Category: Glimpses Of Supreme Court Rulings

11. National Cooperative Development Corporation vs. Assistant Commissioner of Income Tax – SC

(2025)181 Taxmann.com 333-SC

Deductions – Section 36(1)(viii) provides a deduction of “profits derived from the business of providing long-term finance” in respect of any financial corporation engaged in providing long-term finance for industrial or agricultural development – The phrase “derived from” must be interpreted much more narrowly than the phrase “attributable to” – It requires a direct or immediate nexus with the specific business activity, for if the income is even a “step removed” from the business in question, that nexus is snapped – The deduction is limited to income from “first degree” sources and explicitly keeps out “ancillary profits” of the undertaking

The current litigation concerns several assessment years in which the Assessee, a statutory corporation mandated to advance initiatives for the production, processing, and marketing of agricultural produce and notified commodities in accordance with cooperative principles, sought deductions under Section 36(1)(viii) of the Income-tax Act, 1961 (‘the Act’).

In the Assessment Order, the AO proceeded to consider each of the receipts independently. As regards the dividend income, the AO held that this was a return on investment in shares, which is legally distinct from interest earned on long-term loans. Similarly, with respect to the interest on short-term bank deposits, the AO reasoned that these accrued from the investment of idle surplus funds in the interim period, rather than from the core activity of providing agricultural credit. As regards service charges received for the Sugar Development Fund (SDF), the AO noted that the Assessee was acting merely as a nodal agency for the Central Government. The funds disbursed belonged to the government, and the Assessee received a service fee for its administrative role in monitoring these loans. Consequently, the AO concluded that none of these three streams of income could be characterised as “profits derived from the business of providing long-term finance” as envisaged by the Act. Accordingly, the AO disallowed the deductions claimed on these counts and added them back to the total income of the Assessee.

Aggrieved by the Assessment Order, the Assessee preferred an appeal before the CIT(A). The CIT(A) upheld the disallowances relying heavily on the legislative intent and the definition of “long-term finance” in the Explanation to Section 36(1)(viii). This view was subsequently affirmed by the Income Tax Appellate Tribunal (ITAT) and finally by the High Court.

The High Court affirmed the findings of the lower authorities. Addressing the Assessee’s argument regarding dividend income, the High Court held that under Section 85 of the Companies Act, 1956 preference shares are part of share capital and cannot be treated as loans. The Court reasoned that a shareholder is not a creditor and cannot sue for debt; therefore, investments in redeemable preference shares do not satisfy the definition of “long-term finance” which requires a “loan or advance” with repayment of “interest.” Thus, dividends derived from such shares were not deductible under Section 36(1)(viii).

Regarding the interest on short-term deposits, the High Court upheld the Tribunal’s finding that this income was derived from the investment of idle funds during the interregnum period. The Court concluded that such interest is a step removed from the business of providing long-term finance. Since the immediate source of this income is the bank deposit and not a long-term loan extended by the Assessee, the strict requirements of the “derived from” test were not met.

On the issue of service charges for Sugar Development Fund (SDF) loans, the High Court noted the admitted factual position that the loans were funded by the Government of India, not by the Assessee. The Assessee merely acted as a nodal agency for monitoring and disbursement. Since the Assessee’s own funds were not involved, and it received service charges rather than interest, the Court held that the Assessee could not be considered to be carrying on the business of providing long-term finance in this specific context. Consequently, this income stream was also excluded from the deduction.

According to the Supreme Court, the question for adjudication before it in this batch of appeals was whether the National Co-operative Development Corporation (NCDC), Appellant-Assessee, was entitled to deductions under Section 36(1)(viii) of the Act in respect of three specific heads of income, being, (i) Dividend income on investments in shares, (ii) Interest earned on short-term deposits with banks, and (iii) Service charges received for monitoring Sugar Development Fund loans.

The Supreme Court noted that the relevant statutory provision, Section 36(1)(viii) allows for a specific deduction in computing the income referred to in Section 28. The Section provides a deduction in respect of any financial corporation engaged in providing long-term finance for industrial or agricultural development. The deduction is capped at an amount not exceeding forty percent of the “profits derived from such business of providing long-term finance.” The Explanation to the Section defines “long-term finance” to mean any loan or advance where the terms provide for repayment along with interest during a period of not less than five years.

The Supreme Court further noted that this strict framework was introduced intentionally by the Finance Act, 1995. Before this amendment, the provision allowed deductions based on the “total income” of the corporation. Parliament noticed that financial corporations were diversifying into activities unrelated to agricultural financing but were still claiming tax benefits on their entire profit. The amendment was introduced to fix this “mischief” by ensuring that the deduction is restricted only to profits that come directly from the core activity of providing long-term credit.
According to the Supreme Court, this intent was explicitly stated in the Memorandum explaining the Finance Bill, 1995, which explained why the amendment was necessary.

The Assessee contended before the Supreme Court that the phrase “derived from” should be interpreted broadly. Relying on CIT vs. Meghalaya Steels Ltd. 2016:INSC:253 : (2016) 6 SCC 747, it was argued that if a receipt flows directly from the business and is chargeable under Section 28, the Assessee qualifies for the said deductions. Also, that the distinction between “attributable to” and “derived from” is artificial when the business is indivisible. Conversely, the Respondent had submitted that judicial authority has consistently held that “derived from” signifies a strict, first-degree nexus. For this proposition reliance was placed on CIT vs. Sterling Foods 1999:INSC:190 : (1999) 4 SCC 98, Pandian Chemicals Ltd. vs. CIT (2003) 5 SCC 590 and Liberty India vs. CIT 2009:INSC:1094 : (2009) 9 SCC 328.

According to the Supreme Court, resolution of the competing perspectives would depend on the interpretation of the expression “derived from.” The Supreme Court agreed with the Respondent’s submission that this phrase connotes a requirement of a direct, first-degree nexus between the income and the specified business activity. The Supreme Court observed that it is judicially settled that “derived from” is narrower than “attributable to”, this distinction was lucidly clarified by it in Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978:INSC:83 : (1978) 2 SCC 644, where it was held that the legislature uses “derived from” when it intends to give a restricted meaning.

According to the Supreme Court, the phrase “derived from” whether used alone or as “derived from the business of” appears across multiple provisions of the Act, such as Section 80HHC and Section 80JJA and it has consistently held that this phrase requires a direct and proximate connection, or a “first-degree nexus,” between the income and the specific activity. The addition of the words “the business of” simply clarifies which activity is the source; it does not dilute the requirement for a direct link. Any interpretation suggesting otherwise would upset settled law.

According to the Supreme Court, the Assessee’s reliance on the decision in Meghalaya Steels (supra) was misplaced because the facts in that case were fundamentally different. In Meghalaya Steels (supra), the Court interpreted Section 80-IB, which allowed deductions for profits derived from “any business” of an industrial undertaking. The income in dispute there consisted of specific government subsidies given to reimburse the company for actual operational costs like transport, power, and insurance. The Court held that since these subsidies were essentially paying back the costs incurred to run the factory, they had a direct link to the profits of the business. Importantly, that judgment did not change the strict Rule regarding the phrase “derived from” established in earlier cases; it merely applied the Rule to a specific situation involving cost reimbursement,

The Supreme Court held that the present case, however, stood on a completely different footing. Unlike Section 80-IB which applies to “any business,” Section 36(1)(viii) is extremely narrow and restricts the deduction strictly to profits derived from “such business of providing long-term finance”. The disputed income here is not a reimbursement of business costs, nor does it come from the core activity of long-term lending. Therefore, the reasoning in Meghalaya Steels cannot be applied here to expand the scope of the deduction, as the specific statutory requirements and the nature of the income are entirely distinct.

Furthermore, the Supreme Court also rejected the Assessee’s attempt to portray its operations as a “single, indivisible integrated activity” to claim the deduction on all receipts. This specific argument was conclusively dealt with by it in Orissa State Warehousing Corpn. vs. CIT 1999:INSC:153 : (1999) 4 SCC 197, where the Assessee sought to claim an exemption under Section 10(29) for interest income on the ground that it was part of its integrated warehousing business.

In Orissa State Warehousing Corpn. (supra), the Court held that fiscal statutes must be construed strictly based on the plain language used. The Court explicitly rejected the “integrated activity” theory.

The Supreme Court held that the legal principles established by the decisions cited above set a strict threshold for eligibility. First, the phrase “derived from” must be interpreted much more narrowly than the phrase “attributable to”. Second, it requires a direct or immediate nexus with the specific business activity, for if the income is even a “step removed” from the business in question, that nexus is snapped. Third, the deduction is limited to income from “first degree” sources and explicitly keeps out “ancillary profits” of the undertaking. Finally, this Court refuses to accept the argument that Appellants business should be treated as a “single, indivisible and integrated activity” in order to expand the scope of a specific deduction.

The Supreme Court thereafter dealt with arguments made with respect of each of the three receipts.

Re: Dividend received on redeemable preference shares

The Assessee had argued that the substance of redeemable preference shares are effective loans, as fixed redemption Schedule and dividend rate assimilate them to the nature of debt. Resisting this, the Respondent draws our attention to the admitted factual position that these receipts are “investments in agricultural based societies by way of contribution to share capital”. The Respondent submitted that under Section 85 of the Companies Act, 1956, preference shares unequivocally remain share capital and cannot be treated as loans. Reliance is placed on the Constitution Bench decision in Bacha F. Guzdar vs. CIT (1954) 2 SCC 563 to demonstrate that dividends arise from the contractual relationship of shareholding, and the immediate source of the income is the investment in shares, not the activity of lending.

The Supreme Court observed that dividends are a return on investment dependent on the profitability of the investee company, and this distinction is fundamental to the genealogy of the income. The Constitution Bench decision in Bacha F. Guzdar (supra), established that dividend income is derived from the contractual relationship of the shareholder, not the underlying activity or the nature of the funds.

The Supreme Court further observed that a fundamental distinction exists between a shareholder and a creditor. The basic characteristic of a loan is that the person advancing the money has a right to sue for the debt. In stark contrast, a redeemable preference shareholder cannot sue for the money due on the shares or claim a return of the share money as a matter of right, except in the specific eventuality of winding up. This is also the reason for the Court, in Bacha F. Guzdar (supra), to hold that the immediate source of dividend income is the investment in share capital and not the business of providing loans. Since the statute specifically mandates ‘interest on loans’, extending this fiscal benefit to ‘dividends on shares’ would defy the legislative intent. Therefore, the Supreme Court concluded that dividend income does not qualify as profits derived from business of providing long-term finance.

Re: Interest on short-term deposits in banks

The Assessee had placed heavy reliance on the decision of the Supreme Court in National Co-operative Development Corporation vs. CIT 2020:INSC:544 : (2021) 11 SCC 357. They argued that the Supreme Court has already recognized that earning interest on idle funds is “interlinked” with their business and constitutes “business income” rather than “Income from Other Sources”. Based on this, the Assessee contended that their operations were a “single, indivisible integrated activity.” The Appellant contended that since the funds were parked temporarily only to be eventually used for lending, the interest earned on them should be treated as effectively “derived from” the business of providing finance.

The Supreme Court rejected this submission because it confuses two different concepts i.e. the classification of income and the eligibility for a specific deduction. There is a vital distinction between the general genus of “Business Income” and the specific species of “profits derived from the business of providing long-term finance”. Just because an income falls into the broad bucket of “Business Income” does not automatically mean it qualifies for the 40% deduction under Section 36(1)(viii) for the later specific species.

The Supreme Court observed that in NCDC (supra), the dispute was whether the corporation could deduct its expenses under Section 37. The revenue argued that the interest income was “Income from Other Sources,” which would have prevented the corporation from deducting business expenses against it. According to the Supreme Court, it was rightly held that since the funds were waiting to be lent out, the interest was “business income,” and therefore, normal business expenses could be deducted. However, the present case was not about deducting expenses; it was about claiming a special incentive deduction under Section 36(1)(viii). This Section is much stricter and requires more than just being “business income”; it requires the profit to be directly “derived from” long-term financing.

Furthermore, the NCDC judgment dealt with tax years 1976-1984. The law being interpreted in this case was amended significantly by the Finance Act, 1995. Parliament specifically changed the law to narrow the scope of this deduction because financial corporations were claiming benefits on all sorts of diversified income. Therefore, a judgment based on the old, broader law to interpret the new, stricter provision cannot be used. According to the Supreme Court, the amendment was designed precisely to stop the kind of broad “integrated business” claim the Assessee was making now. In NCDC (supra) the Court merely held that interest from short-term deposits was “business income” and not income from other sources. In the present case, the Revenue does not dispute that this is business income, but would contend that Section 36(1)(viii), as a special deduction provision operates on a much narrower plane.

The Supreme Court observed that even if a receipt is classified as “Business Income” under Section 28, it does not automatically qualify for the special deduction unless it satisfies the strict rigor of being “derived from” the specific activity of long-term finance defined in the Explanation. The legislative intent was to incentivize the specific act of providing long-term credit, not the passive investment of surplus capital. If it were to accept the Assessee’s argument, it would create a perverse incentive for financial corporations to park funds in safe, short-term investments and claim the 40% deduction, rather than fulfilling their statutory mandate of providing high-risk long-term credit to the agricultural sector. Consequently, interest earned from bank deposits failed this test as it is, at best, attributable to the business, but certainly not derived from the activity of providing long-term finance.

Re: Service Charge on Sugar Development Fund loans

The Assessee asserted that acting as a nodal agency for the Sugar Development Fund was part of its statutory mandate, and the service charges received were consideration for the core activity of facilitating long-term finance, irrespective of the fund’s origin. Per contra, the Respondent argued that these charges are merely “service fees” or agency commissions paid by the Government of India. The Respondent emphasized that since the
corpus belongs to the Government, the Assessee acted as an intermediary, not as the financier providing the loan.

The Supreme Court observed that deduction under Section 36(1)(viii) is predicated on the financial corporation “providing” the finance. In the case of SDF loans, the admitted factual position is that the funds belong to the Government of India. The Assessee bears no risk and utilizes no capital of its own.

The receipts in question were service charges paid by the Government for the administrative tasks of monitoring and disbursement. The proximate source of this income is the agency agreement with the Government, not the lending activity itself. A fee received for agency services cannot be equated with “profits derived from the business of providing long-term finance,” which implies the deployment of the corporation’s own funds and the earning of interest thereon. Consequently, this income stream was rightly excluded from the deduction.

The Supreme Court, upon a cumulative assessment of the statutory scheme and the judicial precedents cited, held that the claim of the Assessee was not correct in law.

For the above reasons, there was no merit in the appeals and consequently, the same were dismissed.

BCAJ Admin

15 Addl CIT vs. Ericsson India Pvt. Ltd
(2024) 468 ITR 2 (SC)

Jurisdiction to impose penalty- No Penalty can be imposed by the TPO u/s. 271G in respect of default that has occurred prior to the date of amendment conferring jurisdiction on TPO (i.e. 1^st October, 2014).

For the assessment year 2011-12, the assessee filed its returns together with transfer pricing report. A notice was issued by the Transfer Pricing (TPO) on 18th February, 2014 to produce some documents by 25^th March, 2014. The assesee did not comply with the said notice. On 5^th December, 2014, TPO issued notice alleging default and proposing penalty u/s. 271G. TPO passed order on 16^th January, 2015 proposing certain transfer pricing adjustment and imposing penalty of ₹64,43,03,352 u/s. 271G. A draft assessment order was passed on 22^nd June, 2015.

On writ petition being filed before the High Court, the High Court noted that till 1^st October, 2014, the jurisdiction and authority to impose penalty u/s. 271G was with the Assessing Officer (AO) as defined in section 2(7A). This changed with enactment of the Finance (No. 2) Act, 2014. The amendment expanded the jurisdiction of the TPO, who was for the first time authorized to inflict penalty for non-compliance of the notice.

The High Court following the judgment in Brij Mohan vs. CIT (1979) 120 ITR 1 (SC) and Varkey Chacko vs. CIT (1993) 203 ITR 885 (SC) quashed the order imposing penalty by holding that ‘event of default’ occurred in March, 2014, that is, well prior to the date of coming into force the amendment (from 1st October, 2014) and hence the order passed by TPO in respect of such default was without jurisdiction.

The Supreme Court dismissed the SLP as the issue was covered by its decision in Varkey Chacko vs. CIT (supra).

16 ITO vs. Tia Enterprises Pvt. Ltd
(2024) 468 ITR 10 (SC)

Statutory approvals — Approval granted by the statutory authorities, as required under the provision of the Act, has to be furnished to an assessee along with the reasons to believe — the statutory scheme encapsulated in the Income-tax Act provides that the reassessment proceedings cannot be triggered till the Assessing Officer has reasons to believe that income, which is otherwise chargeable to tax, has escaped assessment and the reasons recorded by him are placed before the specified authority for grant of approval to commence the process of assessment.

The Petitioner challenged the notice dated 30^th March, 2018 issued under section 148 of the Act and the order dated 6^th December, 2018 disposing of the objections of the Petitioner to the issuance of the aforesaid notice on one singular ground, namely, that the reassessment proceedings were commenced without the approval of the specific authority.

The High Court observed that the approval has a two-stage process. The satisfaction with regards to commencement of reassessment proceedings is required to be recorded by the Additional Commissioner of Income-tax (ACIT); and by Principal Commissioner of Income Tax (PCIT).

The High Court noted that the ACIT had made an endorsement that he was satisfied that it was a fit case for issue of notice u/s. 148, but the PCIT had not made any noting and merely signed the Form of Recording Reasons without a date. The High Court also noted that the reasons recorded by the Assessing Officer on 30^th March, 2018, were approved by ACIT and PCIT on the same date and the notice was also issued on 30^th March, 2018.

The Petitioner had alleged that this was a case of mechanical approval without application of mind and was contrary to law.

In counter affidavit, the respondent made an assertion that the PCIT had conveyed the approval to AO via letter F No. Pr. CIT-Delhi/148/2017-18 dated 30^th March, 2018, but the said letter was not annexed.

The High Court held that the approval granted by the statutory authorities, as required under the provisions of the Act, has to be furnished to an assessee along with the reasons to believe. The statutory scheme encapsulated in the Act provides that the reassessment proceedings cannot be triggered till the Assessing Officer has reasons to believe that income, which is otherwise chargeable to tax, has escaped assessment and the reasons recorded by him are placed before the specified authority for grant of approval to commence the process of assessment.

According to the High Court, the second condition requiring Assessing Officer to obtain prior approval of the specified authority was not fulfilled, as otherwise, there were no good reasons to not to furnish the same to the Petitioner along with the document which contained the Assessing Officer’s reasons for holding the belief that income otherwise chargeable to tax had escaped assessment.

The High Court therefore set aside the impugned notice and the impugned order.

The Supreme Court dismissed the SLP in view of the categorical finding recorded in paragraph 13 by the High Court and opining that in the facts of the case, no case for interference was made out by the Revenue.

17 PCIT vs. Nitin Nema
(2024) 468 ITR 105 (SC)

Reassessment — Gross Receipts of Sale consideration and income chargeable to tax are not same — Notice issued treating the sale consideration as asset which has escaped assessment is not sustainable.

A notice u/s. 148A(b) was issued observing that the amount of ₹72,05,085 was received by the assessee as a result of export transaction. The assessee had not filed return of income. Hence, a sum of ₹72,05,084 had escaped assessment. Since the amount of ₹72,05,084 was more that ₹50 lakhs, the said income was amenable to proceedings u/s. 148 and 148A.

Assesee filed his objections to the notice issued u/s. 148A(b). After considering the said reply, an order u/s. 148A(d) was passed rejecting the objections of the assessee and consequentially a notice u/s. 148 was issued.

The assesssee challenged the order dated 25^th March, 2023 passed u/s. 148A(d) of the Act deciding that it was a fit case for issuance of a notice u/s. 148 for assessment/ reassessment of income which had escaped assessment for the assessment year 2016-17. The assesee further challenged the consequential notice u/s. 148 of the Act.

The High Court observed that neither the notice u/s. 148A(b) nor the order u/s. 148A(d), nor the consequential notice u/s. 148 gave any indication that the amount of ₹72,05,084 alleged to be income escaping assessment, included land/building/shares/equities/loans/ advances, etc.

The High Court noted that the assessee had filed a rely to the notice u/s. 148A(b) explaining that the said amount of ₹72,05,084 was gross receipt of sale consideration of 16 scooters. Along with the reply, the details of items sold and payment receipt, computation of total income and computation of tax on total income was worked out.

The High Court observed that the said amount of ₹72,05,084 was the total sale consideration receipt of the transactions in question and not income chargeable to tax, which would obviously be less than the said amount.

The High Court noted the decision of the Karnataka High Court in Sanath Kumar Murali vs. ITO (2023) 455 ITR 370 (Kar) which held that the entirety of sale consideration does not constitute income.

According to the High Court, in passing the order u/s. 148A(d) the Respondent had adopted highly casual and perfunctory approach and elementary aspect of clear distinction between consideration of sale and income chargeable to tax was overlooked.

The High Court opined that had the Revenue arrived at the correct figure of income chargeable to tax instead of gross receipts / consideration, possibility of the amount of ₹72,05,084 coming
down to a figure below ₹50 lakhs could not be ruled out.

The High Court quashed the order u/s. 148A(d) and the notice u/s. 148 with costs.

The Supreme Court dismissed the SLP observing that it was not inclined to interfere with the impugned judgment and order of the High Court.

BCAJ Admin

14 Deputy Commissioner of Gift Tax,

Central Circle-II vs. BPL Ltd.

(2022) 448 ITR 739 (SC)

Gift-tax – Equity shares during lock-in period are not ‘quoted shares’ as defined- Valuation of “unquoted equity shares” in companies – Schedule II to the G.T. Act read with Rule 11 of Part C of Schedule III of the W.T. Act is a statutory rule which prescribes the method of valuation of “unquoted equity shares” in companies, other than investment companies, which prescription and method of valuation is mandatory in nature – The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed – No other method of valuation is permitted and allowed – Ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act.

The assessee company was engaged in the the manufacture and sale of consumer electronic products like television sets, VCR’s, audio and video products, etc.

The assessee had also invested in various other companies manufacturing allied or similar electrical, electronic and engineering goods. On 2^nd March, 1993, the assessee transferred its holdings in eight companies to one Celestial Finance Ltd. for a total consideration of ₹23,10,03,974 which was equal to the cost of acquisition of the shares to the assessee.

The assessee had transferred the shares to Alpha Securities Pvt. Ltd., a 99.7 per cent subsidiary of the assessee. Alpha Securities Pvt. Ltd., in turn, had transferred the same to the 100 per cent subsidiary of Celestial Finance Ltd.

In the course of the assessment proceedings for A.Y. 1993-94, there was an audit objection dated 17^th August, 1995. The assessee satisfied the Department that there was no element of gift.

Thereafter, in August, 1998, a search was carried out u/s 132 of the Income-tax Act. The Deputy Commissioner of Gift Tax issued a notice u/s 16 of the Gift Tax Act, 1958. An assessment order was passed that concluded that there was a deemed gift u/s 4(1)(a) [which provided for deemed gift in a case where the property is transferred for inadequate consideration] and 4(1)(b) [this dealt with the situation where consideration was not intended to be passed] to the extent of ₹69,78,49,800. The gift tax with interest u/s 16B (from July, 1993 to January, 2000) was quantified at ₹54,01,12,525.

On appeal, the Commissioner of Income-tax (Appeals) upheld the validity of reopening, but reduced the quantum of the gift tax. He held that the shares of BPL Sanyo Utilities & Appliances Ltd. and BPL Sanyo Technologies Ltd. [the transfer of these shares were also the subject matter of gift tax proceedings] had to be treated as unquoted equity shares as they were in the lock-in-period and, therefore, valued under Rule 5 of Gift Tax Rules and directed that the said value be substituted in place of valuation that adopted the quoted value of shares. He deleted the amount assessed u/s 4(1)(b) as it was difficult to hold that the consideration was not intended to be passed. He also modified the interest u/s 16B.

On further appeal by the assessee and a cross objection by the Revenue, the Tribunal approved the action of the AO but accepted the finding of the Commissioner with regard to issue u/s 4(1)(b). The Tribunal dismissed the assessee’s appeal and accepted the Revenue’s appeal in part.

On an appeal to the High Court by the assessee, it was held that (i) the gift tax proceedings were validly initiated in the facts and circumstances of the case; (ii) there was a ‘deemed gift’ in terms of section 4(1)(a) as the status of subsidiary company was given probably to avoid payment of gift tax; and (iii) as the shares in question were not traded and were not tradable, the valuation made by Commissioner was proper.

The High Court further held that the interest u/s 16B was leviable on the returned income and not on the assessed income.

The High Court noted that the finding of the Commissioner (Appeals) deleting the deemed gift u/s 4(1)(b) for alleged non-receipt of consideration was confirmed by the Tribunal and no further appeal having been filed by the Revenue, the order of the Commissioner (Appeals) had become final.

On an appeal by the Revenue, the Supreme Court noted that the limited issue raised in the appeal before it related to the valuation of 29,46,500 shares of M/s. BPL Sanyo Technologies Ltd. and 69,49,900 shares of M/s. BPL Sanyo Utilities and Appliances Ltd. which were transferred by the Respondent-Assessee, M/s. BPL Ltd. to M/s. Celestial Finance Ltd. on 2^nd March, 1993. The shares of M/s. BPL Sanyo Technologies Ltd, and M/s. BPL Sanyo Utilities and Appliances Ltd, both public limited companies, were listed and quoted on the stock exchanges. However, these shares, being promoter quota shares, allotted to the Assessee on 17^th November, 1990 and 10^thJuly, 1991, were under a lock-inperiod up to 16^th November,1993 and 25^th May, 1994, respectively.

The Supreme Court noted that Sub-section (1)(a) to Section 4 of the Gift Tax Act, 1958 [G.T. Act] states that where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property, at the date of the transfer, exceeds the value of the consideration, shall be deemed as a gift made by the transferor. Sub-section (1) to Section 64 of the G.T. Act states that the value of any property, other than cash, which is transferred by way of gift, shall be its value on the date on which the gift was made and determined in the manner as laid down in Schedule II of the G.T. Act. Schedule II, which incorporates the rules for determining the value of a gifted property, states that the value of any property, other than cash, transferred by way of gift, subject to the modifications as stated, shall be determined in accordance with the provisions of Schedule III of the Wealth Tax Act, 1957 [W.T. Act]. The provisions of Part C of Schedule III of the W.T. Act lays down the method of valuation of shares and debentures of a company. Rules 9 and 11 of Part C of Schedule III of the W.T. Act relate to the valuation of quoted shares and debentures of companies and valuation of unquoted equity shares in companies other than investment companies respectively.

The expressions “quoted share” and “quoted debentures”, and “unquoted shares” and “unquoted debentures” have been defined vide Sub-rules (9) and (11), respectively, to Rule 2 of Part A of Schedule III of the W.T. Act. As per the definitions, the expression “quoted share” in case of an equity share means a share which is quoted on any recognised stock exchange with regularity from time to time and where the quotation of such shares is based on current transactions made in the ordinary course of business. Explanation to Sub-rule (9) of Rule 2 of Part A of Schedule III of the W.T. Act states that when a question arises on whether a share is a quoted share within the meaning of the rule, a certificate to that effect furnished by the concerned stock exchange in the prescribed form shall be accepted as conclusive. The expression “unquoted share”, in relation to an equity share, means a share which is not a quoted share.

The Supreme Court agreed with the view expressed by the High Court, which observed that the equity shares under the lock-in period were not “quoted shares”, for the simple reason that the shares in the lock-in period were not quoted in any recognised stock exchange with regularity from time to time.

According to the Supreme Court, when the equity shares are in a lock-in period, then as per the guidelines issued by the Securities and Exchange Board of India (SEBI), there is a complete ban on transfer, which is enforced by inscribing the words “not transferable” in the relevant share certificates.

The Supreme Court noted that the aforesaid position was accepted by the Revenue, which, however, had relied upon a general circular issued by SEBI, wherein it is stated that the shares under the lock-in period can be transferred inter se the promoters. This restricted transfer, according to the Supreme Court, would not make the equity shares in the lock-in period into “quoted shares” as defined vide Sub-rule (9) to Rule 2 of Part A of Schedule III of the W.T. Act, as the lock-in shares are not quoted in any recognised stock exchange with regularity from time to time, and it is not possible to have quotations based upon current transactions made in the ordinary course of business. The possibility of a transfer to promoters via a private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted.

The Supreme Court held that Rule 11 of Part C of Schedule III of the W.T. Act is a statutory Rule which prescribes the method of valuation of “unquoted equity shares” in companies (other than investment companies), which prescription and method of valuation is mandatory in nature. The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed. No other method of valuation is permitted and allowed. Any ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act. The shares in question being “unquoted shares”, therefore, must be valued in terms of Rule 11 as a standalone valuation method.

Faced with the aforesaid position, the Revenue further relied upon Rule 21 of Part H of Schedule III of the W.T. Act before the Supreme Court.

The Supreme Court noted that Rule 21 of Part H of Schedule III of the W.T. Act had been enacted to clarify and remove doubts. It states that notwithstanding the negative covenants prohibiting or restricting transfer, the property should be valued for the purpose of the W.T. Act and the G.T. Act, but according to the Supreme Court, the valuation is not by overlooking or ignoring the restrictive conditions.

The Supreme Court held that the shares in the lock-in period have market value, which would be the value that they would fetch if sold in the open market. Rule 21 of Part H of Schedule III of the W.T. Act permits valuation of the property even when the right to transfer the property is forbidden, restricted or contingent. Rights and limitations attached to the property form the ingredients in its value. The purpose is to assume that the property which is being valued is being sold, and not to ignore the limitations for the purpose of valuation. This was clear from the wording of Rule 21 of Part H of Schedule III of the W.T. Act, which when read carefully expresses the legislative intent by using the words “hereby declared”. The Rule declares that the price or other consideration for which any property may be acquired by, or transferred, to any person under the terms of a deed of trust or through any other restrictive covenant, in any instrument of transfer, is to be ignored as per the provisions of the Schedule III of the W.T. Act. However, the price of such property is the price of the property with the restrictions if sold in the open market on the valuation date. In other words, notwithstanding the restrictions, hypothetically the property would be assumed to be saleable, but the valuation as per Schedule III of the W.T. Act would be made accounting and taking the limitation and restrictions, and such valuation would be treated as the market value. The Rules do not postulate a change in the nature and character of the property. Therefore, the property must be valued as per the restrictions and not by ignoring them.

In view of the aforesaid discussion, and for thereasons stated above, the appeal by the Revenue was dismissed.

Notes:

1. The above judgment of the Supreme Court gives an impression that this was a case of gift of shares. However, this was a case of transfer/sale of shares at cost and that had raised the issue of valuation of such shares and consequently the issue of deemed gift u/s 4(i)(a) of the Gift-Tax Act, 1958. The relevant facts are available in High Court judgment [(2007) 293 ITR 321(Karn)].

2. The Gift-Tax Act, 1958 is effectively inoperative from 1st October, 1998. Likewise, the Wealth-Tax Act, 1957 is also not operative from A.Y. 2016-17. However, the principle of valuation of shares of listed company during lock-in period of promoters’ quota shares decided by the Court will be still relevant.

15 Indian Institute of Science vs. Dy. Commissioner of Income Tax

(2022) 446 ITR 418 (SC)

Salary – Perquisite – Merely because an assessee might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the assessee is a Central/State Government – Employees of such an assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 2 of Table 1 appended to Rule 3 of the Rules.

The assessee, a premier research institution engaged in imparting higher learning and carrying out advanced research in science and technology, was recognised as a ‘Deemed University’ under the provisions of University Grants Commission Act, 1956 (‘the UGC Act’).

The service conditions of the employees of the assessee were governed by the rules as were applicable to the Central Government employees.

Accordingly, TDS returns in Form 24Q was filed by the assessee u/s 192 of the Act r.w.s 17(2) of the Act, for the period from 1^st April, 2009 to 31^st March, 2010, which was applicable in respect of the employees of the Central Government.

The AO, by an order dated 26^th April, 2013 passed u/s 201(1) and 201(1A) r.w.s 192 of the Act (A.Y. 2010-11), held that the assessee had not correctly worked out the perquisite value of accommodation in accordance with amended Rule 3 of the Rules, and was liable to be treated as an assessee in default u/s 201(1) of the Act for non-deduction/short deduction. It was further held that the assessee was liable to pay interest u/s 201(1A).

The assessee thereupon filed an appeal before the CIT (A) who, by an order dated 22^nd July, 2014, affirmed the orders passed by the AO.

The assessee thereupon filed an appeal before the Tribunal. The Tribunal, by an order dated 27^th February, 2015, inter alia, held that the employees of the assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 1 of Table 1 appended to Rule 3 of the Rules. Accordingly, the appeal was dismissed.

The assessee, thereupon, filed an appeal before the Karnataka High Court. The High Court noted that the assessee, which was a Trust under the 1890 Act, was controlled and financed by the Central Government, and governed by the Rules governing the service conditions of the employees of the Central Government. According to the High Court, the assessee may be an instrumentality of the State for the purpose of Article 12 of the Constitution of India. However, for the purposes of Rule 3, the requirement was that the accommodation should be provided by the Central or State Government to the employees either holding office or post in connection with affairs of the Union or of a State or serving with anybody or undertaking under the control of such Government from deputation. The High Court held that merely because the assessee is a body or undertaking owned or controlled by the Central Government, it cannot be elevated to the status of Central Government. Thus, the assessee cannot claim that valuation of perquisites in respect of residential accommodation should be computed as in case of an accommodation provided by the Central Government. Therefore, Sl. No. 1 of Table 1 of Rule 3 of the Rules did not apply to the assessee.

The assessee thereupon filed a Special Leave Petition before the Supreme Court.

The Supreme Court agreed with the findings recorded by the High Court that even if the petitioner may be considered as a State instrumentality within the definition of Article 12 of the Constitution of India, the same cannot be treated at par with the Central/State Government employees under Table-I of Rule 3 of the Income- tax Rules, 1962. Accordingly, the rules applicable to government employees for the purpose of computing the value of perquisites u/s 17(2) would not be applicable in the case of the petitioner. The Supreme Court held that merely because the petitioner might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the petitioner is a Central/State Government. The Supreme Court therefore declined to interfere with the order of the High Court.

Insofar as the merits of the claim is concerned, the Counsel for the Petitioner pointed out that some of the crucial aspects had not been considered on merits by the High Court and, therefore, the petitioner proposed to file a review application before the High Court pointing out certain aspects on merits.

The Supreme Court, without expressing anything on the same, simply permitted the petitioner to file a review application on the aforesaid only and directed that as and when such a review application is filed, the same be considered in accordance with law and on its own merits.

16 ACIT vs. Kalpataru Land Pvt. Ltd. (2022)

447 ITR 364 (SC)

Reassessment – Assessment could not be reopened on a change of opinion.

The assessment of the assessee, engaged in the business of real estate, for A.Y. 2013-2014 was completed u/s 143(3) of the Income -tax Act, 1961 (the Act) on 20^th February 2016 by determining nil total income.

On 27^th March 2019, a notice u/s 148 was issued to the petitioner for A.Y. 2013-2014.

The assessment was reopened for the reason that the assessee company had issued its shares at premium of ₹990 per share in F.Y. 2012-13 (relevant to A.Y. 2013-14). During the said period, the assessee company had no significant transaction except having capitalized its interest expenses to the cost of the land purchased. The valuation of shares at a high premium of ₹990 per share by the company was based on the Discounted Cash Flow (DCF) method, which projections of profitability, according the AO, were computed on unrealistic future growth projections. The AO was of the view that the company had received consideration which exceeded the Fair Market Value (FMV) of the shares and therefore was liable to be taxed as the difference between the aggregate value of the shares and FMV u/s 56(2) (viib) of the Act.

The High Court noted that by a letter dated 5^th October, 2015, the AO had called upon the assessee to produce evidence in support of increase of the authorised share capital, produce the evidence of share allotment and name and address of the parties from whom share premium was received, among other things. The assessee by its letter dated 23^rd December 2015, provided the details of share premium received including name of the party from whom it was received. After considering the same, the assessment order has been passed on 20^th February, 2016. Therefore, according to the High Court, it was not permissible for an AO to reopen the assessment based on the very same material with a view to take another view without consideration of material on record once view is conclusively taken by the AO.

The Supreme Court dismissed the SLP, considering the fact that earlier the AO had called upon the assessee to produce the evidence in support of increase of authorised share capital, produce the evidence of share allotment and names and addresses of the parties from whom share premium was received, among other things before passing the assessment order. According to the Supreme Court, the subsequent reopening could be said to be a change of opinion.

Note:

The Supreme Court has also dismissed SLPs of the Revenue for similar reasons in other two cases [(i) PCIT vs. State Bank of India (2022) 447 ITR 368 (SC); and (ii) DCIT vs. Financial Software and Systems P Ltd. (2022) 447 ITR 370 (SC)].

17 Harshit Foundation Sehmalpur Jalalpur Jaunpur vs. Commissioner of Income Tax, Faizabad

(2022) 447 ITR 372 (SC)

Charitable purpose – Registration –There is no provision in the Act by which it provides that on non-deciding the registration application u/s 12AA(2) within a period of six months there shall be deemed registration.

In an appeal filed u/s 260A of the Income-tax Act, 1961 (‘the Act’) by the Revenue before the Allahabad High Court from the order dated 28^th June, 2013 passed by the Income-tax Appellate Tribunal, Lucknow, the Appellant had raised a question as to whether non-disposal of the application for registration within a period of six months will result in deemed grant of registration u/s 12AA(2) of the Act.

The High Court set aside the order of the Tribunal and allowed the Revenue’s appeal holding that non-disposal of the application for registration, by granting or refusing registration, before expiry of six months as provided u/s 12AA(2) of the Act would not result in deemed grant of registration by following the decision of its Full Bench in CIT vs. Muzafar Nagar Development Authority (2015) 372 ITR 209 (All) (FB).

After considering in detail the provisions of Section 12AA(2) of the Act, the Supreme Court found that there is no specific provision in the Act by which it provides that on non-deciding the registration application u/s 12AA (2) within a period of six months there shall be deemed registration.

According to the Supreme Court, the Full Bench of the High Court had rightly held that even if in a case where the registration application u/s 12AA is not decided within six months, there shall not be any deemed registration. The Supreme Court was in complete agreement with the view taken by the Full Bench of the High Court. The Special Leave Petition was, therefore, dismissed.

BCAJ Admin

53 Kotak Mahindra Bank Limited vs. Commissioner of Income Tax, Bangalore (2023) 458 ITR 113(SC)

Settlement Commission — Immunity from prosecution and penalty as contemplated — Section 245H — Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act — The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The facts giving rise to the present appeal, in a nutshell, are that the Appellant-Assessee, Kotak Mahindra Bank Limited (formerly, “M/s. ING Vysya Bank Limited”) is a Public Limited Company carrying on the business of banking and is assessed to tax in Bangalore where its registered office is located. Apart from the business of banking, the Appellant also carries out leasing business on receiving approval from the Reserve Bank of India (hereinafter “RBI” for short) vide Circular dated 19th February, 1994. Thus, the Appellant derives its income, inter alia, from banking activities as well as from leasing transactions.

The Appellant filed its income tax returns for the assessment years 1994–1995 to 1999–2000, and assessment orders were passed up to the assessment year 1997–1998 and the assessment for the subsequent years was pending. During the assessment proceedings for the assessment year 1997–1998, the Assessing Officer (AO) made certain additions and disallowances based on which the assessment already concluded for the assessment years 1994–1995 to 1996–1997 were proposed to be reopened. The AO then passed an Assessment Order dated 30th March, 2000, for the assessment year 1997–1998. The main issue pertained to the income with respect to the activity of leasing. As per the Assessment Order, the Appellant had been accounting for lease rental received, by treating the same as a financial transaction. As a result, the lease rental was bifurcated into a capital repayment portion and an interest component. Only the interest component was offered to tax. In other words, the Appellant treated such leases as loans granted to the “purported” lessees to purchase assets. In such cases, the ownership of the assets is vested with the lessees. However, the Appellant claimed depreciation on those assets under Section 32 of the Income-tax Act, 1961 (“the Act”) though the Appellant was not the owner of the assets for the purpose of the said transactions.

On 9th June, 2000, the AO issued a notice under Section 148 of the Act for the reassessment of income for the aforesaid assessment years. The AO also passed a penalty order dated 14th June, 2000, levying a penalty under Section 271(1)(c) of the Act, after being satisfied that the Appellant had concealed its income as regards lease rental.

While various proceedings, such as an appeal before the CIT(A) for the assessment year 1997–1998, re-assessment proceedings for the assessment years 1994–1995 to 1996–1997 and regular assessment proceedings for the assessment years 1998–1999 and 1999–2000 were pending before various income tax authorities, the Appellant, on 10th July, 2000, approached the Settlement Commission at Chennai to settle its income tax liabilities under Section 245C(1) of the Act. The Appellant sought for determination of its taxable income for the assessment years 1994–1995 to 1999–2000, after considering the issues pertaining to the income assessable in respect of its leasing transaction; eligibility to avail depreciation in respect of leased assets; the quantum of allowable deduction under Section 80M and exemption under Sections 10(15) and 10(23G); and depreciation on the investments portfolio of the bank classified as permanent investments.

When matters stood thus, the concluded assessments for earlier assessment years were reopened by the issuance of notices under Section 148 of the Act. The Appellant filed returns under protest with respect to the said assessment years.

Before the Settlement Commission, the Respondents-Revenue raised a preliminary objection contending that the Appellant did not fulfil the qualifying criteria as contemplated under Section 245C(1) and, hence, the application filed by the Appellant was not maintainable, as, under the said provision, the Appellant was required to make an application in the prescribed manner containing full and true disclosure of its income which had not been disclosed before the AO and also the manner in which such income had been derived. That unless there is a true and full disclosure there would be no valid application and the Settlement Commission will not be able to assume jurisdiction to proceed with the admission of the application. It was thus contended that the purported application made before the Settlement Commission was not an application as contemplated under Section 245C(1) of the Act for the reason that the Appellant had not made a full and true disclosure of its income which had not been disclosed before the AO.

After considering the contentions of both parties, the Settlement Commission passed an Order dated 11th December, 2000, entertaining the application filed by the Appellant under Section 245C and rejecting the preliminary objections raised by the Revenue. The Settlement Commission allowed the application filed by the Appellant by way of a speaking order and permitted the Appellant to pursue its claim under Section 245D. Thus, the application proceeded further under Section 245D(1) of the Act.

The Revenue challenged the Order dated 11th December, 2000, passed by the Settlement Commission before the High Court of Karnataka at Bangalore by way of Writ Petition No. 13111 of 2001. The Revenue questioned the jurisdiction of the Settlement Commission in entertaining the application filed by the Appellant under Section 245C(1) of the Act.

The learned Single Judge of the High Court of Karnataka, after going through the legislative history of the provisions of Chapter-XIXA, accepted the argument advanced by the Appellant that the proviso to Section 245C as it stood earlier, which enabled the Commissioner to raise an objection even at the threshold to entertain an application of this nature had been later shifted to sub-section (l)(A) of Section 245D and from the year 1991, it had been totally omitted, and in the light of such legislative history, it was not open to the Revenue to raise any such preliminary objection regarding maintainability of the application itself. It was further held that the application can be proceeded with by the Settlement Commission for determination of the same on merits and it was not necessary that the Revenue should be permitted to raise a preliminary objection as to the maintainability of the application.

The learned Single Judge disposed of the above Writ Petition by way of an Order dated 18th August, 2005, in favour of the Appellant herein by holding that notwithstanding any preliminary finding, it was still open to the Commissioner to agitate or to apprise the Commission of all the aspects of the matter that he may find fit to be placed before the Commission. The Single Judge was of the view that it was not necessary to examine the legal position that may require an interpretation of provisions of Section 245C at that stage when the matter itself was still at large before the Settlement Commission as the very object of Chapter-XIXA was to settle cases and to reduce the disputes and not to prolong litigation. Thus, the High Court disposed of the Writ Petition, holding that it was open to the parties to raise all their contentions before the Commission at the stage of disposal of the application and the Commission may, independent of the findings which it has given under the Order dated 11th December, 2000, examine all the contentions and proceed to pass orders on merits in accordance with the provisions of the Act.

As a result of the Order dated 18th August, 2005, passed by the High Court of Karnataka, the Settlement Commission heard both parties on merits as well as on the issue of maintainability. The Settlement Commission upheld the maintainability of the application filed by the Appellant and passed an Order dated 4th March, 2008, under Sections 245D(1) and 245D(4), determining the additional income at ₹196,36,06,201. As regards the issue of immunity from penalty and prosecution, the Commission, having regard to the fact that the Appellant had co-operated in the proceedings before the Settlement Commission, and true and full disclosure was made by the Appellant before the Commission, granted immunity under Section 245H(1) from the imposition of penalty and prosecution under the Act and the relevant Sections of the Indian Penal Code. Further, the Settlement Commission annulled the penalty levied by the AO under Section 271(1)(c) for the assessment year 1997–1998 in respect of non-disclosure of lease rental income. The same was annulled considering that the non-disclosure was on account of RBI guidelines and subsequent disclosure on the part of the Appellant, of additional income of the lease income before the Settlement Commission when the Appellant realised the omission to disclose the same as per income tax law.

Being aggrieved by the Order dated 4th March, 2008, passed by the Settlement Commission, the Respondent-Revenue preferred Writ Petition bearing No. 12239 of 2008 (T-IT) before the High Court of Karnataka assailing the said Order. The learned Single Judge of the High Court vide Order dated 20th May, 2010, upheld the Order of the Settlement Commission as regards the jurisdiction to entertain the application and also as regards the correctness of the Order passed by the Settlement Commission in determining the tax liability, but found fault with the Commission in so far as granting immunity to the Appellant from the levy of penalty and initiation of prosecution was concerned. The Single Judge was of the view that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles and that the burden was on the Appellant herein to prove that there was no concealment or wilful neglect on its part and in the absence of such evidence before the Settlement Commission, the Order granting immunity from penalty and prosecution was an illegal order. The learned Single Judge, thus, remanded the matter to the Settlement Commission for the limited purpose of reconsidering the question of immunity from levy of penalty and prosecution and the Order of the AO levying penalty, after providing an opportunity to both parties.

Being aggrieved by the remand order passed by the learned Single Judge, the Appellant preferred Writ Appeal No. 2458 of 2018 before a Division Bench of the High Court.

In the meanwhile, Revenue preferred Special Leave Petition (C) CC No. 19663 of 2010 before the Supreme Court against the Order dated 20th May, 2010, passed by the learned Single Judge in Writ Petition No. 12239 of 2008. On 6th January, 2012, the Supreme Court directed the Special Leave Petition to stand over for eight weeks and directed the Settlement Commission to dispose of the matter remanded to it by the High Court. In pursuance of the Order dated 6th January, 2012, passed by this Court, the Settlement Commission, Chennai, issued a notice in the remanded matter on 30th January, 2012.

On 10th February, 2012, the Appellant moved an application before the Supreme Court seeking modification of its Order dated 6th January, 2012, by issuing a direction to the High Court to dispose of Writ Appeal No. 2458 of 2010. It was contended that the filing of a Special Leave Petition against the order of the learned Single Judge was not proper as a Writ Appeal should have been filed. That admittedly, Writ Appeal No. 2458 of 2010 was pending before the High Court and the Revenue suppressed this vital information while filing the Special Leave Petition. The Supreme Court by way of an Order dated 21st February, 2012, recalled its earlier Order dated 6th January, 2012, passed in SLP (C) CC No. 19663 of 2010 and directed the High Court to dispose of Writ Appeal No. 2458 of 2010 within a period of two months.

Following the same, a Division Bench of the High Court of Karnataka vide Order dated 6th July, 2012, dismissed the Writ Appeal preferred by the Appellant and upheld the Order passed by the learned Single Judge. It was observed that the Order of the learned Single Judge remanding the matter to the Settlement Commission for adjudication did not suffer from any material irregularity or illegality.

Aggrieved by the judgment dated 6th July, 2012, in Writ Appeal No. 2458 of 2010, the Appellant has preferred Civil Appeal before the Supreme Court.

According to the Supreme Court, the following points emerged for its consideration:

“Whether the Division Bench of the High Court was right in affirming the findings of the learned Single Judge, to the effect that the Settlement Commission ought not to have exercised discretion under Section 245H of the Act and granted immunity to the Assessee de hors any material to demonstrate that there was no wilful concealment on the part of the Assessee to evade tax and on that ground, remanding the matter to the Commission for fresh consideration?”

The Supreme Court found that in the present case, the Settlement Commission had rightly considered the relevant facts and material and, accordingly, decided to grant immunity to the Appellant from prosecution and penalty. The Supreme Court arrived at this conclusion having regard to the following aspects of the matter, recorded by the Settlement Commission:

The Commission in its order dated 4th March, 2008, had noted that the Appellant had realised while adhering to the RBI guidelines of accounting of lease income that there was an error in not disclosing the full lease rental receipts as per income tax law. Thus, the Appellant offered additional income under various heads, which were not considered by the AO. Considering the nature and circumstances and the complexities of the investigation involved, the Commission was of the view that the application was to proceed under Section 245D(1) of the Act and that prima facie, a full and true disclosure of income not disclosed before the AO had been made by the Appellant. The findings of the Commission to this effect are usefully extracted as under:

“4.3 We have considered the rival submissions. We are of the opinion that there is no bar for banking companies to approach the Commission. The disclosure of the material facts in the return of income or the documents accompanying return of income is not a bar for the applicant to approach the Commission. In view of this, we hold that the applicant is eligible to approach the Commission.
…

5.1 Finally we have carefully gone through the settlement application and the confidential annexures and are satisfied that the complexities of investigation as brought out in the application do exist. We have also considered the nature and circumstances of the case as explained by the applicant’s representative. The applicant is an established scheduled bank with several branches. The applicant has realized that when adhering to RBI guidelines of accounting of lease income there was an error in not disclosing the full lease rental receipts as per income tax law. In addition the applicant has offered additional income under various heads not considered by the Assessing Officer. We are satisfied that the nature and circumstances and the complexities of investigation involved do warrant the application to be proceeded with under Section 245D(1) of the Act. We are also reasonably satisfied that, prima facie, a full and true disclosure of income not disclosed before the Assessing Officer has been made by the applicant. Additionally, taking a practical view of the case, we are also concerned by the time taken to dispose of this application, particularly in respect of a scheduled bank. We feel that the matters need to be given a quietus and brought to close as speedy collection of taxes is also an important function of the Settlement Commission. We therefore allow the application to be proceeded with Under Section 245D(1) of the Act.”

According to the Supreme Court, the aforesaid findings of the Settlement Commission demonstrated that it had applied its mind to the aspect of whether there was wilful concealment of income by the Assessee. Having noted that non-disclosure was on account of RBI guidelines, which required a different standard of disclosure, the Commission decided to grant immunity to the Appellant from prosecution and penalty.

In the light of the aforesaid discussion, the Supreme Court was of the view that the learned Single Judge of the High Court was not right in holding that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles. The Division Bench was also not justified in affirming such a view of the learned Single Judge. The Supreme Court was of the view that the Commission had adequately applied its mind to the circumstances of the case, as well as to the relevant law and accordingly exercised its discretion to proceed with the application for settlement and grant immunity to the Assessee from penalty and prosecution. The Order of the Commission dated 4th March, 2008, did not suffer from such infirmity as would warrant interference by the High Court, by passing an order of remand.

The Supreme Court concluded that in the present case, the Appellant placed material and particulars before the Commission as to the manner in which income pertaining to certain activities was derived and has sought to offer such additional income to tax. Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act. The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The Supreme Court was of the view that the Order of the Settlement Commission dated 4th March, 2008, was based on a correct appreciation of the law, in light of the facts of the case and the High Court ought not to have interfered with the same. Therefore, the judgment dated 6th July, 2012, passed by the High Court of Karnataka at Bangalore in Writ Appeal No. 2458 of 2010 whereby the judgment of the learned Single Judge dated 20th May, 2010, passed in Writ Petition No. 12239 of 2008, remanding the matter to the Settlement Commission to determine afresh, the question as to immunity from levy of penalty and prosecution was affirmed, was set aside by the Supreme Court. Consequently, the order of the learned Single Judge was also set aside. The Order of the Settlement Commission dated 4th March, 2008, was restored. The appeal was accordingly allowed.

54 Director of Income Tax, New Delhi vs. Travelport Inc. Civil
(2023) 454 ITR 289 (SC)

India-USA DTAA – Article 7 — Under Explanation 1(a) under clause (i) of Sub-section (1) of Section 9 of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India — What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact — Article 7 of DTAA is of no assistance as the entire income was taxable in contracting state.

Before the Supreme Court, the Respondents in the appeals before it were in the business of providing electronic global distribution services to Airlines through what is known as “Computerized Reservation System” (hereinafter referred to as CRS). For the said purpose, the Respondents maintain and operate a Master Computer System, said to consist of several mainframe computers and servers located in other countries, including the USA. This Master Computer System is connected to airlines’ servers, to and from which data is continuously sent and obtained regarding flight schedules, seat availability, etc.

In order to market and distribute the CRS services to travel agents in India, the Respondents had appointed Indian entities and had entered into distribution agreements with them.

The Respondents earned an amount of USD 3 / EURO 3 accordingly, as the case may be, per booking made in India. Out of the said earnings, of USD 3 / EURO 3, the Respondents paid various amounts to the Indian entities, which ranged from USD / EURO 1 to USD / EURO 1.8. In other words, the amount paid by the Respondents to their Indian entities ranged from 33.33 per cent to about 60 per cent of their total earnings.

The respective Assessing Officers in the original proceedings came to the conclusion that the entire income earned out of India by the Respondents was taxable. This was on the basis that the income was earned through the hardware installed by the Respondents in the premises of the travel agents and that, therefore, the total income of USD / EURO 3 was taxable.

The orders of assessment so passed were upheld by the respective Commissioners of Income Tax (Appeals) by independent orders.

Appeals were filed by the Respondents before the Tribunal and the Revenue also filed cross objections on a different aspect. The Tribunal held that the Respondents herein constitute Permanent Establishment (PE) in two forms, namely, fixed place PE and dependent agent PE (DAPE). At the same time, the Tribunal also held that the lion’s share of activity was processed in the host computers in USA / Europe and that the activities in India were only minuscule in nature. Therefore, as regards attribution to the PE constituted in India, the Tribunal assessed it at 15 per cent of the revenue and held, on the basis of the functions performed, assets used and risks undertaken (FAR), that this 15 per cent of the total revenue was the income accruing or arising in India. This 15 per cent worked out to 0.45 cents. However, the payment made to the distribution agents was USD 1 / EURO 1 in many cases and much more in some cases. Therefore, the Tribunal held that no further income was taxable in India.

The Revenue filed miscellaneous applications, but the same were dismissed by the Tribunal, clarifying that after apportioning the revenue, no further income was taxable in India, as the remuneration paid to the agent in India exceeded the apportioned revenue.

Appeals were filed both by the Revenue and Assesses against the orders of the Tribunal before the Delhi High Court. The Delhi High Court dismissed the appeals filed by the Revenue on the grounds that no question of law arose in these matters. The Delhi High Court held that insofar as attribution is concerned, the Tribunal had adopted a reasonable approach.

Aggrieved by the orders passed by the Delhi High Court, the Revenue has come up with the above appeals.

Assailing the judgment of the High Court, it was argued by the learned Additional Solicitor General: (i) that the attribution of only 15 per cent of the revenue as income accruing / arising in India within the meaning of Section 9(1)(i) of the Income-tax Act, 1961 read with Article 7 of the Treaty, was completely wrong; and (ii) that the computers placed in the premises of the travel agents and the nodes / leased lines form a fixed place PE of the Respondent in India.

The Supreme Court was of the view that there was no need to go into the second contention of the learned Additional Solicitor General because the approach of the Tribunal and the High Court on the question of attribution appears to be fair and reasonable.

So far as the first contentions were concerned, the Tribunal had arrived at the quantum of revenue accruing to the Respondent in respect of bookings in India, which could be attributed to activities carried out in India, on the basis of FAR analysis (functions performed, assets used and risks undertaken). The Commission paid to the distribution agents by the Respondents was more than twice the amount of attribution, and this had already been taxed. Therefore, the Tribunal had rightly concluded that the same extinguished the assessment.

Further, the question as to what proportion of profits arose or accrued in India was essentially one of the facts. Therefore, according to the Supreme Court, the concurrent orders of the Tribunal and the High Court did not call for any interference.

The Supreme Court observed that under Explanation 1(a), under clause (i) of Sub-section (1) of Section 9
of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India. What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact. On this question of fact, the Tribunal had taken into account relevant factors.

According to the Supreme Court, Article 7 of the India-USA DTAA also may not really come to the rescue of the Revenue for the reason that in the contracting state, the entire income derived by the Respondents, namely, USD / EURO 3 would be taxable. That is why Section 9(1) confines the taxable income to that proportion which is attributable to the operations carried out in India.

Therefore, the Supreme Court was of the view that the impugned order(s) of the High Court did not call for interference. Insofar as the second issue, namely, the question of permanent establishment was concerned, the Supreme Court did not go into the same, as it had concurred with the High Court on the first issue.

All the appeals filed by the Appellant-Department of Income Tax were, therefore, dismissed.

BCAJ Admin

7.  Capital gains –
Exemption u/s. 54E is available to the depreciable assets which is a long term
capital asset and cannot be denied by referring to the fiction created u/s.50.

CIT vs. V.S. Dempo Company Ltd. (2016) 387 ITR 354 (SC)

In the return filed by the assessee for the Assessment Year
1989-90, the assessee had disclosed that it had sold its loading platform M.V.
Priyadarshni for a sum of Rs.1,37,25,000/- on which it had earned some capital
gains. On the said capital gains the assessee had also claimed that it was
entitled for exemption u/s. 54E of the Income Tax Act. The asset was purchased
in the year 1972 and sold sometime in the year 1989. Thus, the asset was almost
17 years old. Going by the definition of long term capital asset contained in
section 2(29B), it was admittedly a long-term capital asset. The Assessing
Officer however rejected the claim for exemption u/s. 54E on the ground that
the assessee had claimed depreciation on this asset and, therefore, provisions
of section 50 were applicable. Though this was upheld by the Commissioner of
Income Tax (Appeals), the Income Tax Appellate Tribunal allowed the appeal of
the assessee herein holding that the assessee was entitled for exemption under
Section 54E of the Act. The High Court dismissed the appeal of the Revenue.
While doing so the High Court relied upon its own judgment in the case of CIT
vs. ACE Builders Pvt. Ltd. [(2006) 281 ITR 210 [Bom]. The High Court
observed that section 50 of the Act which is a special provision for computing
the capital gains in the case of depreciable assets was not only restricted for
the purposes of section 48 or section 49 of the Act as specifically stated
therein, the said fiction created in sub-section (1) & (2) of section 50
had limited application only in the context of mode of computation of capital
gains contained in sections 48 and 49 and would have nothing to do with the
exemption that is provided in a totally different provision i.e. section 54E.
Section 48 deals with the mode of computation and section 49 relate to cost
with reference to certain mode of acquisition. This aspect was analysed by the
judgment of the Bombay High Court in the case of CIT vs. ACE Builders Pvt.
Ltd. (supra) in the following manner:

“In our opinion, the assessee cannot be denied exemption
u/s. 54E, because, firstly, there is nothing in section 50 to suggest that the
fiction created in section 50 is not only restricted to sections 48 and 49 but
also applies to other provisions. On the contrary, section 50 makes it
explicitly clear that the deemed fiction created in sub-section (1) & (2)
of section 50 is restricted only to the mode of computation of capital gains
contained in Section 48 and 49. Secondly, it is well established in law that a
fiction created by the legislature has to be confined to the purpose for which
it is created. In this connection, we may refer to the decision of the Apex
Court in the case of State Bank of India vs. D. Hanumantha Rao reported in 1998
(6) SCC 183. In that case, the Service Rules framed by the bank provided for
granting extension of service to those appointed prior to 19.07.1969.

The respondent therein who had joined the bank on 1.7.1972
claimed extension of service because he was deemed to be appointed in the bank
with effect from 26.10.1965 for the purpose of seniority, pay and pension on
account of his past service in the army as Short Service Commissioned Officer.
In that context, the Apex Court has held that the legal fiction created for the
limited purpose of seniority, pay and pension cannot be extended for other
purposes. Applying the ratio of the said judgment, we are of the opinion, that
the fiction created u/s. 50 is confined to the computation of capital gains
only and cannot be extended beyond that.

Thirdly, Section 54E does not make any distinction between
depreciable asset and non-depreciable asset and, therefore, the exemption
available to the depreciable asset u/s. 54E cannot be denied by referring to
the fiction created u/s. 50. Section 54E specifically provides that where
capital gain arising on transfer of a long term capital asset is invested or
deposited (whole or any part of the net consideration) in the specified assets,
the assessee shall not be charged to capital gains. Therefore, the exemption
u/s. 54E of the I.T. Act cannot be denied to the assessee on account of the
fiction created in Section 50.”

The Supreme Court held that it was in agreement with the
aforesaid view taken by the High Court.

The Supreme Court noted that the Gujarat High Court as well
as Guahati High Court had also taken the same view in the following cases:

1.  CIT 
vs. Polestar Industries [(2014) 221 Taxman 423 (Guj)];

2.  CIT vs. Tax vs. Assam Petroleum Industries
(P.) Ltd. [(2003) 262 ITR 587 (Guj.)].

The Supreme Court also noted that against the aforesaid
judgments no appeal had been filed.

In view of the foregoing, the Supreme Court did not find any
merit in the instant appeal which was accordingly, dismissed.

8. Business Expenditure – Amortisation of expenditure for
issue of share u/s. 35D – Amortisation allowable over a period of 10 years –
Where benefit is allowed for the first two assessment years, it cannot be denied
in the subsequent balance period.

Shasun Chemicals and Drugs Ltd. V. CIT (2016) 388 ITR 1
(SC)  

Business Expenditure – Bonus – Dispute with workmen – Payment
made to Trust to comply with the requirement of section 43B but the dispute was
settled and the payment was made before the expiry of time permissible u/s. 36
– Deduction was allowable and the provisions of section 40A(9) were not
attracted.

The assessee went in for public issue of shares in order to
raise funds to meet the capital expenditure and other expenditure relating to
expansion of its existing units of production both at Pondicherry and Cuddalore
and for expansion of its Research and Development Activity. The assessee issued
to public 15,10,000 equity shares of Rs.10/- each for cash at a premium of
Rs.30/- per share aggregating to Rs.6,04,00,000/-.

The aforesaid issue was opened for public subscription during
the financial year ending 31.03.1995 relevant to the Assessment Year 1995-96.
The assessee had, in the prospectus issued, clearly stated under the column
projects that the production capacity of its existing products, more
particularly Ibuprofen and Ranitidine was proposed to be increased.

The assessee incurred a sum of Rs.45,51,890/- towards the
aforesaid share issue expenses and claimed 1/10th of the aforesaid share issue
expenses each year u/s. 35D of the Act from the Assessment Years 1995-96 to
2004-05. The Assessing Officer on the same set of facts allowed the claim of
the assessee (1/10th of the share issue expenses u/s. 35D of the Act) for the
initial Assessment Year being the Assessment Year 1995-96 after examining the
materials produced. However, the Assessing Officer disallowed the expenses for
the Assessment Year 1996-97 on the ground that the share issue expenses were
not eligible for deduction in view of the decision of the Supreme Court in the
case of Brooke Bond India Ltd. vs. CIT [(1997) 225 ITR 798 (SC)],
stating that the expenditure incurred was capital in nature and hence not
allowable for computing the business profits.

Aggrieved against the aforesaid disallowance made by the
Assessing Officer for the Assessment Year 1996-97, the assessee filed an appeal
before the Commissioner of Income Tax (Appeals), [hereinafter referred to as
CIT(A)] who vide his order directed the Assessing Officer to verify
physically the factory premises of the assessee and find out, whether there
were any additions to the plant and machinery at the factory and whether there
were any additions to the buildings at the factory whereby any expansion has
been made to the existing industrial undertaking to justify the claim made by
the assessee.

In furtherance to the aforesaid direction, the Assessing
Officer after making due physical verification of the factory premises and on
being satisfied with the expansion of the facilities to the industrial
undertaking duly allowed the claim of share issue expenses. While doing so, the
Assessing Officer, for the assessment year 1996-97, passed a detailed and
elaborate order after scrutinising all the materials made available to him and
recorded a positive finding of fact that there was an expansion to the existing
units of the industrial undertaking and after being satisfied of the same duly
allowed the claim of share issue expenses u/s. 35D.

In the return by the assessee for the assessment year
2001-02, it was mentioned by the assessee that it had paid bonus to its
employees to the tune of Rs.96,08,002/- in the said Financial Year and,
therefore, it claimed deduction. However, invoking the provisions of section
40A(9), the said expenditure was disallowed on the ground that it was not paid
in cash to the concerned employees. CIT(A) allowed the expenditure and the same
view was taken by the ITAT but the High Court has reversed the view of ITAT on
this ground also.

In the aforesaid backdrop, two questions were raised before
the Supreme Court by the assessee.

As regards to the issue amortisation u/s. 35D of the
expenditure incurred on issue of shares, the Supreme Court noted that in the
Income Tax Return which was filed for the Assessment Year 1995-96, the assessee
had claimed that it had incurred a sum of Rs.45,51,890/- towards the share
issue expenses and had claimed 1/10th of the aforesaid share issue expenses
u/s. 35D of the Act from the Assessment Year 1995-96. This claim of the
assessee was found to be justified and allowable under the aforesaid provisions
and on that basis 1/10th share issue expenses was allowed u/s. 35D of the Act.
When it was again claimed for the Assessment Year 1996-97, though it was
disallowed and on directions of the Appellate Authority, the Assessing Officer
made physical verification of the factory premises. He was satisfied that there
was expansion of the facilities to the industrial undertaking of the assessee.
It was on this satisfaction that for the Assessment Year 1996-97 also the
expenses were allowed. The Supreme Court held that once this position is
accepted and the clock had started running in favour of the assessee, it had to
complete the entire period of 10 years and benefit granted in first two years
could not have been denied in the subsequent years as the block period was 10
years starting from the Assessment Year 1995-96 to Assessment Year 2004-05. The
Supreme Court observed that the High Court, however, disallowed the same
following the judgment of the Supreme Court in the case of Brooke Bond India
Ltd (supra). In the said case it was held that the expenditure incurred on
public issue for the purpose of expansion of the company is a capital
expenditure. However, in spite of the argument raised to the effect that the
aforesaid judgment was rendered when section 35D was not on the statute book
and this provision had altered the legal position, the High Court still chose
to follow the said judgment. According to the Supreme Court it was here where
the High Court went wrong as the instant case was to be decided keeping in view
the provisions of section 35D. The Supreme Court held that in any case, it
warrants repetition that in the instant case under the very same provisions
benefit was allowed for the first two Assessment Years and, therefore, it could
not have been denied in the subsequent block period. The Supreme Court thus,
answered the question in favour of the assessee holding that the assessee was
entitled to the benefit of section 35D for the Assessments Years in question.

So far as the other question regarding deduction on account
of payment of bonus to the employees of the assessee was concerned, the Supreme
Court noted that in the Assessment Years in question the workers of the
assessee had raised a dispute of quantum of bonus which had led to the labour
unrest as well. Because of this the workers had finally refused to accept the
bonus offered to them. Faced with this situation, the assessee had made the
payment to the Trust to comply with the requirement of section 43B, as the said
provision makes it clear that deduction in respect of bonus would be allowed
only if actual payment was made. Pertinently, the dispute could be settled with
the workers well in time and for that reason payment of bonus was made to the
workers on the very next day of deposit of the said amount in the Trust by the
assessee. This happened before the expiry of due date by which such payment was
supposed to be made in order to claim deduction u/s. 36 of the Act. However,
since the payment was made from the Trust, the Assessing Officer took the view
that as the payment was not made by the assessee to the employees directly in
cash, it was not allowable in view of the provisions of section 40A(9). Though
this view was not accepted by the CIT(A) as well as ITAT, the High Court had
found justification in the stand taken by the Assessing Officer. According to
the Supreme Court, here also the High Court had gone wrong in relying upon the
provisions of section 40A(9) of the Act.

The provisions of section 36 which enumerate various kinds of
expenses which are allowable as deduction while computing the business income
u/s. 28. The amount paid by way of bonus is one such expenditure which is
allowable under clause (ii) of sub-section (1) of section 36. According to the
Supreme Court there was no dispute that this amount was paid by the assessee to
its employees within the stipulated time. Embargo specified u/s. 43B or
40A(9)  did not come in the way of the
assessee. Therefore, the High Court was wrong in disallowing this expenditure
as deduction while computing the business income of the assessee and the
decision of the ITAT was correct.

On both counts, the order of the High Court was set aside by
the Supreme Court and the appeals were allowed.

Note: In the above case, in the context of the second
issue relating to deductibility of bonus payment, some of the observations of
the apex court relating to sections 40A(9) and 43B lack clarity and do not seem
to be in line with the provisions and hence, they are ignored.

9  Appeal to the High
Court – High Court must frame the substantial question(s) of law arising in the
appeal before answering the same.

Jai Hind Cycle Company Ltd. vs. CIT (2016) 388 ITR 482
(SC)

The only point canvassed at the hearing before the Supreme
Court was that the income tax appeal u/s. 260A 
had been decided by the High Court without framing any substantial
question of law. This, according to the Appellant was impermissible on the
basis of several decisions of the Supreme Court including the one in M.
Janardhana Rao vs. Joint CIT reported in [(2005) 273 ITR 50 (SC)].

The Supreme Court after perusing the said order of the Court,
was of the view that the High Court ought to have framed the substantial
question(s) of law arising in the appeal before answering the same. The High
Court having not done that, the Supreme Court set aside the order passed by the
High Court and remanded the matter to the High Court for a de novo
consideration after formulating the substantial question(s) of law arising, if
any.

BCAJ Admin

10.  Co-operative Society – Deduction u/s. 80P –
If the income of a society is falling within any one head of exemption, it has
to be exempted from tax notwithstanding that the condition of other heads of
exemption are not satisfied – A deduction would however not be admissible to a
co-operative bank – Also, where the activities of the society are in violation
of the Co-operative Societies Act, deduction cannot be allowed.

The Citizen
Co-operative Society Limited vs. ACIT (2017) 397 ITR 1 (SC)

The Assessee as
Co-operative Society had filed return of income for the Assessment Year
2009-10, for the year ending March 31, 2009 on September 30, 2009 declaring NIL
income. In the return filed, the Assessee claimed a sum of Rs. 4,26,37,081/- as
deduction u/s. 80P of the Act.

The Assessing
Officer held that deduction in respect of income of co-operative societies u/s.
80P of the Act was not admissible to the Appellant as the benefit of deduction,
as contemplated under the said provision was, inter alia, admissible to
those co-operative societies which carried on business of banking or providing
credit facilities to its members. On the contrary, the Appellant society was
carrying on the banking business for public at large and for all practical
purposes, it was acting like a co-operative bank governed by the Banking
Regulation Act, 1949, and its operation was not confined to its members but
outsiders as well.

Insofar as
disallowance of deduction claimed u/s. 80P of the Act was concerned, the CIT
(A) rejected the claim for deduction thereby upheld the order of the Assessing
Officer. While doing so, the CIT (A) followed the order of the Income Tax
Appellate Tribunal (ITAT) in the case of the Appellant itself in respect of
Assessment Years 2007-08 and 2008-09.

Further, appeal
to the ITAT met the same fate as ITAT also referred to its aforesaid order and
dismissed the appeal of the Appellant.

Undeterred, the
Appellant approached the High Court in the form of appeal u/s. 260A of the Act.
This appeal was dismissed by the High Court with the observations that there
was no illegality or infirmity in the order passed by the ITAT.

The Supreme
Court noted that section 80P of the Act provides for certain deduction in
respect of incomes of the co-operative societies. A co-operative society is
defined by section 2(19) of the Act. Where the gross total income of such
co-operative societies includes any income referred to in sub-section (2) of
section 80P, the sums specified in s/s. (2) are allowed as deduction in
accordance with and subject to the provisions of the said section, while
computing the total income of the Assessee. The profit exempted is the net
profit included in the total income and not the gross profit of the business.
Sub-section (2) enlists those sums which are allowed as deductions. Clause (a)
of s/s. (2) includes seven kinds of co-operative societies which are entitled
to this benefit, and in respect of the co-operative societies engaged in the
activities mentioned in those seven classes, the whole of the amount of profits
and gains of business attributable to anyone or more of such activities is
exempted from income by allowing the said income as deduction.

The Supreme
Court observed that in the present petition it was concerned with sub-clause
(i) of Clause (a) of sub-section (2) of section 80P, which enlisted a
co-operative society engaged in carrying on the business of banking or
providing credit facilities to its members.

The Supreme
Court observed that there could not be any dispute to the proposition that
section 80P of the Act was a benevolent provision which was enacted by the
Parliament in order to encourage and promote growth of co-operative sector in
the economic life of the country. It was done pursuant to declared policy of
the Government. Therefore, such a provision had to be read liberally,
reasonably and in favour of the Assessee (See-Bajaj Tempo Limited, Bombay
vs. Commissioner of Income Tax, Bombay City-III, Bombay (1992) 3 SCC 78).
It was also trite that such a provision had to be construed as to effectuate
the object of the Legislature and not to defeat it (See-Commissioner of
Income Tax, Bombay and Ors. vs. Mahindra and Mahindra Limited and Ors.
(1983) 4 SCC 392). Therefore, all those co-operative societies which fall
within the purview of section 80P of the Act are entitled to deduction in
respect of any income referred to in s/s. (2) thereof. Clause (a) of s/s. (2)
gives exemption of whole of the amount of profits and gains of business
attributable to anyone or more of such activities which are mentioned in s/s.
(2).

The Supreme
Court held that sub-section (i) of Clause (a) of sub-section (2), with which it
was concerned, recognised two kinds of co-operative societies, namely: (i)
those carrying on the business of banking and; (ii) those providing credit
facilities to its members.

The Supreme
Court referring to its decisions in the case of Kerala State Cooperative
Marketing Federation Limited and Ors. vs. Commissioner of Income Tax (1998)
5 SCC 48, and of the Punjab and Haryana High Court in the case of Commissioner
of Income Tax vs. Punjab State Co-operative Bank Ltd. (2008) 300 ITR 24
(Punjab & Haryana H.C.), observed that if the income of a society is
falling within any one head of exemption, it has to be exempted from tax
notwithstanding that the condition of other heads of exemption are not
satisfied.

The Supreme
Court noted that with the insertion of s/s. (4) by the Finance Act, 2006, which
was in the nature of a proviso to the aforesaid provision, it was made clear
that such a deduction would not be admissible to a co-operative bank. However,
if it was a primary agriculture credit society or a primary co-operative
agriculture and rural development bank, the deduction would still be provided.
Thus, co-operative banks were specifically excluded from the ambit of section
80P of the Act.

According to
the Supreme Court, if one had to go by the aforesaid definition of
‘co-operative bank’, the Appellant did not get covered thereby. It was also a
matter of common knowledge that in order to do the business of a co-operative
bank, it was imperative to have a licence from the Reserve Bank of India, which
the Appellant did not possess. The Reserve Bank of India itself had clarified
that the business of the Appellant did not amount to that of a co-operative
bank. The Appellant, therefore, would not come within the mischief of
sub-section (4) of section 80P.

However,
according to the Supreme Court, the main reason for disentitling the Appellant
from getting the deduction provided u/s. 80P of the Act was not s/s. (4)
thereof. What has been noticed by the Assessing Officer, after discussing in
detail the activities of the Appellant, was that the activities of the
Appellant were in violations of the provisions of the Mutually Aided Co-op
Societies Act, 1995 (MACSA) under which it is registered. It was pointed out by
the Assessing Officer that the Assessee was catering to two distinct categories
of people. The first category was that of resident members or ordinary members.
In the opinion of the Supreme Court, there may not be any difficulty as far as
this category was concerned. However, the Assessee had carved out another
category of ‘nominal members’. These were those members who were making
deposits with the Assessee for the purpose of obtaining loans, etc. and,
in fact, they are not members in real sense. Most of the business of the
Appellant was with this second category of persons who had given deposits which
were kept in Fixed Deposits with a motive to earn maximum returns. A portion of
these deposits was utilised to advance gold loans, etc. to the members
of the first category. It was found, as a matter of fact, that the depositors
and borrowers were quiet distinct. In reality, such activity of the Appellant
was that of finance business and could not be termed as co-operative society.
It was also found that the Appellant was engaged in the activity of granting
loans to general public as well. All this was done without any approval from
the Registrar of the Societies. With indulgence in such kind of activity by the
Appellant, it was remarked by the Assessing Officer that the activity of the
Appellant was in violation of the Co-operative Societies Act. Moreover, it was
a co-operative credit society which was not entitled to deduction u/s. 80P
(2)(a)(i) of the Act.

The Supreme
Court noted that a specific finding was also rendered that the principle of
mutuality was missing in the instant case.

According to
the Supreme Court, these were the findings of fact which had remained unshaken
till the stage of the High Court. Once the aforesaid aspects were taken into
consideration, the conclusion was obvious, namely, the Appellant could not be
treated as a co-operative society meant only for its members and providing
credit facilities to its members.

The Supreme
Court held that such a society could not claim the benefit of section 80P of
the Act. The appeal, therefore, was dismissed with costs.

11.  Offences and Prosecution – If there is an
attempt to evade tax of the amount less than the monetary limit prescribed in
the Circular, no prosecution should be launched.

Suresh
Sholapurmath and Ors. vs. Income Tax Department and Ors. (2017) 397 ITR 145
(SC)

The assessee
was liable to pay Rs.1465. Rs. 465 was paid but, the document was tampered with
by showing it as Rs.1465.

The Karnataka
High Court refused to quash the prosecution proceedings against the Appellants.
The High Court declined to follow the Circular which provided that if there is
an attempt to evade tax of less than Rs.25,000, no prosecution could be
launched. According to the High Court, this was not a case of evasion of tax
but of furnishing of false declaration and hence circular would not be of any
assistance to the assessee.

The Supreme
Court noted that the amount involved is small, and was paid with interest long
ago. According to the Supreme Court, the Circular dated February 7, 1992
squarely applied and, therefore, no proceedings should have been filed as the
amount was below Rs. 25,000. In view of this, the Supreme Court set aside the
judgement of the High Court and quashed the proceeding against the appellants.

12.  Interest on Refund – Whether an assessee is
entitled to interest u/s. 244A of the Income-tax Act, 1961 on excess self
assessment tax – The High Court could not have disagreed with the decision of a
co-ordinate Bench – Appropriate course of action would have been to refer the
matter to a larger Bench

Engineers
India Ltd. vs. Commissioner of Income Tax (2017) 397 ITR 16 (SC)

The issue
before the Supreme Court pertained to grant of interest u/s. 244A of the
Income-tax Act, 1961 for the Assessment Year 2006-07.

The impugned
judgment of the High Court revealed that another judgment of the Co-ordinate
Bench of the same High Court in the case of CIT vs. Sutlej Industries Ltd.
[2010] 325 ITR 331 (Delhi) was cited wherein the view taken was that in such
circumstances the Assessee would be entitled to interest u/s. 244A of the Income-tax
Act on the refund of the self-assessment tax. The High Court however did not
agree with the aforesaid view and made the following observation:

“Having
found the position of law as indicated above, we express, with respect, our
inability to subscribe to, or follow, the view taken by the other Division
Bench of this Court in the case of CIT vs. Sutlej Industries Ltd.”

The Supreme
Court held that in the impugned judgment, the Bench had differed with the
earlier view expressed by the Co-ordinate Bench. In the circumstances,
according to the Supreme Court, the appropriate course of action would have
been to refer the matter to the larger Bench.

The Supreme
Court noted that subsequently in the case of Sutlej Industries Ltd. vs. CIT
(I.T.A. Nos. 493 of 2003 and 120 of 2004) [2005] 272 ITR 180 (Delhi) pending
before the High Court, the High Court had referred the matter to a larger
Bench. In these circumstances, the Supreme Court set aside the impugned
judgment of the High Court and remanded the appeal to the High Court for its
decision afresh along with I.T.A. Nos. 493 of 2003 and 120 of 2004 by a larger
Bench.

The appeal was
disposed of accordingly.

13.  Non-resident – Permanent Establishment – No
part of the main business and revenue earning activity of the two American
companies was carried on through a fixed business place in India put at their
disposal – The Indian company only rendered support services which enabled the
assessees in turn to render services to their clients abroad – This outsourcing
of work to India would not give rise to a fixed place or service PE

ADIT vs.
E-Funds IT Solution Inc. (2017) 399 ITR 34 (SC)

The assesses,
e-Funds Corporation, USA [e-Funds Corp] and e-Funds IT Solutions Group Inc.,
USA [e-Funds Inc] were companies incorporated in United States of America [USA]
and were residents of the said country. They were assessed and had paid taxes
on their global income in USA. e-Funds Corp was the holding company having
almost 100% shares in IDLX Corporation, another company incorporated in USA.
IDLX Corporation held almost 100% shares in IDLX International BV, incorporated
in Netherlands and later in turn held almost 100% shares in IDLX Holding BV,
which was a subsidiary again incorporated in Netherlands. IDLX Holding BV was almost
a 100% shareholder of e-Funds International India Private Limited, a company
incorporated and resident of India [e-Funds India] IDLX International BV was
also the parent/holding company having almost 100% shares in e-Funds Inc.,
which, as noticed above, was a company incorporated in USA.

Both e-Funds
Inc. and e-Funds Corp. had entered into international transactions with e-Funds
India. e-Funds India being a domestic company and resident in India was taxed
on the income earned in India as well as its global income in accordance with
the provisions of the Income–tax Act. The international transactions between
the assessees and e-Funds India and the income of e-Funds India, it was
accepted, were made subject matter of arms length pricing adjudication by the
Transfer Pricing Officer [TPO] and the Assessing Officer [AO] in the returns of
income filed by e-Funds India.

The assessing
authority for assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08 in
the case of e-Funds Corporation, USA and for assessment years 2000-01 to
2002-03 and 2005-06 to 2007- 08 in the case of e-Funds IT Solutions Group Inc.,
USA decided that the assessees had a permanent establishment [PE] as they had a
fixed place where they carried on their own business in Delhi, and that,
consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement
of 1990 [DTAA] was attracted. Consequently, the assessees were liable to pay
tax in respect of what they earned from the aforesaid fixed place PE in India.

The CIT
(Appeals) dismissed the appeals of the assessees holding that Article 5 was
attracted, not only because there was a fixed place where the assessees carried
on their business, but also because they were having “service PEs” and “agency
PEs” under Article 5.

In an appeal to
the ITAT, the ITAT held that the CIT (Appeals) was right in holding that a case
of “fixed place PE” and “service PE” had been made out under Article 5, but
said nothing about the “agency PE” as that was not argued by the Revenue before
the ITAT. However, the ITAT, on a calculation formula different from that of
the CIT (Appeals), arrived at a nil figure of income for all the relevant
assessment years.

The appeal of
the assessees to the Delhi High Court proved successful [(2014) 364 ITR 256
(Delhi)] and the High Court, by an elaborate judgment, has set aside the
findings of all the authorities referred to above, and further dismissed the
cross-appeals of the Revenue.

Consequently,
the Revenue was in appeal before the Supreme Court.

The Supreme
Court observed that the Income-tax Act, in particular section 90 thereof, does
not speak of the concept of a PE. This is a creation only of the DTAA. By
virtue of Article 7(1) of the DTAA, the business income of companies which are
incorporated in the US will be taxable only in the US, unless it is found that
they were having PEs in India, in which event their business income, to the
extent to which it is attributable to such PEs, would be taxable in India. The
Supreme Court noted that Article 5 of the DTAA provides for three distinct
types of PEs with which it was concerned in the present case: fixed place of
business PE under Articles 5(1) and 5(2); service PE under Article 5(2) (l) and
agency PE under Article 5(4). According to the Supreme Court, specific and
detailed criteria are set out in the aforesaid provisions in order to fulfill
the conditions of these PEs existing in India. The burden of proving the fact
that a foreign assessee has a PE in India and must, therefore, suffer tax from
the business generated from such PE is initially on the Revenue.

In the context
of fixed place PE, on the behalf of the Revenue, it was argued that under
Article 5(1) of the DTAA, on the facts of these cases, a case of fixed place PE
has been made out. In support of this, it was, inter-alia, pointed out
that: Most of the employees are in India (In fact, the High Court records that
40% of the employees of the entire group are in India). e-Funds Corp has call
centers and software development centers only in India. e-Funds Corp is
essentially doing marketing work only and its contracts with clients are
assigned, or sub-contracted to e-Funds India. The master services agreement
between the American and the Indian entity gives complete control to the
American entity in regard to personnel employed by the Indian entity. It is
only through the proprietary database and software of e-Funds Corp, that
e-Funds India carries out its functions for e-Funds Corp. The High Court
records that the software, intangible data etc. is provided free of cost
and then states that this is irrelevant. The Corporate office of e-Funds India
houses an ‘International Division’ comprising the President’s office and a
sales team servicing e-Funds India and eFunds group entities in the United
Kingdom, South East Asia, Australia and Venezuela. The President’s office
primarily oversees operations of e-Funds India and eFunds group entities
overseas. The sales team undertakes marketing efforts for affiliate entities
also. The Transfer Pricing [TP] Report says that e-Funds India provides
management support and marketing support services to eFunds Corp group
companies outside India. Regarding supervision of personnel rendering the
services, the TP Report states that “The President’s office manages the
operations of eFunds India and eFunds group entities in UK and Australia and
accordingly, employees of these entities report to the President. The
President’s overall reporting is to EFC. Though the personnel rendering
marketing services are employees of EFI, they report to overseas group entities
to the extent that they are engaged in rendering services to such entities.”
Heavy reliance was also placed upon the Form 10 K report dtd. 31/3/2003 filed
by the e-Fund Corp for the group with the United States Securities and Exchange
Commission.

The Revenue’s
counsel had further submitted that on these facts, the assessees satisfy the
requirements of fixed place PE. For this, reliance was also placed on the judgment
of the Apex Court in the case of Formula One World Championship Ltd. [(2017)
394 ITR 80 (SC)] [Formula One] and contented that physically located premises
are at the disposal of the assessees with the degree of permanence required,
viz., the entire year. It was also contended that the High Court was not right
in holding that the place of management PE under Article 5(2)(a) was prima
facie made out, but since the said provision had not been invoked and requires
factual determination, the Revenue’s argument is dismissed on this score. Heavy
reliance was also placed on the MAP settlement made for the Asst. Years 2003-04
and 2004-05 by the assessees to contend that the assessees have admitted for
those years that some income is attributable to their Indian PEs and this
admission would continue to bind the assessees in all subsequent years.

On the other
hand, on behalf of the assessees, it was, inter-alia, contended that the
tests for determining the existence of fixed place PE have now been settled by
the Apex Court in the case Formula One (supra). These require that the
fixed place must be at the disposal of assessees, which means that the
assessees must have a right to use the premises for the purpose of his own
business and that has not been made out in the facts of this case. The TPO has
specifically held that whatever is paid under various agreements between the
assessees and the Indian company are at arm’s length pricing and this being the
case, even if fixed place PE is found, once arm’s length price is paid, the US
companies go out of the net of Indian taxation. Referring to Article 5(6) of
the DTAA, it was further contended that mere fact that a 100 per cent
subsidiary is carrying on the business in India does not by itself means that
the holding company would have a PE in India. It was also further pointed out
that ultimately there are four businesses that the assessees are engaged in
viz., ATM Management Services, Electronic Payment Management, Decision Support
and Risk Management and Global Outsourcing and Professional Services. All these
businesses are carried on outside India and the property through they are
carried out viz., ATM networks, software solutions and other hardware networks
and information technology infrastructure were all located outside India. The
activities of e-Funds India are independent business activities on which, as
has been noticed by the High Court, independent profits are made and income is
assessed to tax in India. For this, a specific reference was also made to the report
of Deloitte Haskins and Sells dated 13/3/2009, which was produced before the
CIT (A). It was further contended that MAP settlement made for the Asst Years
2003-04 and 2004-05 cannot be considered as precedent to hold that there is a
PE in subsequent years. In fact, this settlement was without prejudice to the
assessees contention that they have no PE in India and it is also clarified in
the follow-up letters that the same is not binding on subsequent years.

Since the
Revenue originally relied on fixed place of business PE, the Supreme Court
tackled it first. The Supreme Court observed that under Article 5(1), a PE
means a fixed place of business through which the business of an enterprise is
wholly or partly carried on. According to the Supreme Court, what is a “fixed
place of business” was no longer res integra. In Formula One’s case (supra),
it had after setting out Article 5 of the DTAA, held that the principal test,
in order to ascertain as to whether an establishment has a fixed place of
business or not, is that such physically located premises have to be ‘at the
disposal’ of the enterprise. For this purpose, it is not necessary that the
premises are owned or even rented by the enterprise. It will be sufficient if
the premises are put at the disposal of the enterprise. However, merely giving
access to such a place to the enterprise for the purposes of the project would
not suffice. The place would be treated as ‘at the disposal’ of the enterprise
when the enterprise has right to use the said place and has control thereupon.

Thus, it was
clear that there must exist a fixed place of business in India, which was at
the disposal of the US companies, through which they carry on their own
business. There was, in fact, no specific finding in the assessment order or
the appellate orders that applying the aforesaid tests, any fixed place of
business had been put at the disposal of these companies. The assessing
officer, CIT (Appeals) and the ITAT had essentially adopted a fundamentally
erroneous approach in saying that they were contracting with a 100% subsidiary
and were outsourcing business to such subsidiary, which resulted in the
creation of a PE. The High Court has dealt with this aspect in some detail and
the Supreme Court agreed with the findings of the High Court in this regard.

The Supreme
Court further held that the reliance placed by the Revenue on the United States
Securities and Exchange Commission Form 10K Report, as had been correctly
pointed out by the High Court, is also misplaced. It is clear that this report
evidently speaks of the e- Funds group of companies worldwide as a whole.

According to
the Supreme Court, the Deloitte’s report dated 31/03/2009 [which was produced
before the CIT(Appeals)] showed that no part of the main business and revenue
earning activity of the two American companies was carried on through a fixed
business place in India which had been put at their disposal. It was clear from
the report that the Indian company only rendered support services which enabled
the assessees in turn to render services to their clients abroad. This
outsourcing of work to India would not give rise to a fixed place PE and the
High Court judgment was, therefore, correct on this score.

In the context
of existence of service PE under Article 5(2)(l) of the DTAA, in addition to
some of the facts pointed for fixed place PE [including the fact of TP report
regarding supervision of personnel rendering service], it was, inter-alia,
further pointed out by Revenue’s counsel that: The Master sub-contractor
agreement between e-Funds Corp and e-Funds India discussed in the CIT(A)’s
order provides in clause 1.1(a) that : “Subcontractors personnel assigned to
work with eFunds IT or Customers located in the United States shall be directed
by eFunds IT or by Subcontractors supervisor acting at the direction of eFunds
IT. In the event Subcontractors personnel are assigned to perform such services
in India, the Subcontractor shall supervise such work, acting at the direction
of eFunds IT. eFunds IT shall be the sole judge of performance and capability
of each of subcontractors personnel and may request the removal of one or more
of Subcontractors personnel from a project covered by any statement of work as
follows.” It is submitted that the personnel engaged in providing these
services were ostensibly the employees of e-Funds India but were de facto
working under the control and supervision of eFunds Corp. In this regard,
reference was made to relevant part of the judgement in DIT vs. Morgan
Stanley and Company Inc. [(2007) 292 ITR 416 (SC)]. Furthermore, the AO in
the Assessment Order has observed that e-Funds Corp has seconded two employees
to e-Funds India and these employees worked as Sr. Director Technical Services and Country
Head-Business Development. The activities of the seconded employees go beyond
mere ‘stewardship activities’ in terms of Morgan Stanley’s case [supra].
The term ‘Other Personnel’ has to be seen in the context of the facts of this
case which show that e-Funds India was not an independent subsidiary.

In the context
of service PE, in addition to some of the points made out in connection with
non-existence of fixed place PE,  the
assessee’s counsel, inter alia, further contended that under Article
5(2)(l) of the DTAA, it is necessary that the foreign enterprises must provide
services to customers who are in India, which is not Revenue’s case as all
their customers exist only outside India. It was also pointed out that the
entire personnel engaged only by the Indian company and the facts that the US
companies may indirectly control such employees is only for the purpose of
protecting their own interest. The reliance was also placed on the judgment of
the Supreme Court in Morgan Stanley’s case (supra).

Insofar as a
service PE was concerned, the Supreme Court noted that the requirement of
Article 5(2)(l) of the DTAA was that an enterprise must furnish services
“within India” through employees or other personnel. In this regard, the
Supreme Court referred to its judgment in Morgan Stanley’s case (supra)
and noted that none of the customers of the assessees were located in India or
have received any services in India. This being the case, it was clear that the
very first ingredient contained in Article 5(2)(l) was not satisfied.

However, the
learned Attorney General, relying upon paragraph 42.31 of the OECD Commentary,
had argued that services have to be furnished within India, which does not mean
that they have to be furnished to customers in India. Para 42.31 of the OECD
Commentary states that “Whether or not the relevant services are furnished to a
resident of a state does not matter: what matters is that the services are
performed in the State through an individual present in that State.”

Based upon the
said paragraph, it was argued that in assessment year 2005-06, two employees of
the American company were seconded in India and that, therefore, it was clear
that management of the American company through these employees had obviously
taken place. The High Court, in dealing with this contention, had found it was
not known as to what functions they performed and to whom they reported and it
was also not known whether the services were performed related to services
provided to an associated enterprise in which case clause 5(2)(l)(ii) would be
applicable. According to the High Court, whether the seconded employees were
performing stewardship services or were directly involved with the working
operations was relevant. It was the case of the assessee that they were deputed
to look towards development of domestic work in India and cost of such
personnel was fully borne e-Funds India. They were working under the control
and supervision of e-Funds India. This factual assertion was not negated or
questioned by the AO.

The Supreme
Court agreed with the approach of the High Court in this regard. It held that
para 42.31 of the OECD Commentary does not mean that services need not be
rendered by the foreign assessees in India. If any customer is rendered a
service in India, whether resident in India or outside India, a “service PE”
would be established in India. As noticed hereinabove, no customer, resident or
otherwise, received any service in India from the assessees. All its customers
received services only in locations outside India. Only auxiliary operations
that facilitated such services were carried out in India. This being so, it was
not necessary to advert to the other ground namely, that “other personnel”
would cover personnel employed by the Indian company as well, and that the US
companies through such personnel were furnishing services in India. This being
the case, it was clear that as the very first part of Article 5(2)(l) was not
attracted, the question of going to any other part of the said Article did not
arise. It was perhaps for this reason that the AO did not give any finding on
this score.

The Supreme
Court agreed with the assessee’s counsel that the “agency PE” aspect of the
case need not be gone into as it was given up before the ITAT. However, the
Supreme Court was of the view that for the sake of completeness, it was
necessary to agree with the High Court, that it had never been the case of
Revenue that e-Funds India was authorised to or exercised any authority to
conclude contracts on behalf of the US company, nor was any factual foundation
laid to attract any of the said clauses contained in Article 5(4) of the DTAA.

Dealing with
the issue of effect of MAP settlement for the Asst. Years 2003-04 and 2004-05,
the Supreme Court referred to the relevant paras of OECD Manual on MAP and, in
particular, Best Practice No.3, relied on by the Revenue’s counsel and noted
that this would show that a competent authority should engage in discussion
with the other competent authority in a principled, fair and objective manner,
with each case being decided on its own merits. It is also specifically
observed that, where an agreement is not otherwise achievable, then both
parties should look for appropriate opportunities for compromise in order to
eliminate double taxation on the facts of the case, even though a principled
approach is important. The learned Attorney General also relied upon Best
Practice No. 1 of the said OECD Manual, which requires the publication of
mutual agreements reached that may apply to a general category of taxpayers
which would then improve guidance for the future. According to the Supreme
Court, the Best Practice No. 1 has no application on the facts of the present
case, as the agreement reached applies only to the respondent companies, and not
to any general category of taxpayers. It is clear, therefore, that the
assessee’s counsel Shri Ganesh is right in replying upon para 3.6 of the OECD
Manual, which deals with settlements which are often case and time specific and
they are not considered as precedents for the tax-payers or the tax
administration. It is very clear, therefore, that such agreement cannot be
considered as a precedent for subsequent year, and the High Court’s conclusion
on this aspect is also correct.

Note: In the above case, in the context of fixed place PE, the Court has followed internationally accepted tests confirmed by the Supreme Court in the case of Formula One (supra) and applied the same to the facts found by the High Court in this case. The judgement in Formula One’s case is digested in this column in the last month and since this case, in this respect, follows the same, it is thought fit to consider in this column in this month, which is now also reported in ITR. In the context of service PE, primarily it has relied on its earlier judgment in the case of Morgan Stanley (supra), which has been analysed in greater detail by us in this journal in the column Closements in the months of September/October, 2007. The above judgement is also primarily based on the factual findings of the High Court and also based on certain lack of findings of facts at the lower level. As such, this judgement should be read, understood and applied accordingly. For the purpose of deciding the issues raised in this case, the Court has also referred to and considered the relevant part of OECD commentaries on OECD Model as well as by learned authors Klaus Vogel & Arvind A. Skaar (on PE) and also the OECD Manual on MAP etc. _

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