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Category: Direct Taxes

S. 73—Any speculation loss computed for A.Y. 2006-07 and later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006 by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent assessment years applies only to such loss.

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(Full text 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.)



13 Virendra Kumar Jain v. ACIT
ITAT ‘B’ Bench, Mumbai
Before R. V. Easwar (Sr. VP) and
A. L. Gehlot (AM)
ITA No. 1009/Mum./2010
A.Y. : 2006-07. Decided on : 31-5-2010

Counsel for assessee/revenue : Vijay Mehta/ K. K. Das

 

S. 73—Any speculation loss computed for A.Y. 2006-07 and
later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006
by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent
assessment years applies only to such loss.

Per R. V. Easwar :

Facts :

In A.Y. 2001-02 the assessee suffered a speculation loss of
Rs.4,55,30,494 which loss was allowed to be carried forward to subsequent years
u/s.73(2) of the Act. In the return filed for A.Y. 2006-07 the assessee claimed
that speculation loss brought forward from A.Y. 2001-02 should be set off
against speculation profits for the A.Y. 2006-07. The Assessing Officer (AO)
denied the claim of the assessee on the ground that u/s.73(4) no loss shall be
carried forward for more than four assessment years immediately succeeding the
assessment year for which it was first computed. He held that speculation loss
for A.Y. 2001-02 cannot be carried forward beyond A.Y. 2005-06.

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 :

It is a settled rule of interpretation that a vested right
can be taken away only by express language or by necessary implication. This is
settled by the decision of the Privy Council in Delhi Cloth & General Mills
Company Ltd. v. CIT, AIR 1927 (PC) 242 and the same has been cited with approval
by the Supreme Court in the case of Jose Dacosta v. Bascora Sadashiv Sinai
Narcomin, AIR (1975) SC 1843. The assessee had a vested right to carry forward
the speculation loss for a period of eight assessment years as per S. 73(4) as
it stood before the amendment made by the Finance Act, 2005. That such a right
is a vested right cannot be doubted after the judgment of the Supreme Court in
the case of CIT v. Shah Sadiq & Sons, 166 ITR 102 (SC). In S. 73(4) or in any
other provision there is no express language or any implication to the effect
that the right of the assessee to carry forward the speculation loss for a
period of eight subsequent assessment years has been taken away.

Any speculation loss computed for the A.Y. 2006-07 and later
assessment years alone would be hit by the amendment and such loss can be
carried forward only for four subsequent assessment years. The vested right of
the assessee has not been taken away.

The amendment made by The Finance Act, 2005 w.e.f. 1-4-2006
is merely to substitute the words ‘four assessment years’ for the words ‘eight
assessment years’ in Ss.(4) of S. 73. Ss.(4) of S. 73 refers only to the loss to
be carried forward to the subsequent years. It does not say anything about the
set-off of the speculation loss brought forward from the earlier years. There is
a distinction between a loss brought forward from the earlier years and a loss
to be carried forward to the subsequent years. The sub-section deals only with
the speculation loss to be carried forward to the subsequent years and in the
very nature of the things, it cannot apply to speculation loss quantified in any
assessment year before the A.Y. 2006-07.

The Tribunal made a reference to the Income-tax Rules
prescribing form of return of income and noted that the form in ITR 4 makes a
distinction between loss brought forward and loss to be carried forward. It held
that since in the present case it was concerned with the assessee’s right to set
off the brought forward speculation losses against speculation profits for A.Y.
2006-07, Ss.(4) of S. 73 has no application.

The Tribunal allowed the appeal filed by the assessee.

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Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether reduction in the liability availed by the assessee on the basis of One Time Settlement Scheme in respect of its outstanding term loans is to be treated as taxable u/s.28(iv) or u/s.41(1) — Held, No.

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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.)



17. Accelerated Freez & Drying Co. Ltd. v. Dy.
CIT



ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 971/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

C. Karthikeyan Nair

Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether
reduction in the liability availed by the assessee on the basis of One Time
Settlement Scheme in respect of its outstanding term loans is to be treated as
taxable u/s.28(iv) or u/s.41(1) — Held, No.

 

Per Dr. O. K. Narayanan :

Facts :

The assessee company, engaged in the business of sea food
exports, had availed term loans from three banks, viz. ICICI Bank Ltd.,
Standard Chartered Bank Ltd., and Sumitomo Mitsui Banking Corporation,
Hongkong. These term loans were availed by the assessee for the purpose of
acquiring capital assets to be deployed in the manufacturing system of the
assessee company. Due to bad financial position the assessee defaulted on
payment of installments and interest. The total amount of loans that remained
payable to the banks amounted to Rs.3486.03 lakhs.

 

During the previous year relevant to the assessment year
under appeal, the assessee reached an agreement with the three bankers for One
Time Settlement (OTS) of its loan liability whereby the loan liability of
Rs.3486.03 lakhs was settled on payment of Rs.2450 lakhs resulting in a waiver
of loan amount of Rs.1036.03 lakhs. This principal amount of loan waived by
the banks was credited by the assessee to General Reserve Account and was not
offered for tax.

 

The AO held that waiver resulted in earning gain for the
assessee company in the course of carrying on of its business. He further held
that u/s.2(24)(i) both ‘profits’ and also ‘gains’ are income; it is a mandate
of S. 28 to levy income-tax not only on the profits of the business but even
on the gains of a business. He, therefore, held that In the light of the
definitions attributed to the expressions ‘income’ and ‘gains’, the waiver
benefit enjoyed by the assessee company should be treated as income of the
assessee from business. The AO relied on a decision of the Supreme Court (SC)
in the case of T. V. Sundaram Iyengar & Sons. He, accordingly, included the
amount of Rs.1036.03 lakhs in computation of assessable income under the head
‘Income from Business’.

 

The CIT(A) held that waiver amount was rightly charged
u/s.28(iv) of the Act. She also observed that the decision of the SC in the
case of T. V. Sundaram Iyengar & Sons is analogous in facts and the ratio of
the said decision was applicable to the assessee’s case. She dismissed the
appeal.

 

Aggrieved, the assessee preferred an appeal to the
Tribunal.

 

Held :

The Tribunal stated that the facts of the assessee’s case
are quite different from the facts considered by the SC in the case of T. V.
Sundaram Iyengar and Sons Ltd. and therefore the said decision does not become
applicable to the present case of the assessee.

 

The Tribunal noted that the Bombay High Court while
delivering its judgment in the case of Solid Containers Ltd. has not dissented
in any way from the earlier decision in the case of Mahindra and Mahindra Ltd.
It observed that in the case of Solid Containers Ltd. the Court has reiterated
the ratio laid down in the judgment of the High Court of Bombay in the case of
Mahindra and Mahindra Ltd., that the loan availed for acquiring capital
assets, when waived, cannot be treated as assessable income. Therefore, it
held that it is not possible to hold that as far as the loan waiver of capital
account is concerned, the decision of the Bombay High Court in the case of
Solid Containers Ltd. clashes with the judgment of the same court in the case
of Mahindra and Mahindra Ltd.

 

The Tribunal held that since the loan waiver amount
credited by the assessee in its general reserve account is covered by the
judgment of the Bombay High Court in the case of Mahindra and Mahindra Ltd.,
the said waiver amount cannot be held as taxable.

 

The Tribunal noted that the SC has in the case of Polyflex
(India) Pvt. Ltd. examined the constitution of S. 41(1) and categorically
ruled that the words ‘remission or cessation thereof’ apply only to a trading
liability. Since the term loans availed by the assessee from the three banks
were not in the nature of trading liability but were in the nature of capital
liability, it held that the waiver thereof would not become income u/s.41(1)
on the ground of remission or cessation thereof. It also noted that the
assessee never had the benefit of deduction of the term loan availed by it
from the banks on capital account. Also, the term loans availed were not in
the nature of any loss or expenditure. Therefore, it held that S. 41(1) had no
application to the present case.

 

The Tribunal found the issue raised to be squarely covered
by the judgment of SC in the case of Polyflex (India) Pvt. Ltd., the decision
of the Bombay High Court in the case of Mahindra and Mahindra Ltd., decision
of the Delhi High Court in the case of Phool Chand Jiwan Ram and the decision
of the jurisdictional High Court in the case of Cochin Co. Ltd.

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether trade discount allowed to a customer constitutes commission liable for deduction of tax u/s.194H — Held, No

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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
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postage.)



16. S. D. Pharmacy Pvt. Ltd.

v. Dy. CIT



ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 948/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

V. M. Thyagarajan

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether
trade discount allowed to a customer constitutes commission liable for
deduction of tax u/s.194H — Held, No.

 

Per Dr. O. K. Narayanan :

Facts :

The assessee company was engaged in the business of
manufacture and sale of ayurvedic products. In the course of assessment
proceedings the AO noticed that the total sales of the assessee were
Rs.4,82,12,960 and corresponding trade discount amounted to Rs.1,42,43,565.
This trade discount was given to four concerns of which one was a sister
concern of the assessee. The amount of trade discount to the sister concern
was Rs.1,34,24,839 since the major sales of the assessee were to its sister
concern.

 

The AO disallowed the amount of trade discount of
Rs.1,42,43,565 u/s.40(a)(ia) since he held that the discount fell within the
ambit of S. 194H of the Act and since the assessee had not deducted tax at
source the same was not allowable.

 

The CIT(A) confirmed the action of the AO.

 

On an appeal by the assessee to the Tribunal it was pointed
out to the Tribunal that the products sold were billed at gross amount and
trade discount was given at the rate of 50% or 30% or 17.20%, as the case may
be. Trade discount allowed was reduced from the gross invoice value and net
amount was shown as net price payable by the parties. Sales tax was collected
on the net amount so payable by the parties. In the accounts, the customer’s
account was debited with the net amount and the amount of trade discount was
debited to Trade Discount A/c which was transferred to the debit of Trading
Account. Sales turnover was a gross amount. The property in the goods passed
to the customer on delivery of the goods. It is only the net amount which was
receivable from the customer for the goods sold. Reliance, on behalf of the
assessee, was placed on the decision of Delhi Bench of the Tribunal in the
case of Mother Dairy India Ltd.

 

Held :

The Tribunal found this to be a case of outright sale on a
principal to principal basis at the net amount. The trade discount was held to
be margin that the dealers could enjoy in retail trade. The Tribunal noted
that there was nothing on record to show that dealers and buyers were not
acting on their own behalf and since the sales were made on principal to
principal basis there was no question of assessee paying any commission or
brokerage or similar amounts to parties for the services rendered by them. The
Tribunal also took note of the fact that the assessee was not crediting the
discount to the account of the customer/dealer but was directly debiting it to
Trade Discount A/c.

 

The Tribunal following the ratio of the decision of the
Kerala High Court in the case of M. S. Hameed and Ors. held that since the
assessee was not making any payment of commission or brokerage to the parties
nor was it crediting the accounts of the parties for similar amounts there was
no occasion to deduct the tax as contemplated u/s.194H.

 

The Tribunal also noted that the Kerala High Court has in
the case of Kerala Stamp Vendors Association held that discount given on price
by the seller to the purchaser cannot be termed as ‘commission’ or ‘brokerage’
for services rendered in the course of buying and selling of goods as the act
of buying does not constitute rendering of any service.

 

Considering the facts and following the ratio of the two
decisions of Kerala High Court the Tribunal held that trade discount debited
by the assessee in its accounts is not covered by the provisions of S. 194H of
the Act. Since there was no liability on the part of the assessee to deduct
any tax on the amount of trade discount given to its dealers the disallowance
of Rs.1,42,43,565 was deleted.

 

Cases referred :



(1) Mother Dairy India Ltd. v. ITO, ITA No.
2975/Del./2008 dated 12-12-2008

(2) M. S. Hameed and Ors. v. Director of State
Lotteries and Ors., 249 ITR 186 (Ker.)

(3) Kerala Stamp Vendors Association v. Office of the
Accountant-General and Ors., (282 ITR 7) (Ker.)

 

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S. 2(22)(e) : Balance in share premium account cannot be considered as part of accumulated profit.

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




17 DCIT v. MAIPO India Limited


ITAT ‘A’ Bench, New Delhi

Before R. V. Easwar (VP) and

K. D. Ranjan (AM)

ITA No. 2266/Del./2005.

A.Y. : 1996-97. Decided on : 7-3-2008

Counsels for revenue/assessee : A. K. Singh/

Rano Jain

S. 2(22)(e) of the Income-tax Act, 1961 — Deemed dividend —
Whether balance in share premium account can be considered as part of
accumulated profit — Held, No.

 

Per R. V. Easwar :

Facts :

The assessee had received an advance of Rs.25.43 lacs from
another company ‘G’, wherein it held 40% of the shares. Before the year end, the
assessee had repaid the sum of Rs.14.31 lacs. The AO assessed the balanced sum
of Rs.11.12 lacs u/s.2(22)(e) of the Act. In the books of G, the aggregate sum
of reserves and surplus of Rs.1.95 crore included the sum of Rs. 1.9 crore of
share premium. The issue was whether the balance in share premium account could
be considered as accumulated profit.

 

According to the Revenue, Explanation 2 to S. 2(22)(e) did
not provide for exclusion of capital profit expressly, and secondly, unlike
other clauses of S. 2(22) which contained the expression ‘whether capitalised or
not’, clause (e) did not contain the said expression. Therefore, it was
contended by it that the balance in share premium account was part of
accumulated profit.

 

Held :

The Tribunal noted that as per the provision in the Companies
Act, 1956, application of the proceeds of the share premium account, for
purposes other than those given in S. 78 of the Companies Act, was treated as a
reduction of the company’s share capital. The said purposes were :



  • To pay up fully paid-up bonus shares;



  • To write off preliminary expenses;



  •  To write off share issue expenses;



  • To pay premium on redemption of redeemable shares/debentures;



  • To purchase its own shares/securities.


 


The above position was also confirmed by the Apex Court in
the case of Allahabad Bank Ltd. Thus, according to the Tribunal, not only was
there a prohibition on the distribution of the share premium account as dividend
under the Companies Act, but the same was treated as part of the share capital
of the company. Further, relying on another decision of the Apex Court in the
case of Urmila Ramesh, it observed that the expression ‘whether capitalised or
not’ (as referred to by the Revenue in its submission), could have an
application only where the profits are capable of being capitalised. The same
were not applicable where the receipts in question formed part of the share
capital.

 

Based on the above and also relying on the ratio of the
decision of the Apex Court in the case of P. K. Badiani, the Tribunal upheld the
decision of the CIT(A) and dismissed the appeal filed by the Revenue.

 

Cases referred to :



(1) CIT v. Allahabad Bank Ltd., AIR 1969 SC 1058
(SC)

(2) CIT v. Urmila Ramesh, (1998) 230 ITR 422 (SC)

(3) P. K. Badiani v. CIT, (1976) 105 ITR 642 (SC)


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Scope of Revision of orders by the Commissioner u/s.263

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Issue for consideration

Section 263 of the Income-tax Act, 1961 (‘the Act’) corresponding to section 33B of the Income-tax Act, 1922 (‘the 1922 Act’) was inserted in the statute with the main objective of arming the Commissioner of Income-tax (‘CIT’) with the powers of revising any order of the Assessing Officer (‘AO’), where the order is erroneous and resulted in prejudice to the interest of the Revenue. Prior to the introduction of section 33B in the 1922 Act, the Department had no right of appeal against any order passed by the AO and therefore, it was necessary to provide the CIT with the powers of revision.

While the power is not meant to be a substitute for the power of the AO to make assessment, the same can certainly be exercised when the order of the AO is erroneous and prejudicial to the interest of the Revenue. Whether or not the order is erroneous and prejudicial to the interest of the Revenue has to be decided from case to case.

The relevant provisions of section 263 reads as under:

“263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and making or causing to made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment . . . . .”

The controversy discussed here revolves around the scope of revisional power of the CIT — whether it extends to issues examined by the AO but not discussed in the assessment order.

The Karnataka High Court recently had an occasion to deal with this issue, wherein the Court held that an assessment order is erroneous and prejudicial to the interest of the Revenue, if the AO has not given any conclusion and finding on the ground of revision in the assessment order, thereby, justifying the exercise of powers of revision u/s.263. In deciding the issue, the Karnataka High Court dissented with the earlier findings of the Bombay and Delhi High Courts on the subject.

Gabriel India’s case

The issue under consideration first came up before the Bombay High Court in the case of CIT v. Gabriel India Ltd., (203 ITR 108). In that case, Gabriel had claimed deduction of a sum of Rs.99,326 as ‘Plant relayout expenses’ as being revenue in nature, being business expenditure on account of exercise of merging the two plants which necessarily called for relocation of the facilities as well as adapting the existing structure and other services necessary for the plant as a whole. The AO had accepted the explanation of Gabriel and allowed the deduction as claimed by it.

Upon completion of assessment, the CIT issued notice u/s.263 on the ground that there was an error in the order of the AO in allowing the deduction of the amount, as it was capital in nature. The CIT did not accept the contention of Gabriel that there was proper application of mind by the AO, before allowing the claim of expenditure as revenue in nature.

On appeal by Gabriel to the Tribunal, the Tribunal concluded that the action of the CIT was not in accordance with the provisions of section 263.

Being aggrieved by the order of the Tribunal, the Revenue appealed to the High Court. The High Court, after the considering the facts of the case and perusing the orders of lower authorities, opined that the power of suo moto revision u/s.263(1) was in the nature of supervisory jurisdiction and could be exercised only if the circumstances specified therein existed.

Two circumstances must exist to enable the CIT to exercise power of revision u/s.263:
— The order of AO must be erroneous; and
— By virtue of the order being erroneous, prejudice is caused to the interest of the Revenue.

The High Court held that if the AO acting in accordance with law makes certain assessment, it cannot be termed as erroneous by the CIT simply because according to him the order should have been written more elaborately. The section does not visualise a case of substitution of judgment of the CIT for that of the AO, who has passed the order, unless the decision is held to be erroneous.

The High Court further observed that the AO had exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion. Such a conclusion could not be termed as erroneous simply because the CIT did not feel satisfied with the conclusion. In such a case, in the opinion of the CIT, the order may be prejudicial to the interest of the Revenue, but it cannot be held to be erroneous for the exercise of revisional jurisdiction u/s.263. According to the Court, for an order to be erroneous, it must be an order which is not in accordance with the law or which has been passed by the AO without making any inquiry in undue haste. The Court noted that though the words ‘prejudicial to the interest of the Revenue’ have not been defined, but it must mean that the orders of assessment challenged are such as are not in accordance with law, in consequence whereof the lawful revenue due to the State has not been realised or cannot be realised. [Following Dawjee Dadabhoy & Co. v. S. P. Jain & Anr., (31 ITR 872) (Cal.) and Addl. CIT v. Mukur Corporation, (111 ITR 312) (Guj.)]

The High Court also observed that for re-examination and reconsideration of an order of assessment, which had already been concluded and controversy about which had been set at rest, to be set again in motion, must be subject to some record available with the CIT and should not be based on the whims and caprice of the revising authority. The High Court made the following specific observations as regards the issue under consideration to uphold the contention of the Tribunal, which is as under: “The ITO in this case had made enquiries in regard to the nature of expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing . . . . . Such a decision of the ITO cannot be held to be ‘erroneous’ simply because in his order he did not make elaborate discussions in that regard . . . . . Moreover, in the instant case, the CIT himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous . . . . . He simply asked the AO to re-examine the matter. That in our opinion is not permissible.”

Ashish Rajpal case

The issue under consideration had also come up before the Delhi High Court in the case of CIT v. Ashish Rajpal, (320 ITR 674). In that case, in the course of scrutiny, several communications were addressed by the assessee to the AO, whereby the information, details and documents sought for, were adverted to and filed, which were subject to grounds of revision u/s.263. On challenge before the Tribunal by the assessee of the powers of revision of the CIT, the Tribunal held that the assessee had filed all the relevant details and there was due application of mind by the AO on the grounds of revision. Therefore, merely because the assessment order did not refer to the queries raised during the course of the scrutiny and the response of the assessee thereto, it could not be said that there was no enquiry and that the assessment was therefore erroneous and prejudicial to the interest of the Revenue.

On appeal by the Revenue before the High Court, similar conclusions were arrived at and the exercise of the revisional power of the CIT, on the ground that there was lack of proper verification by the AO, was found to be unsustainable. Further, the High Court, after considering the decisions on the subject, explained the meaning of the expression ‘erroneous’ and ‘prejudicial to the interest of the Revenue’ as under:

“…..(iii) An order is erroneous when it is contrary to law or proceeds on an incorrect assumption of facts or is in breach of principles of natural justice or is passed without application of mind, that is, is stereotyped, inasmuch as, the AO, accepts what is stated in the return of the assessee without making any enquiry called for in the circumstances of the case, that is, proceeds with ‘undue haste’. [See Gee Vee Enterprises v. ACIT, (99 ITR 375) (Del.)]

(iv)    The expression ‘prejudicial to the interest of the Revenue’, while not to be confused with the loss of tax, will certainly include an erroneous order which results in a person not paying tax which is lawfully payable to the Revenue. [See Malabar Industrial Co. Ltd. (243 ITR 83)]”

Infosys Technologies’ case

The issue under consideration came up recently before the Karnataka High Court in the case of CIT v. Infosys Technologies Ltd., (341 ITR 293).

Infosys had claimed certain deductions for A.Y. 1995-96 and A.Y. 1996-97 towards its tax liability on account of tax deducted at source (‘TDS’) from payments received in respect of its business activities in Canada and Thailand. The aggregate tax relief as claimed as per Double Taxation Avoidance Agreement (‘DTAA’) under India-Canada tax treaty and India-Thailand tax treaty for A.Ys. 1995-96 and 1996-97 were Rs.18,12,897 and Rs.48,59,285, respectively. The AO, during the course of original assessment proceedings, after considering the submissions and records of Infosys duly allowed the tax relief as claimed by it under the respective treaties.

However, the CIT, on a consideration of non-speaking order of the AO on the aforesaid tax relief so allowed and in light of Article 23(2) of the India-Canada DTAA and Article 23(3) of the India-Thailand DTAA, was of the view that the order was erroneous and prejudicial to the interest of the Revenue. The CIT exercised his powers u/s.263 of the Act and remanded the matter to the file of the AO to ascertain the exact tax relief to which Infosys was entitled under respective tax treaties.

On appeal by Infosys before the Tribunal, the revisional orders of the CIT u/s.263 were set aside by the Tribunal vide a common order, on the ground that the orders passed by the AO were not shown as erroneous and prejudicial to the interest of the Revenue by the CIT.

The Revenue, aggrieved by the order of the Tribunal, appealed to the Karnataka High Court. After considering the arguments of the respective sides and perusing the orders of the lower authorities, the High Court accepted the fact that the CIT in his order does not anywhere explicitly show as to how the order of the AO is erroneous and prejudicial to the interest of the Revenue. The High Court held that the object of section 263 is to raise revenue for the state. The said provision is intended to plug leakage of revenue by erroneous orders passed by the lower authorities, whether by mistake or in ignorance or even by design.

Reference was made by the Karnataka High Court to the observations of the Supreme Court in the cases of Electro House (82 ITR 824) and Malabar Industrial Co. Ltd. v. CIT, (supra) to hold that since the AO had not disclosed the basis on which the tax reliefs were arrived at in the assessment order, which being important for determination of tax liability, there was definitely a possibility of the order being both erroneous and prejudicial. The ratios of the decisions of the Bombay High Court in the case of Gabriel India (supra) and the Delhi High Court in the case of Ashish Rajpal (supra) were referred to but were considered as not applicable to the facts and circumstances of the present case. The High Court held that the argument that the materials had been placed before the AO and therefore, the AO had applied his mind to the same could not be accepted to restrict the power of the CIT to revise the orders u/s.263.

Further, the following specific findings were made by the High Court as regards the issue under consideration to uphold the exercise of revisional power of the CIT u/s.263:

“We are of the clear opinion that there cannot be any dichotomy of this nature as every conclusion and finding by the assessing authority should be supported by reasons, however brief it may be, and in a situation where it is only a question of computation in accordance with the relevant articles of a DTAA and that should be clearly indicated in the order of the assessing authority, whether or not the assessee had given particulars or details of it. It is the duty of the assessing authority to do that and if the assessing authority has failed in that, more so in extending a tax relief to the assessee, the order definitely constitutes an order not merely erroneous but also prejudicial to the interest of the Revenue…….”

Further the AO, pursuant to the directions of the CIT u/s.263, had re-examined the tax reliefs, resulting in some reduction of tax relief to Infosys. On appeal by the assessee before the CIT(A) and further before the Tribunal, the Tribunal had set aside the fresh assessment on the ground that the revisional jurisdiction of the CIT u/s.263 had been set aside at that point in time and the appeal against such fresh assessment by Infosys was accordingly allowed with necessary tax reliefs. Aggrieved by this Tribunal order, the Revenue had appealed against this order to the High Court, which appeal was clubbed with the appeals against the orders u/s.263. The High Court, on taking cogni-zance of these facts, set aside the matters to the file of the Tribunal, for deciding the issue on merits and in accordance with law.

Observations

Recently, the Full Bench of the Gauhati High Court in the case of CIT v. Jawahar Bhattacharjee, (67 DTR 217), after extensively considering the legal decisions and precedents on the subject, explained the expression ‘erroneous’ assessment in context of section 263 is an ‘assessment made on wrong assumption of facts or on incorrect application of law or without due application of mind or without following the principles of natural justice.’ Though the decisions of the Bombay High Court in the case of Gabriel India Ltd. (supra) and the Delhi High Court in the case of Ashish Rajpal (supra) were not specifically referred to in the aforesaid decision, the ratio of these judgments were accepted by the Full Bench in the decision.

The Karnataka High Court in the case of Infosys Technologies Ltd. (supra) has held that the AO should record reasons for his conclusions and findings in the assessment order, irrespective of whether the issue has been accepted or not by the AO. In case the assessment order does not contain the reasons for his findings and conclusions, then it may be construed as an order which is erroneous and prejudicial to the interest of the Revenue, whereby the action of revision by the CIT shall be justified u/s.263.

This interpretation would subject the concluded assessments of the assessees to revision by the CIT for want of duty not performed by the AO in recording reasons for his findings and conclusions in his orders. In other words, the assessees may be penalised for want of non-performance of the duty by the AO. If one were to construe the provisions of section 263 in such a manner, then all settled issues which are concluded at the assessment stage after due application of mind by the AO, may also be subject to revision by the CIT. Such a construction of the expression ‘erroneous order and prejudicial to the interest of the Revenue’ by the Karnataka High Court is clearly in contradiction to the Full Bench of the Gauhati High Court and other High Courts as referred to above.

In addition to the above, the following decisions have also held that merely because the AO should have gone deeper into the matter or should have made more elaborate discussion could not be a ground for exercising power u/s.263:

  •    CIT v. Development Credit Bank Ltd., (323 ITR 206) (Bom.);

  •     CIT v. Hindustan Marketing and Advertising Co. Ltd., (341 ITR 180) (Del.);

  •     CIT v. Ganpati Ram Bishnoi, (296 ITR 292) (Raj.);

  •     CIT v. Unique Autofelts (P) Ltd., (30 DTR 231) (P&H);

  •     Hari Iron Trading Co. v. CIT, (263 ITR 437) (P&H); and

  •     CIT v. Goyal Private Family Specific Trust, (171 ITR 698) (All.).

Further, from the limited facts as understood from the order, the Karnataka High Court also failed to appreciate that the material as filed by Infosys during the course of assessment before the AO for the claim of tax relief was also available for consideration before the CIT. However, the CIT, instead of considering the materials on record and then reaching the necessary conclusions, chose to remand the matter to the file of the AO for re-examination without giving any reasons and findings for satisfaction as to how the tax relief so claimed by the assessee was erroneous and prejudicial to the interest of the Revenue. The CIT, in that case, seems to have relied on the text of the impugned Articles of the DTAAs to remand the matter to the file of the AO for re-examination, without taking cognizance of the material filed by the assessee before the AO for claim of tax reliefs or pointing out any specific defects in the application of the impugned articles. The CIT has also in his order seems to have neither opined, nor demonstrated how the conditions provided under the respective tax treaties were not fulfilled by the assessee or satisfied only for a particular amount out of the total tax relief claimed. Under similar circumstances on different issues, the Bombay High Court in the case of Gabriel India Ltd. (supra), after elaborate discussions as reproduced above, had set aside the revisional order of the CIT.

Though it may sound paradoxical, the Karnataka High Court while expecting the AO, being a quasi-judicial authority, to record the reasons and conclusions for the findings in the assessment order, it allowed the CIT, also a quasi-judicial authority, to exercise the revisional power, though the satisfaction and reasons were not recorded for holding the order of the AO as erroneous and prejudicial to the interest of the Revenue. The powers of revision had been exercised by the CIT merely on the ground of a doubt that the AO had not properly applied his mind in carrying out the procedural aspect of allowing the tax relief as per the impugned Articles under consideration and because the assessment order did not discuss the issue.

While one appreciates that the CIT u/s.263 is never required to come to a firm conclusion before exercising his powers of revision, it is equally true that the CIT being a quasi-judicial authority, is also required to satisfy himself and give reasons before invoking the powers of revision. This legal proposition is also approved in the following decisions rendered in the context of section 263:

  •     CIT v. T. Narayana Pai, (98 ITR 422) (Kar.);
  •     CIT v. Associated Food Products, (280 ITR 377) (MP);
  •     CIT v. Jai Mewar Wine Contractors, (251 ITR 785) (Raj.);
  •     CIT v. Duncan Brothers, (209 ITR 44) (Cal.) — an order of the CIT not bringing any cogent materials on record and based only on certain hypothesis is unsustainable;
  •     CIT v. Kanda Rice Mills, (178 ITR 446) (P&H);
  •     CIT v. Trustees, Anupam Charitable Trust, (167 ITR 129) (Raj.) — the error envisaged in this section is not one which depends on possibility or guesswork, it should be actually an error either of fact or of law; and
  •     CIT v. R. K. Metal Works, (112 ITR 445) (P&H);

Without prejudice to the aforesaid discussions, it would be relevant to mention that in the case of Infosys Technologies (supra), the reference to the observations of the decisions of the Supreme Court in the case of Electro House (supra) and Malabar Industrial Co. Ltd. (supra) may not help the case for justification of exercise of revisional power by the CIT u/s.263. While the decision of the Apex Court in the case of Electro House (supra) dealt with the question of whether it is necessary to issue notice to the assessee before assuming jurisdiction u/s.33B of the 1922 Act (corresponding to section 263) vis-à-vis requirements of issue of notice u/s.34 of the 1922 Act (corresponding to section 148, section 149 and section 150), the decision of the Apex Court in the case of Malabar Industrial Co. Ltd. (supra) had a specific finding of fact that the AO had undertaken assessment in absence of any supporting material and without making any inquiry, which does not seem to be the case in Infosys Technologies matter (supra).

In light of the above, the findings of the Karnataka High Court in the case of Infosys Technologies Ltd. (supra) may require reconsideration. Otherwise, practically, considering the manner in which orders are passed by the AOs, wherein the reasons for the conclusions and findings are only spelt out with regard to the issues where the claims of the assessees are not accepted, such a view may give a free hand to the CIT to exercise powers of revision u/s.263 in almost all cases and revise all such settled assessments, which is unwarranted.

Further, judicial propriety and judicial discipline required that the case of Infosys Technologies Ltd. (supra) should have been referred to a Larger Bench of the Karnataka High Court, particularly considering that the same High Court in the case of T. Narayana Pai (supra) had decided otherwise regarding want of satisfaction and recording of a finding by the CIT in the context of section 263.

The view taken by the Bombay and Delhi High Courts, that revision cannot be resorted to in cases where the relevant information has been examined by the Assessing Officer, though not recorded in the assessment order, therefore seems to be the better view.

GAAR — are safeguards adequate?

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It was not surprising that the Government did not wait for introducing the General Anti Avoidance Rules (GAAR) as a part of the Direct Taxes Code (DTC). Its introduction in the Finance Bill, 2012 was natural corollary to the Supreme Court decision in the Vodafone’s case. The Government has now deferred the implementation of GAAR for a year and has introduced few more safeguards after negative reaction of the stock market and industry in general to GAAR.

Now, the discussion on the issue as to whether or not India should have GAAR has become irrelevant after its introduction in the Finance Bill. At this moment arguably, pertinent discussion could be about whether or not GAAR has enough safeguards that address the concerns of the taxpayers. Common concerns of the most taxpayers are that GAAR gives too much power to the tax authorities; it will also hit genuine tax planning schemes and it creates uncertainty as it cannot be predicted as to which arrangements will be hit by GAAR.

Many countries such as Australia, Canada, China, New Zealand, South Africa, and Spain among others have safeguards in varying degrees in their GAAR responding to the similar concerns expressed in their jurisdictions. This article discusses the safeguards in the Indian provisions and particularly, the safeguard provided by Australia, Canada, and UK on Panel akin to the Approving Panel in Indian GAAR.

  • Safeguards in the Indian GAAR GAAR has now the following safeguards after the amendments to the Finance Bill, 2012:  The burden of application of GAAR rests with the tax authority.
  • Assessing Officer (AO) can invoke GAAR only after obtaining the approval of the Approving Panel.
  • The Approving Panel will have an ‘Independent Member’.
  • AO can pass Order only after the approval of the Commissioner.
  • Taxpayer can avail the facility of the Advance Ruling on GAAR.

The Government has also formed a committee for drafting and recommending the Rules and the Guidelines for the implementation of GAAR. The Guidelines are almost certain to specify a monetary threshold for invoking GAAR and may incorporate the Parliamentary Committee’s recommendation that the AO should record the reasons before applying GAAR.

Burden of proof is on the Department

The earlier version of GAAR had one of the most criticised provision under which the taxpayer was responsible for proving that the GAAR is not applicable to it. In the amended Bill, this particular provision is deleted to bring it in line with other tax charging provisions. Now, the burden of proving the applicability of the GAAR in a particular case rests with the tax authority.

Approving Panel

GAAR has provided one more safeguard in the form of the Approving Panel. The provision on the Approving Panel in the clause 144BA of the Finance Bill is as under:

  • The AO has to make a reference to the Commissioner for invoking GAAR.
  • The Commissioner shall provide an opportunity of being heard to the taxpayer on receipt of the reference. He shall refer the matter to the Approving Panel if he is not satisfied by the reply of the taxpayer and is of the opinion that GAAR provisions are required to be invoked. The Commissioner shall also decide as to whether the arrangement is an impermissible avoidance arrangement or not when the taxpayer does not object or reply.
  • The Approving Panel after providing an opportunity to be heard to the taxpayer has to dispose of the reference within six months after examining material and if necessary, after getting further inquiry conducted. The disposal could be either by declaring an arrangement to be impermissible or by declaring it to be not impermissible.

The AO will determine the consequences of such declaration of an arrangement as ‘impermissible avoidance arrangement’.

  • Every direction of the Approving Panel shall be binding on the AO and the AO shall complete the proceedings in accordance with the directions only after the approval of the Commissioner.
  • The period taken by the proceedings before the Commissioner and the Approving Panel shall be excluded from the time limitation for the completion of assessment. l The Approving Panel shall comprise of minimum three members. Out of which, two members would be of the Income-tax Department of the rank of Commissioner or above and third ‘independent’ member would be from the Indian Legal Service not below the rank of Joint Secretary.
  • The Board may make rules for the procedure, for efficient working of the Panel and for expeditious disposal of references.

This proposed Section is largely based on the provision under UK’s draft law on GAAR2. For appreciating the issues involved in Approving Panel, it might be worthwhile to peruse the information on similar panels formed by Australia and Canada as well as proposed Panel of UK for the application of GAAR.

Role of the Approving Panel

Australia3 (GAAR Panel) and Canada4 (GAAR Committee) have non-statutory, advisory or consultative body to assist tax officers in administration of GAAR and to ensure consistency in approach in application of GAAR. In both the countries, although the Tax Officer finally decides as to whether or not to apply GAAR, he considers the advice given by the Panel before taking the decision. Similarly, UK’s proposed statutory Advisory Panel also shall give only its opinion as to whether there is reasonable ground for the application of GAAR5. The Indian Approving Panel neither is an advisory in nature, nor is mandated to assist the AO on the application of GAAR. Neither the clause 144BA elaborate, nor the ‘explanatory notes to the Finance Bill’ explain the role of the Approving Panel. This ambiguity can create different expectations among taxpayers as it has happened in the case of the ‘Dispute Resolution Panel’ (DRP).

Many taxpayers see the DRP as an adjudicating body on a dispute between the taxpayer and the Department. This expectation is because of the words ‘dispute resolution’ used for the Panel along with the lack of clarity on its role. On the other hand, many Departmental officers perceive DRP as an administrative safety mechanism to prevent inappropriate application of law against a taxpayer. Their justification is based on the argument that, the Law does not intend to have an appellate level between the AO and the Tribunal even before the order is passed. Moreover, DRP cannot be an adjudicating body, as it does not have necessary powers to function as an Appellate Court.

The role of the Approving Panel appears to be of an administrative in nature for ‘approving’ or ‘disapproving’ applicability of GAAR, a function similar to that of the Range head (Additional Commissioner) who approves some of the AO’s orders6. However, in absence of clarity, officers on the Panel may consider that it is their job to ensure successful invoking of GAAR in deserving cases. Therefore, they also may give directions to strengthen the case of the Department. On the other hand, the taxpayer would like to have a neutral body in which the panel should decide against the Department in weak cases rather than the Panel issuing directions to strengthen the Department’s case. Therefore, elaboration of the Panel’s role will help all in its functioning.

Aspect of consistency in the Panel’s approach is also of worth consideration. Australia and Canada ensure consistency in the Panel’s decisions by having a system under which reference is made only from a single point (head office) and by having centralised Panel in the country. In India also, initially only one Panel may be constituted to ensure consistency. Number of Panels can be gradually added with the increase in work. The need for consistency also requires that the Panel members should be appointed for a longer duration and should not be frequently changed. It might be a good idea to have the members dedicated only for the work of the Approving Panel or the DRP for ensuring consistency in its approach.

Composition of the Panel
The Parliamentary Standing Committee has recommended that the Departmental body should not review application of GAAR but an independent body should review it. The Committee has suggested that the Chief Commissioner should head the reviewing body and it should have two independent technical members. However, the Government has decided to form a Panel consisting of the senior Tax Officers and an Officer of Indian Legal Service as against the arguments for having non-Governmental independent members. Now the composition of the Panel appears to be more balanced than what was previously proposed, although taxpayers would have preferred to have non-Governmental independent member on the Approving Panel.

The Australian GAAR Panel consists of senior tax officers, businessmen and professional experts. The Panel is headed by a senior Tax Officer7. UK’s Advisory Panel is proposed to be to be chaired by an independent person and will have a tax officer and an independent member having experience in area relevant to the activity involved in the arrangement8. Whereas, the Canadian GAAR Committee consists of the representatives from the different departments of the Government such as Department of Legislative Policy, Tax Avoidance and Income-tax Rulings. The Committee also has lawyers and representatives from the Department of Finance of the Government.9

Presence of the non-governmental independent members on the Approving Panel gives more confidence to taxpayers in its decisions. Tax-payers perceive such a panel to be fair and unbiased. It also results in external review of the Departments’ work on GAAR and makes the Department some-what accountable to external systems.

However, having independent non-governmental member in the Committee raises different issues, such as such member’s eligibility criteria, transparency in selection process, tenure, etc. Having non-Governmental independent members on the Panel also raises the issue of protection of taxpayers’ confidentiality. Not many taxpayers would prefer their affairs becoming known to other professionals or businesspersons. Again, non-Governmental independent members have conflict of perception and occasionally may have conflict interest. Unlike in many developed taxation systems, it is doubtful as to how many independent members in India would take an adverse view of the arrangement devised by a fellow professional or a businessperson. Further, a non-Governmental independent member on a Panel also may lead to the issue of his accountability, especially when the Panel’s decision is not advisory but is binding on the tax authority under the present law. Moreover, eminent independent persons may not be easily available for the Approving Panel work due to pressure on their time. Constituting a Panel with eminent independent persons is easier said than done and therefore, a Panel consisting of independent members also may not solve the problem.

Powers and procedure of the Panel

Both, the Australian GAAR Panel and the Canadian GAAR Committee do not investigate or find facts or arbitrate disputed contentions. They advise on the basis of the facts referred by the tax officer and by the taxpayer. The Panel may suggest tax officer to make additional enquiries if the facts are disputed. As against this, Indian Panel is armed with more powers and it can direct the Commissioner to get necessary enquiries conducted as the Panel’s role is not advisory in its nature.

The Australian GAAR Panel may extend invitation to the taxpayer to make oral as well as concise written submission before it. The Canadian GAAR Committee does not afford taxpayer right to represent before it, but they may file written submissions before it. The taxpayers are not entitled to have copies of the reports and other submissions made by the authorities or experts in their case before the Committee. However, they will receive the copy of the Committee’s decision along with the reasons of the decision. The Australian Tax office releases the decision of the Panel in the form of either taxation ruling or in the form of the summarised decision on issue to be followed by the tax officers as the official tax office position on that issue.

Working of the Panel

The statistics of Australia and Canada show that these bodies have recommended application of GAAR in majority of the cases referred to it. In a period from 1st July 2007 to 30th June 2011, the Australian Panel advised application of GAAR in 64% of cases, called for further information in 17% of cases, whereas it decided not to apply GAAR only in 19% of the cases referred to it10. Whereas, as on 31st March 2011, the Canadian Committee approved application of GAAR in 73% cases referred from the date since GAAR was first introduced in Canada in 198811. Based on this statistics, one can expect similar trend in India on approval of GAAR references.

The statistics of the decisions of these Panels are available in public domain in Australia and in Canada. Australia also releases the decisions of the Panel in form of taxation rulings or in form of decisions to be followed as a precedent. UK’s draft law also proposes publication of a synopsis of each opinion (without revealing the identity of
taxpayer to protect confidentiality) and publication of regular digests of such opinions.12 It might be good to release statistics of the decisions of the Approving Panel for transparency.13

Purposive interpretation of GAAR

One relevant issue, which is not a safeguard but requires consideration for ensuring effectiveness of GAAR is of having a legal provision on interpretation of GAAR.

The Indian Courts have largely applied the rule of literal construction to the interpretation of taxing statutes. This approach is based on the following two principles:

  •     Legislation should be strictly interpreted on the basis of the words used and legislative purpose should not be presumed and

  •     If the words of a provision are found to be ambiguous, the ambiguity should be resolved in favour of the taxpayer.

This approach creates problem when taxpayer pay lesser taxes by using a legal construction or transaction based on a gap or a loophole in law which will place him outside reach of the law.14 Therefore, the Courts of Australia, UK and Canada more often use purposive interpretation on provisions of tax avoidance as narrow interpretation of the legal provisions could result in injustice. Purposive interpretation of taxing statute seeks to interpret the provision according to the object, spirit, and purpose of the tax provision. This approach is sum marised in the case of the Pepper v. Hart, (1993) 1 All ER 42, HL(E) as under:

“The object of the Court in interpreting legislation is to give effect so far as the language permits to the intention of the Legislature….. Courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted.”

Purposive interpretation is also justified on the ground of fundamental principle of taxation statute, which seeks to treat similarly placed taxpayers similarly. In absence of purposive interpretation, arrangement of one taxpayer may be treated as tax avoidance, but similar arrangement of other taxpayer may not be treated as tax avoidance due to some minor insignificant difference. Therefore, Australia15 and New Zealand16 have enacted a specific legal provision to ensure that the provision is interpreted according to purpose and object of the statute. Other provision permits them to use extrinsic aids to overcome the problem of gathering the purpose and object of the law17.

Tax laws deal with the transactions taking place in changing economic circumstances. Tax avoidance schemes are carefully devised so that legal provision may not catch them. Purposive interpretation could be helpful on such occasions. Therefore, clarification in the proposed Guidelines may help in ensuring uniformity in the judicial approach on interpretation of the GAAR.

Conclusion

The Indian Approving Panel is statutory and non-advisory body and its directions are binding on the AO. It is sufficiently empowered to carry out its function effectively by getting further enquires conducted. The Indian Panel is the most powerful when compared to similar Panels in other jurisdictions. Therefore, legally, the Indian GAAR has the strongest safeguard on this ground among all.

However, industry’s apprehensions on GAAR may be arising out on implementation of such tax laws in India. It is a fact that many of these concerns are because of the huge trust deficit between the Department and taxpayers. Improving their relationships is an uphill task in a country which has massive tax evasion leading to various estimates of the size of parallel economy. For the Government, raising more revenue by plugging revenue loss taking place due to tax evasion schemes is a matter of high priority when less than 3% of its population bears the burden of paying taxes. Therefore, there is no going back from GAAR. Now, one can only hope that, GAAR and its procedure will gradually evolve for better with the feedback of the stakeholders.

1    The author is Commissioner of Income-tax. Views expressed in the article are entirely personal.

2    Section 14, ‘Illustrative draft GAAR’, ‘GAAR Study’, Report by Graham Aaronson, QC, at p-52

3    PS LA 2005/24, 13th December 2005, Australian Taxation Office.

4    William Innes, Patrick Boyle and Joel Nitikman, ‘The essential GAAR manual: Policies, principles and procedures’, CCH Canadian Ltd. (Toronto: 2006) pp- 1-296, at p-90.

5    Para 61, See note-2, at p-72

6    Search Assessment Orders, some of the penalty orders under Chapter-XXI.

7    Para 23, see note-3.

8    Para 66, see note-2, at p 73

9    See note-4, at p 90

10    Out of total 55 cases, GAAR application was advised in 35, declined in 10 and decision deferred for various reasons in 9. Source- GAAR Panel Report, NTLG Minutes, March 2008, September 2008, September 2009, March 2010, October 2010, March 2011 and September 2011, Australian Taxation Office, Australia website.

11    Lynch Paul, ‘GAAR Committee Update-March 31 2011’ Canadian Tax Adviser, May 24,2011, http://www.kpmg. com/Ca/en/IssuesAndInsights/ArticlesPublications/ CanadianTaxAdviser/CTA_Uploads/

12    Para 5.25, see note 2, at p 34.

13    “We are working on an easy and transparent mechanism to implement GAAR, but more specifics will be notified once the Finance Bill is passed,” Shri R. Gopalan, Secretary, Economic Affairs, 16th April 2010, moneycontrol.com

14    Vanistendael Frans, ‘Legal framework for taxation’, Tax Law Design and Drafting, Vol-1, (ed, Victor Thuronyi), International Monetary Fund (1996), Washington DC, at p 45.

15    Acts Interpretation Act, 1901, Australia. section 15AA — Regard to be had to purpose or object of the Act.
“(1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object.”

16    Interpretation Act, 1999, Section 5(1) “The meaning of an enactment must be ascertained from its text and in the light of its purpose.”

17    Australia section 15AB of Acts Interpretation Act, 1991 and New Zealand section 5(1) and 5(2) of the Interpretation Act, 1999.

Karwat Steel Traders vs. ITO Income tax Appellate Tribunal Mumbai Bench “A”, Mumbai Before B. Ramakotaiah (A. M.) and Vivek Varma (J. M.) ITA No. 6822 / Mum / 2011 A Y 2008-09. Decided on 10.07.2013 Counsel for Assessee / Revenue: K. S. Choksi / Manoj Kumar

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Section 40(a)(ia) – No disallowance can be made merely on the ground of non filing of Form 15H / 15G to CIT as prescribed u/r 29C.

Facts:
The AO had disallowed interest paid to various parties amounting to Rs. 5.3 lakh u/s. 40(a)(ia) on the ground that the assessee had not filed Form 15H /15G to CIT as prescribed u/r 29C. On appeal, the CIT(A) upheld the order of the AO.

Held:
According to the tribunal, u/s. 40(a)(ia) the amount cannot be allowed as deduction only when tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid. In the case of the assessee, since the assessee had received the prescribed forms viz., Form 15H / 15G, from the parties to whom interest was paid, there was no liability to deduct tax. For nonfurnishing of Form 15H / 15G to the CIT as prescribed under the Act, according to the tribunal, it may result in invoking penalty provisions u/s 272A(2)(f). Since no tax was deductible, the tribunal held that the provisions of section 40(a)(ia) were not applicable to the facts of the case and the interest paid was allowable as deduction. In coming to the above conclusion the tribunal also relied on the decision of the co-ordinate bench in the case of Vipin P. Mehta vs. ITO (2011) [11 taxmann.com 342 (Mum)].
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ACIT vs. Goodwill Theatres Pvt. Ltd. ITAT Mumbai `G’ Bench Before R. K. Gupta (JM) and N. K. Bllaya (AM) ITA No. 8185/Mum/2011 A.Y.: 2008-09. Decided on: 19th June, 2013. Counsel for revenue / assessee: D. K. Sinha / Vijay Mehta

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Mesne Profits received, for unauthorized occupation of the premises, constitute capital receipt not chargeable to tax. The decision of the Madras High Court in the case of CIT vs. P. Mariappa Gounder (147 ITR 676) is distinguishable on facts.

Mesne profits, being capital receipts, were deductible while computing book profits u/s. 115JB.

Facts I :
During the year under consideration the assessee company received mesne profits for unauthorised occupation of the premises from Central Bank of India who was in possession of rented premises belonging to the assessee.

The tenancy of Central Bank of India (“the Bank”) ended on 01-06-2000. The Bank handed over possession of the premises to the assessee on 30-09- 2003 though the Supreme Court had vide its order directed the bank to handover the possession by 30- 06-2003. The Small Causes Court vide its order dated 28-03-2007 (received by the assessee on 30th June, 2007) disposed off the suit filed by the assessee company for mesne profit for the period 01-06-2000 to 30-09-2003 by fixing the compensation to be Rs. 3,33,38,960 plus interest thereon at 6% i.e. Rs. 8,33,474 per month.

The application of the Bank to stay execution and operation of the order dated 28-03-2007 was disposed of by the Small Causes Court by directing the Bank to pay Rs. 1,47,28,280. The Bank also filed an appeal against the determination of mesne profits, which appeal was admitted and was pending. In the meantime, the Bank paid assessee company Rs. 1,47,28,280 which the assessee regarded it as capital receipt. The Assessing Officer relying on the ratio of the decision of the Madras High Court in the case of P. Mariappa Gounder 147 ITR 676 (Mad) considered this amount to be chargeable to tax.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that in the case before the Madras High Court which has been affirmed by the Supreme Court the issue was of the year of taxability of mesne profit. Relying on the ratio of the decision of Special Bench of Mumbai Tribunal in the case of Narang Overseas P. Ltd. 111 ITD 1, appeal against which was dismissed by Bombay High Court vide order dated 25-06-2009 (ITA No. 1797 of 2008), the CIT(A) allowed the appeal of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Fact II : The assessee had treated the sum of Rs. 1,47,28,280 as capital receipt and had taken it directly to capital reserve account without crediting the profit & loss account. The AO held that since the receipt is revenue in nature the same needs to be added back to book profit in view of the provisions of section 115JB. He brought the same to tax while computing the book profits.

Aggrieved, the assessee preferred an appeal to CIT(A) who deleted the addition by observing that the receipt is capital in nature. However, while deleting the addition he observed that since the mesne profit is reflected in profit & loss account, it is rightly taxable for computing book profit, hence, on principle, the findings of AO were upheld. Aggrieved by these observations the assessee preferred an appeal to the Tribunal.

Held I: The Tribunal noted that the AO decided the issue against the assessee by following the decision of Madras High Court in the case of P. Mariappa Gounder (supra). The Special Bench of the Mumbai Tribunal has while deciding the case of Narang Overseas (supra) considered the decision of the Madras High Court and also the decision of the Supreme Court confirming the decision of the Madras High Court. It also noted that the decision of the Special Bench has been confirmed by the Bombay High Court vide order dated 25-06-2009. The Tribunal found the order of CIT(A) to be in consonance with the order of the Special Bench. The Tribunal confirmed the order of the CIT(A) on this issue.

Held II: The Tribunal held that since the mesne profit is capital in nature in view of the decision of the Special Bench, they cannot be brought to tax u/s. 115JB of the Act. Even Explanation 2 to section 115JB supports the case of the assessee. CIT(A) was justified in deleting the addition computed by the AO u/s. 115JB of the Act. The Tribunal observed that the assessee’s counsel is correct in objecting to the findings of the CIT(A).

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Protocol amending the DTAA between India and Netherlands notified with effect from 2nd November 2012 signed – Notification no. 2/2013 dated 14-1-2013

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Protocol amending the DTAA between India and Netherlands notified with effect from 2nd November 2012 signed – Notification no. 2/2013 dated 14-1-2013

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Extension of time limit for filing ITR V – Notification no. 1/2013 under the CPR Scheme 2011 dated 7-1-1203

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Time limit for filing ITR V for AY 2010-11 filed during financial year 2011-12 and for AY 2011-12, for returns filed on or after 1-4-2011, the due date is extended till 28th February, 2013. For returns filed for AY 2012- 13, the due date is extended till 31st March, 2013 or 120 days from filing the return whichever is later.

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No deduction of TDS u/s. 197A in certain specified cases –Notification no. 56/2012 DATED 31-12-2012

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CBDT has notified that w.e.f 1st January 2013, no TDS would be deducted in the below mentioned payments made by a person to a Scheduled bank as per RBI Act (excluding a foreign bank:

• bank guarantee commission

• cash management service charges;

• depository charges on maintenance of DEMAT accounts;

• charges for warehousing services for commodities; • underwriting service charges; • clearing charges (MICR charges);

• credit card or debit card commission for transaction between the merchant establishment and acquirer bank.

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Assessment of preceding years in search cases during election period – Circular No. 10/2012 dated 31-12-2012

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Pursuant to introduction of Rule 112F, for cases of search u/s. 132 and requisition made u/s. 132A and cash or other assets seized during the election period, no further investigations would be carried out for any preceding assessment years subject to certain certification to be obtained from investigating officer with the approval of the DGIT.

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Instructions regarding e-payment of ITAT fees: Office order [F. No. 19-AD(ATD)/2012 dated 13-12-2012 (Reproduced)

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Advocates/Chartered Accountant/Authorised Representative and assessees are hereby informed that in case of E-Payment of Tribunal Fees, the respective Challans are to be countersigned by the concerned bank manager or attested by the authorised Representatives or assessees themselves. In case of non compliance of these instructions, the remittent of Tribunal fees will not be treated valid.

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Section 32, Appendix to Income-tax Rules – UPS being energy saving device is entitled for higher depreciation @ 80%.

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Facts:

The assessee claimed depreciation on UPS @ 80% on the ground that it is employed by it as an energy saving device. The claim of the revenue was that the same is not an energy saving device but an energy supply device.
Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the issue is covered by the decision of the Tribunal in assessee’s own case for A.Y. 2002-03 in ITA No. 2792/M/06; for AY 2003-04 in ITA No. 1071/M/2007; for AY 2004-05 in ITA No. 5569/M/2007 and for AY 2005-06 in ITA No. 6964/M/2008. The Tribunal noted the following observations in respect of AY 2002-03:

“13. We have heard the rival contentions. Short question is whether UPS is a `Automatic Voltage Controller’ falling within the heading of energy saving device in the Appendix to the Income-tax Rules, 1962 giving depreciation rates. Legislature in its wisdom has chosen to show an Automatic Voltage Controller as an electrical equipment eligible for 100% depreciation, falling under the broader head of energy saving devices. Once Legislature deemed that an `Automatic Voltage Controller’ is a specie falling within energy saving device, it is not for the Assessing Officer or Ld CIT(A) to further analyse whether such an item would (sic was) indeed be an energy saving device. In fact it is beyond their powers. Hence the only question to answer, in our opinion is whether an UPS is an `Automatic Voltage Controller’. It is mentioned in the product brochure (Paper Book Page 64) that the UPS automatically corrected low and high voltage conditions and stepped up low voltage to safe output levels. Thus in our opinion, there cannot be a quarrel that UPS was doing the job of voltage controlling automatically. Even when it was supplying electricity at the time of power voltage, the voltages remained controlled. Therefore in our opinion, a UPS would definitely fall under the head of `Automatic Voltage Controller’. We are fortified in taking this view by the decision of Jodhpur Bench in the case of Surface Finishing Equipment (supra). As for the decision of the Delhi Bench in the case of Nestle India (supra) referred by the Ld. DR, there the question was whether UPS could be considered as `computer’ for depreciation rate of 60%. There was no issue or question, whether it could be considered as an Automatic Voltage Controller and hence in our opinion that case would not help the Revenue here. Therefore, we are of the opinion that the assessee was eligible for claiming 100% depreciation on UPS. Disallowance of Rs. 6,82,443 therefore stands deleted. Ground number 3 is allowed.”

Following the above mentioned decision, the Tribunal decided the issue in favour of the assessee.

This ground was decided in favour of the assessee.

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What constitutes ‘teaching in or by educational institutions’ under Article 12(5)(c) of India-USA DTAA ?

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New Page 2


Part C — Tribunal & International Tax Decisions



  1. Sri Ramachandra Educational and Health Trust

(2009 TIOL 13 ARA IT) (AAR)

Article 12(5)(c) read with MOU, India-USA DTAA; S. 9, S.
195, Income-tax Act

Dated : 29-5-2009

Issue :

What constitutes ‘teaching in or by educational
institutions’ under Article 12(5)(c) of India-USA DTAA ?

 

Facts :

The applicant was registered u/s.12AA of Income-tax Act. It
had two institutions — a medical college (which was a deemed university) and a
hospital (which was a university hospital). The applicant had executed an
agreement with an American medical institution (‘US Med’) for transfer of
knowledge and experience in the field of medical sciences. US Med was a
tax-exempt entity in USA. The applicant applied to AAR for determination of
the issue whether, having regard to Article 12(5) of India-USA DTAA, the
applicant would be required to deduct tax at source u/s.195 on the annual fee
payable to US Med, especially when both the payer and the payee are not liable
to tax in their respective countries.

 

The applicant stated that :



  •  US Med
    would be rendering the services from USA. Being non-resident, it was not
    liable to tax u/s.9 of the Act in respect of services rendered in USA.



  •  As the
    payments were for teaching in or by educational institution, they would be
    excluded from Article 12(5)(c) of India-USA DTAA. The applicant supported
    this proposition with examples 10 & 11 in the MOU appended to India-USA DTAA
    in respect of fees for included services in Article 12 (‘the MOU’).



  •  As US Med
    was not liable to tax in India, the applicant had no obligation to deduct
    tax at source.


The tax authorities stated that :



  •  Though
    the applicant was exempt u/s.12AA, US Med was not so exempt under the Act.



  •  Fees
    payable by the applicant to US Med fall within the purview of S. 9(1)(vii)
    of the Act, read with the explanation below S. 9(2).



  •  The fee
    paid was described as ‘annual alliance development
    administrative/maintenance fee’, which showed that it was not wholly for
    teaching in or by educational institution. Hence, the payment was outside
    the purview of Article 12(5)(c) of India-USA DTAA.



  •  Correspondence from US Med showed that tuition fee paid was to be covered
    under ‘program deliverables’, which showed that the consideration was paid
    for making available technical knowledge, experience, skill, know-how or
    processes. As such, it was covered under Article 12(4) and example 10 of the
    MOU explaining the scope of exemption for teaching in educational
    institutions.


 


The AAR noted that, US revenue authorities had granted
exemption to US Med under US Revenue Code. It was also noted that US Med was
an incorporated entity which was exempt from tax in USA and as such, it could
invoke provisions of DTAA. The tax authorities did not dispute this position1.

 

The AAR observed that, as the question of tax deduction
would arise only if income is chargeable to tax, it was necessary to ascertain
the taxability of the fees paid. For this purpose, the AAR reviewed the
agreement. It observed that :



  •  US Med
    was to provide educational and teaching services.



  •  Specific
    services were to be agreed and decided in annual plan. These services were
    termed ‘deliverables’ for which fixed annual fee was to be paid.



  •  Additional services were termed ‘additional deliverables’ for which
    additional payment was to be made.



  •  US Med
    had granted non-exclusive, non-transferable licence to the applicant for use
    of copyright, trade mark, trade secrets, patent, etc. (‘intellectual
    property’) owned by it. The AAR observed that though the agreement clarified
    that no royalty was to be paid for use of Intellectual Property, the
    substances of the arrangement was to the contrary.



  •  Based on
    information provided by the applicant, the AAR noted that following actual
    activities were conducted during the years 2004 to 2006.



  •  Various
    programmes and workshops called ‘CME Programmes (comprising medical
    education).



  •  Faculty
    student exchanges where the applicant’s representatives were deputed to US
    Med for doing clerkship.



  •  Tele-medicine, which was a continuing program of monthly tele-medical
    education, e-learning and providing help in applicant’s institution-building
    through programmes in education, clinical care and research.


The AAR then referred to Article 12 of DTAA and examples 10
and 11 of the MOU appended to DTAA. It also referred to the legal definitions
of the terms ‘technical’ and ‘teaching’. It observed that the terms were
defined in their widest sense. The AAR then discussed examples 10 and 11 of
the MOU as also the connotations of the terms ‘technical’ and ‘teaching’.

Held :

The AAR stated that as clear picture of the activity and
payments did not emerge from the facts, it would lay down broad guidelines. In
respect of each of the activities, the AAR held that :



  • Workshops and seminars are conducted from time to time. Generally, the speakers are from US Med. Medical teachers and professional from different places participated in these events. However, it was not known whether the workshops and seminars had any connection to a particular course conducted by the medical college of the applicant and whether it was meant for the benefit of students. These activities could be covered in Article 12(S)(c) : only if faculty from US Med participated in them; some of the participants benefiting from the activities were pursuing medical courses in the applicant’s institution; and seminar/workshop has substantial connection with the course of studies in the college.

  • Tuition fees paid in respect of scholars deputed to complete course in USA were covered by example 10 of the MOU and consequently, were covered under Article 12(S)(c). Accordingly, they were excluded from the purview of fees for included services.

  • Tele-conferencing and e-Iearning were part of teaching methodology. Hence, payments made for them would qualify for exclusion under Article 12(S)(c).

  •  Payment to faculty for teaching through tele-conferencing and e-learning would be covered under Article 12(S)(c).

  • Consideration for use of intellectual property would not be covered under Article 12(5)(c)2.

The AAR held that as the applicant made lump sum payment for various services, it was not possible for AAR to relate the payment to individual services which are exempt and those which relate to consideration for use of IPR. In the light of the above observations, AAR declined to give a ruling to the effect that the applicant was not at all liable to deduct tax at source in respect of payments to US Med and hence directed applicant to make an application before the tax authorities for determination of appropriate portion chargeable to tax in India.

On facts, the assessee is an employer responsible for tax deduction u/s.192.

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New Page 2


Part C — Tribunal & International Tax Decisions






  1. Dolphin Drilling Ltd. v.
    ACIT



[2009] 121 TTJ (Del.) 433

S. 10(6)(viii), S. 40(a)(i), S. 40(a)(iii), S. 192, S. 195,
Income-tax Act

A.Y. : 2004-2005. Dated : 30-1-2009

Issue :

  • On facts,
    the assessee is an employer responsible for tax deduction u/s.192.

  • Amount paid to non-resident
    towards reimbursement of employees’ salaries disbursed as an agent is not
    subject to tax withholding u/s.195.




 


Facts :

The assessee was a UK company (‘UKCo’). UKCo had entered
into a contract with ONGC to charter duly manned deep water drilling rig
together. UKCo entered into contract with another group company in Norway for
procuring crew to operate the drillship. As per the agreement with the
Norwegian company, the Norwegian company was to procure/supply crew. Norwegian
company was to disburse the salary of the crew. UKCo was to, reimburse the
salary of the crew and also pay 5% of the reimbursed amount as handling fee to
the Norwegian company.

 

Additionally, UKCo also paid fixed fees to Norway Company
towards meeting personnel, office, administration and other costs. The crew
were employees of UKCo. UKCo had issued appointment letters to the crew and
UKCo was responsible to secure work permits and security passes for crew as
well as to provide housing and transportation to crew. UKCo also deducted tax
at source u/s.192 of the Act from the income of the crew after considering
exemption u/s.10(6)(viii) of the Act and deposited the same with the
Government.

 

UKCo deducted tax u/s.195 on the fixed fee and the handling
fee paid to Norwegian company.

 

The AO held that the amount reimbursed by UKCo to Norwegian
company for disbursement of crew salaries was ‘fees for technical services’
and hence, tax should have been deducted u/s.195 on the entire amount. Since
the tax was not deducted, the AO disallowed the payment u/s.40(a)(i) of the
Act.

On appeal, CIT(A) confirmed the order of the AO.

 

Held :

The Tribunal held that the obligation for payment of
salaries to the crew was of UKCo and Norwegian company disbursed the salaries
only for the convenience of the parties.

 

The reimbursement of crew salaries was chargeable under the
head ‘Salaries’ and hence, the payments would not be covered u/s.40(a)(i) but
would be covered by S. 40(a)(iii). Since S. 10(6)(viii) exempts remuneration
for employment on a foreign ship if total stay in India does not exceed 90
days, tax would not be deductible in case of employees whose stay did not
exceed 90 days.


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Sections 32 read with section 72 – Brought forward unabsorbed depreciation is allowed to be set off against long term capital gains

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1. (2012) 54 SOT 450 (Mumbai)
Suresh Industries (P.) Ltd. vs. Asst.CIT
ITA No.5374 (Mum.) of 2011
A.Y.: 2007-08. Dated: 10.10.2012

Sections 32 read with section 72 of the Income Tax Act, 1961 – Brought forward unabsorbed depreciation is allowed to be set off against long term capital gains.

For the relevant assessment year, the assessee’s claim for setting off current year’s unabsorbed depreciation and brought forward unabsorbed depreciation against current year’s long term capital gains was rejected by the Assessing Officer and by the CIT(A). The Tribunal allowed the assessee’s claim.

The Tribunal held as under: The law regarding set off of unabsorbed depreciation up to 01-04-1996 was very liberal and set off was allowable against any income. This was also upheld by the Supreme Court in the case of CIT vs. Virmani Industries (P.) Ltd. [1995] 216 ITR 607/83 Taxman 343. However, the law regarding such set off was changed by the Finance Act (No. 2) of 1996 and from assessment years 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses u/s. 72.

 However, the status quo has been restored from assessment year 2003-04 and, therefore, the ratio laid down by the Supreme Court in the case of Virmani Industries (P.) Ltd. (supra) once again holds good and, therefore, now unabsorbed depreciation can be set off against any income. Because of the legal fiction created by the provisions of section 32(2), brought forward unabsorbed depreciation merges with current year’s depreciation.

The treatment given to current year’s depreciation is equally applicable to brought forward unabsorbed depreciation. Therefore, brought forward unabsorbed depreciation is also allowed to be set off against long term capital gains.

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Service of notice u/S.143(2)

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Issue for consideration

Section 143
of the Income-tax Act, 1961 (‘the Act’) provides for assessment by an
Assessing Officer (‘AO’) of the tax payable by an assessee for a
particular assessment year. Section 143 is a purely procedural or
machinery section laying down the procedures for making assessment in
various contingencies. Broadly, section 143 prescribes two types of
assessment — ‘summary assessment’ u/s.143(1) and ‘scrutiny assessment’
u/s.143(2).

As the name suggests, under ‘summary assessment’,
the AO makes regular assessment without inquiry and makes adjustments,
if any, to the income, limited to any arithmetical error in the return
or an incorrect claim which is apparent from any information in the
return. Section 143(2) on the other hand provides for regular assessment
after detailed inquiry. Section 143(2)(ii) enables the AO to make a
regular assessment after detailed inquiry.

The proviso to
section 143(2)(ii) of the Act prescribes the service of notice on the
assessee within a particular period as a pre-requisite to enable the AO
to complete an assessment other than summary assessment. The notice
should specify a date and should call upon the assessee either to attend
before the officer on that date or produce or cause to be produced
before the officer, on that date, any evidence which the assessee may
rely upon in support of his return and it is then up to the assessee to
satisfy the officer by producing necessary material that the return is
correct and complete. At present, the proviso to section 143(2)(ii)
specifies six months from the end of the financial year in which the
return is furnished, as the time-limit within which notice needs to be
served on the assessee for valid assessment of his return of income.

Section
143(2)(ii) and the proviso thereto, read as under: “Section 143(2)
Where a return has been furnished u/s.139, or in response to a notice
u/ss.(1) of section 142, the Assessing Officer shall, —
(i) ……..

(ii)
notwithstanding anything contained in clause (i), if he considers it
necessary or expedient to ensure that the assessee has not understated
the income or has not computed excessive loss or has not underpaid the
tax in any manner, serve on the assessee a notice requiring him, on date
to be specified therein, either to attend his office or to produce, or
cause to be produced, any evidence on which the assessee may rely in
support of the return; Provided that no notice under clause (ii) shall
be served on the assessee after the expiry of six months from the end of
the financial year in which the return is furnished.”

The controversy
sought to be discussed here, revolves around the issue as to whether the
expression ‘served’ used in the proviso to section 143(2) (ii) of the
Act needs to be given a literal meaning of ‘actual physical receipt of
notice by the assessee’ or otherwise needs to be construed as giving a
meaning of ‘issue’ of notice by the AO.

The Punjab and Haryana High
Court had an occasion to deal with this issue, holding that the date of
receipt of notice by the assessee was not relevant to determine whether
the notice had been served within the prescribed time, and that the
expression ‘serve’ meant the date of ‘issue of notice’. In deciding the
issue, the Punjab and Haryana High Court specifically dissented with the
findings of other earlier judgments of the Punjab and Haryana High
Court on the subject.

V.R.A. Cotton Mills’ case

The issue came up
recently before the Punjab and Haryana High Court in the case of V.R.A.
Cotton Mills (P) Ltd. v. Union of India and Others, (CWP No. 18193 of
2011) dated 27 September 2011 (reported in www.itatonline.org). V.R.A.
Cotton Mills filed a writ petition challenging the notice dated 30
September 2010 issued by the AO u/s.143(2) for A.Y. 2009-10, on the
ground that the notice was not served within the prescribed time limit
and accordingly, claimed that the initiation of assessment proceedings
by the AO was bad in law. The Court opined that the expressions ‘serve’
and ‘issue’ were interchangeable, relying on the following legal
precedents to construe the expression ‘serve’ as the date of issue of
notice:

  •  Banarsi Debi and Anr. v. ITO, (53 ITR 100);
  • Collector of
    Central Excise v. M/s. M. M. Rubber & Co., (1991 AIR 2141 SC);
  • Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co.,
    (AIR 1966 SC 543); and
  • State of Punjab v. Khemi Ram, (AIR 1970 SC
    214). 

The High Court dissented from its own earlier judgment in the case
of CIT v. AVI-OIL India (P.) Ltd., (323 ITR 242), on the ground that
the legal precedents referred to above were not placed before the Court
in the case of AVI-OIL India (supra) and therefore, the Court, in
ignorance of law, had given literal meaning to the word ‘served’ in that
case. Treating the decision of AVI-OIL India (supra) as per incuriam,
the Court in V.R.A. Cotton Mills case (supra) held that the purpose of
the statute would be better served, only if the expression ‘served’ was
considered as being issue of notice. The Court, in light of the
aforesaid findings, dismissed the writ petition of the assessee and
construed the expression ‘served’ as meaning ‘issue’ of notice.

AVI-OIL
India’s case

This issue had come up earlier before the Punjab and
Haryana High Court in the case of CIT v. AVI-OIL India (P.) Ltd.
(supra).

In that case, the assessee filed its return of income on 29
October 2001 for A.Y. 2001-02 and notice u/s.143(2) was issued on 29
October 2002. The notice server visited the factory premises of the
assesseecompany on 31 October 2002 and as per the report of the notice
server, the office was found closed. The AO then directed the notice
server to serve the notice by affixture. This mode of service of notice
by affixture was challenged in appeal and the Court upheld the decision
of the Tribunal that such service of notice was not in accordance with
section 282 of the Act and Rules as prescribed under the Code of Civil
Procedure, 1908.

In addition, another notice dated 30 October 2002, was
also issued by the AO and sent by Registered post on 30 October 2002.
This notice was served upon the assessee on 1 November 2002. Relying on
the proviso to section 143(2)(ii) of the Act, the assessee-company
submitted that the second notice was non est in law considering that it
was served on the assessee beyond the then prescribed time limit of 12
months from the end of the month in which the return was furnished.

On
perusal of section 143(2) of the Act, the Court held that a notice under
that section is not only to be issued but also has to be served upon
the assessee within the time-limit as provided under the proviso to
section 143(2)(ii) for a valid assessment. The Court further held that
belated service of notice cannot be considered as curable u/s.292B of
the Act, as this section deals with issue of notice and not service of
notice.

In light of these facts, the Court upheld the decision of the
Tribunal of service of notice on the assessee not being a valid service
of notice u/s.143(2).

Observations

Section 143 of the Act corresponds in material particulars to section 23(1) to section 23(3) of the Income-tax Act, 1922 (‘the 1922 Act’). Section 143 has received major overhauls due to changes in the assessment procedures vide Taxation Laws (Amendment) Act, 1970 and Direct Tax Laws (Amendment) Act, 1987. Over the years, amendments have been carried out in the provisions of section 143, to reach its present form. The condition of service of notice on the assessee and the time-limit thereof was introduced in section 143 by the Direct Tax Laws (Amendment) Act, 1987. Circular No. 549, dated 31 October 1989 issued by the Central Board of Direct Taxes (CBDT), 182 ITR 19 (St.), explains the scope of the amendment in the proviso to section 143(2) of the Act, as under:

“5.10 Commencement of proceedings for scrutiny and completion of scrutiny proceedings [s.s (2) and (3) of section 143] —………….

5.12 Since, under the provisions of s.s (1) of new section 143, an assessment is not to be made now, the provisions of s.s (2) and (3) have also been recast and is entirely different from the old provisions…….

5.13 A proviso to s.s (2) provides that a notice under the sub-section can be served on the assessee only during the financial year in which the return in furnished or within six months from the end of the month in which the return in furnished, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if a case is picked up for scrutiny. It follows that if an assessee, after furnishing the return of income does not receive a notice u/s.143(2) from the Department within the aforesaid period, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return.”

The Legislature, by inserting proviso to section 143(2) has intended that if no notice is received by the assessee within the prescribed time-limit, then the assessee can consider that the return filed by him has become final and that no scrutiny proceedings have been started. The notice can only be received on actual service, and therefore the intention seems to have been to place a time-limit for actual service, and not merely for issue, of the notice.

This position is further supported by Circular No. 621, dated 19 December 1991, 195 ITR 154 (St.), which clarifies as under:

“Extending the period of limitation for the service of notice u/ss.(2) of section 143 of the Income-tax Act — 49. Under the existing provisions of section 143 of the Income-tax Act relating to the assessment procedure, no notice u/ss.(2) thereof can be served on the assessee after the expiry of the financial year in which the return is furnished or the expiry of six months form the end of the month in which the return is furnished, whichever is later.

49.1 The aforesaid period of limitation for the service of notice u/ss.(2) of section 143 does not allow sufficient time to the Assessing Officers to select the returns for scrutiny before assessment. Therefore, s.s (2) has been amended to provide that the notice thereunder can be served on the assessee within twelve months from the end of the month in which the return in furnished.”

This interpretation of the proviso to section 143(2)(ii) of the Act is also supported by the enactment of sections 282 and 292BB. Section 282 prescribes the procedure and manner in which service of notice needs to be generally effected under the provisions of the Act and further, section 292BB of the Act vide a legal fiction holds certain notices as valid service of notice under the Act, based on satisfaction of certain conditions.

Further, section 34 of the 1922 Act corresponds to section 148, section 149 and section 150 of the Act (collectively referred to as ‘reassessment provisions’) which deals with procedure and conditions for reassessment of income of the assessee for a particular assessment year. On comparison of the language of section 143(2) of the Act with the reassessment provisions, one finds that the reassessment provisions have used both the expressions ‘issue of notice’ and ‘service of notice’, as against the provisions of section 143(2), which have consistently used only the expression ‘service of notice’.

The decision of the Supreme Court in the case of Banarsi Debi and Anr. v. ITO (supra) relied upon by the High Court in the V.R.A. Cotton Mills’ case (supra) was delivered in the context of section 34 of the 1922 Act. The Apex Court was considering an amendment in section 34 of the 1922 Act vide section 4 of the Amending Act of 1959, which sought to save the validity of notices issued beyond the prescribed period. Since section 34 used the term ‘served’ and not the term ‘issued’ while the amendment sought to cover notices ‘issued’ beyond the prescribed time, the Supreme Court, in that case, held as under:

(1)    The clear intention of the Legislature was to save the validity of notice as well as the assessment from an attack on the ground that the notice was served beyond the prescribed period;

(2)    That intention could be effectuated if a wider meaning was given to the expression ‘issued’, whose dictionary meaning took into account the entire process of sending the notice as well as the service thereof;

(3)    The word ‘issued’ in section 4 of the Amending Act had to be construed as interchangeable with the word ‘served’ or otherwise the amendment would become unworkable.

On perusal of these findings, one notices that the Apex Court confirmed that the expression ‘issue of notice’ had two meanings. The word ‘issue of notice’ was equated to as being ‘service of notice’ in a wider sense and of ‘notice sent’ in a narrower sense. In order to make the section workable and to further the intention of the Legislature of enacting section 4 of the Amending Act, 1959, the Court had to interpret the word ‘issue of notice’ as ‘service of notice’ in a contextual sense.

When the applicability of these findings were sought to be applied to corresponding reassessment provisions of the 1961 Act, the Supreme Court in the case of R. K. Upadhyaya v. Shanabhai P. Patel, (166 ITR 163), distinguished the decision of Banarsi Debi and Anr. v. ITO, (supra) holding that the scheme of the 1961 Act so far as notice for reassessment was concerned was quite different; and that a clear distinction had been made out between the ‘issue of notice’ and ‘service of notice’ under the 1961 Act.

The decision of Banarsi Debi and Anr. v. ITO (supra) was also distinguished by the High Courts in the following decisions on similar lines:

  •     Jai Hanuman Trading Co. Ltd. v. ITO, (110 ITR 36) (P&H) (FB);

  •     CIT v. Sheo Kumari Devi, (157 ITR 13) (Pat) (FB); and

  •     New India Bank Ltd. v. ITO, (136 ITR 679) (Del.)

Further, the following extracts of observations in the context of ‘issue of notice’ and ‘service of notice’ of the Full Bench of the Patna High Court in the case of Sheo Kumar Devi (supra), need to be noted:

“Once the maze of precedents is out of the way, one might as well examine the issue refreshingly on principle. To my mind, the fallacy that seems to have crept in this context is to suggest that (barring some very peculiar or compulsive textual compulsion) in plain ordinary English, the word ‘issue’ and the word ‘serve’ are synonyms or identical in terms. With great respect, it is not so. Their plain dictionary meaning runs directly contrary to any such assumption. No dictionary says that the issuance of an order is necessarily the service of order on a person as well, or in reverse, that the service of an order on a person is the mathematical equivalent to its issuance. In Chamber’s Twentieth Century Dictionary, the relevant meanings given to the word ‘issue’ are act of sending out, to put forth, to put into circulation, to publish, to give out for use. On the other hand, the word ‘serve’ in the same dictionary has been given the meaning, as a term of law, to deliver or present formally, or give effect to. Similarly in the New Illustrated Dictionary, the relevant meaning attributed to the word ‘issue’ is come out, be published, send forth, publish, put into circulation whilst the relevant meanings attributed to the word ‘serve’ are to supply a person with, make legal delivery of (writ, etc.), deliver writ, etc., to a person. Thus it would appear that the words ‘issue’ and ‘serve’ are distinct and separate and the indeed the gap between the two may be wide, both in point of time and place. An order or notice may be issued today, but may be served two years later. An order or notice may be issued at one place and may be served at a point 1,000 or more miles away. An order issued may not require any service at all……. shape of notification…….. Merely because a statute may provide that an order issued should also be properly served subsequently on the person directly affected would not, in my view, in any way render the words ‘issue’ and ‘serve’ as either synonymous or identical. A very peculiar situation in a statute and the compulsion of sound cannon of construc-tion may sometimes require the enlargement or extension of a word to save the legislation from being rendered nugatory. That, indeed, was the situation in Banarsi Debi case (supra).”

On similar lines, the other decisions as relied on by the Court in the case of V.R.A. Cotton Mills (supra) are not relevant in the context of the issue under consideration, since none of these decisions dealt with the expression ‘issue; or ‘service’ of notice.

On the contrary, the following decisions of the High Courts, delivered in the context of section 143(2), upholding the interpretation of service of notice not being synonymous with issue of notice, were not considered by the High Court in the case of V.R.A. Cotton Mills (supra):

  •     CIT v. Shanker Lal Ved Prakash, (300 ITR 243) (Del.) — in this case, the High Court even issued directions to AOs to dispatch notices at least a fortnight before the expiry of the date of limitation;

  •     CIT v. Yamu Industries Ltd., (306 ITR 309) (Del.) — the principles of section 282 were also applied in this case in interpreting the expression ‘service’ of notice;

  •     CIT v. Cebon India Ltd., (34 DTR 119) (P&H);

  •     CIT v. Pawan Gupta and Others, (318 ITR 322) (Del.) and Rajat Gupta v. CIT, (41 DTR 265) (Del.) — In context of block assessment;

  •     CIT v. Bhan Textiles (P) Ltd., (287 ITR 370) (Del.);

  •     CIT v. Vardhman Estate (P) Ltd., (287 ITR 368) (Del.); and

  •     CIT v. Dewan Kraft Systems (P) Ltd., (165 Taxman 139)(Del.).

One also needs to keep in mind that the requirement of service of notice within the specified period, and not issue of notice within that time, has been provided for to ensure that AOs do not show a notice as having been issued at an earlier date, though issued and dispatched much later, as that could have resulted in possible harassment of assessees.

In the light of the above, the better view is that the expression ‘served’ as referred to in section 143(2)(ii) of the Act and its proviso thereof, has to be given literal meaning of ‘actual receipt of notice by the assessee’ as against the meaning of issue of notice. The decision of the Punjab and Haryana High Court in the case of V.R.A. Cotton Mills case (supra), with due respect, therefore requires reconsideration.

Further, the principle of judicial propriety and judicial discipline demanded that the matter in the case of V.R.A. Cotton Mills Ltd. (supra) should have been referred to a Larger Bench of the Punjab and Haryana High Court, more particularly after the fact that the same High Court in the cases of Cebon India (supra) and AVI-OIL India Ltd. (supra) had decided otherwise in the context of section 143(2).

OffShore Transaction of Transfer of Share between Two NRs Resulting in Change in Control & Management of Indian Company —Withholding Tax Obligation and Other Implications

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Part-III
(Continued from last month)
VIH’s obligation to withhold tax — Section 195

3.14 As stated in Part II of this write-up, the Apex Court held that the capital gain in question is not chargeable to tax u/s.9(1)(i) of the Act and as such, question of deduction of TAS does not arise.

3.15 While deciding the issue relating to withholding tax obligation of VIH, the Court analysed the provisions of section 195 and the implications thereof and made certain observations such as: if, in law, the responsibility for payment is on a Non-Resident (NR), the fact that the payment was made under the instructions of NR to its agent/ nominee in India or its PE/Branch Office, will not absolve the Payer of his liability to deduct Tax At Source (TAS) u/s.195; the liability to deduct TAS is different from the assessment under the Act, etc. The Court then took a view that in the present case the transaction is of ‘outright sale’ between two NRs of a capital asset (share) situated outside India and the transaction was entered into on a principal-to-principal basis. Therefore, no liability to deduct TAS arose.

3.15.1 On the issue of withholding tax obligation of VIH, the Court effectively held that since the capital gain arising on transfer of share of CGP is not chargeable to tax in India, question of deduction of TAS u/s.195 does not arise. The Court also further stated that Tax Presence has to be viewed in the context of the transaction that is subjected to tax and not with reference to an entirely unrelated matter. The Tax Presence must be construed in the context, and in a manner that brings the NR assessee under the jurisdiction of the Indian Tax Authorities. The investment made by VG Companies in Bharati did not make all the entities of that group subject to the Indian Income Tax Act and the jurisdiction of the tax authority. The Court also noted that in the present case, the Revenue has failed to establish any connection with section 9(1)(i). Under these circumstances, the Court concluded that section 195 is not applicable.

3.15.2 Even the concurring judgment concludes that there was no obligation on the part of VIH to withhold tax. However, this judgment has gone a step further and considered the issue of applicability of section 195 extra-territorially. After considering the hosts of statutory compliance requirements for a tax deductor, apart from deducting tax and paying to the Government, other provisions relating deduction of TAS, such as 194A, 194C, 194J, etc. and the normal presumption of applicability of the provisions of Indian law to its own territory, this judgment took the view that section 195 is intended to cover only Resident Payers who have presence in India. The tax presence has to be considered in the context of the transaction that is subject to tax and not with reference to entirely unrelated matter. Finally, this judgment interpreted the expression ‘any person responsible for paying’ to mean only person resident in India and accordingly, took a view that section 195 “would apply only if payments made from a resident to another non-resident and not between two non-residents situated outside India”.

Applicability of section 163

3.16 In view of the fact that the transaction relates to transfer of capital asset situated outside India between two NR’s, both the judgments took a view that the VIH cannot be considered as representative assessee for HTIL u/s.163.

Mauritius Tax Treaty

3.17 Since the issue before the Court did not invoke the application of treaty, the majority judgment has not specifically dealt with the impact of Mauritius Tax Treaty in the case under consideration. However, the concurring judgment specifically dealt with the Mauritius Tax Treaty and in that judgment certain observations have also been made in that context after referring to the judgments of the Apex Court in the case of Azadi Bachao Andolan (supra).

 3.17.1 In this judgment, principles laid down in the case of Azadi Bachao Andolan (supra) governing the application of Mauritius Tax Treaty have been reiterated. Accordingly, it is held that in the absence of Limitation of Benefit (LOB) Clause and in the presence of the Circular No. 789, dated 13-4-2000 and the TRC, the Tax Department cannot deny the benefit of Mauritius Tax Treaty to Mauritius companies, on the ground that: principal company (foreign parent) is resident of a third country; or all the funds were received by the Mauritius company from a foreign parent; or the Mauritius subsidiary is controlled/managed by the principle company; or the Mauritius company had no assets or business other than holding the investments/shares in Indian company; or the foreign principal of the Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the receipt of sale proceeds by the Mauritius company was ultimately remitted to the foreign principal, etc. Setting-up of a WOS in Mauritius for substantially long-term FDI in India through Mauritius, pursuant to Mauritius Tax Treaty, can never be considered to be set up for tax evasion.

3.17.2 According to this judgment, the LOB and look through provisions cannot be read into Mauritius Tax Treaty. However, the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. In this context, the judgment further observed as under (page 102):

 “. . . . . DTAA and Circular No. 789, dated 13-4-2000, in our view, would not preclude the Income-tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction.”

3.17.3 Referring to the issue of round tripping, based on the reports which are afloat that millions of rupees go out of the country only to be returned as FDI or FII, it is stated that round tripping can take many formats like under-invoicing and over-invoicing of exports and imports. It also involves getting the money out of India, say, Mauritius, and then bring back to India by way of FDI or FII in Indian company. With the idea of tax evasion, one can also incorporate a company off-shore, say, in a Tax Haven, and then create WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defence. If it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as round tripping; then TRC can be ignored, since the transaction is fraudulent and against the national interest.

3.17.4 Accordingly, in view of the above, the concurring judgment takes further view that though the TRC can be accepted as a conclusive evidence for accepting status of residence as well as beneficial ownership for applying the Mauritius Tax Treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax.

Conclusion

In view of the above judgment of the Apex Court the following principles governing tax implications of an offshore transaction of transfer of share between two NRs may emerge or get re-iterated:

4.    Section 9(1)(i) of the Act is not a ‘look through’ provision to include the transfer of shares of a foreign company holding shares in an Indian company by treating such transfer as equivalent to transfer of shares of an Indian company on the premise that section 9(1)(i) covers direct and indirect transfer of capital asset. Accordingly, section 9(1)(i) does not cover indirect transfer of capital asset situated in India.

4.1 Section 195(1) is attracted only if the sum in question is chargeable to tax. According to the concurring judgment, in case of a NR Payer, the obligation of withholding tax u/s.195(1) does not arise if NR Payer does not have any tax presence whatsoever in India. For this, support can also be drawn from the observations made in the majority judgment. However, there is no clarity as to the meaning of tax presence in India. It seems that if the entity has tax presence in India that should suffice. If the entity has permanent establishment or branch office, etc. in India, it is desirable to treat the entity as having tax presence in India.

4.1.1 In the concurring judgment, a view is taken that section 195(1) applies only in cases where Resident makes a payment to NR and the same is not applicable to payments between two NRs outside India. This view may have a great persuasive value for the lower authorities/courts. However, it seems advisable not to take recourse to this view to avoid deduction of TAS. This could, of course, be a good defence in case of a default.

4.2 In view of the fact that the transfer in question in the above case was of a capital asset situated outside India, the NR Payer (VIH) was also not to be treated as representative assessee u/s. 163 of the Act.

4.3 There is no conflict between the judgments of the Apex Court in the case of McDowell & Company Ltd. (supra) and the judgment in the case of Azadi Bachao Andolan (supra). In this context, the Court has further held that to decide the issue relating to allegation of tax avoidance/evasion, it is the task of the Court to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt dissecting approach.

4.3.1 In the above context, referring to the majority judgment in the McDowell’s case, the Court reiterated the principle that tax planning may be legitimate provided it is within the frame work of law and it should not be a colourable device.

4.4 Carrying on business by a large business group through subsidiaries under the control of a Holding Company (HC) is a normal method of carrying on business. Setting up of such subsidiaries, even in low-tax jurisdiction, by itself should not be regarded as a device.

4.4.1 Such holding structures give rise to tax issues such as double taxation, tax deferrals, tax avoidance, implication of GAAR, etc. In the absence of an appropriate provision in the statute/treaty regarding the circumstances in which judicial GAAR would apply, when it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to establish the abuse, in the sense of tax avoidance in the creation and/or use of such structure. For this, the Revenue must apply look at test and the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/ savings device but it should apply the look at test to ascertain its legal nature.

4.4.2 Holding company, as a shareholder, will have influence on its subsidiaries and in that sense, will be in a persuasive position. However, that cannot reduce the subsidiary or its directors’ puppets. The power of persuasion cannot be construed as a right in legal sense. The decisive criteria is whether the parent company’s management has such steering interference with the subsidiaries core activities that subsidiary can no longer be regarded to perform its activities on the authority of its own directors. The concept of ‘de facto’ control, in genuine cases, conveys a state of being in control without any legal right to such a state.

4.4.3 A case of FDI should be seen in a holistic manner and while doing so, various factors enumerated by the Court should be taken into account. Cases of participative investment should not be construed as tax avoidant/device.

4.5 In transactions of divestment of investment of this type, it becomes necessary for the parties to enter into SPA for various commercial reasons and for recording various terms and to give smooth effect to the transaction.

4.6 When the structure is held to be a device/ tax avoidant on the basis of various tests referred to in para 3.5 of Part II of this write-up, the Revenue would be entitled to ignore this structure and tax the actual entity and to re-characterise the transaction appropriately for that purpose.

4.7 For the purpose of entering into any such transaction efficiently, if more than one routes are available, then it is open to the parties to opt for any one of those routes available to them.

4.8 Under such arrangement, call options to acquire shares of a company cannot be equated with interest in share capital of that company. The legal understanding as to acquisition of shares in Indian company for the purpose of compliance with FDI norms and the commercial understanding of the parties in that respect with regard to the transactions could be different.

4.9 In case of transactions involving the transfer of shares lock, stock and barrel for a lump-sum consideration, the same cannot be broken up into separate individual components or rights, such as right to vote, management rights, controlling rights, etc.

The above principles are, now, subject to the follow-ing proposals contained in the Finance Bill, 2012 and accordingly, the same will have to be read with the final amendments which are expected to be carried out by the Finance Act, 2012.

5.    In the Finance Bill, 2012, stated clarificatory amendments are proposed in various sections such as: Section 2(14) (to clarify that property includes any rights in or in relation to Indian company, including rights of management, control, etc.), section 2(47) (extending the scope of the definition of the term ‘transfer’ to include disposing of or parting with an asset or any interest therein, or creating an interest in any asset in any manner whatsoever, directly or indirectly, etc. even if, transfer of such rights has been characterised as being effected or dependent upon or flowing from transfer of shares of a foreign company) and section 9(1) to effectively provide that the section is a ‘look through’ provision and also to provide that an asset or capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if it derives, directly or indirectly, its value substantially from the assets located in India. These amendments are proposed with retrospective effect from 1st April, 1962. These amendments are intended to effectively nullify all the major effects (favourable to the taxpayers) of the judgment of the Apex Court in the above case. Some of these proposals, if enacted in the present form, will also have far-reaching other implications and the same will not necessarily confine to only offshore transactions.

Considering the nature of above proposed amendments and their far-reaching unreasonable consequences and effects, it is difficult to digest that these amendments are clarificatory in nature as claimed by the Government. If the amendments are carried out in the present form, it is likely that the validity of the retrospective effect thereof may come up for questioning. In the past, the Parliament’s power to make retrospective law has been upheld. However, the manner in which these amendments are proposed is matter of serious concern and will have a far-reaching long-term implications in Indian tax jurisprudence. Therefore, we will have to wait and watch as to how this complex constitutional issue gets further developed. But one thing is certain that such an approach of the Government is highly unfair and also raises a question about the respect for rule of law in the tax matters.

5.1 Similarly retrospective amendment is also proposed in section 195 to effectively provide that all persons, including all NRs, will be under an obligation to comply with the requirements of section 195(1). For this purpose, whether the NR has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India or not will not be relevant. Even this amendment, is proposed with retrospective effect from 1st April 1962. One may wonder whether any retrospective amendment of this kind can be made in the provisions dealing with TDS creating an obligation on the ‘person’ to deduct TAS with retrospective effect. The validity of the retrospective provision of this kind could be open to question. Even the validity of prospective operation of the applicability of this provision to NR having no presence whatsoever in India may come up for questioning and will have to be tested on the basis of the principles laid down by the Constitution Bench of the Apex Court in the case of GVK Ind. Ltd. (332 ITR 130). This judgment was analysed by us in this column in the June and July, 2011 issues of this Journal.

5.2 The Finance Bill, 2012 also proposes to introduce set of provisions dealing with the General Anti- Avoidance Rules (GAAR) w.e.f. 1-4-2013. These provisions, inter alia, specifically provide that the period for which the arrangement exists, the fact of payment of taxes, directly or indirectly, under the arrangement in question and the fact that exit route is provided by the arrangement shall not be taken into account for determining whether an arrangement lacks commercial substance or not. It may be noted that this provision was not made in the GAAR proposed in the Direct Tax Code Bill, 2010 (DTC).

The above-referred tests are part of the tests (referred to in para 3.5 of Part II of this write-up) considered by the Apex Court for determining the genuineness of the arrangement of the Hutchison Group in Vodafone’s case to conclude that the arrangement was having commercial substance.

5.3 The introduction of the GAAR provisions will also have a practical impact on the effect and implications of Mauritius Tax Treaty (and, of course, also other such Tax Treaties) and therefore, many of the observations made in the concurring judgment in the above case in that respect will have to be read with the GAAR provisions. It may also be noted that the applicability of the proposed GAAR provisions is not restricted only to offshore transactions, but the same will also apply to all other transactions including domestic transactions. Considering the wide discretionary powers sought to be granted to the assessing authorities, these provisions may also create enormous amount of unintended hardships at the implementation level.

The unrestricted and highly discretionary unguided powers sought to be given to the Government under the provisions relating to GAAR has raised quite a few genuine issues of far-reaching implications and such excess delegation of effectively unguided powers may come up for judicial scrutiny if, such provisions are enacted in the present form.

Vodafone – Part III

5.4 In the context of the manner in which retrospective amendments are proposed in the Finance Bill, 2012 the following observations of the learned authors of the book ‘Nani Palkhivala, The Courtroom Genius’ are worth mentioning:

“……….There is complete absence of any fair-play in the administration of tax laws. If a decision of the court or the tribunal is in favour of the assessee, the relevant statutory provision is promptly amended retrospectively with very little regard for the enormous hardship that it causes to the assessee. One can only conclude with the last passage of the last preface written by Palkhivala:

‘Every Government has a right to levy taxes. But no Government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of the palpable injustice’.”

(Concluded)

Is it fair to make amendments that may cause unintended hardship (Sub-clauses (e) and (f) of Section 80IB vis-à-vis sub-clause (c)

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Introduction:

Section 80IB(10) provides for 100% deduction of profits and gains from housing projects for certain period if it satisfies various conditions prescribed in the section. Section 80IB(10)(c) prescribes the condition restricting the size of residential unit to maximum built-up area of one thousand sq.ft if the residential unit is situated within the cities of Delhi or Mumbai and one thousand five hundred sq.ft at any other place.

In case of housing project having houses beyond this size, the developers used to circumvent the provisions by showing one house as two adjacent houses on paper, sell these premises to one person or persons belonging to one family and then combine it.

To avoid any such misuse, sub-clauses (e) and (f) were inserted by Finance Act, 2009 w.e.f. 1-4-2010. According to sub-clause (e), deduction shall be denied to the undertaking if more than one residential unit in the housing project is allotted to an individual.

Further, as per sub-clause (f), such deduction shall be denied to the undertaking, if one residential unit is allotted to an individual and at the same time the other unit is allotted to

(i) him or the spouse or his/her minor child, or

(ii) HUF of which he is a karta. Thus insertion of clause (e) and (f) definitely provided a check in the case of undertakings where the size of units was more than 1000 or 1500 sq.ft as the case may be. However, it created a hurdle even where the combined size of units was less than the prescribed area. In other words, if two units of 500 sq.ft each are allotted to husband and wife, respectively, then in that case the undertaking may lose the deduction even though the cumulative area does not exceed the prescribed area. This was certainly not the intention of the Legislature.

The unfairness:
How far is it logical to deny the deduction to an undertaking just because the condition in sub-clause (e) or (f) is not satisfied even though the prescribed condition of total built-up area to a family of an individual is satisfied, or not violated.

In fairness sub-clause (e) or (f) should have been drafted in such a way that the area allotted to a family of an individual collectively shall not exceed the prescribed area. In fact, that was the intention of the Legislature in inserting clauses (e) and (f).

In the situation where the question of denial of deduction arises where the areas of some of flats are exceeding the prescribed area or the flats are allotted as stated above, the solace is available to an undertaking in view of the decisions given below in which it was held that in such a situation, deduction may be denied only in respect of those units where the area exceeds the prescribed limit or the condition as above is not satisfied.

The said decisions are as follows:

(1) Sanghavi & Doshi Enterprise v. ITO, (Third member ITAT Chennai) (2011) 131 ITD 151/12 Taxmann. com 240

(2) CIT v. Bengal Ambuja Housing Development Ltd., (ITA 458 of 2006 dated 5-1-2007)

Conclusion:
In short, the purpose of introducing sub-clauses (e) and (f) was to curb the practice of claiming tax benefits by circumventing the limits of area. However, in the process, there has been an overdoing of the remedy, due to which even the genuine cases involving the total area within prescribed limits are also adversely affected. It is desirable that a suitable proviso be inserted or a clarification issued to the effect that the deduction or the tax benefits would not be denied so long as the total area is within the limits. In fact section 80-IB was introduced to encourage housing projects and in view of this, one may even feel that clauses (e) and (f) may prove to be harsh on the assessees.

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S. 271(1)(c) : Denial of claim for deduction resulting into higher assessed income cannot be ground for imposition of penalty

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New Page 1

(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.)



16 Nasu Properties Pvt. Ltd. v. ITO


ITAT ‘I’ Bench, Mumbai

Before K. C. Singhal (JM) and

D. K. Srivastava (AM)

ITA Nos. 1160 and 1161/Mum./2006

A.Ys. : 2000-01 and 2001-02. Decided on : 21-1-2008

Counsels for assessee/revenue : Jayesh Dadia/Ashima Gupta

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for
concealment of income — Claim for deduction denied resulting into higher
assessed income — Whether AO justified in imposing penalty — Held, No.

 

Per D. K. Srivastava :

Facts :

The assessee’s claim for deduction of Rs.5 lacs towards
diminution in the value of investment was disallowed by the AO and confirmed in
appeal by the CIT(A) as well as the Tribunal.

 

In response to the show-cause notice with reference to the
penalty u/s.271(1)(c), the assessee contended that full facts necessary for the
assessment were disclosed in the return of income filed. Therefore, it did not
amount to concealment of income. However, the AO levied the penalty which was
confirmed by the CIT(A).

 

Held :

The Tribunal noted that the assessee had furnished all the
relevant particulars in its return of income. Thus, the charge of furnishing of
inaccurate particulars of income by the assessee was not established. According
to it, simply because the Departmental authorities had not accepted the claim of
the assessee or the assessee had lost appeals filed against the orders of the
Departmental authorities, dismissing the claim of the assessee, cannot ipso
facto lead to the establishment of charge of furnishing of any inaccurate
particulars of income. Accordingly, the penalty levied was cancelled by the
Tribunal.

 

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S. 9(1)(vii), 40(a)(i), 195 — Payments made for purchase of Internet bandwidth and TDS — Not FTS, not subject to TDS

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New Page 19 DCIT
v. M/s. Estel
Communications Pvt. Ltd. (Delhi ITAT) (Unreported)


S. 9(1)(vii), S. 40(a)(i), S. 195
of the Act


A.Y. : 2003-04. Dated : 10-3-2008

 

Issue :

Disallowance u/s.40(a)(i) of the Act for
non-deduction of tax u/s.195 of the Act from payments made for purchase of
internet bandwidth and TDS.

 

Facts :

The assessee-company had entered into a reseller
agreement with a non-resident company. In terms of the agreement, the
non-resident company was to provide various internet services on non-exclusive
basis to the assessee-company for resale of these services to the end-user
customers in the territory. The Internet services pertained to provisions of
bandwidth with certain minimum performance speed. The privity of contract was
between the assessee-company and the non-resident company and there was no
privity of contract between the non-resident company and the end-user customers.
In terms of the agreement, the assessee-company had made certain payments to the
non-resident company. While making the payments, the assessee-company had not
deducted any tax at source. According to the AO, the assessee-company was
required to deduct tax u/s.195 of the Act, but since it had not deducted the
tax, he disallowed such payments u/s.40(a)(i) of the Act.

 

In the assessee-company’s appeal before him, the
CIT(A) observed that the issue was identical to the decision in Wipro Ltd. v.
ITO, (2003) 80 TTJ 191 (Bang). In that case, the Bangalore Tribunal had held
that the agreement was for use of standard facility and standard services; the
payments were for utilisation of customer-based circuits; the payments were not
fees for technical services u/s.9(1)(vii) of the Act and were not subject to
deduction u/s.195 of the Act. The CIT(A) therefore held that the payments were
not subject to TDS u/s.195 of the Act and that the disallowance u/s.40(a)(i) of
the Act was not warranted.

 

The Department preferred an appal to the Tribunal
against the order of the CIT(A). The Tribunal referred to several clauses of the
reseller agreement and observed that the assessee-company was not paying any
fees for technical services but making payment for the purchase of internet
bandwidth. Even though sophisticated equipment was being used and though the
Internet connectivity was through satellite link, the assessee-company cannot be
said to be availing technical services. Further, the Tribunal also noted that in
the assessee-company’s case for A.Y. 2001-02, the Tribunal had considered
similar issue of disallowance and held in favour of the assessee.

 

Held

Following the order of
the Bangalore Tribunal in the aforementioned case, the Tribunal upheld the Order
of the CIT(A) and held that :

(i) The payment made
by the assessee-company was not towards rendering of any managerial, technical
or consultancy services, but was merely for use of Internet access facility
and accordingly, the payment was not subject to tax u/s.9(1)(vii) of the Act.

(ii) As such the
assessee-company was not required to deduct tax at source u/s.195 of the Act.

(iii) Since there was
no liability to deduct tax u/s.195 of the Act, the amount could not be
disallowed u/s.40(a)(i) of the Act.

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S. 195 — Reimbursement of expenses incurred by non-resident promoters outside India — Not subject to TDS.

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New Page 18 Bangalore
International Airport Ltd. v.
ITO (2008) 6 DTR (Bang.) (Trib.) 15


S. 195 of the Act


A.Y. : 2006-07. Dated :
17-12-2007

 

Issue :

Whether reimbursement of expenses incurred by
non-resident promoters prior to their participation in joint venture company is
subject to tax deduction u/s.195 of the Act ?

 

Facts :

The assessee-company was a joint venture company
established for development of international airport at Bangalore, having equity
participation from certain non-resident companies, which were also the promoters
of the assessee. The non-resident promoters had incurred various expenses
towards technical and other consultations. These consultations were undertaken
outside India prior to the award of the contract to the non-resident promoters
and payments were also made by the non-resident promoters outside India. The
shareholders’ agreement pertaining to the assessee-company provided for
reimbursement of development cost to the promoters. In pursuance thereof, the
Board of Directors of the assessee-company passed a resolution to the effect
that “The offshore expenses shall be advanced by private promoters. All
expenses will be reimbursed and capitalised after financial close“. The
reimbursement of the expenses was to be limited to 50%. Accordingly, the
assessee-company reimbursed 50% of the expenses to the non-resident promoters.

 

In his order u/s.195 of
the Act, the AO had accepted the fact that the amount was being paid much after
the incurring of the expenses by the promoters. However, since the expenses
included element of technical services and since they were incurred after the
execution of shareholders agreement, he was of the opinion that tax should have
been deducted or should be deducted. In this context, the assessee-company
brought to the attention of the AO the decision in Hyder Consulting Ltd., In
re (1999) 236 ITR 640 (AAR) and also contending that reimbursement of
expenses in no way involves any element of profit and further since the expenses
were incurred by the non-resident in respect of services rendered by another
non-resident outside India, TDS provisions were not attracted. The AO, however,
did not accept this contention and concluded as follows and proceeded to compute
the tax to be withheld by the assessee-company.

(a) The foreign
shareholders of the applicant company had provided certain services to the
applicant company.

(b) The contention
that part of these services were obtained from other parties is of no
consequence.

(c) All these services
which are proposed to be paid for by the applicant company now, have been
utilised by the applicant company in India.

(d) All these services
called by the applicant as ‘consultancy services’ fall squarely within the
meaning of fees for technical services, as provided for in Article 12 of both
the relevant DTAAs as also the IT Act.

(e) Thus, the
consideration payable for such services is chargeable to tax, even if its
nomenclature is ‘reimbursement’, as the income is deemed to accrue or arise in
India.

(f) Hence, withholding
provisions of S. 195 are clearly invoked.

(g) The rate of
withholding tax is 10% as per the respective DTAAs, in view of the fact that
it is the rate beneficial to the payees.

(h) The above
conclusions, based on the facts and information as provided by the applicant,
are to be seen in the context of S. 195 of the IT Act. The provisions of S.
195 are necessarily summary and are only for the purpose of determining the
issue and quantum of withholding tax. It follows that the said tentative
conclusion is subject to the test of final determination at the stage of
assessment.

 

In appeal by the assessee-company, the CIT(A) noted
the agreement and arrangement between the share-holders and also the arguments
of the assessee-company. CIT(A) did not dispute assessee-company’s claim of it
being a case of reimbursement of expenses and also that the reimbursement was
only to the extent of 50% of the actual expenses. However, observing as follows,
he held that the AO was justified in his conclusions :

(i) The nature of
services are such as would be prima facie covered by the definition of
FTS in IT Act as well as respective DTAAs.

(ii) Adequate support
in respect of quantification of costs reimbursed has not been furnished by the
appellant.

 


In appeal before the Tribunal, the Tribunal noted that the expenses were incurred by the non-residents out of India in their capacity as promoters and at the relevant time, S. 5 or S. 9 was not applicable, since it was not a payment by a resident to a non-resident. The payment by the assessee-company to the non-resident promoters was a case of reimbursement of expenses incurred and such reimbursement was limited to 50%, which could not be equated to amount paid for technical services. As such it would not involve any profit element. The expenses were incurred to ascertain the feasibility and viability of the project for the promoters to decide whether to participate in the project. One of the bidders whose bid was not accepted had also incurred certain expenses, 50% of which were reimbursed and the Department had permitted such reimbursement without any TDS. The Tribunal noted that there was no difference between the bidder whose bid was not accepted and the bidder whose bid was accepted.

Held:

The Tribunal held that on facts and circumstances, the reimbursement of 50% of the expenses incurred by the non-resident promoters outside India did not attract provisions of S. 195(2) of the Act.

India-USA DTAA — Examination fee paid to US Company — Not taxable

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New Page 17 KnoWerX Education (India) Private


Limited, In re
(AAR) (unreported)


Articles 1, 4, 5, 7 of India-USA DTAA;


Sections 4, 5, 9, 195 of the Act


Dated : 30-4-2008

Issues :

(i)
Examination fee
collected in India by resident on behalf of American professional
organisations and remitted to them outside India — Taxability thereof :

(a) in terms of
the Act; and

(b) in terms of
India-USA DTAA.

(ii)
Characterisation of the income mentioned in (i) above.


(iii)
TDS obligations of the resident
in respect of the income mentioned in (i) above

 



Facts :

The applicant was an Indian company which had
entered into agreement with an American entity for promotion of professional
certification programmes and examinations conducted by the American entity. It
was also in the process of entering into agreement with another American entity
for the same purpose. Under both the agreements, the applicant was to act as
their agent. The applicant would carry out promotional and marketing activities;
collect registration forms and fees from candidates in India desirous of
enrolling for the programmes/examinations; and remit the fees to the American
entities after deducting certain administration expenses and commission. The
American entities would conduct examinations either through the applicant or
through other entities in India; evaluate answer sheets; award certificates to
the candidates; forward these certificates to the applicant; and the applicant
would in turn distribute them to the candidates.

 

The AAR considered the
following questions :


1. (a) Whether
examination fees collected by the applicant in India on behalf of the
American entities and remitted to them were their ‘income’ liable to tax in
India ?

(b) If answer to (a)
is in affirmative, how should that income be classified — as business
income, royalty or fees for technical services ?

2. Whether the
applicant was required to deduct tax at source in respect of the remittances
and if so, at what rate ?

 



The AAR first examined the questions in light of S.
5 of the Act and observed that in terms of S. 5(2), income of a non-resident
includes income which accrues, arises or is received in India, or which is
deemed to accrue, arise or to be received in India, from any source in India. In
this context, the AAR referred to the Supreme Court’s decisions in CIT v.
Ahmedbhai Umarbhai and Co., (1950) 18 ITR 472 (SC), CIT v. Ashokbhai
Chimanbhai, (1965) 56 ITR 42 (SC) and Seth Pushalal Mansinghka (P) Ltd.
v. CIT, (1967) 66 ITR 159 (SC) and observed that while the income did not
accrue or arise, nor was it deemed to accrue or arise in India, it was received
in India as an agent of the American entities in India. It further observed that
the income was in the nature of business income. The applicant was receiving
income in India on behalf of the American entities as their agent. Hence, in
terms of S. 4 and S. 5 of the Act, the examination fee collected by the
applicant on behalf of the American entities would be taxable in India.

The AAR then considered the questions in light of
India-USA DTAA. The applicant had stated in his application that the American
entities were non-profit organisations, which were determined by American tax
authorities as ‘tax exempt organisations’. In response, the Department had
contended that since these were ‘tax exempt organisations’, they could not be
regarded as tax residents of the USA and consequently, provisions of India-USA
DTAA could not apply. For this purpose, the Department relied on the provisions
of Articles 1 and 4 of India-USA DTAA. The Department also contended that
partnerships, trusts, etc. were regarded as ‘transparent entities’ in the USA
and were not liable to pay tax there. In response, the applicant filed
additional documents and submissions to prove that the American entities were
corporations incorporated in the USA; were not ‘transparent entities’; were
liable to pay tax in the USA; but being in certain specified category, were
exempted from payment of tax. The AAR, therefore, held that they were tax
residents of the USA and provisions of India-USA DTAA would apply.

 

The Department also put forth the argument that the
applicant should be treated as PE in India of the American entities. After
examining the provisions of Articles 7 and 5 of India-USA DTAA, the AAR found
that the applicant did not conclude any contract on behalf of the American
entities and the admission of candidates for programme/examination was solely
done by them. Further, the applicant did not carry on any of the other
activities mentioned in Article 5 (such as storage of goods, etc.); on facts, it
could not be considered as dependent agent; it had liberty to have similar
relationship with others; it was not wholly or substantially dependent on the
American companies; it appeared to carry on promotion in the ordinary course of
its business; and it was not subject to any control of the American entities
with regard to the manner of carrying on it.

Indian company engaged Chinese company for testing of bauxite and providing test reports— Testing done entirely in China—Issue of taxability of payment by Indian company for services—Held : (i) After amendment to S. 9, irrespective of the place of utilisa

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16 Ashapura
Minechem Ltd. v.
ADIT
(2010) 5 Taxman.com 57 (Mum-ITAT)
Article 7, 12(4) of India-China DTAA
S. 9, S. 195 of Income-tax Act
Dated : 21-5-2010


 

Indian company
engaged Chinese company for testing of bauxite and providing test reports—
Testing done entirely in China—Issue of taxability of payment by Indian company
for services—Held : (i) After amendment to S. 9, irrespective of the place of
utilisation or rendition and territorial nexus, payment was chargeable as FTS
under Income-tax Act; and (ii) As per source rule under India-China DTAA, place
of rendition is not material and FTS is deemed to accrue in country where payer
is resident.

Facts :

The taxpayer
was an Indian company (‘IndCo’), in the process of building an alumina refinery.
It engaged a Chinese company (‘ChinaCo’) for testing of bauxite to be mined by
IndCo in India. ChinaCo was to test bauxite in its laboratories in China and
prepare test reports so that IndCo could define the process parameters for
processing of bauxite. The test reports were to provide complete chemical
composition of bauxite, performance tests, etc. IndCo agreed to pay certain
payment to ChinaCo for these services.

According to
IndCo : testing charges were in the nature of business profits subject to
Article 7 of India-China DTAA; ChinaCo did not have any PE in India; and hence,
no taxes were required to be withheld u/s.195. Accordingly, it applied for
certificate for no withholding of tax.

According to
the tax authorities, the payments were for services and were taxable as ‘Fees
for Technical Services’ (FTS).

The CIT(A)
upheld the order of the tax authority.

The Tribunal
referred to and relied on its earlier order in case of Hindalco Industries Ltd
v. ACIT, (2005) 94 ITD 242 (Mum.) which laid down certain principles of
interpretation of tax treaties, stating that the language used in a tax treaty
need not be examined in literal sense and a departure from plain meaning is
permissible where the context so requires.

Held :

The Tribunal held that :

  • As regards taxability
    under the Income-tax Act :

  • Payments received by
    ChinaCo were covered within the definition of FTS under the Income-tax Act.

  • In light of the amendment
    to S. 9 by the Finance Act, 2010, the legal proposition regarding utilisation,
    rendition and territorial nexus is no longer good in law. Income of ChinaCo
    for services rendered to IndCo is taxable as FTS under the Income-tax Act.

  • As
    regards taxability under India-China DTAA :

  • The definition of FTS
    covers payments for provision of managerial, technical or consultancy
    services by a resident of one country in the other country. The expression
    ‘provision of services’ is not defined or elaborated anywhere in the tax
    treaty.

  • As per the source rule,
    FTS will be deemed to have accrued in the country where the payer is a
    resident and place of rendition of technical services is not material.

  • Literal interpretation
    of definition of FTS to mean rendition of service would render the source
    rule meaningless.

  • Literal interpretation
    to a tax treaty, which renders treaty provisions unworkable and which is
    contrary to the clear and unambiguous scheme of the treaty, has to be
    avoided.

  • he payments made to
    ChinaCo were taxable as FTS under India-China DTAA as well as under the
    Income-tax Act and hence, IndiaCo was liable to deduct tax from these
    payments.

levitra

UK company had contractual obligation to provide repair and overhaul support and components to an Indian aircraft operator—maintained stock of components with Indian operator—consideration from Indian company for repair and overhaul and use, or right to u

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15 Airlines Rotables Ltd v. Jt. DIT (Unreported)
ITA No. 3254/Mum./2006
Article 5, 7, 13 of India-UK DTAA
A.Y. : 1998-99. Dated : 21-5-2010

 

UK company had contractual obligation to provide repair and
overhaul support and components to an Indian aircraft operator—maintained stock
of components with Indian operator—consideration from Indian company for repair
and overhaul and use, or right to use, of component—repair and overhaul of
component only outside India. Held : (i) UKCo did not have PE in India; (ii)
even if PE, no profit could be attributed to that PE; (iii) stock maintained
with Indian company was not for delivery on behalf of UK companY—even if Indian
company assumed to be agent, no agency PE constituted.

Facts :

The taxpayer was a company incorporated in the UK (‘UKCo’),
and a tax resident of the UK. Principal business of UKCo was to provide spares
and component support to aircraft operators. UKCo entered into an agreement with
an Indian company (‘IndCo’) for providing certain support services for aircraft
operated by IndCo. Under the agreement, UKCo was required to repair or overhaul
a component when IndCo discovered that such components had become operationally
unserviceable. In such case, UKCo was also required to provide replacement of
the component. UKCo was also required to ensure that airworthiness directives in
respect of such component (whether replaced, repaired or overhauled) were fully
complied with. The consideration received by UKCo comprised two parts. One, for
repair and overhaul of the component. Two, for use or right to use, replacement
component. To ensure timely availability of the component, UKCo maintained stock
of replacement component at the operational bases of IndCo in India and also in
the UK at its depot. IndCo was forbidden from loaning, pledging, selling,
exchanging or encumbering any items from the stock.

Before the AO, UKCo contended that it did not have any PE in
India and hence, its business profits were not taxable in India. However, the AO
inferred that the stores staff of IndCo was acting as agent of UKCo and since
UKCo maintained stock of goods in India, in terms of Article 5.4(b) read with
Article 5.5 of India-UK DTAA, PE of UKCo came into existence. The AO estimated
10% of gross receipts of UKCo as profits attributable to PE.

The CIT(A) concurred with the view of the AO.

The Tribunal observed that in terms of Article 5(1) (i.e.,
the basic rule), a PE is said to exist in the other contracting state when an
enterprise of one of the contracting state has a fixed place of the business in
that contracting state through which the business of the enterprise is wholly or
partly carried out. There are three criteria embedded in this definition (i)
physical criterion (i.e., existence of physical location); (ii) subjective
criterion (i.e., right to use that place); and (iii) functionality criterion
(i.e., carrying out of business through that place). Only when these three
criteria are satisfied, a PE can come into existence.

Thus, it is necessary that for PE to exist not only should
there be a physical location through which the business of the foreign
enterprise is carried out, but also that such place should be at its disposal.

Held :

The Tribunal held that :




  • Even though
    the stock of UKCo was stored at a specified physical location, it was under
    the control of IndCo and UKCo did not have any place at its disposal in the
    sense that it could carry out its business from that place. As the physical
    location was under the control of IndCo, UKCo did not have any place at its
    disposal. Thus, it cannot be said to constitute PE of UKCo in India.

  • Even if there is a PE,
    only profit attributable to that PE can be taxed in India. Hence, as entire
    repair and overhaul work was done outside India, no part of the profit could
    be taxed in India.

  • A dependent agent PE
    (‘DAPE’) under Article 5(4)(b) of India-UK DTAA can come into existence only
    when business of UKCo is carried through that DAPE. It would be absurd to
    contend that IndCo is dependant agent of UKCo, which the tax authorities have
    not established. Even if IndCo is regarded as an agent, the maintenance of
    stock by it was for IndCo’s business. Further, even if it is assumed that
    IndCo is an agent, it would be an independent agent. Also, it maintained the
    stock for stand by use and not for delivery on behalf of UKCo. Therefore, UKCo
    does not have PE in India.

  • As part of the
    consideration pertains to use, or right to use, of components, taxability
    under Article 13(3)(b) (i.e., ‘equipment royalty’) should be examined.
    Non-taxability under Article 7 would still require consideration of
    application of Article 13. As these aspects had not been heard by the lower
    authorities, the matter was remanded to the CIT(A) for limited adjudication
    only on this aspect.



levitra

Indian company purchasing shares of another Indian company from non-resident—Non-resident assessed to tax—AO treated Indian company as agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is not a bar to order u/s.163; (ii) there is

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14 Hindalco Industrial Ltd v.
DCIT
AIT 2010 211 ITAT-Mum.
S. 163 of Income-tax Act
A.Y. : 2001-02. Dated : 14-5-2010


Indian company purchasing shares of another Indian company
from non-resident—Non-resident assessed to tax—AO treated Indian company as
agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is
not a bar to order u/s.163; (ii) there is no time limit u/s.163; and (iii) same
income cannot be assessed simultaneously in hands of non-resident as well as
agent.

Facts :

The taxpayer was an Indian company (‘IndCo’). IndCo purchased
shares of another Indian company from a foreign company. the foreign company was
a non-resident in terms of the Income-tax Act. The non-resident applied to the
AO u/s.197 of the Income-tax Act for lower withholding tax on the sale proceeds
of the shares. The AO issued certificate for lower withholding tax. Based on
this certificate, IndCo withheld and deposited the tax. Pursuant to the transfer
of the shares, the non-resident was chargeable to capital gains tax.

The non-resident furnished the return of its income. In the
course of assessment, the AO while assessing the non-resident, also issued
notice u/s.163 of the Income-tax Act to IndCo as representative assessee of the
non-resident, because the non-resident was in receipt of income from IndCo.
IndCo contended before the AO that as per the scheme and intent of the
Income-tax Act and particularly the provisions of S. 160(1)(i) read with S.
161(1), S. 162 and S. 163, no person could be treated as ‘Agent’, in relation to
a non-resident after the expiry of previous year corresponding to the assessment
year in question. The AO however, treated IndCo as Agent on the basis of plain
reading of S. 163(1), S. 160(1)(i) and S. 149(3).

The CIT(A) dismissed the appeal of IndCo.

Held :

The Tribunal held that :

  • The non-resident received
    income from IndCo. Therefore S. 163(1)(c) was attracted. Liability is not
    fastened on the representative assessee merely on passing of order u/s.163.

  • The fact that the agent
    had withheld tax u/s.195 cannot be a bar to pass order u/s.163.

  • The Income-tax Act does
    not contemplate any time limit for initiating proceeding u/s.163. The purpose
    of S. 163 is to secure payment of taxes by the non-resident. The proceedings
    were also not time-barred under the
    Income-tax Act. Hence order u/s.163 was valid.

  • In a similar issue in
    Saipem UK Ltd v. DDIT, (2008) 298 ITR (AT) 113 (Mum.), the Mumbai Tribunal has
    held that the same income cannot be assessed simultaneously in the hands of
    the non-resident as well as the agent, since such double taxation militates
    against the cardinal principles of taxation. Hence, once the assessment in the
    case of principal becomes final, the assessment of the same income in the
    hands of the agent cannot be made. Therefore the assessment of capital gain of
    the non-resident in the hands of IndCo was not proper.



levitra

Mauritius company performing contract for transportation and installation of platforms to be used in mineral oil exploration—Part of income pertained to activities carried on outside India— Whether entire income taxable in India—Income under presumptive t

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13 JDIT v. J. Ray McDermott Eastern Hemisphere Ltd.
(2010) TII 41 ITAT (Mum.-INTL)
Article 4 of India-Mauritius DTAA;
S. 5, S. 9(1)(i), S. 44BB of Income-tax Act
A.Y. : 2003-04. Dated : 30-4-2010

Mauritius company performing contract for transportation and
installation of platforms to be used in mineral oil exploration—Part of income
pertained to activities carried on outside India— Whether entire income taxable
in India—Income under presumptive tax provision can be taxed only if it is
otherwise chargeable to tax.

Facts :

MCo, a tax resident of Mauritius, undertook and executed a
contract for transportation and installation for certain well platform projects
to be used in mineral oil exploration. The contract was undertaken and performed
with an Indian company. Certain portion of the receipts of MCo pertained to work
carried on outside India.

While furnishing its return of income, MCo did not offer the
receipts pertaining to the work carried on outside India on the ground that in
terms of Explanation (a) to S. 9(1)(i) of the Income-tax Act, they were not
chargeable to tax. MCo also contended that, alternatively, such receipts cannot
be attributed to its PE in India.

While assessing the income, the AO held that : income
pertained to work to be carried out in India; source of income is related to
work to be carried out in India; and hence the entire receipts are taxable in
India. Further, S. 44BB does not distinguish between income for activities
carried on in India and for those carried on outside India.

The CIT(A) reversed the order.

The Tribunal relied on the decision on Saipem SPA v. DCIT,
(2004) 88 ITD 213 (Delhi ITAT) and McDermott ETPM Inc v. DCIT, (2005) 92 ITD 385
(Mumbai ITAT).

Held :

The Tribunal held that :

  • Only the income which is
    reasonably attributable to operations carried on in India is taxable in India.

  • Income computed on
    presumptive basis can be taxed in India only if it is otherwise chargeable
    under the provisions of the Income-tax Act.



levitra

Whether a liaison office in India involved in collecting and transmitting of information for a Korean company would, by virtue of Article 5(4) of India-Korea DTAA, not constitute a PE ?

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Part C — Tribunal & International Tax Decisions



  1. M/s. K. T. Corporation

(2009 TIOL 12 ARA IT) (AAR)

Articles 5(1), 5(2), 5(4), 13,

India-Korea DTAA;

S. 9(1)(vi)/(vii), Income-tax Act

Dated : 29-5-2009

Issue :

Whether a liaison office in India involved in collecting
and transmitting of information for a Korean company would, by virtue of
Article 5(4) of India-Korea DTAA, not constitute a PE ?

 

Facts :

The applicant was a Korean company (‘KorCo’). KorCo had
obtained RBI’s permission for opening a liaison office (‘the LO’) in India for
the sole purpose of acting as a communication channel between the head office
and companies in India. While granting its permission, RBI had stipulated
various conditions and parameters subject to which the LO was to function.

 

The issue before the AAR was whether the LO of KorCo would
constitute its PE in India. Together with its application, KorCo had furnished
copy a Reciprocal Carrier Service Agreement (‘RCSA’), which it had executed
with an Indian company (‘IndCo’) after opening of its LO. Both KorCo and IndCo
were telecom carriers/resellers and had agreed to provide inter-connection
services to each other. IndCo was to provide and maintain connecting
facilities in India and KorCo was to do the same outside India. Each party was
to raise invoice on the other party in respect of the traffic terminated on
its side during each calendar month.

 

On the merits of the application, the tax authorities had
commented that the applicant had not sought ruling on the question of
taxability of payment made by IndCo to KorCo but had sought ruling only on the
limited issue whether the LO would constitute a PE. The tax authorities
mentioned that unless the applicant furnishes its reply on the following four
specific questions, it was not possible to conclude the issue :

(i) What was the role of LO in pre-bid survey carried out
before entering into the Agreement ?

(ii) How was the feasibility report prepared, did the LO
play any role in it ?

(iii) Were the employees of the LO involved in the
technical analysis of the project ?

(iv) Is the LO involved in the technical analysis of the
project or the execution of any part of the contract ?

 



Further, the tax authorities contended that independent of
the issue under consideration, the payments received by KorCo from IndCo were
taxable u/s. 9(1)(vi)/(vii) of the Act and Article 13 of India-Korea DTAA3.


 

By a supplementary statement of facts, KorCo furnished
information on the questions raised by the tax authorities. It submitted that
the LO was to act only as a communication channel within the restrictions
imposed by RBI. While it was a fixed place of business, its purpose was only
to collect information and to carry out preparatory and auxiliary activities
such as :

(i) Holding of seminars/conferences.

(ii) Receiving trade inquires from customers.

(iii) Advertising about the technology used by the
applicant in its wired/wireless services and replying to queries of
customers.

(iv) Collecting feedback from perspective customers.

 


The LO had not played any role in the pre-bid survey nor
had it involved itself in the technical analysis of any project before KorCo
executed agreement with IndCo. The applicant also furnished affidavit of the
general manager of the LO to this effect. The affidavit also stated that the
LO did not have permission/authority to conclude, nor had it executed, any
trade contract. Similarly, LO did not procure any order nor did it conclude
any negotiation. The counsel for the applicant emphasised that the LO was only
a representative office acting within the restrictions imposed by RBI and had
not undertaken any trading activity, nor had it executed any business
contract, nor had it rendered consultancy or any other services. Thus, the LO
was not a fixed place of business through which the business of KorCo was
wholly or partly carried on but it was a fixed place which had undertaken only
preparatory or auxiliary work. Hence, it could not be regarded as a PE under
Article 5(1), 5(2) read with clauses (d), (e) and (f) of Article 5(4) of
India-Korea DTAA.

 

Held :

The AAR referred to : paragraphs 1, 2 and 4 of Article 5 of
India-Korea DTAA; definition of ‘liaison office’ as per FEMA; the permitted
activities for a liaison office as per FEMA; and legal definition of the term
‘auxiliary’.

 

The AAR expressed its view that collecting information for
an enterprise by a liaison office can be considered to be an auxiliary
activity unless collection of information is primary purpose of the
enterprise. In case of KorCo, collection of information was not its primary
purpose and hence, collecting and transmitting of information by the LO to the
Head office was auxiliary activity particularly when the LO had no connection
with telecom services and network and the contracts related thereto. Hence, LO
could not be considered as PE in terms of Article 5(4)(d), (e) of India-Korea
DTAA. The AAR supported its view with certain extracts from the commentary on
OECD Model Convention, which inter alia, stated that the decisive criterion is
whether the activity of fixed place of business in itself was an essential and
significant part of the activity of the enterprise as a whole.

 

The AAR held that, as per the facts available, the LO had not performed ‘core business activity’ but had confined itself only to preparatory and auxiliary activity and as such the LO was covered within the exclusion in Clauses (e) and (f) of Article 5(4) of India-Korea DTAA. Hence, it could not be regarded as a PE in terms of Article 5(1). Reliance in this regard was made by the AAR on the Supreme Court’s decision in DIT (International Taxation) v. Morgan Stanley and Co Inc, (2007) 292 ITR 416 (SC) and Delhi High Court’s decision in UAE Exchange Centre v. UOI, (2009) 223 CTR 250 (Del.).

S. 36(1)(vii) : Unrealisable amount due to a share broker from client allowable as bad debts

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7 ACIT v. Olympia
Securities Ltd.

ITAT ‘G’ Bench, Mumbai

Before K. P. T. Thangal (VP) and

V. K. Gupta (AM)

ITA No. 4053/Mum./2002

A.Y. : 1997-1998. Decided on : 21-12-2006

Counsel for revenue/assessee: T. Shivkumar/

Rajiv Khandelwal

S. 36(1)(vii) of the Income-tax Act, 1961 — Bad
debts — Assessee, a share broker — Payments made towards purchase price of
shares on behalf of client turned bad — Whether allowable as bad debts — Held,
Yes.

 

Per V. K. Gupta :

Facts :

The assessee was a share broker. It had made
certain payments to the stock exchange on the day of settlement in respect of
purchases and sale of shares made through it by its clients. However, the client
failed to make payment and the assessee wrote off Rs.27.04 lacs as bad debts.
According to the AO, the assessee had failed to prove that the debt had become
bad. Accordingly, he disallowed the claim of the assessee, both as bad debts and
as trading loss u/s.28. On appeal, the CIT(A) deleted the addition and held that
the claim of the assessee was allowable both, u/s.36(1)(vii) as bad debts and as
trading loss u/s.28.

 

Before the Tribunal, the Revenue contended that the
assessee had not fulfilled the conditions of S. 36(2) viz., that the
amount claimed as bad debts had not been taken into account in computing the
income of the assessee for the previous year or any other earlier years.
Secondly, unlike banking company or money lender, the brokerage income earned by
the assessee was not of the category of interest on loan, hence, the loss
arising out of non-payment of amount by the clients was a capital loss. Further,
it relied on the decisions of the Mumbai Tribunal in the case of Harshad J.
Choksi and B. N. Khandelwal.

 

Held :

The Tribunal noted that as per the provisions of S.
36(2), the deduction of bad debt or part thereof can be allowed only when such
debt or part thereof has been taken into account in computing the income of
the assessee.

 

According to the Tribunal, the income of any
assessee was not the gross receipts, but it was the excess of gross receipts
over the expenditure. Thus, in the case of share brokers or agents, gross income
by way of brokerage or commission was credited in the profit and loss account
against which the expenses were claimed. To further explain, it gave an
hypothetical example wherein the assessee credits Rs.105 in profit and loss
account and debits the same in the client’s account. Simultaneously, the
assessee debits profit and loss account with Rs.100 being the value of shares,
treating the purchases of shares on behalf of the client as on its own account
and the sale thereof, by including the brokerage amount in the sale price, as
its gross margin. In that situation, according to the Tribunal, all the
conditions of S. 36(2) would stand satisfied as per the Revenue. However,
according to the Tribunal, even the crediting of only gross brokerage amount of
Rs.5 in profit and loss account would reflect the transaction from which it
emerged and the transaction of creating a debt which was taken into account
impliedly or notionally in computing the income of the assessee. Thus, the
Tribunal opined that the conditions of S. 36(2) stand satisfied even in cases
where only income had been credited in the profit and loss account. According to
the Tribunal, the provisions of allowing the claim in case of money-lending or
finance business as provided in S. 36(2) further support the view expressed
above. Since the claim of the assessee was allowed u/s.36(1)(vii), no finding
was given about the allowability of the claim u/s.28 of the Act.

 

Cases referred to:



1. Harshad J. Choksi v. ACIT, (1995) 52
ITD 511

2. ACIT v. B. N. Khandelwal, (2006) 101
TTJ (Mum.) 717



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S. 148 : When time limit for issuance of notice u/s.143(2) not expired, notice u/s.148 invalid.

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




15 B. R. Industries v. ITO


ITAT ‘A’ Bench, Jaipur

Before I. C. Sudhir (JM) and B. P. Jain (AM)

ITA No. 988/J.P./2006

A.Y. : 2003-04. Decided on : 31-12-2007

Counsels for assessee/revenue : Mahendra Gargieya/L. R. Meena

S. 148 of the Income-tax Act, 1961 — Validity of issuance of
Notice — When time limit for issuance of notice u/s.143(2) had not expired,
whether Assessing Officer was justified in issuing notice u/s. 148 — Held, No.

 

Per B. P. Jain :

Facts :

The assessee had filed return of income on 2-12-2003, which
was processed u/s.143(1)(a) on 10-3-2004. Thereafter a notice u/s.148 was issued
on 8-4-2004 and served on 9-4-2004. The assessee was also served a notice
u/s.143(2) on 29-7-2005. The assessee challenged the validity of the notice
u/s.148 of the Act which was rejected by the AO and the CIT(A) as well.

 

The assessee contended that once the AO was having the
statutory time available with it for the issuance and service of a notice
u/s.143(2), during the pendency and availability of such time, he could not have
issued the notice u/s.148. The original return of income was filed on 2-12-2003
and as per the proviso below S. 143(2) of the Act, such a notice could have been
issued validly on or before 31-12-2004. The AO however, without waiting until
the expiry of the said period i.e., up to 31-12-2004, issued a notice
u/s.148 on 8-4-2004.

 

Held :

The Tribunal agreed with the assessee that when the statutory
time limit was a available with the AO for issuance of notice u/s.143(2) of the
Act, then the notice u/s.148 cannot be issued during the pendency of the
proceedings. Further, it observed that the notice u/s.143(2) could be served
within 12 months from the end of the month in which the return was furnished as
per proviso to S. 143(2) of the Act and since in the present case, the notice
u/s.143(2) was served on 29-7-2005 i.e., after the expiry of 12 months
from the end of the month in which the return was furnished, the same was also
not valid. Further, relying on the decisions listed below, the Tribunal allowed
the appeal of the assessee.

 

Cases referred to :



(1) DCIT v. Krishan Lal Leela, 34 TW 40 (Jp)

(2) R. B. Securities Ltd. v. JCIT, 141 Taxman 49
(Digest) (Del.)

(3) Bapa Lal Exports Co. v. JCIT, (2007) 289 ITR 371
(Mad.)

(4) KLM Royal Dutch Airlines v. ADI, (2007) 159
Taxman 191 (Del.)

 


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S. 23(1)(b) : Stamp duty and brokerage paid by the landlord allowable as deduction from rent received.

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


14 Govind S. Singhania v. ITO

ITAT ‘K’ Bench, Mumbai

Before R. K. Gupta (JM) and

V. K. Gupta (AM)

ITA No. 4581/Mum./2006

A.Y. : 2002-03. Decided : on 3-4-2008

Counsels for assessee/revenue : Vijay Mehta/

L. K. Agarwal

 

S. 23(1)(b) of the Income-tax Act, 1961 — Income from house
property — Annual letting value — Whether Stamp Duty and brokerage paid by the
landlord-assessee allowable as deduction from the rent received — Held, Yes.

 

Per V. K. Gupta :

Facts :

The assessee gave his premises at Mittal Towers on lease and
incurred expenses of Rs.30,000 for Stamp Duty and Rs.85,000 for payment of
brokerage on account of renewal of Lease Agreement. The Assessing Officer,
however, held that the expenses were not allowable against the income from house
property, because the expenses allowable therefrom had been specified by the
Legislature and these expenses did not fall in that category. On appeal, the
CIT(A) also, confirmed the action of the Assessing Officer.

 

The assessee contended before the Tribunal that without
incurring these expenses, he could not have earned the rental income, because
Stamp Duty had to be paid as per the provisions of the Stamp Duty Act, which was
a mandatory requirement and since the premises was let out through the broker,
there was also an obligation on the part of the assessee to pay the brokerage.
The assessee further contended that he could have asked the tenant to pay the
same and adjust the same from the rent and in that event the assessee would have
got only net rent.

Held :

The Tribunal agreed with the assessee that without incurring
these expenses, the assessee would not have earned the rental income. It further
noted that the assessee had computed the annual letting value u/s.23(1)(b) of
the Act. Hence, according to it, such rent had to be net of these expenses. The
Tribunal also found substance in the alternative argument of the assessee that
had these expenses been borne by the tenant, then only the net amount would have
been the annual letting value within the meaning of S. 23(1)(b) of the Act.
Further, the case laws relied on by the assessee (listed below) also support
this view. In this view of the matter, the Tribunal held that the annual letting
value should be taken net of Stamp Duty and brokerage paid by the assessee.

Cases referred to :



(1) Varma Family Trust v. Sixth ITO, 7 ITD 392
(Mum.)

(2) Sharmila Tagore v. JCIT, 93 TTJ 483 (Mum.)

(3) Realty Finance & Leaseing (P) Ltd. v. ITO, 5 SOT
348 (Mum.)

(4) Nandita Banerjee v. ITO, (ITA. No.
1360/Mum./2000) dated 8-4-2004.

 


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S. 2(24) — Income — Whether the receipts of non-occupancy charges, transfer fees and voluntary contribution from its members by the cooperative housing society is taxable — Held, No.

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11. ITO v. Grand Paradi CHS
Ltd.


ITAT ‘G’ Bench, Mumbai

Before D. K. Agarwal (JM)
and

A. L. Gehlot (AM)

ITA No. 521/Mum./ 2010

A.Y. : 2005-06. Decided on :
27-8-2010

Counsel for revenue/assessee
: A. K. Nayak/Dharmesh Shah

S. 2(24) of the Income-tax
Act, 1961 — Income — Whether the receipts of non-occupancy charges, transfer
fees and voluntary contribution from its members by the cooperative housing
society is taxable — Held, No.

Per D. K. Agarwal :

Facts :

The assessee was a
co-operative housing society. During the year under appeal, it had shown
following receipts in its accounts which is the subject matter of dispute :


(i) Non-occupancy
charges (sub letting charges) — Rs.13.24 lakh;

(ii) Transfer fees of
Rs.1.95 lakh;

(iii) Voluntary
contribution (Donation) from outgoing members and incoming members Rs. 54.52
lakh;


The assessee contended that
all the above three receipts were exempt from tax on the principle of mutuality.
However, the AO, following the decisions of the Bombay High Court in the case of
Presidency Co-op. Housing Society Ltd. (216 ITR 321) taxed the above receipts.
On appeal, the CIT(A) relying on the decisions of the Bombay High Court in the
cases of Shyam Co-op. Housing Society Ltd. (ITA Nos. 92, 93 and 206, dated
17-7-2009) and Su Prabhat



Co-op. Housing Society Ltd. v. ITO, (ITA No. 1972 of 2009, dated 1-10-2009),
allowed the appeal of the assessee.

The Revenue challenged the
order of the CIT(A) before the Tribunal on the ground that the two decisions
relied on by the CIT(A) have not been accepted by the Department and the same is
challenged before the higher authority. Thus, according to it, the matter was
sub-judice.

Held :

As regards non-occupancy
charges — the Tribunal relying on the decision of the Bombay High Court in the
cases of Su Prabhat Co-op. Housing Society Ltd. upheld the order of the CIT(A).
With regard to transfer fee and voluntary contribution — it agreed with the
assessee and held that its case was covered in favour of the assessee by the
decision of the Bombay High Court in the case of Sind Co-op. Housing Society
Ltd. v. ITO, (317 ITR 47).

According to the Tribunal, the decision of
the Bombay High Court in the case of Presidency Co-op. Housing Society Ltd.
relied on by the Revenue, had been distinguished by the Bombay High Court in the
case of Sind Co-op. Housing Society Ltd. Further, it observed that the Revenue
was not able to show any other contrary decisions. As regards the Revenue’s
contention about the non-acceptance of the Bombay High Court decisions, since
the same have been challenged, the Tribunal based on the Bombay High Court
decision in the case of Bank of Baroda v. H. C. Srivastava and another, (256 ITR
385) held that the ground taken by the Revenue was devoid of any merit and
accordingly, the same was rejected.

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Explanation (aa) to S. 80HHC — Date of export out of India — Held that the relevant date was the date when the goods were dispatched and cleared by the customs and not the date as per the bill of lading.

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22. Dy. CIT v. Vallabh Metal Inc..


ITAT ‘H’ Bench, Delhi

Before I. P. Bansal (JM) and

Shamim Yahya (AM)

ITA No. 2564/Del./2009

A.Y. : 2004-05. Decided on : 27-11-2009

Counsel for revenue/assessee : Piyuash Kaushik/

N. K. Chand

Explanation (aa) to S. 80HHC — Date of export out of India
— Held that the relevant date was the date when the goods were dispatched and
cleared by the customs and not the date as per the bill of lading.

Per Shamim Yahya :

Facts :

One of the issues before the tribunal was regarding the
year in which the exports made by the assessee under certain invoices fall.
The AO noted that exports under Invoice Nos. 435 to 444, though dated March,
the corresponding bills of lading were dated April. The assessee contended
that during the financial year itself the goods were dispatched and the custom
clearance was obtained. However, the AO held that these goods cannot be
considered as export of the current year. On appeal the CIT(A) held that the
AO’s view that the bill of lading was the date of sale was absolutely contrary
to the provisions of explanation (aa) of S. 80HHC.


Before the Tribunal the Revenue submitted that the bill of
lading was the authoritative document for dealing with the period of export
sales. It was further submitted that those goods had been exported on FOB
(Free on Board) wherein risk passes to buyer, once goods were delivered on
board of the ship by the seller.


Held :


The Tribunal noted the following facts :


(a) it had been regular system of accounting wherein
exports were accounted according to the date of export invoices;

(b) the goods had been dispatched from the factory
premises of the assessee and had been duly cleared by the customs during the
financial year;


Further, referring to Explanation (aa) to S. 80HHC defining
‘export out of India’ and relying on the decision of the Apex Court in the
case of Silver and Arts Place which explains what is ‘export out of India’,
the Tribunal upheld the order of the CIT(A).


Case referred to :



CIT v. Silver and Arts Place, 259 ITR 684 (SC).



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S. 37(1) — Capital or revenue expenditure — Cost of tools and dies — Allowed as expenditure on its issue for production.

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21. Central Electronics Ltd. v. AO


ITAT ‘B’ Bench, New Delhi

Before R. P. Tolani (JM) and

R. C. Sharma (AM)

ITA. Nos. 233 & 1821/Del. of 2009

A.Ys. : 2004-05 & 2005-06. Decided on : 27-11-2009

Counsel for assessee/revenue : R. S. Singhvi/Ashima Nab &
Manish Gupta

S. 37(1) — Capital or revenue expenditure — Cost of tools
and dies — Allowed as expenditure on its issue for production.

S. 145A — Valuation of inventory in accordance with the
method of accounting regularly followed — Assessee justified in valuing three
years old inventory at nil value.

Per R. P. Tolani :

Facts :

The assessee was engaged in the business of developing and
producing various electronic components, sophisticated systems, solar
photovoltaic cells and other allied items for defence and other government
departments. In its accounts it used to treat items of loose tools and small
dies used in production as consumables. At the time of purchase of tools/dies
the same were entered in the stock as consumable tools and were charged to
consumption as and when issued for production activities. However, the AO
treated the same as of capital nature subject to depreciation @ 25%, the rate
applicable to plant and machinery.

Out of the other issues before the Tribunal — the one was
regarding allowability of Rs.50.2 lakhs claimed by the assessee towards
provision for slow moving inventory. As per the method of accounting regularly
followed, the assessee used to write off all inventories which were more than
three years old. According to the AO — the writing off was premature and was
not allowable under the Act. The assessee justified its method of accounting
on the ground of obsolescence resulting from change and/or upgradation in
technology with the passage of time. It was submitted that the inventory so
written off had no market value and for all practical purposes had only scrap
value. The same was shown as income in the year of sale.

Held :

The Tribunal noted that the assessee was a Government
undertaking and the accounting policy was being followed consistently. Its
accounts were audited by CAG. Further, relying on the judgment of Rajasthan
High Court in the case of Wolkem India Ltd., it allowed the claim of the
assessee.

Case referred to :


CIT v. Wolkem India Ltd., 221 CTR 767 (Raj.)

 

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Explanation to S. 73 — Speculation business — Assessee company earning income from the sale of shares — AO holding that income earned was from speculation — On the facts held that income earned was in the nature of capital gains.

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20. Axis Capital Markets (India) Ltd. v. ITO


ITAT ‘A’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

R. K. Panda (AM)

ITA No. 4098/Mum./2007

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

Counsel for assessee/revenue : Rajan R. Vora and Sheetal
Shah/Vikram Gaur

Explanation to S. 73 — Speculation business — Assessee
company earning income from the sale of shares — AO holding that income earned
was from speculation — On the facts held that income earned was in the nature
of capital gains.

Per R. K. Panda :

Facts :

The assessee was a public limited company engaged in the
business of investment, dealing in shares/ securities/bonds, etc. The assessee
during the impugned assessment year had shown income under the head capital
gain at Rs.22,98,229 the break-up of which was as under :

 

Rs.

Long-term capital
gains

41,85,744

Less :

 

Adjusted b/f
long-term capital loss

18,80,681

Less :

 

Short-term capital
loss

6,834

 

22,98,229

On being questioned the assessee explained that in the
current year no shares were purchased or sold as stock in trade. It was only
the shares held as investment that were sold during the year. However, the
Assessing Officer did not accept the contention of the assessee on account of
the reasons, amongst followings :

(a) The assessee had claimed deduction of entire expenses
on share dealings as business expenses though the transactions shown were
for sale of investments;

(b) In earlier years also the assessee had not shown any
stock in trade, even though, shares were acquired for resale;

(c) Memorandum of Association of the assessee company
showed that it was formed with the main objective of carrying on the
business of share trading along with other activities mentioned therein.

(d) As per Note in Part I of Schedule VI of the Companies
Act — for an investment company, shares take the character of stock in trade
and as such, shares shown as investment in the balance sheet could be
stock-in-trade also. The Companies Law does not differentiate between the
capital or revenue nature of transactions of investments and stock-in-trade.

Further, relying on a couple of decisions, the Assessing
Officer concluded that Explanation to S. 73 of the Act was applicable to the
transactions in question. He accordingly treated the net result of the profit
and loss of such transactions as arising out of speculation business. He
further did not allow any set-off of the brought forward long-term capital
loss of the preceding year against the income of the current year.

Before the CIT(A) the assessee submitted that the original
intention of the assessee at the time of entering into share transactions was
to earn dividend and hold them for appreciation in value. The shares were held
as investment and not as stock-in-trade. However, the CIT(A) held that the
claim of the assessee cannot be sustained on the following reasons :

(a) Although the appellant admitted that in the earlier
years as well as in the subsequent year, transactions in share trading were
carried out but not during the current year, in earlier years also no
stock-in-trade of shares was shown in the balance sheet. Shares were always
shown as investments only;

(b) All the expenses incurred on transactions in share
investments were claimed as business expenses in the Profit and Loss A/c.;

(c) The appellant had shown short-term capital loss of Rs.6,834. It means that it was engaged in frequent purchase and sale of shares during the year under consideration, which fact clearly proves the intention of the appellant for dealing in shares as stock-in-trade.

Held :

The Tribunal found merit in the submission of the assessee that the provisions of Explanation to S. 73 were not applicable to the facts of the present case for the reasons that :

    a) In the assessment order passed u/s.143(3) of the Act for the A.Ys. 2005-06 and 2006-07, the Assessing Officer in the orders had considered the income from sale of shares as income from long-term capital gain/short-term capital gain and not as speculation business.

    b) There is no purchase or sale of shares during the year and the assessee has sold the shares/units of mutual funds which were shown under the head investment.

    c) The shares were held for a long period and no borrowed fund had been utilised by the assessee for purchase of shares/units.

As regards the Assessing Officer disallowing the expenses of Rs.4 lakhs out of the total expenses of Rs.6.16 lacs on the ground that the same could have been incurred for earning of speculation income, the Tribunal agreed with the assessee’s contention that the entire expenditure relates to maintaining the corporate entity of the assessee. Accordingly it held that no part of expenditure was disallowable.

S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation O


    19. Abbas T. Reshamwala v. ITO

        ITAT ‘A’ Bench, Mumbai

        Before N. V. Vasudevan (JM) &

        R. K. Panda (AM)

        ITA No. 3093/Mum./2009

        A.Y. 2006-07. Decided on 30-11-2009

        Counsel for assessee/revenue : Ajay R. Singh/

        Vikram Gaur

        S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation Officer to determine fair value.

        Per R. K. Panda :

        Facts :

        During the year the assessee had sold an industrial gala for a consideration of Rs.20 lakhs. Based thereon the assessee had offered to tax the sum of Rs.18.73 lacs by way of capital gains. The Assessing Officer noted that the stamp duty authorities had valued the said property at Rs.44.62 lakhs. The assessee brought to the notice of the AO the various negative factors. He also filed a valuation report of the registered valuer, according to which, the value of the said premises was Rs.18.66 lakhs. He also requested the Assessing Officer if the valuation report was not accepted, then the same may be referred to the DVO u/s.50C of the Act.

        However, the Assessing Officer did not accept the contention of the assessee. He was of the opinion that since the assessee had not taken objection before the Registrar in the initial stages when the property was sold and it was only during the stage when objection was raised, the assessee filed a valuation report of registered valuer after giving second thought. Therefore, he was not under obligation to refer the matter to the DVO. He accordingly adopted the value determined by the stamp duty authorities at Rs.44.62 lakhs u/s.50C and made the addition of Rs.25.88 lakhs as short-term capital gain being the difference between the amount declared by the assessee and the amount finally determined by him. In appeal the learned CIT(A) upheld the action of the Assessing Officer.

        Before the Tribunal the Revenue submitted that the Assessing Officer can refer the matter to the DVO only if the assessee claims that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property on the date of transfer and the value adopted or assessed by the stamp valuation authority had not been disputed in any appeal or revision or no reference had been made before any authority. According to it, in the absence of the word ‘or’ between sub clause (a) and (b) of S. 50C(2), both the conditions, as per clauses (a) and (b) of S. 50C(2), are to be fulfilled before referring the matter to the DVO.

        Held :

        According to the Tribunal, the word ‘may’ used in Ss.(2) of S. 50C had to be read as ‘should’ and the Assessing Officer had no discretion but to refer the matter to the DVO for the valuation of the property when the assessee had raised an objection that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property. Accordingly, the matter was referred back to the file of the Assessing Officer with a direction to refer the matter to the DVO and decide the issue afresh as per law.

S. 43(6)(c) — When an asset is sold, the block of assets stands reduced only by moneys payable on account of sale of the asset and not by the fair market value of the asset sold.

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18. DCIT v. Cable Corporation of India Ltd.


ITAT ‘E’ Bench, Mumbai

Before Pramodkumar (AM) and

V. D. Rao (JM)

ITA No. 5592/Mum./2002

A.Y. : 1995-96. Decided on : 29-10-2009

Counsel for revenue/assessee : Vandana Sagar/

Arvind Sonde

S. 43(6)(c) — When an asset is sold, the block of assets
stands reduced only by moneys payable on account of sale of the asset and not
by the fair market value of the asset sold.

Per Pramodkumar :

Facts :

During the previous year relevant to the assessment year
under consideration, the assessee sold a flat which formed part of block of
assets and on which depreciation was claimed and was allowed @ 5%, for a
consideration of Rs.9,00,000. The District Valuation Officer (DVO), on a
reference by the Assessing Officer (AO), valued the flat at Rs.66,44,902. For
the purposes of computing the amount of depreciation allowable, the AO
computed the written down value of the block by reducing the value determined
by the DVO instead of reducing the consideration for which the flat was sold.
He, therefore, disallowed depreciation of Rs.2,96,551.

Aggrieved, the assessee preferred an appeal to the CIT(A)
who allowed the appeal and held that for computing written down value it is
only the sale consideration of the asset sold, which needs to be deducted and
not the fair market value of the asset sold.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

In view of the provisions of S. 43(6)(c) read with
Explanation 4 to S. 43(6) and also Explanation below S. 41(4), when an asset
is sold, the block of assets shall stand reduced by ‘moneys payable’ in
respect of the asset sold. The expression moneys payable refers to ‘the price
at which it is sold’. What really matters is the price at which the asset is
sold and not its fair market value. The AO does not have any power to tinker
with the sale price of the asset sold. The AO ought to take the sale price for
computing the WDV of the block.

The Tribunal dismissed the appeal filed by the Revenue.

S. 45 and S. 48 — Amount received by the society from the builder for permitting him to construct additional floors on existing building of the society by utilising TDR FSI belonging to him is not chargeable to tax since there is no cost of acquisition.

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17. Om Shanti Co-op Hsg. Society Ltd. v. ITO


ITAT ‘C’ Bench, Mumbai

Before D. Manmohan (VP) and

R. K. Panda (AM)

ITA No. 2550/Mum./2008

A.Y. : 1999-2000. Decided on : 28-8-2009

Counsel for assessee/revenue : Subhash Shetty/

Virendra Ojha

S. 45 and S. 48 — Amount received by the society from the
builder for permitting him to construct additional floors on existing building
of the society by utilising TDR FSI belonging to him is not chargeable to tax
since there is no cost of acquisition.

Per D. Manmohan :

Facts :

The assessee, a co-operative society, on request of the
developer granted him permission to construct 2 floors having 8 flats, on the
existing building of the assessee by utilising TDR FSI available to the
developer. As consideration, the developer paid Rs.26 lakhs to the assessee
and Rs.5.50 lakhs to each of the 12 members of the assessee.

According to the assessee, the members owned a piece of
land on which 12 flats were constructed by utilising maximum FSI available to
them. These persons formed a society. Since the assessee had no right to
construct further structure, there was no question of exploiting any of its
available right so as to earn income out of it. The assessee had regarded the
amounts received by it as not being chargeable to tax.

The Assessing Officer held that the permission granted by
the assessee-society resulted into transfer by way of relinquishment of the
right i.e., ‘to load TDR and construct additional floors’ and since
there was no cost of acquisition, in absence of details, he taxed the entire
consideration of Rs.26 lakhs as long-term capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A)
who enhanced the assessment and charged even Rs.66 lakhs, being the amount
paid by the developer to individual members of the society, as long-term
capital gains in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The assessee and its members had exhausted the right
available while constructing the flats and therefore the assessee and its
members had no right to construct additional floors on the existing building.
The Tribunal noted that TDR was not obtained by the assessee and sold to the
developer. The Tribunal held that the assessee had not transferred any
existing right to the developer, nor any cost was incurred/suffered prior
to permitting the developer to construct the additional floors. Since there
was no cost of acquisition, following the ratio of the decision of the Apex
Court in B. C. Srinivasa Shetty 128 ITR 294 (SC), the consideration was held
to be not assessable as capital gains.


The Tribunal dismissed the appeal filed by the Revenue.


Cases referred to :

1. CIT v. B. C. Srinivasa Setty, (1981) 128 ITR
294 (SC)

2. Deepak S. Shah v. ITO, (2009) 29 SOT 26 (Mum.)

3. M/s. New Shailaja CHS Ltd. v. ITO, ITA
512/M/2007 dated 2-12-2008

4. Maheshwar Prakash-2 Co-op Hsg. Soc. Ltd v. ITO,
(2009) 118 ITD 223 (Mum.)




 

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S. 28 — Contractual payment made by the assessee firm to its retiring partners, in terms of the partnership deed, is not includible in the total income of the assessee since to that extent income has never reached the hands of the assessee.

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New Page 1

16. RSM & Co.
v. ACIT


ITAT ‘D’ Bench, Mumbai

Before P. M. Jagtap (AM) and

R. S. Padvekar (JM)

ITA No. 3269/Mum./2007

A.Y. : 2004-05. Decided on : 12-10-2009

Counsel for assessee/revenue : Sunil M. Lala & Dhanesh
Bafna/Sanjay Agarwal

S. 28 — Contractual payment made by the assessee firm to
its retiring partners, in terms of the partnership deed, is not includible in
the total income of the assessee since to that extent income has never reached
the hands of the assessee.

Per R. S. Padvekar :

Facts :

The assessee, a partnership firm, claimed a sum of Rs.10
lakhs towards payment made by it to its retiring partner, as per the terms of
the partnership deed. The partnership deed provided that a partner retiring
after a specified age would be entitled to receive from the firm an amount,
computed in the manner stated in the deed, for a period of 5 years from the
date of retirement. Before the Assessing Officer (AO) the claim was made
u/s.37 of the Act. The AO held that the amount was not allowable as a
deduction.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where this sum was contended to be not taxable on the principles of diversion
of income by overriding title. The CIT(A) held that the amount paid was
application of income. He, accordingly, dismissed the assessee’s appeal.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The Tribunal noted the relevant clause of the partnership deed and
also the judicial precedents relied upon by the assessee.

Held :

Payment of retirement benefits for a period of five years
from retirement was a contractual obligation of the assessee. The retired
partner had nothing to do with the profit earned or losses suffered by the
assessee firm, but the quantum of retirement benefits had been fixed. On
facts, there was a charge on the profits of assessee firm. The Tribunal upon
considering the facts and the legal principles laid down in the precedents
relied upon by the assessee held that there was diversion of income to the
extent of the retirement benefits paid by the assessee firm to the retired
partner. The Tribunal held that the retirement benefit paid in accordance with
the terms of the partnership deed was not to be included in the total income
of the assessee firm as to that extent the income never reached the hands of
the assessee.

The assessee’s appeal was allowed.


Cases referred to :

1. CIT v. Sitaldas Tirathdas, 41 ITR 367 (SC)

2. CIT v. Crawford Bayley & Co., 106 ITR 884 (Bom.)

3. CIT v. Nariman B. Bharucha & Sons, 130 ITR 863
(Bom.)

4. CIT v. C. N. Patuk, 71 ITR 713 (Bom.)

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S. 275 read with S. 271B — Bar of limitation for imposition of penalty also applies to penalty imposed u/s.271B

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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.)


21 Motilal Vishwakarma HUF v.
ITO


ITAT ‘B’ Bench, Mumbai

Before M. A. Bakshi (VP) and

R. K. Panda (AM)

ITA No. 7055/Mum./2007

A.Y. : 2003-04. Decided on : 27-8-2007

Counsel for assessee/revenue : Ajay C. Gosalia/

Garima Jain

 

S. 275 read with S. 271B of the Income-tax Act, 1961 — Bar of
limitation for imposition of penalty — Whether limitation period applicable to
penalty imposed u/s.271B — Held, Yes.

 

Per M. A. Bakshi :

Facts :

The issue before the Tribunal was whether the penalty of
Rs.23,520 imposed on the assessee u/s.271B was barred by limitation. The
show-cause notice was issued and served in June 05 and the order imposing
penalty was passed on 27-2-2006. The contention of the assessee was that the
order has to be passed within six months from the date of initiation of the
proceeding.

 

Held :

The Tribunal agreed with the assessee that since the penalty
order has been passed after the expiry of six months from the end of June 2005,
it was barred by the period of limitation. Relying on the Special Bench decision
of the Chandigarh Tribunal in the case of Dewan Chand Amrit Lal & Ors., the
Tribunal allowed the appeal of the assessee.

 

Case referred to :


Dewan Chand Amrit Lal & Ors. v. DCIT, 283 ITR (AT) 203 (Chandigarh) (SB)

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Section 50C does not apply to transfer of immovable property held through company.

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15. Irfan Abdul Kader Fazlani vs. ACIT ITAT Mumbai bench ‘I’ Mumbai BeforeI.P.Bansal(J.M.)andD.KarunakaraRao (A. M.)
ITA No. 8831/Mum/11
A.Y.: 2007-08.
Dated: 2-1-2013
Counsel for Assessee/Revenue: K. Shivaram & Paras S. Savla/P.K. Shukla

Section 50C does not apply to transfer of immovable property held through company.


Facts

The assessee was holding 306 equity shares of Rs. 100 each in a private company (‘the company’). The total share capital of the company was 3,813 equity shares of Rs. 100 each. The company owned two flats in a residential building and was earning rent income from the same. During the year under appeal the assessee sold the shares for Rs. 37.51 lakh and capital gain was offered on that basis. According to the AO the assesse engineered the sale of the shares of all other shareholders of the company and thereby effectively transferred the immovable property belonging to the company. According to him, it was an indirect way of transferring the immovable properties, being the flats in the building. He accordingly ‘pierced the corporate veil and invoked the provisions of section 50C and computed the capital gains by adopting the stamp duty value of the flats.

Held

The tribunal noted that the provisions of section 50C applies on fulfillment of two conditions viz., (i) when a transfer of “capital asset, being land or building or both” takes place; and (ii) the consideration for a transfer is less than the value “assessed” by any authority of a State Government for stamp duty purposes. It further observed that the term “transfer” as used in the provisions would only cover direct transfer. While in the case of the assesse, the assets transferred were shares in a company and not land and/or building. The flats were owned by the company who continues to remain its owner even after the transfer of the shares by the assesse. Secondly, the consideration for transfer received by the assesse is also not “assessed” by any authority. Thus, the other condition to attract the provisions of section 50C is also not complied with. According to it, since the provisions of section 50C are deeming provisions, the same have to be interpreted strictly in accordance with the spirit of the provisions. Therefore, the appeal filed by the assesse was allowed and it was held that the AO’s decision to invoke the provisions of section 50C to the tax planning adopted by the assessee was not proper and it does not have the sanction of the provisions of the Act.

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The total amount of adjustment, along with the arm’s length price already reported by an assessee, cannot exceed the total amount of revenues earned by the assessee and its associated enterprises from third party customers.

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New Page 1

Tribunal News

Part C — Tribunal & AAR International Tax Decisions

Geeta Jani
Dhishat B. Mehta
Chartered Accountants


 


21 DCIT vs Global Vantedge Pvt. Ltd.

2010-TIOL-24-ITAT-DEL

Section 92

Dated: 17.12.2009

 

Issues:

 

  • The total amount of adjustment, along with
    the arm’s length price already reported by an assessee, cannot exceed the
    total amount of revenues earned by the assessee and its associated enterprises
    from third party customers.

  • In undertaking a transfer pricing analysis,
    the least complex entity should be selected as the tested party. However,
    selecting an overseas entity as the tested party may not be appropriate;
    because it is difficult to obtain all relevant facts and data required for
    undertaking a proper analysis of functions, assets and risks (FAR) and making
    the requisite adjustments    .

 

Facts:

 

  • Global Vantedge Pvt. Ltd.
    (GV), is an Indian company engaged in providing IT enabled services. RCS
    Centre Corp (RCS), a company incorporated in USA, is a customer of GV. GV and
    RCS are held by a common parent company and, hence, are associated enterprises
    (AE).

  • RCS is engaged in the
    business of providing debt collection and telemarketing services to clients in
    USA. RCS contracts with third party customers in USA. In turn, RCS enters into
    contracts with GV which has the requisite infrastructure and capacity for
    providing the services which RCS has contracted to render to its customers.

  • RCS retains 9.4% of the
    revenues earned from third party customers in USA and remits the balance 90.6%
    to GV. GV is also engaged in rendering services to other independent clients
    which constitute approximately 18% of its total revenue.

  • GV selected RCS as the
    tested party for the purpose of TP analysis. The TPO rejected selection of RCS
    as the tested party by contending that it is difficult to benchmark an entity
    in overseas jurisdiction.

  • The TPO selected GV as the
    tested party and by making a comparative analysis, he arrived at an average
    operating margin of 11.88%, as against the loss of 53.5% incurred by GV. As a
    result, GV was virtually assessed on revenue of Rs 101.1 as against the
    transaction value with RCS of Rs 90.8, and as against the billing of Rs 100
    raised by RCS on third party customers.

  • Aggrieved, the assessee
    preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].
    Before the CIT(A), the assessee, inter-alia, contended that:

(a) The least complex entity (RCS in the present
case) needs to be selected as a tested party for the purpose of carrying out
transfer pricing analysis because a simpler party requires fewer and more
reliable adjustments to be made to its operating margins.

(b) Without prejudice, the adjustment to the transfer price
between the AE and the taxpayer cannot be more than the revenue earned by the
group from independent third parties. Also, the transfer price needs to be
determined after excluding a fair remuneration payable to the AE, from the
revenue earned from third parties.

  • Based
    on the contentions of the assessee, the CIT(A) held as follows:

(a) The least complex entity should be selected as a tested
party.

(b) However, selection of RCS as a tested party and
consequent use of international comparables would be inappropriate, as it is
difficult to benchmark ALP in different jurisdictions on account of the
differences in facts and circumstances in each geographical area.

(c) The total amount of adjustment along with the arm’s
length price already reported by the assessee cannot exceed the total revenue
earned by the assessee and its associated enterprise from dealing with third
party clients.

(d) Also, the ALP of the assessee in the present case
cannot be 100% of revenues earned from third party customers. RCS was
admittedly rendering market support for which it was entitled to a fair
consideration.

(e) ALP remuneration of RCS was determined @1.4% by
adopting a report issued by the Information and Credit Rating Agency of India
Limited (ICRA report) on marketing expenses in the BPO industry.

(f) The balance 98.6% (100 – 1.4) of the revenues was held
to represent an arm’s length price between GV and RCS.

 

Held:



 


The ITAT upheld the order of the CIT(A) as neither GV nor the
tax authority was able to controvert the its findings.


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S. 250(6) — An order passed by CIT(A) without mentioning point of determination as also without giving any reason for decision while dismissing the appeal is violative of S. 250(6).

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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.)

13 Rang Rasayan Agencies v.
ITO

ITAT ‘C’ Bench, Ahmedabad

Before Bhavnesh Saini (JM)
and

D. C. Agrawal (AM)

ITA No. 917/Ahd./2009

A.Y. : 2004-05. Decided on :
18-1-2011

Counsel for assessee/revenue
:

Ketan M. Bhatt/Ms. Anurag
Sharma

 


Income-tax Act, 1961, S.
250(6) — An order passed by CIT(A) without mentioning point of determination as
also without giving any reason for decision while dismissing the appeal is
violative of S. 250(6) of the Act and cannot be sustained in law.

Per Bhavnesh Saini :

 

Facts :


The assessee had preferred
an appeal to the CIT(A). Due to non-appearance by the counsel of the assessee
before the CIT(A), the CIT(A) dismissed the appeal of the assessee. In the order
passed by the CIT(A), he did not mention the point for determination and also
did not mention the reason for decision.

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


Held :


The Tribunal noted that S.
250(6) requires the CIT(A) to mention the point of determination in the
Appellate order and also the reason for decision. Since the order passed by the
CIT(A) did not mention any point of determination in the Appellate order and
also did not give any reason for decision while dismissing the appeal of the
assessee, the Tribunal held the order of the CIT(A) to be violative of S. 250(6)
of the Act and consequently unsustainable in law. The Tribunal observed that the
act of the CIT(A) in merely noting the default committed by the counsel for the
assessee in not putting appearance before him and dismissing the appeal cannot
be sustained. Accordingly, the Tribunal set aside the impugned order and
restored the appeal of the assessee to the file of the CIT(A) with a direction
to re-adjudicate the appeal of the assessee on merit by giving reasons for
decision in the Appellate order.

The appeal filed by the
assessee was allowed.


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(2012) 150 TTJ 265 (Ahd.)(TM) ITO vs. Sardar Vallabhbhai Education Society ITA No.2984 (Ahd.) of 2008 A.Y.2000-01 Dated 18-09-2012

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Section 11(1)(d) of the Income-tax Act 1961 – Since assessee had produced books of account, original receipt books of corpus fund and confirmation letters from the donors, the donations received constituted corpus fund of the Society.

Facts

For the relevant assessment year, the Assessing Officer taxed the entire amount of Rs. 154.67 lakh of donations received by the Trust on the grounds that:

a. None of the donation receipts were signed by the donors.

b. The donation receipts were self made evidence furnished in support of the corpus fund collected and

c. As per section 11(1) of the Income Tax Act, there must be a specific direction from the donors in respect of their donations that it should be for the purpose of the corpus.

The CIT(A) deleted the addition made by the Assessing Officer. Since there was a difference of opinion between the members of the Tribunal, the matter was referred to the Third Member u/s. 255(4).

Held

The Third Member, agreeing with the Judicial Member, held in favour of the assessee-trust. The Third Member noted as under :

The assessee has produced complete books of account along with original receipt book of corpus fund wherein complete names and addresses of the donors were recorded and the column “corpus fund” has been duly “ticked” and signed by the employees of the trust.

It was for the Assessing Officer to make or not to make further inquiry in the facts and circumstances of the case, with regard to the genuineness of the donation claimed by the assess-trust to have been received by it towards its “corpus fund”.

The Tribunal, as a second appellate authority, could not direct the Assessing Officer to make detailed inquiry for the reason that the issue of “inquiry” is not before the Tribunal.

The Assessing Officer has not made any detailed inquiry further and added the amount of corpus fund as income in the hands of the assessee on the plea that such receipts were prepared by the employees of the trust and in none of the receipts, signatures of the donors was available. This approach of the Assessing Officer in finalising the assessment of the assessee is not in accordance with law.

In view of the fact that the CIT(A) has accepted declarations from all the 60 donors of the corpus fund certifying that they have donated towards corpus fund of the assessee-society and the Revenue has not raised any ground of appeal against the admission of these declarations produced by the assessee before the CIT(A), the amount in question has to be held as constituting corpus fund of the assessee-society.

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[2012] 137 ITD 318 (Chennai) Shri Rengalatchumi Education Trust vs. ITO (OSD) Exemptions A.Y. 2004-05 to 2007-08 Dated 25th March, 2011

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Sections 32 and 11 – Assessee entitled to depreciation on capital asset even if cost of acquisition of such asset was earlier allowed as application of income while computing income u/s. 11

Facts:
Assessee trust claimed depreciation while computing its income for the respective assessment years. The Ld. AO held that as the cost of addition to asset was claimed by the assessee as application of income for the respective assessment years, assessee could not further claim depreciation on the very same assets and hence disallowed the claim of depreciation.

Held:
For the purpose of determining the income of trust eligible for exemption u/s. 11, income should be construed strictly in commercial sense (i.e., normal accounting principles), without reference to the heads of income specified in section 14. The income to be considered is the book income and not the total income as defined in section 2(45). The concept of commercial income necessarily envisages deduction of depreciation on the assets of the trust. This position is as confirmed by the CBDT vide its circular No.5-P (LXX-6), dated 19-6-1968. Normal accounting principles clearly provide for deducting depreciation to arrive at income. Income so arrived at (after deducting depreciation) is to be applied for charitable purpose. Capital expense is application of income so determined. Hence, there is no double deduction or double claim of the same amount as application. Thus, depreciation is to be deducted to arrive at income and it is not application of income.

Note:
1. Supreme Court decision in case of Escorts Ltd. vs. Union of India [1993]199 ITR 43 was distinguished
2. Readers may also refer two decisions of Hon’ble Bombay High Court viz.
• DIT (Exemption) vs. Framjee Cawasjee Institute [1993] 109 CTR 463 and
• CIT vs. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110

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Section 246A, Rule 45(2) – Once the appeal filed by the assessee if found to be legally invalid and dismissed as such, the assessee can file another appeal which has to be considered along with condonation application, and if admitted has to be decided on merit.

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Facts:

Aggrieved by the exparte order dated 31-12-2008 passed by the Assessing Officer (AO) u/s 144 of the Act the assessee filed an appeal to CIT(A). The memorandum of appeal was signed by CA, Shri S. U. Radhakrishnani, as authorised representative. Since the assessee neither submitted any valid power of attorney nor was there any explanation as to why the appeal was not signed by the assessee, CIT(A) vide order dated 11-10-2010 dismissed the appeal as invalid. Thereafter, the assessee filed a fresh appeal on 7-3-2011 along with application for condonation of delay. The CIT(A) in his order dated 22-12-2011 held that the appeal filed by the assessee against the assessment order had already been adjudicated by CIT(A) and dismissed. There was no provision for filing of an appeal when the first appeal had been dismissed. The appeal was also filed beyond the time limit. CIT(A) therefore dismissed the appeal in limine. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

Once the appeal was treated as invalid, the same became non-est. The assessee had the right to file another appeal which of course has to be considered as delayed appeal and, in case delay is condoned, the appeal has to be decided on merit. The Tribunal held that the view taken by CIT(A) does not represent the correct view and therefore, has to be rejected. Once the appeal filed by the assessee is found to be legally invalid and dismissed as such, the assessee can file another appeal which has to be considered along with condonation application and, if admitted after due consideration of condonation application, it has to be decided on merit.

The Tribunal restored the matter to CIT(A) for deciding the same afresh after necessary examination in the light of observations made by the Tribunal.

As regards the first appeal which was not signed by the assessee, disposal by CIT(A) was considered as just and fair and the same was upheld.

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Salary income of an expatriate who partly rendered services in India and partly outside India not chargeable to tax in India in respect of proportionate period for which services performed outside India

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New Page 2

13 DCIT v.
Mr. Erick Moroux C/o. Air France and Others

(2008) (TIOL 145 ITAT Del.)

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

A.Y. : 2001-02. Dated : 15-2-2008

Issues :



l
Salary income of an expatriate who partly rendered services in India and
partly outside India would not be chargeable to tax in India in respect of
proportionate period for which services are performed outside India.


l
Contribution towards social securities and other funds in terms of labour law
regulations in France represents diversion of salary at source and is not
taxable in India.


 


Facts :

The assessee, an employee of Air France, was posted in India
since August 2000. For the year under reference, he was R but NOR. In terms of
his employment agreement, apart from rendering services in India, the assessee
was also required to supervise operations in France as well as in South Asia.
The employment agreement itself contemplated that about 20% of the time of the
assessee would be for operations outside India.

 

For the year under reference, the assessee was outside India
for a period of 19 days. The assessee claimed that the salary attributable to
the period for which he rendered services outside India was not taxable in
India.

The Department rejected the claim primarily on the ground
that the assessee provided no evidence of the service that he rendered while
being outside India. The Department also relied on the Explanation to S.
9(1)(ii) inserted with effect from A.Y. 2000-01 to contend that the salary for
period outside India was salary for leave/rest period and hence taxable in terms
of amended S. 9(1)(ii).

The second controversy was about deduction/exclusion in
respect of contributions made towards various schemes in France. The assessee
had made mandatory contributions towards various social security schemes for
health insurance, for retirement scheme, for pension scheme, insurance coverage
for long illness and for widowhood, etc. in France. These amounts were claimed
to be non-chargeable on the ground that the same represented diversion of income
at source.

The Department rejected the contention by holding that the
payments were in the nature of application akin to the payment of provident fund
or some such investment schemes applicable in India.

Held :



l
The ITAT accepted the assessee’s contention that salary attributable to
service outside India was not taxable in India. The ITAT relied on Special
Bench decision in the case Air France viz. J. Calle and Others, (ITA
5921 to 5929/Del). In the view of ITAT, the fact that the employment contract
mandated the assessee to oversee operations outside India coupled with the
assessee’s actual presence outside India did amply support the claim of the
assessee.


 


The Tribunal also held that the amended explanation to S.
9(1)(ii) was not applicable, as the period of absence from India was neither
rest period, nor leave period.

 

The ITAT relied on earlier decision of the Mumbai Tribunal in
the case of Gallotti Raoul v. ACIT, (1997) (61 ITD 453) to hold that
since there was no discretion available to the assessee with regard to statutory
deduction, such contribution was a diversion of income by overriding title and
cannot be brought to tax.

 

The Tribunal noted the following observations from the
decision of Galloti Raoul (supra) and concurred with them.

“The concept of such compulsory contribution to social
security is not prevalent in India. Unlike the schemes in India which are saving
schemes, the scheme of social security is not a saving scheme, but a scheme to
protect the French nationals from various calamities. From this point of view,
the amount that was contributed to the social security organisation was a
diversion of income by overriding title at the stage of earning point itself.
The affiliation being compulsory, making the social security organisation an
earning partner alongside of the assessee i.e., assessee earned not only
for himself, but also for the social security organisation. The assessee had no
right over it at all and thereby no domain on it. Hence the social security
charges were to be deducted from the salary income as a prior charge by
overriding title and it would be only the net salary after such deduction that
should be treated as gross salary within the meaning of S. 16.”

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Salary: Benefit or perquisite: A. Ys. 1996-1997 to 2001-02: Assessees directors of company CRS: CRS effected its sale through franchisees which were owned by HUFs of assesses: Assessing Officer treated personal expenses of assessees and their family members paid by company as income of assessee’s by invoking section 2(24)(iv): Addition not proper:

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CIT vs. Srivatsan; 213 Taxman 413 (Mad): 30 Taxman. com 423 (Mad):

The assessees were directors of the company ‘CRS’ which was engaged in the business of retail-selling of silk sarees and other textiles. ‘CRS’ effected its sale through franchisees which were owned by different HUFs of the assessee. Said franchisees were paid commissions for the sale effected by them. The Assessing Officer treated the personal expenses of the assessees and their family members (Franchisee commission paid to different HUF) paid by the company as the income of the Directors, by invoking the provisions of section 2(24)(iv). The Tribunal held that the personal expenses met out of the company’s money could not be treated as income in the hands of the assessees u/s. 2(24)(iv) as the money had not been paid directly to them, but to the franchisees, which their HUF owned.

In appeal, the Revenue contended that when the factum of each of the Directors, having received benefit towards the personal expenses, was not disputed, it was irrelevant and immaterial whether such expenses were directly paid by the company or through franchisees. The Madras High Court upheld the decision of the Tribunal and held as under:

 “i) The Tribunal has taken note of the following aspects and has given the specific findings:-

a) CRS paid franchise commission to various firms owned by HUF of Directors.

b) This has been done on the basis of agreement entered into which were in force.

c) The payment by CRS on the basis of franchise agreement to various persons cannot be treated as payment to Directors who have substantial interest in the company and section 2(24)(iv) cannot be invoked.

ii) The findings rendered by the Tribunal do not warrant any interference, as it is supported by factual matrix and legal reasoning.”

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(2013) 88 DTR 288 (Ahd) Harshadbhai Dahyalal Vaidhya (HUF) vs. ITO A.Y.: 2005-06 Dated: 26.04.2013

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Section 56(2)(v) – Gift received from relative of karta is not taxable in the hands of HUF.

Facts:
The assessee in the capacity of HUF received a gift of Rs. 7 lakh from a person who was uncle of the karta of the HUF. The Assessing Officer brought said amount to tax under head ‘income from other sources’ by invoking provisions of section 56(2)(v). The objection of the Assessing Officer was that as per the Explanation to section 56(2)(v) the definition of relative does not include relationship vis-a-vis HUF, therefore the amount received from the donor by the HUF does not fall within the relationships as prescribed in the said Explanation.

Held:
For the year under consideration, i.e. asst. yr. 2005- 06, the definition of “relative” was in respect of the relationship by an individual donee with close relatives as defined therein. However, it is very pertinent to note that the operative section i.e., s. 56(2)(v) was in respect of (i) individual and (ii) HUF. Meaning thereby the legislature had clear intention to include both the categories i.e., individual as well as HUF within its scope as well as within its operation. Thus, the section is applicable in respect of money exceeding Rs. 25,000 received without consideration either by an “individual” or by an “HUF”. The proviso annexed to s/s. (v) states that the charging clause shall not apply to any sum of money received from any relative. Meaning thereby the proviso is applicable to both of them i.e. “individual” as well as “HUF”. The donor relative can be either relative of “individual” or “HUF”, as the case may be. In other words, if an amount exceeding Rs. 25,000 is received as a gift either by “individual” or by “HUF”, then such an amount is chargeable to income under the head “Income from other sources” but an exception is provided in the first proviso that the said clause of charging the amount to tax should not apply to an amount received from any relative. Thus, the proviso prescribes that the charging of the gifted amount shall not apply to any sum of money received as a gift from a “relative” either by an “individual” or by “HUF”. Naturally, the proviso to cl. (v) of section 56(2) is not restricted to an “individual” but it governs an “individual” as well as an “HUF”. The position is absolutely clear that even in case of HUF if a sum of money is received from any relative and that relative is as defined in Explanation, then also it falls within the exception as prescribed in this section.

Therefore, since the assessee-HUF has undisputedly received a gift of Rs. 7 lakh from a relative who is an uncle of the Karta of this HUF, i.e., as per Explanation, sub-cl. (iv) “brother or sister of either of the parents of the individual”, and thus falls within the category of the “relative” prescribed in the Act, therefore, not chargeable to tax in the hands of the assessee.

Editor’s Note: The section amended by Finance Act 2012 w.e.f. 01-10-2009, defining the term relative in respect of an HUF. Therefore the decision may not apply from 01-10-2009

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Notification No. 15/2012 [F.No. 149/21/2010- S.O. (TPL)]/S.O. 694 (E), dated March 30, 2012 — Income-tax (fourth amendment) Rules, 2012 — Amendment in the New Appendix I.

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Depreciation on windmills installed after March 31, 2012 shall be restricted to 15%.

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Exports — Taxability of profits u/s.28 — Deduction under Chapter VIA — DEPB is ‘cash assistance’ receivable by a person against exports and fall under clause (iiib) of section 28 and is chargeable to tax even before it is transferred by the assessee (in the year of entitlement) and profit on transfer of DEPB fall under clause (iiid) of section 28 and were chargeable to tax in the year of transfer — If the assessee having export turnover of more than Rs.10 crore does not satisfy the two conditio<

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[Topman Exports v. CIT, (2012) 342 ITR 49 (SC)]

During the previous year relevant to the A.Y. 2002- 03, the assessee, a manufacturer and exporter of fabrics and garments, sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to it on export of its productions. The assessee filed a return for the A.Y. 2002-03 claiming a deduction of Rs.83,69,303 u/s.80HHC of the Act. The Assessing Officer held that if the profit on transfer of the export incentive was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction u/s.80HHC of the Act as has been held by this Court in IPCA Laboratory Ltd. v. Deputy CIT, (2004) 266 ITR 521 (SC). Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and contended that the profits on the transfer of DEPB and DFRC were not the sale Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings proceeds of the DEPB and the DFRC amounting to Rs.2,06,84,841 and Rs.1,65,616, respectively, but the difference between the sale value and face value of the DEPB and the DFRC amounting to Rs.14,35,097 and Rs.19,902, respectively, and if these figures of profits on transfer of the DEPB and the DFRC are taken, the income of the assessee would be positive and the assessee would be entitled to the deduction u/s.80HHC of the Act. The Commissioner of Income-tax (Appeals) rejected this contention of the assessee and held that the assessee had received an amount of Rs.2,06,84,841 on sale of the DEPB and an amount of Rs.1,65,612 on sale of the DFRC and the costs of acquisition of the DEPB and the DFRC are to be taken as nil and hence the entire sale proceeds of the DEPB and the DFRC realised by the assessee are to be treated as profits on transfer of the DEPB and the DFRC for working out the deduction u/s.80HHC of the Act and directed the Assessing Officer to work out of the deduction u/s.80HHC of the Act accordingly.

Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). A Special Bench of the Tribunal heard the appeal and held that there was a direct relation between the entitlement under the DEPB Scheme and the customs duty component in the cost of imports used in the manufacture of the export products. The Tribunal further held that the DEPB accrues to the exporter soon after export is made and application is filed for the DEPB and the DEPB is a ‘cash assistance’ receivable by the assessee and is covered under clause (iiib) of section 28 of the Act, whereas profit on the transfer of the DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of section 28 of the Act. The Tribunal compared the language of section 28(iiib) of the Act in which the expression ‘cash assistance’ is used, with the language of section 28(iiia), (iiid) and (iiie) of the Act in which the expression ‘profit’ is used and held that the words ‘profit on transfer’ in section 28(iiid) and (iiie) of the Act would not represent the entire sale value of the DEPB but the sale value of the DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the Assessing Officer and the Commissioner of Incometax (Appeals) and directed the Assessing Officer to compute the deduction u/s.80HHC of the Act accordingly.

Against the judgment and order of the Tribunal, the Commissioner of Income-tax, Mumbai, filed appeal u/s.260A of he Act before the High Court and by the impugned order the High Court disposed of the appeal in terms of the judgment delivered in CIT v. Kalpataru Colours and Chemicals, [ITA(L) 2887 of 2009] (328 ITR 451). In Commissioner of Income-tax v. Kalpataru Colours and Chemicals (supra), the High Court formulated the following two substantial questions of law (page 454 of 328 ITR):

“(a) Whether the Tribunal is justified in holding that the entire amount received on the sale of the Duty Entitlement Pass Book does not represents profits chargeable u/s.28(iiid) of the Income-tax Act, 1961, and that the face value of the Duty Entitlement Pass Book shall be deducted from the sale proceeds?

(b) Whether the Tribunal is justified in holding that the face value of the Duty Entitlement Pass Book is chargeable to tax u/s.28(iiib) at the time of accrual of income, i.e., when the application for Duty Entitlement Pass Book is filed with the competent authority pursuant to the exports made and that the profits on the sale of the Duty Entitlement Pass Book representing the excess of the sale proceeds over the face value is liable to be considered u/s.28(iiid) at the time of sale?”

In its judgment, on the first question of law formulated under (a), the High Court held that the Tribunal was not justified in holding that the entire amount received on the sale of the DEPB does not represent profits chargeable u/s.28(iiid) of the Act and in holding that the face value of the DEPB shall be deducted from the sale proceeds of the DEPB. On the second question of law formulated under (b), the High Court in its judgment did not agree with the Tribunal that the face value of the DEPB is chargeable to tax as income of the assessee u/s.28(iiib) of the Act and instead held that the entirety of sale consideration for transfer of the DEPB would fall within the purview of section 28(iiid) of the Act.

Against the judgment and order of the High Court the assessee appealed before the Supreme Court under Article 136 of the Constitution. The Supreme Court on a reading of the Hand Book on the DEPB and the Export and Import Policy of the Government of India, 1997-2002, observed that it was clear that the objective of the DEPB Scheme was to neutralise the incidence of customs duty on the import content of the export productions. Hence, it had direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralisation of the cost of customs duty under the DEPB Scheme, however, was by granting a duty credit against the export product and this credit could be utilised for paying customs duty on any item which is freely importable. DEPB was issued against the exports to the exporter and was transferable by the exporter.

It was clear from reading of the provisions of section 28 that under clause (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India is by itself income chargeable to income-tax under the head ‘Profits and gains of business or profession’. DEPB was a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it was receivable once exports were made and an application was made by the exporter for the DEPB. The Supreme Court therefore, held that the DEPB was ‘cash assistance’ receivable by a person against exports under the scheme of the Government of India and fell under clause (iiib) of section 28 and was chargeable to Income-tax under the head ‘Profits and gains of business or profession’ even before it was transferred by the assessee.

Under clause (iiid) of section 28, any profit on transfer of the DEPB is chargeable to Income-tax under the head ‘Profits and gains of business or profession’ as an item separate from cash assistance under clause (iiib). The Supreme Court held that the word ‘profit’ meant the gross proceeds of a business transaction less the costs of the transaction.

It was further held that ‘Profits’ therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB had a direct nexus with the cost of imports for manufacturing an export product, any amount realised by the assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of the DEPB.

The Supreme Court therefore held that while the face value of the DEPB would fall under clause (iiib) of section 28 of the Act, the difference between the sale value and the face value of the DEPB would fall under clause (iiid) of section 28 of the Act and the High Court was not right in taking the view in the impugned judgment that the entire sale proceeds of the DEPB realised on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB.

(i)    The Supreme Court further held that: (i) cost of acquiring the DEPB was not nil, because the person acquired it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports had a cost element in it. Accordingly, when the DEPB is sold by a person, his profit on transfer of the DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB.

(ii)    The DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilised by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, the DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB.

(iii)    If in the same previous year the DEPB accrues to a person and he also earns profit on transfer of the DEPB, the DEPB will be business profits under clause (iiib) and the difference between the sale value and the DEPB (face value) would be the profits on the transfer of the DEPB under clause (iiid) for the same assessment year. Where, however, the DEPB accrues to a person in one previous year and the transfer of the DEPB takes place in a subsequent previous year, then the DEPB will be chargeable as income of the person for the first assessment year chargeable under clause (iiib) of section 28 and the difference between the DEPB credit and the sale value of the DEPB credit would be income in his hands for the subsequent assessment year chargeable under clause (iiid) of section 28.

The Supreme Court then held that s.s (1) of section 80HHC, makes it clear that an assessee engaged in the business of export out of India of any goods or merchandise to which this section applies shall be allowed, in computing his total income, a deduction to the extent of profits referred to in s.s (IB), derived by him from the export of such goods or merchandise. S.s (IB) of section 80HHC gives the percentages of deduction of the profits allowable for the different assessment years from the A.Ys. 2001-02 to 2004-05. S.s (3)(a) of section 80HHC provides that where the exports out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee.

Explanation (baa) u/s.80HHC states that ‘profits of the business’ in the aforesaid formula means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature including any such receipts and (2) the profits of any branch office, warehouse or any other establishment of the assessee situated outside India. Thus, ninety per cent, of the DEPB which is ‘cash assistance’ against exports and is covered under clause (iiib) of section 28 will get excluded from the ‘profits of the business’ of the assessee if such DEPB has accrued to the assessee during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value of the DEPB, the difference between the sale value of the DEPB and the face value of the DEPB will represent the profit on transfer of DEPB covered under clause (iiid) of section 28 and ninety per cent of such profit on transfer of DEPB certificate will get excluded from ‘profits of the business’. But, where the DEPB accrues to the assessee in the first previous year and the assessee transfers the DEPB certificate in the second previous year, only ninety per cent of the profits on transfer of DEPB covered under clause (iiid) and not ninety per cent of the entire sale value including the face value of the DEPB will get excluded from the ‘profits of the business’.

To the figure of profits derived from exports worked out as per the aforesaid formula u/ss. (3) (a) of section 80HHC, the additions as mentioned in first, second, third and fourth proviso u/s.(3) are made to profits derived from exports. Under the first proviso, ninety per cent of the sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 are added in the same proportion as export turnover bears to the total turnover the business carried on by the assessee. In this first proviso, there is no addition of any sum referred to in clause (iiid) or clause (iiie). Hence, profit on transfer of the DEPB or the DFRC are not be added under the first proviso.

The second proviso to s.s (3) of section 80HHC states that in case of an assessee having export turnover not exceeding Rs.10 crore during the previous year, after giving effect to the first proviso, the export profits are to be increased further by the amount which bears to ninety per cent of any sum referred to in clauses (iiid) and (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assesses. The third proviso to s.s (3) states that in case of an assessee having export turnover exceeding Rs.10 crore, similar addition of ninety per cent of the sums referred to in clause (iiid) of section 28 only if the asses-see has the necessary and sufficient evidence to prove that (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate or credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs.10 crore does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to s.s (3) of the section 80HHC.

Capital gain: Exemption u/s.10(38): A. Y. 2006-07: Assessee company and other group companies held 98.73% shares in BFSL which owned a land: They sold those shares to DLFCDL for a consideration of Rs. 89,28,36,500/- and claimed exemption u/s. 10(38): AO denied exemption holding that it is a sale of land: Denial of exemption not proper:

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Bhoruka Engineering Industries Ltd. vs. Dy. CIT; 261 CTR 287 (Karn):

The assessee company and other group companies were holding 98.73% of the shares in BSFL which owned a land. They sold those shares to DLFCDL for a consideration of Rs. 89,28,36,500/- and claimed exemption u/s10(38) of the Income-tax Act, 1961. The Assessing Officer held that land was transferred to DLFCDL by way of said circuitous transaction, and the shareholders being owners of the land to the extent of their shareholdings in the company, the gains arising to the assessee are chargeable to tax as short term capital gain on sale of land. Accordingly, he disallowed the claim for exemption u/s. 10(38) of the Act. The Tribunal allowed the assessee’s claim for exemption.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under: “
i) The assessee and other group concerns holding 98.3% shares of BSFL having sold their entire shareholding in that company to another company for valuable consideration after complying with the legal requirements, the transaction cannot be said to be a colorable device to avoid payment of tax on the basis that the effect of the transfer of shares is transfer of immovable property belonging to BFSL in favour of the purchaser of the share.

ii) The assessee having fulfilled all the conditions stipulated u/s. 10(38), the benefit of tax exemption cannot be denied merely because in case a registered sale deed had been executed by BFSL selling the land in favour of the purchaser, tax would have been paid on the capital gain.”

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Subscription fees for database access which contains repository of information otherwise available in public domain is not royalty within the means of S. 9(1)(vi) or Article 12 of India-USA DTAA.

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Part C — Tribunal & International Tax Decisions




  1. FactSet Research System Inc

Authority for Advance Ruling

Before Justice P. V. Reddi (Chairman),

Mr. A. Sinha (Member) and

Mr. Rao Ranvijay Singh (Member)

A.A.R. No. 787 of 2008, Dated : 30-6-2009

S. 9(1)(vi) of the Income-tax Act and Article 12 of
India-USA DTAA

Counsel for assessee/revenue : A. V. Sonde/

Sanjeev Sharma

Facts of the case :


  • FactSet
    Research System Inc, (herein applicant) is a company incorporated in the
    USA. It maintains databases outside India, which contains the financial and
    economic information (like shareholding by global holders of global
    equities, takeover defence strategies adopted by various US public
    companies, etc.) of a large number of companies worldwide.



  • The
    information contained in the database is available in the public domain.
    However, the applicant collates, stores and displays this information in an
    organised manner which enables the customers to retrieve the required
    information within a short span of time in a focussed manner. The customers
    are required to download client interface software (similar to an internet
    browser) to access and view the database. The customers of the applicant are
    mostly financial intermediaries and investment banks. The databases,
    software and tools are hosted on the applicant’s main frames/data libraries
    maintained at its data centres in the US.



  • The
    applicant enters into a Master Client Licence Agreement (MCLA), with its
    customers, which inter alia provides that :




  • The
    applicant grants limited, non-exclusive, non-transferable rights to use
    its database, software tools, etc. and receive subscription fees from its
    customers.



  • All
    proprietary rights including intellectual property rights in the software,
    databases and related documentations remain the property of the applicant.



  • The
    customer agrees that it will not copy, transfer, distribute, reproduce,
    etc. any works from or make any part of the data available to others.



  • The
    customer will cease to use all licensed material and software and destroy
    all documentation except such copies as are required to be maintained by
    law.





  • The
    applicant does not carry out any business operations in India and there is
    no agent in India acting on behalf of the applicant with the authority to
    conclude contracts.



  • In the
    above background, the applicant raised following issues before AAR :



    •

  • Whether
    the subscription fees received from customers in India shall be taxable in
    India under the domestic law and under the treaty ?



  • If the
    applicant is not liable to be taxed in India, whether its subscribers will
    be required to withhold taxes u/s.195 of the Act ?



  • Assuming the applicant has no other taxable income in India, whether the
    applicant will be absolved from filing a tax return in India u/s.139 ?





Ruling of AAR :


  • Based on
    features of the Licence Agreement noted by AAR, it was held that the
    subscription fess received by the applicant do not amount to ‘royalty’ in
    terms of S. 9(1)(vi) of the Act and Article 12 of the treaty. AAR held :



    •

  • The
    subscription fees are paid by customers for facilitating the customer’s
    access to the database and not for any rights in the copyright of the
    database. No proprietary right or exclusive rights possessed by the
    applicant in the database are transferred to the customers. The customers
    merely get a right to view and use the data for internal business purpose.



  • The
    subscription fee is not fees for use of “information concerning
    industrial, commercial or scientific knowledge, experience or skill” as
    the information which the subscriber gets through the database is already
    available in public domain and it does not relate to the underlying
    experience or skills. The applicant does not share its experiences,
    techniques or methodology employed in evolving the database with the
    subscribers. The OECD Commentary and Commentary by Prof. Klaus Vogel was referred to conclude that royalty taxation covers transfer of know-how which may cover unprotected, non-secret knowledge derived from experience.

    The subscription fee cannot be considered as payment towards the use of ‘scientific equipment’ as the fees paid are for availing of the facility of accessing the data/information collected and collated by the applicant in the database.

    There is no use of or right to use any copy-right of a literary or scientific work involved in the event of subscriber getting access to the database for his own internal purpose. It is like offering a facility of viewing and taking copies of books for its own use without conferring any other rights available to a copyright holder.

Waiver of interest : S. 234A, S. 234B and S. 234C of Income-tax Act, 1961 and CBDT Circular No. 400/234/95-IT(B), dated 23-5-1996 : A.Ys. 1991-92 and 1992-93 : Death of father who was looking after business : Entire tax paid voluntarily and extra amount a

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Reported :


  1. Waiver of interest : S. 234A, S. 234B and S. 234C of
    Income-tax Act, 1961 and CBDT Circular No. 400/234/95-IT(B), dated 23-5-1996 :
    A.Ys. 1991-92 and 1992-93 : Death of father who was looking after business :
    Entire tax paid voluntarily and extra amount also paid : Sufficient reason for
    non-payment of advance tax on time : Levy of interest set aside.

[V. Akilandeswari v. CCIT, 318 ITR 1 (Mad.)]

The petitioner was a minor during the A.Ys. 1991-92 and
1992-93. For these two years the returns were filed voluntarily and taxes were
paid. Assessment was completed and interest was levied u/s.234A, u/s.234B and
u/s.234C of the Income-tax Act, 1961. The petitioner’s application for waiver
of interest was rejected by the Chief Commissioner.

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

“(i) The fact of the death of the petitioner’s father who
was looking after the business and as well as that the petitioner’s mother
and guardian was a housewife unfamiliar with such transactions was not
denied by the Chief Commissioner. The petitioner had paid the entire tax
voluntarily and had also paid some extra amount. The claim made by the
petitioner was bona fide and genuine and the Chief Commissioner had
not exercised his discretion in terms of law.

(ii) Thus the levy if interest u/s.234A, u/s.234B and u/s.234C was set
aside and the petitioner did not need to pay any interest for the two
assessment years. The petitioner was not entitled to seek refund of the excess
amount if any paid.”

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TDS : S. 194A and S. 201 of Income-tax Act, 1961 : A.Y. 2003-04 : Discount allotted to subscribers of chit : Discount is not interest : No liability to deduct tax u/s.194A : Order u/s.201 not valid.

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Reported :


  1. TDS : S. 194A and S. 201 of Income-tax Act, 1961 : A.Y.
    2003-04 : Discount allotted to subscribers of chit : Discount is not
    interest : No liability to deduct tax u/s.194A : Order u/s.201 not valid.

[CIT v. Sahib Chits (Delhi) (P) Ltd., 226 CTR 119
(Del.)]

The assessee is a chit fund company. The assessee had not
deducted tax at source on the amounts paid to its members on the chits
contributed by them. The AO held that there was default on the part of the
assessee company for not deducting tax u/s.194A of the Income-tax Act, 1961.
Therefore, the AO passed order u/s.201 and quantified the default amount at
Rs.8,17,683. CIT(A) and the Tribunal quashed the order.

On appeal by the Revenue, the following two questions were
raised :

“(a) Whether the Tribunal was correct in law in holding
that the assessee had not paid any interest to the subscribers of the chit
and such payment does not fall within the meaning of interest as defined
u/s.2(28A) of the Act ?

(b) Whether the Tribunal was correct in law in holding
that the assessee was not required to deduct the tax at source within the
meaning of S. 194A of the Act and as such the assessee was not in default
u/s.201 of the Act ?”

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

“Distribution of bid amount or discount allotted to the
subscriber of the chit is not interest as there is no money borrowed or debt
incurred and therefore there is no question of deducting tax at source
u/s.194A.”

 

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TDS : S. 194I of Income-tax Act, 1961 : A.Ys. 2001-02 and 2002-03 : Premises owned by co-owners : Limit of Rs.1,20,000 is applicable to each co-owner.

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Reported :


  1. TDS : S. 194I of Income-tax Act, 1961 : A.Ys. 2001-02 and
    2002-03 : Premises owned by co-owners : Limit of Rs.1,20,000 is applicable to
    each co-owner.

[CIT v. Manager, SBI; 226 CTR 310 (Raj.)]

In an appeal filed by the Revenue u/s.260A of the
Income-tax Act, 1961 the following question was raised :

“Whether on the facts and in the circumstances of the
case, the learned Tribunal was legally justified in holding with regard to
TDS u/s.194-I of the Income-tax Act, 1961 that when there are a number of
owners of a property, the limit or ceiling will apply to each and every
owner separately, notwithstanding the fact that the amount has been paid by
crediting the aggregate sum in the joint account of the owners ?”

The Rajasthan High Court held as under :

“(i) The property was of late Smt. Tej Roop Kumari, who
created registered trust in her lifetime on 10th October 1990, according to
which, her three sons and one grandson became absolute owners of the
property in definite shares.

(ii) Learned counsel for the appellant has placed
reliance on Smt. Bishaka Sarkar v. UOI; 219 ITR 327 (Cal.), in which
it was held that rent paid to co-owners cannot be split up and co-owners
would come within the expression ‘other cases’, so deduction of tax at the
rate of 20% was justified.

(iii) It appears that the learned Judge of Calcutta High
Court did not take note of law laid down by the Apex Court in CIT v.
Bijoy Kumar Almal; 215 ITR 22 (SC), in which it was held that where
property is owned by two or more persons and their respective shares are
definite and ascertainable, they shall not, in respect of such property, be
assed as an AOP and that the share of each such person in the income from
that property shall be included in his total income, meaning thereby,
liability to deduct on the rental income received by each co-owner was to be
judged.

(iv) Thus, limit of Rs.1,20,000 was applicable to each
co-owner, and thus, no tax was to be deducted at source, and the learned
Tribunal has not committed any error in accepting the appeals of the
assessee.”

 

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Return of income : Doctrine of relation back : S. 140 of Income-tax Act, 1961 : A.Y. 2004-05 : Return signed by company secretary : Defect curable : Subsequent valid return though filed late relates back to original return.

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Reported :


  1. Return of income : Doctrine of relation back : S. 140 of
    Income-tax Act, 1961 : A.Y. 2004-05 : Return signed by company secretary :
    Defect curable : Subsequent valid return though filed late relates back to
    original return.

[CIT v. Haryana Sheet Glass Ltd., 318 ITR 173
(Del.)]

For the A.Y. 2004-05, the assessee-company had filed its
return of income on 1-11-2004 declaring a loss of Rs.10,38,98,405, which was
signed by the company secretary. Thereafter a revised return was filed on
5-10-2005 declaring loss of Rs.7,20,50,041, which was signed by the managing
director. The AO ignored the original return on the ground that the return was
not signed and verified in accordance with the provisions of S. 140 of the
Income-tax Act, 1961. He further found that the revised return was filed
belatedly and therefore he did not take the said return into consideration.
The Tribunal held that signing of the return by the secretary was a curable
irregularity. Therefore, when the managing director signed and filed the
return, it should relate back to the date when the original return was filed
under the signature of the company secretary. Since that original/revised
return was within time, it could have been taken into consideration.

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

“(i) If the irregularity in the original return is
curable, then the doctrine of relation back would apply, but if there is a
fundamental defect in the original return, which cannot be cured, then such
a doctrine cannot be applied.

(ii) It is clear that the secretary has signed the
return, who is otherwise, as per the provisions of the Companies Act,
competent to sign. The provision of S. 140 of the Income-tax Act mandates
that the managing director or some other responsible officers can sign.
Because of this reason, we are of the opinion that in a case like this, the
irregularity was curable and the doctrine of relation back was rightly
applied.”

 

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Return of income : Defective/invalid return : S. 140 of Income-tax Act, 1961 : A.Y. 1994-95 : Return signed by company secretary : Defect curable : Opportunity to rectify defect should be given.

New Page 1

Reported :


  1. Return of income : Defective/invalid return : S. 140 of
    Income-tax Act, 1961 : A.Y. 1994-95 : Return signed by company secretary :
    Defect curable : Opportunity to rectify defect should be given.


[CIT v. Bhiwani Synthetics Ltd., 318 ITR 177 (Del.)]

For the A.Y. 1994-95, the assessee company had filed its
return of income on 30-11-1994 declaring a loss. The return was signed by the
general manager (finance) and the company secretary of the assessee. The
Assessing Officer came to the conclusion that since the return was not signed
by the managing director or a director as provided in S. 140(c) of the
Income-tax Act, 1961, it was non est. The CIT(A) held that the defect
was a curable defect and an opportunity ought to have been given to the
assessee to rectify it. He, accordingly, directed the Assessing Officer to
give such an opportunity to the assessee. 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) We are of the view that on the facts of this case,
since there is nothing on record to suggest that the assessee has disowned
the return that was signed by the general manager (finance) of the assessee
and on the contrary, a power of attorney was given by the assessee to its
general manager (finance) for signing the return, it would have been
appropriate if an opportunity had been granted to the assessee to have the
return signed by the managing director or its director in accordance with
the directions given by the CIT(A).

(ii) There is nothing to suggest that any prejudice will
be caused to the Revenue if this direction is complied with.”


 

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Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Exemption cannot be denied on the ground that it is not a trust: Filing of Form No. 10 : Revised form can be filed before completing assessment.

New Page 1

Reported :


  1. Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 :
    Exemption cannot be denied on the ground that it is not a trust: Filing of
    Form No. 10 : Revised form can be filed before completing assessment.

[CIT v. Simla Chandigarh Diocese Society, 318 ITR 96
(P&H)]

The assessee, a charitable society, claimed exemption
u/s.11 r.w. S. 12(1) of the Income-tax Act, 1961. The Assessing Officer
declined the claim on the ground that the assessee was a society and not a
trust. The Assessing Officer also raised objection that revised Form No. 10
was not furnished with the return. The Tribunal allowed the assessee’s claim.

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

“(i) The assessee could not be denied exemption u/s.11 of
the Act on the ground that it was not a trust but a society.

(ii) The Commissioner (Appeals) had observed that the
assessee modified Form No. 10 in the course of assessment proceedings. The
modified Form No. 10 has been rejected by the Assessing Officer on the
ground that there was no provision in the Act for revising Form No. 10. It
was held that there was no specific bar prohibiting the assessee from
modifying the figure of accumulation. Form No. 10 could be furnished before
the assessing authority completes the concerned assessment.”

 

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Depreciation : S. 32 of Income-tax Act, 1961 : A.Ys. 2000-01 and 2001-02 : User of asset : Asset discarded and written off : Depreciation is allowable on WDV after reducing scrap value of asset discarded and written off.

New Page 1

 Reported :


  1. Depreciation : S. 32 of Income-tax Act, 1961 : A.Ys.
    2000-01 and 2001-02 : User of asset : Asset discarded and written off :
    Depreciation is allowable on WDV after reducing scrap value of asset discarded
    and written off.

[CIT v. Yamaha Motor India (P) Ltd., 226 CTR 304
(Del.)]

In an appeal filed by the Revenue u/s.260A of the
Income-tax Act, 1961, the following two questions were raised before the High
Court :

“(a) Whether the Income-tax Appellate Tribunal
(hereinafter ‘Tribunal’) was correct in law in directing the AO to recompute
the depreciation after reducing scrap value of the assets, which have been
discarded and written off in the books of account for the year under
consideration from the WDV of the block of assets ?

(b) Whether provisions of sub-clause (iii) to S. 32(1)
r/w. S. 43(6)(c)(B) are applicable to the present case when the assessee had
not complied with the primary conditions for eligibility of depreciation ?”

The Delhi High Court held as under :

“(i) The crux of the matter is : what is the meaning to
be ascribed to the expression ‘used for the purposes of the business’ as
found in S. 32 of the Income-tax Act, 1961. The provisions of S. 32 pertain
to depreciation. The contention of the Revenue is that with respect to any
machinery for which depreciation is claimed u/s.32, the same cannot be
allowed unless such machinery is used in the business and since
discarded machinery is not used in the business, therefore, with respect to
the discarded machinery no depreciation can be allowed.

(ii) As long as the machinery is available for use,
though not actually used, it falls within the expression ‘used for the
purposes of the business’ and the assessee can claim the benefit of
depreciation.

(iii) No doubt, the expression used in S. 32 is ‘used for
the purposes of the business’. However, this expression has to be read
harmoniously with the expression ‘discarded’ as found in clause (iii) of
Ss.(1). Obviously, when a thing is discarded it is not used. Thus ‘use’ and
‘discarding’ are not in the same field and cannot stand together. However,
if a harmonious reading of the expressions ‘used for the purposes of the
business’ and ‘discarded’ is adopted, then it would show that ‘used for the
purposes of the business’ only means that the assessee has used the
machinery for the purposes of the business in earlier years. It is not
disputed that in the facts of the present case, the machinery in question
was in fact used in the previous year and depreciation was allowed on the
block of assets in the previous years. Taking therefore a realistic approach
and adopting a harmonious construction, the expression ‘used for the
purposes of the business’ as found in S. 32 when used with respect to
discarded machinery would mean that the user in the business is not in the
relevant financial year/previous year, but in the earlier financial years.
Any other interpretation would lead to an incongruous situation.

(iv) Therefore, the Tribunal was correct in law in
directing the AO to recompute depreciation after reducing the scrap value of
the assets which have been discarded and written off in the books of account
for the year under consideration from the WDV of the block of assets.”

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Educational institution : Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : Society running various educational institutions : Object of society also to serve church and nation : Not a ground for rejection of approval for exemption.

New Page 1

Reported :

  1. Educational institution : Exemption u/s. 10(23C)(vi) of
    Income-tax Act, 1961 : Society running various educational institutions :
    Object of society also to serve church and nation : Not a ground for rejection
    of approval for exemption.

[Ewing Christian College Society v. CCIT, 318 ITR
160 (All.)]

The petitioner-society ran various educational institutions
in the State of UP and it was not for the purpose of making profit. Its
application for approval for exemption was rejected by the Chief Commissioner
on the ground that the purposes for which the society has been established
were religious in nature and consequently the society could not be said to
exist solely for the purpose of education.

On a writ petition filed by the petitioner, the Allahabad
High Court held as under :

“(i) Merely because the object of the petitioner-society
was also to serve the church and the nation, that would not mean that the
educational institution was not existing solely for educational purposes.

(ii) Thus the order passed by the Chief Commissioner
could not be sustained and was set aside. The Chief Commissioner was
directed to pass a fresh order.”

 

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Charitable purpose : Exemption u/s. 10(23C)(iv) of Income-tax Act, 1961 : Petitioner-foundation created for imparting, spreading and promoting knowledge, learning, education, etc. in fields related to profession of accountancy : Clearly falls in category

New Page 1

Reported :

 

  1. Charitable purpose : Exemption u/s. 10(23C)(iv) of
    Income-tax Act, 1961 : Petitioner-foundation created for imparting, spreading
    and promoting knowledge, learning, education, etc. in fields related to
    profession of accountancy : Clearly falls in category of institutions which
    are devoted to research and are of charitable nature : Petitioner entitled to
    exemption u/s.10(23C)(iv).

[ICAI Accounting Research Foundation v. DGIT
(Exemption), 226 CTR 27 (Del.)]

The petitioner-foundation was set up by the Institute of
Chartered Accountants of India (ICAI), the main object of the petitioner being
to make it an academy for imparting, spreading and promoting knowledge,
learning, education and understanding in the various fields relating to
profession of accountancy, like accounting, auditing, fiscal laws and policy,
corporate and economic laws and policies, economics, financial management,
financial services, capital and money markets, management information and
capital systems, management consultancy services and allied disciplines. The
petitioner’s application for exemption u/s.10(23C)(iv) of the Income-tax Act,
1961 was rejected stating that the petitioner-foundation did not qualify for
exemption.

On a writ petition filed by the foundation the Delhi High
Court directed the Director General of I.T. (Exemption) to grant exemption to
the petitioner-foundation and held as under :

“(i) The objective of the petitioner-foundation would
fall within the expression ‘education’, as appearing in the definition
u/s.2(15).

(ii) On the basis of the activities of the foundation,
there is not even an iota of doubt that the petitioner-foundation is
involved in education and, thus, meets the description of ‘charitable
institution’.

(iii) Services provided to various Government bodies were
the research projects which were given to the petitioner-foundation having
regard to its expertise in this field. Therefore, these activities per se
would not bring out the petitioner-foundation out of the ambit of S. 2(15).
It can be said that the activities amounted to ‘advancement of an object of
general public utility’, which also appears in the definition of charitable
purpose in S. 2(15).

(iv) The only aspect, in this backdrop, which needs to be
considered is as to whether charging of amount from the MCD, KMC, etc. for
undertaking these research projects would make the activity commercial.
Merely because some remuneration was taken by the petitioner-foundation for
undertaking these projects would not alter the character of these objects,
which remained research and consultancy work. The important test is the
application of the amount received from those projects. It is nowhere
disputed that the receipts are utilised by the petitioner-foundation for the
advancement of its objectives. It is clear that most of the amount received
qua these projects was spent on the project and surplus, if any, is used for
advancement of the objectives for which the petitioner-foundation is
established.

(v) The amended definition of ’charitable purpose’ would
not alter this position. No doubt, proviso to this definition clarifies that
advancement of any other object of general public utility will not be
treated as charitable purpose if it involves the carrying on of any activity
in the nature of trade, commerce or business. However, what is not
appreciated by the respondent No. 1 is that merely on undertaking those
research projects at the instance of the Government/local bodies, the
essential character of the petitioner-foundation cannot be converted into
the one which carries on trade, commerce or business or activity of
rendering any service in relation to trade, commerce or business.

(vi) The impugned order of the respondent No. 1 is,
accordingly, set aside. Direction/mandamus is given to the respondent No. 1
to accord requisite exemption to the petitioner-foundation u/s.10(23C)(iv).”

 

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Bad debts : Deduction u/s.36(1)(vii) of Income-tax Act, 1961 : A.Y. 2005-06 : Disallowance u/s.14A : Exemption u/s.80HHC allowed : Deduction of bad debts cannot be disallowed u/s.14A.

New Page 1





Reported :

  1. Bad debts : Deduction u/s.36(1)(vii) of Income-tax Act,
    1961 : A.Y. 2005-06 : Disallowance u/s.14A : Exemption u/s.80HHC allowed :
    Deduction of bad debts cannot be disallowed u/s.14A.

[CIT v. Kings Exports, 318 ITR 100 (P&H)]

The assesse was engaged in manufacture and export of
engineering goods. The assessee’s claim for deduction of bad debts
u/s.36(1)(vii) of the Income-tax Act, 1961 was disallowed by the AO on the
ground that the assessee had claimed deduction u/s.80HHC and the claim for bad
debts would be hit by S. 14A of the Act. The Tribunal allowed the assessee’s
claim.

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

“U/s.80HHC and u/s.14A, the expenditure incurred from
export income could not be held to be for earning income which did not form
part of total income, which concept was dealt with u/s.10 of the Act. S.
80HHC deals with deduction of the element of profit from export from taxable
income. Therefore, the claim of bad debt could not be disallowed.”

 

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Business expenditure : Disallowance u/s. 14A of Income-tax Act, 1961 : In the absence of nexus between exempt income and expenditure in question established by Revenue, the provisions of S. 14A cannot be applied.

New Page 1

 

Unreported :

  1. Business expenditure : Disallowance u/s. 14A of Income-tax
    Act, 1961 : In the absence of nexus between exempt income and expenditure in
    question established by Revenue, the provisions of S. 14A cannot be applied.


[CIT v. M/s. Hero Cycles Ltd. (P&H), ITA No. 331 of
2009 dated 4-11-2009]

The assesse is engaged in manufacturing of cycles and parts
of two-wheelers in multiple units. It earned dividend income, which is
exempted u/s. 10(34) and u/s.(35) of the Income-tax Act, 1961. The AO made an
inquiry whether any expenditure was incurred for earning this income and as a
result of the said inquiry, addition of Rs.3,48,04,375 was made by way of
disallowance u/s.14A(3) of the Act. The Tribunal deleted the addition and
observed as under :

“(i) We find that the plea of the assessee that the
entire investments have been made out of the dividend proceeds, sale
proceeds, debenture redemption, etc., is borne out of record. One aspect
which is evident is that the interest income earned by the main unit exceeds
the expenditure by way of interest incurred by it, thus obviating the
application of S. 14A of the Act. Even with regard to the funds of the main
unit, the fund flow position explained shows that only the non-interest
bearing funds have been utilised for making the investment.

(ii) Thus, on facts we do not find any evidence to show
that the assessee has incurred interest expenditure in relation to earning
the tax exempt income in question. Therefore, merely because the assessee
has incurred interest expenditure on funds borrowed in the main unit, it
would not ipso-facto invite the disallowance u/s.14A, unless there is
evidence to show that such interest-bearing funds have been invested in the
investments which have generated the ‘tax exempt dividend income’.

(iii) As noted earlier, there is no nexus established by
the Revenue in this regard and therefore, on a mere presumption, the
provisions of S. 14A cannot be applied. In fact, in the absence of such
nexus, the entire addition made is required to be deleted. We accordingly
hold so.”

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

“(i) Learned counsel for the appellant relies upon S.
14A(2) and Rule 8D(1)(b) to submit that even where the assessee claimed that
no expenditure had been incurred, the correctness of such claim could be
gone into by the AO and in the present case, the claim of the assessee that
no expenditure was incurred was found to be not acceptable by the AO and
thus disallowance was justified. We are unable to accept the submission.

(ii) In view of the finding reproduced above, it is clear
that the expenditure on interest was set off against the income from
interest and the investment in shares and funds were out of the dividend
proceeds. In view of this finding of fact, disallowance u/s.14A was not
sustainable.

(iii) Whether, in a given situation, any expenditure was
incurred which was to be disallowed, is a question of fact. The contention
of the Revenue that directly or indirectly some expenditure is always
incurred which must be disallowed u/s.14A and the impact of expenditure so
incurred cannot be allowed to be set off against the business income which
may nullify the mandate of S. 14A, cannot be accepted.

(iv) Disallowance u/s.14A requires finding of incurring
of expenditure. Where it is found that for earning exempt income, no
expenditure has been incurred, disallowance u/s.14A cannot stand. In the
present case finding on this aspect, against the Revenue, is not shown to be
perverse. Consequently, disallowance is not permissible.”

 

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Income : Excess cash received at cash counters of bank : Liable to be repaid to the real owner : Not income of assessee.

New Page 2

6 Income : Excess cash
received at cash counters of bank : Liable to be repaid to the real owner : Not
income of assessee.


[CIT v. Bank of Rajasthan
Ltd., 326 ITR 526 (Bom.)]

The assessee-bank claimed
that the excess cash received at the cash counter is liable to be repaid to the
real owner and therefore it cannot be treated as income of the assessee. The
Assessing Officer did not accept this contention and treated the excess cash as
income of the assessee. The Tribunal allowed the assessee’s claim. The Tribunal
held that the liability on account of excess cash received at the cash counters
of the bank represents the liability to pay the customers as and when they may
demand payment. The Tribunal, therefore held that it can not be considered as
income of the assessee.

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

“(i) Before the Tribunal
reliance was placed on the cash manual of the assessee which provides that the
bank has to make a record of the excess cash, this has to be considered as
liability of the bank and the collection is required to be handed back to the
real owner in accordance with the prescribed procedure.

(ii) The reasoning of the
Tribunal has not been demonstrated to suffer from any perversity.

(iii) The question raised
does not give rise to any substantial question of law.”

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Income : Accrual of : Amount due to assessee in terms of royalty agreement : Dispute between parties and arbitration proceedings pending : No accrual of income : Assessment only on completion of arbitration proceedings.

New Page 2

5 Income : Accrual of :
Amount due to assessee in terms of royalty agreement : Dispute between parties
and arbitration proceedings pending : No accrual of income : Assessment only on
completion of arbitration proceedings.


[FGP Ltd. v. CIT, 326
ITR 444 (Bom.)]

The assessee had a royalty
agreement with one M/s. UPT, under which certain amounts were payable to the
assessee. The assessee company had not received any amount as UPT had denied
that any amount was due and payable by it to the assessee-company and
arbitration proceedings were pending. The Assessing Officer added the amount to
the total income of the assessee holding that the income has accrued. The
Tribunal upheld the addition.

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

“(i) The real income of
the assessee can be assessed and the test before the income can be taxed is
whether there is real accrual of income.

(ii) There was no real
accrual of income. There was dispute between the parties which was pending in
arbitration during the assessment year. The income received by the assessee
would be liable to be assessed only after passing of an award.”

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Charitable purpose : Registration u/s.12A of Income-tax Act, 1961 : Rejection on the ground that amended deed not produced : Amended deed is not a pre-requisite condition : Matter remanded.

New Page 2

4 Charitable purpose :
Registration u/s.12A of Income-tax Act, 1961 : Rejection on the ground that
amended deed not produced : Amended deed is not a pre-requisite condition :
Matter remanded.


[CIT v. R. M. S. Trust,
326 ITR 310 (Mad.)]

The assessee, a charitable
trust, came into existence on December 1, 1995. On 10-3-2006 the assessee-trust
filed application for registration u/s.12A. The application was belated by more
than 10 years for which condonation petition was filed stating that the delay
was due to ignorance of law. The Commissioner of Income-tax noticed that the
requisite clause indicating that any amendment to the trust deed would be
carried out after obtaining approval from the Commissioner of Income-tax, has
not been incorporated, and on that ground directed the assessee-trust to file an
amended deed duly registered along with notes on the activities of the trust
with regard to various expenses debited in the income and expenditure account.
The assessee did not respond to the letter. Therefore, the Commissioner held
that the assessee-trust was not entitled to registration u/s.12AA and exemption
u/s.80G(vi) of the Act. The Tribunal allowed the assessee’s appeal.

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

“(i) The amended trust
deed is not a pre-requisite as required by the Commissioner and it is also not
a pre-requisite condition for registering the applicant as a trust as per the
provisions of the Act. The requisition made by the Commissioner is an
extra-statutory requisition.

(ii) Hence, the Tribunal,
by reason of the impugned order, had set aside the rejection made by the
Commissioner and remitted to decide the issue afresh after affording a
reasonable opportunity of being heard.

(iii) We do not find any
reason to interfere with the order of the Tribunal.”

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Charitable or religious trust : Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Additional condition by way of Explanation to S. 11(2) inserted w.e.f. 1-4-2003 is to apply only to accumulations in excess of 15% u/s. 11(2) and not to accumulation

New Page 2

3 Charitable or religious
trust : Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2003-04 : Additional
condition by way of Explanation to S. 11(2) inserted w.e.f. 1-4-2003 is to apply
only to accumulations in excess of 15% u/s. 11(2) and not to accumulations up to
15% u/s.11(1)(a).


[DIT Exemption v. Bagri
Foundation, 192 Taxman 309 (Del.)]

The assessee was a trust
duly registered u/s.12AA and duly recognised u/s.80G(5)(vi) of the Income-tax
Act, 1961. For the relevant year, i.e., A.Y. 2003-04, the assessee had
shown certain gross income and deducted therefrom the amount applied for
charitable purposes by way of donation to another charitable trust, BLB, as
corpus donation and to others. The source of the amount over and above the
income of the year was the accumulation of income of the past. The AO added the
amount of donations to the income of the assessee, holding that owing to the
Explanation appended to S. 11(2) with effect from the A.Y. 2003-04, any donation
made out of income accumulated or set apart during the period of accumulation or
thereafter to any trust or institution registered u/s.12AA was liable to be
added in the income of the donor-trust. On appeal, the Commissioner (Appeals)
deleted the addition holding the donation by the assessee to BLB trust was made
out of excess of income over expenditure and not out of amount accumulated
u/s.11(1)(a). The Tribunal affirmed the order of the Commissioner (Appeals).

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

“(i) It is clear from S.
11(1)(a) that the income applied for charitable purposes is not to be included
in the total income for the relevant year. In CIT v. Shri Ram Memorial
Foundation, (2004) 269 ITR 35/140 Taxman 263 (Delhi), the Court has held
that when a donor-trust, which is itself a charitable and religious trust,
donates its income to another trust, the provisions of S. 11(1)(a) can be said
to have been met by such donor-trust and the donor-trust can be said to have
applied its income for religious and charitable purposes, notwithstanding the
fact that the donation is subject to a condition that the donee-trust will
treat the donation as towards its corpus and can only utilise the accruing
income from the donated corpus for religious and charitable purposes.

(ii) Explanation to S.
11(2) inserted w.e.f. 1-4-2003, provides that the amount accumulated cannot be
donated to another trust. The Explanation to S. 11(2) is nothing but an
additional condition attached to accumulation in excess of 15% permitted
u/s.11(2). It cannot be held as a condition on accumulation up to 15% as
provided for in S. 11(1)(a) also. There is no rational classification for
imposing the restriction as contained in the Explanation to the accumulation
up to 15% also when there is no such restriction to donating the entire income
of a year to another charitable trust.

(iii) If the Legislature
intended to completely ban/discourage inter se donation between trusts,
it would have changed the position as existing in law, as noticed in the case
of Shri Ram Memorial Foundation (supra). The Legislature did not do so.

(iv) Even after the
insertion of the Explanation, if a trust donates its entire income for a year
to another charitable trust, it would still be entitled to exemption
u/s.11(1)(a). It defies logic as to why such donations cannot be permitted out
of 15% accumulation permitted u/s.11(1)(a) itself.

(v) There is, however,
rationale for imposing the restriction as contained in the Explanation to
accumulations in excess of 15%. Such accumulations, but for the conditions
imposed in S. 11(2) and in the Explanation aforesaid, would have been liable
to be taxed. One of the conditions in S. 11(2)(a) is the purpose for which
accumulation in excess of 15% being made is to be notified; another condition
is of the accumulation being permitted for a period not exceeding 5 years; yet
another condition is as to the modes in which the accumulation can be
invested. There are no such restrictions on accumulation u/s.11(1)(a).

(vi) The scheme of the
Section indicates that the additional condition by way of the aforesaid
Explanation is intended to apply only to accumulations in excess of 15%
u/s.11(2) and not to accumulations up to 15% u/s.11(1)(a). The Explanation is
not found to be intended to take away something from the accumulation up to
15% permitted without any condition whatsoever u/s.11(1)(a).

(vii) It also followed
that even if the donations by the assessee were to be out of accumulations
from previous years and not out of surplus reserves, the same would still not
be liable to be included in the total income as assessed by the Assessing
Officer and the orders of the Commissioner (Appeals) and the Tribunal would
still be upheld. It was nobody’s case that the said accumulations were beyond
the accumulation of 15% permitted in S. 11(1)(a).”

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Charitable purpose : Exemption u/s.11 : S. 11, S. 12A and S. 13(1)(d) of Income-tax Act, 1961 : A.Y. 2005-06 : Interest-free loan by assessee-society to another society : Loan neither ‘investment’, nor ‘deposit’ : Both societies having similar objects, re

New Page 2

2 Charitable purpose :
Exemption u/s.11 : S. 11, S. 12A and S. 13(1)(d) of Income-tax Act, 1961 : A.Y.
2005-06 : Interest-free loan by assessee-society to another society : Loan
neither ‘investment’, nor ‘deposit’ : Both societies having similar objects,
registered u/s.12A and approved u/s.80G : Loan later repaid : Assessee entitled
to exemption u/s.11.


[DIT (Exemption) v. Acme
Educational Society, (Del.)]

For the A.Y. 2005-06, the
Assessing Officer disallowed the claim of the assessee-society for exemption
u/s.11 of the Income-tax Act, 1961 on the ground that the assessee-society had
given a loan of Rs.90,50,000 to another educational society, whose president was
the brother of the president of the assessee-society. The Assessing Officer held
that there was a violation of S. 13(1)(d) read with S. 11(5) of the Act. The
Commissioner (Appeals) allowed the assessee’s claim and held that there was no
violation of S. 13(1)(d) read with S. 11(5) of the Act, as both societies had
similar objects and that the Assessing Officer had not brought anything on
record to show that the advance of Rs.90,50,000 was a ‘deposit’ or ‘investment’.
The Tribunal upheld the decision of the Commissioner (Appeals).

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


“(i) The interest-free
loan of Rs.90,50,000 given by the assessee-society to another society did
not violate S. 13(1)(d) read with S. 11(5) of the Act, as the loan was
neither an ‘investment’, nor a ‘deposit’. Moreover both societies had
similar objects and were registered u/s.12A of the Act and had approvals
u/s.80G.

(ii) The fact that the
loan was interest-free and had been subsequently returned was also
significant.”



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Appellate Tribunal : Rectification u/s.254(2) of Income-tax Act, 1961 : A.Y. 1994-95 : Appellate order u/s.254(1) gets merged in rectification order only on issues raised in rectification application and not on other issues decided by Tribunal in appeal,

New Page 2

1 Appellate Tribunal :
Rectification u/s.254(2) of Income-tax Act, 1961 : A.Y. 1994-95 : Appellate
order u/s.254(1) gets merged in rectification order only on issues raised in
rectification application and not on other issues decided by Tribunal in appeal,
Appellate order u/s.254(1) survives and is available for rectification again on
any other issue on an application filed by either of parties : Once
rectification application filed by one of parties is considered and decided by
Tribunal rightly or wrongly, another rectification application on same issue is
not maintainable.


[CIT v. Aiswarya Trading
Co., 192 Taxman 385 (Ker.)]

For the A.Y. 1994-95, while
deciding the appeal, the Tribunal did not consider one of the grounds raised by
the assessee pertaining to the levy of interest u/s.220(2) of the Income-tax
Act, 1961. Therefore, the assessee filed rectification application before the
Tribunal to rectify the Appellate order, which was allowed by the Tribunal. The
Department thereafter filed a rectification application for rectifying the order
issued by the Tribunal in the assessee’s rectification application. The Tribunal
held that the Department’s rectification application was on the very same issue
agitated by the assessee in its rectification application and allowed by the
Tribunal and, therefore, it was not maintainable u/s.254(2).

On appeal, the Revenue
contended that by virtue of the merger of the rectification order in the
Appellate order, the application filed u/s.254(2) by the Revenue was still
maintainable.

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


“(i) The second
application on the very same issue is not maintainable before the Tribunal.
In fact, merger applies only on issues decided in rectification proceedings
and the Tribunal’s order issued u/s.254(1) will remain unaffected on all
matters other than those covered by the rectification order issued
u/s.254(2). In other words, even after the Tribunal rectifies the Appellate
order u/s.254(2) on any issue raised, still the original order can be
rectified on any other issue decided by the Tribunal.

(ii) However, if the
rectification application filed by one of the parties is allowed or rejected
by the Tribunal, the very same issue cannot be agitated in another
rectification application by the opposite party. If this is done and allowed
to be entertained by the Tribunal, then what happens is that the Tribunal
gets an opportunity to review its own order for which it has no powers under
the statute. Therefore, once the rectification application filed by one of
the parties is considered and decided by the Tribunal rightly or wrongly,
another rectification application on the same issue is not maintainable
against the order issued by the Tribunal u/s.254(2).

(iii) In the instant
case, the question of liability for interest payable by the assessee u/s.
220(2) rightly or wrongly was decided by the Tribunal in the rectification
application filed by the assessee in its favour and, therefore, the
Department could not seek to rectify the very same order again u/s.254(2) by
filing another application.

(iv) Consequently, the
order of the Tribunal was to be upheld.”



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Valuation of closing stock : Change in method of valuation as per AS 2 : Resultant variation in income : Not taxable.

New Page 2

11 Valuation of closing stock : A.Y.
2001-02 : Change in the method of valuation as per Accounting Standard 2, which
is mandatory : Resultant variation in income : Not taxable.


[CIT v. George Oakes Ltd., 303 ITR 357 (Mad.)]

For the A.Y. 2001-02, the Assessing Officer made an addition
representing the reduction of profit due to change in the method of valuing the
closing stock. In the relevant year the closing stock was valued in accordance
with the Accounting Standard 2, which is mandatory. The Tribunal deleted the
addition on the ground that that the change of accounting method was bona
fide.

 

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

“(i) When the change of accounting method is bona fide
and is recognised in accounting principles, the resultant variation in income
cannot be forced to be taxed upon the assessee.

(ii) Being compulsory, the company had adopted the
Accounting Standard (AS-2) as per the guidelines prescribed by the ICAI. There
was a specific finding that the assessee valued its opening stock in one way
and the closing stock in another method, during the relevant year when the
Accounting Standard (AS-2) had come into effect in the earlier year. The
change in the accounting method had not been found to have been made with a
mala fide intention. Such a change in the method of accounting was bona
fide and was made mandatory by the ICAI to be followed in the preparation
of financial accounts. Under such circumstances, in the year of change, some
discrepancy was bound to happen in the profitability of the company as
compared to the previous year. However, in succeeding years, there would not
be any discrepancy on this account.

(iii) The reasons given by the Tribunal were based on valid materials and evidence, and did not warrant any interference.”

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TDS : Works contract : S. 194C : Purchase of packing material carrying printed work : Essentially a sale/purchase : Not a works contract : Purchaser not liable to deduct tax at source.

New Page 2

10 TDS : Works contract : S. 194C of
Income-tax Act, 1961 : A.Y. 2005-06 : Purchase of packing material carrying
printed work : Essentially a sale/purchase : Not a works contract : Purchaser
not liable to deduct tax at source.


[CIT v. Dy. Chief Accounts Officer, Markfed, Khanna,
304 ITR 17 (P&H)]

The assessee had purchased printed packing material, but did
not deduct tax at source on the payment therefor. The Assessing Officer was of
the view that the transaction was a works contract. Therefore, he levied penalty
and interest for not deducting tax at source u/s.194C of the Income-tax Act,
1961. The Tribunal deleted the penalty and the interest.

 

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

“(i) There was no dispute that the main purpose of the
assessee in buying packing material was to obtain goods for the purpose of
packing its finished products. The factum of such packing material carrying
some printed work could only be regarded as the work executed by the supplier
incidental to the sale to the assessee. The fact of some printing being done
as a part of supply was of no consequence to the contract being essentially of
a sale of chattel. The predominant object underlying the contracts was
sale/purchase of goods and the only intention of the assessee was to buy
packing material.

(ii) Admittedly, the raw material for the manufacturing of
such packing material was not supplied by the assessee. Thus, it was a case of
sale and not a contract for carrying out any work.

(iii) The purchase of particular printed packing material
by the assessee was a contract for sale and outside the purview of S. 194C.”

 


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Investment allowance : S. 32A : Dumpers, tippers and hydraulic excavators are construction equipment vehicles, not road transport vehicles : Eligible for investment allowance

New Page 2

8 Investment allowance : S. 32A of
Income-tax Act, 1961 : A.Ys. 1989-90, 1990-91 and 1992-93 : Dumpers, tippers
and hydraulic excavators are construction equipment vehicles and not road
transport vehicles : Eligible for investment allowance.


[CIT v. Gotan Lime Stone Khanij Udyog, 170 Taxman
442 (Raj.)]

The assessee was engaged in the business of running
hydraulic excavators and tippers for cement companies on hire basis by
realising rent for operation of the same. For the A.Ys. 1989-90, 1990-91 and
1992-93, its claim for investment allowance on the hydraulic excavators and
tippers was declined by the Assessing Officer on the ground that they were
road transport vehicles and, moreover, the same were not used by the assessee
for its own business. The Commissioner(A) and the Tribunal allowed the
assessee’s claim.

 

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

“(i) Under the Motor Vehicles Act, 1989, the dumpers,
tippers and hydraulic excavators are construction equipment vehicles within
the definition of Rule 2(ca) of the 1989 Rules and are non-transport
vehicles by virtue of Explanation attached to this definition, and cannot be
categorised as road transport vehicles for the purpose of entitlement of
investment allowance u/s.32A.

(ii) The construction equipment vehicles like dumpers,
tippers and hydraulic excavators are not road transport vehicles and profit
gained out of it by letting them out on hire basis to a cement producing
industrial undertaking could not debar them from claiming investment
allowance u/s.32A.”

Penalty : Concealment of income : S. 271(1)(c) : Estimated addition : No evidence of concealment of income : Penalty could not be imposed

New Page 2

9 Penalty : Concealment of income : S.
271(1)(c) of Income-tax Act, 1961 : A.Y. 1992-93 : Estimated addition : No
evidence of concealment of income : Penalty could not be imposed.


[CIT v. Sangrur Vanaspati Mills Ltd., 303 ITR 53
(P&H)]

For the A.Y. 1992-93, the assessee had filed return of
income disclosing income of Rs.65,18,970. The Assessing Officer rejected the
accounts, estimated the sales and made an addition of Rs.66,16,865. The
Assessing Officer also imposed penalty u/s.271(1)(c) of the Income-tax Act,
1961 for concealment of income. The Tribunal deleted the penalty on the ground
that there was no conclusive evidence that sales estimated by the Assessing
Officer were made outside the books of account.

 

On appeal by the Revenue, the Punjab and Haryana High Court
held that the Tribunal was justified in cancelling the penalty.

 


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Export profit : Deduction u/s.80HHC of Income-tax Act, 1961 : A.Y. 2001-02 : Separate accounts maintained for export sales and domestic sales : Deduction not to be on basis of total turnover of all business : Assessee entitled to deduction fully on export

New Page 2

6 Export profit : Deduction u/s.80HHC of
Income-tax Act, 1961 : A.Y. 2001-02 : Separate accounts maintained for export
sales and domestic sales : Deduction not to be on basis of total turnover of all
business : Assessee entitled to deduction fully on export profits.


[CIT v. M. Gani and Co., 301 ITR 381 (Mad.)]

The assessee was a manufacturer of garments and fancy items
and an exporter. For the A.Y. 2001-02 the assessee claimed deduction u/s.80HHC
of the Income-tax Act, 1961 on the export turnover ignoring the results of
domestic turnover. The Assessing Officer considered the composite turnover
comprised of both export turnover and domestic turnover and recomputed the
deduction u/s. 80HHC. The Tribunal allowed the claim of the assessee.

 

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

“The assessee having maintained separate books of account
for export business and domestic business, it was entitled to deduction
u/s.80HHC of the Act fully on the export profit.”

 


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Income : Dividend : In whose hands to be taxed : A sold shares to B : Change in ownership of shares not registered : Income from dividend assessable in the hands of A and not in the hands of B

New Page 2

7 Income : Dividend : In whose hands to be
taxed : A.Y. 1994-95 : A sold shares to B : Change in ownership of shares not
registered : Income from dividend assessable in the hands of A and not in the
hands of B.


[CIT v. Aatur Holdings P. Ltd., 302 ITR 92 (Bom.)]

For the A.Y. 1994-95, the Assessing Officer made an addition
to the total income of the assessee as dividend income. The CIT(A) found that
the shares were not registered in the name of the assessee and deleted the
addition holding that the dividend income had to be received by the registered
share holders only. The Tribunal upheld the decision of the CIT(A).

 

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

“(i) Merely because a person may have purchased or been in
receipt of shares, in the absence of the shares being registered in his name
in the books of account of the company, such a person is not entitled to
receive the dividend. The dividend has to be paid by the company in the name
of registered shareholders and it is the registered shareholders alone who
can claim dividend u/s.27 of the Securities Contracts (Regulation) Act,
1956.

(ii) Nothing was brought to show that under the provisions
of the Companies Act or the provisions of Securities Contracts (Regulation)
Act, 1956, there were any other standard or statutory rules under the
Income-tax Act by which dividend could be taxed in the hands of the assessee.
Moreover, the burden of proving that an amount received in the year of
account was taxable lies on the Department.”

 


 


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KVSS : A.Y. 1993-94 : On 29-12-1998, the assessee AOP filed KVSS application in respect of appeal pending before Tribunal on basis of tax dues of Rs.24,04,600 : Rejection of application on ground that tax dues have been adjusted on 30-11-1998 against refu

New Page 1

 

Unreported :

  1. KVSS : A.Y. 1993-94 : On 29-12-1998, the assessee AOP filed
    KVSS application in respect of appeal pending before Tribunal on basis of tax
    dues of Rs.24,04,600 : Rejection of application on ground that tax dues have
    been adjusted on 30-11-1998 against refund in case of a member of AOP :
    Adjustment of tax dues and rejection of KVSS application invalid.

[M/s. Asia Corporation and Ors. v. CIT and Ors. (Bom.),
W.P. Nos. 782 and 783 of 1999, dated 14-9-2009]

Pending an appeal before the Tribunal for the A.Y. 1993-94,
on the basis of the tax dues of Rs.24,04,600, the assessee AOP had filed an
application under KVSS on 29-12-1998. The application was rejected by the
Commissioner on 24-2-1999 on the ground that there are no tax dues as on
30-11-1998, since in respect of one of the members of the AOP, namely,
Petitioner No. 1, refund had been ordered by the Assessing Officer for the A.Y.
1997-98 and that refund had been adjusted on 30-11-1998 against the dues of
the AOP.

The members of the AOP filed two writ petitions, one
challenging the adjustment of refund and the other challenging the rejection
of the KVSS application. The Bombay High Court allowed both the petitions and
held as under :

“(i) The grievance of the petitioner is that the order of
adjustment was passed without complying with the mandatory requirements of
S. 245 of the Income-tax Act. Our attention is invited to the provisions
which mandate that the refund can be adjusted against the dues of the
persons to whom the refund is due after giving intimation in writing to such
persons of the action proposed to be taken under the Section. It is
submitted that no notice as required u/s. 245 was served on the petitioner
proposing to make adjustment. This it is submitted would render adjustment
illegal, and consequently the order making adjustment has to be set aside.
Reliance for that purpose is placed on the judgment of this Court in
Suresh Jain v. A. N. Shaikh, 165 ITR 151 (Bom.) which was confirmed by
the Division Bench in A. N. Shaikh v. S. B. Jain, 165 ITR 86 (Bom.).

(ii) After considering the language of the Section and
the judgment of the Co-ordinate Bench of this Court, we find no reason to
take a different view than the view taken by the Co-ordinate Bench of this
Court, namely, failure to comply with the mandatory requirement of S. 245,
would result in the adjustment made becoming illegal.

(iii) As the application under KVSS was rejected solely
on the ground that there were no dues pending, and once in W.P. No. 783 of
1999 the order of adjustment passed on 30-11-1998 has been set aside,
consequently we will have to set aside the order under KVSS dated 24-2-1999
and consequently this petition will have to be allowed.”

 

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Revision : S. 263 : Commissioner should consider explanation offered by assessee and not set aside assessment order for consideration by AO

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9 Revision : S. 263 of Income-tax Act, 1961 : A.Y. 1992-93 :
Commissioner should consider explanation offered by assessee in response to
notice and decide the question : He is not to set aside the assessment order for
consideration of the explanation by the AO.


[Smt. Leela Choudhury v. CIT, 167 Taxman 1 (Gau.)]

For the A.Y. 1992-93, the assessment of the assessee was
completed u/s.143(3) of the Income-tax Act, 1961. The Commissioner found that
the Assessing Officer had not made enquiry as regards the investment in the
house property. Therefore the Commissioner issued a show-cause notice to the
assessee in exercise of his power u/s.263. The assessee contended that the house
property in question was owned by her and the investments made therein from her
own sources. She submitted the yearly investments made by her in the house
property in question along with her return for the assessment year in question,
balance sheets for the period 31-3-1988 to 31-3-1992, showing the position of
her assets and liabilities; and the details of the funds available with the
assessee. The Commissioner, after considering the explanation of the assessee
and documents brought on record, by his order dated 1-11-1996, directed the
Assessing Officer to examine the matter in proper manner and complete the
assessment in accordance with law.

The Gauhati High Court allowed the writ petition filed by the
assessee challenging the revision order passed by the Commissioner u/s.263 of
the Act and held as under :

“(i) The foundation for the exercise of the power being the
formation of an opinion or conclusion, there is no escape from the view that
the Commissioner must record his conclusion in the matter before setting aside
an order of assessment in exercise of the powers conferred u/s.263. It will
again be futile to embark upon any discussion as to the ‘intensity’ or
‘strength’ of the conclusion that must be reached by the Commissioner before
setting aside an assessment u/s.263, as the answer to the said question would
really depend upon the facts that may be confronting the Commissioner in any
given case. The position can be best resolved by saying that, in certain
situations, the opinion or conclusion recorded would be the final opinion,
while in other situation, it may be ‘less than final’. What would be necessary
is to take note of the fact that there has to be an opinion that the
assessment which has been set aside is, indeed, erroneous and prejudicial to
the interest of the Revenue. Furthermore, the power u/s.263 being
quasi-judicial, such conclusion must be reached after hearing the assessee,
which is mandated by the statute itself and after recording the reasons for
the conclusions reached, a requirement, imposition of which would be
consistent with the well-settled principles for exercise of quasi-judicial
powers.

(ii) It could be noticed from the impugned order of the
Commissioner that the Commissioner had not recorded any opinion that the order
of assessment of the assessee for the A.Y. 1992-93 was erroneous and
prejudicial to the interest of the Revenue. The said opinion was recorded in
the show-cause notice issued to the assessee and the same must be understood
to be a highly rebuttable view. Such view/opinion was required to be recorded
after hearing the assessee and after holding the necessary enquiry.

(iii) On receipt of the show-cause notice the assessee
submitted an elaborate reply laying material before the Commissioner to show
that sufficient proof of her income was laid before the Assessing Officer to
enable the said authority to come to the conclusion that the investments in
the house property were made from the known sources of income of the assessee.
The said materials were in the form of balance sheets and details of the funds
available to the assessee from time to time. In the above facts, the assessee
contended that the assessment order in question was not erroneous and
prejudicial to the interest of the Revenue.

(iv) The Commissioner, on receipt of the reply of the
assessee, could not have ignored the same. Rather, it was incumbent on the
Commissioner to consider the explanations offered and on that basis to record
his opinion/conclusion as to whether he still considered the assessment order
in question to be erroneous and prejudicial to the interest of the Revenue
and, if so, reasons therefor. The Commissioner did not do so. Instead, in its
order, the Commissioner had recorded that the assessee had filed a written
submission giving an exhaustive explanation and enclosing copies of various
deeds, certificates, etc., which were required to be verified in detail. The
Commissioner, in the above facts, set aside the assessment order and directed
the Assessing Officer to make a fresh assessment after examining the
submissions and contentions advanced by the assessee and after due scrutiny of
the documents adduced.

(v) The course of action adopted by the Commissioner was
clearly impermissible in law in the absence of a finding that on consideration
of the explanation submitted and for reasons shown, the assessment had to be
treated to be erroneous and prejudicial to the interest of the Revenue.
Unfortunately, the Commissioner did not do so, which omission would have the
effect of rendering the impugned order legally fragile.

(vi) In view of the above, the instant writ petition was to
be allowed.”


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Refund : S. 119, S. 240 and S. 244A of Income-tax Act, 1961 : A.Ys. 1998-99 and 1999-00 : Refund payable consequent on appeal : Application not necessary : Assessee entitled to interest on refund : Chief Commissioner has no power to deny interest on groun

New Page 1

Reported :

34 Refund : S. 119, S. 240 and S. 244A of Income-tax Act,
1961 : A.Ys. 1998-99 and 1999-00 : Refund payable consequent on appeal :
Application not necessary : Assessee entitled to interest on refund : Chief
Commissioner has no power to deny interest on ground of delay in filing revised
return.

[S. Thigarajan and ors. v. ACIT, 322 ITR 581 (Kar.)]

In respect of the A.Ys. 1998-99 and 1999-00, the Deputy
Commissioner (TDS) held that the shares allotted to the assessee employees were
perquisites and tax had to be deducted on their value. Therefore, the employer
deducted tax and remitted it to the Department, and issued revised Form No. 16
to the assessee employees for claiming credit for the deduction. This was
followed by the assessee filing revised returns, though beyond the time
stipulated u/s.139. The order of the Deputy Commissioner was reversed by the
Tribunal. The Assistant Commissioner gave effect to the order of the Tribunal
and directed the assesses to claim credit of the TDS by filing Form No. 16, as
the employer was not entitled to the Refund of TDS. The assesses filed revised
return with a request to refund the TDS amount. The assesses also filed
applications to condone the delay in preferring the revised returns. In exercise
of the jurisdiction u/s.119(2)(b) of the Income-tax Act, 1961, the Chief
Commissioner condoned the delay, but declined admissible interest on the ground
that the claims were belated and the petitioners had forgone their claims.

The Karnataka High Court allowed the writ petition filed by
the assessee petitioners held as under :

“(i) The first and the second revised returns along with
the application to condone the delay in filing the same, were rendered
infructuous, by the law declared in the matter of allotment of shares to the
employees, not being a perquisite, attracting TDS. Hence, the question of
exercise of jurisdiction u/s.119(2)(b) of the Act did not arise. The order of
the Chief Commissioner was arbitrary, without jurisdiction and illegal and as
a consequence the orders of the Assistant Commissioner, giving effect to the
orders of the Chief Commissioner were unsustainable. They were liable to be
quashed.

(ii) Where a refund is due to the assessee consequent on an
Appellate Order, an obligation is cast on the Revenue u/s.240, to effect the
refund without the assessee having to claim it. U/s.244A, the Revenue is bound
to pay interest at one-half percent on the amount of refund.

(iii) It is no doubt true that the Revenue had the benefit
of the monies belonging to the petitioners, up to the date of refund, and
there are a catena of decisions of the Apex Court over payment of compounded
interest on refund, which the petitioners are entitled to press into service.
Without, however going into the merits or demerits of the quantum of interest
or compounding either quarterly or half-yearly, the request of interest at 18%
per annum compounded monthly, is kept open for consideration by the first
respondent, to be decided within a period of four weeks from today and effect
payment immediately thereafter.”

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Co-operative society : Deduction u/s. 80P(2)(a)(i) of I. T. Act, 1961 : A. Y. 1995-96 : Society engaged in procuring raw silk and marketing to its members: Interest received from members for supplying materials on credit : Entitled to deduction.

New Page 1

  1. Co-operative society : Deduction u/s. 80P(2)(a)(i) of I.
    T. Act, 1961 : A. Y. 1995-96 : Society engaged in procuring raw silk and
    marketing to its members: Interest received from members for supplying
    materials on credit : Entitled to deduction.



 


[CIT vs. Tamil Nadu Co-operative Silk Producers Ltd.;
311 ITR 224 (Mad)].

The assessee was a cooperative society engaged in the
business of procuring raw silk and twisted silk and marketing it to its
members. The assessee received interest from its members in respect of
material supplied on credit. For the A. Y. 1995-96 the Assessing Officer
rejected the claim of the assessee that the interest so received from the
members is deductible u/s. 80P(2)(a)(i) of the Income-tax Act, 1961. The
Assessing Officer held that the activity of the society in procuring and
supplying raw silk and twisted silk on credit to its members could not be
considered as “carrying on the business of banking or providing credit
facilities within the meaning of section 80P(2)(a)(i)”. The Tribunal allowed
the assessee’s claim.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held that the assessee co-operative society was
eligible for the benefit of section 80P(2)(a)(i) of the Act in respect of the
interest received from its members for supplying the materials on credit.

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KVSS 1998 : Rectification u/s.154 of Income-tax Act, 1961 : A.Y. 1993-94 : During the pendency of appeal before the Tribunal the assessee preferred an application under KVSS 1998 : After issue of certificate under KVSS a rectification order demanding addi

New Page 1

Reported :

33 KVSS 1998 : Rectification u/s.154 of Income-tax Act, 1961
: A.Y. 1993-94 : During the pendency of appeal before the Tribunal the assessee
preferred an application under KVSS 1998 : After issue of certificate under KVSS
a rectification order demanding additional interest u/s.234B cannot be validly
made.

[CIT v. Goel Lottery Centre, 323 ITR 262 (All.)]

During the pendency of appeal before the Tribunal for the A.Y.
1993-94, the assessee preferred an application under KVSS 1998. Pursuant thereto
the designated authority issued certificate u/s.90 of the KVSS 1998. Thereafter,
on 31-3-2000 the Deputy Commissioner passed an order of rectification u/s.154 of
the Income-tax Act, 1961 and raised an additional demand of interest u/s.234B.
According to him the demand of interest calculated earlier was low. The
Commissioner (Appeals) set aside the order and this was upheld by the Tribunal.

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

“(i) In view of the provisions of the Finance (No. 2) Act,
1998, which lays down the Kar Vivad Samadhan Scheme, it is apparent that the
order passed u/s.90(1) determining the sum payable under the Scheme shall be
conclusive in respect of all the matters stated therein and no matter covered
by such order shall be reopened in any other proceeding under the direct tax
enactment or indirect tax enactment or under any other law for the time being
in force. It further contemplates that only in a case where the certificate is
found to be false, the designated authority at any stage can withdraw the
same.

(ii) After the issue of the certificate u/s.90 of the KVSS
1998, the assessing authority had no authority to sit over the certificate.
The rectification was not permissible.”

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Industrial undertaking : Deduction u/s.80-IA of Income-tax Act, 1961 : A.Y. 2005-06 : Computation : Adjustment of brought forward losses and depreciation set off in earlier years : Only the losses of the years beginning from the initial assessment year ar

New Page 1

Reported :

32 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2005-06 : Computation : Adjustment of brought forward losses
and depreciation set off in earlier years : Only the losses of the years
beginning from the initial assessment year are to be brought forward and not the
losses of the earlier year which have been already set off against other income
of the assessee.

[Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT, 231
CTR 368 (Mad.)]

For the A.Y. 2005-06, the assessee had claimed a deduction of
Rs.1,70,76,945 u/s.80-IA of the Income-tax Act, 1961. The Assessing Officer
disallowed the claim on the ground that the eligible income is a negative
figure. CIT(A) allowed the claim and held that since the A.Y. 2005-06 is the
initial assessment year, unabsorbed depreciation and the losses of earlier
years, which had already been absorbed, cannot be notionally carried forward and
taken into consideration for computing deduction u/s.80-IA. The Tribunal
reversed the order of the CIT(A) and restored the order of the Assessing
Officer.

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

“Losses and depreciation of the years earlier to the
initial assessment year which have already been absorbed against profits of
other businesses cannot be notionally brought forward and set off against the
profits of the eligible business for computing the deduction u/s.80-IA.”

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Depreciation : Business expenditure : S. 32 and S. 37 of Income-tax Act, 1961 : A.Y. 1994-95 : Closure of business due to riots : Closure for reasons beyond control of assessee : Assessee entitled to depreciation and business expenditure.

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Reported :

30 Depreciation : Business expenditure : S. 32 and S. 37 of
Income-tax Act, 1961 : A.Y. 1994-95 : Closure of business due to riots : Closure
for reasons beyond control of assessee : Assessee entitled to depreciation and
business expenditure.

[CIT v. Blend Well Bottles P. Ltd., 323 ITR 18 (Kar.)]

The assessee was engaged in the manufacture and sale of
Indian-made foreign liquor. In the financial year ending 31-3-1994 the assessee
had not carried on the manufacturing activities as the business was closed on
account of local problems. The Assessing Officer therefore disallowed the claim
for depreciation for the A.Y. 1994-95. The Tribunal allowed the assessee’s claim
and held that the assessee is entitled to depreciation and business expenditure.

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

“(i) The business premises of the assessee were situated in
Punjab. On account of riots and other activities in the place, where the
factory of the assessee was situated, the assessee was forced to close down
the activity till peace was restored in the locality. This fact was not
disputed by the Revenue.

(ii) If for reasons which were beyond the control of the
assessee, its business activities were closed, such a closure could not be
treated as a closure with an intention to close the business once for all and
such closure had to be treated as an act of God or vis major. The assessee
would be entitled to claim depreciation as well as business expenditure u/s.32
and u/s.37 of the Income-tax Act, 1961, respectively.”

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Industrial undertaking : Deduction u/s.80-IA of Income-tax Act, 1961 : A.Y. 2003-04 : Trial production in A.Y. 1998-99 and commercial production in A.Y. 1999-00 : Therefore initial assessment year is the A.Y. 1999-00 in which there was commercial producti

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Reported :

31 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2003-04 : Trial production in A.Y. 1998-99 and commercial
production in A.Y. 1999-00 : Therefore initial assessment year is the A.Y.
1999-00 in which there was commercial production and not the A.Y. 1998-99 in
which there was only trial production : Therefore, the assessee is entitled to
100% deduction u/s.80-IA in the A.Y. 2003-04.

[CIT v. Nestor Pharmaceuticals Ltd., 231 CTR 337
(Del.)]

In the Goa unit of the assessee’s industrial undertaking
there was trial production in the A.Y. 1998-99 and the commercial production
commenced in the A.Y. 1999-00. Therefore, the assessee claimed that the initial
assessment year is the A.Y. 1999-00 and accordingly claimed 100% deduction
u/s.80-IA of the Income-tax Act, 1961 in the A.Y. 2003-04. The Assessing Officer
was of the view that the initial assessment year is the A.Y. 1998-99 in which
there was trial production and accordingly restricted the deduction to 30%. The
Tribunal allowed the assessee’s claim.

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

“(i) Initial assessment year for the purpose of S. 80-IA is
the assessment year relevant to the previous year in which the commercial
production is started and not the A.Y. in which there was only a trial
production.

(ii) There was only a trial production in the A.Y. 1998-99
and commercial and full-fledged production commenced only in the A.Y. 1999-00.
Merely the trial production will not be regarded as beginning to manufacture
or produce articles. The Tribunal was therefore justified in holding that the
benefit of Section would be allowed in the year in which commercial production
started i.e., A.Y. 1999-00 and, therefore, would be extendable up to the A.Y.
2003-04.”

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Assessment : Notice u/s.143(2) of Income-tax Act, 1961 : A.Y. 1997-98 : A valid notice u/s.143(2) can be issued only after the AO examines the return filed by the assessee.

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Reported :

29 Assessment : Notice u/s.143(2) of Income-tax Act, 1961 :
A.Y. 1997-98 : A valid notice u/s.143(2) can be issued only after the AO
examines the return filed by the assessee.

[DIT v. Society for Worldwide Inter Bank Financial,
Telecommunications, 323 ITR 249 (Del.)]

In an appeal against the assessment order u/s. 143(3) of the
Income-tax Act, 1961 for the A.Y. 1997-98 the Tribunal found that the assessee
had filed the return of income on 27-3-2000, whereas the notice u/s.143(2) was
issued on 23-3-2000 i.e., before filing the return of income. The Tribunal
therefore held that the notice was invalid and hence the consequential
assessment order is invalid.

In appeal before the Delhi High Court, the Revenue contended
for the first time that the notice was issued on March 27, 2000 and not on March
23, 2000. The High Court upheld the decision of the Tribunal and held as under :

“(i) In the memorandum of appeal, the Revenue had stated
that the return was filed by the assessee on March 27, 2000 and the notice
u/s.143(2) was served upon the authorised representative of the assessee by
hand when the authorised representative of the assessee came and filed return
and that the date of the notice was mistakenly mentioned as March 23, 2000.

(ii) Even if it was true, the notice was served on the
authorised representative simultaneously on his filing the return, which
clearly indicated that the notice was ready even prior to the filing of the
return.

(iii) The provisions of S. 143(2) make it clear that the
notice could only be served after the Assessing Officer had examined the
return filed by the assessee. Thus, even if the statement of the Assessing
Officer is taken at face value, it would amount to gross violation of the
scheme of S. 143(2) of the Act.

(iv) That being the case, no interference with the impugned
order is called for.”

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Appellate Tribunal : Powers and duty : A.Y. 1990-91 : Assessee filed cross-objections in appeal filed by Revenue : Revenue’s appeal dismissed without considering cross-objections of assessee : Cross-objections should be disposed of on merits.

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Reported :

28 Appellate Tribunal : Powers and duty : A.Y. 1990-91 :
Assessee filed cross-objections in appeal filed by Revenue : Revenue’s appeal
dismissed without considering cross-objections of assessee : Cross-objections
should be disposed of on merits.

[Ram Ji Dass and Co. v. CIT, 323 ITR 505 (P&H)]

In an appeal filed by the Revenue before the Tribunal the
assessee had preferred cross-objections. The Tribunal dismissed the appeal filed
by the Revenue but the cross objections of the assessee were not considered on
merits. Therefore the assessee applied for recalling the order and requested for
decision on the cross-objections on merits. The Tribunal rejected the
application observing that the Tribunal had already dismissed the appeal of the
Revenue and that while deciding the Revenue’s appeal the Tribunal had already
considered the question relating to the rate of profits and had upheld it and it
could not be re-examined thereafter in the assessee’s cross objections.

On reference at the instance of the assessee, the Punjab and
Haryana High Court held that the cross-objections of the assessee were required
to be heard and decided on merits.

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Disallowance of loss u/s.94(7) of Income-tax Act, 1961 : A.Y. 2004-05 : The conditions spelt out in clauses (a), (b) and (c) are cumulative and not alternative : Purchase of units within a period of less than three months from the record date, but sale be

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Unreported

26 Disallowance of loss u/s.94(7) of Income-tax Act, 1961 :
A.Y. 2004-05 : The conditions spelt out in clauses (a), (b) and (c) are
cumulative and not alternative : Purchase of units within a period of less than
three months from the record date, but sale beyond a period of three months :
Loss cannot be ignored.

[CIT v. Smt. Alka Bhosle (Bom.), ITA No. 2656 of 2009
dated 9-6-2010]

In the previous year relevant to the A.Y. 2004-05 the
assessee had purchased certain units within a period of less than three months
from the record date, but the units were sold beyond a period of three months
from the record date. The Tribunal held that the provisions of S. 94(7) of the Income-tax Act, 1961 are not applicable and there would be no disallowance of loss.

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

“Whether on the facts and in the circumstances of the case
and in law, the ITAT was right in holding that clauses (a), (b) and (c) of S.
94(7) of the Income-tax Act, 1961, are to be satisfied independently or
cumulatively ?”

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

“(i) The question that falls for consideration is as to
whether the conditions spelt out in clauses (a), (b) and (c) of Ss.(7) are
cumulative.

(ii) The contention of the Revenue is that though the units
were, as a matter of fact, sold beyond a period of three months of the record
date, the provisions of S. 94(7) would apply since they were acquired within a
period of three months from the record date.

(iii) There is no merit in the submission. Ss.(7) of S. 94
spelt out three requirements; these being (i) The purchase or acquisition of
any of the securities or units should take place within a period of three
months prior to the record date; (ii) The sale or transfer should take place
within a period of three months after the record date; and (iii) The dividend
or income received or receivable should be exempt. In the event that these
three conditions are fulfilled, the loss, if any, arising from the purchase or
sale of securities or units has to be ignored for the purpose of computing the
income chargeable to tax, to the extent such loss does not exceed the amount
of dividend or income received or receivable.

(iv) Ex-facie, all the three conditions that are spelt out
in clauses (a), (b) and (c) of Ss.(7), must be fulfilled before the
consequence that is envisaged in the Section comes into force. The conditions
prescribed in clauses (a), (b) and (c) of Ss.(7) are intended to be cumulative
in nature.

(v) In the present case, the sale of the units has taken
place after the expiry of a period of three months from the record date.
Hence, the second condition spelt out for the applicability of Ss.(7) would
not come into force.

(vi) In the circumstances, the appeal by the Revenue is
lacking in merit and does not raise any substantial question of law. The
appeal is accordingly dismissed.”

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Appellate Tribunal : Power and duty : Third proviso to S. 254(2A) of Income-tax Act, 1961 : The Tribunal has power to grant stay of recovery for a period of 365 days only : The Tribunal is therefore under a bounden duty and obligation to ensure that the a

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Reported :

27 Appellate Tribunal : Power and duty : Third proviso to S.
254(2A) of Income-tax Act, 1961 : The Tribunal has power to grant stay of
recovery for a period of 365 days only : The Tribunal is therefore under a
bounden duty and obligation to ensure that the appeal is disposed of within that
period: Fact that same issue was pending before the Special Bench cannot be a
reason for the Tribunal not to dispose of the appeal.

[Jethmal Faujimal Soni v. ITAT, 231 CTR 332 (Bom.)]

In an appeal preferred by the assessee before the Tribunal,
the assessee’s application for stay of recovery was allowed by the Tribunal and
the recovery was stayed for a period of six months. On a subsequent application
the stay was extended by a further period of six months. The hearing of the
appeal was adjourned from time to time for the reason that the issue in the
appeal was pending before the Special Bench. The Tribunal rejected the third
application for stay dated 4-11-2009 for the reason that the third proviso to S.
254(2A) of the Income-tax Act, 1961 prohibits the Tribunal from granting such
stay.

On a writ petition filed by the assessee, the Bombay High
Court directed the Tribunal to dispose of the appeal within a period of four
months. The counsel appearing on behalf of the Revenue informed the Court that
the Revenue shall not take any coercive steps for enforcing the demand during
that period. The High Court held as under :

“(i) A stringent provision is made by the third proviso to
S. 254(2A), as a result of which even if the delay in disposing of the appeal
is not attributable to the assessee, the stay has to stand vacated in any
event upon the lapse of a period of three hundred and sixty-five days. Having
regard to the nature of the provision which has been enacted by the
Parliament, the Tribunal is under a bounden duty and obligation to ensure that
the appeal is disposed of, so as not to result in prejudice to the assessee,
particularly in a situation like the present where no fault could be found
with the conduct of the assessee.

(ii) The fact that an issue was pending before the Special
Bench was not a reason for the Tribunal not to dispose of the appeal,
particularly since the consequence of the inability of the Tribunal to do so
would result in vacating of the order of stay, which was passed originally in
favour of the assessee.

(iii) It is unfortunate that the Tribunal simply adjourned
the appeal merely on the ground of the pendency of an identical issue before
the Special Bench. The state of affairs which has come to pass could well have
been avoided by the appeal being taken up for final disposal.”

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Exemption : S. 10(11) : Interest income accrued in provident fund account of employees after retirement : Continue to qualify for exemption u/s.10(11).

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4 Exemption : S. 10(11) of Income-tax Act,
1961 : A.Ys. 2001-02 to 2004-05 : Interest income accrued in the provident fund
account of employees after retirement : Would continue to qualify for exemption
u/s.10(11).


[Subhash Bansal v. ITO, 170 Taxman 601(P&H)

The petitioner was a senior citizen and an employee and a
retired employee of the Punjab State Electricity Board. In this case, in the
writ petition filed by the petitioner, the question before the Punjab and
Haryana High Court was as to whether interest income, that had accrued on the
credit balance in the provident fund governed by the Provident Fund Act, 1925
after the retirement, would continue to qualify for exemption from income-tax.

 

The High Court held as under :

“(i) A perusal of S. 10(11) would show that any payment
received by an assessee from a provident fund, to which the 1925 Act applies,
would not constitute a part of total income. In other words, it would, thus,
qualify for exemption from income-tax. It is, thus, obvious that since payment
of interest is received by the assessee-employee from provident fund, it would
also qualify for exemption from income-tax, provided the provisions of 1925
Act apply.

(ii) The reply given by the CBDT in its letter dated
15-6-2006 clarified the issue that interest on GPF is exempt from income-tax
as per the provisions of S. 10(11) and no TDS is required to be deducted from
the payment of interest on GPF after the date of retirement of an employee.

(iii) The petition succeeded and the Revenue was to be
directed to extend the benefit of exemption from income-tax to the interest
income that had accrued to the employees of the Board on the credit balance
which had been retained by them by exercising option in their provident fund
account after their retirement in terms of Regulation 38.”

 


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Charitable Trust : Certificate u/s.80G : Renewal of certificate denied on the ground that one particular expenditure is for an activity termed as spending for a particular religion : Not justified.

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3 Charitable Trust : Certificate u/s.80G of
Income-tax Act, 1961 : Renewal of certificate denied on the ground that one
particular expenditure is for an activity which may be termed as spending for a
particular religion : Not justified.


[Umaid Charitable Trust v. UOI, 171 Taxman 94 (Raj.)]

The assessee trust was granted exemption certificate u/s.80G
of the Income-tax Act, 1961 for the period from 1-4-2001 to 31-3-2004. However,
renewal of the certificate for a further period was refused on the ground that
the assessee had incurred expenditure exceeding 5% of its total income on a
particular religion, namely, colouring and repairing of Lord Vishnu’s temple.

Allowing the writ petition filed by the Trust, the Rajasthan
High Court held as under :

“(i) Mere one contribution by the assessee trust to another
trust which carried out repairs and renovation of Lord Vishnu’s temple, did
not disentitle the assessee from renewal of its exemption certificate u/s.80G.
The line of distinction between the religious purpose and a charitable purpose
is very thin and no watertight compartment between the two activities can be
very well established. Unless the objective of the charitable trust in
question itself is of spending its income for a particular religion and it is
so found in the trust deed, the Income-tax Department cannot reject the
renewal of the trust as a charitable trust u/s.80G, merely because one
particular expenditure is for an activity which may be termed as spending for
a particular religion.

(ii) In the instant case, the repairs and renovation of
Lord Vishnu’s temple did not necessarily mean that expenditure in question was
for a particular religion only. All people, who have faith in Lord Vishnu’s
temple, belong to different sects and have faith in different religions and
also visit the temple of Lord Vishnu. The Revenue had not shown that entry in
the said temple was restricted to the persons of one particular community or
sect following one religion. Hinduism is not one particular religion and
different sects following Hindu philosophy do visit temple of Lord Vishnu, be
that Jains, Sikhs, Brahmins, etc. There is no watertight compartment between
different castes or sects following one particular religion. Freedom of
religion is guaranteed by the Constitution of India under Article 25.
Therefore, by taking such a pedantic and narrow approach, it could not be said
that character of the charitable trust was lost if one particular expenditure
was made for repairs and renovation of Lord Vishnu’s temple and that too by
way of contribution to another trust.

(iii) A perusal of the trust deed of the assessee produced
on record showed that the objective of the trust was clearly charitable one
and was not for any particular religion even wholly or substantially. Nothing
had been pointed out in the impugned order that the assessee had been
constantly spending money for a particular religion.

(iv) There was no leaning in favour of any particular
religion in the trust deed of the assessee-trust and, therefore, once such
exemption was granted to the assessee upon scrutiny of its application and it
held for at least three years, as was shown by the impugned order itself and
the trust deed indicated that the said trust was constituted long back on
27-8-1963 and had been carrying on such charitable activities, there was no
justification for rejecting its renewal u/s.80G, which is a matter of right.”


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Business deduction : S. 43B : Deposit with customs authorities as per demand notice under the head Special Value Branch (SVB) is deductible in the year of actual payment.

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1 Business deduction : S. 43B of Income-tax
Act, 1961 : A.Y. 1999-00 : Deduction to be allowed on actual payment : Deposit
with customs authorities as per demand notice under the head Special Value
Branch (SVB) is deductible in the year of actual payment.


[CIT v. Hughes Escorts Communications Ltd., 170 Taxman
571 (Del.)]

In the previous year relevant to the A.Y. 1999-00, the
assessee company had paid Rs.26,60,128 by way of Special Value Branch (SVB)
deposit as per the demand notice issued by the Customs authorities. The said
amount was not claimed by way of deduction before the AO. The claim for
deduction was made for the first time before the CIT(A) by way of additional
ground. It was the contention of the assessee that the additional payment was
called a deposit pending final determination of the actual duty and it is an
amount that is to be paid on demand to the Customs authorities, that the
assessee really had no option but to make the payment. The CIT(A) allowed the
claim for deduction and held that if the whole or any part of this amount is
found to be not payable to the Customs authorities on the relevant goods, then
such amount shall be brought to tax u/s.41(1)(a) of the Act, in the relevant
year. 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 :

“(i) The assessee really had no option but to make the
payment as per the demand notice issued by the Customs authorities. At the
time of making the payment it was not known whether the demand would fall
short of the actual liability or in excess of the actual liability. Taking
this into consideration, the Tribunal felt that it would not be appropriate to
limit the claim of the assessee only to the extent of the actual liability. It
was found that there is no error in directing the Assessing Officer to make a
verification with regard to the excess payment, if any, and to tax the amount
if it has not already been taxed. The Tribunal also limited the liability of
the actual amount to the assessment year under consideration.

(ii) We cannot find any fault in the view taken by the
Tribunal primarily because the liability was required to be discharged by the
assessee on demand and the assessee had no option but to make the payment.
This clearly falls within S. 43B(a) of the Act.”

 


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Business expenditure/bonus : S. 37(1) and S. 36(1)(ii) : ‘Good work reward’ paid to employees, not dependent on profit/loss : does not constitute ‘bonus’ u/s. 36(1)(ii) : Allowable as normal business expenditure u/s.37(1)

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2 Business expenditure/bonus : S. 37(1) and
S. 36(1)(ii) of Income-tax Act, 1961 : ‘Good work reward’ paid to employees, not
dependent on profit/loss : Does not constitute ‘bonus’ u/s.36(1)(ii) : Allowable
as normal business expenditure u/s.37(1).


[Shriram Pistons & Rings Ltd. v. CIT, 171 Taxman 81
(Del.)]

The assessee had claimed the deduction of the ‘good work
reward’ paid to the employees as business expenditure u/s.37(1) of the
Income-tax Act, 1961. The Tribunal considered as to whether it constitutes
‘bonus’ within the meaning of S. 36(1)(ii) of the Act. The Tribunal held that it
does not constitute bonus.

 

In reference, the Delhi High Court upheld the decision of the
Tribunal and held as under :

“(i) There is nothing to suggest that the ‘good work
reward’ given by the assessee to its employees has any relation to the profits
that the assessee may or may not make. It appears from the order of the
Tribunal that it has relation to good work that is done by the employee during
the course of his employment and that at the end of the financial year on the
recommendation of a senior officer of the assessee, the reward is given to the
employee. Consequently, the ‘good work reward’ cannot fall within the ambit of
S. 36(1)(ii) of the Act as contended by the Revenue.

(ii) The ‘good work reward’ is allowable as business
expenditure u/s.37(1) of the Act.”

 


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Scientific research expenditure : Deduction u/s.35 of Income-tax Act, 1961 : Research not restricted to applied or natural science but includes any scientific research which may lead to or facilitate extension of business.

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Reported :

20. Scientific research
expenditure : Deduction u/s.35 of Income-tax Act, 1961 : Research not restricted
to applied or natural science but includes any scientific research which may
lead to or facilitate extension of business.

[CIT v. Engineering
Innovation Ltd., 327 ITR 392 (HP)]

The assessee was carrying on
the business of manufacture and sale of metal components. The assessee decided
to manufacture and market automatic coffee machines. It imported an automatic
coffee machine from abroad and engaged the services of an engineer for
indeginising and copying the machine in such a fashion so as to make it suitable
for Indian conditions. In the A.Y. 1992-93, the assessee claimed the deduction
of the cost of the imported machine and the retainership fees paid to the
engineer as scientific research expenditure u/s.35 of the Income-tax Act, 1961.
The Assessing Officer disallowed the claim holding that the expenditure was not
incurred on research work. The Tribunal allowed the assessee’s claim.

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

“(i) The definition of
scientific research in S. 43(4) is comprehensive, but the use of the word
‘include’ in every clause of the Section clearly implies that the definition
is inclusive and not comprehensive. Therefore, the contention of the
Department that scientific research must be in the fields of natural or
applied science, could not be accepted.

(ii) Any methodical or
systematic investigation based on science into the study of any materials or
sources, is a scientific research.

(iii) The investigation
done by the assessee to improvise, indigenise and improve the imported machine
to suit the Indian market would have resulted in expanding and extending its
business and therefore fell within the meaning of the term ‘scientific
research’ as defined in S. 43(4)(iii) of the Act.

(iv) The assessee was entitled for
deduction in terms of S. 35(4).”

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Penalty : Failure to get accounts audited in time : S. 44AB and S. 271B : Condition precedent : Tribunal to record a finding whether assessee deliberately failed to submit audit report in time : Matter remanded

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19 Penalty : Failure to get accounts audited
in time : S. 44AB and S. 271B of Income-tax Act, 1961 : A.Y. 2001-02 : Condition
precedent : Tribunal to record a finding whether assessee deliberately failed to
submit audit report in time : Matter remanded.


[Gramin Vidyut Sahkari Samity Maryadit. v. ACIT, 305
ITR 89 (MP)]

For the A.Y. 2001-02, the assessee, a co-operative society
did not get its accounts audited as required u/s.44AB of the Act. The Assessing
Officer therefore, imposed a penalty of Rs.1,00,000. The CIT(A) deleted the
penalty. The Tribunal upheld the penalty order and held that there was no
illegality or infirmity in the order of the Assessing Officer.

 

On appeal, the Madhya Pradesh High Court remanded the matter
back to the Tribunal for fresh decision according to law, and held as under :

“(i) An order imposing penalty for failure to carry out a
statutory obligation is the result of a quasi-criminal proceeding and penalty
will not ordinarily be imposed unless the party obliged either acted
deliberately in defiance of law or was guilty of conduct contumacious or
dishonest or acted in conscious disregard of its obligation. The penalty will
not be imposed merely because it is lawful to do so. Whether the penalty
should be imposed for failure to perform a statutory obligation is a matter of
discretion of the authority to be exercised judicially and on consideration of
all the relevant circumstances. Even if minimum penalty is prescribed, the
authority competent to impose the penalty will be justified in refusing to
impose penalty, when there is a technical or venial breach of the Income-tax
Act, 1961, or where the breach flows from a bona fide belief that the
offender is not liable to act in the manner prescribed by the statute.

(ii) It is obligatory on the part of the Tribunal to record
a finding whether the assessee had acted deliberately in defiance of the
provisions of S. 44AB of the Act and is guilty of conduct contumacious or
dishonest, warranting imposition of penalty by the AO u/s.271B of the Act.

(iii) The Tribunal, apart from stating that there was no
denial by the assessee that the provisions of S. 44AB were not applicable to
it and there was delay in getting the accounts audited, had not applied its
mind and recorded any cogent or germane reasons as is imperative in law.
Therefore, the order of the Tribunal is liable to be set aside and the matter
remitted to it for reconsideration.”

Penalty : Failure to deduct tax at source : S. 194A and S. 271C : Bona fide belief based on opinion of senior counsel : Penalty not justified.

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18 Penalty : Failure to deduct tax at
source : S. 194A and S. 271C of Income-tax Act, 1961 : A.Ys. 1994-95 and
1995-96 : Bona fide belief based on opinion of senior counsel :
Penalty not justified.


[CIT v. Wishwapriya Financial Services and Securities
Ltd., 303 ITR 122 (Mad.)]

The assessee was engaged in retail and financial services,
corporate and advisory services and securities trading. An advertisement was
given in the newspaper in the name of the assessee, stating that the return on
the investment made with the company would not attract tax deduction at source
and accordingly, the assessee did not deduct tax at source on interest paid on
such investments. For the A.Ys. 1994-95 and 1995-96, the Assessing Officer
issued show-cause notice proposing to impose penalty u/s.271C of the Income-tax
Act, 1961 for failure to deduct tax at source u/s.194A on interest paid on such
investments. The assessee replied that he had acted under the bona fide
belief that the income received from the investments did not attract the
liability for deduction of tax at source and therefore, when the amounts were
distributed among the investors, no tax was deducted at source. It was also
contended that an opinion from a senior counsel was obtained before devising the
scheme to the effect that no tax need be deducted at source on the payments made
to the investors. The Assessing Officer rejected the contention and imposed the
penalty. The Tribunal deleted the penalty.

 

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

“(i) The mere fact that the bona fide claim stood
disallowed did not itself lead to the inference that the company consciously
and deliberately flouted the provisions of the Act. The assessee thought that
there was no relationship of debtor and creditor or borrower and lender and
that, S. 194A, S. 201(1), S. 201(1A) read with S. 2(28A) of the Act were not
attracted. It was clear from the order of the Tribunal that it had accepted
the explanation and given a finding that there was a reasonable cause for not
deducting tax at source.

(ii) The assessee acted in a bona fide manner on the
basis of the opinion obtained from a senior counsel before devising the
scheme. The finding that there was a reasonable cause was a finding of fact
and it was not perverse. The concurrent findings given by both the authorities
below were based on valid materials and evidence and did not warrant
interference. The Tribunal was justified in deleting the penalty levied
u/s.271C of the Act.”

Penalty : Deposits/loans in cash in excess of prescribed limits : S. 269SS, S. 269T, S. 271D and S. 271E : Finding that the amounts were mere book entries and transactions on behalf of family members : No violation of S. 269SS and S. 269T : Penalty could

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17 Penalty : Deposits/loans in cash in
excess of prescribed limits : S. 269SS, S. 269T, S. 271D and S. 271E of
Income-tax Act, 1961 : A.Y. 1991-92 : Finding that the amounts were mere book
entries and transactions on behalf of family members : No violation of S. 269SS
and S. 269T : Penalty could not be imposed.


[CIT v. Natwarlal Purshottamdas Parekh, 303 ITR 5 (Guj.)]

The assessee was carrying on the business of money-lending
and trading in jewellery. For the A.Y. 1991-92, the AO imposed penalty u/s.271D
and u/s.271E of the Income-tax Act, 1961 on account of receipt/repayment of
deposits/loans otherwise than by way of account-payee cheque. The Tribunal found
that most of the amounts represented book entries except amounts of NSCs of
family members which had matured and which were reinvested. The Tribunal also
found that the assessee had acted under bona fide belief in view of the
opinion of an advocate and income-tax practitioner of standing of 33 years who
had opined that the assessee would not violate the provisions of S. 269SS and S.
269T of the Act if the assessee receives amounts from the family members and
repays to different family members. Accordingly the Tribunal cancelled the
penalty.

 

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

“(i) The Tribunal had found on the facts and in the light
of the evidence on record that there was no violation of either the provisions
of S. 269SS or S. 269T of the Act.

(ii) The Tribunal had further found that there was
reasonable cause, assuming that there was any violation by the assessee.

(iii) Hence the Tribunal had rightly deleted the penalties
levied u/s.271D and u/s.271E.”

 


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Penalty : Deposits in cash in excess of prescribed limits : S. 269SS, S. 269T, S. 271D and S. 271E : Firm accepting cash from partners in belief that it was not different from them : Reasonable ground : Penalty could not be imposed.

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15 Penalty : Deposits in cash in excess of
prescribed limits : S. 269SS, S. 269T, S. 271D and S. 271E of Income-tax Act,
1961 : A.Y. 1990-91 : Firm accepting cash from partners in belief that it was
not different from them : Reasonable ground : Penalty could not be imposed.


[CIT v. Lokhpat Film Exchange (Cinema), 304 ITR 172 (Raj.)]

In the A.Y. 1990-91 the Assessing Officer had levied
penalties u/s.271D and u/s.271E of the Income-tax Act, 1961 in respect of
transactions between the assessee-firm and its partners described as deposits
from the partners. The assessee had claimed that in view of the fact that the
partners and the firm are not independent of each other and the firm is not a
juristic person, these transactions cannot be considered as intra-person, but
were only for the purpose of carrying on partner’s own business. The fact that
under the Income-tax Act, the firm and the partners of the firm are recognised
as independent units, the same cannot be treated for all purposes to be separate
and independent. The assessee had contended that in that view of the matter,
they had not violated the requirement of S. 269SS and S. 269T while conducting
these transactions. However, the Assessing Officer did not accept this
explanation and imposed penalties u/s.271D and u/s.271E. The Tribunal relying on
a decision in CIT v. R. M. Chidambaram Pillai, (1977) 106 ITR 292 wherein
the Supreme Court had said that there cannot be a contract of service, in strict
law, between a firm and one of its partners, so as to consider the salary paid
to the partner as income from salary held that for the purpose of S. 269SS and
S. 269T also the firm and partners cannot be considered to be separate entities
and deleted the penalty.

 

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

“The assessee had acted bona fide and its plea that
inter se transactions between the partners and the firm were not
governed by the provisions of S. 269SS and 269T was a reasonable explanation.
Penalty could not be imposed.”

 


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Penalty : Deposits/Loans in cash in excess of prescribed limits : S. 269T and S. 271E : Repayment of advance towards share application money : Neither deposit nor loan : Bona fide belief : Penalty not justified.

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16 Penalty : Deposits/loans in cash in
excess of prescribed limits : S. 269T, and S. 271E of Income-tax Act, 1961 : A.Y.
1990-91 : Repayment of advance towards share application money : Neither deposit
nor loan : Bona fide belief : Penalty not justified.


[CIT v. Rugmini Ram Ragav Spinners P. Ltd., 304 ITR
417 (Mad.)]

The assessee is a closely held company. For the A.Y. 1990-91
the Assessing Officer imposed penalty of Rs.5,90,416 u/s.271E of the Income-tax
Act, 1961 on the ground that during the year of account the assessee had repaid
some of the share application money which it had received earlier in cash. The
Tribunal cancelled the penalty.

 

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

“(i) The assessee had received cash over a period of time
as advance towards allotment of shares from 16 persons without stipulating any
time frame towards return/refund of money without interest, in case of
non-allotment of shares either fully or partly. The money retained by the
company was neither deposit nor loan, it was only share capital advance.

(ii) The advance of share application money and repayment
of such advances had not flowed from any undisclosed income of the assessee or
the concerned persons. The assessee had not paid any interest at all on any of
the advances repaid after some time. If the intention was to receive them as
loan or deposit, then certainly the lenders would not have made the advances
gratuitously. The assessee was not called upon to explain the default
u/s.269SS of the Act on receipt of the advances of the earlier years, which
would show that the assessee’s case was not governed by the said provisions.

(iii) Penalty u/s.271E is not automatic, and a bona fide
belief to the effect that the receipt of the advance against allotment of
shares would not be termed as loan or deposit, would be sufficient to drop the
penalty leviable unless and until the material on record positively showed
that the money received was only a deposit or loan.

(iv) There was no dispute that the advances were
only against allotment of shares and not by way of loans or advances. In this
case the reasonable cause was that the assessee was under bona fide
belief that the money received was only for the purpose of allotment of
shares. There was no material or evidence or any compelling reason produced by
the Revenue to prove that the money received was a deposit or loan.”

 


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Penalty : Concealment of income : S. 271(1)(c) : No penalty proceeding initiated in the preceding year on similar issue : Finding by Tribunal that a case of difference of opinion and not concealment of income : Proper.

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14 Penalty : Concealment of income : S.
271(1)(c) of Income-tax Act, 1961 : A.Y. 1983-84 : No penalty proceeding
initiated in the preceding year on similar issue : Finding by Tribunal that a
case of difference of opinion and not concealment of income : Proper.


[CIT v. Sood Harvester, 304 ITR 279 (P&H)]

For the A.Y. 1983-84, the Assessing Officer imposed penalty
u/s.271(1)(c) of the Income-tax Act, 1961 for concealment of income. The
Tribunal found that in respect of the addition made on the same issue for the
A.Y. 1982-83, the AO had not initiated penalty proceedings. The Tribunal
recorded that the assessee had disclosed complete facts before the AO along with
the return, as well as during the course of assessment proceedings and held that
it was a case of difference of opinion and not concealment of income. The
Tribunal also held that there was no reason for the Revenue to take a different
view for the A.Y. 1983-84 on the same set of facts and without assigning
reasons.

 

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

“(i) The Tribunal had followed the correct approach by
concluding that it was a case of difference of opinion and not concealment of
income on the reasoning that in the preceding year the facts were almost the
same and still no penalty proceedings u/s.271(1)(c) was initiated.

(ii) The Revenue had to maintain consistency for the
purpose of finality in all litigation and a decision on the same question
would not be re-opened unless some new facts were found with material
difference in the subsequent years.”

 


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