf of the assessee. The Tribunal agreed with the submissions of the society and held that the interest was not taxable in the hands of the society but ought to be taxed in the hands of the assessee. On the basis of the said observations of the Tribunal the Assessing Officer issued notices u/s. 148 of the Income-tax Act, 1961 on 23-03-2011 for reopening the assessment for the A.Ys. 1999-00 to 2002-03.

The Delhi High Court allowed the writ petition filed by the assessee, set aside the notices issued u/s. 148 and held as under:

“i) Before a notice u/s. 148 can be issued beyond the time limit prescribed u/s. 149, the ingredients of Explanation 3 to section 153 have to be satisfied. Those ingredients require that there must be a finding that income which is excluded from the total income of one person is income of another person. The second ingredient is that before such a finding is recorded, such other person should be given an opportunity of being heard.

ii) When the Tribunal held in favour of the society concluding that the interest was not taxable in its hands and that the interest ought to have been taxed in the hands of the assessee, an opportunity of hearing ought to have been given to the assessee. No opportunity of hearing was given to the assessee prior to the passing of the order by the Tribunal in the case of the society.

iii) As such, one essential ingredient of Explanation 3 was missing and, therefore, the deeming clause would not get triggered. Thus, section 150 would not apply and, therefore, the bar of limitation prescribed by section 149 was not lifted. In such a situation, the normal provisions of limitation prescribed u/s. 149 would apply.

iv) Those provisions restrict the time period for reopening to a maximum of six years from the end of the relevant assessment year. The notices u/s. 148 having been issued beyond the period of six years were time barred.”

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Notification no- 52/2012 [S.O.2805(E)] dated 29th November 2012, Income tax (Fifteenth Amendment) Rules, 2012 – Amendment in Rules 11U and 11UA

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Rule 11UA is amended to interalia provide that the Discounted free cash flow method is recognised as one of the methods for valuation for the purpose of issue of shares The Capital Gains Account (First Amendment) Scheme, 2012 – Notification no. 44/2012 dated 25-10-2012
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Cash credits : Section 68: A. Y. 2004-05: Assessee sold shares and claimed to have earned capital gains: Assessee produced purchase bills of shares, letter of transfer, sale bills, accounts with brokers, purchase and sale chart and copy of quotations from stock exchange showing rate of shares at relevant time and letters from brokers confirming sale of shares: Payment of sale price was made through bank channel and not in cash: Sale transactions of shares could not be disbelieved only for reaso<

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CIT vs. Sudeep Goenka; 29 Taxman.com 402 (All)

In the A. Y. 2004-05, the assessee had showed long term capital gains on sale of shares. The Assessing Officer found that the assessee had purchased the shares for a price of Rs. 1,37,750/- in April 2002 and had sold the shares in May and November 2003 for a price of Rs. 42,34,350/-. The Assessing Officer found that the shares were sold for a price more than 30 times of the purchase price. He therefore held that the transactions are bogus. Therefore, he treated the sale price of the shares as the income from undisclosed sources u/s. 68 of the Income Tax Act, 1961. The Commissioner (Appeals) deleted the addition as the assessee had filed purchase bills of shares, letters of transfer, sale bills, accounts of brokers, purchase and sale chart, copy of quotations of Stock Exchange showing the rate of shares at relevant times and letters from broker confirming sale. On an independent inquiry, ICICI Bank informed that payment of sale price of shares was made through bank draft. Thus, documentary evidence proved that the transactions were actual and not fictitious accommodation entries. On appeal, the Tribunal upheld the order of Commissioner (Appeals).

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

“i) The Commissioner (Appeals) after considering entire evidence of record, found that purchase and sale transactions were proved. He further found that payment of the sale price was made to the assessee through bank channel and not in cash and as such, the transactions are actual transactions and not a fictitious accommodation entries.

 ii) The sale transactions cannot be disbelieved only for the reason that the assessee could not give the identity of the purchasers.”

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Income – In determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt – Amounts collected from customers towards disputed Sales Tax liability were not kept in a separate bank account and hence formed part of business turnover and thus constituted income.

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Sundaram Finance Ltd. v. ACIT [2012] 349 ITR 356 (SC)

The assessee, a non-banking financial company, was engaged in the business of the hire purchase financing, equipment leasing and allied activities.

The assessee had filed its return of income for the assessment year 1998-99 for a total income of Rs.50,38,16,950.

The assessee had been collecting certain sums as “contingent deposit” from the leasing/hire purchase customers with a view to protect themselves from sales tax liability. These amounts were collected on ad hoc basis.The assessee did not offer such sums to tax as income on the ground that such sums were collected as contingent deposits.

The case of the assessee before the Supreme Court was that the said collection was in anticipation of sales tax liability, which was disputed. According to the assessee, in order to safeguard itself against, inter alia, the said sales tax liabilities, the assessee received Rs.36,47,585 as contingent deposits from its customers which were “refundable”, if the assessee was to succeed in its challenge to the levy of the said sales tax. According to the assessee, the sum of Rs.36,47,585 was, therefore, an imprest with a liability to refund, that the said sum had the character of “deposits” and hence, were not taxable in the year of receipt, but would be taxable only in the year in which the liability to refund the sales tax ceased [in case the assessee failed in the pending sales tax appeals).

The Supreme Court observed that it is well settled that in determining whether a receipt is liable to be taxed, the taxing authorities cannot ignore the legal character of the transaction which is the source of the receipt. The taxing authorities are bound to determine the true legal character of the transaction. In the present case, the assessee had received Rs.36,47,585 in the assessment year 1998-99. As per the statement made by learned counsel for the assessee in court, the said sum of Rs.36,47,585 was not kept in a separate interest bearing bank account but it formed part of the business turnover. In view of the said statement, the Supreme Court was of the view that there was no reason to interfere with the impugned judgment of the High Court. Applying the substance over form test, the Supreme Court was satisfied that in the present case the said sum of Rs.36,47,585 constituted income. The said amount was collected from the customers. The said amount was collected towards sales tax liability. The said amount formed part of the turnover.

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S/s. 43B & 145A – Service tax on unrealised service charges cannot be added back to the income

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3. (2013) 82 DTR 303 (Mum)
Pharma Search vs. ACIT
A.Y.: 2007-08 Dated: 2.5.2012

S/s. 43B & 145A – Service tax on unrealised service charges cannot be added back to the income


Facts:

The assessee was engaged in the business of rendering consultation in pharmaceuticals, chemicals and drugs. In the P & L A/c, the assessee has shown fees for rendering consultancy services net of service tax. The service charges of Rs. 32 lakh was not realised and outstanding at the year end. The Assessing Officer was of the view that the service tax should have been shown as receipts in the P & L A/c on the principle laid down by the Honourable Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. vs. CIT [87 ITR 542] and also as per the provisions of section 145A. The Assessing Officer made an addition of Rs. 3,91,680/- on account of service tax on the ground that the assessee ought to have made payment of the service-tax in order to claim deduction as per provisions of section 43B.

Held:

As per the service tax law, service tax is payable as and when the payments/fees for underlying service provided are realised. As the assessee has not received the sum till the end of the financial year, question of paying the same did not arise at all. If for any reason the payment for services rendered is not realised, there was no liability as to payment of service tax. Thus, the service tax law stands on a different footing as compared to other laws like Central excise or VAT.

The application of section 145A is restricted to purchase and sale of goods only, and does not extend to service contracts. Therefore, the action of the Assessing Officer in invoking provisions of section 145A and adding service-tax to gross receipts is incorrect in as much as against the very basic principles of section 145A.

The rigours of section 43B might be applicable to the case of sales-tax or excise duty, but the same could not be said to be the position in case of service tax because of two reasons. Firstly, the assessee is never allowed deduction on account of service tax which is collected on behalf of the Government and is paid to the Government account. Therefore, a service provider is merely acting as an agent of the Government. Secondly, section 43B(a) uses the expression “any sum payable”. If there is no liability to make the payment to the credit of the Central Government because of nonreceipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of section 43B(a).

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Clinical trial test reports did not ‘make available’ technical knowledge, experience, know-how, etc. — Consideration is not fee for included services under India-Canada DTAA

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New Page 1

Part C — International Tax Decisions

 



6 Anapharm Inc, In re


(2008) 305 ITR 394 (AAR)

S. 9(1)(vii) of IT Act; Articles 5, 7, 12 of India-Canada
DTAA

Dated : 11-9-2008

Issue :

Issuance of clinical trial test reports to clients did not
‘make available’ technical knowledge, experience, know-how, etc. and
consideration thereof is not fee for included services under India-Canada DTAA.

Facts :

The applicant, a Canadian company, was a contract research
organisation which assisted pharmaceutical companies globally by providing
clinical and bio-analytical services for development of new drugs or generic
equipments of drugs already being marketed.

The applicant had entered into agreement with two Indian
pharma companies for undertaking clinical and bio-analytical studies. The issue
before the AAR was whether the fee received by the applicant from the Indian
pharma companies is subject to tax in India in accordance with the provisions of
the Income-tax Act, 1961 (‘IT Act’) and DTAA between India and Canada.

For the purpose of undertaking clinical trials, the applicant
had devised product-specific methods/protocols which were in conformity with
international regulations and requirements of the drug authorities of the
various countries. Such methods/protocols belonged to the applicant and were not
shared with the clients. The applicant merely gave final reports/conclusions of
the trials to its clients. The applicant contended that the services rendered to
the Indian pharma companies did not result in transfer of any technical
experience, know-how or technical plan or technical design to the payers and
hence, did not satisfy the test of ‘make available’ under ‘Article 12 – Fees for
included services’ (‘FIS’) of the DTAA.

Held :

The AAR accepted the contention and held :

(i) There was some difference between S. 9 of the IT Act
and Article 12 of DTAA. Mere provision of technical services, in absence of
their being ‘made available’, was not enough to attract Article 12(4)(b).

(ii) To ascertain the meaning of the expression ‘makes
available’ as embodied in the treaty, the AAR referred to the similar
provision of India-USA DTAA and the annexed protocol. The AAR observed that
consideration paid can be regarded as ‘FIS’ only if the twin test of rendering
services and making technical knowledge available were satisfied. Reliance for
this was placed on the Bombay High Court decision in the case of Diamond
Services International Ltd. v. UOI, (2008) 169 Taxman 201.

(iii) Though the services rendered were sophisticated in
nature, the applicant did not reveal to Indian pharma companies the process of
how it conducted clinical trials and related tests. A broad description or
indication of the type of test carried out before issuance of reports did not
enable Indian pharma companies to derive requisite knowledge to conduct the
tests or to develop the technique on their own.

(iv) Clinical procedure, analytical methods, etc., which
were proprietary items of the applicant, were not transferred, assigned or
handed over to Indian pharma companies. Mere handing over of reports of tested
samples and test compounds cannot be equated with making technology, know-how,
etc., available to the pharma companies.


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Capital gain: Rate of tax: Section 112: A. Y. 2010-11: Non-residents are eligible for the benefit of 10% tax rate on long term capital gains under proviso to section 112(1): AAR should avoid giving conflicting rulings:

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Cairn UK Holdings Ltd. vs. DIT (Del); W. P. (Civil) No. 6752/2012 dated 07-10-2013:

The petitioner, a non-resident company, had transferred certain equity shares of a company CIL in the relevant year resulting in a long-term capital gain of INR532,84,251 after applying the benefit under the first proviso to section 48 of the Income-tax Act, 1961. The petitioner made an application to AAR for an advance ruling on the following question.

“Whether on the stated facts and in law, the tax payable on long term capital gains arisen to petitioner assessee on sale of equity shares of CIL will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act?”

AAR accepted the plea and contention of the Revenue and held that the proviso to section 112(1) was not applicable and therefore, the petitioner cannot avail the lower rate of tax at 10% on capital gains. The reason and ratio applied was that for the proviso to section 112(1) to apply, second proviso to section 48 should be also applicable and as second proviso to section 48 was excluded and was not applicable to the petitioner, benefit of lower rate of tax at 10% was not available.

The petitioner assessee filed a writ petition before the Delhi High Court and challenged the order of the AAR. The petitioner submitted that they are covered by the proviso to section 112(1) as they are not taking benefit of indexation under the second proviso to section 48. The assets sold by them were shares listed on the Bombay Stock Exchange and National Stock Exchange. This satisfies the statutory requirement of assets to be listed securities. The proviso nowhere stipulates that if an assessee takes benefit of first proviso to section 48, the proviso to section 112(1) is not applicable. Neither does the language postulates that the assessee must be entitled to benefit of the second proviso to section 48 and only when the said proviso is applicable but not applied, that an assessee can get benefit under proviso to section 112(1) of the Act. It was further submitted that the view of the petitioner was accepted by the AAR on 01-10-2007 in Timken France SAS, In Re, reported in (2007) 294 ITR 513 (AAR), and was repeatedly followed in the subsequent decisions and even in one decision after the present impugned decision.

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

i) It is not possible to decipher the exact legislative purpose behind the proviso to section 112(1) in a categorical and unambiguous manner. However, if one squarely focuses on the words used in the proviso and interpret them without extracting or subtracting any phrase or word, a non-resident assessee is entitled to benefit of the said provision.

ii) The proviso to section 112(1) does not state that an assessee, who avails benefits of the first proviso to section 48, is not entitled to lower rate of tax at 10%. The said benefit cannot be denied because the second proviso to section 48 is not applicable. In case the legislature wanted to deny the said benefit where the assessee had taken the benefit of the first proviso to section48, it was easy and this would have been specifically stipulated. The fact that by this interpretation, a non-resident becomes entitled to double deductions by way of computation of gains in foreign currency under the first proviso to section 48 and the benefit of lower rate of tax under the proviso to section 112(1) is no reason to interpret the proviso differently.

iii) Further, as the AAR had taken a view in Timken France SAS which was followed in several cases over several years, it ought not to have taken a opposite view and brought about uncertainty in understanding the effect of the proviso to section 112(1). There should be consistency and uniformity in interpretation of provisos as uncertainties can disable and harm governance of tax laws. The AAR should follow its earlier view, unless there are strong grounds and reasons to take a contrary view.”

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Basic design services provided by US entity which includes preparation of plan, concept design, schematic design, design development and other related consultancy services during construction phase are part of architectural services provided by the US ent

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

8 HMS Real Estate
(2010) TIOL 17 ARA-IT
Article 12 of the India-US DTAA,
S. 115A & S. 195 of the Income-tax Act
Dated : 18-3-2010

Basic design services provided by US entity which includes
preparation of plan, concept design, schematic design, design development and
other related consultancy services during construction phase are part of
architectural services provided by the US entity. Payment received for such
services are fees for included services as it involved development and transfer
of technical plan and design. The agreement needs to be read having regard to
the predominant features of the contract and by taking into account crux and
substance of the contract.

Remittance made to the US entity for making payment to
consultants for the services rendered by such consultants directly to the
taxpayer represents reimbursement of actual expenses and does not represent
income chargeable to tax.

Facts :

The US entity entered into agreement with the Indian company
for providing architectural design services in connection with development and
management of commercial real estate project of ICO. In terms of the agreement,
the US entity was obliged to develop master plan, prepare concept design,
schematic designs, etc. Additionally, it was also obliged to :

(i) understand the specifications from ICO and get the
designs approved by ICO;

(ii) assist ICO in bidding and contractor selection
process;

(iii) observe construction progress;

(iv) provide alternative proposals for cost reduction; and

(v) co-operate with the local director in getting the
requisite approvals or modify the designs to conform with the regulations,
etc.

The agreement was for a fixed fee. The fee was payable on the
basis of the milestones achieved. The US entity was also entitled to
reimbursement of fees paid by it to the consultants who assisted the US entity
in rendering services if such consultants were appointed with the consent of ICO.

For rendering services, personnel of the US entity were
present in India for a period of 50 days. There was no dispute that the presence
of the US entity did not result in emergence of service PE in India.

ICO as a payer contended that substantial portion of the
consideration was for transfer and sale of designs on an outright basis. By
relying on the specific provision of the agreement, it was contended by ICO that
all the rights in designs, including right to use the designs for the other
projects vested in ICO. Hence, the contract was for sale of design which was
concluded outside India and hence not taxable, either under the IT Act or in
terms of DTAA.

AAR held :

  • The AAR rejected contention of the ICO that the agreement
    merely involved transfer of right, title and interest in the drawings, models
    and work product and that the transaction can be regarded as one of sale of
    designs. The AAR concluded that the contract was for rendering of services
    having regard to the following :

  1. The agreement needs to
    be read as a whole. The true scope and dominant object of the contract needs
    to be ascertained having regard to the predominant features of the contract
    and by taking holistic view of the matter.


  2. The US entity developed
    the designs after in depth interview with ICO and participated as an expert
    service provider at every stage from the conceptualisation till the stage of
    completion. This supported that the contract was a service contract.


  3. The role of the
    applicant did not end upon transfer of plans, drawings and designs.

  4. The substance
    and crux of the contract was rendering of services and the sale of designs
    was incidental. To contend that the essence of the contract was the sale of
    designs, models and that the services were to distort and stultify true
    nature and dominant purpose of the contract.



  • The consideration
    was for development and transfer of a technical plan and designs, which is
    specifically covered as fees for included services. Article 12(4)(b) covers
    transfer of technical plan or design which arises as a sequel to and as an
    integral part of the service contract.

  • The decision of
    the Calcutta High Court in CIT v. Davy Ashmore, (190 ITR 626) is
    distinguishable as that case involved transfer of designs which were already
    available on an outright basis and did not appear to be a case of tailor-made
    designs and drawings.


  • The remittance
    made to the US entity for reimbursements towards the fees of the consultants
    who assisted the US entity in rendering architectural services and who were
    appointed with the consent of ICO represented remittance towards reimbursement
    of actual expenses. Accordingly, it was not income chargeable to tax.

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Mutual concern — Income of the association of flat owners is not taxable on the principle of mutuality, despite the fact that most of the flats are let out and tenants are paying the contribution — Interest earned from bank on surplus funds deposited in t

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New Page 1Part B : UNREPORTED DECISIONS

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


9 Wellington Estate Condominium v. ITO
ITAT ‘I’ Bench, Delhi
Before R. P. Tolani (JM) and A. K. Garodia (AM)
ITA No. 2846/Del./2007


A.Y. : 2003-04. Decided on : 16-10-2009

Counsel for assessee/revenue : Ved Jain & V. Mohan/Anusha
Khurana

Mutual concern — Income of the association of flat owners is
not taxable on the principle of mutuality, despite the fact that most of the
flats are let out and tenants are paying the contribution — Interest earned from
bank on surplus funds deposited in the bank is also not taxable on the principle
of mutuality.

Per A. K. Garodia :

Facts :

The assessee was an AOP formed by Residents’ Welfare
Association of the residents of Wellington Estate, DLF City, Phase V, Gurgaon
which consisted of 555 flats, out of which 505 flats were sold out by DLF
Universal Ltd. (Developer) and 51 unsold flats remained in possession of the
developer. The association was registered with The Registrar of Societies,
Haryana on 1-10-2002 and hence this was the first year of operation of the
assessee.

The association claimed itself to be a mutual concern and
claimed that its income is not taxable. The AO rejected the claim of the
assessee and assessed the total income at Rs.25,95,060 as against returned
income of Rs.14,180.

The CIT(A) rejected the claim of the assessee on the ground
that (i) most of the flats were rented out to tenants who were paying various
charges to the association and tenants are not the members of the association;
(ii) the assessee is receiving money on account of various charges from
non-members as per rules; (iii) profits on account of excess charges were
refundable to the members which indicates the profit making purpose of the AOP
and distribution of profits amongst members; and (iv) there is no identity
between the contributors and participators which is essential element of mutual
concern.

The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that clause 18(b) of the bye-laws of the
assessee regarding winding up or dissolution of the society provide that any
surplus remaining after satisfaction of its debts and liabilities shall not be
paid to or distributed among the members of the society at the time of
dissolution, but shall be given or transferred to some other institution having
objects similar to the objects of the society to be determined by the members of
the society at the time of dissolution. It also noted that clause 2 and 4 of the
bye-laws provided that the assessee could invest or deposit money and could let
out suitable portion of the common areas to outsiders for commercial purposes
and to accumulate the common profit for building up reserve fund.

The Tribunal observed that the Delhi Bench of Tribunal has in
the case of Standing Conference of Public Enterprise (SCOPE) v. ITO in ITA No.
5051/Del./2007, dated 31-3-2008 dealt with the situation where as per bye-laws
the surplus was not required to be distributed amongst the members on
dissolution of the society and the Revenue had denied mutuality on this ground.
Clause (xvi) of the bye-laws of SCOPE was identical to clause 18(b) of the
bye-laws of the assessee. The Tribunal after considering the decision of Apex
Court in the case of Bankipur Club (226 ITR 97) (SC) rejected the argument of
the Revenue. Further, in the case of SCOPE, interest income was earned from
surplus funds and rental income was received from non-members also. Therefore,
letting out of suitable portion of common area to outsiders for commercial
purposes and accumulation of common profit for building up reserve fund could
not be a reason for denying mutuality. As regards interest income the Tribunal
has in the case of SCOPE held that this issue is covered in favour of the
assessee by the judgment of the Delhi High Court in the case of All India
Oriental Banking Commerce of Welfare Society (184 CTR 274) (Del.).

As regards the allegation of the CIT(A) that when flats are
rented out, maintenance charges are received by the assessee from non-members,
the Tribunal held that liability of payment of maintenance and other charges is
of the member i.e., the owner and even if the same is paid to the society by the
tenant of the members, it cannot be said that the society is receiving it from
non-members because in case of default the assessee can collect the same from
members only and not from tenants. The Tribunal observed that as per clause 4(b)
of the bye-laws all the owners are obliged to pay monthly assessment imposed by
the association to meet all expenses relating to Wellington Estate Condominium,
which may include an insurance premium for a policy to recover repair and
reconstruction work in certain cases. The Tribunal held that payments made by
tenants of the members are to be considered as received from members since the
liability to pay the amount is of the member and the tenant is making the
payment to the assessee for and on behalf of the member. The Tribunal held the
assessee to be a mutual concern and allowed the appeal filed by the assessee.

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Capital gains: Exemption u/s. 54F: A. Y. 2008-09: Exemption in case of investment in residential house: For claiming deduction u/s. 54F, new residential house need not be purchased by assessee exclusively in his own name: Purchase of new house in name of wife: Exemption could not be denied

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CIT vs. Kamal Wahal; 30 Taxman.com 34 (Del)

The assessee sold his joint property which gave rise to proportionate long term capital gains. He invested the sale proceeds in a residential house in the name of his wife and claimed deduction u/s. 54F. The Assessing Officer denied the claim for deduction holding that for deduction u/s. 54F, investment in residential house should be in the assessee’s name. The Commissioner (Appeals) allowed the assessee’s claim. The Tribunal confirmed the order of the Commissioner (Appeals), holding that section 54F, being a beneficial provision enacted for encouraging investment in residential houses, should be liberally interpreted.

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

“i) In CIT vs. Ravinder Kumar Arora [2012] 342 ITR 38 /[2011] 203 Taxman 289/ 15 taxmann.com 307 (Delhi), it was held that where the entire purchase consideration was paid only by the assessee and not a single penny was contributed by any other person, preferring a purposive construction against a literal construction, more so when even applying the literal construction, there is nothing in section 54F to show that the house should be purchased in the name of the assessee only.

ii) Section 54F in terms does not require that the new residential property shall be purchased in the name of the assessee; it merely says that the assessee should have purchased/constructed ‘a residential house’.

iii) Therefore, the predominant judicial view for the purposes of section 54F is that the new residential house need not be purchased by the assessee in his own name nor is it necessary that it should be purchased exclusively in his name. It is moreover to be noted that the assessee in the present case has not purchased the new house in the name of a stranger or somebody who is unconnected with him. He has purchased it only in the name of his wife.

iv) The substantial question of law is answered in favour of the assessee and against the revenue.”

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Appeal to CIT(A): S/s. 245C and 251: Appeal can be made only by assessee: Assessee cannot withdraw appeal: Order of CIT(A) allowing assessee to withdraw appeal is not valid

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M. Loganathan vs. ITO; 350 ITR 373 (Mad)

While the assessee’s appeals were pending before the CIT(A), the assessee moved the Settlement Commission for settlement of the cases. Thereafter, the assessee withdraw the appeals and the CIT(A) allowed the assessee to do so for the A. Ys. 1992-93,1993-94 and 1996-97. The Settlement Commission passed an order that by reason of the withdrawal of the appeals after the date of filing of the application, and that there was no appeal pending before the authorities, the application itself was not maintainable for the A. Ys. 1992-93,1993-94 and 1996-97. It proceeded with the settlement of the case for the A. Y. 1997-98 alone. The assessee preferred appeals before the Tribunal against the orders of the CIT(A) allowing the assessee to withdraw the appeals. The Tribunal dismissed the assessee’s appeals.

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

“i) Section 251 of the Income Tax Act, 1961, provides that the powers of the Commissioner (Appeals) extend not only to the subject matter of the appeal against the assessment, but, in a given case, it is open to him to even enhance the assessment. Thus, apart from confirming an assessment or granting relief to the assessee or cancelling the assessment, he has the power of an Assessing Officer to enhance the assessment which is under appeal before him. He has the jurisdiction to examine all matters covered by the assessment order and correct the assessment in respect of all such matters even to the prejudice of the assessee.

ii) An assessee having once filed an appeal cannot withdraw it. After filing an appeal, the tax payer could not, at his option or at his discretion, withdraw an appeal to the prejudice of the Revenue.

 iii) The Tribunal was not justified in its reasoning that the order passed by the first appellate authority allowing the withdrawal of appeal was justifiable on the facts as the Revenue had not objected to the same.

 iv) We have no hesitation in setting aside the order of the Tribunal and restoring the matter back to the file of the Commissioner of Income Tax (Appeals) for considering the assessment on the merits and pass orders thereon in accordance with law, after giving the assessee an opportunity. In the result, the appeals stand allowed.”

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Method of Accounting – Valuation of Stock – Manufacturer of sugar – the closing stock of incentive sugar to be valued at levy price which was less than the cost

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CIT vs. Bannari Amman Sugars Ltd. [2012] 349 ITR 708 (SC)

The assessee is a company engaged in the business of manufacture and sale of sugar. The assessee filed its return of income for the assessment year 1997-98. In its return of income, confined to its Karnataka unit, the assessee valued the closing stock of incentive sugar (free sugar) at levy price. The Assessing Officer valued the closing stock of incentive sugar at cost, whereas the assessee claimed that the said stock should be valued at levy price which has less than the cost.

The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee. The Tribunal and the High Court dismissed the appeal of the Revenue. According to the Supreme Court, to answer that above controversy, the following facts are required to be noted. By virtue of the provisions of the Essential Commodities Act, 1955, and the Sugar Control Order read with the Notification issued thereunder, a sugar manufacturer (assessee in this case) was required to sell 40 % of his sugar production at the notified levy price to the public distribution system. At the relevant time, on an average, the levy price came to be less than the manufacturers’ cost of production. Consequently, it was found by the manufacturers that under the above price control regime, the establishment of new sugar manufacturing units was not viable. It was found that even the existing sugar manufacturing units had become unviable and uneconomical. Therefore, an incentive scheme was framed, as suggested by the Sampat Committee, the committee that was set up to examine the economic viability by establishing new sugar factories and expanding the existing factories. The Sampat Committee gave its report. Under the report, an incentive scheme was evolved. The said incentive scheme provided an inducement for persons to set up new sugar factories or to expand the existing one. Under the scheme, 40 % of the total sugar production was permitted to be sold at market price (“incentive sugar” for short). However, the scheme provided that excess amount realised by the manufacturer over the levy price by sale of incentive sugar would be utilised only for repayment of loans taken from the banks/financial institutions for establishing the new units. In regard to utilisation of excess realisation towards repayment of loans, the sugar mills were directed to file certificate of chartered accountant subject to which further release orders would be issued by the Directorate of Sugar. This scheme came up for consideration before the Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) in which it was held that the excess amount realised by the manufacturer over the levy price by sale of incentive sugar should be treated as a capital receipt which was not taxable under the Income-Tax Act, 1961. In that case, one of the arguments advanced on behalf of the Department, as in this case, was that the excess amount realised by the manufacturer over the levy price should be treated as a revenue receipt.

The Supreme Court observed that there are different methods of valuation of closing stock. The popular system is cost or market, whichever is lower. However, adjustments may have to be made in the principle having regard to the special character of assets, the nature of the business, the appropriate allowances permitted, etc., to arrive at taxable profits. The Supreme Court noted that in the present case, it was the case of the assessee, that following the judgment in Ponni Sugar and Chemicals Ltd. (supra), the closing stock of incentive sugar should be allowed to be valued at levy price, which on facts is found to be less than the cost of manufacture of sugar (cost price). According to the Supreme Court, there was merit in this contention. In Ponni Sugars and Chemicals Ltd. (supra), on examination of the scheme, it was held that, the excess realisation was a capital receipt, not liable to be taxed and in view of the said judgment, the Supreme Court held that the assessee was right in valuing the closing stock at levy price.

The Supreme Court dismissed the civil appeals filed by the Department.

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Business Expenditure – Scheduled Commercial Banks – Bad and doubtful debts – Entitled to deduction of irrecoverable debts written off u/s. 36(1)(vii) in addition to the deduction of provision for bad and doubtful debts u/s. 36(1)(viia).

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Dy. CIT (Assessment) & Anr. vs. Karnataka Bank Ltd. [2012] 349 ITR 705 (SC)

The Assessing Officer noticed that for the relevant assessment year, while the assessee had claimed a deduction of a sum of Rs.3,36,78,394 under clause (vii) of s/s. (1) of section 36, the assessee had also claimed a deduction in terms of section 36(1)(viia) to the extent of Rs.5,75,00,000 and therefore, being of the opinion that the deduction claimed u/s. 36(1)(vii) being less than the amount claimed u/s. 36(1)(viia) disallowed the entire amount of deduction claimed u/s. 36(1)(vii). It was this dispute which had been carried to the first appellate authority by the assessee which was not successful but in the appeal before the Appellate Tribunal, the Tribunal purporting to follow its decision in the case of the very assessee for the assessment years 1990-91 to 1993-94 and having allowed the assessee’s appeals for the relevant assessment year thought it fit to allow the appeal for the year relevant to the subject-matter of the appeal.

The High Court while examining the very questions in the case of the very assessee and for the years 1993-94 and 1994-95, had answered similar questions in favour of the assessee and against the Revenue and dismissed the appeals as per the judgment dated 19th March, 2008 [Deputy CIT vs. Karnataka Bank Ltd. [2009] 316 ITR 345 (Karn)].

The Supreme Court held that the issue involved in these cases was covered in favour of the assessee, vide its judgment in the case of Catholic Syrian Bank Ltd. v. CIT reported in (2012) 343 ITR 270.

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Small Scale Industrial Undertaking – Reference not to be made to the Eleventh Schedule for the purposes of consideration of the claim u/s. 80-IB. Manufacture – Process of blending of Extra Neutral Alcohol (ENA) to make various products like whiskey, brandy, rum, etc. is a manufacturing activity.

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CIT vs. Vinbros And Co. [2012] 349 ITR 697 (SC)

The assessee, a small–scale industry recognised as such by the Director of Industries, Pondichery, set up a second unit to manufacture and bottle Indian manufactured foreign liquor (IMFL) at Pondichery. In its return for the assessment years 2003-04 and 2004-05, it claimed deduction u/s. 80-IB of the Act in respect of the profits and gains derived from the second unit. The Assessing Officer, however, rejected the plea on the issue that the process carried on by the assessee for its product, did not constitute ‘manufacture’ within the meaning of section 80-IB. He further held that setting up of the second unit was only an expansion or reconstruction of the existing unit. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).

In the proceedings before the Commissioner of Income Tax (Appeals), the assessee explained the process of blending as follows:

The assessee purchased rectified spirit or extra neutral alcohol (ENA) made of grain or grapes or malt to which it added demineralised water in required proportion to reduce the strength of the ENA to make various products like whiskey, brandy, rum, etc. Apart from that, other ingredients like caramel, sugar, etc., were also added as per the blending formulations. This blend was subject to filtration for required time, blend inspection and then bottling in empty bottles. The finished products were packed and sold.

The Commissioner of Income Tax (Appeals) considered the fact that the alcoholic strength of ENA which was around 95 % v/v was reduced to a maximum of 42.8 % v/v. Consequently, the Commis- sioner of Income Tax (Appeals) held that there was no manufacture or production of any new article or thing as the alcohol which was the input remained as alcohol. In the circumstances, he rejected plea for deduction u/s. 80-IB of the Act.

On further appeal before the Tribunal, the assessee reiterated the contentions as regards the process undertaken to result in a totally different marketable commodity. Considering the entirety of the issue and applying the decision of the Allahabad High Court in the case of CIT vs. Rampur Distilleries and Chemicals Co. Ltd., reported in [2005] 277 ITR 416 (All), the Tribunal held that the rectified spirit is not mentioned in the first item of the Eleventh Schedule ‘beer, wine and other alcoholic spirits’ and, consequently, the assessee as a small-scale industrial unit was entitled to deduction u/s. 80-IB of the Act.

On appeal by the Revenue before the High Court, it was held that a perusal of section 80-IB showed that a deduction under the said provision is available only where the assessee engages in the manufacture or production of an article or thing, not being an article or thing as specified in the list in the Eleventh Schedule or operates one or more cold storage plant or plants in any part of India. The proviso to sub-clause (iii) of s/s. (2) of section 80-IB of the Act showed that the condition with reference to the list in the Eleventh Schedule did not apply at all to the case of an industry being a small scale undertaking or an undertaking referred to in s/s. (4). The industry run by the assessee was admittedly a small-scale industry, reference to the Eleventh Schedule for the purpose of consideration of the claim u/s. 80-IB of the Act did not arise.

As regards the second issue as to whether the assessee had engaged itself in the manufacturing or producing of an article or thing by the act of blending, the High Court observed that (i) the assessee did not just add water and sell the final product, apart from water, the assessee had to add several items to make it fit for human consumption; (ii) the assessee was not a manufacturer of ENA which was the basic raw material required for making various IMFL products; (iii) it was mixing water and other ingredients with ENA formulations; (iv) the alcoholic strength of the ENA which was around 95 % v/v was reduced to a maximum of 42/8 % v/v in respect of the final marketable commodity, namely, whiskey, brandy, rum, vodka and gin; (v) the blending was subject to filtration for required time and thereafter only, the final product was sold. On the face of the facts stated above, the High Court opined that it was not possible for it to accept that the blending should not be treated as a manufacturing activity u/s. 80-IB of the Act.

The Supreme Court dismissed the civil appeal filed by the Revenue holding that there was no infirmity in the impugned judgment of the high Court.

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Crystal Phosphates Ltd. vs. ACIT ITAT Delhi `B’ Bench Before B. R. Mital (JM) and B. R. Jain (AM) ITA No. 3630/Del/2009 A.Y.: 2006-07. Decided on: November, 2012. Counsel for assessee / revenue: Gautam Jain / Deepak Sehgal

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Notice issued u/s. 143(2) to initiate proceedings for scrutiny assessment needs to be quashed if the said notice does not comply with the instructions issued by CBDT for selection of cases for scrutiny. Instructions so issued have to be followed in letter and spirit.

Facts:
The assessee filed its return of income for AY 2006-07 on 28-11-2006 declaring the income of Rs. 3,97,17,920. The case was selected for scrutiny by notice dated 17-10-2007 issued u/s. 143(2) of the Act. The CBDT had issued instructions for selection of cases for corporate assessee in FY 2007-08. Clause 2(v)(b) of the Scrutiny Guidelines provided as under:

“2. The following categories of cases shall be compulsorily scrutinised:-

……
……

(vb) All cases in which an appeal is pending before the CIT(Appeals) against an addition/ disallowance of Rs. 5 lakh or above, or the Department has filed an appeal before the ITAT against the order of the CIT(Appeals) deleting such an addition/disallowance and an identical issue is arising in the current year. However, as in (i) above, the quantum ceiling may not be taken into account if a substantial question of law is involved.”

The assessee vide its letter dated 07-12-2007 challenged the assumption of jurisdiction on the ground that no addition/disallowance exceeding Rs. 5 lakh was made in an earlier year, which was pending in appeal before the CIT(A). Further, there was no identical issue arising in the current year as arising in the earlier year.

The Additional CIT and CIT vide orders dated 25- 11-2008 and 15-12-2008 respectively rejected the contention of the assessee and held that the notice issued was in accoundance with law on the ground that the aggregate of additions made in AY 2004-05 was Rs. 5,60,207 which was pending before CIT(A).

The CIT(A) held that the notice was valid.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted from the assessment order for AY 2004-05 that no disallowance was made in excess of Rs. 5 lakh though aggregate of all the disallowances was Rs. 5,60,207. It noted that the AO had considered the aggregate of disallowances. It held that there has to be an addition or disallowance of Rs. 5 lakh or more against which an appeal is pending and such an issue must also arise in the year under consideration. All these facts must be available to the AO on the date of assumption of jurisdiction. The burden is on the assessing authority to establish that jurisdiction was assumed in accordance with the instructions of the Board. It held that the notice issued u/s. 143(2) was not in terms of the instructions issued by the CBDT.

As regards the question whether jurisdiction assumed, by issue of a notice which is not in terms of instructions issued by CBDT, was illegal so as to hold the entire proceedings as invalid. Relying on the decision of the Andhra Pradesh High Court in the case of CIT vs. Smt. Nayana P. Dedhia 270 ITR 572 (AP) it held that once the CBDT has issued instructions for assumption of jurisdiction for selection of cases of corporate assessees for scrutiny and assessment thereof, the same have to be followed in letter and spirit by the AO. The Tribunal quashed the notice issued u/s. 143(2) of the Act since assumption of jurisdiction was not in terms of the instructions of CBDT. The notice and the assessment framed  were held to be without valid jurisdiction and were quashed.

The appeal filed by the assessee was allowed.

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Venkata Ramana Umareddy vs. DCIT ITAT Hyderabad `A’ Bench Before Chandra Poojari (AM) and Saktijit Dey (JM) ITA No. 552/Hyd/2012 A.Y.: 2008-09. Decided on: 18th January, 2013. Counsel for assessee / revenue: Roopanjali / M H Naik

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Exemption u/s. 54 and 54F of the Act can be claimed with reference to investment in the same residential house purchased/constructed, if the other conditions are satisfied.

Facts:
During the previous year 2007-08 the assessee transferred land to a developer under a development agreement and also sold a house along with land. Long term capital gain earned on transfer of land to developer was Rs. 49,19,513 and long term capital gain on sale of house was Rs. 44,05,302. The assessee claimed the entire amount of long term capital gain of Rs. 93,24,815 to be exempt u/s. 54 and 54 F of the Act towards investment in a new house purchased for a total price of Rs. 1,43,26,665.

The Assessing Officer (AO) held that to claim exemption under both sections i.e. 54 and 54F the assessee has to invest in two houses. He disallowed exemption claimed u/s. 54 and added back an amount of Rs. 44,05,302 to the total income of the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held: Section 54 and 54F apply under different situations. While section 54 applies to long term capital gain arising out of transfer of long term capital asset being a residential house, section 54F applies to long term capital gain arising out of transfer of any long term capital asset other than a residential house. However, the condition for availing exemption under both sections is purchase or construction of a new residential house within the stipulated period. There is also no specific bar either u/s. 54 and 54F or any other provision of the Act prohibiting allowance of exemption under both the sections in case the conditions of provisions are fulfilled.

Since the assessee had invested long term capital gain arising from sale of two distinct and separate assets in purchase of a new residential house, the Tribunal held that he was entitled to claim exemption both u/s. 54 and 54F of the Act. The Tribunal directed the AO to delete the addition of Rs. 44,05,302.

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

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2013-TIOL-641-ITAT-MUM Cinetek Telefilms P. Ltd. v ACIT ITA No. 7834 and 7645/Mum/2010 Assessment Year: 2007-08. Date of Order: 07.06.2013

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Section 40(a)(ia) – Provisions of section 40(a)(ia) do not apply to a case where there is shortfall in deduction of tax at source.

Facts:
The assessee engaged in the business of making T.V. serials and ad films had incurred certain expenses on which tax was deductible at source but the assessee had either not deducted tax at source at all or had deducted it at a lower rate. The Assessing Officer disallowed a sum of Rs. 71,30,633 u/s. 40(a)(ia) – Rs. 62,33,890 for short deduction of tax at source and Rs. 8,96,743 for non-deduction of tax at source. 

Aggrieved, the assessee preferred an appeal to CIT(A) who on the basis of some additional evidence deleted certain disallowances and confirmed the remaining.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that in some cases the assessee treated the payment to be covered u/s. 194C of the Act whereas the authorities below treated the same payment as being covered u/s. 194I of the Act thereby resulting in short deduction of tax at source. It held that the issue whether disallowance u/s. 40(a)(ia) can be made where assessee short deducted tax at source instead of non-deduction of tax at source is no mere res integra in view of several orders passed by various benches of the Tribunal across the country holding that no disallowance u/s. 40(a)(ia) can be made in such cases. The Tribunal made a mention of U.E. Trade Corporation (India) Ltd. vs. DCIT (2012) 54 SOT 596 (Del) and DCIT v. Tekriwwal (2011) 48 SOT 515 (Kol). It also noted that the Calcutta High Court has vide its judgment dated 03-12-2012 in the case of CIT vs. S. K. Tekriwal (2012 – TIOL- 1057-HC-KOL) upheld the view of the Kolkata Bench of the Tribunal. Following these, it held that CIT(A) was not justified in sustaining disallowance u/s. 40(a)(ia) in respect of expenses on which short deduction of tax at source was made.

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2013-TIOL-632-ITAT-AHM Shrinivas R Desai v ACIT ITA No. 1245 and 2432/Ahd/2010 Assessment Year: 2007-08. Date of Order: 28.06.2013

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S/s. 45, 54(1) & 54 (2), 55(1)(b) – Cost of purchase includes any capital expenditure incurred by the assessee on the property purchased to make it livable though the expenditure may be incurred after having purchased the property. The use of words `purchased or constructed’ does not mean that the property can either be purchased or constructed and not a combination of both the actions.

Facts:
During the relevant previous year the assessee earned long term capital gain of Rs. 98,76,855 on sale of his residential house in August 2006. In May 2006, he purchased a house property for Rs. 71,94,570 and claimed to have spent Rs. 15,48,773 on its improvement. The expenditure on improvement was claimed to have been incurred till 31st March, 2007. The assessee claimed exemption u/s. 54 with reference to both the cost of purchase as well as expenditure incurred on improvement. It was submitted that “cost of improvement, as per section 55(1)(b), in any other case, means all the expenditure of capital nature incurred in making any addition or alteration to the capital asset by the assessee, after it becomes his property.”

The Assessing Officer (AO) was of the view that cost of improvement can be allowed as a deduction only to the transferor and not to the transferee. He denied claim of exemption u/s. 54 with reference to cost of improvement incurred by the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal took note of the fact that the authorities below had laid a lot of emphasis on the fact that as the original house property was sold by the assessee in August 2006, it cannot be believed that the new house property was not habitable till September 2007. These observations were on the assumption that on sale of the old house, the assessee had to shift to new house. However, this overlooked the uncontroverted fact that the assessee had, during the period from August 2006 to June 2007 lived in a residential unit taken on lease. Lease rent was paid by cheque, copies of lease agreement and broker’s note were also filed and no errors were found in these evidences. Thus, the contention of the Department that the new house was habitable at the time of purchase was held to be unsustainable.

The Tribunal held that the cost of purchases does include any capital expenditure incurred by the assessee on such property to make it livable. As long as the costs are of such a nature as would be included in the cost of construction in the normal course, even if the assessee has bought a readymade unit and incurred those costs after so purchasing the readymade unit – as per his taste and requirements, the costs so incurred will form an integral part of the qualifying amount of investment in the house property. The use of words `purchased or constructed’ does not mean that the property can either be purchased or constructed and not a combination of both the actions. A property may have been purchased as a readymade unit but that does not restrict the buyer from incurring any bonafide construction expenditure on improvisation or supplementary work.

The Tribunal held that as long as the assessee has incurred bonafide construction expenditure, even after purchasing the unit, the additional expenses so incurred would be eligible for qualifying investment u/s. 54. The Tribunal restored the matter to the file of the AO for carrying out factual verifications, which was not done, in the light of its observations and to pass a speaking order after giving an opportunity of hearing to the assessee.

The appeal filed by the assessee was allowed for statistical purposes.

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Asst. CIT vs. B.V.Raju, Hyderabad(SB) (2012) 135 ITD 1 Date of the order : 13.02.2011 A.Y.2000-01

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Section 28(va)(a) – When compensation is paid for not carrying out any activity in relation to any business which transferor is not carrying on same would be chargeable u/s. 28(va)(a) and not as capital gain.

Facts:
Assessee was a chairman of two companies namely, Rassi Cements Ltd. (RCL) and Sri Vishnu Cements Ltd. (SVCL) without any controlling interest. Both these companies were subjected to a hostile takeover by India Cements Ltd. (ICL).

ICL Paid Rs. 11 crore to assessee under Non-compete agreement (NCA). After takeover assessee lost his business and died. Mean while, Search was conducted in the premises of one of the close relatives of the assessee where copy of NCA disclosing Rs. 11 crore paid to assessee were found. Based on the same, AO issued notice u/s. 148 and added the above sum to income of the assessee under the head Capital gain.

Aggrieved by the order of Ld. A.O. legal heirs of the assessee preferred appeal before CIT(A). CIT(A) held that sum was in the nature of capital receipt and not chargeable to tax before insertion of provisions of section 28(va)(a) w.e.f. 01-04-2003. Revenue preferred appeal against order of CIT(A).

Held:
Taxability of amount paid at the time of takeover of business depends upon:

1- Purpose of payment.

2- What was the right transferred by assessee.

When Right to manufacture, produce or process any article or thing is transferred, there is an extinguishment/relinquishment of rights, the same being capital asset chargeable to capital gain tax.

In the instant the case assessee had no controlling interest in the transferred companies. He was associated with business in his managerial capacities and was not carrying on any business directly. Hence, the amount received by assessee under NCA is for “not carrying out any activity in relation to business” which is taxable u/s. 28(va)(a).

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Industrial Undertaking – Deduction u/s. 80 HH and 80-I – Neither section 80HH nor section 80-I (as it stood in assessment year 1992-93) statutorily obliged an assessee to maintain its accounts unit-wise and it was open to maintain accounts in a consolidated form from which unit-wise profits could be worked out for computing deduction u/s. 80HH/80I.

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[2012] 349 ITR 352 (SC) CIT v. Bongaigaon Refinery and Petrochemical Ltd.

Bongaigaon Refinery and Petrochemical Ltd. (for short “BRPL”) (before it merged in IOC) was a public sector undertaking engaged in refinery, petrochemical and polyester staple fibre business. Three different and separate units were set up by BRPL in the financial year 1979-80, 1985-86 and 1988-89 respectively. The three units were engaged in the production of separate and distinct types of products. They were three different industrial undertakings. BRPL was entitled to claim deduction u/s. 80HH and 80-I of the Income-tax Act, 1961, during the relevant assessment year 1992-93. BRPL could not claim such deduction till the assessment year 1992-93, as its net taxable income for earlier assessment years was nil. It was only in the assessment year 1992-93 when the gross total became positive that BRPL claimed relief for its petrochemical unit u/s. 80HH and u/s. 80-I of the Income-tax Act 1961. However, BRPL could not claim such deduction for its refinery unit, as the period for which such relief could be claimed had expired. Further, it could not claim such deduction for its polyester staple fibre unit as it had negative income during the accounting year ending 31st March, 1992, corresponding to the assessment year 1992-93.

The Assessing Officer while framing assessment had allowed the claim of deduction u/s. 80HH and 80I. Subsequently, the Commissioner of Income Tax revised the assessment u/s. 263 on the grounds that the assessee had not maintained its accounts unit-wise for claiming deduction u/s. 80HH and 80-I. On an appeal, the Tribunal held that there was no s tatutory requirement u/s. 80HH(5)/80-I(7) to maintain unit-wise accounts, but to put an end to the litigation directed the assessee to submit unit-wise accounts. The assessee went in an appeal before the High Court which set aside the direction of the Tribunal. On an appeal to the Supreme Court by the Department, the Supreme Court held that though neither section 80HH nor section 80-I (as it stood) statutorily obliged assessee to maintain its accounts unit-wise and that it was open to assessee to maintain the accounts in a consolidated form, however in order to put an end to the litigation between the Tax Department and PSU, it remitted the case to the Assessing Officer, to ascertain whether the assessee had correctly calculated its net profits for the assessment year in respect of its petrochemical units for the purposes of claiming deduction u/s. 80HH and 80-I. The Supreme Court observed that in the present case, the assessee had prepared its financial statements on consolidated basis from which it had worked out unit-wise net profits. If not done, it could be done by the Auditors even today from the Consolidated Books of Accounts. Once such working is certified by the Auditors, the net profit computation (unit-wise) could be placed before the Assessing Officer, who can find out whether such profits are properly worked out and on that basis compute deduction u/s. 80HH/80-I.

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Commission to Non-resident Agents – Whether Accruing or Arising in India

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Issue for Consideration Many exporters, located in India, use the services of commission agents located abroad, for procuring orders from abroad. These agents locate customers in foreign countries, and procure orders from them on behalf of the Indian exporters . The goods are then shipped from India to such customers by the Indian exporters, and payment is received directly from such customers by the Indian exporters. The commission agents are generally paid a commission by the Indian exporters as a percentage of the orders procured by the agents, such commission generally being remitted directly from India to the overseas bank accounts of the agents.

The taxability of such commission in India had been an issue that had arisen long back, and the CBDT as far back as 1969, had issued a circular no. 23 dated 23.7.1969, clarifying that such commission was not taxable in India. Further, vide circular no. 786 dated 7.2.2000, the CBDT had again reiterated that such commission was not taxable in India u/s. 5(2) and 9, and that therefore no tax was deductible at source u/s. 195 from such commission. However, vide circular no. 7 of 2009 dated 22.10. 2009, the CBDT has withdrawn both the above referred circulars, no. 23 as well as no. 786, besides the circular no. 163 dated 29.5.1975 which dealt with an agent engaged in the activity of purchase of goods for export. The ostensible reason behind withdrawal of the said circulars was that the interpretation put on the said circulars by some of the taxpayers to claim relief in the opinion of the Board was not in accordance with the provisions of section 9, or the intention behind the issue of the circulars.

In the light of the withdrawal of the above circulars, the question has arisen as to whether such commission to foreign agents is subject to tax in India, and whether tax is accordingly deductible u/s. 195 from such commission. In case of agents who are tax residents of countries with which India has Double Taxation Avoidance Agreements, such income may not be taxable in India on account of the applicability of Article 7 of the DTAA dealing with Business Profits, as business profits are not taxable in India in the absence of a permanent establishment in India. The issue would however assume significance in the case of agents who are tax residents of countries with which India does not have DTAAs, and who would be governed by the provisions of the Income Tax Act.

While the Authority for Advance Rulings has recently taken a view that such commission is chargeable to tax in India under the provisions of the Income Tax Act, the Hyderabad bench of the tribunal has taken a contrary view of the matter.

SKF Boilers & Driers’

Case The issue came up before the Authority for Advance Rulings (AAR) in the case of SKF Boilers and Driers Pvt Ltd, in re, 343 ITR 385.

In this case, the applicant was an Indian company engaged in the manufacture and supply of rice par boiling and dryer plants as per customer requirements. It had received an order from a Pakistani company through two Pakistani agents. The plant was shipped to the Pakistani customer, and on completion of the export order, the commission became payable to the agents as per the agreed terms. A ruling was sought from the AAR as to whether such commission income of the nonresident agents could be deemed to accrue or arise in India and whether tax was required to be deducted at source u/s. 195.

On behalf of the revenue, it was pointed out that there was no DTAA with Pakistan which covered such payment, nor was there any other tax exemption available. It was also stated that circular no. arising to the agents on account of export commission fell u/s. 5(2)(b), as the income had accrued in India when the right to receive the income became vested.

On behalf of the applicant, it was argued that the agents had rendered services abroad and would be entitled to receive commission abroad for the services rendered to foreign clients of the applicant. As services were rendered outside India, and the payment was receivable by the agents abroad, no income would arise u/s. 5(2)(b) read with section 9(1).

The AAR considered the provisions of sections 5 and 9, and observed that they proceeded on the assumption that income had a situs, and the situs had to be determined according to the general principles of law. According to the AAR, the words ‘accrue’ or ‘arise’ occurring in section 5 had more or less a synonymous sense, and income was set to accrue or arise when the right to receive it came into existence. The AAR expressed the view that no doubt the agents had rendered services abroad and had solicited orders abroad, but the right to receive the commission arose in India when the order was executed by the applicant in India. According to the AAR, the fact that the agents had rendered services abroad in the form of soliciting the orders and that the commission was to be remitted to them abroad were wholly irrelevant for the purpose of determining the situs of their income.

The AAR therefore held that the income arising on account of commission payable to the two agents was deemed to accrue and arise in India and was taxable in India in view of the specific provisions of section 5(2)(b) read with section 9(1)(i), and that the provisions of section 195 would therefore apply.

Avon Organics’ case

The issue again came up recently before the Hyderabad bench of the tribunal in the case of ACIT v Avan Organics Ltd., 28 taxmann.com 170.

In this case, the assessee was engaged in the activity of manufacture and sale of chemicals and bulk drugs. It paid commission to foreign agents for services rendered by them in connection with effectuating export sales, and such payments were made by telegraphic transfer directly to the overseas bank accounts of the agents. Such payments were made without deducting tax at source. It was claimed by the assessee that the foreign agents operated in their respective countries and no part of the income arose in India, and hence no tax was required to be deducted at source on the payments made to the foreign agents.

The assessing officer rejected the assessee’s contention by observing that the non-residents were paid by way of telegraphic transfer obtained from banks in India, that the banks acted as agents of the non-residents, and therefore, the non-residents had received the payment in India. He accordingly disallowed the payment of the commission u/s. 40(a)(i). The Commissioner (Appeals) reversed the order of the assessing officer.

Before the tribunal, it was argued on behalf of the revenue that the commission payment being for services rendered by the foreign agents in connection with business activities arising in India, was taxable in the hands of the foreign agents, and therefore the assessee was required to deduct tax at source.

On behalf of the assessee, it was argued that the foreign agents did not render any part of the services in India, did not have an establishment in India and therefore, commission was not deemed to have arisen in India as per section 5(2)(a). It was further argued that the mere fact of transmission of the commission to foreign agents through telegraphic transfer did not make the banks as agents of the foreign commission agents, amounting to receipt of payment on their behalf in India.

The tribunal examined the material on record and noted that besides the fact of telegraphic transfer of the remittances being made from a bank in India, the assessing officer had no other material on record to show that the foreign agents either rendered any services in India or had any permanent establishment in India. According to the tribunal, only the fact that the remittances towards commission were telegraphically transferred to the foreign agents from banks in Hyderabad would not lead to the inference that the income to the foreign agents accrued or arose in India in terms of section 5(2)(a).

The tribunal therefore held that the assessee was justified in not deducting tax at source from the commission paid to the foreign agents.

A similar view had been taken earlier by the AAR in the case of SPAHI Projects (P) Ltd, in re 183 Taxman 92 and by the Tribunal earlier in the case of DCIT v Divi’s Laboratories Ltd 131 ITD 271 (Hyd). In the latter case, the Tribunal has expressly taken the view that the withdrawal of earlier circulars by the CBDT did not assist the Department in disallowance of such expenditure.

Observations

The controversy to an extent revolves around the question whether the withdrawal of the said circulars changed the legal position, as it was understood that the said circulars only confirmed the legal position that such commission was not taxable in India. Circular nos. 23 and 786, clarified the legal position and confirmed that even the interpretation of the CBDT was that, where the non-resident agent operated outside the country, no part of his income arose in India, and since the payment was usually remitted directly abroad, it could not be held to have been received by or on behalf of the agent in India. The CBDT confirmed that this was its interpretation of sections 5(2) and 9, and this view prevailed within the CBDT right till 22.10. 2009, when circular no. 7 of 2009 was issued for withdrawing the above circulars.

The position stated by the earlier circulars is the correct legal position, and the circulars merely clarified this position, a fact that has been confirmed by the number of tribunal and High Court decisions which, in the past, have upheld the validity of the reasoning and conclusion given in the said circular nos. 23 and 786. Therefore, the mere withdrawal of a circular which clarified the correct legal position would not change the legal position in this regard and if that is so , the stand now taken by the CBDT under the said circular 7 of 2009 has to be taken as the one that is contrary to the true legal position under the Act for taxation of such commission.

The AAR in SKF Boilers & Driers case perhaps erred holding that the place of accrual of an income is to be determined w.r.t the time of its accrual. While it is true that the point of time when commission arises is the time when the export of goods takes place, the AAR, in SKF Boilers & Driers case, erred in taking the view that even the situs of accrual of the income was the place from where the goods were exported. Under tax laws in India, it has been generally accepted that the place where the work is actually done is normally the situs of accrual of the income. For instance, in the case of salary income, the place of rendering of services is regarded as the place of accrual of income. The commission agent did not carry on any activity in India, and just the fact that the moment of accrual of income was linked to the moment of export of goods from India, did not mean that the commission income also accrued in India. The income from the export of goods was not the same as the income by way of commission. The linkage between the quantum or time of accrual between two events does not necessarily imply a linkage between the place of accrual of the two events. For instance, the value of a derivative is derived from its underlying fact, but the place of its accrual would be the place where the contract is entered into, and not the

place where the delivery of the underlying goods takes place. The AAR seems to have mistaken the linkage between the two events vis-a -vis the moment of accrual, to also imply a linkage in the place of accrual.

The AAR in the SKF Boilers & Driers case seems to have overlooked clause (a) of explanation 1 to section 9(1)(i). This clause provides that in the case of a business of which all the operations are not carried out in India, the income of the business that is deemed under this clause to have accrued or arisen in India is only such part of the income as is reasonably attributable to the operations carried out in India. This clause supports the view that the Income Tax Act treats the place where the activity is carried out as a place of accrual of income. This effectively means that if a business is only partly carried out in India, only that part of the income attributable to the business activity carried out in India would be taxable in India. This position is further reiterated by explanation 3 to section 9(1)(i) of the Act. That being the case, if no part of the business activity is carried out in India, as in the case of a foreign commission agent, then no part of the income can be taxed in India.

Further, the Supreme Court, in the case of CIT v Toshoku Ltd 125 ITR 525, considered a situation where an Indian exporter had appointed a non-resident sales agent for exports. The commission was credited in the books of the Indian exporter, and was subsequently paid. While holding that such credit did not constitute receipt of the commission in India, the Supreme Court also considered whether the commission accrued or arose in India. The Supreme Court observed as under:

“The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of s/s (1) of section 9 of the Act, which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India, shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the tax-able territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India.

In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad, does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non -resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India.”

From the above decision of the Supreme Court, it is clear that in the absence of any activity being carried out in India by a non-resident commission agent, the commission does not accrue or arise in India, and is not taxable in India.

A view similar to the view taken in the case of Avon Organics in favour of the assessee has been taken by the Hyderabad tribunal in the case of Priyadarshini Spinning Millls (P) Ltd. , 25 taxmann. com 574. The tribunal in this case took a view that no tax was deductible at source u/s. 195 on payment of such commission and that expenditure on commission could not be disallowed u/s. 40(a) (i) of the Act.

In view of the discussion here, it is appropriate to hold that the said Circular No. 7 of 2009 is without the authority of the law and shall have no application in determining the taxability of income by way of commission in the hands of a foreign commission agent rendering services outside India.

Educational Institution: Exemption: Section 10(23C)(vi): A. Y. 2008-09: Rejection of approval for exemption on the ground of defect in admission procedure: Rejection not just:

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CCIT vs. Geetanjali University Trust; 352 ITR 433 (Raj): 257 CTR 239 (Raj):

During the relevant year, i.e. A. Y. 2008-09, the admission to the college run by the assessee-trust were not on the basis of the system approved by the medical council of India and Rajasthan University. The Single Judge and the Division Bench of the High Court held that the admission was illegal. A Special Leave Petition filed by the assessee was pending before the Supreme Court. The Chief Commissioner rejected the application of the assesee for approval for exemption u/s. 10(23C)(vi) of the Income-tax Act, 1961 holding as under:

“In the institution’s case, the Hon’ble High Court has held that the admissions made for the academic year 2008-09 were illegal. The purpose of education would not be served, if the education is for students who have been illegally admitted. The purpose of education as contemplated in the section would be served only if the students have been legally admitted and not otherwise. The spending of funds on education of students who have been admitted illegally will not amount to application of income for the purpose of education. In the trust’s case, neither the condition regarding existence for the purpose of education nor the application of funds for the objects, are being fulfilled.”

However, an order granting approval was passed for the A. Y. 2010-11 and onwards.

On a writ petition challenging the order of rejection, the Single Judge of the Rajasthan High Court (352 ITR 427) set aside the order of rejection for fresh disposal and observed as under:

“The sanction was to be granted within the parameters laid down u/s. 10(23C) which are relevant and not the admission procedure undertaken by the assessee.”

On appeal by the Revenue, the Division Bench of the High Court upheld the decision of the Single Judge and held as under:

“i) U/s. 10(23C)(vi) and (via), what is required for the purpose of seeking approval is that the university or other educational institution should exist “solely for educational purposes and not for purposes of profit”. It was nowhere the case or the finding of the Chief Commissioner that on account of the defect in the admission procedure, the assessee ceases to exist solely for educational purposes or it existed for the purpose of profit. Further, it was not the case of the Revenue that the students who were admitted were not imparted education in the college in which they were admitted or the admissions granted were fake or non-existent or that the income generated by admitting the students was not used for the purpose of the assessee.

ii) The emphasis on the part of the Chief Commissioner that the purpose of education would not be served if the education is for students who have been illegally admitted and the purpose of education as contemplated in the section would be served only if the studentshave been legally admitted and not otherwise, went beyond the requirements of the section.

iii) Of course, the requirement of an educational institution to provide admission strictly in accordance with the prescribed rules, regulations and statute need to be adhered to in letter and spirit, but violation could not lead to its losing the character as an entity existing solely for the purpose of education.

iv) Therefore, there is no interference with the order of the Single Judge.”

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Capital gain: A. Y. 2007-08: Family settlement: Principle of owelty: Payment to assessee to compensate inequalities in partition of assets: Amount paid is immovable property: No capital gain arises:

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CIT vs. Ashwani Chopra; 352 ITR 620 (P&H):

In the course of the assessment for the A. Y. 2007-08, the Assessing Officer found that the assessee (Group A) had received compensation from group B at the time of partition of properties of the group of HSL and that the amount had been kept in fixed deposit receipts in accordance with the orders passed by the High Court and by the Supreme Court. The Assessing Officer considered the family settlement and found that 8.56% of Rs. 24 crore of compensation was the share of the assessee and levied long term capital gains on the amount. The Commissioner (Appeals) held that the distribution of assets including the sum of Rs. 24 crore was not complete during the relevant year as the matter was subjudice and the assessee was not allowed to use the money by the order of this court, and therefore, the sum of  Rs. 24 crore transferred to the assessee and the other members of the Group A did not accrue to the income of this group including the assessee. The Tribunal upheld this decision.

The Punjab and Haryana High Court dismissed the appeal filed by the Revenue and held as under:

“i) The payment of Rs. 24 crore to the assessee was to equalize the inequalities in partition of the assets of HSL. The amount so paid was immovable property. If such amount was to be treated as income liable to tax, the inequalities would set in as the share of the recipient would diminish to the extent of tax.

ii) Since the amount paid during the course of partition was to settle the inequalities in partition, it would be deemed to be immovable property. Such amount was not an income liable to tax.

iii) Thus, the amount of owelty, i.e. compensation deposited by group B was to equalise the partition and represented immovable property and would not attract capital gains.”

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Capital gain: Section 50C: A. Y. 2005-06: Amendment by Finance (No. 2) Act, 2009, w.e.f. 01/10/2009 is prospective: Amended provision not applicable to transactions completed prior to 01/10/2009:

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CIT vs. R. Sugantha Ravindran; 352 ITR 488 (Mad):214 Taxman 543 (Mad): 32 taxman.com274 (Mad):

In the A. Y. 2005-06, the assessee had transferred a property to a third party under an agreement for sale. Physical possession was given to the buyer but the agreement was not registered. The assessee computed the capital gain without applying the provisions of section 50C. The Assessing Officer applied section 50C and adopted the guideline value given by the stamp valuation authority as the sale consideration instead of the consideration admitted by the assessee. The Commissioner (Appeals) held that section 50C can be invoked only when the property was transferred by way of registered sale deed and assessed for stamp valuation purposes. The Tribunal held that section 50C could not be invoked as the property was not transferred by way of registered sale deed.

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

“i) The insertion of the words “or assessable” in section 50C of the Income-tax Act, 1961, w.e.f. 1st October, 2009, is neither a clarification nor an explanation to the existing provision and it is only an inclusion of new class of transactions, namely, the transfer of properties without or before registration.

ii) Before the amendment, only transfer of properties where the value was adopted or assessed by the stamp valuation authority were subjected to section 50C application. However, after introduction of the words ”or assessable” such transfers where the value is assessable by the valuation authority are also brought into the ambit of section 50C. Thus such introduction of a new set of class of transfer would certainly have prospective application only. The amendments have been made applicable w.e.f. 1st October, 2009 and will apply only in relation to transactions undertaken on or after such date.

iii) Since the transfer in the assessee’s case was admittedly made prior to the amendment, section 50C, as amended w.e.f. 1st October, 2009, was not applicable.”

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Business expenditure : Section 37(1) : A. Y. 2008-09: Software development and upgradation expenditure: Is allowable revenue expenditure:

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CIT vs. N.J. India Invest (P.) Ltd.; [2013] 32 taxmann. com 367 (Guj):

In the relevant year, the assessee claimed deduction on account of software development and upgradation expenditure. The Assessing Officer held that software development and upgradation would give the assessee an enduring benefit and such expenditure should be treated as capital expenditure. Accordingly, he disallowed the claim. The Tribunal allowed the assesee’s claim. On appeal by the Revenue , the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The assessee had entered into contract with a company, which had agreed to provide certain services. These services, thus, essentially were in the nature of maintenance and support  services providing essentially backup to the assessee, who had procured software for its purpose. These services, thus, essentially did not give any fresh or new benefit in the nature of a software to be used by the assessee in the course of the business but were more in nature of technical support and maintenance of the existing software and hardware. For example, the service provider had to provide technical support to the employees of the company and to maintain the computers and the laptop, had to supply security service for controlling the data theft and providing checks on access by unauthorised persons to the data etc.

ii) In essence, these services, therefore, were in nature of maintenance, back up and support service to existing hardware and software already installed by company for the purpose of its business. The Tribunal, therefore, rightly held that the expenditure was revenue in nature.”

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Business expenditure : Section 37(1) : A. Y. 2003-04: Landlord incurred expenditure on construction as per assessee’s requirements: Compensation paid to landlord for nonoccupation of premises, in lieu of withdrawing all claims against assessee: Was in the course of business and was allowable as revenue expenditure:

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CIT vs. UTI Bank Ltd.; [2013] 32 taxmann.com 282 (Guj):

The assessee had contracted with a landlord to take premises on lease for opening its branch, but no formal agreement was entered into. The landlord started the construction of the premises as per assessee’s requirements. However, before completion of construction, assessee came to know of the proposed construction of an overbridge over the said property which would cause hindrance to conduct its business and services. The assessee, therefore, terminated the understanding with the landlord and paid compensation to the landlord for the work done, in lieu of withdrawing all claims against the assessee. In the A. Y. 2003-04, the assessee claimed such amount paid as revenue expenditure. The Assessing Officer disallowed the claim. The Tribunal deleted the disallowance as the compensation was paid in the course of business and for the purpose of business, to protect the assessee’s interest and in lieu of the claims that could have been raised by the landlord.

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

“i) The Tribunal referred to the case of J.K. Woollen vs. CIT [1969] 72 ITR 612 (SC) in which it was held, that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the IT department.

ii) No question of law arises. Tax appeal is, therefore, dismissed.”

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Assessment giving effect to order of Tribunal: Section 254, r/w. s. 154 : A. Y. 2001-02: Tribunal restored proceeding back to AO for fresh examination of nature of share transaction: AO passed an order giving effect to order of Tribunal: Subsequently, successor AO recomputed loss and passed a fresh order: Fresh order is without jurisdiction:

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Classic Share & Stock Broking Services Ltd. vs. ACIT; [2013] 32 taxmann.com 273 (Bom.):

For the A. Y. 2001-02, the assessee filed return of income claiming loss of Rs. 16.82 crore which included a loss from share transactions of Rs. 13.63 crore. An assessment order was passed u/s. 143(3) determining a total loss of Rs. 3.13 crore after disallowing the loss from the share transactions. The Tribunal restored the assessment proceeding back to Assessing Officer for fresh examination of the nature of the share transactions in view of SEBI guidelines and to decide the matter. The Assessing Officer passed an order giving effect to the order of the Tribunal and recomputed the total loss at Rs. 16.83 crore. Subsequently, the successor in office of the Assessing Officer passed another order computing the loss at Rs. 3.19 crore.

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

“i) Once the Assessing Officer had given effect to the order of the Tribunal, his successor-in- office had no jurisdiction to pass a fresh order. The impugned order of the successor-in-office in fact reflects his awareness of the earlier order which was passed by the predecessor in order to give effect to the order of the Tribunal became the successor Assessing Officer has, in his computation, commenced with a total income as computed in the order of the predecessor Assessing Officer (viz., a loss of Rs. 16.83 crore). The successor Assessing Officer has not purported to exercise the jurisdiction u/s. 154.

ii) Once effect was given to the order of the Tribunal by the passing of an order u/s. 254 that order could have been modified or set aside only by following a procedure which is known to the Act. What the Assessing Officer has done by the impugned order is to conduct a substantive review of the earlier order of the predecessor which was clearly impermissible. Since the order of the successor Assessing Officer is clearly without jurisdiction, there was no reason or justification to relegate the Petitioner to the remedy of an appeal.

iii) Therefore, the instant petition was allowed and the assessment order passed by the successor Assessing Officer was quashed and set aside.”

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Exemption – Trust issuing a receipt on 31st March, 2002 for the cheque of donation dated 22nd April, 2002 – No Violation of provisions of section 13 since the Trust had shown the amount as donation receivable in the Balance Sheet and the donor had not availed the exemption in accounting year 2001-02 but claimed it in 2002-03 only.

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DIT vs. Raunaq Education Foundation (2013) 350 ITR 420 (SC)

During the relevant accounting year 2002-03 of the respondent-assessee had, by way of donation, received two cheques for a sum of Rs.40 lakhs each from M/s. Apollo Tyres Ltd. One of the cheques was 22nd dated April, 2002, and yet it was given in the accounting year 2001-02, i.e., before 31st March, 2002.

In the assessment proceedings for the assessment year 2002-03, the Assessing Officer came to the conclusion that with an intention to do undue favour to M/s. Apollo Tyres Ltd., the cheque dated 22nd April, 2002, given by way of donation for a sum of Rs. 40 lakh had been accepted by the respondentassessee and receipt for the said amount was also issued before 31 March, 2002, i.e., in the accounting year 2001-02. According to the Assessing Officer, many of the trustees of the assessee-trust were related to the directors of M/s. Apollo Tyres Ltd., and as to give undue advantage under the provisions of section 80G of the Act, the cheque had been accepted before 31st March, 2002, although the cheque was dated 22nd April, 2002.

In the opinion of the Assessing Officer, this was clearly in violation of the provisions of section 13(2)(d), (h) and as such exemption u/s. 11 and 12 could not be allowed to the assessee. The assessment was made in the status of an association of persons.

The appeal which was filed against the assessment order was dismissed by the Commissioner of Income-tax (Appeals).

The second appeal filed before the Income-tax Appellate Tribunal by the respondent-assessee was however allowed. The Tribunal held that there was no violation of the provisions of sections 13(2)(b) and 13(2)(h) of the Act and the assessee-trust had not acted in improper and illegal manner.

The Tribunal noted the fact that the amount of donation, i.e., Rs. 40 lakhs received by way of a cheque dated 22nd April, 2002, was treated as donation receivable and, accordingly, accounting treatment was given to the said amount. The said amount was not included in the accounting year 2001-02 as donation but was shown separately in the balance-sheet as amount receivable by way of donation. Moreover, M/s. Apollo Tyres Ltd., had also not availed of the benefit of the said amount u/s. 80G of the Act during the accounting year 2001-02 but had availed of the benefit only in the accounting year 2002-03, the period during which the cheque had been honoured and the amount of donation was paid to the assessee-trust.The High Court dismissed the appeal to the Revenue observing that the Tribunal found that it was only a post-dated cheque and it could not be said to be an amount which was made available for the use of the drawer of the cheque and, therefore, the provisions of section 13(2)(b) of the Act did not apply.

Also, no service of the assessee was available to the drawer of cheque and, therefore, the provisions of section 13(2)(d) also did not apply.

In the civil appeal filed by the revenue the Supreme Court noted certain undisputed facts. It was not in dispute that though the assessee-trust has issued receipt when it received the cheque dated 22nd April, 2002, for Rs. 40 lakh in March 2002, it was clearly stated in its record that the amount of donation was receivable in future and, accordingly, the said amount was also shown as donation receivable in the balance-sheet prepared by the assess-trust as on March 31, 2002. It was also not in dispute that M/s. Apollo Tyres Ltd., did not avail of any advantage of the said donation during the accounting year 2001-02. Upon a perusal of the assessment order of M/s. Apollo Tyres Ltd., for the assessment year 2002-03, it was clearly revealed that the cheque dated 22nd April, 2002, was not taken into account for giving benefit under section 80G of the Act as the said amount was paid in April 2002, when the cheque was honoured.

Looking into the aforestated undisputed facts, and the view expressed by the court in the case of Ogale Glass Works Ltd. [(1954) 25 ITR 529 [(SC)], the Supreme Court was of the view that no irregularity had been committed by the assesseetrust and there was no violation of the provisions of section 13(2(b) or 13(2)(h) of the Act. The fact that most of the trustees of the assessee-trust and the directors of M/s. Apollo Tyres Ltd., were related was absolutely irrelevant. The Supreme Court therefore dismissed the appeal.

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Principle of mutuality – Interest earned on surplus funds placed by the members club with members bank not covered by mutuality principle, liable to be taxed in the hands of the club.

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CIT vs. Bangalore Club. (2013) 350 ITR 509 (SC)

The Bangalore Club (“the “assessee”), an unincorporated association of persons, (AOP), in relation to the assessment years 1990-91, 1993-94, 1994- 95, 1995-96, 1996-97, 1997-98 and 1999-2000, had sought an exemption from payment of incometax on the interest earned on the fixed deposits kept with certain banks, which were corporate members of the assessee, on the basis of the doctrine of mutuality. However, tax was paid on the interest earned on fixed deposits kept with non-member banks.

The Assessing Officer rejected the assess’s claim, holding that there was a lack of identity between the contributors and the participators to the fund, and hence, treated the amount received by it as interest as taxable business income. On appeal by the assessee, the Commissioner of Income-tax (Appeal) reversed the view taken by the Assessing Officer, and held that the doctrine of mutuality clearly applied to the assessee’s case. On appeal by the Revenue, the Income-tax Appellate Tribunal affirmed the view taken by the Commissioner of Income-tax (Appeals).

The High Court reversed the decision of the Tribunal and restored the order of the Assessing Officer holding that on the facts of this case and in the light of the legal principles it was clear to us what has been done by club is nothing but what could have been done by a customer of a bank. The principle of ‘no man can trade with himself’ is not available in respect of a nationalised bank holding a fixed deposit on behalf of its customer.

On appeal to the Supreme Court by the assessee, the Supreme Court observed that the assessee was an association of persons. The concernedbanks were all corporate members of the club. The interest earned from fixed deposits kept with non-member banks was offered for taxation and the tax due was paid. Therefore, it was required to examine the case of the assessee, in relation to the interest earned on fixed deposits with the member banks, on the touchstone of the three cumulative conditions.

The Supreme Court held that: Firstly, the arrangement lacks a complete identity between the contributors and participators. Till the stage of generation of surplus funds, the setup resembled that of the mutuality; the flow of money, to and fro, was maintained within the closed circuit formed by the banks and the club, and to the extent, nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their banking business, the members banks used such deposits to advance loans to their clients. Hence, in the present case, with the funds of the mutuality, member bank engaged in commercial operations with third parting outside of the mutuality, rupturing the ‘privity of mutuality’, and consequently, violating the one to one identity between the contributors and participators. Thus, in the case before it the first condition for a claim of mutuality was not satisfied.The second condition demands that to claim an exemption from tax on the principle of mutuality, treatment of the excess funds must be in furtherance of the object of the club, which was not the case here. In the instant case, the surplus funds were not used for any specific service, infrastructure, maintenance or for any other direct benefit for the member of the club. These were taken out of mutuality when the member banks placed the same at the disposal of third parties, initiating an independent contract between the bank and the clients of the bank, a third party, not privy  to the mutuality. This contract lacked the degree of proximity between the club and its members, which may in a distant and indirect way benefit the club, nonetheless, it cannot be categorised as an activity of the club in pursuit of its objectives. The second condition postulates a direct step with direct benefits to the functioning of the club. For the sake of arguments, one may draw remote connections with the most brazen commercial activities to a club’s functioning. However, such is not the design of the second condition. Therefore, it stood violated.

The facts at hand also failed to satisfy the third condition of the mutuality principle, i.e., the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. This principle required that the funds must be returned to the contributors as well as expended solely on the contributors. In the present case, the funds do return to the club. However, before that, they are expended on non-members, i.e., the clients of the bank. Banks generate revenue by paying a lower rate of interest to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for commercial reasons, snaps the link of mutuality and thus, breached the third condition.

The Supreme Court further observed that there was nothing on record which showed that the banks made separate and special provisions for the funds that came from the club, or that they did not loan them out. Therefore, clearly, the club did not give, or get, the treatment a club gets from its members; the interaction between them clearly reflected one between a bank and its client.

According to the Supreme Court, in the present case, the interest accrued on the surplus deposited by the club like in the case of any other deposit made by an account holder with the bank.

The Supreme Court further observed that the assessee was already availing of the benefit of the doctrine of mutuality in respect of the surplus amount received as contributions or price for some of the facilities availed of by its members,before it was deposited with the bank. This surplus amount was not treated as income; since it was residue of the collections left behind with the club. A façade of a club cannot be constructed over commercial transactions to avoid liability to tax. Such setups cannot be permitted to claim double benefit of mutuality.

In the opinion of the Supreme Court, unlike the aforesaid surplus amount itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee from the banks would not fall within the ambit of the mutuality principle and would, therefore, be exigible to income-tax in the hands of the assessee-club.

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Circular on issuance of TDS Certificates in Form No. 16A downloaded from TIN Website.

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Circular No. 1 of 2012 [F.No. 276/34/2011-IT(B)], dated 9th April, 2012 — Copy available for download on www.bcasonline.org

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S. 140A(3) : Assessee offers explanation for failure to pay S.A. tax — Full tax and interest paid — Penalty not justified

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New Page 1

10 Dy. CIT v. Kamala Mills
Ltd.

ITAT ‘K’ Bench, Mumbai

Before G. E Veerabhadrappa (VP) &

Ms. Sushma Chowla (JM)

ITA No. 7775-77/Mum./2004

A.Ys. : 2000-01, 2001-02 and 2002-03.

Decided on : 31-10-2007

Counsel for revenue/assessee : Mohit Jain/

Jitendra Jain

S. 140A(3) of the Income-tax Act, 1961 — Failure to pay
self-assessment tax — Assessee deemed to be in default — assessee offers full
explanation for non-payment — Taxes fully paid together with interest — Whether
imposition of penalty justified — Held, No.

 

Per G. E Veerabhadrappa :

Facts :

The assessee had filed its return of income for A.Y. 2000-01
to 2002-03 in time, but did not make the payment of S.A. Tax. The AO asked the
assessee to explain as to why penalty should not be imposed u/s.221, read with
S. 140A(3) of the Income-tax Act. The assessee explained that it could not make
payment due to financial crunch on account of paucity of funds. The AO was not
satisfied with the explanation and imposed penalty of Rs.20 lacs for A.Y.
2000-01, Rs.50 lacs for A.Y. 2001-02 and Rs.20 lacs for A.Y. 2002-03.

 

Being
aggrieved, the assessee appealed before the CIT(A) who considered the
explanation offered by the assessee and deleted the penalty mainly on the
following grounds :

(1) Paucity
of funds at the material time when S.A. Tax was to be paid does constitute a
reasonable cause for the default of non-payment of S.A. Tax.

(2) The
assessee has paid the entire tax, together with applicable interest u/s.234B,
u/s.234C and u/s.220(2), before show-cause notice u/s.221 was served on the
assessee. This shows that the assessee had no mala fide intention to
withhold the payment of S.A. Tax.

(3)
Initiation of penalty proceedings after a long period is contrary to the
spirit of the provisions relating to bar of limitation for imposing penalties
and hence imposition of penalty was illegal.

 


The Department appealed to the ITAT.

 

Held :

The Tribunal examined the provisions of S. 220(4) and S. 221,
together with provisions of S. 140A(3) and came to a conclusion that in the
present case, the assessee has paid all the taxes, together with interest and it
cannot be held that the assessee is in default or deemed to be in default, and
as such, there is no merit in the levy of penalty u/s.221 of the Act, specially
when there is no clear provisions for imposition of penalty u/s.140A(3), after
the amendment in S. 140A(3) in the year 1987. The Tribunal therefore confirmed
the order of CIT(A) and dismissed the Revenue’s appeal.

 

Errata :

Attention of the readers is drawn to the Tribunal decision
reported at Sr. No. 26 in March 2008 issue of the Journal. The last line of the
said decision on page no. 638 should be read as “Accordingly, the assessee could
not be treated as an assessee in default.” The error is regretted.

 

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S. 263 : Assessed income higher than income determined by CIT — CIT’s order bad

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9 Bhuppindera Flour Mills Pvt.
Ltd. v. ITO

ITAT Amritsar Bench, Amritsar

Before Joginder Pall (AM) and

A. D. Jain (JM)

ITA Nos. 457 and 540/Asr./2005

A.Y. : 2000-01. Decided on : 15-2-2008

Counsel for assessee/revenue : P. N. Arora/

Tarsem Lal

S. 263 of the Income-tax Act, 1961 — Revision of
orders — Power of the Commissioner of Income-tax — Income assessed u/s.143(3)
higher than the income determined u/s.263 — Held, that the order passed u/s.263
by the CIT bad in law.

 

Per Joginder Pall :

Facts :

The assessee had filed its return of income
declaring loss of Rs.1.47 lacs. However, the assessee had not filed the accounts
hence, in the order dated 1-8-2001 passed u/s.143(1)(a), the loss returned was
disallowed by the Assessing Officer. Subsequently, the Assessing Officer
assessed the income u/s.143(3) vide his order dated 12-3-2003, determining a
long-term capital gain of Rs.46.07 lacs. On appeal the CIT(A) vide his order
dated 14-5-2003 deleted the addition made by the Assessing Officer. According to
the CIT, the order passed by the Assessing Officer u/s.143(3) was erroneous and
prejudicial to the interest of the Revenue inasmuch as the book profit u/s.115JA
of Rs.1.13 crore liable to tax was not considered by the AO. Being aggrieved,
the assessee appealed before the Tribunal.

 

Held :

According to the Tribunal in order to confer
jurisdiction on the CIT u/s.263, both the conditions viz., the order
passed by the Assessing Officer must be (i) erroneous; and (ii) prejudicial to
the interest of the Revenue, must be fulfilled. The Tribunal found that at the
time of making assessment u/s. 143(3), the income computed as per regular
provisions of the Act was higher at Rs.46.07 lacs as against income u/s.115JA of
Rs.33.93 lacs (30% of Rs.1.13 crore). Therefore, according to the Tribunal, the
provisions of S. 115JA were not attracted. Therefore, it held that the order
passed by the Assessing Officer cannot be said to be erroneous, because the same
was as per the provisions of the Act. It further held that the order passed was
also not prejudicial to the interest of the Revenue, because there was no loss
of revenue. Therefore, the assumption of jurisdiction by the CIT u/s.263 was bad
in law.

 

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Notification No. 14/2012 (F.No. 142/31/2011- TPL)/S.O. 626 (E), dated March 28, 2012 — Income-tax (third amendment) Rules, 2012 — Amendment in Rule 12 and substitution of Forms ITR 1, ITR 2, ITR 3 ITR 4S, ITR 4 and ITR V.

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The gist of the amendment is as under:

(1) An individual or HUF must file the return of income electronically for the A.Y. 2012-13 and in subsequent years if his/its total income exceeds Rs.10 lakh.

(2) A resident individual or a resident HUF must file the return of income electronically for the A.Y. 2012-13 and subsequent years, if he/it has: (a) assets (including financial interest in any entity) located outside India; or (b) signing authority in any account located outside India.

(3) The prescribed ITR Form SAHAJ — ITR 1 and SUGAM — ITR 4S cannot be used by a resident

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Section 40(a)(ia) — Disallowance of expenditure for failure to pay TDS within the time stipulated u/s.200(1) — Payment/expenditure was incurred throughout the year — Whether payment of TDS made after the end of the accounting year but before the due date for filing of return was allowable as deduction — Held, Yes.

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Piyush C. Mehta v. ACIT
ITAT ‘C’ Bench, Mumbai Before N. V. Vasudevan (JM) &
N. K. Billaiya (AM)
ITA No. 1321/Mum./2009
A.Y.: 2005-06. Decided on: 11-4-2012
Counsel for assessee/revenue:
Prakash K. Jotwani/Pitambar Das

Section 40(a)(ia) — Disallowance of expenditure for failure to pay TDS within the time stipulated u/s.200(1)

— Payment/expenditure was incurred throughout the year — Whether payment of TDS made after the end of the accounting year but before the due date for filing of return was allowable as deduction — Held, Yes.


Facts:

The assessee is an individual engaged in the business of building repairs, and construction works contracts. In the course of assessment proceedings the AO noticed that the assessee had not paid the TDS deducted on the labour charges/ advances paid to various contractors within the time stipulated u/s.200(1). The assesses had made payments/advances to the contractors throughout the year, but had deposited the TDS only on 31-5-2005. According to the AO, the assessee was required to deduct TDS on the dates the payments were made. Since that was not done, he held that in terms of provisions of section 40(a)(ia) the payments of Rs.1.41 crore were not allowable. On appeal, the CIT(A) confirmed the order of the AO.

Held:

According to the Tribunal, the amendment to section 40(a)(ia) by the Finance Act, 2008 made two categories of defaults, causing disallowance on the basis of the period of the previous year in which tax was deductible. The first category of disallowances included the cases in which tax was deductible and was so deducted during the last month of the previous year, but there was failure to pay such tax on or before the due date specified in section 139(1). The second category included those cases where tax was deductible and was deducted during the first eleven months of the previous year, i.e., till February, 2005 in the case of the assessee. In such case, the disallowance was to be made if the assessee failed to pay it before 31st March, 2005.

Then came the amendment by the Finance Act, 2010. The said amendment dispensed with the earlier two categories of defaults brought about by the Finance Act, 2008. It has not made any change qua the first category described above. With reference to the second category, the Tribunal noted that the hitherto requirement of paying it before the close of the previous year has been eased to extend such time for payment of tax up to the due date u/s.139(1) of the Act. The effect of this amendment is that, now the assessee, deducting tax either in the last month of the previous year or first eleven months of the previous year, shall be entitled to deduction of the expenditure in the year of incurring it, if the tax so deducted at source, is paid on or before the due date u/s.139(1). As regards the applicability of the amendment by the Finance Act, 2010 to the case of the assessee, the Tribunal relied on the decision of the Calcutta High Court in the case of Virgin Corporation (ITA No. 302 of 2011 GA 3200/2011 decided on 23-11-2011), where it was held that the said amendment was retrospective from 1-4-2005 and accordingly, allowed the appeal of the assessee.

As regards the applicability of the decision of the Mumbai Special Bench in the case of Bharati Shipyard Ltd. v. DCIT, where it was held that the amendment by the Finance Act, 2010 was prospective and not retrospective from 1-4-2005, the Tribunal relying on the Delhi Tribunal decision in the case of Tej International (P) Ltd. v. Dy. CIT, (2000) 69 TTJ (Del) 650 read with the Bombay High Court decision in the case of CIT v. Godavaridevi Saraf, 113 ITR 589 (Bom.), held that as per the hierarchical judicial system in India, the wisdom of the Court below has to yield to the wisdom of the higher Court. The fact that the judgment of the higher judicial forum is from a non-jurisdictional High Court does not alter the position. Accordingly, the decision of the Calcutta High Court prevailed over the decision of the Mumbai Special Bench.

In view of the above, the Tribunal held that the Amendment to the provisions of section 40(a)(ia) of the Act, by the Finance Act, 2010 was retrospective from 1-4-2005. Consequently, any payment of tax deducted at source during the previous years relevant to and from A.Y. 2005-06 can be made to the Government on or before the due date for filing return of income u/s.139(1) of the Act.

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Section 54EC — The limit of Rs.50 lakh referred to in the proviso to section 54EC is with reference to a financial year — If subscription for eligible investment was not available to the assessee during the period of six months, then investment made beyond a period of six months qualifies for deduction u/s.54EC.

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Aspi Ginwala v. ACIT
ITAT ‘C’ Bench, Ahmedabad
Before D. K. Tyagi (JM) and
A. Mohan Alankamony (AM)
ITA No. 3226/Ahd./2011
A.Y.: 2008-09. Decided on: 30-3-2012
Counsel for assessee/revenue:
S. N. Soparkar/S. P. Talati

Section 54EC — The limit of Rs.50 lakh referred to in the proviso to section 54EC is with reference to a financial year — If subscription for eligible investment was not available to the assessee during the period of six months, then investment made beyond a period of six months qualifies for deduction u/s.54EC.


Facts:

The assessee sold a house property on 22-10-2007. The long-term capital gain arising on such sale was computed and returned at Rs.1,30,32,450 after claiming exemption of Rs.100 lakh u/s.54EC, on account of investment of Rs.50 lakh each made in REC bonds (invested on 31-12-2007) and bonds of NHAI (invested on 26-5-2008). During the period from 1-4-2008 to 26- 5-2008 no subscription for eligible investment was available to the assessee. The Assessing Officer (AO) held that the assessee is entitled to exemption of up to Rs.50 lakh u/s. 54EC of the Act. He, accordingly, allowed exemption in respect of amount invested in bonds of REC and did not allow exemption in respect of amount invested in bonds of NHAI. Aggrieved the assessee preferred an appeal to the CIT(A) who upheld the action of the AO. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that there is no dispute about the fact that the assessee could have invested the amounts in eligible investment within six months of the date of transfer i.e., on or before 21-4-2008 to avail of exemption u/s.54EC of the Act. Also, there is no dispute that during the period from 1-4-2008 to 26-5-2008 subscription to eligible investment was not available to the assessee and the assessee had subscribed on the 1st day of reopening of subscription. It also noted that the dispute which remained to be decided was whether as per the provisions of section 54EC, the assessee is entitled for exemption of Rs.1 crore as six months period for investment in eligible investment involves two financial years. If the answer to this question is yes, whether investment made by the assessee on 26-5-2008 beyond six months period is eligible for exemption in view of the fact that no subscription for eligible investment was available to the assessee from 1-4-2008 to 26-5-2008. It is clear from the proviso to section 54EC that where the assessee transfers his capital asset after 30th September of the financial year, he gets an opportunity to make an investment of Rs.50 lakh each in two different financial years and is able to claim exemption up to Rs.1 crore u/s.54EC of the Act. The language of the proviso being clear and unambiguous, the benefit available to the assessee cannot be denied, the assessee is entitled to get exemption up to Rs.1 crore in this case. Various judicial authorities have taken a view that delay in making an investment due to non-availability of bonds is a reasonable cause and exemption should be granted in such cases. Relying on the observations of the Mumbai Bench of the ITAT in the case of Ram Agarwal v. JCIT, (81 ITD 163) (Mum.) the Tribunal held that the investment s made by the assessee on 26-5- 2008 beyond six months is eligible for exemption in view of the fact that no investment was available from 1-4-2008 to 26-5-2008. The Tribunal allowed the appeal filed by the assessee.

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Section 40(a)(ia) — Per majority — Section 40(a)(ia) can apply only to expenditure which is outstanding as on 31st March and does not apply to expenditure which is paid during the previous year.

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Merilyn Shipping & Transports v. ACIT ITAT Special Bench, Visakhapatnam
Before D. Manmohan (VP),
S. V. Mehrotra (AM) and Mahvir Singh (JM) ITA No. 477/Viz./2008

A.Y.: 2005-06. Decided on: 29-3-2012 Counsel for assessee/revenue: Subramanyam/T. L. Peter and D. Komali

Section 40(a)(ia) — Per majority — Section 40(a)(ia) can apply only to expenditure which is outstanding as on 31st March and does not apply to expenditure which is paid during the previous year.


Facts:

The assessee-firm incurred brokerage expenses of Rs.38,75,000 and commission of Rs.2,43,253without deducting TDS. Of the aggregate amount of Rs.41,18,253 incurred during the previous year, the amounts outstanding as on 31st March were Rs.1,78,025. In the course of assessment proceedings the assessee’s representative agreed for disallowance. The AO disallowed Rs.41,18,253 u/s.40(a)(ia).

Aggrieved, the assessee preferred an appeal before the CIT(A) and contended that on a careful reading of the provisions of section 40(a)(ia) and also on going through the expert opinion, the disallowance u/s.40(a)(ia) should be Rs.1,78,025, being the amount of brokerage and commission outstanding as on 31st March on which tax was not deducted at source, and not the entire sum of Rs.41,18,253. The CIT(A) rejected the contention made on behalf of the assessee and upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal. Since the Division Bench did not agree with the decision rendered by the Hyderabad Bench of the ITAT in the case of Teja Constructions, (ITA No. 308/Hyd./2009 relating to A.Y. 2005-06, order dated 23-10-2009), on which reliance was placed by the counsel of the assessee, it referred the matter to the President to constitute a Special Bench (SB). The President constituted the SB to decide the following question:

“Whether section 40(a)(ia) of the Income-tax Act can be invoked only to disallow expenditure of the nature referred to therein, which is shown as ‘payable’ as on the date of the balance sheet or it can be invoked also to disallow such expenditure which became payable at any-time during the relevant previous year and was actually paid within the previous year?”

Held:

The majority view (VP and JM) of the SB was as under:

By replacing the words ‘amounts credited or paid’, as proposed by the Finance Bill, 2004 with the ‘payable’, at the time of enactment (by the Finance Act, 2004), the Legislature has clarified its intent that only outstanding amounts or the provisions for expenses liable for TDS under Chapter XVII-B of the Act is sought to be disallowed in the event there is a default in following the obligations casted upon the assessee under Chapter XVII-B. Section 40(a)(ia) creates a legal fiction by virtue of which even genuine and admissible expenditure can be disallowed due to non-deduction of tax at source. A legal fiction has to be limited to the area for which it is created. The word ‘payable’ must be understood in its natural, ordinary or popular sense and construed according to its grammatical meaning. Such a construction would not lead to absurdity because there is nothing in this context or in the object of the statute to suggest to the contrary. The word ‘payable’ is to be assigned strict interpretation, in view of the object of the legislation which is intended from the replacement of the words in the proposed and enacted provision.

The majority view of the SB was that section 40(a) (ia) is applicable only to the amounts of expenditure which are payable as on 31st March of every year and it cannot be invoked to disallow the amounts which have been actually paid during the previous year, without deduction of tax at source.

The AM held that the object of section 40(a)(ia) is to ensure that the TDS provisions are scrupulously implemented without any default. The term ‘payable’ cannot be assigned a narrow interpretation. Section 40(ia) is to be interpreted harmoniously with the TDS provisions. Accordingly, section 40(a)(ia) applies to all expenditure which is actually paid and also which is payable as at the end of the year.

The SB, by a majority view, decided the question referred to it in favour of the assessee.

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Carry forward and set-off in case of Nil Return v. Reassessment at Loss — Unabsorbed depreciation entitled to be carried forward and set off even if return showing nil income was filed — Also, loss determined in Appellate proceedings and not claimed by assessee eligible to be carried forward.

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(2012) 67 DTr (Ahd.) (Trib.) 470
ACIT v. Mehsana District Co-operative Milk
Producers Union Ltd.
A.Y.: 1999-2000. Dated: 30-6-2011

Carry forward and set-off in case of Nil Return v. Reassessment at Loss — Unabsorbed depreciation entitled to be carried forward and set off even if return showing nil income was filed — Also, loss determined in Appellate proceedings and not claimed by assessee eligible to be carried forward.

Facts:

The assessee, a co-operative society had filed nil return of income u/s.139(1). The assessment was completed u/s.143(3) r.w.s. 147 at total income of Rs.48.19 crore. The assessee went into appeal and after Appellate proceedings, the income of the assessee was determined at loss of Rs.5.41 crore. The assessee vide application u/s.154 requested the AO to permit carry forward of such loss to subsequent year. The AO vide his order u/s.154 held that loss can be carry forward only if the same is determined in pursuance to return filed u/s.139(3). In this case as per return of income, the income declared was nil and the loss was determined only on giving appeal effect which was could not be carry forward as per the AO.

On further appeal, the CIT(A) upheld the stand of the AO. He further stated that in this case, the assessment was reopened by issue of notice u/s.148. Placing reliance on the decision of the Apex Court in the case of CIT v. Sun Engineering Works (P) Ltd., (198 ITR 297), the CIT(A) held that section 147 was for the benefit of the Revenue and the assessee cannot be allowed relief not claimed by him in the original assessment. However, out of the total loss of Rs.5.41 crore, sum of Rs.5.10 crore pertained to unabsorbed depreciation. The CIT(A) permitted carry forward of such unabsorbed depreciation referring to Explanation 5 to section 32 wherein benefit is allowed even if deduction not claimed by the assessee. Both the Revenue as well as the assessee went into appeal.

Held:

As per section 32(2), for carry forward of unabsorbed depreciation, the only condition is that full effect cannot be given to depreciation allowable u/s.32(1) on account of there being insufficient profit. Carry forward of unabsorbed depreciation as per section 32(2) is automatic. No other condition is required to be fulfilled by the assessee for carry forward of unabsorbed depreciation. Hence, assessee is eligible to carry forward unabsorbed depreciation even if not claimed in return of income. Regarding balance business loss, as per section 72, the assessee is not required to fulfil any conditions so as to be eligible for carry forward of loss. The only requirement is that the result of computation under the head ‘Income from Business or Profession’ should be loss. However, for denying the benefit of carry forward of loss, the Revenue has relied upon section 139(3). The Tribunal held that section 139(3) would have application only where the assessee files the return disclosing the loss. If the assessee files the return disclosing the loss, then he is required to file return as per section 139(1). In the given case, firstly, the assessee has not disclosed any loss in the return of income, so 139(3) should not be applicable. Even if applied, only condition u/s.139(3) is for filing return before due date as stated u/s.139(1) which has been filed by the assessee. So, benefit of carry forward of loss is to be allowed.

The judgment of the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd., (supra) was distinguished since that case could have relevance during the assessment/Appellate proceedings. In the given case the assessment as well as Appellate proceedings are already completed. The AO has himself given effect to Appellate orders and determined the loss. Hence, once the orders of Appellate authorities have become final and the effect has been given and loss is determined thereby, the same has to be carried forward as per provisions of the Income-tax Act.

Hence, even though nil return of income was filed by the assessee u/s.139(1), he is entitled to carry forward entire loss as determined under Appellate proceedings.

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Section 80G — Approval for the purpose of section 80G cannot be denied simply because the trust is not registered as charitable trust.

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(2011) 131 ITD 117 (Hyd.)
Kamalakar Memorial Trust v. DIT (Exemptions)
Dated: 5-3-2010

Section 80G — Approval for the purpose of section 80G cannot be denied simply because the trust is not registered as charitable trust.


Facts:

The assessee was engaged in running of old-age home as a charitable trust and was claiming a deduction u/s.80G. On filing of application for renewal of exemption certificate, the Director of Income-tax (DIT) rejected the application stating that running an old-age home constitutes as business activity. Further the DIT observed that the assessee is not registered as a charitable trust under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowment Act, 1987. He thus held that the trust is not eligible for renewal of exemption certificate.

Held:

Running an organisation purely with the intentions of no profit cannot be termed as trade activity. The nature of activity depends not only on the economies of scale of organisation but also on the motives of organisation. In the given case, the assessee had applied for renewal of exemption certificate required for the purposes of section 80G which as per the Director of Income-tax is against the laws. The assessee contended that the fees charged by them for inmates are nominal fees for the services rendered for the inmates and further stated that these fees only fulfilled a partial amount of expenses which the organisation actually incurred for the inmates. Five members out of seventeen were admitted for free. Thus, there is no profit motive of the assessee, as there was no benefit from the fees charged from the inmates. Also it mentioned that for the year ended 31-3-2007 there was excess of expenditure over income of Rs.60,923 which shows that there is no intention of making profits. The assessee further relied on the decision given by the Nagpur Bench, in the case of Agricultural Produce & Market Committee v. CIT, (2006) 100 ITD 1.

Thus, in the light of the justifications presented by the assessee, it is clear that though it is not registered as a charitable trust, one cannot ignore its intentions and objectives of the organisation. Thus the DIT was directed to accept the application for renewal of approval u/s.80G within three months from the date of receipt of this order.

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Section 153A read with section 143 — Non-service of notice u/s.143(2) when a return is filed u/s.153(A), AO cannot make addition and is bound to accept income returned.

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(2011) 130 ITD 509 (Agra) Narendra Singh v. ITO-2(3), Gwalior A.Y.: 2001-02. Dated: 30-11-2010

Section 153A read with section 143 — Non-service of notice u/s.143(2) when a return is filed u/s.153(A), AO cannot make addition and is bound to accept income returned.


Facts:

The assessee filed return of income u/s.153A. The Assessing Officer completed the assessment wherein he made certain addition to the assessee’s income. On appeal, the assessee raised an objection that the assessment framed without issuing notice u/s.143(2) was void ab initio. The CIT(A) rejected the assessee’s objection. Aggrieved the assessee made an appeal to the ITAT.

Held:

Section 153(A) states that all other provisions of the act shall apply to the return filed in response to notice issued under this section as if such return is a return required to be furnished u/s.139. It does not provide for any methodology for making assessment. It only states that the AO shall assess or reassess the total income in respect of each assessment year falling within such six assessments. The section creates a legal fiction that all the provisions of the Act so far as they are applicable to return filed u/s.139 shall apply to the return filed u/s.153A. The provisions of both the sections 139 and 153A are under Chapter XIV. The word ‘shall’ makes it mandatory that all the provisions of this Act as are applicable to section 139 will apply to the return filed in response to notice issued u/s.153A.

According to section 143, the AO is permitted to process the return based on the return filed by the assessee. AO shall have no power to make an assessment unless he has issued the notice within the prescribed time.

Thus it was held that in the absence of service of such notice the AO cannot make addition in the income of the assessee and AO is bound to accept the income as returned by the assessee.

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Section 271(1)(c), read with section 10(13A) of the Income-tax Act, 1961 — Mere making of a claim, which is not mala fide but which is not sustainable in law by itself does not amount to furnishing of inaccurate particulars regarding income of assessee so as to attract levy of penalty u/s. 271(1)(c).

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(2011) 130 ITD 378/9 taxmann.com (Delhi) N. G. Roa v. Dy. CIT, Circle 47(1), New Delhi A.Y.: 2004-05. Dated: 7-4-2010

Section 271(1)(c), read with section 10(13A) of the Income-tax Act, 1961 — Mere making of a claim, which is not mala fide but which is not sustainable in law by itself does not amount to furnishing of inaccurate particulars regarding income of assessee so as to attract levy of penalty u/s. 271(1)(c).


Facts:

The assessee had claimed exemption u/s.10(13A) for two residential accommodations taken on rent. The assessee, in view of CIT v. Justice S. C. Mittal T.C. 32R 593 (Punj. & Har.), was under a belief that he was entitled to exemption with regard to both the residential accommodations held by him. Whereas, the Assessing Officer disallowed the exemption claimed with respect to one property, holding that exemption u/s.10(13A) could be allowed only qua one residential accommodation. Further, the Assessing Officer levied penalty u/s.271(1)(c). On appeal, the Commissioner (Appeals) also confirmed the levy of penalty. Aggrieved, the assessee went for second appeal.

Held:

(1) The factum of the assessee taking two residential accommodations on rent was not disputed. The only issue was whether by claiming exemption with regard thereto, the assessee had rendered himself liable to levy of penalty for furnishing inaccurate particulars of income.

(2) The meaning of word ‘particulars of income’ has been clearly laid down by the Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. As held in this case, there has to be a concealment of the particulars of the income of the assessee; the assessee must have furnished inaccurate particulars of his income; the meaning of the word ‘particulars’ used in the section would embrace the details of the claim made and to attract penalty, the details supplied by the assessee should in his return must not be accurate, not exact or correct, not according to the truth or erroneous. Also it was held that mere making of a claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars regarding the income of the assessee and there is no question of inviting penalty u/s.271(1)(c) for the same.

(3) The instant case of the assessee is squarely covered under the above decision. In the instant case, the assessee had accurately and truthfully disclosed all particulars of the residential accommodations rented and payments made. It was only, as such, a case of difference of opinion where the claim made by the assessee [exemption u/s.10(13A)] relying on earlier relevant decision was viewed differently by the Department. Thus, no concealment penalty was, in such situation, attracted. Thus the appeal of the assessee was to be allowed and penalty levied was to be cancelled.

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Section 140A r.w.s. 244A — Whether an assessee is entitled to interest on excess payment of selfassessment tax from date of payment upto the date the refund is actually granted — Held, Yes.

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2011) 130 ITD 305
11 ADIT v. Royal Bank of Scotland N.V.
A.Y.: 2007-08. Dated: 3-11-2010

Section 140A r.w.s. 244A — Whether an assessee is entitled to interest on excess payment of self-assessment tax from date of payment upto the date the refund is actually granted — Held, Yes.


Facts:

The assessee was into the business of banking. The return of income filed by the assessee, in the relevant assessment year was processed u/s.143(1) to determine the final income tax liability of Rs.272.93 crore. Against this, the credit of Rs.346.36 crore was allowed which was aggregate of T.D.S, advance tax and self-assessment tax. Accordingly the refund was issued, but as it didn’t include any interest element u/s.140A, the assessee filed an application u/s.154. On appeal the CIT(A) allowed the assessee’s claim.

Held:

The CIT(A) relying on the decision of the Madras High Court in the case of Ashok Leyland Ltd. (2002) (254 ITR 641/125) and Cholamandalam Investment & Finance Co. Ltd. (2008) 166 Taxmann 132, held that computation of interest on excess payment of selfassessment tax has to be paid in terms of section 244A(1)(b) i.e., from the date of payment of such amount up to the date on which refund is actually granted.

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Section 40(a)(ia) of the Income-tax Act, 1961 — Provisions of section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax at source.

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(2012) 49 SOT 448 (Mumbai)
Dy. CIT v. Chandabhoy & Jassobhoy
A.Y.: 2006-07. Dated: 8-7-2011

Section 40(a)(ia) of the Income-tax Act, 1961 — Provisions of section 40(a)(ia) can be invoked only in event of non-deduction of tax at source but not for lesser deduction of tax at source.

Accountants, had employed 18 consultants with whom it entered into agreements for a period of two years renewable further at the option of either parties. These consultants were prohibited from taking any private assignments and worked full time with the assessee. During the year, the assessee had paid an amount of Rs.26.75 lac to the said consultants by way of salary after deduction of tax at source u/s.192 and claimed deduction of the same. The Assessing Officer after analysing the agreements entered by the assessee-firm with the said consultants came to a conclusion that there was no employer-employee relationship and that the payment made to the consultants was in the nature of fees for professional services. He, therefore, held that the assessee should have deducted tax at source u/s.194J and, invoking the provisions of section 40(a)(ia), he disallowed the entire payment made to the consultants. The CIT(A) deleted the disallowance made by the Assessing Officer.

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

(1) There is no dispute with reference to the deduction of tax u/s.192 and also the fact that in the individual assessments of the consultants these payments were accepted as salary payments.

(2) It is also not the case that the assessee has not deducted any tax.

(3) The assessee had indeed deducted tax u/s.192 and so the provisions of section 40(a)(ia) also do not apply since the said provisions can be invoked only in the event of non-deduction of tax at source, but not for lesser deduction of tax.

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Section 12AA of the Income-tax Act, 1961 — When assessee had not carried out any activity other than running school or hostel and all properties owned by it were held in trust for purpose of carrying on charitable activities, there was nothing unlawful in assessee acquiring assets and buildings and registration u/s.12AA could not be denied to it.

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(2012) 49 SOT 242 (Chennai)
Anjuman-e-Khyrkhah-e-Aam v. DIT (e)
Dated: 18-7-2011
The assessee-trust was running a school with hostel facilities. Its application for grant of registration u/s.12AA was rejected on the ground that the activities carried on by it were not charitable in nature. The Tribunal allowed the appeal of the assessee and directed the authority to grant registration u/s.12AA. This order was challenged before the High Court which remitted the matter back to the DIT(E) for fresh disposal. The DIT(E) considered the issue again and finally reached at a conclusion that the assessee was not eligible for getting registration u/s.12AA on the ground that the main activity of the assessee was to accumulate huge investments in purchase of assets and earn rental income from those assets without engaging itself in any charitable activities.

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

(1) It was true that the assessee-trust had been established since more than 100 years and it was running the school with hostel facilities attached to it.

(2) Amounts collected by the assessee-trust had been used for the purpose of running the school and hostel and also in constructing buildings. A major portion of the outgoings of the assessee-trust had been towards construction of buildings.

(3) If the object of the assessee-trust was to run educational institution and the assessee had been carrying on that activity alone, the construction of buildings and purchase of property could not be treated as a point against the assessee. The assessee might be purchasing properties and constructing buildings for the purpose of letting out to earn income necessary for carrying on the charitable activity in the nature of running the school and hostel.

(4) All the properties owned by the assessee-trust were held in trust for the purpose of carrying on charitable activities. There was nothing unlawful in the assessee acquiring assets and buildings.

(5) If the entire activities carried on by the assessee were charitable in nature, the expenses incurred for construction of buildings and purchase of assets also qualified to be considered as application of funds for charitable purposes.

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Reassessment: S/s. 147 and 148: A. Y. 2007-08: Where AO has acted only under compulsion of audit party and not independently, action of reopening assessment is not valid:

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Vijay Rameshbhai Gupta vs. ACIT; 32 Taxman.com 41 (Guj):

In the course of assessment proceedings u/s. 143(3), the Assessing Officer took a view that income earned by assessee from leasing out his restaurant was taxable as business income. Subsequently, the Assessing Officer initiated reassessment proceedings on the ground that aforesaid lease income was liable to be taxed as income from other sources and, thus, business expenses were wrongly allowed against said income.

The assessee filed writ petition challenging the validity of reassessment proceedings contending that the Assessing Officer was compelled by the audit party to reopen the assessment, though on the reasons recorded, the Assessing Officer was of the belief that no income chargeable to tax had escaped assessment.

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

“i) From the series of evidence, it stands clearly established that the Assessing Officer was under compulsion from the audit party to issue notice for reopening. This is so because after the audit party brought the controversial issue to the notice of the Assessing Officer, he had not agreed to the proposal for reexamination of the issue. Thereupon, he in fact, wrote a letter and gave elaborate reasons why he did not agree to make any addition on the controversial issue.

ii) In the said letter, the Assessing Officer firmly asserted that the assessee’s income from lease was to be assessed as business income and not as income from other sources. Despite his firm assertion, the audit party once again wrote to the jurisdictional Commissioner that the reply of the Assessing Officer was not acceptable.

iii) Thus, it is apparent on the face of the record that the Assessing Officer was compelled to issue notice for reopening, though he held a bona fide he had accorded in the original assessment was as per the correct legal position.

iv) By now, it is well settled that even if an issue is brought to the notice of the Assessing Officer by the audit party, it would not preclude the Assessing Officer from acting on such communication as long as the final opinion to take appropriate action is that of the Assessing Officer and not that of the audit party. It is equally well settled however that if the Assessing Officer has acted only under compulsion of the audit party and not independently, the action of reopening would be vitiated.

v) In view of above, the impugned notice seeking to reopen the assessment was to be quashed.”

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Penalty: Limitation: S/s. 271D and 275(1)(c): A. Y. 2001-02: On 27/03/2003 AO served show cause notice for penalty u/s. 271D: Matter referred to Jt. CIT on 22/03/2004: Jt. CIT passed order of penalty u/s. 271D on 28/05/2004: The order is barred by limitation u/s. 275(1)(c):

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CIT Vs. Jitendra Singh Rathore; 257 CTR 18 (Raj):

For the A. Y. 2001-02, the assessment was completed by an order u/s. 143(3), 1961 dated 25/03/2003. The Assessing Officer noticed that the assessee had accepted cash loans exceeding the limit specified u/s. 269SS to the tune of Rs. 4,00,000/- and the same being in contravention of section 269SS initiated penalty proceedings u/s. 271D of the Act and served show cause notice on the assessee on 27/03/2003. The matter was referred to the Jt. CIT on 22/03/2004, who was the competent authority to impose such penalty u/s. 271D. On 28/05/2004, the Jt. CIT passed an order of penalty u/s. 271D imposing the penalty of Rs. 4,00,000/-. The Tribunal cancelled the penalty holding that the order is barred by limitation.

In appeal by the Revenue, the following question was raised:

“Whether on the facts and in the circumstances of the case as well as in the law, the learned Tribunal was justified in deleting the penalty u/s. 271D holding that the penalty was not imposed within the prescribed period u/s. 275(1)(c) from the date of initiation by the AO ignoring the legal provision that the authority competent to impose penalty u/s. 271D was Jt. CIT and hence the period of limitation should be reckoned from the issue of first show cause by the Jt. CIT?”

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

“i) Even when the authority competent to impose penalty u/s. 271D was Jt. CIT the period of limitation for the purpose of such penalty proceedings was not to be reckoned from the issue of first show cause by the Jt. CIT, but the period of limitation was to be reckoned from the date of issue of first show cause for initiation of such penalty proceedings.

ii) For the purpose of the present case, the proceedings having been initiated on 25/03/2003, the order passed by the Jt. CIT u/s. 271D on 28/03/2004 was hit by the bar of limitation.

iii) The CIT(A) and the Tribunal have, thus, not committed any error in setting aside the order of penalty. Consequently, the appeal fails and is, therefore, dismissed.”

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Penalty: S/s. 269SS and 271D: Amount received by assessee from her father-in-law for purchasing property: Transaction genuine and source disclosed: Penalty u/s. 271D not to be imposed:

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CIT vs. Smt. M. Yeshodha: 351 ITR 265 (Mad):

In the previous year relevant to A. Y. 2005-06, the assessee received a loan of Rs. 20,99,393/- in cash from her father-in-law for purchasing property. In the penalty proceedings u/s. 271D r/w. s. 269SS, the assessee claimed that the amount received in cash from father-in-law was a gift and not a loan. The Assessing Officer held that the assessee had received the amount as a loan and not as a gift, because the amount was shown as a loan in the balance sheet of the assessee, which was filed with the return of income. He therefore imposed penalty of Rs. 20,99,393/- u/s. 271D of the Act. The Tribunal held that the transaction was between the father-in-law and the daughter-in-law and the genuineness of the transaction in which the amount had been paid by the father-in-law for the purchase of property was not disputed, and the cash taken by the assessee from her father-in-law was not a loan transaction. The Tribunal, accordingly, deleted the penalty.

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

“i) The contention of the Revenue is that the amount received by the assessee from her fatherin- law has to be treated only as a loan and if it is a loan, then the assessee is liable to pay penalty u/s. 271D of the Act.

ii) Whether it is a loan or other transaction, still the other provision, namely, section 273B, comes to the rescue of the assessee, if she is able to show reasonable cause for avoiding penalty u/s. 271D. The Tribunal has rightly found that the transaction between the daughter-in-law and the father-in-law is a reasonable transaction and a genuine one owing to the urgent necessity of money to be paid to the seller. We find that this would amount to reasonable cause shown by the assessee to avoid penalty u/s. 271D of the Act.

iii) The Tribunal has rightly allowed the appeal. We do not find any error or infirmity in the order of the Tribunal to warrant interference. Accordingly, the substantial question of law is answered in favour of the assessee.”

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Exemption: Interest on tax free bonds: Section 10(15) : A. Y. 1988-89: Interest for period between application for allotment and actual allotment: Entitled to exemption: CIT vs. Bharat Heavy Electricals Ltd.; 352 ITR 88 (Del):

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For the A. Y. 1988-89, the assessee had claimed exemption of interest on tax free bonds u/s. 10(15). The Assessing Officer disallowed the claim for exemption in respect of the interest for the period from the date of application for allotment and the date of actual allotment. The Tribunal held that the assessee was entitled to exemption.

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

“i) In view of the amplitude of section 10(15)(iv), the fact that interest was paid for a brief period of about six days would not make it any less an amount of interest payable “in respect of bonds”.

ii) The assessee was entitled to exemption on the interest earned on tax free bonds between the date of their application by the assessee and the date of their allotment.”

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Double taxation relief: Section 91(1): A. Y. 1997- 98: Income earned in foreign country: Relief of taxes paid abroad: Relief not dependent upon payment of taxes being made in foreign country in previous year:

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CIT vs. Petroleum India International; 351 ITR 295 (Bom):

The assessee had paid taxes of Rs. 82 lakh in Kuwait on the income earned in Kuwait by it during the period relevant to the A. Y. 1997-98. Its claim for deduction of the said amount u/s. 91(1), was denied by the Assessing Officer on the ground that the payment of taxes in Kuwait was not made in the previous year relevant to the A. Y. 1997-98. The Tribunal allowed the assessee’s claim.

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

“i) There was no requirement that the benefit of section 91(1) would be available only when payments of taxes had been made in the previous year relevant to the assessment year under consideration.

ii) The object of section 91(1) is to give relief from taxation in India to the extent taxes have been paid abroad for the relevant previous year. This deduction/ relief is not dependent upon the payment also being made in the previous year.

iii) The payment of taxes on the income earned in Kuwait during the previous year had been examined and found to be correct. Therefore, the assessee was entitled to double taxation benefit for the taxes paid in Kuwait.”

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Depreciation(Unabsorbed): Carry forward and set off: A. Y. 2006-07: Effect of amendment of section 32(2) w.e.f. 01/04/2002: Unabsorbed depreciation from A. Y. 1997-98 to 2001-02 got carried forward to A. Y. 2002-03 and became part thereof: It is available for carry forward and set off against the profits and gains of subsequent years, without any limit:

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General Motors India (P) Ltd. vs. Dy. CIT; 257 CTR 123 (Guj):

In this case, the question for consideration before the Gujarat High Court was as to “whether the unabsorbed depreciation pertaining to A. Y. 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by section 32 as amended by Finance Act 2001?”. The reason given by the Assessing Officer is that section 32(2), was amended by Finance Act No. 2 Act of 1996 w.e.f. A.Y. 1997-98 and the unabsorbed depreciation for the A. Y. 1997-98 could be carried forward up to the maximum period of 8 years from the year in which it was first computed. According to the Assessing Officer, 8 years expired in the A. Y. 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of A. Y. 1997-98 for being carried forward and set off. But the assessee was not entitled for unabsorbed depreciation of Rs. 43,60,22,158/- for A. Y. 1997-98, which was not eligible for being carried forward and set off against the income for the A. Y. 2006-07.

The Gujarat High Court held as under:

“i) Amendment of section 32(2) by Finance Act, 2001 is applicable from A. Y. 2002-03 and subsequent years. Therefore unabsorbed depreciation from A. Y. 1997-98 upto the A. Y. 2001-02 got carried forward to the A. Y. 2002-03 and became part thereof.

ii) It came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and was available for carry forward and set off against the profits and gains of subsequent years, without any limits whatsoever.”

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Capital or revenue receipt: A. Y. 2003-04: Business of Multiplexes and Theatres: Exemption from entertainment tax under Scheme of Incentive for Tourism Project, 1995 to 2000 for giving boost to tourism sector: Scheme offering incentive for recouping or covering capital investment:

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Is capital receipt: Dy. CIT vs. Inox Leisure Ltd.; 351 ITR 314 (Guj):

The assessee was engaged in the business of operating multiplexes and theatres in Pune and Baroda. During the previous year relevant to the A. Y. 2003-04 the assessee received an amount of Rs. 1,14,47,905/- by way of exemption from payment of entertainment tax relating to its Baroda multiplex unit. The exemption was granted by the State Government under the New Package Scheme of Incentive for Tourism Projects 1995 to 2000. Likewise, the assessee also received a similar entertainment tax exemption of Rs. 1,85,06,998/- from the State of Maharashtra under its own incentive scheme for its multiplex unit at Pune. The assessee claimed that the incentives were granted for covering the capital outlay and, therefore, the receipt was capital in nature. The Assessing officer treated the receipt as revenue receipt. The CIT(A) 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) The character of receipt of a subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. If the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the scheme is to enable the assessee to set up a new unit or expand the existing unit then the receipt of subsidy would be on capital account.

ii) The salient features of the scheme showed that the incentive was being offered for recouping or covering a capital investment or outlay already made by the assessee.

iii) The Tribunal was right in holding that the entertainment exemption of Rs. 1,85,06,998/- and Rs. 1,14,47,905/- in respect of Pune and Baroda multiplexes, respectively, was a capital receipt, which was not eligible to tax for the A. Y. 2003-04.”

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Capital or revenue receipt: Entertainment subsidy: Object of subsidy to promote cinema houses by constructing Multiplex Theatres: Subsidy is capital receipt:

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CIT vs. Chaphalkar Bros.; 351 ITR 309 (Bom):

The following question was raised before the Bombay High Court in this case:

“Whether the entertainment duty subsidy given to the assessee by the State Government for construction of multiplexes is in the nature of revenue receipt or capital receipt?”

The High Court held as under:

“i) The purpose for which the subsidy was given is the relevant factor and if the object of subsidy was to enable the assessee to setup a new unit then the receipt of subsidy would be on capital account.

ii) Since the object of the subsidy was to promote construction of multiplex theatre complexes, the subsidy would be on capital account. The fact that the subsidy was not meant for repaying the loan taken for construction of multiplexes should not be ground to hold that the subsidy receipt was on revenue account because if the object of the scheme was to promote cinema houses by constructing multiplex theatres, irrespective of whether the multiplexes had been constructed out of the assessee’s own funds or borrowed funds, the receipt of subsidy would be on capital account.

iii) Therefore, the decision of the Tribunal that the amount of subsidy received by the assessee is on capital account could not be faulted.”

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Capital gains: Exemption u/s. 54/54F: A. Y. 2007-08: A residential house includes a building with a basement, ground floor, first floor and second floor constituting two residential units: Exemption allowable:

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CIT vs. Gita Duggal; 257 CTR 208 (Del): 214 Taxman 51 (Del): 30 Taxman.com 320 (Del):

Under a development agreement the assessee received by way of consideration Rs. 4 crore and a building consisting of basement, ground floor, first floor and the second floor constituting two residential units. In the computation of income for the A. Y. 2007-08, the assessee had computed capital gain with reference to the cash consideration of Rs. 4 crore. The Assessing Officer estimated the cost of construction of the said building at Rs. 3,43,72,529/- and included the same in the total sale consideration. The Assessing Officer rejected the assessee’s claim for exemption u/s. 54, but allowed the claim for exemption u/s. 54F in respect of one residential unit. The assessee’s reliance on the judgment of the Karnataka High Court in CIT vs. D. Anand Basappa; (2009) 309 ITR 329 (Kar) was not accepted by the Assessing Officer. Accordingly, he recomputed the capital gain and made an addition of Rs. 98,20,722/-. The CIT(A) allowed the assessee’s claim following the judgment of the Karnataka High Court. The Tribunal upheld the decision of the CIT(A).

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

“i) Fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the exemption u/s. 54/54F. It is neither expressly nor by necessary implication prohibited.

ii) Tribunal was therefore justified in allowing exemption u/s. 54F in respect of entire investment in construction of a building consisting of two residential units.”

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Business expenditure: Fines and penalties: Section 37(1) : A. Y. 2004-05: Dishonour of export commitment in view of losses: Encashment of bank guarantee by Export Promotion Council: Payment recorded as penalty in assessee’s books and claimed as deduction: Compensatory in nature:

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Deduction allowable: CIT vs. Regalia Apparels Pvt. Ltd.; 352 ITR 71 (Bom):

The assessee is a manufacturer of garments. The Apparel Export Promotion Council granted to the assessee entitlements for export of garments and knit ware. In consideration of the export entitlements, the assessee furnished a bank guarantee in support of its commitment that it shall abide by the terms and conditions in respect of the export entitlements and produce proof of shipment. It was also provided that failure to fulfill the obligation to export would render the bank guarantee liable to being forfeited/ encashed. In view of the fact that the assessee was incurring losses, it decided not to utilise the export entitlements. This led the Council to encash the bank guarantee. The assessee recorded the payment as penalty in its books of account. The assessee claimed deduction of the said amount u/s. 37 of the Income-tax Act, 1961 for the A. Y. 2004-05. The Assessing Officer disallowed the claim holding that it is in the nature of penalty. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) The finding of fact recorded by the Commissioner (Appeals) and upheld by the Tribunal was that the assessee took a business decision not to honour its commitment of fulfilling the export entitlements in view of losses being suffered by it. The Assessing Officer did not dispute the fact nor did he doubt the genuineness of the claim of the expenditure being for business purposes.

ii) In these facts the Tribunal held that the assessee had not contravened any provisions of law and, thus, the forfeiture of the bank guarantee was compensatory in nature u/s. 37(1) of the Act.

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Search and seizure: Block assessment: Section 158BC; Block period 01-04-1986 to 26-06- 1996: Undisclosed income to be determined on basis of evidence found during search: Cannot be computed on the basis of best judgment:

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CIT vs. Dr. Ratan Kumar Singh; 357 ITR 35 (All)

The assessee was a practicing medical doctor having different sources of income such as income from agricultural activities, medical profession and pathology. On 25-09-1996, a search u/s. 132 at the residential premises of the assessee was simultaneously conducted with a survey u/s. 133A at his business premises where an x-ray clinic and blood bank were located. During the survey a register marked pertaining to the blood bank was found and seized. Another register pertaining to x-ray was also seized. No search was conducted at the business premises of the assessee from where these registers were impounded. The assessing Officer made an assessment u/s. 158BC of the Act, of the assessee’s undisclosed income for the block period making additions pertaining to the blood bank and x-ray. 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) Undisclosed income of the block period has to be determined on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence with certain other conditions. It is not open to the Assessing Officer to compute the income on the basis of best judgment.

ii) A search was conducted at the residential premises of the assessee and survey was conducted at the business premises. During the search, no cash, bullion, jewellery or any material was found, which could be considered as undisclosed income.

iii) The additions were made on estimate basis after seizing the register from the business premises of the assessee. The Tribunal was justified in deleting the addition.”

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Salary: Perquisite: Sections 15 and 17(2): A. Y. 1994-95: Assesee R but NOR: Employer to bear the tax on salary: Assessee paid tax of Rs. 50 lakh: Got reimbursement from employer of Rs. 35 lakh: Salary received by the assessee to be enhanced by Rs. 35 lakh only and balance Rs. 15 lakh paid by assessee not to be enhanced:

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CIT vs. Jaydev H. Raja; 261 CTR 408 (Bom):

The assesee a resident but not ordinarily resident individual was an employee of Coca Cola Inc. USA having salary income. Under the tax equalisation policy framed by the company, the assessee’s tax liability arising out of his foreign assignment was to be borne by the company. In the relevant year, the assessee had received salary of Rs. 77 lakh and the tax payable thereon was Rs. 35 lakh which was reimbursed by the employer. The assessee returned the total income of Rs. 1.12 crore ( 77 + 35 lakh) and paid tax thereon of Rs. 50 lakh. The Assessing Officer made an addition of Rs. 15 lakh treating the same as the amount reimbursable by the employer. The Tribunal allowed the assessee’s appeal and held that though the assesee had paid the tax amounting to Rs. 50 lakh, the assessee was entitled to reimbursement of tax amounting to Rs. 35 lakh only from the employer and the balance Rs. 15 lakh was borne out of the salary income received by the assessee in India.

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

“Only the actual reimbursement of tax by the employer could be included in the salary of the employee and not the tax paid by employee from his salary income for the purposes of grossing up u/s. 195A.”

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Revision: Scope: Section 263: A. Y. 2006-07: CIT feeling inquiry inadequate: CIT must make enquiry and show that assessment order was erroneous: CIT has no power to remand and direct AO to conduct enquiry:

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DIT vs. Jyoti Foundation: 357 ITR 388 (Del):

For the A. Y. 2006-07, the assessment was completed u/s. 143(3) r/w. section 147, making enquiry as regards the consideration on sale of the four plots. Subsequently, exercising powers u/s. 263 of the Act, the Commissioner held that the enquiry made by the Assessing Officer was inadequate and therefore directed the Assessing Officer to make fresh enquiry and pass a fresh order of assessment. The Tribunal cancelled the order of the Commissioner passed u/s. 263.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “
i) Revisionary power u/s. 263, is conferred by the Act on the Commissioner/Director of Income-tax when an order passed by the lower authority is erroneous and prejudicial to the interest of the Revenue, but orders which are passed after inquiry/ investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interest of Revenue because the revisionary authority feels and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken.

ii) In cases where there is inadequate enquiry but not lack of enquiry, the Commissioner must record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in law. An order of remit cannot be passed by the Commissioner to ask the Assessing Officer to decide whether the order was erroneous.

iii) Inquiries were certainly conducted by the Assessing Officer. It was not a case of no inquiry. The order u/s. 263 itself recorded that the Director felt that the inquiries were not sufficient and further inquiries and details should have been called for. The inquiry should have been conducted by the Director himself to record the finding that the assessment order was erroneous. He should not have set aside the order and directed the Assessing Officer to conduct the inquiry. iv) We do not think any substantial question of law arises for consideration. The appeal is dismissed.”

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Rectification: Interest: Sections 154 and 244A: A. Y. 2002-03: While giving effect to order of CIT(A) the assessee was allowed refund with interest u/s. 244A: Rectification u/s. 154 to withdraw interest is not sustainable: Question whether there was delay and to whom the delay was attributable is a debatable question of fact:

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CIT Vs. Nathpa Jhakri Joint Venture; 261 CTR 110 (Bom):

In the assessment order giving effect to the order of the CIT(A), the Assessing Officer allowed refund and also interest u/s. 244A of the Income-tax Act, 1961. Subsequently, the Assessing Officer passed a rectification order withdrawing the interest allowed u/s. 244A of the Act. The Tribunal allowed the assessee’s appeal and cancelled the rectification order.

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

“Whether or not, there was a delay in the proceedings and to whom is such delay attributable is a question of fact, requiring investigation and therefore interest granted u/s. 244A could not be withdraw by rectification u/s. 154.”

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Penalty: Sections 139A and 272B: A. Y. 2003- 04: Quoting PAN in TDS certificates: Failure: Where assessee-deductor did not mention PAN of deductees on TDS certificates issued by it, as same was not provided by deductees within time prescribed, there was reasonable cause for non-compliance of section 139A(5A), and, therefore, penalty u/s. 272B could not be imposed:

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CIT vs. Gail (India) Ltd.; [2013] 36 taxmann.com 336 (All)

The assessee, a public sector undertaking, had deducted income tax at source as per the provisions of sections 194C and 194J on all the payments made to contractors/professionals during the financial year 2002-03. The tax so deducted was also deposited by it in the government treasury in time. The annual return of TDS as per the provisions of section 203 was also filed in the prescribed ‘Form 26C’ and TDS certificates were issued to contractors/professionals. However, penalty at the rate of Rs. 10,000 for each 350 defaults committed by the respondent-assessee was imposed by the revenue on the ground that the respondent-assessee has not mentioned PAN in Form 16A issued to 350 contractors. The assessee’s contention that there was reasonable cause for not mentioning the PAN in Form 16A since the deductee had not provided the PAN was rejected and penalty was imposed. The Tribunal deleted the penalty, holding that there was reasonable cause for default.

On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under “
i) A perusal of section 139A(5A) shows that it puts an obligation on the person receiving any sum or income or amount from which tax has been deducted under the provisions of Chapter XVII (which include sections 194C and 194J) to intimate his permanent account number to the person responsible for deducting such tax under the Chapter. In the present case, it is clear that it was statutory obligation of the contractors, who received certain amounts from the respondent-assessee, from which tax was deducted under the provision of Chapter XVII-B, to intimate their permanent account number to the respondent-assessee.

ii) It is the specific stand of the assessee that certain contractors had not intimated their permanent account number, and for that reason it could not be mentioned in Form 16A issued to such contractors. Section 139A(5B) makes it obligatory for every person deducting tax under Chapter XVII-B to quote the permanent account number of the person to whom such sum or income or amount has been paid by him. Thus, reading both the provisions together, namely, sections 139A(5A) and section 139A(5B), it appears that the deductor may be at fault under section 139A(5B) if he does not quote the permanent account number of the persons to whom the amount has been paid, despite the intimation of permanent account number by such person to the deductor u/s. 139A(5A) of the Act. There is nothing on record to show that the contractors to whom certain amounts were paid by the respondentassessee, had intimated their permanent account number to the respondent-assessee as required u/s. 139A(5A). In the circumstances, therefore, the assessee successfully explained the reasonable cause to satisfy the provisions of section 273B.

iii) Considering the provisions of section 272B, 273B and sections 139A(5A) and 139A (5B), a bare reading of the provision itself makes it clear that the penalty u/s. 272B would not ordinarily be imposed, unless the assessee had either acted deliberately in defiance of law or was guilty of conduct which is contumacious, dishonest or acted in conscious disregard to its obligation. The penalty u/s. 272B cannot be imposed merely because it is lawful to do so. It can be imposed for failure to perform statutory obligation. The imposition of penalty for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially, after considering the explanation of reasonable clause submitted by the assessee and on a consideration of all the relevant circumstances.

iv) On the findings recorded by the Tribunal that there was no revenue loss and mere technical breach, it clearly satisfies the test of reasonable cause u/s. 273B. In the present case the levy of penalty u/s. 272B by the assessing authority was fully unjustified.”

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Income from industrial undertaking: Deduction u/s. 80-IB and 80-IC: A. Ys. 2004-05 and 2006-07: Transport subsidy, power subsidy, interest subsidy and insurance subsidy resulting in increase of profits of the undertaking: Such increased profit is income derived from the industrial undertaking and is eligible for deduction u/s. 80-IB/80-IC of the Act:

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CIT vs. Meghalaya Steels Ltd.; 356 ITR 235 (Gau): 261 CTR 17 (Gau):

The assessee’s industrial unit was eligible for deduction u/s. 80-IB/80-IC of the Income-tax Act, 1961. For the relevant years, the Assessing Officer disallowed the claim for deduction in respect of the profit relating to the transport subsidy, power subsidy, interest subsidy and insurance subsidy. The Tribunal held that the subsidies in question would go on to reduce the corresponding expenses incurred and the resultant profit would be the profits and gains of the business of the industrial undertaking, that all these subsidies are interlinked, interlaced and having a direct nexus with the manufacturing activities of the assessee which are inseparable from the expenditure incurred by the assessee on account of transportation of purchase as well as sales, power, interest, insurance cover of the business of the assessee and, therefore, there is a direct nexus between the subsidy received by the asessee’s industrial undertaking and the resulting profits and gains thereof and the assessee is eligible for deduction u/s. 80-IB/80-IC of the Act.

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

i) Transport subsidy, power subsidy, interest subsidy and insurance subsidy received under various Government Schemes go to reduce the cost of gains derived by it and there is direct and first degree nexus between the industrial activities of the assessee on one hand, and the subsidies received by it on the other.

ii) The profits and gains earned on the strength of such subsidies are profits and gains derived by, the industrial undertaking and are deductible under the provisions of section 80—IB or section 80-IC as the case may be.”

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Income of foreign company from satellite navigation and transponder capacity lease not royalty for equipment hire

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New Page 1

Part C — International Tax Decisions




5 ISRO Satellite Centre, In re


(2008) 220 CTR 13 (AAR)

S. 9(1)(vi), S. 90 of IT Act;

Article 13 of India-UK DTAA

Dated : 22-10-2008

Issue :

Income of a foreign company towards satellite navigation and
transponder capacity lease is not royalty for equipment hire.

Facts :

ISRO, the applicant, a part of the Department of Space,
Government of India, jointly with Airport Authority of India, was implementing
GAGAN Project (a satellite-based augmentation system) to provide seamless
navigation and tracking facility for civil aviation in India. For this purpose,
it entered into a contract with M/s. Inmarsat Global Ltd., UK (‘IGL’) for
availing of ‘Navigation Transponder Capacity’ for its GAGAN project.

As per the contract, the applicant had taken on lease the
space segment capacity which was utilised through data commands sent from the
ground station set-up by the applicant in India. The transponders for navigation
purposes were meant to dispatch satellite-based augmentation system signals in
space on specified frequencies which were accessed for GAGAN project. The
corrected or augmented data sent from the land station, and transmitted by the
said transponder over the footprint area of the satellite was to be used for
better tracking of planes. The applicant paid a fixed annual charge to IGL,
regardless of the actual use of the transponder capacity.

The issue before the AAR was whether the payment by ISRO to
IGL was royalty having regard to the provisions of the IT Act and the India-UK
DTAA, so as to be subject to tax withholding obligation u/s.195 of the IT Act.

The applicant submitted that the access to navigation
transponder did not amount to use of equipment as the applicant was not able to
operate or control the satellite or transponder. The applicant contended that
even if it was assumed that there was use of equipment, such use was not within
the Indian territory, but it was in space. The amount represented business
income and as there was no permanent establishment of IGL in India, the payment
was not exigible to tax in India.

The Revenue authorities contended that the exclusive capacity
of specific transponder was kept entirely at the applicant’s disposal. The
Revenue also contended that the transponder was under control of the applicant
and can be regarded as operated by applicant, as the transponder was responding
to the directions sent through the ground station of the applicant. Such
directions were held to be akin to operation of TV by remote control. The amount
was therefore claimed to be chargeable as royalty income.

Held :

The AAR accepted the applicant’s claim that the payment was
not royalty for equipment user. It held :

(i) Mere earmarking a space segment capacity of the
transponder for use by the applicant did not enable the applicant to get
possession (actual or constructive) or control of the equipment of IGL.

(ii) The applicant did not use or operate any equipment of
IGL.

(iii) The expression ‘use of space segment’ of transponder
had no reference to any operations performed by the applicant by means of the
transponder capacity.

(iv) The substance of the contract was the ‘facility’
provided to the applicant for the utilisation of space segment capacity of the
transponder for transmitting the augmented data by availing use of
bandwidth/connectivity capacity provided by IGL by using equipment. Such
facility was provided by IGL to the applicant and other customers also.

(v) The analogy of TV operations by means of a remote
control was inappropriate, since the ground station was an independent unit
and not an accessory to the satellite.

(vi) The recent ruling of the AAR in the case of Dell
International Services (P) Ltd., (2008) 218 ITR 209 was relied upon to support
that there was availment of standard service provided by the service provider.

(vii) Even though IGL was alleged to have its regional
office in India, no part of the receipts from the applicant could be said to
be attributable to any PE in India and hence, they were not exigible to tax in
India.


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Income of foreign company from golf tournaments on remote basis by hiring independent contractors not taxable in India

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New Page 1

Part C — International Tax Decisions



4 Golf in Dubai, LLC v. ADIT, In re


(2008) 306 ITR 374 (AAR)

Articles 5 & 7 of India-UAE DTAA

Dated : 13-10-2008

Issue :

Income of a foreign company from organising golf tournaments
on remote basis by hiring independent experienced local contractors is not
taxable in India.

Facts :

The applicant was a company registered in the UAE having its
registered office in Dubai. The applicant was an event organiser and had
affiliations with the European Professional Golf Association. It was engaged in
the business of promoting golf nationally as well as internationally by way of
organising golf tournaments in different countries.

The applicant organised two golf tournaments in India at
Eagleton in Bangalore and at Delhi Golf Club (‘DGC’) in Delhi. The applicant was
granted the right to use the premises to host the events at Bangalore and Delhi
against payment of a consideration. The tournaments were organised by hiring
independent third-party local contractors and service providers.

The applicant received sponsorship fees, management fees and
income from sale of merchandise at the venue and over the Internet.

The issues before the AAR were :

(1) Whether the applicant was having a Permanent
Establishment (‘PE’) in India in terms of Article 5 of India-UAE DTAA ?

(2) Whether Eagleton or DGC could be deemed to be agency PE
of the applicant in India, since the tournaments were held at grounds of each
of these clubs and/or they were providing assistance to the applicant in
organising the golf tournaments ?

(3) If PE is held to have triggered the extent to which
various streams of events-related receipts can be attributed for taxation in
India ?

(4) Lastly, could there be taxation even in absence of PE
trigger either as fees for technical services or otherwise ?


It was the claim of the applicant that there were no tax
implications in India on the following counts :

(a) ‘Fixed place of business’ for PE trigger connotes a
specific geographic location of the enterprise where activities at that
location must endure for more than a temporary period. Since the tournament
lasted only for six to seven days, the requirements of Article 5(1) of the
India-UAE DTAA were not satisfied for emergence of base Rule PE as the
requisite degree of permanence was lacking. The applicant’s business of
organising golf was neither carried on regularly, nor was there certainty that
it will be carried on regularly.

(b) The applicant relied on OECD Commentary to support that
the place of business for PE emergence must be fixed i.e., it must be
established at a distinct place with a certain degree of permanence. In the
present case, the mere access to the place was not sufficient to hold that the
‘place’ was ‘fixed’ and was at the ‘disposal of the applicant’.

(c) There was no service PE as the applicant’s employees or
other personnel had not stayed in India for furnishing services for the
threshold period of 9 months as prescribed in the treaty.

(d) There was no Agency PE as the various third party
vendors with whom the applicant had entered into arrangements for organising
the tournaments were independent contractors who acted in their ordinary
course of business operations.

(e) The sponsorship fees and the management fees were not
‘royalty’, as such fees were not received as consideration for the use of or
right to use any patent, secret formula or information concerning any
industrial or commercial experience. The India-UAE DTAA does not have any
specific Article dealing with FTS and hence there can be no taxation even
assuming receipts are held to be FTS.


The Revenue authorities contended that :

(a) The applicant had a PE in India as it had a ‘fixed
place of business’ at its disposal. Reliance was placed on OECD Commentary to
the effect that if an enterprise has a certain amount of space at its
disposal, which is used for the business activities, it is sufficient to
constitute a place of business even in absence of formal legal right to own
the place. The commentary by Klaus Vogel on Double Taxation Convention was
also referred to contend that regularly maintaining the same pitch in a market
place for weekly market would be enough to constitute a ‘fixed place of
business’.

(b) The service provider with whom the applicant had
entered into agreements, had provided the services for organising the events
and therefore could be regarded as agents of the applicant, thus constituting
an Agency PE for the applicant in India.

(c) The service PE threshold was crossed if the initial
visit of the Vice-Chairman of the applicant-company prior to the organisation
of events was taken into account.


Held :

The AAR ruled as follows :

(i) By organising and conducting golf tournaments at Delhi
and Bangalore for a week’s duration without repetition thereof, did not result
in the applicant carrying on business through a fixed place in India. The
essential ingredients of regularity, continuity and repetitiveness as conveyed
by the word ‘carried on’ were absent. Accordingly, no fixed place PE existed
for the applicant in India.

(ii) As regards the Agency PE, the AAR held that the
independent contractors or third-party vendors were acting in the ordinary
course of their business and were not devoted wholly or almost wholly on
behalf of the applicant in India. The activities of the third-party
contractors were not carried out wholly on behalf of the applicant. Hence,
there was no Agency PE of the applicant in India.

(iii) The service PE did not emerge in absence of ‘furnishing of services’ by a foreign enterprise. The concept of ‘furnishing of services’ is a bilateral concept which necessitates the existence of at least two parties i.e., a provider of services and a recipient of services. The presence of employees for enterprise’s own activities does not trigger service PE.

(iv) Though the event management fees received by the applicant could be brought to tax within the purview of FTS, in absence of specific provision in India-UAE DTAA dealing with FTS, the same could not be taxed. The management fees could not be brought to tax under the residual Article 22 dealing with ‘other income’.

On facts, matter remanded to tax officer to determine place of effective management of the company incorporated in Mauritius.

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New Page 2

Part C : Tribunal & AAR International Tax Decisions

 


19 2010 TII 66 ITAT-Del. Intl.

SMR Investment Limited v. DDIT

Article 13 of India-Mauritius DTAA

Dated : 26-3-2010

On facts, matter remanded to tax officer to determine place
of effective management of the company incorporated in Mauritius.

Facts :

The taxpayer, a company in Mauritius (Mauco), earned certain
capital gain on sale of shares of Indian Company. Such gain was claimed exempt
in terms of Article 13(4) of India-Mauritius Treaty.

The tax officer of Mauco called for certain information about
investment decisions, board meetings, etc. The AO also examined and recorded
statement of the director of the share-broking company in India through which
Mauco had purchased and sold shares. Based on such statement, the AO noted that
the decision for purchase and sale of shares was conveyed to the share-broking
firm by one Mr. SR who held 99% shares of Mauco and was also one of the 3
directors of Mauco. The AO therefore asked for copy of passport of Mr. SR as
also the details of board meetings and resolutions passed by Mauco. The AO
denied the benefit of the treaty to Mauco by holding that :


(i) Copy of passport of Mr. SR was not made available
despite specific request to that effect;

(ii) In absence of evidence as to where Mr. SR was when
the investment decisions were made, it could be concluded that effective
management of Mauco was in India.


The AO accordingly held Mauco to be resident of India and
assessed Mauco in respect of capital gains income.

Held :

The Tribunal noted decision of the co-ordinate Bench in case
of Radharani Holdings Private Limited (2007) 110 TTJ 920 (Delhi). In that case,
the Company was held to be resident of Singapore as all the board meetings were
held in Singapore and this was substantiated by the residency certificate
obtained from Singapore Government in addition to furnishing minutes of the
board of directors duly authenticated by the Indian Commission in Singapore. The
Tax Department sought to distinguish applicability of the ruling on the ground
that no such evidence was furnished by Mauco. As against that, the taxpayer was
seeking to place reliance on details of board meetings, presence of other
directors at such board meetings, etc. It was also contended that onus of
proving that control and management of Mauco is not situated in Mauritius is on
the Tax Department.

The ITAT restored the matter to the AO for deciding the issue
afresh/de novo. The Tribunal directed the AO to consider all the documents and
examine the authenticity thereof with regard to claim of board meetings held in
Mauritius. The ITAT observed that :

“After considering all the documents which were either placed
before the lower authorities or before the Bench for the first time, we find
that it is very essential to once again examine the authenticity of the same and
their relevance with regard to board meetings held in Mauritius. For this
purpose, either third party evidence or evidence by any government agency either
situated in Mauritius or in India is required to be brought on record to
substantiate the assessee’s claim. In the interest of justice and fair play, we
restore both the appeals to the file of the AO for deciding the same afresh/de
novo in terms of our observations contained hereinabove.”

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S. 80HHC and S. 80IA — Deduction allowed u/s.80IA need not be reduced from the profits of the business in computing deduction u/s.80HHC

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New Page 1

8 J. B. Chemicals & Pharmaceuticals Ltd.
v. ACIT


ITAT ‘B’ Bench, Mumbai

Before S. V. Malhotra (AM) and

R. S. Padvekar (JM)

ITA No. 6044/Mum./2002

A.Y. : 1999-2000. Decided on : 30-7-2008

Counsel for assessee/revenue : D. R. Rayani/

Mohit Jain

S. 80HHC and S. 80IA of the Income-tax Act, 1961 — Whether
deduction allowed u/s.80IA is to be reduced from the profits of the business in
computing deduction u/s.80HHC — Held, No.

 

Per S. V. Malhotra :

Facts :

The issue before the Tribunal was whether the deduction
u/s.80HHC(1) and S. 80IA can be independently allowed subject to the overall
ceiling of 100% of profit of the undertaking. According to the AO, in view of
Ss.(9) of S. 80IA, when the assessee had claimed deduction u/s.80IA, then the
deduction u/s.80HHC was not allowable in respect of that portion of income on
which deduction u/s.80IA had been claimed. In the case of the assessee, since
the business profit after reducing eligible profit u/s.80IA worked out negative,
he disallowed the deduction u/s.80HHC.

 

On appeal, the CIT(A) directed the AO to independently
compute the deduction u/s.80IA and u/s.80 HHC and restrict the profits and gains
to be excluded from business profit for the purpose of S. 80 HHC only to the
extent of amount allowed as deduction u/s.80IA.

 

Held :

The Tribunal took note of the following and allowed the
appeal filed by the assessee :

(i) In the assessee’s own case for the A.Y. 1999-2000, the
Tribunal relying on the decision of the Mumbai Tribunal in the case of Ifunik
Pharma Ltd. had rejected the appeal filed by the Revenue and the appeal filed
by the assessee was allowed.

(ii) In the case of V. Chinnapandi, the Madras High Court,
relying on the decision of the M. P. High Court in the case of J. P. Tobacco
Products Pvt. Ltd. (SLP filed against which by the Revenue was dismissed by
the Apex Court), had taken the view that both the Sections were independent,
and hence, the deductions could be claimed u/s.80HHC as well u/s.80I on the
gross total income;

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

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

 


Cases referred to :



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

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

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

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

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

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

 


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S. 158BE — Limitation period cannot get extended by issuing prohibitory order u/s.132(3).

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New Page 1

7 Nandlal M. Gandhi v. ACIT

ITAT ‘E’ Bench, Mumbai

Before G. D. Agrawal (VP)

as Third Member

IT(SS)A No. 11 (Mum.) of 2000

A.Ys. : 1-4-1987 to 28-7-1997. Decided on : 16-6-2008.

Counsel for assessee/revenue : K. Shivaram & Ajay Singh/Rajiv
Nabar

 

S. 158BE of the Act, 1961 — Time limit for completion of
block assessment — On the day of search (i) panchnama prepared with the remark
that ‘search temporarily concluded for the day to be commenced subsequently’;
and (ii) prohibitory order u/s.132(3) issued — After a period, prohibitory order
revoked and panchnama prepared with the remark ‘search is finally concluded’ —
Whether the period of limitation is to be computed from the date search was
originally initiated or from the later date of panchnama — Held that the period
of limitation is to be computed from the former date.

 

Facts :

The search u/s.132 was carried out on 28-7-1997 and continued
till 29-7-1997. During the search certain incriminating materials which,
inter alia, included jewellery and shares were found. The search party
prepared an inventory in respect of the material found and a panchnama was
drawn. As per the panchnama, only books of accounts and certain documents were
seized and no seizure was effected in respect of other materials found,
including those of jewellery and shares. In the panchnama it was stated that
search was temporarily concluded for the day to be commenced subsequently.
However, on the same day i.e., 29-7-1997, a prohibitory order was issued
u/s.132(3) in respect of jewellery and shares, which was subsequently revoked on
1-8-1997 and 8-9-1997 in respect of jewellery and shares, respectively. On
8-9-1997, another panchnama was prepared, wherein it was stated that ‘search is
finally concluded’, and no other comments/remarks were recorded therein. During
the period 29-7-1997 to 8-9-1997, certain statements were recorded by the I.T.
authorities.

 

In response to notice u/s.158BC, the assessee filed his block
return of income declaring undisclosed income of Rs.16.35 lacs which was
assessed by the AO in his order dated 30-9-1999 at Rs.55.69 lacs. Being
aggrieved the assessee challenged the order passed by the AO, on the grounds,
amongst others, that u/s.158BE, the order passed by the AO was beyond the
stipulated period of 2 years from the end of the month in which the warrant of
authorisation of search was executed. However, the CIT(A) did not agree with the
contention of the assessee and upheld the addition made by the AO.

 

The assessee appealed before the Tribunal. There was a
difference of opinion between the two members, in relation to the assessee’s
ground relating to time limit prescribed u/s.158BE for completion of block
assessment u/s.158BC. Therefore, the matter was referred u/s.255(4) to the Third
Member.

 

Before the Third Member, the Revenue contended that the
second panchnama drawn on 8-9-1997 was in continuation of the first panchnama
dated 29-7-1997 and therefore, it should be taken that the first panchnama dated
29-7-1997 was finally concluded on 8-9-1997. According to it, the search had
been completed on the date when the prohibitory order u/s.132(3) was revoked,
which in this case was 8-9-1997. It was further submitted that between the
period of first panchnama dated 29-7-1997 and second panchnama dated 8-9-1997,
statements u/s. 132(4)/131 on five different occasions were recorded and after
considering the statements recorded, the authorised officer considered it
appropriate to lift the prohibitory order. Therefore, it was contended that the
search got concluded on 8-9-1997 when finally the prohibitory order u/s.132(3)
was revoked.

 

Held :

The Tribunal noted that the Department was seeking extension
of time limit for framing the assessment on the strength of prohibitory order
issued u/s.132(3) on 29-7-1997, which was finally revoked on 8-9-1997 and the
panchnama was prepared stating that the search was finally concluded.

(2013) 92 DTR 345 (Rajkot)(SB) Bharti Auto Products vs. CIT A.Ys.: 2009-10 & 2010-11 Dated: 06.09.2013

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Section 206C: A seller of scrap is liable for collection of tax at source irrespective of the fact that such a seller has not himself generated scrap from manufacture or mechanical working of materials undertaken by him. The mode of sale of scrap need not be necessarily akin to the auction or tender for this purpose but it can be any mode.

Section 206C(6A): First proviso inserted by the Finance Act, 2013 with effect from 01-07-2012, would apply retrospectively.

Facts:
The assessee imported brass scrap and sold it without collecting tax at source. The assessee’s case was that the brass scrap sold by him was not generated from the manufacture or mechanical working of material and therefore, it was not ‘scrap’ within the meaning of Explanation (b) to section 206C. According to him, the provisions of section 206C would be attracted only when scrap was sold to a “buyer”, which is defined as a person who obtains in any sale, by way of auction, tender or any other mode, goods of specified nature. It was submitted that sale of goods by an assessee to a buyer in retail sale of such goods cannot therefore be construed as sale to a buyer as such sale was not by way of auction or tender or any other like mode and therefore such transactions in retail sale between the assessee and his buyer would clearly be outside the scope of section 206C.

The Assessing Officer rejected the assessee’s explanation. He held that since the assessee had failed to collect the tax at source as required by section 206C(6) on the sale of scrap made by him to various dealers, he was liable to pay it u/s. 206C(6) alongwith interest u/s. 206C(7).

Held:
The isues in this case are
a) Is it necessary that the scrap should have been generated by the assessee himself from the manufacture or mechanical working of material undertaken by him in order to apply the provisions of section 206C?

Explanation (b) to section 206C defines ‘scrap’ as ‘waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons’. It is evident that the word ‘scrap’ occurs twice in the said definition. The first part of the definition, namely, ‘waste and scrap from the manufacture or mechanical working of materials’ seeks to cover both ‘waste’ as well as ‘scrap from the manufacture or mechanical working of materials’. In the absence of any definition of the term ‘waste’ in the Act, one has to turn to its meaning as it is understood in common parlance. In common parlance, ‘waste’ is understood as something unusable or unwanted material. According to the Concise Oxford Dictionary, ‘waste’ is something which has been ‘eliminated or discarded as no longer useful or required’. ‘Scrap’, on the other hand, represents something which is left over after the greater part has been used or consumed. ‘Scrap’ thus refers to the incidental residue derived from certain types of manufacture, which is recoverable without further processing. It is in this context that the words ‘from the manufacture or mechanical working of materials’ qualify the preceding word ‘scrap’ and not ‘waste’. The definition of ‘scrap’ as given in Explanation (b) is not limited to scrap fromthe manufacture or mechanical working of materials alone but extends to cover ‘waste’ also. Therefore, the scope of the term ‘scrap’ as defined in Explanation (b) cannot be interpreted so as to restrict its application to scrap from the manufacture or mechanical working of materials alone.

The word ‘and’ in the expression ‘waste and scrap from the manufacture or mechanical working of materials’ has been used to enlarge the scope of ‘scrap’, so as to cover both, i.e., waste as well as scrap from the manufacture or mechanical working of materials.

Section 206C seeks to prevent evasion of taxes. It therefore, needs to be construed in a manner that seeks to achieve the purpose for which it has been enacted.

Further, the use of the words ‘business of trading’ in the head note of section 206C makes it clear that the applicability of section 206C is not restricted to sale of scrap generated from the business of manufacturing undertaken by the assessee himself but covers sale of scrap in the business of trading in scrap also.

b) Should the mode of sale of scrap be akin to auction or tender in order to fall in the definition of “buyer” u/s. 206C?

It was submitted that the provisions of section 206C require a seller to collect the tax at source from the buyer (and from none else) on sale, inter alia, of scrap. Attention was drawn to the definition of ‘buyer’ as given in sub-clause(i) of clause (aa) of Explanation to section 206C, which defines a ‘buyer’ as ‘a person who obtains in any sale, by way of auction, tender, or any other mode, goods of the nature specified in the Table in sub-s. (1) ……’.

Placing reliance on the interpretative tools of noscitur a sociis and ejusdem generis, it was contended that the phrase ‘any other mode’ in the expression ‘a person who obtains in any sale, by way of auction, tender or any other mode …..’ in Explanation (aa)(i) would get its meaning from the words preceding it, namely, ‘by way of auction, tender’ and, therefore, the said phrase, namely, ‘any other mode’ would have to be construed narrowly and in the same sense as something akin to auction or tender.

It was contended that the assessee has sold the scrap in retail trade and not by way of auction or tender or any similar mode or mode akin to auction or tender and, therefore, it was not required to collect tax at source from them u/s. 206C as such purchasers in retail trade were not buyers within the meaning of Explanation (aa)(i) to section 206C.

The principles of ‘noscitur a sociis’ and ‘ejusdem generis’ apply only when meaning of questionable or doubtful words or phrases in a statute is required to be ascertained. If a given provision is plain and unambiguous and the legislative intent is clear, there is no occasion to call in aid those rules.

The use of the word ‘or’ in the aforesaid expression shows that all the three phrases (namely, auction, tender or any other mode) are intended to carry independent meaning without being controlled by  each other. The words “any other mode” are words of wide amplitude and, therefore, cover all possible modes of sales in addition to specific modes of sales by way of auction or tender. Hence, they cannot be construed ejusdem generis or as referring to similar sales as those by way of auction or tender.

c) Does the first proviso to section 206C(6A) apply retrospectively?

The attention of Tribunal was also drawn to the first proviso inserted in section 206C(6A) with effect from 01-07-2012 which stipulates that the payer who fails to deduct tax on the payment made to payee shall not be deemed to be an assessee in default if the payee has paid the tax due on his returned income and fulfilled the other conditions specified therein.

In the aforesaid background, the issue that arises for consideration is whether the first proviso to section 206C(6A) is applicable to pending matters also notwithstanding the fact that it has been made effective from 01-07-2012.

Keeping in view the fact that the first proviso to s/s. (6A) of section 206C not only seeks to rationalise the provisions relating to collection of tax at source but is also beneficial in nature in that it seeks to provide relief to the collectors of tax at source from the consequences flowing from non/short collection of tax at source after ensuring that the interest of the revenue is well protected, thus, there is no hesitation to hold that the said proviso would apply retrospectively and, therefore, to both the assessment years under appeal.

(2013) 144 ITD 325 (Hyderabad) Vittal Krishna Conjeevaram vs. ITO A.Y. 2009-2010 Dated: 10th July, 2013

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Section 54F, read with section 54 – Capital Gains– The expression ‘a residential house’ appearing in sections 54 and 54F has to be understood in the sense that building should be of a residential nature and word ‘a’ should not be understood to indicate a singular number.

Facts:-
The assessee was a co-owner of a residential property. The assessee entered into a development agreement for construction of flats with a developer. As per development agreement the owner had to transfer 50 % of his land for superstructure received as consideration. The assessee received 7 flats towards his share. The Ld AO held that the assessee was entitled to exemption u/s. 54F but only in respect of one flat out of seven flats. CIT (A) also upheld the order of AO.

Held:-
Both the sections, 54 and 54F, speak of either purchase or construction of “a residential house”. Following the decision of the Hon’ble Karnataka High Court in case of. CIT v. Smt. K.G. Rukmini Amma [2011] 331 ITR 211, the Tribunal held that the expression “a residential house” as appears in section 54 of the Act, cannot be interpreted in a manner to suggest that the exemption would be restricted to a single residential unit. “A residential house” as mentioned in section 54(1) of the Act, has to be understood in a sense that the building should be of a residential nature and the word “a” should not be understood to indicate a singular number. Assessee was entitled to exemption u/s. 54F in respect of all the seven flates.

Note:
As the decision of Special Bench, Mumbai in case of ITO vs. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB) has been disapproved by the High Court in case of CIT vs. Syed Ali Adil. [2013] 352 ITR 418, the same was not considered to be a good law and hence not followed. CIT vs. D. Anand Basappa [2009] 309 ITR 329/180 Taxman 4 (Kar.) followed CIT vs. Syed Ali Adil [2013] 352 ITR 418/215 Taxman 283/33 taxmann. com 212 (AP) followed

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[2013] 144 ITD 461 (Hyd) S. Ranjith Reddy vs. DCIT AY : 2006-07 Date of order : June 07, 2013

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Section 2(47) – joint development agreement – mere signing of agreement without any other performance cannot be termed as transfer for the purpose of capital gains.

Facts :
The assessee had received certain land from his late father. He, alongwith other family members entered into joint development agreement (joint venture) on 28-02-2006 with L constructions which itself held land in the same area. As per the agreement the assessee was to receive developed plots (i.e. constructed properties) in lieu thereof. The assessing officer, relying on the decisions of Chaturbhuj Dwarkadas Kapadia [2003] 260 ITR 491 (Bom.) held that there was a transfer of land on 28-02-2006 itself.

Held:
The Hon’ble tribunal held as under: The joint venture project was in a nascent stage. In the concerned previous year, nothing happened other than the execution of the agreement. The transfer of an immovable property always contemplates transfer of an existing property, i.e., a property in praesenti. . As far as the assessee is concerned, there was only an agreement. The proposed project was still to be born as the offshoot of the assessee.

The assessee was not transferring any right or any property to ‘L’. The assessee assigned its landed property in favour of ‘L’ by the joint venture agreement between the assessee and ‘L’. There cannot be a sale to oneself. Nothing was exchanged in the previous year relevant to the assessment year under appeal. No rights are relinquished. It only proposes to redefine the rights.

The assessing officer has concluded that providing land for the purpose of development is a transfer. The consent given by the assessee to provide its land for developing the housing project is only one of the necessary stipulations of the whole scheme. It cannot be broken into an independent segment so as to conclude the same as transfer. The provision of land to facilitate the implementation of the joint venture is always to be read with other equally important stipulations.

Even though the agreement entered into is an enforceable one, that by itself does not take the character of an immovable property. The agreement speaks about the intentions of the parties. Once the project is completed and all the stipulations are satisfied, the parties may come to declare the final satisfaction of the agreements. Only at that point of time, the question really arises as to whether there was any transfer within the meaning of section 2(47). The housing project was a proposed project. As already stated, a transfer is contemplated only in the case of an existing property. In the present case the property was only in the nature of mutual rights. The project and development are yet to happen. Strictly, speaking, the projects and plans may happen or may not happen.

As far as applicability of section 53A of the Transfer of Property Act is concerned, it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract.

It is clear that willingness to perform for the purposes of section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. It is only elementary that, unless provisions of section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer u/s. 2(47)(v).

Both the developer and the assessee were having the landed property. They pooled together the landed property along with some other parties who were owners of some other landed property and all parties together gave licence to the builder to enter the premises and construct houses. No sale was effected on the date of agreement. No consideration has passed between the parties on signing theagreement. Further from the date of signing of development agreement dated 28-02-2006 to 31-03- 2006, no progress has taken place in the said landed property which is subject-matter of the development agreement. Further, there was no consideration in the form of money that passed between the parties. There was no construction, whatsoever, that took place during the period. Even otherwise, there was a General Power of Attorney given by the assessee to the developer. In such a situation, it is only the actual performance of transferee’s obligation which can give rise to the situation envisaged in section 53A of the TP Act. On these facts, it is not possible to hold that the developer performed its obligation during the period in which the capital is sought to be taxed by the Revenue authorities. Thus, the condition laid down u/s. 53A of TP Act was not satisfied during the period. Once it is concluded that the developer did not perform the stipulation as required by the development agreement during the period under consideration and within the meaning assigned to the expression in section 53A of TP Act it cannot be said that there was a transfer u/s. 2(47)(v) so as to levy capital gain tax.

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[2013] 144 ITD 76 (Mum) Mattel Toys (I) (P) Ltd. vs. Dy. CIT, Mumbai A.Y. 2002-2003 Order dated- 12.06.2013

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Section 92C – Transfer Pricing
(i) Resale price method is an appropriate method in case where resale takes place without any value addition to product – where the assessee had followed Transactional Net Margin method but later on during the assessment proceedings claimed that Resale Price Method be followed, the same should be considered.

(ii) An internal comparable can be followed for computation of ALP against external comparable where the assessee sends goods back to its associated enterprise (AE) to get a best available price in comparison to the sale made to a third party.

Facts I:
The assessee-company, a subsidiary of a U.S.A. company being its Associated Enterprise (‘AE’), was engaged in marketing and selling of toys and games imported from its AE. The assessee adopted Transactional Net Margin Method (TNMM) in its transfer pricing report and rejected the Resale Price Method (RPM). Further, the assessee claimed that RPM should be followed instead of TNMM which was rejected by the Commissioner as detailed analysis was given in the TP study report as to why RPM was not taken.

Held I:
The assessee is a distributor of toys and resells the same to independent parties without any value addition. In such situation, RPM can be the best method as there is no much alteration to the products which are resold by the assessee. On the other hand, TNMM can be resorted to only if the other methods have been rendered inapplicable. The revenue contended that once the assessee has chosen a method as appropriate then it should not resort to any other method at an assessment or appellate stage. If a particular method will not result in proper determination of the ALP then it will not serve the purpose of transfer pricing. Therefore, it was held that if at any stage of the proceedings, it is found that another method will result in more appropriate ALP then the assessment officers and the appellate Courts cannot reject the plea of the assessee.

Facts II:
The assessee resells the goods which are imported from the associated enterprise. The assessee in this case has sent the goods back to the associated enterprise. These goods were the unsold ones. The assessee preferred to return the goods to the AE as there was no demand for the product due to change in consumer preferences. The Transfer Pricing officer treated these goods as export to the AE.

Held II:
The assessee returned the goods to the assessee due to a negative trend in the market. It was stated that the assessee had suffered a greater loss while making sale in case of third party in comparison to the sale made to the AE. Thus, the margin of export sale to third party i.e internal comparable should be compared to the export sale made to the AE. Therefore, the issue was remanded to the file of the Transfer Pricing Officer for the purpose of carrying out comparability analysis under internal CUP.

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2013-TIOL-955-ITAT-PANAJI ACIT vs. Joe Marcelinho Mathias ITA No. 43/PNJ/2013 Assessment Years: 2009-10. Date of Order: 26.04.2013

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S/s. 45, 47(xiv) – In a case where an assessee transfers all its assets and liabilities to a private limited company and all conditions of section 47(xiv) are satisfied, AO cannot deny exemption on the ground that sale consideration was higher than the book value.

Facts:
The assessee, an individual, was carrying on business of real estate, as a sole proprietor, by acquiring land, developing the same by sub-dividing the same into plots and selling the said plots. The land was held as stock-in-trade. The net worth of the concern, as per audit report u/s. 50B(3) was Rs. 1.62 crore. On 31-03-2009, vide Deed of Succession, all the assets and liabilities of the proprietory concern were transferred to a private limited company for a consideration of Rs. 963 crore against acquisition of shares of a company at a high premium. The assessee contended that the transfer was covered by section 47(xiv) and therefore, the provisions of section 45 were not attracted.

The Assessing Officer (AO) was of the view that section 47(xiv) does not exempt capital gains if the assets are transferred at a value which is higher than the book value. He held that receipt of additional consideration by way of allotment of shares over and above the proprietor’s capital was in violation of conditions laid down in section 47(xiv). He held that since the assessee got additional income/benefit than what was due as per books of accounts this amounted to receiving any direct or indirect benefit other than by way of allotment of shares and therefore the assessee is not entitled to exemption. The AO taxed the capital gains and denied the benefit of section 47(xiv).

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held :
The assessee has disposed off the industrial undertaking to a private limited company and in exchange thereof, the assessee has received consideration by way of shares in the company. Therefore, this is a clear cut case of a transfer of an undertaking to a private limited company. Section 45 is applicable when there is a profit or gain arising from the transfer. Profit and gains will also include losses. The undertaking has been valued by the assessee more than the net worth, therefore, there is profit and gain and the provision of section 45 was clearly applicable in the case of the assessee. Once a capital gain arises and is chargeable to tax u/s. 45, section 47 provides for certain exceptions according to which certain transactions are not regarded to be transfer.

The only objection on the part of the revenue is that the assessee did not comply with the condition no. 3 of section 47(xiv) since assessee has received consideration by way of allotment of shares in the company and the value of those shares are more than the value of the assets as was disclosed in the books of the proprietory concern. In our opinion, the assessee has duly complied with the condition as stipulated in clause (c) to section 47(xiv). This proviso only requires that same proprietor does not receive any consideration or benefit directly or indirectly in any form or manner other than way of allotment of shares in the company. The words form or manner other than by way of allotment of shares in the company qualify the words `does not receive any consideration or benefit’ as well as `directly or indirectly’. This clearly denotes that proviso (c) permits receiving consideration or benefit directly or indirectly by way of allotment of shares in the company. It is not a case where the assessee has received any other consideration or benefit other than the allotment of shares in the company.

The Tribunal held that receipt of higher value of shares because of revaluation of assets at the time of succession cannot be treated as consideration or benefit received other than by way of allotment of shares. The Tribunal confirmed the order of CIT(A).

This ground of appeal of revenue was dismissed.

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2013-TIOL-941-ITAT-DEL Rachna Gupta vs. ITO ITA No. 5527/Del/2012 Assessment Years: 2003-04. Date of Order: 05.07.2013

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S/s. 147, 148 – Reassessment cannot be done on the basis of a notice issued at the address mentioned as per PAN data when the new address was available in returns of income filed.

Facts :
On 30-03-2010 the Assessing Officer (AO), with the prior approval of the Additional CIT, issued a notice u/s. 148 requiring the assessee to file return of income for AY 2003-04. The notice was issued at an address taken from PAN data. The address given in the PAN data was address of the employer of the assessee where she was then working. Subsequently, the said employer company had shifted its address and the change in address was intimated to ROC as well. In the return of income filed for AY 2003-04, 2004-05 and 2005-06 (all filed before 30.3.2010) the assessee had stated her new address.

The assessee failed to comply with this notice and no return was filed. Thereafter, AO issued notices u/s. 142(1) on 09-06-2010, 06-08-2010 and 14-09-2010. The assessee claimed that it received first notice on 14-09- 2010. In response, the assessee filed a letter dated 22-09-2010 enclosing acknowledgement of Saral form and further stated that the assessee was not holding the relevant record for the assessment year and also that the initiation of the proceedings after lapse of six years was unjustified.

The AO was of the view that the provisions of the Act require issue of notice within a period of six years and not service thereof. The notice was issued within six years from the end of the assessment year. The AO completed the assessment by making an addition of Rs. 6,15,000.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :
The Tribunal noted that it is not disputed by the Department that notice dated 30-03-2010 u/s. 148 was issued at BE-63, Hari Nagar, New Delhi address. From the copy of returns filed for assessment years 2003-04, 2004-05 and 2005-06 prior to 30-03-2010, it is evident that the address of the assessee was BK- 22, Shalimar Bagh, Delhi – 110 052 which was available with the Department and, therefore, admittedly the notice was issued at the wrong address. The 6 year period from the end of the assessment year expired on 30-03-2010. Therefore, in view of the decision of the Hon’ble Delhi High Court in the case of CIT v. Eshaan Holding (P) Ltd. (2012) 344 ITR 541 (Del), it cannot be said that valid notice was issued u/s 148 to the assessee. The Delhi High Court had held as under:

“The first notice issued on January 29, 2004, by speedpost was said to have been served at the old address at East of Kailash. There was no proof of service on record. Even otherwise, this was not valid service because the assessee had already filed its return on November 28, 2003, and in this return address shown was Panchsheel Park. Thus, the record of the Department already contained the new address of the assessee. Before issuing notice u/s 148, it was expected of the Assessing Officer to have checked up if there was any change of address, because valid service of notice of reopening the assessment is a jurisdictional matter and this is a condition precedent for a valid reassessment.”

 Following the ratio of the above mentioned decision, the Tribunal set aside the order of CIT(A) holding that initiation of proceedings u/s. 148 was not legal and, therefore, consequent assessment order framed by AO is quashed.

The appeal filed by the assessee was allowed.

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Business expenditure: Disallowance u/s. 40(a)(ia): A. Y. 2007-08: Amendment by Finance Act, 2010 permitting TDS payment till due date for filing return of income is retrospective:

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CIT vs. Rajinder Kumar (Del); ITA No. 65 of 2013 dated 01-07-2013, 06-09-2013:

For the A. Y. 2007-08, the Assessing Officer found that TDS on the expenses of Rs. 78,51,800/- paid in the month of March 2007 was deposited in April 2007. The Assessee contended that the said expenditure should be allowed since the TDS has been deposited within the due date. The Assessing Officer disallowed the said amount of Rs. 78,51,800/- relying on the provisions of section 40(a)(ia) of the Income-tax Act, 1961 on the ground that TDS has been deposited after March 2007. The Tribunal allowed the assessee’s claim relying on the decision of the Calcutta High Court in the case of CIT vs. Vergin Creations, ITA No. 302/11, G.A. No. 3200/11 dated 23/11/2011, wherein it has been held that the proviso to section 40(a)(ia) of the Act, amended by the Finance Act, 2010 has retrospective effect. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “i) The intention behind section 40(a)(ia) is to ensure that TDS is deducted and paid. The object of introduction of section 40(a)(ia) is to ensure that TDS provisions are scrupulously implemented without default in order to augment recoveries. It is not to penalise an assesee when payment has been made within the time stated.

ii) Failure to deduct TDS or deposit TDS results in loss of revenue and may deprive the Government of the tax due and payable. The provision should be interpreted in a fair, just and equitable manner. It should not be interpreted in a manner which results in injustice and creates tax liabilities when TDS has been deposited/paid and the Respondent who is following cash system of accountancy has made actual payment to the third party for services rendered.

iii) Also, section 40(a)(ia), prior to the insertion of the proviso by the Finance Act, 2010, was not free from interpretative difficulties and problems. The amended provisions are clear and free from any ambiguity and doubt and help curtail litigation. The amended provision clearly support the view that the expression “said due date” used in clause A of proviso to the unamended section refers to the time specified in section 139(1) of the Act. The amended section 40(a)(ia) expands and further liberalises the statutes when stipulates that deductions made in the first eleven months of the previous year but paid before the due date for filing of the return, will constitute sufficient compliance.

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Appeal to High Court – Fresh material produced before the Supreme Court – The Supreme Court remanded the matter to the High Court to consider the said material as it was of relevance.

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In an appeal against the judgement and order passed by the High Court of Punjab and Haryana at Chandigarh, the Supreme Court while issuing notice to the respondent, by its order dated 3rd February, 2012 had passed the following order:

“Issue notice as to why the matter should not be sent back to the High Court as, today, learned counsel for the petitioner has placed before us a number of documents which earlier were not placed before the High Court.”

At the time of admission, the Supreme Court was of the opinion, the documents, which the appellants had filed before it were of some relevance and those documents should be looked into by the High Court before it comes to a conclusion whether the appeal requires to be allowed or to be rejected.

Taking that view of the matter, the Supreme Court set aside the order passed by the High Court and remanded the matter back to the High Court for fresh disposal after accepting the documents that were/ may be filed by the appellants, keeping all the contentions of both the parties open.

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Consortium of members formed for the purpose of joint bid does not constitute AOP if each of the members has specified responsibility independent of the other member and consideration flowing to each of the member is separate. Certain common covenants inc

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New Page 1

Part C : Tribunal &
AAR International Tax Decisions

7 Hyundai Rotem Co.
(2009) TIOL 798 ARA-IT
Dated : 23-3-2010

Consortium of members formed for the purpose of joint bid
does not constitute AOP if each of the members has specified responsibility
independent of the other member and consideration flowing to each of the member
is separate. Certain common covenants including agreeing to joint and several
liability for the comfort of the customer does not alter the situation.

Facts :


Five companies (one Korean, two Japanese and two Indian)
entered into a consortium named MRMB to bid for tender floated by Delhi Metro
Rail Corporation (DMRC). The bid was for designing, manufacturing, supplying,
commissioning, training and transfer of technology of 192 numbers of EMUs. The
contract was for a fixed consideration and was apportioned amongst various cost
centres and was linked to various milestones.

Responsibility of each of the member was clearly identified.
For example, Korean company was responsible for mechanical work, the Indian
company 1 was responsible for electric work, etc. Consideration of each one of
the members was clearly identified. Japco 1 was appointed as a consortium
leader. The amount collected from the customer was disbursed by the consortium
leader to the various members as per the pre-agreed ratio.

The tax authorities were of the view that the consortium
constituted an AOP on account of the following features :

(a) Joint participation of the consortium members in the
tender process.

(b) Bid having been submitted by the consortium.

(c) Execution of single contract.

(d) Appointment of common project director for planning,
organising and controlling execution of the project.

(e) Nomination of a consortium leader and its appointment
as a contact point between the customer and the members.

(f) Constitution of the project Board with nominee of each
member for overall planning, organising or controlling the execution of the
project.

(g) Furnishing of joint bank guarantee.

(h) Joint and several liability for the undertaking of the
contract. The overall responsibility of the consortium was to design,
manufacture, supply, etc. of 192 EMUs for which considerations was also
prefixed.

(i) All in all, there were collaborative efforts on the
part of the parties to undertake the contract which in view of the Tax
Department resulted in formation of the AOP.

AAR held :

  1. AAR noted that
    there is no definition of AOP in the IT Act or under the general law. It
    observed that AOP differs from the partnership and it falls short of a
    partnership, but the degree of distinction between the AOP or the firm is not
    clear.

  2. The constitution
    of AOP is fact-based and there are no hard and fast rules.

  3. In the context of
    IT Act, the association must be one the objects of which is to produce income,
    profits or gains by deploying assets in a joint enterprise with a view to make
    profit.

  4. The facts of the
    present case were akin to the facts before the AAR in case of Van Oord Acz BV
    (248 ITR 399). In view of the AAR, the present consortium did not constitiute
    an AOP on account of the following features :

(a) Nature of work undertaken and capable of being executed
by each member was materially different. Skill-set of each member was
different. Work of one member could not have been relocated to another.

(b) Bid evaluation by the costomer was done keeping in mind
competency of each member. There was no interchangeability or reassignment of
work or overseeing the work of each other.

(c) There was deduction in the original bid amount and the
discount agreed by each member was different. This was indicator of the fact
that economics of each of the members were detemined independently.

(d) In addition to the joint performance guarantee, each
member provided separate guarantee and undertaking.

(e) The agreement specifically clarified that there was no
intent between the parties to create any partnership or a joint venture.

(f) The covenant of joint and several liability was a
safeguard for the client to have better control over the consortium members.


  1. The facts of the case before AAR in GeoConsult ZT GMBH (304
    ITR 283) where the arrangement was regarded as giving rise to AOP were
    distinguishable. In GeoConsult’s case, there was intention to create a joint
    venture; the members had the same skill-set and scope of their work was
    overlapping. Also, the members had assisted each other in performance of the
    work and the members had unrestricted access to the work carried out by the
    other members, etc. The features in the present arrangement were different.

levitra

Payments made towards the share of the cost incurred in respect of research and development activities pursuant to cost contribution arrangement (CCA) is not the payment towards fees for technical services or royalty. Such contribution is not liable to ta

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

6 ABB Limited
(2010) TIOL 94 ARA-IT
S. 2(24), S. 195 of the Income-tax Act,
Articles 5 & 7 of India-Switzerland DTAA
Dated : 15-3-2010

Payments made towards the share of the cost incurred in
respect of research and development activities pursuant to cost contribution
arrangement (CCA) is not the payment towards fees for technical services or
royalty. Such contribution is not liable to tax in the hands of the co-ordinating
agency.

There is no obligation of tax withholding if the amount does
not represent income chargeable to tax.

Facts :


The applicant is a company incorporated in India and part of
the ABB Group, which is a leader in power and automation technologies. The Group
has presence in more than 100 countries.

As per Group’s R&D policy, all basic R&D is coordinated and
directed through group entity in Switzerland (Swissco).

The group entities who wish to participate in basic R&D enter
into a CCA with Swissco. As per the terms of CCA, the entire costs of basic R&D
is shared amongst the participants based on a pre-agreed allocation key. The
participating entities are allowed a royalty-free unlimited access to the
research results, including any Intellectual Property Rights (IPRs) generated
from basic R&D. Any revenue earned from third party is reduced from the total
cost recovered from the participants. The research programme and policy is
decided by the research Board which has nominee from the participating entities.
The research Board decides on the research to be undertaken, the budgeted cost,
recovery to be made from various participants based on budget and adjustment to
be made based on the actual cost incurred and third-party revenue earned, etc.
The research Board gets the research carried out through various research
centres to whom the remuneration is paid on cost plus basis.

CCA made it clear that though the economic benefits of
research vest in various participants, for administrative reasons and
convenience, the IPRs generated are legally registered in the name of Swissco.

In addition to the cost contribution payments, each
participant also paid a ‘coordination fee’ to Swissco for its role as
administrator and coordinating agency under the CCA. Such fee was accepted to be
chargeable to tax in India and no question was raised on taxability of such
amount.

The applicant sought the ruling on the tax implications of
the contributions proposed to be made to Swissco. The primary contentions of the
applicant before the AAR were (i) that the CCA was merely a pooling and
coordinating arrangement and represented reimbursement of actual cost incurred
in carrying out the research jointly; (ii) the contribution did not partake the
character of income and was, therefore, not chargeable to tax in India; and
(iii) even if the contribution constituted income, it represented business
income of Swissco, which in absence of PE in India, was not chargeable to tax.

AAR held :

  • The payments made to
    Swissco are not in the nature of FTS since Swissco had not rendered any
    managerial, technical or consultancy service to the participants of CCA.
    Swissco did not deploy any personnel to perform any services in India.


  • The contribution was not
    payment on account of royalty. It is true that research results in creation of
    IPR in the form of information, technical knowledge and experience. However,
    payment made to Swissco was not for getting rights to such IPRs. The contract
    research organisation through whom the research board got the research carried
    out merely works as contractor without retaining IPR or right to commercial
    exploitation of the research.


  • Even though the IPRs
    generated from the research were to be registered in the name of Swissco,
    their economic benefits and beneficial ownership vested in the contributories.
    Admittedly, all participants had royalty-free and perpetual access to IPR.
    Also, amounts received from third party or from exploitation of IPR reduced
    the cost of the research to the participants. The arrangement was thus for the
    benefit of all the participants where the resources were pooled by various
    participants for undertaking R&D for common benefit.


  • The arrangement was such
    that each participant reimbursed the actual cost incurred by making the
    proportionate contribution. The OECD Guidelines on CCA arrangement also makes
    it clear that each participant is effective owner of the IPR generated through
    common pool and hence the contribution is not royalty paid to any other
    person.


  • The amount of
    reimbursement was not chargeable to tax in India and consequentially not
    liable to TDS.


  • The AAR clarified that
    its decision on non-taxability however does not preclude enquiry in
    appropriate proceedings about the nature of contribution on an armed-length
    basis.



levitra

No income arises to the foreign company in India in the course of deputing personnel to an Indian company, who work under the control and supervision of the Indian company and thus become employee of the Indian company. Amount of salary of deputed employe

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New Page 1Part C : Tribunal &
AAR International Tax Decisions

5 DDIT v. Tekmark Global Solutions LLC
(ITA 671/2007) (ITAT-Mum.)
Article 5(2), 7 of India-USA DTAA
Dated : 23-2-2010


No income arises to the foreign company in India in the
course of deputing personnel to an Indian company, who work under the control
and supervision of the Indian company and thus become employee of the Indian
company. Amount of salary of deputed employees reimbursed to the foreign company
is not taxable in India.

Facts :

Lucent Technologies Hindustan Private limited (ICO), an
Indian company, entered into an agreement with the assessee, a tax resident of
USA, to have their personnel deputed as per specifications of ICO.

ITAT considered the following terms of the contract between
ICO and the assessee to conclude that the arrangement between them was not for
providing of services by the assessee through its employees but that of
selecting and offering personnel for working as employees of ICO :

  • ICO provided
    specifications of the employees whom it (ICO) required pursuant to deputation
    arrangement.

  • The deputed personnel
    worked under the direction, supervision and control of ICO.


  • The assessee was not
    responsible for the work done or actions taken by the deputed personnel.


  • The lodging, boarding and
    other related expenses of deputed personnel were arranged by ICO.


  • The agreement made it
    clear that the agreement was for providing employees as per specifications of
    ICO and not for providing services to ICO.


The ITAT did note that the deputed personnel continued to be
on the payroll of the assessee and that the salary of the deputed personnel was
paid by the assessee for recoupment by way of reimbursement from ICO.

The Tax Department contended that the arrangement involved
rendering of services by the assessee to ICO through its employees in India and
that there was emergence of Service PE of the assessee in India. Accordingly,
the amounts were held chargeable in the hands of the assessee.

ITAT held :

The ITAT held :

  • No part of technical
    services were rendered by the assessee to ICO.


  • The deputed personnel for
    all practical purposes became the employees of ICO and carried out work
    allotted to them by ICO. The assessee had no control over the activities or
    the work performed by the deputed personnel. ICO alone had the right to remove
    the deputed personnel.


  • When the services
    rendered are independent of, and not under the control of, the assessee, the
    deputed personnel do not give rise to emergence of PE of the assessee in
    India.


  • In the circumstances, the
    amount received was reimbursement of salary which the assessee had disbursed
    as advance on behalf of and to the employees of ICO.


  • Even on an assumption
    that there is emergence of PE, there was no income embedded in the
    reimbursement of expenses.



levitra

Provisions of Section 195 are not attracted where the payment represents reimbursement of expenses having no element of income.

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New Page 1

Part C — International Tax Decisions




  1. Cairn Energy India Pty Ltd. vs. ACIT
    [2009-TIOL-220-ITAT-MAD] (Chennai)

A.Ys. : 1996-97 to 1999-2000

Date : 20.02.2009

Sections 40(a)(i), 42 and 195.

Issue :

 

@ Provisions of Section 195 are not attracted where the
payment represents reimbursement of expenses having no element of income.

@ Where income is computed under the special provisions of Section 42, no
disallowance can be made under Section 40(a)(i).

Facts :



Ø The assessee, an Australian company, was engaged in the
business of prospecting for and production of mineral oils in India. Since
the exploration and production activities carried out by the assessee were
covered by Production Sharing Contract (PSC) approved by the Parliament, the
assessee was admittedly covered by provisions of Section 42 of the Act.

Ø The assessee made certain reimbursements to its parent
company outside India in connection with business activity carried on by the
assessee in India. These reimbursements were claimed as expenditure under
Section 42. The AO disallowed the claim on the ground that assessee had
failed to deduct tax at source.

Ø The assessee submitted before the Tribunal that the
expenditure was in connection with petroleum operations and were charged to
the assessee on cost-to-cost basis in terms of the PSC. Since the charge was
at cost without any mark-up, withholding in terms of 195 was not required.
The assessee also argued that Section 42 had an overriding effect and is a
separate code by itself and accordingly the general computational provisions
of the Act cannot be applied. Reliance in this behalf was made to Supreme
Court decision in the case of Enron Oil and Gas India Ltd. [305 ITR 75].
Alternatively, based on judicial precedents it was submitted that there
cannot be any withholding on reimbursement where there was no element of
income.


Held :



Ø The Supreme Court in Enron (referred above) has
analysed the scope of Section 42 and held that the Section is a special
provision, is a code by itself for computing the income in respect of the
business of prospecting, extraction or production of mineral oils.

Ø In terms of Section 42, any expenditure which is
referred to in PSC, whether revenue or capital in nature is allowed as a
deduction. The scheme of Section 42 overrides all general computational
provisions including Section 40(a)(i). Hence, no disallowance can be made in
terms of Section 40(a)(i).

Ø As regards withholding on the payment, the Tribunal
held that the auditors of the parent company had certified that such payment
represented actual expenses and there was no reason to disbelieve such
certificate. Even, PSC provided and regulated that charges shall be equal to
the actual cost of providing services and shall not include any element of
profit. The Tribunal relied on decisions of CIT vs. Industrial Engg.,
[202 ITR 1014] (Delhi) and CIT vs. Dunlop Rubber Company, [142 ITR
493] (Calcutta) and held that no income accrued to the parent company from
payments representing reimbursement of expenses and hence provisions of
Section 195 did not apply.


levitra

Whether income earned from transportation of cargo in international traffic by aircraft owned, chartered or leased by other airlines is covered by Article 8 of India-USA Treaty.

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New Page 1

Part C — International Tax Decisions




  1. ADIT vs. Federal Express Corporation, USA
    [2009-TIOL-179-ITAT-Mumbai]

A.Y. : 1998-99 to 2000-01

Date : 29.01.2009

Article 8 of India-USA Treaty

Issue :

Whether income earned from transportation of cargo in
international traffic by aircraft owned, chartered or leased by other airlines
is covered by Article 8 of India-USA Treaty.

 

Facts :



Ø The assessee, a US company was engaged in integrated
air and ground transportation of time sensitive and time definite shipments
to various destinations worldwide (airport to airport services). It also
provided door-to-door delivery service for international shipment
(door-to-door delivery).

Ø The assessee had its own fleet of aircrafts, however,
in case of shipments which required express custom clearance it had entered
into interline arrangement with other airlines.

Ø In India, it was granted approval by the Director
General of Civil Aviation (DGCA) to operate air cargo services to and from
India. During the relevant year, in absence of approval from DGCA, the
assessee entered into interlines arrangement with other airlines for
carrying its cargo to India. In respect of monitoring of movement of cargo
within India, it entered into collaboration with Blue Dart Express which
performed actual pick-up and delivery of cargo. It established branches in
India and operated air cargo services to and from India.

Ø The Assessing Officer held that the assessee was
engaged in courier activities and not in the business of operation of
aircrafts in international traffic. Accordingly he denied benefit of
exemption of Article 8 of India-USA Treaty as claimed by the assessee. The
claim was however accepted by the CIT(A).

Ø The Department preferred appeal on the ground that
unless assessee establishes linkage between transportation of cargo carried
by other airlines with the carriage from the hub by the assessee, it cannot
be allowed the benefit of Article 8. Reliance was placed on Mumbai Tribunal
decision in the case of Cia de Navegacao Norsul [27 SOT 316]. The Department
argued that the term ‘profits from operation of ship or aircraft in
international traffic’ is defined in Article 8(2) of the Treaty and hence no
reference can be made to the commentaries and other support/guidance to
interpret. Article 8(2)(b) includes activities directly connected with
transportation of goods by the owners or lessees or charterers but would not
include cargo carried in international traffic by other airlines or inland
transportation of cargo.

Ø Before the Tribunal, the assessee submitted it had
entered into interline arrangements for transportation of cargo to a hub
from where aircrafts of the assessee were used for transportation of the
same in international traffic under slot arrangement. Reliance was also
placed on Mumbai Tribunal decision in the case of Balaji Shipping (UK) Ltd.
[25 SOT 325], where it was held that the expression ‘Profits from operation
of ships’ in UK Treaty would include not only profits from operation of
ships owned, chartered or leased, but also transportation through other
ships under slot arrangement. It further submitted that services of other
airlines were merely incidental to the main activity and hence covered by
Article 8. Alternatively it was submitted that the arrangements were pool
arrangement providing reciprocal services covered by Article 8(4) of the
Treaty.

Ø As regards inland transportation, assessee contended
that these activities were directly connected to the main activity of
transportation of cargo in international traffic covered by Article 8(2)(b).


Held :



Ø The assessee could be said to be engaged in the
business of transportation of cargo in the international traffic (and not in
courier services) as it is engaged in the business of transporting cargo
through a large fleet of globally-owned aircraft and it was recognised as
such by the authorities in India and in the USA. It was a registered member
of the International Air Transport Association.

Ø In the decision of Balaji, the Mumbai Tribunal referred
to OECD commentary since the term ‘profits from operation of ship’ is not
defined in UK Treaty. However, since the term ‘profits from operation’ has
been defined in Article 8 of US Treaty, relying on its decision in Delta
Airlines, where no reference was made to the commentary, the Tribunal held
that the benefit of Article 8 would be available only to the extent the
activity falls under the definition of Article 8(2).

Ø The transportation by aircraft, which is neither owned
nor leased by assessee would be outside the scope of the term ‘profits from
operation of ships or aircraft’ as defined in Article 8(2) of the US Treaty.
Accordingly, the Tribunal held that the income from operation involving
interline arrangement would not be exempt in India.

Ø The term ‘other activity directly connected with such
transportation’ would only mean transportation as referred in Article 8(2)
and as already concluded, the assessee is not covered by Article 8(2).
Accordingly, relying on decisions of the Mumbai Tribunal in Safamarine
Containers Lines [24 SOT 211] and Delhi Tribunal in KLM Royal Dutch Airlines
[307 ITR 142] (AT), the Tribunal held that inland transportation was also
not connected with the main activity and would be outside the scope of
Article 8.

Ø Where the income is not covered by the provisions of
Article 8, it would be treated as business profits under Article 7 of the
treaty and accordingly, the claim of the assessee would be examined under
Article 7.

Ø In respect of the alternative, claim of exemption under
Article 8(4) as pool arrangement, the Tribunal held that the same could be
examined by ascertaining whether the profits were derived from participation
in a pool, joint business or an international operating agency. Also, as the
claim of the assessee of having chartered the aircraft by booking some space
therein was made for the first time, it would have to be examined by the AO.
Further, as the meaning of the word ‘chartered’ as appearing in the Article
is not clear from the definition itself.

Whether royalty income earned by the taxpayer can be said to be ‘effectively connected’ with its permanent establishment (PE) in India, so as to be taxable as per the ‘business income’ article of the India-Australia Tax Treaty (Treaty).

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Part C — International Tax Decisions



  1. Worley Parsons Services Pty. Ltd.

[2009-TIOL-06-ARA-IT] (AAR)

Date : 30.03.2009

Article 12 of India-Australia DTAA

Issues :

Whether royalty income earned by the taxpayer can be said
to be ‘effectively connected’ with its permanent establishment (PE) in India,
so as to be taxable as per the ‘business income’ article of the
India-Australia Tax Treaty (Treaty).

 

Facts :



Ø A company incorporated in Australia (Ausco), is in the
business of providing professional services to the energy and resources
industry. Ausco entered into a contract with Reliance Petroleum Limited, an
Indian Company (ICo) for providing certain services in connection with the
ICo’s project of laying cross-country pipelines for the transportation of
hydro-carbons.

Ø Ausco entered into the following separate contracts
with the ICo :

G Basic Engineering and Procurement Services Contract
(BE&P), which was divided into two phases. Phase I was further divided
into 2 parts, viz., Basic Engineering and Procurement Services. In
respect of Basic Engineering services, 80% of the work was performed in
Australia and the balance was performed in India. In respect of the work
which was performed in India, Ausco’s employee had made short duration
visits to India for inspection, topography study, preparation of route
map, etc.).

G Ausco was entitled to a lump sum consideration for
all components under the BE&P.

G Project Management Services Contract (PMS). For this
Ausco’s employees were present in India for a significant period. The
employees were provided office space by the local engineering contractor,
for the performance of services under PMS.

G In terms of India-Australia Treaty, it was admitted
by the applicant that the amount was chargeable to tax in India under
Article XII of the Treaty as royalty income. The applicant also submitted
that it had PE in India.

Ø In its application, Ausco submitted before the AAR that
both (a) the contract BE&P and PMS were integral part of single contract and
hence entirety of royalty income was ‘effectively connected’ with the PE in
India; (b) In terms Article XII (4) (herein referred to as ‘the PE exclusion
rule’) of the Treaty, the amount was chargeable to tax as business income in
terms of Article VII of the Treaty; and (c) In terms of Article VII, only
that part of the profits, which was attributable to the PE, can be charged
to tax in India. For this, the applicant relied on the SC decision in
Ishikawajima Harima Heavy Industries [288 ITR 408], to contend that where
income is in respect of services rendered outside India, it is not liable to
be taxed in India in terms of the domestic law provisions.

Ø The Tax Department however contended that services
performed outside India in terms of Phase I of the BE&P were not
‘effectively connected’ with the PE of the Taxpayer in India and hence the
PE exclusion rule did not apply. Consequently, the royalty receipts were
taxable in terms of Article XII of the Treaty. The department obtained that
the SC decision in Ishikawajima’s case was distinguishable.


Held :

The AAR considered the taxability of the applicant under
Article XII and Article VII of the Tax Treaty. The AAR held :

1. Article VII (7), which paves way for the operation of
other specific articles of the Treaty, does not dilute the impact of the PE
exclusion Rule contemplated in terms of other Articles of the Treaty. If the
specific Articles provide for taxation of income under Article 7, the
receipt will be taxable as business income in terms of other provisions of
the treaty.

2. In case of royalty, the PE exclusion rule applies
where there is an ‘effective connection’ between the royalty generating
services and the PE. Mere presence of a PE for carrying out some other
activities is not sufficient for establishing an effective connection. For
royalty to be ‘effectively connected’ to the PE, the PE in India should be
engaged in the performance of royalty generating services and should
facilitate performance of such services.

3. ‘Effectively connected’ means ‘really connected’ and
the connection should not only be in ‘form’, but also in ‘substance’. A
pragmatic and purposive approach needs to be adopted for construing whether
or not an ‘effective connection’ exists between the PE and the royalty
income. The set-up, the functions, the purpose and duration of the PE, etc.
are relevant factors for determining this aspect.

4. The words ‘effectively connected with the PE’ are not
words of redundancy and should be given their due meaning. A real and
perceptible connection should exist to fulfil the condition before the
receipt can be treated as effectively connected with PE.

5. For the PE exclusion rule to get triggered, the PE
must have substantial activities and such securities must be carried out
over a period of time. A nominal establishment with skeletal staff,
attending to minimal or negligible work may not be sufficient to trigger the
PE exclusion rule on the ground of ‘effective connection’.

6. In the case of the applicant, BE&P and PMS contracts
are separate contracts covering different phases of the projects having
different rights and obligations. The nature of services and consideration
in respect of each one are separate and distinct. As a result, each
contract, although relating to the same project, needs to be seen
independently for determining the effective connection with the PE.

7. The SC ruling in the case of Ishikawajima cannot be
read to mean that the mere existence of a PE is enough to trigger the PE
exclusion rule and cause royalty income to be assessed as business income.
It does, however, imply that there may be situations where, though the
royalty may be ‘effectively connected’ with the PE, it may still not be
‘attributable’ to the PE.

8. The AAR observed that the SC decision is
distinguishable and not applicable to the facts of the present case. The AAR
held that the SC was concerned with the PE exclusion rule in respect of the
India-Japan Tax Treaty, which gets triggered when ‘right, property or
contract’ is ‘effectively connected.

S. 163, and India — Japan Treaty

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New Page 16 Masuzawa Punjab Silk Ltd. v.
ACIT

(113 TTJ 878) (Asr)

A.Y. : 2000-01. Dated : 4-12-2007

S. 163 and India-Japan Treaty.



l
Salaries including perquisites provided to NR technical personnel deputed
to Indian JVCO to provide erection and installation services are chargeable to
tax u/s.9(1)(ii) of the Act. In the circumstances of the case, Indian JVCO can
be regarded as an agent of the expatriates u/s.163(1)(c) and u/s.163(1)(b) of
the Act.


l
Reimbursement of actual travel expenses of employees are exempt u/s.10(14).


 


Facts :




(1) MCL (A company of Japan — herein Japco) entered into
joint venture agreement with another Indian company. The joint venture was
carried through the assessee-company. In terms of the joint venture agreement,
Japco had agreed to supply certain equipments which hitherto were used by Japco
at Japan.

(2) The plant at Japan was discontinued and the equipments
were dismantled for the purpose of refurbishing and installation at the
premises of the assessee-company. In terms of the agreement, Japco had
obligation to refurbish and install the equipments and to ensure that the
plant provided certain minimum production of specified quality.

(3) In terms of the overall arrangement, the Japanese
company had to provide certain technical personnel during the stage of
erection, installation, commissioning as also during the initial years of
plant operation.

(4) During the set-up phase of plant, the responsibility of
meeting cost of the technical personnel was that of Japco.

During the first and the second year of operation of the
plant, the assessee company had obligation to pay certain consolidated charge
towards providing of personnel by Japco. The assessee also had to meet the
cost of travel and accommodation of such personnel. The employees however were
to continue to be employees of Japco and their salary was to be paid by Japco.

(5) During post-installation period, two engineers,
residents of Japan, had stayed in India for a longer duration. The duration
had elongated because the production was not of desired quantity and quality.
In terms of the agreement, the assessee had paid for travel of the employees
and provided accommodation to them. Salary of these two engineers was paid at
Japan by Japco.

(6) It was common ground that the engineers were liable to
tax in India in respect of services rendered in India in view of their long
stay in India. Also, engineers were admittedly employees of Japco and salary
to them was paid by Japco at Japan.

(7) There was difference of opinion on true scope and
interpretation of the agreement as to who was responsible to bear cost of
salary. The assessee’s contention was that since the basic obligation of
setting up plant was of Japco, the cost obligation was of Japco, as the plant
was not set up as desired. As against that, the Department’s contention was
that even during pre set-up period, the assessee had obligation to meet cost
of certain engineers and for the years under reference, and for the two
engineers covered by the notice u/s.163, the assessee was obliged to meet the
cost of such personnel.

(8) The assessee had remitted certain amount to Japco and
had deducted tax at source by treating it to be remittance towards fees for
technical services. The tax so deducted was duly paid. In addition to such
compliance, the Department was seeking to treat the assessee as an agent
u/s.163 in respect of salary taxation of two engineers who were employees of
Japco, on the ground that their salary burden was ultimately borne by the
assessee.

(9) The AO passed order u/s.163 and held the assessee to be
an agent in relation to two engineers. The assessee was held to be an agent
u/s.163(1)(c), on the ground that the assessee was a person from or through
whom the non-resident engineers were in receipt of the income indirectly.

(10) The assessee was also held to be an agent
u/s.163(1)(b), on the ground that the assessee had business connection with
Japco which was carrying on business in India through the medium of the
assessee company.

 


Held :



l
On factual front, the Tribunal concurred with the Department that the assessee
was responsible for meeting the cost of two engineers for whom it was held to
be an agent u/s.163.


l
The Tribunal also concurred with the lower authorities and held that the
assessee was rightly held to be agent of two non-resident engineers.


l
In the view of the Tribunal, provisions of S. 163(1)(c) are wide enough to
cover income earned directly or indirectly. Though the two engineers deputed
by Japco were employees of Japco, salary received by non-resident engineers
was for services rendered to the assessee and therefore the salary income can
be said to have been received by non-resident engineers through the assessee
who was obliged to meet the cost of such personnel.


l
The Tribunal also concurred with the lower authorities that the assessee can
also be treated as an agent u/s.163(1)(b), on the ground that the assessee had
business connection with the non-resident. The Tribunal held that Japco had
agreed to provide exclusive marketing support and also had equity
participation in the capital of the assessee-company.


l
Apart from proportionate salary, the housing accommodation provided by the
assessee to the non-resident engineers was held chargea

India USA Treaty — Article 12(4) of India-US treaty — Scope of fees for included services

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New Page 15 ICICI Bank Ltd. v.
DCIT (20 SOT 453) (Mum.)

A.Y. : 1997-98. Dated : 9-10-2007

India-USA Treaty.

 

Amount remitted to credit rating agency for the purpose of
obtaining rating in respect of issue of Floating Rate Euro Notes (FRENs) is not
fees for included services in terms of Article 12(4) of India-US treaty and is
therefore not chargeable to tax in India.

 

Facts :

The assessee bank appointed Moody’s Investor Services (MIS),
a credit rating agency of the USA, for the purpose of obtaining rating in
respect of one of its FRENs issues. MIS rendered rating services outside India.
The assessee remitted fees towards such services without deducting tax at
source. The contention of the assessee was that the amount represented charges
towards commercial services chargeable as business income and since the services
were rendered outside India, the same was not chargeable to tax in India.

The AO held that the amount was chargeable to tax in India,
as the same represented fees for technical services covered by S. 9(1)(vii)(b)
of the Act. The AO also concluded that services were covered by Article 12 of
the DTAA and hence payment was subject to withholding tax obligation in India.

 

Before the Tribunal, the assessee submitted that rating is
required to be done as per international practice for the benefit of investors
and no technical skill or process was transferred to the assessee. The assessee
relied on the following decisions to support its contention that payments for
rating services were not fees for included services and hence were not liable to
taxation in India :

1. Raymond Ltd. v. DCIT, (86 ITD 791) (Mum.)

2. Wockhardt Life Science Ltd. [IT Appeal No. 3625 (Mum.)
of 2000]

3. Gujarat Ambuja Cements Ltd. v. DCIT, (2 SOT 784)
(Mum.)

4. Bajaj Auto v. DCIT, [IT Appeal Nos. 2662 and 2663
(Mum.) of 2000]

5. Wipro Ltd. v. ITO, (1 SOT 758) (Bang.)

6. Mc Kinsey & Co. Inc (Philippines) v. ADIT, (99
ITD 549) (Mum.)

 


The assessee also relied on Memorandum of Understanding to
India-US DTAA on the scope for fees for included services as also on example VII
given in the said protocol to support the contention that commercial services
were not fees for included services and were not covered by Article 12 of the
treaty.

 

Held :



l
The Tribunal observed that the rating services were commercial services. In
view of the Tribunal, though skill, expertise, know-how were used by the
service provider for rendering services, the service was not technical in
nature. Also, skill, expertise or know how was not made available to the
assessee, so as to get covered by the scope of fees for included services.


l
The Tribunal referred to and relied on decision of Mumbai Tribunal in the case
of Raymonds and that in case of McKinsey to support that the concept of ‘make
available’ requires that the person acquiring the service is enabled to apply
the technology in his own right to the exclusion of the service provider.


l
Since the amount was not chargeable to tax in India, the assessee had no
obligation to deduct tax at source u/s.195 of the Act.


 


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India Mauritius Treaty — Payment for liasoning with legal and financial advisors — commercial services — Not royalty

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New Page 14 Spice Telecom v.
IPO (113 TTJ 502) (Bang.)

A.Y. : 2001-02. Dated : 3-2-2006

India-Mauritius Treaty



l
Payment for liasing with legal and financial advisors and negotiations with
vendors and financial institutions for vendor loans and long-term project
finance are commercial services not liable to source taxation in India as
royalty.


l
Providing of information constitutes royalty if information has perpetual
or extended use. Suggestions on ways and means on the basis of
data/information collected by the assessee itself is not royalty.


 


Facts :

(1) The assessee was engaged in the business of providing
telecommunication services. For this purpose, it entered into technical and
operating service agreement with one M/s. Distacom of Mauritius [herein Mauco].
Mauco had an obligation of providing certain know-how and other support
services.

 

(2) The assessee-company remitted certain amounts to Mauco on
account of :

(a) Provision of expertise and training on the
technological aspect of mobile telephony business;

(b) Provision of advisory and support services in respect
of financial and operational aspects of business.

 


(3) The assessee deducted tax at source in respect of payment
covered by 2(a) above by treating it to be payment of royalty. In respect of
payment covered by 2(b) above, no tax was deducted on the ground that the same
represented remittance towards commercial services rendered by Mauco outside
India.

 

(4) On further inquiries, it was found that the payment
covered by 2(b) viz. advisory and support services comprised of two
components :

(a) Payment for liaising with legal and financial advisors
and negotiating with vendors and financial institutions for obtaining vendor
credit and long-term project finance.

(b) Providing support for developing sales distribution
channels, promoting brand awareness, promoting customer-care programmes,
formulating marketing strategy, suggestions on pricing strategies billing
systems, etc.

 


(5) The assessee claimed that the remittance covered by para
4 was towards services provided from Mauritius and was not in respect of royalty
payment. The amount was claimed by the assessee to be not chargeable in the
hands of the recipient in view of India-Mauritius treaty which does not have
specific Article dealing with fees for technical services (FTS). The fee was
claimed to be treated at par with any other offshore business income.

 

(6) The Department contended that the payment was pursuant to
the know-how contract and was in respect of grant of know-how or for imparting
information concerning industrial, commercial or scientific knowledge of Mauco
and was therefore chargeable to tax as royalty income.

 

Held :

The Tribunal held :


l
The agreement under reference was for providing of services apart from
providing certain know-how and access to intellectual property rights. The
scope of agreement required Mauco to provide know-how as also give advice and
assistance in technical, administrative, accounting and finance field. Payment
concerning know-how covered by para 2(a) was rightly treated as royalty and
liable to tax as such.


l
The contract for services is different compared to the know-how contract. In
case of any know-how contract, the person uses his already existing knowledge
base and experience which is unrevealed to the public. As against that, in
service contract, the person undertakes to use his customary skills and
executes work himself. In a know-how contract, the supplier has to little
exert while he leverages upon his knowledge and experience, whereas in a
service contract, he undertakes greater level of expenditure of his efforts.


l
Having regard thereto, part of the contract which dealt with legal and
financial advice and negotiations with vendors, financial institutions
represented contract for services. The services were commercial in nature. In
absence of special article in India-Mauritius treaty dealing with fees for
technical services, the amount was chargeable as any other business income.
Since the services were rendered from outside India, the same were not taxable
in India. The payment covered by para 4(a) was held to be not chargeable to
tax in India.


l
As regards the second limb [viz. payment covered by para 4(b) above],
the Tribunal observed that the amount may constitute royalty, depending on the
nature of information and support provided. The Tribunal referred to various
meanings of the term know-how. The Tribunal observed that grant of know-how
will result in access to information which is of perpetual or extended use. As
against that, if Mauco provided support on the basis of facts and information
collected by the assessee, the same would, prima facie, be in the
nature of providing of services, which is not equivalent to grant of access to
know-how. So observing, the Tribunal set aside the matter to ITO to determine
taxability of the payment made in the circumstances gisted at para 4(b).


 


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Valid and commercially justifiable presence of recipient of income in treaty favourable jurisdiction cannot be disregarded to tax income in the hands of another ent

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New Page 2

Part C : Tribunal & AAR International Tax Decisions

 


18 2010 TII 58 ITAT-Mum.-Intl.

Satellite Television Asia Region Advertising Sales BV v.
ADIT

India-Netherlands DTAA; CBDT Circular No. 742, dated 2-5-1996
and Circular No. 23, dated 23-7-1969

Dated : 21-5-2010

Valid and commercially justifiable presence of recipient of
income in treaty favorable jurisdiction cannot be disregarded to tax income in
the hands of another entity.

Withdrawal of Circular No. 23, dated 23-7-1969, w.e.f.
22-10-2009 is prospective in its application.

Facts :

The assessee, a Netherlands company, is a wholly-owned
subsidiary of a Hong Kong Company (HKCo) and a second-generation subsidiary of a
company based in British Virgin Islands. The assessee was granted exclusive
right to sell advertising time in India on channels of TV network owned by HKCo.
The assessee engaged an Indian company (ICo) to procure business from Indian
advertisers by paying commission of 15% of receipts from business procured from
India. Based on the CBDT Circular No. 742, dated 2-5-1996, which was applicable
for the year in question, the assessee offered 10% of the advertisement revenues
to tax in India.

The AO held that the assessee was a conduit company and not a
resident of the Netherlands and that the advertisement revenues were taxable in
the hands of HKCo. As a protective measure, the
AO assessed the revenue in the hands of the assessee by estimating 20% of
revenues as income earned in India.

In support of its claim, the assessee submitted that it is
registered in, assessed to tax, and domiciled in, the Netherlands, and all its
business is conducted from the Netherlands. The assessee had also filed tax
resident certificate (TRC) issued by the Netherlands tax authorities, and
submitted that it earned revenue not only from India, but also from other
countries.

The AO contended that the assessee was appointed to sell
advertising time in India because the Netherlands had a favourable tax treaty
with India, whereas there is no tax treaty entered into between India and Hong
Kong, where the parent HKCo is located. The tax treaty between India and the
Netherlands is entered to give benefit and relief to bona fide taxpayers and not
to encourage creation of non-genuine taxpayers for the purpose of tax avoidance.
The Tax Department justified its action by contending that it was a clear case
of treaty shopping and TRC was not sufficient to justify that the assessee had
not been created with a motive to avoid taxes. The AO concluded that the
assessee is a conduit and its real residence is not in the Netherlands. In any
case, HKCo also had permanent establishment (PE) in India though ICo was
ostensibly appointed as an agent of the assessee justifying actual assessment in
the name of HKCo.

The CIT(A) concurred with the AO’s order.

Held :

On further appeal, the ITAT held :

The Department could not disregard the existence of the
assessee and proceed to tax HKCo. The ITAT noted the main contention of the Tax
Department was that the assessee is used as a commercially irrelevant entity
(commonly referred as PE blocker) so as to reduce the tax exposure of HKCo in
India and that as per the Department HKCo is deriving tax advantage by inserting
the assessee as a link in its chain entities was also unacceptable. The ITAT
concluded that the Department’s contention is based on incorrect perception that
HKCo is deriving tax advantage by interposing the assessee. The advertisement
revenues are derived through a commission agent, ICo. ICo has been paid a fair
remuneration for its services. In terms of the CBDT Circular No. 23, dated
23-7-1969, no further income could be taxable in India. Withdrawal of the
Circular in October 2009 is only prospective and does not impact the year in
question.

The group to which the assessee belongs had chosen to
centralise sale of advertisement time to the assessee on a global basis and the
choice was not driven solely by tax considerations.

The evidence produced by the assessee commercially justified
its appointment for selling advertising time and hence its existence could not
be disregarded.

In the assessment proceedings of the assessee, the Tax
Authority cannot determine taxability of the advertisement revenues in hands of
HKCo, which could be decided only after taking into account material on records
available with HKCo.

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Royalty payment by one Singapore company to another Singapore company for acquiring right to broadcast live cricket matches from Singapore is not income of the recipient arising in India in terms of source rule of the Treaty. Such royalty income could hav

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New Page 2

Part C : Tribunal & AAR International Tax Decisions

 


17 SET Satellite (Singapore Pte Ltd.) v.
ADIT

ITA No. 7349/Mum./2004

Article 12 of India-Singapore DTAA

Dated : 25-6-2010

Royalty payment by one Singapore company to another Singapore
company for acquiring right to broadcast live cricket matches from Singapore is
not income of the recipient arising in India in terms of source rule of the
Treaty. Such royalty income could have triggered tax in India only if the payer
non-resident had PE in India, in connection with which royalty liability was
incurred and royalty was borne by such PE.

Facts :

The assessee Singapore company (Singco) is engaged in the
business of acquiring television programmes, motion pictures and sports events
and exhibiting the same on its television channels from Singapore. Singco
entered into agreement with GCC (another Singapore company) and acquired right
to live telecast of cricket matches in the territory of India, Pakistan, etc.
Payment made by Singco to GCC was held to be payment in the nature of royalty.

Singco earned revenue from selling advertisement time and
collecting fees from cable operators in India. For such sales and marketing
activity, Singco took assistance of an associate Indian company (ICo), which was
held to constitute agency PE of Singco in India.

The Tax Department held that royalty paid by Singco to GCC
was chargeable in India in terms of IT Act as also the treaty, because :


(i) Singco had a place of business in India and sourced
revenue from India;

(ii) earning of revenue from India had direct nexus with
payment made by Singco to GCC for acquiring broadcasting right; and

(iii) Singco had agency PE in India.


Singco contended that payment made to GCC was not taxable in
terms of India-Singapore Treaty applicable to GCC, because :


(i) Payment was made for acquiring broadcasting rights
outside India;

(ii) Singco had no PE in India to which royalty payment
made to GCC can be related; and

(iii) Presence in the form of agency PE did not result in
income being sourced from India as there was no direct nexus between
marketing activities of the agent and the broadcasting activity carried out
at Singapore for which rights were acquired from GCC.



Held :

The ITAT held :




(1) Royalty income of GCC received from a
non-resident was taxable in India in terms of Article 12(7) of the treaty
only if following cumulative conditions are satisfied :

(a) The payer (Singco) has a PE or fixed base in India.

(b) The liability to pay royalty is incurred in
connection with such PE or fixed base.

(c) The royalty is borne by such PE or fixed base.


(2) Mere existence of agency PE of payer in India does not
lead to a conclusion that royalty arises in India. For tax liability to arise,
royalty should have been paid in connection with PE or fixed base in India and
that such royalty should be borne by PE in India.

(3) Similar condition exists in OECD model for taxability of
interest income. As clarified by OECD commentary, interest can be regarded as
arising in source state only if interest income has economic link with the PE.
In the present case, there is no economic link between royalty payment and
agency PE. The economic link of payment made to GCC is with Singco’s HO in
Singapore. The payment to GCC cannot be said to be ‘in connection’ with the
agency PE in India. The agency PE was not involved in acquisition of right to
broadcast the cricket matches, nor has the PE borne the cost of payment to GCC.
The payments were therefore not liable to tax in India.

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filing appeal by Revenue: Instruction No. 3 of 2011, dated 9-2-2011 is retrospective: Department must show ‘cascading effect’.

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[CIT v. Varsha Dilip Kohle (Bom.) (Aurangabad Bench); ITA No. 7 of 2010 dated 5-3-2012]

In this appeal filed by the Revenue in the year 2010 the tax amount in dispute was Rs.6,69,770. CBDT Instruction No. 3 of 2011, dated 9-2-2011 prescribed the limit of Rs.10,00,000 for filing an appeal before the High Court u/s.260A of the Income-tax Act, 1961. The High Court observed that since the tax effect does not exceed Rs.10 lakh, the appeal is required to be dismissed in view of the CBDT Instruction No. 3 of 2011, dated 9-2-2011.

The Department contended that (i) as the appeal has been filed prior to the issuance of the Circular, the Circular did not apply; and (ii) as the appeal had a ‘cascading effect’ involved a ‘common principle’, the appeal could not be dismissed in view of the Supreme Court’s verdict in Surya Herbals.

The Bombay High Court dismissed the appeal and held as under: “

(i) In CIT v. Smt. Vijaya V. Kavekar, (Tax Appeal No. 78 of 2007 with Tax Appeal No. 76 of 2007) decided on 29-7-2011, a Division Bench of this Court, while interpreting the very Circular No. 3 of 2011, has held that the Circular has a retrospective operation and instructions contained in the Circular would apply even to the pending cases.

(ii) As regards Surya Herbals case, the appeal does not involve any ‘cascading effect’ as the Department has not shown whether there are other appeals which raise the same point.”

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Educational Institution: Exemption u/s. 10(22):A. Y. 1998-99: Denial of exemption disputing genuineness of transaction: Contributor to assessee denying the transaction: Assessee should be given opportunity to cross-examine the disputant:

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Sri Krishna Educational and Social Trust vs. ITO; 351 ITR 178 (Mad):

For the A. Y. 1998-99, the Assessing Officer made additions denying exemption u/s. 10(22) of the Income-tax Act, 1961, disputing the genuineness of a transaction wherein the contributor to the assessee had denied transaction. The assessee was not given the opportunity to cross-examine the said person. The Tribunal upheld the decision of the Assessing Officer. The Tribunal held that the assesee did not have the right to cross-examine the witness who made the adverse report, especially when the records did not indicate that the assessee had made any attempt to produce witnesses.

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

 “i) When the authorities entertained a doubt about the genuineness of the transaction, the Tribunal ought to have afforded the assessee an opportunity to cross examine the disputant. The Revenue had not accepted the explanation given by the assessee. The assessee would not have expected one of the contributors to have denied the factum of contribution. This view was inevitable because but for this the assessee would not have opted to cross-examine the contributor.

 ii) Therefore, when there was unexpected change of facts, the party should not be deprived of the opportunity to cross-examine the witness branded as the assessee’s witness. The Evidence Act also permits a party to cross-examine his own witness under stated circumstances.

 iii) Unless it is proved that the income derived was covered u/s. 10(22) it could not be decided whether the addition u/s. 68 was possible or not. Therefore, the matter was remitted to the Assessing Officer for further consideration in the light of the legal position.”

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Capital or revenue receipt: Test: A. Y. 1997- 98: assessee receiving amount in terms of release agreement: Compensation for loss of source of income: Capital receipt: Not taxable:

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Khanna and Annadhanam vs. CIT; 351 ITR 110 (Del):

The assessee is a firm of Chartered Accountants. Since 1983, the assessee had an arrangement with a foreign firm whereunder the foreign firm referred work to the assessee through a Calcutta firm in respect of clients based in Delhi and nearby areas. The arrangement was reduced to writing in 1992. In 1996, the foreign firm wanted a firm of Chartered Accountants of Bombay to represent its work in India. Accordingly, an agreement was entered into on 14-11-1996, which was called a release agreement, under which the assessee was to no longer represent the foreign firm in India and thereafter the foreign firm would not refer any work to the assessee. In consideration of the termination of the services of the assessee, the assessee received an amount of Rs. 1,15,70,000/- in terms of the release agreement. The assessee claimed the amount to be capital receipt. The assessing Officer assessed the amount as professional income. The CIT(A) deleted the addition. The Tribunal upheld the decision of the Assessing Officer.

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

“i) The fact that the assessee continued its business or its usual operations even after termination of an agency is of no consequence. If the receipt represents compensation for the loss of a source of income, it would be capital and it matters little that the assessee continues to be in receipt of income from its other similar operations.

 ii) There was no evidence that the assessee had entered into similar arrangements with other international firms of Chartered Accountants. The arrangement with the foreign firm was in operation for a fairly long period of 13 years and had acquired a kind of permanency as a source of income. When that source was unexpectedly terminated, it amounted to the impairment of the profit-making structure or apparatus of the assessee. It was for that loss of the source of income that the compensation was calculated and paid to the assessee.

 iii) The compensation was thus a substitute for the source. Therefore, the amount of Rs. 1,15,70,000/- received by the assessee in terms of the release agreement represented a capital receipt, not assessable to tax.”

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Capital gains: Forfeiture of earnest money: Section 51 r/w. s. 4: A. Y. 2007-08: Earnest money forfeited on cancellation of sale agreement is capital receipt: Not taxable as income:

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CIT vs. Meera Goyal; 30 Taxman.com (Del):

The assessee entered into an agreement to sell his house property to a company and in terms of agreement received certain sum as earnest money Since purchaser failed to pay balance consideration by stipulated period, the assessee forfeited the earnest money and claimed same as capital receipt. The Additional Commissioner on reference u/s. 144A directed the Assessing Officer to the effect that earned money so received and forfeited was to be adjusted against the cost of property and capital gain was to be worked out on the basis of the resultant cost as and when the property was sold. However, the Assessing Officer held that entire transaction was a sham transaction in which purchaser attempted to book bogus losses. He accordingly made addition of the forfeited amount. The Commissioner (Appeals) deleted the addition. The Tribunal upheld the order of Commissioner (Appeals) observing that the earnest money was received through banking channels and genuineness of the receipt was not in dispute.

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

“i) The Tribunal has rightly noted that the provisions of section 51 would come into play as it specifically covers this type of a transaction. Once the transaction has been held to be genuine, there is no question of the transaction being without any consideration.

ii) Consequently, there is no merit in the revenue’s appeal, much less any substantial question of law.”

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Recovery: Stay of demand pending appeal: Section 220(6) : A. Y. 2010-11: Stay can be granted on the basis of the merits even if there is no financial hardship:

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UTI Mutual Fund vs. ITO (Bom); WP(L) No. 523 of 2013 dated 06-03-2013:

In respect of the A. Y. 2010-11, the application of the petitioner u/s. 220(6) for keeping the demand in abeyance till the disposal of the appeal was rejected by the Assessing Officer. The Assessing Officer refused to follow the order of the Bombay High Court (see. UTI Mutual Fund vs. ITO; 345 ITR 71 (Bom); wherein stay was granted in similar circumstances for the preceding year. CIT also rejected application for stay.

On a writ petition filed by the Petitioner challenging the order of rejection, the Department relied on the order of the Karnataka High Court in CIT vs. IBM India Pvt. Ltd.(Kar); ITA No. 31 of 2013 dated 04-02-2013, taking the view that in a revenue matter an interim order should be passed only in the case of genuine financial hardship and not otherwise.

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

“i) The order of the Karnataka High Court cannot be read to mean that consideration of whether an assessee has made out a strong prima facie case for stay of enforcement of a demand is irrelevant. Nor is the law to the effect that except a case of financial hardship, no stay on the recovery of demand can be granted even though a strong prima facie case is made out.

 ii) In considering whether a stay of demand should be granted, the Court is duty bound to consider not merely the issue of financial hardship if any, but also whether a strong prima facie case raising a serious triable issue has been raised which would warrant a dispensation of deposit. That is a settled position in the jurisprudence of our revenue legislation. In CEAT Ltd. vs. UOI; 2010 (250) E.L.T. 200 (Bom), the Division Bench of this Court has held as follows. “If the party has made out a strong prima facie case, that by itself would be a strong ground in the matter of exercise of discretion as calling on the party to deposit the amount which prima facie is not liable to deposit or which demand has legs to stand upon, by itself would result in undue hardship of the party.”

 iii) Where a strong prima facie case is made out calling upon the petitioner to deposit, would itself occasion undue hardship. Where the issue has raised a strong prima facie case which requires serious consideration as in the present case, the requirement of predeposit would itself be a matter of hardship.

iv) Finally, we express our serious disapproval of the manner in which the Revenue has sought to brush aside a binding decision of this Court in the case of the assessee on the issue of the stay on enforcement for the previous year. The rule of law has an abiding value in our legal regime. No public authority, including the Revenue, can ignore the principle of precedent. Certainty, in tax administration is of cardinal importance and its absence undermines public confidence.

 v) For these reasons, we direct that pending the disposal of the appeals for the A. Y. 2010-11 and for a period of six weeks thereafter, no coercive steps shall be taken against the assessee for the recovery of the demand in pursuance of the impugned notices dated 25-02-2013.”

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Advance Tax – Levy of interest u/s. 234A/234B/234C is mandatory and the interest could be levied without specific direction in the assessment order.

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Karanvir Singh Gossal vs. CIT & Anr. [2012] 349 ITR 692 (SC)

The short point that was involved in the case before the Supreme Court was whether levy of interest u/s. 234A/234B of the Income-tax Act, 1961 ( “the Act”), is mandatory or not. The Supreme Court observed that at one point of time, there was a doubt on the nature of interest payable by the assessee u/s. 234A/234B of the Act and that the controversy was finally settled by its five judge bench decision in the case of CIT vs. Anjum M.H. Ghaswala [2001] 252 ITR 1.

According to the Supreme Court, the position that emerged after the judgment in Anjum Ghaswala’s case (supra) was that if interest is leviable in a given case u/s. 234B/234C, then in such a case that levy is mandatory and compensatory in nature. The recitation by the Assessing Officer directing institution of penal proceedings was not obligatory and penal proceedings could be initiated for such default without a specific direction from the Assessing Officer.

The Supreme Court noted that in the said judgment, it had been held that in appropriate cases, the Chief Commission had an authority to waive the interest.

 The Supreme Court observed that in the present case, the assessee had placed reliance on the Circular issued by the Central Board of Direct Taxes, which had been referred to and mentioned in Anjum Ghaswala’s case (supra) and that this aspect had not been considered by the High Court in its impugned order, and it was not considered even by the Tribunal.

 For the above reasons, the Supreme Court set aside the impugned orders of the Tribunal as also of the High Court. The Supreme Court directed the Tribunal to consider whether the assessee would be entitled to waiver of interest under the Circular bearing No.400/234/95-IT(B) dated 23rd May, 1996, which had been referred to in the case of Anjum Ghaswala (supra).

[Note: Since the decision of the Punjab and Haryana High Court is not available, it is not clear as to how the reference of initiation of penalty proceedings is made in paragraph 2 above. In the context and considering the cases referred to, the reference to penalty proceedings seems inadvertent. It should instead be read as “the recitation by the Assessing Officer directing levy of interest is not obligatory and interest could be levied for such default without a specific direction from the Assessing Officer.]

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Export – Profits derived from export of granite not eligible for deduction under section 80HHC

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Tamil Nadu Minerals Ltd. vs. CIT [2012] 349 ITR 695 (SC) Manufacture –

Mining of granite from quarries and exporting them after cutting, polishing, etc. tantamounts to manufacture.

The following question of law arose from determination before the Supreme Court in Civil Appeal No.2997 of 2004.

“Whether the assessee is entitled to claim deduction to the extent of profits referred to in s/s. (IB) of section 80HHC of the Income-tax Act, 1961, derived from export of goods – in this case, granite, for the assessment year 1988-89?”

The Supreme Court answered above question against the assessee in view of its judgment in the case Gem Granites vs. CIT reported in [2004] 271 ITR 322 (SC). In Civil Appeal Nos. 7472-7473 of 2004 the following question of law arose for determination before the Supreme Court.

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is entitled to investment allowance on the activities of the assessee, viz., mining granite from quarries and exporting them after cutting, polishing etc., which tantamount to manufacture for the purpose of section 32A of the Income-tax Act, 1961?

The Supreme Court held that this issue was squarely covered in favour of the assessee, vide its judgment in the case of CIT v. Sesa Goa Ltd. [2004] 271 ITR 331 (SC).

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