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Category: In the High Courts: Part A-Reported Decisions

Reassessment – Sanction u/s. 151 – A. Y. 2007-08 – In the absence of the requisite sanction u/s. 151 the notice u/s. 148 will be invalid

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Dhadda Export vs. ITO; 278 CTR 258 (Raj):

For the A. Y. 2007-08,
the Assessing Officer issued notice u/s. 148 without obtaining the
prior sanction u/s. 151 of the Act. The objection raised on this count
was countered by relying on section 292B of the Act.

The Rajasthan High Court allowed the writ petition challenging the notice and held as under:
“i)
The objection has been rejected by the ITO citing the reason that
required sanction of CIT was not taken due to oversight that assessment
of the assessee firm had already been completed u/s. 143(3). It was
stated that mistake was committed inadvertently and is curable by
recourse to section 292B.
ii) That plea is liable to be rejected
because when specific provision has been inserted in the proviso to
section 151(1), as a prerequisite condition for issuance of notice,
namely, sanction of the CIT or the Chief CIT, the Assessing Officer
cannot find escape route for not doing so by relying on section 292B.
Resort to section 292B cannot be made to validate an action, which has
been rendered illegal due to breach of mandatory condition of the
sanction on satisfaction of Chief CIT or CIT under proviso to
sub-section (1) of section 151.
iii) This is an inherent lacunae
affecting the very correctness of the notice u/s. 148 and is such which
is not curable by recourse to section 292B.”

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Income from house property – Annual letting value – Section 23 – A. Y. 1986-87 – Annual value is lesser of fair rent and standard rent

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Vimal R. Ambani vs. Dy. CIT; 375 ITR 66 (Bom):

For the A. Y. 1986-87, the Assessing Officer determined the annual value on the basis of the standard rent and not on the basis of the rateable value as determined by the municipal corporation. This was upheld by the Tribunal.

On appeal by the assessee, the following question was raised before the Bombay High Court:

“Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was right in holding that in computing the property income u/s. 23 of the Income-tax Act, 1961, the annual letting value of the self-occupied property has to be the sum equivalent to the standard rent under the Rent Control Act and not the municipal rateable value.”

The Bombay High Court held as under:

“(i) While determining the annual letting value in respect of properties which are subject to rent control legislation and in cases where the standard rent has not been fixed, the Assessing Officer shall determine the annual letting value in accordance with the relevant rent control legislation. If the fair rent is less than the standard rent, then, it is the fair rent which shall be taken as annual letting value and not the standard rent. This will apply to both self-acquired properties and general cases where the property is let out.

(ii) The order of the Tribunal had to be set aside. Matter stands remanded for consideration in accordance with the aforesaid norms.”

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Deemed dividend – Section 2(22)(e) – A. Y. 2009- 10 – Loan to shareholder – Amounts taken as loan from company and payments also made to company – AO directed to verify each debit entry and treat only excess as deemed dividend

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Sunil Kapoor vs. CIT; 375 ITR 1 (Mad):

For the A. Y. 2009-10,
the Assessing Officer made an addition of Rs. 76,86,829/- as deemed
dividend u/s. 2(22) (e) of the Income-tax Act, 1961, being the loan
received from KIPL of which the assessee was a shareholder. The
Assessing Officer noted that there were certain payments as on
31/03/2009 and the balance due to the company was Rs.39,32,345/-. The
assessee pointed out that there was credit balance in favour of the
assessee in a sum of Rs.45,44,303/- while there was debit balance of
Rs.39,32,345/-, and accordingly, the company itself had to pay
Rs.6,11,957/-. CIT(A) and the Tribunal held that the Assessing Officer
had erred in not taking into consideration the amount that has been
repaid by the assessee to KIPL. Therefore, the Assessing Officer was
directed to verify each and every transaction and, accordingly, to
determine the dividend amount.

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

“i)
Any amount paid to the assessee by the company during the relevant
year, less the amount repaid by the assessee in the same year, should be
deemed to be construed as “dividend” for all purposes. However, the
Assessing Officer had taken the entire amount of Rs.76,86,829/- received
by the assessee from the company as dividend, while computing the
income but had lost sight of the payments made.

ii) In such
circumstances, the Commissioner(Appeals) had rightly come to the
conclusion that the position as regards each debit would have to be
individually considered because it may or may not be a loan. The
Assessing Officer, was, therefore, directed to verify each debit entry
on the aforesaid line and treat only excess amount as deemed dividend
u/s. 2(22)(e) of the Act.”

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Charitable Institution – Exemption u/s. 11 – A. Y. 2006-07 – Where the objects of the trust include “(2)Devising means for imparting education in and improving the Ayurvedic system of Medicine and preaching the same. In order to gain objects No. 2, it is not prohibited to take help from the English or Yunani or any other system of medicine and according to need one or more than one Ayurvedic Hospital may be opened.”, it cannot be held that running an allopathic hospital is ultra vires to the ob<

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Mool Chand Khairati Ram Trust vs. DIT; [2015] 59 taxmann.com 398 (Delhi)

The Assessee was a charitable institution engaged in running a hospital (both Allopathic and Ayurvedic). For the A. Y. 2006-07, the Assessing Officer had denied the exemption claimed by the Assessee u/ss. 11 and 12 of the Act as the Assessing Officer was of the view that the activities of the Assessee were not in accordance with its objects. In addition, the Assessing Officer also denied the Assessee’s claim for depreciation on assets purchased by the Assessee by application of its income that was exempt u/s. 11 of the Act. The CIT (Appeals) allowed the Assessee’s claim and also held that the Assessee was entitled for depreciation on the assets purchased by application of its income, which was exempt u/s. 11 of the Act.

The Tribunal accepted the Revenue’s contention that the properties of the Assessee had not been applied towards its objects. The Tribunal held that the Assessee’s activities relating to Allopathic system of medicine had more or less supplanted the activities relating to Ayurvedic system of medicine and concluded that predominant part of the Assessee’s activities exceeded the powers conferred on the trustees and the objects of the Assessee Trust were not being followed. The Tribunal held that whilst the activities of the Assessee relating to providing medical relief by the Ayurvedic system of medicine were intra vires its objects, the activities of providing medical reliefs through Allopathic system of medicine was ultra vires its objects. Consequently, the Assessee was not entitled to exemption u/s. 11 of the Act in respect of income from the hospital run by the Assessee, which offered medical relief through Allopathic system of medicine. Accordingly, the Tribunal directed that the income and expenditure of the Assessee from the activities relating to the two disciplines of medicine, namely Ayurveda and Allopathy, be segregated. Insofar as the Assessee’s claim for depreciation was concerned, the Tribunal held that deprecation on assets, used for providing relief through Ayurvedic system of medicine or used in education and research relating to Ayurvedic system of medicine, was allowable notwithstanding that the expenditure on purchase of the assets was exempted u/s. 11(1)(a) of the Act. However, insofar as the assets purchased for providing medical relief through Allopathic system of medicine was concerned, the Tribunal held that depreciation would not be available if the expenditure incurred on purchase of the assets had been exempted u/s. 11(1)(a) of the Act.

On appeal by the assessee, the Delhi High Court held as under:

“i) In our view, the Assessing Officer and the Tribunal erred in concluding that the Assessee’s activities were in excess of its objects. Running an integrated hospital would clearly be conducive to the objects of the Assessee. The trustees have carried out the activities of the trust bonafide and in a manner, which according to them best subserved the charitable objects and the intent of the Settlor. Thus the activities of the Assessee cannot be held to be ultra vires its objects. The Assessing Officer and the Tribunal were unduly influenced by the proportion of the receipts pertaining to the Ayurvedic Research Institute and the hospital. In our view, the fact that the proportion of receipts pertaining to the Ayurvedic Research Institute is significantly lower than that pertaining to the hospital would, in the facts of the present case, not be material. Undisputedly, significant activities are carried out by the Assessee for advancement and improvement of the Ayurvedic system of medicine in the institution established by the Assessee and though the receipts from the Allopathic treatment are larger, the same does not militate against the object for which the institution has been set up and run.

ii) Insofar as the issue regarding depreciation on assets used for providing Allopathic systems of medicine is concerned, the learned counsel for the Revenue did not dispute that the depreciation would be allowable if the activities of the Assessee were considered to be within the scope of its objects. The Tribunal had denied the claim of depreciation, in respect of assets used for providing medical relief through Allopathic system of medicine, only on the basis that the Assessee’s activity for running the hospital was ultra vires its objects. In the circumstances, the third question is to be answered in the negative and in favour of the Assessee.”

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Business income or short term capital gain – A. Ys. 2005-06 and 2006-07 – Transaction in shares NBFC – Whether business transactions or investment – Frequency of transactions is not conclusive test – Concurrent finding that transactions not business activity – Upheld

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CIT vs. Merlin Holdings P. Ltd.; 375 ITR 118 (Cal):

The assessee was a certified NBFC. Its main activities were giving loans and taking loans and investing in shares and securities. For the A. Ys. 2005-06 and 2006-07, the Assessing Officer opined that the activity which, according to the assessee was on investment account amounted business activity and, therefore, he treated the short term capital gains of Rs.1,01,00,000 as business income. The Commissioner (Appeal) and the Tribunal accepted the assessee’s claim that it is short term capital gain.

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

“i) The frequency of transactions in shares alone cannot show that the intention of the investor was not to make investment. The Legislature has not made any distinction on the basis of frequency of the transactions. The benefit of short term capital gains can be availed of, for any period of retention of shares upto 12 months. Although a ceiling has been provided, there is no indication as regards the floor, which can be as little as one day. The question essentially is a question of fact.

ii) The assessee had adduced proof to show that some transactions were intended to be by way of investment and some transactions were by way of speculation. The revenue had not been able to find fault from the evidence adduced. The mere fact that there were 1,000 transactions in a year or mere fact that the majority of the income was from the share dealings or that the managing director of the assessee was also the managing director of a firm of share brokers could not have any decisive value.

iii) The Commissioner (Appeals) and the Tribunal have concurrently held against the views of the Assessing Officer. On the basis of the submissions made on behalf of the Revenue, it was not possible to say that the view entertained by the Commissioner (Appeals) or the Tribunal was not a possible view. Therefore, the decision of the Tribunal could not be said to be perverse. No fruitful purpose was likely to be served by remanding the matter.”

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Business expenditure – Section 37 – A. Y. 2005- 06 – Assessee running hospital – Daughter of MD working in hospital as doctor – Expenditure on her higher studies incurred by assessee – She comes back to work in hospital – Expenditure had nexus with business of assessee – Expenditure allowable as deduction

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Mallige Medical Centre P. Ltd. vs. JCIT; 375 ITR 522 (Karn):

The assessee company was running a hospital. In the A. Y. 2005-06, it had claimed deduction of Rs.5 lakh spent for the higher education of the daughter of the managing director of the company who was working in the assessee’s hospital as a doctor. The deduction was claimed on the ground that the daughter was committed to work for the assessee after successful completion of studies. The Assessing Officer disallowed the claim for deduction. The Tribunal upheld the disallowance.

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

“i) Before the expenditure was incurred, the daughter had acquired a degree in medicine. She was employed by the assessee. She was sent outside the country for acquiring higher educational qualification, which would improve the services, which the assessee was giving to its patients. It was in this context, that the sum of Rs.5 lakh was spent. That was not in dispute. After acquiring the degree she had come back and she was working with the assessee.

ii) Therefore, there was a direct nexus between the expenses incurred towards the education, with the business, which the assessee was carrying on. In that view of the matter, the expenditure was deductible.”

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Penalty – Concealment of income – Section 271(1)(c) – A. Y. 2005-06 – Assessment u/s. 115JB – No change in book profits and assessed tax – Penalty u/s. 271(1) (c) could not be levied

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CIT vs. Citi Tiles Ltd.; 278 CTR 245 (Guj):

For the A. Y. 2005-06, the assessee was assessed u/s. 115JB of the Income-tax Act, 1961. There was addition to the normal income but the book profits remained the same. The Assessing Officer imposed penalty u/s. 271(1)(c) for concealment of income. The Tribunal cancelled the penalty.

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

“CIT(A) having not permitted addition in book profits u/s. 115JB even after detection of concealment, there remained no tax sought to be avoided. Hence penalty u/s. 271(1)(c) could not be levied.”

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Export oriented undertaking – Exemption u/s. 10B – A. Y. 2007-08 – Development Commissioner granting approval to assessee as 100% export oriented unit – Board of Approval ratifying this subsequently – Ratification relates back to date on which Development Commissioner granted approval – Assessee is entitled to exemption

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Principal CIT vs. ECI Technologies Pvt. Ltd.; 375 ITR 595 (Guj):

For
the A. Y. 2007-08, the assessee claimed deduction u/s. 10B as a 100%
export oriented unit. It had obtained approval from the Development
Commissioner. The Assessing Officer disallowed the claim on the ground
that there was no ratification of the decision of the Development
Commissioner by the Board of Approval. The Commissioner(A) found that
the approval was subsequently ratified by the Board of Approval and
accordingly allowed the assessee’s claim. The Tribunal confirmed the
decision of the Commissioner (Appeals).

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

“i)
Circular No. 68 issued by the Export Promotion Council for EOUS and
SEZS dated May 14, 2009, made it clear that from 1990 onwards the Board
of Approval had delegated the power of approval of 100% export oriented
undertakings to the Development Commissioner and, therefore, the
Development Commissioner, while granting the approval of the 100% export
oriented unit, exercises delegated powers.
ii) In any case when at
the relevant time the Development Commissioner granted approval of the
100% export oriented unit in favour of the assessee, which came to be
subsequently ratified by the Board of Approval the ratification shall be
from the date on which the Development Commissioner granted the
approval. Hence, both the Commissioner (A) as well as the Tribunal have
rightly held that the assessee was entitled to deduction u/s. 10B as
claimed.”

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Export oriented undertaking – Exemption u/s. 10B – A. Y. 2007-08 – Part of manufacture outsourced but under control and supervision of assessee – Assessee entitled to exemption

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MKU (Armours) P. Ltd. vs. CIT; 376 ITR 514 (All):

The assessee is a 100% export oriented unit. For the A. Y. 2007-08 the Assessing Officer disallowed the assessee’s claim for exemption u/s. 10B on the ground that the assessee had got the manufacture outsourced. The Commissioner (Appeals) found that only a part of the manufacturing activity was got done by the assessee from outside agency and that too under the direct control and supervision of the staff of the assessee. After the job work, the product was returned to the assessee’s factory, where the final product was assembled, packed and dispatched to the overseas buyers. He allowed the claim of the assessee. However, the Tribunal restored the order of the Assessing Officer.

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

“A new product had come out at the final stage. It was not a case of changing the label or the cover of the product. Only a part of the manufacturing activities was got done by the assessee from the outside agency and that too under the direct control and supervision of the managerial and technical staff available with the assessee. The assessee was entitled to exemption u/s. 10B.”

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Educational Institution – Exemption u/s. 10(23C)(vi) – A. Y. 2009-10 – One of the object clauses providing trust could run business – No finding recorded that predominant object of trust was to do business – Trust is entitled to exemption

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HARF Charitable Trust vs. CCIT.; 376 ITR 110 (P&H):

The
assessee trust was running educational institutions. The Chief
Commissioner rejected the assessee’s application for grant of approval
for exemption u/s. 10(23C)(vi) of the Income-tax Act, 1961, on the
ground that the assessee trust had an intention to carry out business
activity which was not permissible for a charitable organisation. The
trustees were in place for the whole duration of their life and it gave
the organisation a look and character of a private body rather than a
charitable organisation and the objectives were not related the
promotion of education and the educational trust did not exist solely
for educational purposes.

The Punjab and Haryana High Court allowed the assessee’s writ petition and held as under:

“i) The school run by the assessee as such was affiliated with the Central Board of Secondary Education and had also been granted registration u/s. 12A w.e.f. 15/07/1997. Merely because one of the clauses of the trust deed provided that the trust would carry on other business as decided by the trustees that would not per se disentitle it from being considered for registration u/s. 10(23C)(vi).
ii) The reasoning that the trust had intention to carry out the business and the institution was not existing solely for educational purposes would amount to giving a very narrow meaning to the section and the predominant object test was to be applied. It was not that the Chief Commissioner came to the conclusion that the trust was doing some other business and the business was generating substantial amounts which would override the main objects of the trust which pertain mainly to the cause of education. In the absence of any such finding that the trust was doing business, the application could not have been rejected only on this ground that one of the clauses in the objects provided such right to the trust. The prescribed authority could have made it conditional by holding that if any such business was carried out, the registration granted was liable to be cancelled.
iii) Therefore, the order refusing to grant approval of exemption u/s. 10(23C)(vi) could not be justified solely on the ground that in view of a clause which provided that the trust could run a business, it would be debarred as such for registration on the ground that it was not existing solely for educational purposes. That merely a conferment of power to do business would not debar the right of consideration of the trust without any finding being recorded that the predominant object of the trust was to do business.
iv) Thus, the Chief Commissioner misdirected himself in rejecting the application on this ground without coming to any conclusion that the trust was carrying on any other activity under clause (i). It was also a matter of fact now that the trust had already also deleted the objectionable clause for the year 2010-11. The Chief Commissioner was directed to decide the assessee’s application afresh.”

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Disallowance u/s. 14A – A. Y. 2004-05 – Section 14A will not apply if no exempt income is received or receivable during the relevant previous year

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Cheminvest Ltd. vs. CIT; [2015] 61 taxmann.com 118 (Delhi)

In
the case of the assessee Cheminvest Ltd., the Special Bench of the ITAT
in [2009] 121 ITD 318 (DELHI)(SB) held that section 14A disallowance can
be made in year in which no exempt income has been earned or received
by assessee. It referred to the decision of Apex Court in case of CIT
vs. Rajendra Prasad Moody [1978] 115 ITR 519 to settle this controversy.

In the appeal by the assessee, the following question was raised before the Delhi High Court:

“Whether
disallowance under Section 14A can be made in a year in which no exempt
income has been earned or received by assessee?

The High Court held in favour of assessee as under:
“(i)
The Special Bench has relied upon the decision of the Supreme Court in
Rajendra (supra). In such case the Supreme Court held that Section
57(iii) does not say that expenditure shall be deductible only if any
income is made or earned. The decision of Supreme Court was rendered in
context of allowability of deduction u/s. 57(iii). Thus, such decision
could not be used in reverse to contend that even if no income has been
received, the expenditure incurred can be disallowed u/s. 14A.

(ii)
The expression ‘does not form part of total income’ in Section 14A
envisages that there should be an actual receipt of income, which is not
includible in the total income, for the purpose of disallowing any
expenditure in relation to said income.

(iii) In other words,
Section 14A will not apply if no exempt income is received or receivable
during the relevant previous year.”

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Business expenditure-Capital or revenue expenditure – Section 37 – A. Y. 1998-99 – Machine not put to use on ground that technology had become obsolete – Expenditure incurred for development of machines is revenue expenditure

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CIT vs. Britannia Industries Ltd.; 376 ITR 299 (Cal):

In the previous year relevant to A. Y. 1998-99, the assessee had developed four machines at a cost of Rs. 46,26,552/. However, after the machines were developed, the assessee found that the technology used had already become obsolete. Therefore, the machines were not put to use for manufacturing purposes. The assessee claimed the expenditure as revenue expenditure. The Assessing Officer rejected the claim. CIT(A) held that the expenditure is allowable u/s. 37. The Tribunal upheld the allowance.

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

“The question whether the expenses incurred on account of development of machines was revenue expenditure or not basically is a question of fact and when the Tribunal had concurred with the views expressed by the Commissioner (Appeals) and the view taken by them was a plausible view, no interference in the order of the Tribunal was warranted.”

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Settlement of cases – Interest – Section 245D(2C) – B. P. 01/04/1995 to 05/10/2001 – Assessee depositing tax on admitting additional income: Required amount deposited within time when application admitted – Further tax liability determined final order satisfied – Interest on further tax for the period during the pendency of application before Settlement Commission is unwarranted

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CIT vs. Vishandas and ors; 374 ITR 591 (Del):

The assessee and two others disclosed Rs. 10,00,000/- in the hands of each of the three assesses. The Settlement Commission directed to accept the offer of additional income of Rs. 1,48,16,160/- and rejected the waiver of interest. While computing the amount payable, the Assessing Officer made an addition of Rs. 13,03,211/- as interest recoverable for the period between 01/01/2004 and 26/03/2010 u/s. 245D(2C) of the Income-tax Act, 1961. The Commissioner (Appeals) held that section 245D(2C) could be invoked only if the assessee did not deposit the tax payable on income disclosed and admitted u/s. 245D(1). In the instant case, the assessee deposited Rs. 6,12,000/- within the time prescribed u/s. 245D(2C) on the income of Rs. 10,00,000/- in terms of order u/s. 245D(1) and deleted the addition. This was confirmed by the Tribunal.

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

“i) When the application was filed before the Settlement Commission, the assessee deposited the admitted tax liability. Soon, thereafter, when the application was admitted, the amount required was deposited within the time stipulated u/s. 245D(6A). The further tax liability determined was payable after the final decision. The records and the materials examined by the Commissioner (Appeals) and upheld by the Tribunal disclosed that even the tax liability finally determined was satisfied. In these circumstances, the addition of interest for the period during the pendency of the application before the Settlement was entirely unwarranted.

ii) We do not see any reason to disturb the concurrent findings of fact. The appeals do not raise any substantial question of law and are, consequently, dismissed.”

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ITAT: Power to grant stay beyond 365 days: Section 254(2A) – Section 254(2A) third proviso cannot be interpreted to mean that extension of stay of demand should be denied beyond 365 days even when the assesseee is not at fault. ITAT may extend stay of demand beyond 365 days if delay in disposing appeal is not attributable to assessee: ITAT should make efforts to decide stay granted appeals expeditiously

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DCIT vs. Vodafone Essar Gujarat Ltd. (Guj);SCA No. 5014 of 2015; dated 12/06/2015; www.itatonline.org: [2015] 58 taxmann.com 374 (Guj)

The Tribunal passed an order extending stay of recovery of demand beyond the period of 365 days. The department filed a Writ Petition to challenge the said order on the ground that in view of the third proviso to section 254(2A) of the Act, the Tribunal has no jurisdiction to extend the stay of demand beyond 365 days.

The Gujarat High Court dismissed the Petition and held as under:

“(i) It is true that as per third proviso to section 254(2A) of the Act, if such appeal is not so disposed of within the period allowed under the first proviso i.e. within 180 days from the date of the stay order or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee. Therefore, as such, legislative intent seems to be very clear. However, the purpose and object of providing such time limit is required to be considered. The purpose and object of providing time limit as provided in section 254(2A) of the Act seems to be that after obtaining stay order, the assessee may not indulge into delay tactics and may not proceed further with the hearing of the appeal and may not misuse the grant of stay of demand. At the same time, duty is also cast upon the learned Tribunal to decide and dispose of such appeals in which there is a stay of demand, as early as possible and within the period prescribed under first proviso and second proviso to section 254(2A) of the Act i.e. within maximum period of 365 days.

ii) However, one cannot lost sight of the fact that there may be number of reasons due to which the learned Tribunal is not in a position to decide and dispose of the appeals within the maximum period of 365 days despite their best efforts. There cannot be a legislative intent to punish a person/ assessee though there is no fault of the assessee and/or appellant. The purpose and object of section 254(2A) of the Act is stated herein above and more particularly with a view to see that in the cases where there is a stay of demand, appeals are heard at the earliest by the learned Tribunal and within stipulated time mentioned in section 254(2A) of the Act and the assessee in whose favour there is stay of demand may not take undue advantage of the same and may not adopt delay tactics and avoid hearing of the appeals. However, at the same time, all efforts shall be made by the learned Tribunal to see that in the cases where there is stay of demand, such appeals are heard, decided and disposed of at the earliest and periodically the position/ situation is monitored by the learned Tribunal and the stay is not extended mechanically.

(iii) By section 254(2A) of the Act, it cannot be inferred a legislative intent to curtail/withdraw powers of the Appellate Tribunal to extend stay of demand beyond the period of 365 days. However, the aforesaid extension of stay beyond the period of total 365 days from the date of grant of initial stay would always be subject to the subjective satisfaction by the Tribunal and on an application made by the assessee / appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay is not attributable to the appellant / assessee.

iv) As observed hereinabove, the Tribunal can extend the stay granted earlier beyond the period of 365 days from the date of grant of initial stay, however, on being subjectively satisfied by the Tribunal and on an application made by the assessee/appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay, is not attributable to the appellant / assessee and that the assessee is not at fault and therefore, while considering each application for extension of stay, the Tribunal is required to consider the facts of each case and arrive at subjective satisfaction in each case whether the delay in not disposing of the appeal within the period of 365 days from the date of initial grant of stay is attributable to the appellant – assessee or not and/or whether the assessee / appellant in whose favour stay has been granted, has cooperated in early disposal of the appeal or not and/or whether there is any delay tactics by such appellant / assessee in whose favour stay has been granted and/or whether such appellant is trying to get any undue advantage of stay in his favour or not. Therefore, while passing such order of extension of stay, Tribunal is required to pass a speaking order on each application and after giving an opportunity to the representative of the revenue – Department and record its satisfaction as stated hereinabove. Therefore, ultimately if the revenue – department is aggrieved by such extension in a particular case having of the view that in a particular case the assessee has not cooperated and/or has tried to take undue advantage of stay and despite the same the Tribunal has extended stay order, revenue can challenge the same before the higher forum/High Court. (Commissioner of Customs and Central Exercise, Ahmedabad vs. Kumar Cotton Mills Pvt. Ltd (2005) 180 ELT 434(SC) & Commissioner vs. Small Industries Development Bank of India in Tax Appeal No.341 of 2014 followed; Commissioner of Income Tax vs. Maruti Suzuki (India) Limited decided on 2.1.2014 in Writ Petition (Civil) No.5086 of 2013 not followed)”

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Capital gain – Agricultural land – Section 2(14)(iii) (b) – A. Y. 2009-10 – Land situated within prescribed distance from municipal limit – Measurement of distance – Amendment in 2014 providing that distance should be measured aerially is prospective and not to apply to earlier years

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CIT vs. Nitish Rameshchandra Chordia; 374 ITR 531 (Bom):

On 10/04/2007, the assessee purchased agricultural land and sold it on 15/04/2008. The assessee claimed the profit as exempt on the ground that the land sold was agricultural land and not a capital asset according to section 2(14) of the Income-tax Act, 1961, urging that the land was situated beyond 8 kms. of the municipal limits. The Assessing Officer rejected the claim holding that the distance must be measured by the shortest distance as the crow flies or the straight line method and not by the road distance. The Tribunal allowed the assesses claim.

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

“i) The amendment in the taxing statute, unless a different legislative intention is clearly expressed, shall operate prospectively. If the assessee has earned business income and not the agricultural income, section 11 of General Clauses Act, 1897, will prevail unless a different intention appears to the contrary. The relevant amendment prescribing that the distance to be counted must be aerial came into force w.e.f. 01/04/2014. The need for the amendment itself showed that in order to avoid any confusion, the exercise became necessary. This exercise to clear the confusion, therefore, showed that the benefit thereof must be given to the assessee.

ii) In such matters, when there is any doubt or confusion, the view in favour of the assessee needs to be adopted. Circular No. 3 of 2014, dated 24/01/2014, dealing with applicability expressly stipulates that it takes effect from 01/04/2014, and, therefore, prospectively applies in relation to the A. Y. 2014-15 and subsequent assessment years. Hence, the question whether prior to the A. Y. 2014-15 the authorities erred in computing the distance by road did not arise at all.”

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Business expenditure – Disallowance u/s. 40(a) (ia) -: Section 40(a)(ia) – Argument that the disallowance for want of TDS can be made only for amounts “payable” as of 31st March and not for those already “paid” is not correct. In Liminie dismissal of SLP in Vector Shipping does not mean Supreme Court has confirmed the view of the HC

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P. M. S. Diesel vs. CIT (P&H); ITA No. 716 of 2009 dated 29/04/2015:www.itatonline.org: 277 CTR 491(P&H):

Dealing with the scope of section 40(a)(ia) of the Income Tax Act, 1961, the Punjab and Haryana High Court held as under:

“(i) The introduction of Section 40(a)(ia) had achieved the objective of augmenting the TDS to a substantial extent. When the provisions and procedures relating to TDS are scrupulously applied, it also ensured the identification of the payees thereby confirming the network of assessees and that once the assessees are identified it would enable the tax collection machinery to bring within its fold all such persons who are liable to come within the network of tax payers. These objects also indicate the legislative intent that the requirement of deducting tax at source is mandatory.

(ii) The argument that section 40(a)(ia) relates only to assessees who follow the mercantile system and does not pertain to the assessees who follow the cash system is not acceptable. The purpose of the section is to ensure the recovery of tax. We see no indication in the section that this object was confined to the recovery of tax from a particular type of assessee following a particular accounting practice.

(iii) The argument that section 40(a)(ia) applies only to amounts which are “payable” and not to amounts that are already “paid” is also not acceptable (Commissioner of Income Tax vs. Crescent Export Syndicate (2013) 216 Taxman 258 (Cal) and Commissioner of Income Tax vs. Sikandar Khan N. Tunwar (2013) 357 ITR 312 (Guj) followed)

(iv) Though in Commissioner of Income Tax vs. M/s Vector Shipping Services (P) Ltd (2013)262 CTR (All) 545, 357 ITR 642, it was held that no disallowance could be made u/s 40(a)(ia) as no amount remained payable at the year end and the Special Bench decision of the Tribunal in Merilyn Shipping & Transports, 136 ITD 23 (SB) (Vishakhapatnam) was noted, this cannot be agreed with as there is no reasoning for the finding. The dismissal of the department’s petition for special leave to appeal (SLP) was in limine. The dismissal of the SLP, therefore, does not confirm the view of the Allahabad High Court.”

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Business expenditure – Disallowance of payment to directors – Section 40(c) – A. Y. 1981-82 – Film production – Amounts paid as professional charges to directors for directing and producing film – Amounts not paid in their capacity as members of Board of Directors – No disallowance can be made u/s. 40(c)

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CIT vs. Rupam Pictures Pvt. Ltd.; 374 ITR 450 (Bom)

The assessee was in the business of production of films. In the A. Y. 1981-82, two directors of the assessee company were paid Rs. 3 lakh and Rs. 1.5 lakh, respectively for directing and producing a film. The Assessing Officer applied section 40(c) of the Income-tax Act, 1961 and disallowed the payment in excess of Rs. 72,000/- in respect of each of them. The Tribunal deleted the addition.

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

“i) The disallowance made by the Income-tax Officer u/s. 40(c) was not justified. The amounts paid to the two individuals were not paid in their capacity as members of the Board of Directors but as professional charges for directing and producing a film.

ii) The Revenue was, therefore, not justified in disallowing the claim, the character of remuneration mode being different.”

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Depreciation – Carrying on of business – Set-off of unabsorbed depreciation of previous years – Section 32(2) and 41(2) – A. Y. 2002-03 – Where once amount realised by assessee by sale of building, plant and machinery was treated as income arising out of profits and gains from business by virtue of section 41(2) notwithstanding fact that assessee was not carrying on any business during relevant assessment year, provision contained in section 32(2) would become applicable and, consequently, set-

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Karnataka Trade Corporation Ltd. vs. ACIT; [2015] 62 taxmann.com 239 (Karn)

The appellant is a Public Limited Company manufacturing cement in a factory situated at Mathodu village, Hosadurga Taluk. In the relevant year, i.e. A. Y. 2002- 03, the assessee had not carried on any business. In the relevant year the assessee had received amounts on sale of building, plant and machinery and as a result an amount of Rs. 34,01,644/- was treated as income from business u/s. 41(2). However, the assessee’s claim for set off of the brought forward unabsorbed depreciation was rejected. This was upheld by the Tribunal.

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

“In computing the income from business, the provisions of Section 32 as well as Section 41 of the Act would be applicable. Therefore, once the amount realized by the assessee by sale of building, plant and machinery is treated as income arising out of the profits and gains from the business by virtue of Section 41(2) of the Act, notwithstanding the fact that the assessee was not carrying on any business during the relevant assessment year, the provision contained in Section 32(2) become applicable and consequently, the setoff has to be given for unabsorbed depreciation allowances of previous year brought forward in terms of that provision.”

Loss – Carry forward and set off – Section 79 – A. Y. 2002-03 – During the relevant assessment year holding company of assessee reduced its shareholding from the 51% to 6% by transferring its 45% shares to another 100% subsidiary company – 51% of voting rights remained with the holding company – The revenue not justified in refusing to allow carry forward and set-off of business losses

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CIT vs. AMCO Power Systems Ltd.; [2015] 62 taxmann. com 350 (Karn)

In the A. Y. 2002-03, 51% of the shares of the assessee were held by the holding company. In the relevant year the holding company transferred 45% shares to another 100% subsidiary company. In the relevant year, the Assessing Officer disallowed the assessee’s claim for set off of the carried forward loss relying on section 79, on the ground that the voting power of the holding company is reduced from 51% to 6%. The Tribunal held that the voting power of the holding company has remained at 51% and allowed the assessee’s claim.

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

“The expression ”not less than 51% of voting power…”used in Section 79 indicates that only voting power is relevant and not the shareholding pattern. Despite transfer of shares, the holding-company still holds effective control over the assessee-company. The objective of Section 79 is to prevent misuse of losses carry forward by the new owner. Therefore, losses could be carry forward and setoff even if there is change in shareholding since effective control over the assessee company is unchanged.”

Revision – Section 263 – A. Y. 2007-08 – Assessee consistently following project completion method – Revision on the ground that other method is preferable – Revision not valid

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CIT vs. Aditya Builders.; 378 ITR 75 (Bom):

The Assessee was engaged in construction of commercial and residential premises. For the A. Y. 2007- 08, the Assessing Officer accepted the project completion method followed by the assessee and completed the assessment u/s. 143(3). Exercising the powers u/s. 263 of the Act, the Commissioner set aside the assessment and directed to recomputed the income of the asessee applying the percentage completion method. The Tribunal held that the assessee had been consistently following project completion method over the years. Moreover, the issue relating to the appropriate method of accounting is a debatable issue and, thus, the Commissioner would have no jurisdiction u/s. 263 to direct application of one particular method of accounting in preference to another. The Tribunal set aside the order of the Commissioner.

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

“The assessee had chosen the project completion method of accounting and had been consistently following it over the years. The Revenue could not reject the method because, according to the Commissioner, another method was preferable. Thus, no fault could be found with the order of the Tribunal.”

Charitable trust – Exemption u/s. 11(2) – A. Y. 2005-06 – Accumulation of income – Three purposes given covered by fourteen objects of trust – More than one purpose specified in Form 10 and details about plan of such expenditure not given – Not sufficient to deny exemption

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DIT(E) vs. Envisions; 278 ITR 483 (Karn):

The assessee, a registered charitable trust, collected donations of Rs.32,47,909/- and incurred incidental expenses of Rs.7,527/-. For the A. Y. 2005-06, it claimed the remaining amount as accumulation u/s. 11(2). In Form 10, 3 purposes were given out of the 14 objects of the Trust. The Assessing Officer disallowed the accumulation holding that the purpose stated was vague and thus the benefit of section 11(2) was denied. The Commissioner (Appeals) and the Tribunal allowed the assesee’s claim.

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

“i) T he objects of the trust, as given in the trust deed, were 14 in number. The three purposes for which accumulation was prayed for and mentioned in Form 10 by the assessee were undisputedly covered by the objects of the trust. As such, it could not be disputed that the purpose mentioned by the assessee while claiming the benefit, was for achieving the objects of the trust.

ii) M erely because more than one purpose had been specified and details about the plan of such expenditure had not been given would not be sufficient to deny the benefit u/s. 11(2) to the assessee. As long as the objects of the trust are charitable in character and as long as the purpose or purposes mentioned in Form 10 are for achieving the objects of the trust, merely because of nonfurnishing of the details, as to how the amount was proposed to be spent in future, the assessee could not be denied the exemption as was admissible u/s. 11(2) of the Act.”

Charitable trust – Exemption u/s. 11 – A. Y. 2008- 09 – Hospital – Application of income to objects and for purposes of trust – Charity Commissioner giving directions from time to time – Amounts charged or surcharges levied on bills given to indore patients – To be treated as income from activities of trust – Entitled to exemption u/s. 11

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DIT(Exemp) vs. Jaslok Hospital and Research Centre; 378 ITR 230 (Bom):

The assessee is a charitable trust running a hospital. For the A. Y. 2008-09, the assessee declared total income at Nil claiming exemption u/s. 11. The Assessing Officer found that the assessee levied surcharge of 20% on the bills given to the patients and recovered 25% of the fees paid to honrary doctors. The Assessing Officer treated these amounts as corpus donations and denied exemption u/s. 11. The Tribunal allowed the assessee’s claim and deleted the addition.

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

“i) T he Tribunal concurred with its earlier order in relation to exemption. Despite the directions of the Charity Commissioner, the Revenue could not insist that the amount charged or surcharges levied should not be treated as income from the activities of the trust. The authorities under the Income-tax Act are supposed to scrutinize the papers and related documents of the trust or the assessee so as to bring the income to tax and in accordance with the Income-tax Act.

ii) In such circumstances, the concurrent finding did not in any manner indicate that the directions issued by the Charity Commissioner are incapable of being complied with or liable to be ignored. The directions issued did not change the character of the receipts. The appeal does not raise any substantial question of law.”

Income or capital – A. Y. 2008-09 – Fund allotted to Government Company for a scheme – Specific direction that the interest on the amount should be utilised for the scheme – Interest is not assessable as income

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CIT vs. Karnataka State Agricultural Produce Processing and export Corporation Ltd.; 277 ITR 496 (Karn):

The assessee is a company fully owned by the Government of Karnataka engaged in trading in agricultural produce. The Government of Karnataka sanctioned Rs. 10 crore for improvement of infrastructure in order to encourage the farmers for development of horticulture sector and to promote exports. The grant of Rs. 10 crore was kept in fixed deposits by the assessee till utilisation for the desired projects. The Government of Karnataka had specifically directed that the interest earned on fixed deposits should be treated as additional grant of the scheme and not to be treated as “income of the assessee”. The Assessing Officer assessed the interest as income from other sources. The Tribunal deleted the addition.

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

“There was no profit motive as the entire fund entrusted and the interest accrued therefrom from deposits had to be utilized only for the purpose of the scheme originally granted. The whole of the fund belonged to the State exchequer and the assessee had to channelise them to achieve the objects of centrally sponsored scheme of infrastructural development as specified in the Government order. Hence, interest on all these fixed deposits had to be considered as capitalised and not revenue receipts to be treated as income.”

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Income – Mutuality – A. Y. 1986-87 – Co-operative society allotting plots in land to members at premium – Ownership of land remaining with society – Premium to be utilised for development of common facilities and amenities – Co-operative society a mutual concern – Premium received for transfer of plots exempt from tax

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CIT vs. Prabhukunja Co-operative Housing Society Ltd.; 377 ITR 13 (Guj)(FB): 279 CTR 466 (GUJ)(FB):

The
assessee is a co-operative housing society. It owned lands for
residential use. Such lands were developed by the society for providing
common amenities such as internal roads, drainage, street lights if need
be, common plot and club house. Individual plots were allotted to
members who enjoy occupational rights but ownership of the land always
remained with the society. On the plot of land so allotted, the member
would be allowed to construct his residential unit. Upon transfer of the
plot by a member, the society would collect 50% of the excess or
premium. The fund so collected would be appropriated in the common fund
of the society to be utilised according to the bye-laws which envisaged
development of common facilities and expenditure for common amenities. A
part of the surplus would be diverted to the reserve fund of the
society. The surplus could also be utilised for waiver of the lease
amount or for the health, education and social activities of the
members. The Assessing Officer held that the assessee was not a
co-operative society but an association of persons engaged in business
and, accordingly, made an addition to the income of the assessee on
account of the premium received for transfer of plots. The Commissioner
(Appeals) held that the assessee was governed by the principles of
mutuality, and such amount was not taxable in the hands of the assessee
society. The Tribunal confirmed the order of the Commissioner (Appeals).

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

“i)
Contributions made by the members to the general fund of a co-operative
society in various forms would be governed by the principle of
mutuality. Particularly, in the case of premium collected by the society
from its outgoing member from out of a portion of his profit, the
principle of mutuality would apply and the receipt would not be taxable
as income of the society.

ii) There was total identity of
contributors of the fund and recipients from the fund. The contribution
came from the outgoing member in the form of a portion of the premium
and it was utilised for the common facilities and amenities for the
members of the society. Different modes of application of the funds made
it clear that the funds would be expended for common amenities or for
general benefit of the members or be distributed amongst the members in
the form of dividend or lease rents waiver.

iii) Creation of the
society was primarily for the convenience of the members to create a
housing society where individual members could construct their
residential units and common facilities and amenities could be provided
by the society. It was essential thus that a combined activity be
carried on by a group of persons who would be the members in the
co-operative society.

iv) Merely because upon the winding up of
the society, the surplus fund would be utilised by the Registrar as
provided under the Gujarat Co-operative Societies Act, 1961, and would
not be returned to the members, that would not break down the
relationship of mutuality since even in the eventuality of winding up,
there was no scope of profiteering by the members. Therefore, the
premium received by the assesses for transfer of plots was exempt from
tax.”

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Income – Deemed profit – Section 41(1) – A. Y. 2007-08 – Amounts shown for several years as due to sundry creditors – Amount not written off in relevant year – Genuineness of credits not doubted – Amount not assessable u/s. 41

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Principal CIT vs. Matruprasad C. Pandey; 377 ITR 363 (Guj):

For the A. Y. 2007-08, the Assessing Officer made an addition of Rs. 56,96,645/- u/s. 41(1), doubting certain sundry creditors amounting to Rs. 56,96,645 appearing in the balance sheet of the assessee for the past several years. The addition was deleted by the Tribunal.

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

“i) The addition u/s. 41(1) cannot be made unless and until it is found that there was remission or cessation of the liability that too during the previous year relevant to the assessment year in question.

ii) The sundry creditors mentioned in the balance-sheet of the assesee were shown as sundry creditors for several years before the relevant assessment year and at no point of time earlier had the Assessing Officer doubted the creditworthiness or identity of the creditors. There was no remission or cessation of the liability during the previous year relevant to the assessment year under consideration. The deletion of the addition was justified.”

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Presumptive income – Section 44BB – The servicetax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee is only collecting the service-tax for passing it on to the government. Thus, for the purpose of computing the presumptive income of the assessee u/s. 44BB, the service-tax collected by the assessee on the amount paid for rendering services is not to be included in the gross receipt in terms of section 44BB(2) rea<

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DIT vs. Mitchell Drilling International (P.) Ltd.: [2015] 62 taxmann.com 24 (Delhi):

The High Court of Delhi framed following question of law:

“Whether the amount of service-tax collected by assessee from its various clients should have been included in gross receipts while computing its income u/s. 44BB?”

The High Court held as under:

“(i) Section 44BB introduces the concept of presumptive income and states that 10% credit of the amounts paid or payable or deemed to be received by the assessee on account of “the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oil in India” shall be deemed to be the profits and gains chargeable to tax. The purpose of this provision is to tax what can be legitimately considered as income of the assessee earned from its business and profession.

(ii) The service-tax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee is only collecting the service-tax for passing it on to the government.

(iii) The position has been made explicit by the CBDT itself in two of its circulars. In Circular No. 4/2008 dated 28th April, 2008 it was clarified that “service tax paid by the tenant does not partake the nature of income of the landlord”. The landlord only acts as a collecting agency for Government for collection of service-tax. Therefore, it has been decided that TDS u/s. 194-I would be required to be made on the amount of rent paid/payable without including the service tax. In Circular No. 1/2014 dated 13th January, 2014, it has been clarified that service-tax is not to be included in the Fees for professional services or technical services and no TDS is required to be made on the service-tax component u/s. 194J.

(iv) Thus, for the purpose of computing the presumptive income of the assessee u/s. 44BB, the service-tax collected by the assessee on the amount paid for rendering services is not to be included in the gross receipt in terms of section 44BB(2) read with section 44BB(1).”

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Housing project – Deduction u/s. 80-IB(10) – A. Ys. 2002-03 to 2007-08 – Architect certifying completion of project, application made to municipal corporation for issuance of completion certificate and fees paid therefor within time specified – Delay by municipal corporation for issuance of certificate – Delay cannot be attributed to assessee – Assessee is entitled to deduction

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CIT vs. Hindustan Samuh Awas Ltd.; 377 ITR 150 (Bom):

The assessee was a builder and a developer which undertook a mega housing project on a layout covering an area of about 25 acres. The project was approved in February 2000. The assessee completed part of the project and obtained a completion certificate for that part of the project from the municipal corporation on October 10, 2008. The assessee sought exemption u/s. 80-IB(10) for the A. Ys. 2002-03 to 2007-08 in respect of the profit made in these years from the sale of flats. The claim was denied by the Assessing Officer on the ground that the completion certificate was not issued on or prior to 31st March, 2008. The Tribunal allowed the assessee’s claim and held that in view of the fact that the assessee had made an application seeking a completion certificate prior to 31st March, 2008, the date on which the completion certificate was issued was not material. The delay in issuing the completion certificate was not attributable to the assessee. The delay was beyond its control.

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

“i) The Explanation is quite clear and did not introduce any uncertainty. In other words. The date of completion of a project has to be the date of issuance of completion certificate by the municipal authority. The architect of the project had given a certificate prior to 31st March, 2008. The assessee submitted the application to the municipal authority along with such certificate well in time on 25th March, 2008. The municipal authorities directed the assessee to deposit certain amount for issuance of completion certificate on 27th March, 2008 and the amount was, accordingly deposited on 31st March, 2008.

ii) The delay could not be attributed to the assessee. Therefore, the project for which exemption was sought was completed prior to 31st March, 2008, and entitled to deduction u/s. 80-IB(10).”

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Business expenditure – Capital or revenue expenditure – Section 37 – A. Ys. 2007-08 and 2008-09 – Development charges on research and testing of components – Revenue expenditure

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CIT vs. JCB India Ltd.; 376 ITR 621 (Del):

For the A. Ys. 2007-08 and 2008-09, the assessee had claimed that development charges on research and testing components is revenue expenditure. The Assessing Officer rejected the claim. The Tribunal allowed the assessee’s claim on the ground that in several previous assessment years the plea of the assessee that it was revenue expenditure was accepted.

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

“i) The assessee incurred the development charges on research and testing of components. This did not result in a benefit to it of enduring nature so as to characterize the development charges as capital expenditure. Testing of products and components is essentially a continuous process which permeats different accounting years. It is an integral part of the routine manufacturing and monitoring activity. It can not obviously be a one-time event.

ii) The Revenue had not been able to persuade the Court that an error had been committed in any of the previous assessment years where the assessee’s explanation was accepted and the expenditure on development charges was treated as revenue expenditure.

iii) In the facts and circumstances of the case, the rule of consistency was adopted and the plea of the revenue to remand the matter to the Assessing Officer for a fresh determination was declined.”

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Income or capital receipt – A. Y. 2008-09 – An amount received by a prospective employee ‘as compensation for denial of employment’ was not in nature of profits in lieu of salary. It was a capital receipt that could not be taxed as income under any other head

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CIT vs. Pritam Das Narang; [2015] 61 taxmann.com 322 (Delhi)

In terms of employment agreement, the assessee was to be employed as CEO of M/s ACEE Enterprises (‘ACEE’). The ACEE was unable to take assessee on board due to sudden change in its business plan. The ACEE paid compensation of Rs. 1.95 crore to assessee as a “onetime payment for non-commencement of employment as proposed”. The assessee had not offered such compensation to tax. The Assessing Officer rejected the claim of assessee on the ground that u/s. 17(3)(iii) receipt by the assessee of any sum from any person prior to his joining with such person was taxable. The CIT(A) deleted the addition and held that section 17(3)(iii) had been brought in to account for taxing ‘joining bonus’ received from the prospective employer as profit in lieu of salary. The ITAT upheld the findings of CIT(A).

In appeal by the Revenue, the ld. Counsel of department urged that since the wording of section 17(3)(iii) was that “any amount received from any person”, it was not necessary that the amount had to be received only from an employer in order that such sum be brought to tax in the hands of an assessee under the head ‘profits in lieu of salary’. It was submitted that the expression any person could include a prospective employer in the present case.

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

“(i) The interpretation sought to be placed by revenue on plain language of section 17(3)(iii) could not be accepted. The words “from any person” occurring therein have to be read together with the following words in sub-clause (A): “before his joining any employment with that person”. In other words, section 17(3)(iii) pre-supposes the existence of the relationship of employee and employer between the assessee and the person who makes the payment of “any amount’ in terms of section 17(3)(iii).

(ii) Therefore the words in section 17(3)(iii) cannot be read disjunctively to overlook the essential facet of the provision, viz, the existence of ’employment’, i.e., a relationship of employer and employee between the person who makes the payment of the amount and the assessee.

(iii) The other plea of revenue that said amount should be taxed under some other head of income, including ‘income from other sources’, was also unsustainable. In case of CIT vs. Rani Shankar Mishra [2009] 178 Taxman 324 (Delhi), it was held that where an amount was received by a prospective employee ‘as compensation for denial of employment’, such amount was not in nature of profits in lieu of salary. Thus, it was a capital receipt that could not be taxed as income under any other head.”

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Charitable and religious trust – Anonymous donations – Special rate of tax – Section 115BBC – A. Y. 2009-10 – Exception – Religious trust – Overall activities of trust to be seen – Charitable activity part of religious activity – Assessee is a public religious trust – Special rate not attracted

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CIT vs. Bhagwan Shree Laxmi Narayandham Trust; 378 ITR 222 (Del): 280 CTR 335 (Del):

The assessee was a public religious trust. For the A. Y. 2009-10 the assessee had received anonymus donations to the extent of Rs. 27,25,306/-. The Assessing Officer applied the provisions of section 115BBC of the Incometax Act, 1961 and levied tax at the special rate. The Tribunal held that the Revenue had incorrectly applied section 115BBC to the facts of the assessee’s case.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) T he question of receipt of anonymus donations could not be addressed within the narrow scope of the specific wordings of some of the clauses of the trust deed but in the overall context of the actual activities in which the trust was involved in including imparting spiritual education to persons of all casts and religions, organizing samagams, distribution of free medicine and cloths to the needy and destitute, provision of free ambulance service for needy and destitute patients and so on.

ii) What can constitute religious activity in the context of Hindu religion need not be confined to the activities incidental to a place of worship like a temple. A Hindu religious institution like the assessee is also engaged in charitable activities which were very much part of the religious activity. In carrying on charitable activities along with organizing of spiritual lectures, the assessee by no means ceased to be religious institution. The activities described by the assessee as having been undertaken by it during the assessment year in question could be included in the broad conspectus of Hindu religious activity when viewed in the context of objects of the trust and its activities in general.

iii) Thus, the Tribunal was justified in coming to the conclusion that for the purpose of section 115BBC(2)(a) anonymus donations received by the assessee would qualify for deduction and it can not be included in its assessable income.”

Capital gain – Short term capital gain or business income – A. Y. 2008-09 – Purchase and sale of shares – Entire investment in shares consistently treated as investment in shares and not stock-intrade – Transactions not of high volume – Own funds used for the purposes of investment in shares – Transactions delivery based – Income to be treated as short term capital gains and not business income

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CIT vs. Smt. Datta Mahendra Shah (Bom)

In the A. Y. 2008-09, the assessee claimed Rs. 9.25 crores as short term capital gain. The Assessing Officer held that it was business income. The Commissioner (Appeals) found that the assessee had been an investor in shares and had consistently treated her entire investment in shares as investment and not stock-intrade. The assessee was dealing in 35 scrips, involving 59 transactions for the entire year could not be considered for high volume so as to be classified as trading income. The assesee had not borrowed any funds but had used her own funds. He held the income to be treated as shortterm capital gains. The Tribunal upheld the decision of the Commissioner (Appeals).

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

“(i) T he Commissioner (Appeals) considered all the facts including the stand taken by the Revenue as found in the Assessing Officer’s order. On examination of all the facts he came to the conclusion that the activities carried out by the assesee could not be classified under the head “business income” but more appropriately as claimed by the assessee under the head “shortterm capital gains”. This was particularly so on application of the CBDT circular.

(ii) In view of the concurrent finding of fact arrived at by the Commissioner (Appeals) and the Tribunal no substantial question of law would arise.”

Business expenditure – Section 37(1) – A. Y. 2009- 10 – Payment made by the assessee law firm to the Indian branch of the International Fiscal Association towards the cost of constructing one of its meeting halls on the understanding that the hall would be named after the assessee firm was deductible as business expenditure

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CIT vs. Vaish Associates; 280 CTR 605 (Del): The assessee, a law firm, had agreed to contribute Rs. 50 lakh to the Indian branch of the International Fiscal Association (IFA) on progressive basis towards the cost of constructing one of its meeting halls on the understanding that the hall would be named after the asessee firm. In the relevant year, i.e. A. Y. 2009-10, the assessee had paid Rs. 19 lakh and the same was claimed as business expenditure. The Assessing Officer disallowed the claim. However, he allowed 50% deduction u/s. 80G of the Income-tax Act, 1961. The Tribunal allowed the full claim u/s. 37(1) of the Act.

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

“i) T he Tribunal has accepted the explanation of the assessee that the IFA is a professional body and a non-profit organization engaged in the study of international tax laws and policies. It, inter alia, undertakes research, holds conferences and publishes materials for the use of its members. Mr. Ajay Vora, one of the partners of the assessee firm, was also a member of the executive body of the IFA.

ii) T he contribution made by the assessee to the IFA was held to be for inter alia creating greater awareness of the assessee firm’s activities and therefore an expenditure incurred for the purposes of the profession of the assessee. It was accordingly held to be allowable as a deduction u/s. 37(1) of the Act.”

Business expenditure – Disallowance u/s. 14A – A. Y. 2007-08 – Disallowance u/s. 14A is not automatic upon claim to exemption – AO’s satisfaction that voluntary disallowance made by assessee unreasonable and unsatisfactory is necessary – In the absence of such satisfaction the disallowance cannot be justified

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CIT vs. I. P. Support Services India (P) Ltd.; 378 ITR 240 (Del):

In the A. Y. 2009-10, the assessee had earned dividend income which was exempt. The Assessing Officer asked the assessee to furnish an explanation why the expenses relevant to the earning of dividend should not be disallowed u/s. 14A. The assessee submitted that as no expenses had been incurred for earning dividend income, this was not a case for making any disallowance. The assessing Officer held that the invocation of section 14A is automatic and comes into operation, without any exception. He disallowed an amount of Rs. 33,35,986/- u/s. 14A read with rule 8D and added the amount to the total income. The Commissioner (Appeals) found that no interest expenditure was incurred and that the investments were done by using administrative machinery of PMS, who did not charge any fees. He deleted the addition. The Tribunal affirmed the order of the Commissioner (Appeals).

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

“i) The Assessing Officer had indeed proceeded on the erroneous premise that the invocation of section 14A is automatic and comes into operation as soon as the dividend income is claimed as exempt. The recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable or unsatisfactory, is a mandatory requirement of the law.

ii) N o substantial question of law arises. The appeal is dismissed.”

Business expenditure – Disallowance u/s. 14A – A. Y. 2007-08 – Higher disallowance under rule 8D agreed before AO – Assessee could not be bound by such offer – Tribunal justified in reducing the amount of disallowance

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CIT vs. Everest Kanto Cylinders Ltd.; 378 ITR 57 (Bom):

For the A. Y. 2007-08, the assessee and the Assessing Officer worked out the amount disallowable u/s. 14A read with rule 8D at Rs.20,27.896/- Before the Tribunal the assessee pointed out that the disallowance is on a higher side and claimed that a reasonable amount should be disallowed. The Tribunal restricted the disallowance to Rs. 1 lakh.

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

“The Tribunal had gone into the factual aspects in great detail and interpreted the law as it stood on the relevant date. Therefore, the order of the Tribunal restricting the disallowance to Rs. 1 lakh u/s. 14A was justified.”

Business expenditure – Accounting – Sections 37 and 145 – A. Ys. 1996-97 to 1999-00 – Accounting standards issued by ICAI not to be disregarded – Accounting standard employed by assessee, issued by ICAI but not notified by Central Government – Not a ground to discard – Lease equalisation charges – Deductible from lease rental income

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CIT vs. Pact Securities and Financial Services; 374 ITR 681 (T&AP):

For the A. Y. 1998-99, the assessee showed gross lease rental of Rs. 1,14,91,395/- as income. Out of this, a sum of Rs. 48,56,224/- was claimed as deduction of lease equalization charges from the lease rental income following the guidance note on accounting of leases, Issued by the ICAI. The Assessing Officer disallowed the lease equalisation charges. The Tribunal allowed the claim.

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

“(i) The Assessing Officer could not have disregarded the method of accounting followed by the assessee in respect of the lease rental as it was based on a guidance commended for adoption by a professional body such as the ICAI. The guidance note reflected the best practices adopted by accountants the world over. The fact that at the relevant point of time, it was not mandatory to adopt the methodology professed by the guidance note issued by the ICAI was irrelevant because as long as there was a disclosure of the change in the accounting policy in the accounts, which had the backing of a professional body such as the ICAI, it could not be discarded by the Assessing Officer.

(ii) Notwithstanding the fact that the opinion of ICAI was expressed in a guidance note which had not attained a mandatory status, would not provide a basis to the Assessing Officer to disregard the books of account of the assessee and in effect the method of accounting of leases followed by the assessee.

iii) Merely because the Central Government has not notified in the Official Gazette “accounting standards” to be followed by any class of assesses or in respect of any class of income, it could not be stated that the accounting standards prescribed by the ICAI or the accounting standards reflected in the “guidance note” cannot be adopted as an accounting method by an assessee.

iv) T he questions of law are answered in favour of the assessee and against the Revenue.”

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Appeal to High Court – Competency of appeal – Rule of consistency – Sections 92B and 260A – A. Y. 2007-08 – Decision of Tribunal on identical issues relating to section 92B – No appeals from decisions – Presumption that the decision has been accepted – Appeal on similar issue to High Court not maintainable

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CIT vs. Tata Autocomp Systems Ltd.; 374 ITR 516 (Bom):

The Revenue had filed an appeal before the High Court against the order of the Tribunal relating to section 92B. Appeal was not preferred against the decisions of the Tribunal on identical issue in other cases:

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

“i) T he order of the Tribunal, inter alia, had followed the decisions of the Bombay Bench of the Tribunal to reach the conclusion that the arm’s length price in the case of loans advanced to associate enterprises would be determined on the basis of the rate of interest being charged in the country where the loan is received/ consumed.

ii) T he Revenue had not preferred any appeal against those decisions of the Tribunal on the above issue. No reason had been shown as to why the Revenue sought to take a different view in the present case from that taken in those decisions of the Tribunal. The Revenue having not filed any appeal against those decisions, had in fact accepted the decisions of the Tribunal. The appeal was not maintainable.”

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Search and seizure – Block assessment – Sections 158BC and 158BD – B. P. 1/04/1988 to 03/05/1998 – Police recovering cash from possession of three persons – Persons stating cash belonging to assessee who in reply stated that cash belongs to firm – No search warrant or requisition in name of assessee or the firm – No asset requisitioned from assessee – No notice could be issued in the name of assessee – Block assessment against assessee not valid

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CIT vs. Anil Kumar Chada; 374 ITR 10 (All):

On 2nd May, 1998, the police recovered a sum of Rs. 17 lakh from the possession of three persons. On interrogation, they stated that the money belonged to the assessee who in reply to the query by the police stated that the cash belonged to the firm, C. When the matter was referred to the Income Tax Department, it issued a notice u/s. 158BC in the name of the assessee for the block period 1 st April, 1988, to 3rd May, 1998, and made an assessment of undisclosed income of Rs. 18,11,700/- in the hands of the assessee. The Tribunal cancelled the assessment holding that since no search warrant was issued u/s. 132 in the name of the assessee, no notice could be issued in the name of the assessee u/s. 158BC.

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

“i) There was no search warrant in the name of the assessee nor were assets requisitioned from the assessee. Therefore, the provisions of section 158BC were not applicable. Further, no warrant or requisition was issued either in the name of the firm or the assessee.

ii) The order of the Tribunal did not call for interference.”

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Refund – Self-assessment tax – Interest – Sections 140A, 244A(1)(a),(b) and 264 – A. Y. 1994-95 – Excess amount paid as tax on self-assessment – Interest payable from date of payment to date of refund of the amount

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Stock Holding Corporation of India Ltd vs. CIT; 373 ITR 282 (Bom):

For the A. Y. 1994-95, the Assessing Officer did not pay interest u/s. 244A in respect of the excess amount paid by the petitioner as self assessment tax. The petitioner’s application u/s. 264 of the Income-tax Act, 1961 was rejected by the Commissioner.

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

“i) The requirement to pay interest arises whenever an amount is refunded to the assessee as it is a kind of compensation for use and retention of money collected by the Revenue.

ii) Circular No. 549 dated 31/10/1989, makes it clear that if refund is out of any tax other than out of advance tax or tax deducted at source, interest shall be payable from the date of payment of tax till the date of grant of refund. The circular even remotely did not suggest that interest is not payable by the Department on self-assessment tax.

iii) The tax paid on self-assessment would fall u/s. 244A(1)(b). The provisions of section 244A(1)(b) very clearly mandate that the Revenue would pay interest on the amount refunded for the period commencing from the date payment of tax is made to the Revenue up to the date when refund is granted by the Revenue. Thus, the submission that the interest is payable not from the date of payment but from the date of demand notice u/s. 156 could not be accepted as otherwise the legislation would have so provided in section 244A(1)(b), rather than having provided from the date of payment of the tax. Therefore, the interest was payable u/s. 244A(1)(b) on the refund of excess amount paid as tax on self-assessment u/s. 140A.”

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Non-resident: Section 6(1)(a) – A. Ys. 2007-08 and 2008-09: Assessee will not lose non-resident status due to forced stay in India due to invalid impounding of passport

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CIT vs. Suresh Nanda; [2015] 57 taxmann.com 448 (Delhi):

In the relevant years, the assessee was forced to stay in India for more than 182 days in a previous year due to impounding of passport. Such impounding was found by courts to be wrongful. The assessee was fighting court cases to get his passport released so that he could travel outside India to maintain his NRI status. If such forced stay was excluded then the assessee’s stay in India was less than 182 days and his status would have been that of non-resident. The assessee claimed that such forced stay should be excluded and the asessee should be treated as non-resident. The Assessing Officer rejected the claim and treated the assessee as resident. The Tribunal held that the assessee continued to enjoy the status of nonresident and, thus, not amenable to be held accountable under the Income-tax Act for income not earned here.

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

“Whether the ITAT was correct in taking the view that the period for which the assessee was in India involuntarily on account of his passport having been impounded is not to be counted for purposes of section 6(1)(a) of the Income -tax Act so as to hold him entitled to be a non-resident?”

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

“i) Where assessee was forced to stay in India for more than 182 days in a previous year due to impounding of passport found by courts to be wrongful and he was fighting court cases to get passport released so that he could travel outside India to maintain his NRI status, the period of such forced/unwilling stay in India cannot be counted for determining his residential status u/s 6. If assessee’s stay in India without counting such forced stay is for less than 182 days, he retains his NRI status for tax purposes.

ii) We must, however, add a caveat here. The conclusion reached by us on the facts and in the circumstances of the case at hand cannot be treated as a thumb rule to the effect that each period of involuntary stay must invariably be excluded from computation for purposes of Section 6(1)(a) of Income-tax Act. The view taken by us in the case of assessee here is in the peculiar facts and circumstances wherein he was inhibited from travelling out of India on account of such action of the law enforcement agencies as was found to be wholly unjustified. Here, it is important to notice that the passport impounding order was invalidated as without authority of law. The finding on whether in a given case an assessee’s claim to extended stay being involuntary, has to be fact dependent. For purposes of section 6(1)(a), each case will have to be examined on its own merits in the light of facts and circumstances leading to “involuntary” stay, if any, in India.”

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Housing project – Deduction u/s. 80-IB(10) – A. Y. 2007-08 – Condition precedent – Plot must have minimum area of one acre – Composite housing scheme consisting of six blocks in area exceeding one acre – Housing project approved under Development Control Rules – Separate plan permits were obtained for six blocks is not a ground for denial of deduction – Assessee entitled to deduction

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CIT vs. Voora Property Developers P. Ltd.; 373 ITR 317 (Mad):

For the A. Y. 2007-08, in the assessment order u/s. 143(3) of the Income-tax Act, 1961, the Assessing Officer had allowed the assessee’s claim for deduction u/s. 80-IB(10) in respect of the housing project consisting of six blocks in a area exceeding one acre. The Commissioner set aside the assessment order u/s. 263 for reconsidering the claim for deduction u/s. 80-IB(10) of the Act holding that the assessee had developed six separate projects in one single piece of land measuring 1.065 acres and the assessee did not fulfill the essential condition of the minimum area of one acre for a single project as laid down u/s. 80-IB(10). Accordingly, the Assessing Officer disallowed the claim for deduction u/s. 80-IB(10) of the Act. The Tribunal allowed the assessee’s claim.

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

“i) There was no dispute in the approval granted by the CMDA in respect of the composite housing scheme. When the Legislature introduced 100% deduction it was known that the local authorities could approve a housing project to the extent permitted under the Development Control Rules. When the project fulfilled the criteria for being approved as a housing project, the deduction could not be denied u/s. 80-IB(10) merely because the assessee had obtained a separate plan permit for six blocks.

ii) If the conditions specified u/s. 80-IB are satisfied, then deduction is allowable on the entire project. Since the project was approved in accordance with the Development Control Rules, the assessee would be entitled to 100% deduction on the entire project approved by the local authority.

iii) The assessee constructed six blocks in a land measuring one acre and 6.5 cents which admittedly exceeded the required area specified in clause (a) of section 80-IB(10), viz., one acre. Therefore, the assesee was entitled to the deduction.”

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Export profit – Supporting manufacturer – Deduction u/s. 80HHC – A. Y. 2003-04 – Condition precedent – Not necessary that exporter should have earned profit – Requisite certificate filed during assessment proceedings – Assessee, supporting manufacturer is entitled to deduction u/s. 80HHC

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80HHCCIT vs. Shamanur Kallappa & Sons; 373 ITR 373 (Karn)

The assessee exported rice to Cambodia through State Trading Corporation of India as a supporting manufacturer and claimed deduction u/s. 80HHC of the Income-tax Act, 1961. The Assessing Officer disallowed the claim on the ground that the State Trading Corporation had declared loss. The Tribunal allowed the asessee’s claim.

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

“i) In order to attract the provisions of section 80HHC(1A), the supporting manufacturer sells the goods or merchandise to the export house or trading house. The export house or trading house has to issue a certificate under the proviso to subsection (1) of section 80HHC of the Act. If these two conditions are fulfilled, the supporting manufacturer is entitled to the deduction as contemplated u/s. 80HHC of the Act to the extent as mentioned in section 80HHC(1A) of the Act. It is immaterial whether in the process, the export house or trading house sells the goods to any foreign country or earns profit or realises any foreign exchange.

ii) In order to attract section 80HHC(1A) of the Act, after purchase of goods or merchandise from the supporting manufacturer, the goods have to be exported out of India. Once such export is established, a certificate under the proviso to subsection (1) is issued by the export house or trading house and when they do not claim the benefit u/s. 80HHC, the assessee would be entitled to the benefit of deduction as prescribed u/s. 80HHC(1A).

iii) The assessee was entitled to deduction u/s. 80HHC. The Tribunal was justified in granting the relief to the assessee upon the certificate produced in the course of the proceedings.”

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Capital gain – Exemption u/s. 54 – A. Y. 2007-08 – Investment of net consideration in purchase of a residential house – Acquisition of plot and substantial domain over new house – Requirement for claiming exemption complied with – Assessee entitled to exemption –

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CIT vs. Smt. G. Venkata Laxmi; 373 ITR 572 (T&AP):

The assessee sold a property and sale proceeds were used for construction of a new building. The Tribunal found that the assessee invested the entire net consideration within the stipulated period and in fact had even constructed the major portion of the residential property except some finishing, making it fit for occupation. The Tribunal held that as the assessee had acquired substantial domain over the new house and had made substantial payment towards cost of land and construction, within the period specified u/s. 54 of the Income-tax Act, 1961 the assessee could be said to have complied with the requirements for claiming the exemption u/s. 54. Accordingly, the Tribunal allowed the assessee’s claim for exemption u/s. 54 of the Act.

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

“i) In order to get the benefit of section 54 of the Act, it does not appear that in case of purchase of property with sale proceeds it has to be reconed within three years, in case of construction of new building utilizing sale proceeds, the construction has to be completed within a period of three years of the sale. In this case, the question of registration of document does not arise and it is a question of investment in construction of the new building.

ii) When it was found on the facts that the construction was completed within three years of sale of the property, the benefit would automatically follow. Hence we dismiss the appeal.”

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Co-operative society – Deduction u/s. 80P(2)(a) (i) – A. Ys. 2008-09, 2009-10 and 2011-12 – Byelaws of society not prohibiting other co-operative societies from being its members – Assessee is not a co-operative bank – Assessee entitled to deduction u/s. 80P(2)(a)(i)

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Quepem Urban Co-operative Credit Society Ltd. vs. ACIT; 377 ITR 272 (Bom):

For the A. Ys. 2008-09, 2009-10 and 2011-12, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80P(2)(a)(i), on the ground that the assessee was a primary co-operative bank. The Tribunal upheld the decision.

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

“i) There was no dispute between the parties that the assessee was a co-operative society as the society was registered under the Goa Co-operative Societies Act, 2001. Its transactions with non-members were insignificant or miniscule. On the above basis, it could not be concluded that the assessee’s principal business was of accepting deposits from the public and, therefore, it was in banking business. Besides, the qualifying condition 3 for being considered as a primary co-operative bank is that the bye-laws must not permit admission of any other co-operative society. This is a mandatory condition, i.e., the bye-laws must specifically prohibit the admission of any other cooperative society to its membership. The Revenue had not been able to show any such prohibition in the bye-laws of the assessee.

ii) The assessee could not be considered to be a cooperative bank for the purposes of section 80P(4) of the Act. Thus, the assessee was entitled to the benefit of deduction u/s. 80P(2)(a)(i) of the Act.

iii) The authorities should restrict the benefit of deduction u/s. 80P of the Act only to the extent that the income is earned by the assessee in carrying on its business of providing credit facilities to its members.”

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Mutuality Income: A. Y. 2005-06- Transfer fees received by Co-operative Housing Societies from incoming & outgoing members (even in excess of limits) is exempt on the ground of mutuality

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CIT vs. Darbhanga Mansion CHS Ltd (Bom): ITA No. 1474 of 2012 dated 18/12/2014: www.itatonline.org:

The
assessee, a Co-operative Housing Society, received a sum of Rs.
39,68,000 on account of transfer of flat and garage and credited it to
‘general amenities fund’ as well as ‘repair fund’. The assessee claimed
that the said receipt is exempted from tax on the ground of mutuality.
However, the Assessing Officer held that the principles of mutuality
will not apply. However, the CIT(A) and Tribunal allowed the assessee’s
claim by relying on Sind Co-operative Housing Society vs. ITO; 317 ITR
47 (Bom).

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

i)
The very issue and the very question was raised repeatedly in the case
of the assessee society. Repeatedly, the Revenue has failed in
convincing the Tribunal that Sind Co-operative Housing Society will not
cover the Society’s case. The contribution is made to the repair fund or
to the general fund and credited as such. While it may be true that it
is occasioned by transfer of a flat and garage, yet, we do not see how
merely because there was cap or restriction placed on the transfer fees
or the quantum thereof, in this case the principle of mutuality cannot
be applied.

ii) The underlying principle and of a co-operative
movement has been completely overlooked by the Revenue. The Revenue
seems to be of the view that a Co-operative Housing Society makes
profit, if it receives something beyond this amount of Rs. 25,000. There
has to be material brought and which will have a definite bearing on
this issue. If the amount is received on account of transfer of a flat
and which is not restricted to Rs. 25,000/- but much more, then
different consideration may apply. However, in the present case, what
has been argued and vehemently is the amount was received by the Society
when the flat and the garage were transferred. Therefore, it must be
presumed to be nothing but transfer fees. It may have been credited to
the fund and with a view to demonstrate that it is nothing but a
voluntary contribution or donation to the Society, but still it
constitutes its income. However, for rendering such a conclusive finding
there has to be material brought by the Revenue on record. Beyond
urging that it has been received at the time of a transfer of the flat
and credited to such a fund will not be enough to displace the principle
laid down in the decision of Sind Cooperative Housing Society.

iii)
The attempt of the Revenue therefore is nothing but overcoming the
binding judgment of this Court. In the present case, the Commissioner
and the Tribunal both have held that the receipt may have been
occasioned by the transfer but the principle of mutuality will still
apply.

iv) It is a typical relationship between the member of
the Co-operative Society and particularly a Housing Society and the
Society which is a body Corporate and a legal entity by itself that is
forming the basis of the principle laid down by the Division Bench.
Co-operative movement is a socio economic and a moral movement. It has
now been recognised by Article 43A of the Constitution of India. It is
to foster and encourage the spirit of brotherhood and co-operation that
the Government encourages formation of Co-operative Societies. The
members may be owning individually the flats or immovable properties but
enjoying, in common, the amenities, advantages and benefits. The
Society as a legal entity owns the building but the amenities are
provided and that is how the terms “flat” and the “housing society” are
defined in the statute in question. We do not therefore find any reason
to deviate from the principle laid down in Sind Co-operative Housing
Society’s case and which followed a Supreme Court judgment.”

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Charitable Trust – Registration – Section 12AA(2) – Period of six months provided in section 12AA(2) for disposal of application is not mandatory – Non disposal of application before expiry of six months does not result in deemed grant of registration –

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CIT vs. Muzafar Nagar Development Authority; 372 ITR 209(All)(FB)

The following question of law was raised in an appeal by the Revenue:

“Whether the non-disposal of an application for registration, by granting or refusing registration, before the expiry of six months as provided u/s. 12AA(2) of the Income-tax Act, 1961, would result in deemed grant of registration?”

The Full Bench of the Allahabad High Court held as under:

“Parliament has carefully and advisedly not provided for a deeming fiction to the effect that an application for registration would be deemed to have granted, if it is not disposed of within six months. Therefore, nondisposal of an application for registration before the expiry of six months as provided u/s. 12AA(2) would not result in a deemed grant of registration.”

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Charitable Institution-Exemption u/s. 10 & 11- In computing the income of charitable institutions exempt u/s. 11, income exempt u/s. 10 has to be excluded. The requirement in section 11 with regard to application of income for charitable purposes does not apply to income exempt u/s. 10 –

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DIT (E) vs. Jasubhai Foundation; www.itatonline.org

The Bombay High Court had to consider whether an assessee enjoying exemption u/s. 11 could claim that the income exempt u/s. 10(33) and 10(38) had to be excluded while computing the application of income for charitable or religious purpose.

The High Court held as under:

“There is nothing in the language of sections 10 or 11 which says that what is provided by section 10 or dealt with is not to be taken into consideration or omitted from the purview of section 11. If we accept the argument of the Revenue, the same would amount to reading into the provisions something which is expressly not there. In such circumstances, the Tribunal was right in its conclusion that the income which in this case the assessee trust has not included by virtue of section 10, then, that cannot be considered u/s. 11.”

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Capital gains – Computation – Section 50C – Valuation by DVO – Sale of land – Stamp duty assigning higher value to the land – Matter should be referred to DVO –

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Sunil Kumar Agarwal vs.CIT; 372 ITR 83 (Cal):

The assessee sold piece of land for Rs. 10,00,000/-. The stamp duty value of the same was Rs. 35,00,000/-. The Assessing Officer adopted the stamp duty value u/s. 50C of the Income-tax Act, 1961 and computed the capital gain on that basis. The Tribunal upheld the same.

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

“i) T he case of the assessee was that the price offered by the buyer was the highest prevailing price in the market. If this were his case then it is difficult to accept the proposition that the assessee had accepted that the price fixed for stamp duty was the fair market value of the property. No such inference could be made as against the assessee because he had nothing to do in the matter.

ii) Stamp duty was payable by the purchaser. It was for the purchaser to either accept it or dispute it. The assessee could not have done anything. In the case of this nature the Assessing Officer should, in fairness, have given an option to the assessee to have the valuation made by the DVO contemplated u/s. 50C.”

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Capital gains – Section 45(4) – A. Y. 1993-94: Conversion of firm into company – Transfer of assets means a physical transfer or intangible transfer of rights to property – Conversion of shares of partners to shares in company – No transfer within meaning of section 45(4) – No capital gain:

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CIT vs. United Fish Nets; 372 ITR 67 (T&AP):

In the A. Y. 1993-94, the assessee firm was converted into a private limited company. The entire assets and liabilities of the firm were made over to the company. The respective partners were issued shares by the company corresponding to the value of their share in the firm. The Assessing Officer took the view that there was transfer of assets from the firm to the private limited company and thereby the capital gains tax u/s. 45 became payable. The Tribunal held that section 45 was not applicable and deleted the addition.

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

“i) From a perusal of section 45(4) of the Incometax Act, 1961, it becomes clear that two aspects become important, viz., the dissolution of the firm and the distribution of the assets as a consequence thereof. The distribution must result in some tangible act of physical transfer of properties or tangible act of conferring exclusive rights vis-à-vis an item of property on the erstwhile shareholder. Unless these other legal correlatives take place, it cannot be inferred that there was any distribution of assets.

ii) The shares of the respective shareholders in the assessee company were defined under the partnership deed. The only change that had taken place on the assessee being transformed into the company was that the shares of the partners were reflected in the form of share certificates. Beyond that, there was no physical distribution of the assets in the form of dividing them into parts, or allocation of the assets to the respective partners or even distribution the monetary value thereof. Section 45 was not applicable.”

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Business expenditure – Bogus purchases – A. Y. 2001-02 – No rejection of books of account – Substantial amount of sales to Government Department – Confirmation letters filed by suppliers, copies of invoices of purchases as well as copies of bank statements indicating purchases were made – Non-appearance of suppliers before authorities is not a ground to hold purchases bogus – No addition could be made –

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CIT vs. Nikunj Eximp Enterprises Pvt. Ltd.; 372 ITR 619 (Bom):

For the A. Y. 2001-02, the assessee declared a total income of Rs. 42.08 lakh. The Assessing Officer disallowed an expenditure of Rs. 1.33 crore on account of purchases from seven parties on the ground that they were not genuine. The Tribunal found that the assessee had filed the letters of confirmation of suppliers, copies of bank statements showing entries of payment through account payee cheques to the suppliers, copies of invoices for purchases and stock statement, i.e. stock reconciliation statement and no fault was found with regard to it. Books of account of the assessee had not been rejected. The Tribunal deleted the disallowance holding that the purchases were not bogus.

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

“i) The Tribunal had deleted the additions made on account of bogus purchases not only on the basis of stock statement, i.e. reconciliation statement but also in view of other facts. The Tribunal recorded that the books of account of the assessee had not been rejected. Similarly, the sales had not been doubted and it was an admitted position that a substantial amount of sales had been made to the Government Department.

ii) Further, there were confirmation letters filed by the suppliers, copies of invoices of purchases as well as copies of bank statements all of which would indicate that the purchases were in fact made.

iii) Merely because the suppliers had not appeared before the Assessing Officer or the Commissioner (Appeals), one could not conclude the purchases were not made by the assessee. The order of the Tribunal was well reasoned order taking into account all the facts before concluding that the purchases of Rs. 1.33 crore were not bogus. No fault could be found with the order of the Tribunal.”

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Business expenditure – Section 37(1) – A. Y. 2000-01 to 2002-03 – Where assessee, engaged in manufacturing and selling of motorcycles, made payment of royalty to a foreign company for merely acquiring right to use technical know how whereas ownership and intellectual property rights in know how remained with foreign company, payment in question was to be allowed as business expenditure –

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CIT vs. Hero Honda Motors Ltd.; [2015] 55 taxmann.com 230 (Delhi)

The assessee was a joint venture between the Hero Group and Honda, Japan, for manufacture and sale of motorcycle using technology licensed by Honda. The assessee and Honda thereupon entered into an agreement called ‘licence and technical assistance agreement’ in terms of which assessee paid royalty to the Honda. The assessee claimed deduction of said payment u/s. 37(1). The Assessing Officer rejected assessee’s claim holding that it was in the nature of capital expenditure. The Tribunal allowed the assessee’s claim.

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

“i) In the facts of the present case, one has to consider whether the expenditure incurred on acquisition of right to technical information and know-how would satisfy the enduring benefit test in the capital field, or the right acquired had enabled the assessee’s trading and business apparatus, in practical and commercial sense.

ii) Technical information and know-how are intangible and have unique characteristics as distinct from tangible assets. These are acquired by a person over a period of time or acquired from a third person, who may transfer ownership or grant a licence in the form of right to use, i.e., grant limited rights, while retaining ownership rights. In the latter case technical information or know-how even when parted with, the proprietorship is retained by the original holder and in that sense what is granted to the user would be a mere right to use and not transfer absolute or complete ownership.

iii) In the instant case, from perusal of terms and conditions and applying the tests expounded, it has to be held that the payments in question were for right to use or rather for access to technical know how and information. The ownership and the intellectual property rights in the know how or technical information were never transferred or became an asset of the assessee. The ownership rights were ardently and vigorously protected by Honda. The proprietorship in the intellectual property was not conveyed to the assessee but only a limited and restricted right to use on strict and stringent terms were granted. The ownership in the intangible continued to remain the exclusive and sole property of Honda. The information, etc. were made available to assessee for day to day running and operation, i.e., to carry on business. In fact, the business was not exactly new. Manufacture and sales had already commenced under the agreement dated 24-1-1984. After expiry of the first agreement, the second agreement dated 2-6-1995, ensured continuity in manufacture, development, production and sale.

iv) In view of the aforesaid, it is held that the Tribunal was right in holding that the payment made to ‘Honda’ Japan under the ‘know-how’ agreement is revenue expense and not partly or wholly capital expense.”

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Transfer pricing- Section 92C-A. Y. 2007-08- Arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid

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CIT vs. Cotton Naturals (I) (P.) Ltd.; [2015] 55 taxmann. com 523 (Delhi):

The assessee, an Indian company, was one of the leading manufacturers of rider apparel. It had incorporated a subsidiary company in United States for undertaking distribution and marketing activities for the products manufactured by it and advanced loan to its subsidiary and received interest at the rate of 4%. It applied CUP method and claimed rate of 4% to be comparable with the export packing credit rate obtained from independent banks in India. The TPO opined that what was to be considered was the prevalent interest that could have been earned by advancing a loan to an unrelated party in India with the same financial health as that of the tax payer’s subsidiary. The TPO further noted that while deciding the interest rate that may be charged on receivables from AE’s, Libor rate for calculating interest was not proper and instead of US rate, Indian rate was to be adopted. Finally, the TPO held that interest rate at 14% would be fair and reasonable. DRP granted partial relief in the form of reduction in rate of interest to 12.20%, recording that the loan was given on fixed rate of interest out of shareholder funds and the Prime Lending Rate (PLR, for short) fixed by the Reserve Bank of India, ranged from 10.25% to 10.75% in April, 2006 to 12.25% to 12.50% in March, 2007. The Tribunal agreed with assessee in view of earlier year’s decision of Tribunal.

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

“Arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. Interest rates should not be computed on basis of interest payable on currency or legal tender of place or country of residence of either party. There is no justification or a cogent reason for applying PLR for outbound loan transactions where Indian parent has advanced loan to an AE abroad. Parameters cannot be different for outbound and inbound loans and a similar reasoning applies to both inbound and outbound loans.”

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Search and seizure- Assessment- Section 153 A of- A. Y. 2008-09- No addition can be made in respect of an unabated assessment which has become final if no incriminating material is found during the search

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CIT vs. Continental Warehousing Corporation (Bom) TA No. 523 of 2013: dated 21/04/2015: www.itatonline.org:

In this case the Bombay High Court had to consider as to whether scope of assessment u/s. 153A of the Incometax Act, 1961 in respect of completed assessments is limited to only undisclosed income and undisclosed assets detected during search.

The High Court held as under:

“(i) On a plain reading of section 153A of the Incometax Act, it becomes clear that on initiation of the proceedings u/s. 153A, it is only the assessment/ reassessment proceedings that are pending on the date of conducting search u/s. 132 or making requisition u/s. 132A of the Act stand abated and not the assessments/reassessments already finalised for those assessment years covered u/s. 153A of the Act. By a circular No. 8 of 2003 dated 18-9-2003 (263 ITR (St) 61 at 107) the CBDT has clarified that on initiation of proceedings u/s. 153A, the proceedings pending in appeal, revision or rectification proceedings against finalised assessment/ reassessment shall not abate. It is only because, the finalised assessments/reassessments do not abate, the appeal revision or rectification pending against finalised assessment/reassessments would not abate. Therefore, the argument of the revenue, that on initiation of proceedings u/s. 153A, the assessments/ reassessments finalised for the assessment years covered u/s. 153A of the Income-tax Act stand abated cannot be accepted. Similarly on annulment of assessment made u/s. 153A (1) what stands revived is the pending assessment / reassessment proceedings which stood abated as per section 153A(1).

ii) Once it is held that the assessment has attained finality, then the AO while passing the independent assessment order u/s. 153A read with section 143 (3) of the I.T. Act could not have disturbed the assessment / reassessment order which has attained finality, unless the materials gathered in the course of the proceedings u/s. 153A of the Income-tax Act establish that the reliefs granted under the finalised assessment/ reassessment were contrary to the facts unearthed during the course of section 153A proceedings. If there is nothing on record to suggest that any material was unearthed during the search or during the 153A proceedings, the AO while passing order u/s. 153A read with section 143(3) cannot disturb the assessment order.”

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Reassessment: S/s. 143(1), 147 and 148- A. Y. 2010-11- Reopening of assessment, even in case of intimation u/s. 143(1), on the ground that a specific aspect requires verification is not permissible

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Nivi Trading Limited vs. UOI (Bom) W. P. No. 2314 of 2015 dated 07/04/2015: www.itatonline.org

For the A. Y. 2010-11, the return of income was accepted u/s. 143(1) of the Income-tax Act, 1961. Subsequently, a notice u/s. 148 was issued on the ground that a specific aspect requires verification. The assessee filed a writ petition and challenged the notice.

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

“(i) The assessee filed a return of income which could have been subjected to verification and scrutiny and in terms of the applicable law and sections in the Income-tax Act, 1961 itself. However, if this notice has been issued in the present case and on the footing that the income chargeable to tax has escaped assessment during the course of the assessment proceedings, then, we would not go by the stand taken by the Revenue and on affidavit. It is too late now to urge that there was no assessment and therefore no question arises of reopening thereof. In the light of the language of the notice itself, it would not be proper for us and to permit the Revenue to raise such a plea.

(ii) In the present case, the AO does not state that any income chargeable to tax has escaped assessment. All that the Revenue desires is verification of certain details and pertaining to the gift. That is not founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. That belief is not recorded and which alone would enable the Assessing Officer to proceed. Thus, the reasons must be founded on the satisfaction of the AO that income chargeable to tax has escaped assessment. Once that is not to be found, then, we are not in a position to sustain the impugned notice (Smt. Maniben Valji Shah (2006) 283 ITR 453 and Prashant S. Joshi and Anr. vIncome Tax Officer (2010) 324 ITR 154 referred)”

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ITAT- Power to grant stay beyond 365 days- S. 254(2A)- The Third Proviso which restricts the power of the ITAT to grant stay beyond 365 days “even if the delay in disposing of the appeal is not attributable to the assessee” is arbitrary, unreasonable and discriminatory. It is struck down as violative of Article 14. The ITAT has the power to extend stay even beyond 365 days

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Pepsi Foods Pvt. Ltd. vs. ACIT (Del); W. P. No. 1334 of 2015 dated 19/05/2015:www.itatonline.org:

The third proviso to section 254(2A) was amended by the Finance Act, 2008, with effect from 01/10/2008 to provide that the Tribunal shall not have the power to grant stay of demand for a period exceeding 365 days “even if the delay in disposing of the appeal is not attributable to the assessee”. The said amendment was inserted to overcome the judgement of the Bombay High Court in Narang Overseas Private Limited vs. ITAT 295 ITR 22(Bom). The Petitioners filed a Writ Petition to challenge the said amended third proviso to section 254(2A) on the ground that it is arbitrary and contrary to the provisions of the Article 14 of the Constitution of India.

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

“i) U /s. 254, there are several conditions which have been stipulated with respect to the power of the Tribunal to grant stay of demand. First of all, as per the first proviso to Section 254(2A), a stay order could be passed for a period not exceeding 180 days and the Tribunal should dispose of the appeal within that period. The second proviso stipulates that in case the appeal is not disposed of within the period of 180 days, if the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to extend the stay for a period not exceeding 365 days in aggregate. Once again, the Tribunal is directed to dispose of the appeal within the said period of stay. The third proviso, as it stands today, stipulates that if the appeal is not disposed of within the period of 365 days, then the order of stay shall stand vacated, even if the delay in disposing of the appeal is not attributable to the assessee.

ii) While it could be argued that the condition that the stay order could be extended beyond a period of 180 days only if the delay in disposing of the appeal was not attributable to the assessee was a reasonable condition on the power of the Tribunal to grant an order of stay, it can, by no stretch of imagination, be argued that where the assessee is not responsible for the delay in the disposal of the appeal, yet the Tribunal has no power to extend the stay beyond the period of 365 days. The intention of the legislature, which has been made explicit by insertion of the words – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– renders the right of appeal granted to the assessee by the statute to be illusory for no fault on the part of the assessee. The stay, which was available to him prior to the 365 days having passed, is snatched away simply because the Tribunal has, for whatever reason, not attributable to the assessee, been unable to dispose of the appeal. Take the case of delay being caused in the disposal of the appeal on the part of the revenue. Even in that case, the stay would stand vacated on the expiry of 365 days. This is despite the fact that the stay was granted by the Tribunal, in the first instance, upon considering the prima facie merits of the case through a reasoned order;

iii) The petitioners are correct in their submission that unequals have been treated equally. Assessees who, after having obtained stay orders and by their conduct delay the appeal proceedings, have been treated in the same manner in which assessees, who have not, in any way, delayed the proceedings in the appeal. The two classes of assessees are distinct and cannot be clubbed together. This clubbing together has led to hostile discrimination against the assessees to whom the delay is not attributable. It is for this reason that we find that the insertion of the expression – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– by virtue of the Finance Act, 2008, violates the non-discrimination clause of Article 14 of the Constitution of India. The object that appeals should be heard expeditiously and that assesses should not misuse the stay orders granted in their favour by adopting delaying tactics is not at all achieved by the provision as it stands. On the contrary, the clubbing together of ‘well behaved’ assesses and those who cause delay in the appeal proceedings is itself violative of Article 14 of the Constitution and has no nexus or connection with the object sought to be achieved. The said expression introduced by the Finance Act, 2008 is, therefore, struck down as being violative of Article 14 of the Constitution of India.

iv) This would revert us to the position of law as interpreted by the Bombay High Court in Narang Overseas (supra), with which we are in full agreement. Consequently, we hold that, where the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to grant extension of stay beyond 365 days in deserving cases.”

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Interest- Ss. 234A, 234B and 234C- A. Y. 1990- 91- Order levying interest should be specific- Order directing levy of interest as per rules is not sufficient

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CIT vs. Oswal Exports; 369 ITR 630 (T&AP):

If interest is leviable u/s. 234A, 234B or 234C, such levy of interest is mandatory and compensatory in nature but in order to levy interest under these sections, the Assessing Officer is specifically required to mention the specific section of charging interest, failing which, no interest could be levied under those sections.

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Education: Charitable purpose- Exemption u/s. 11-A. Y. 2007-08-Pre-sea and post-sea training for ships and maritime industry-Object of trust educational- Trust entitled to exemption u/s. 11

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DIT vs. Samudra Institute of Meritime Studies Trust; 369 ITR 645 (Bom):

The assessee was a trust established with the purpose of administering and maintaining technical training institutions at various places in India for pre-sea and post-sea training of ships and maritime industry as a public charitable institution for education, that is to provide on board and offshore training and continuing technical education for officers, both on the deck and engine side. The Assessing Officer held that the assessee was not entitled to exemption u/s. 11. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) We are of the opinion that the Tribunal has applied the correct test in concluding that the exemption u/s. 11 of the Act can be availed of by the respondent assessee. The Tribunal in paragraph 9.6 of the impugned order concludes that the assessee is giving training in the above area to seamen. All the courses may not be approved by the Director General of Shipping but that by itself is no ground to hold that the purpose is not charitable.

ii) The exemption u/s. 11 can be claimed and bearing in mind the object of the trust. We are of the opinion that the Tribunal and the CIT(A) have approached the issue correctly and in the light of the definition so also the tests laid down came to a factual conclusion that the respondent is entitled to exemption u/s. 11.

iii) This is not a case where the purpose can be said to run a coaching class or a centre. This is an institution which imparts education in the area of pre-sea and post-sea training to seamen so as to prepare them for all the duties. In such circumstances, we do not find that the concurrent findings of fact are vitiated by error of law apparent on the face of the record or perversity enabling us to entertain this appeal. The appeal is, therefore, dismissed.”

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DTAA between India and Denmark-Section 9(1) (vi)-A. Y. 1991-92: Income deemed to accrue or arise in India-Danish company supplying equipment and information regarding installation of such equipment-Consideration received is not royalty-Not assessable in India

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DIT vs. Haldor Topsoe; ; 369 ITR 453 (Bom):

Under an agreement between a Danish company and an Indian company, the Danish company supplied equipment and information regarding installation of such equipment. For the A. Y. 1991-92, the Danish company claimed that its income consequent on the agreement was not taxable in India. The Assessing Officer rejected the claim. The Tribunal accepted the claim and held that the payments were not covered within the expression “royalty” provided u/s. 9(1)(vi) of the Income-tax Act, 1961, which was much wider than the one provided in the DTAA between India and Denmark.

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

“i) The equipment was supplied to the Indian party for which the Indian party made payment. The contract included stipulations for giving all information so as to guide the Indian party to install the equipment at site and thereafter to use it.

ii) In these circumstances, this was a mixed question and finding of fact had been rendered considering the peculiar facts and circumstances. The finding of fact was a possible one. There was no perversity or error of law apparent on the face of the record. The payments were not assessable in India.”

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Deemed income-Section 41(1)-A. Y. 2003-04- Remission or cessation of liability-Sales tax deferral scheme-Option in subsequent scheme for premature payment of net present value-No remission or cessation of liability of the difference- Difference is not deemed income u/s. 41(1)

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CIT Vs. Sulzer India Ltd.; 369 ITR 717 (Bom):

In the A. Y. 2003-04, the assessee had opted for deferral scheme for payment of sales tax of Rs. 7,52,01,378/- under the deferral 1993 scheme of the Government of Maharashtra. The amount was allowed as deduction treating the option as deemed payment for the purpose of section 43B of the Income-tax Act, 1961 as per the circulars. The assessee also opted for the 2002 scheme for premature payment of net present value and paid an amount of Rs. 3,37,13,393/-. The Assessing Officer added the difference amount of Rs. 4,14,87,985/- as deemed income u/s. 41(1) of the Act. The Tribunal deleted the addition and held that the amount was not taxable u/s. 41(1) of the Act.

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

“i) The first requirement of section 41(1) is that the allowance or deduction is made in respect of the loss, expenditure or a trading liability incurred by the assessee and the other requirement is that the assessee has subsequently obtained a benefit in respect of such trading liability by way of a remission or cessation thereof. The sales tax collected by the assessee during the relevant year amounting to Rs. 7,52,01,378/- was treated by the State Government as a loan liability payable after 12 years in six annual/equal installments.

ii) Subsequently, pursuant to the amendment made to the fourth proviso to section 38 of the 1959 Act, the assesee accepted the offer of the SICOM paid an amount of Rs. 3,37,13,393/- to the SICOM, which represented the net present value of the future sum as determined and prescribed by the SICOM. The State may have received a higher sum after a period of 12 years and in installments. However, the statutory arrangement and by section 38, fourth proviso did not amount to remission or cessation of the assessee’s liability assuming the liability to be a trading one. Rather that obtains a payment to the State prematurely and in terms of the correct value of the debt due to it. There was no evidence to show that there had been any remission or cessation of the liability by the State Government.

iii) A proper understanding of all this by the Tribunal cannot be termed as perverse. The view taken by it is imminently possible. Appeals are dismissed.”

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Deemed income- Section 41(1)- A. Y. 2004-05- Remission or cessation of liability- Sales tax deferral scheme-Option in subsequent scheme for premature payment of net present value- No remission or cessation of liability of the difference- Difference is not deemed income u/s. 41(1)

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CIT vs. Mcdowell and Co. Ltd.; 369 ITR 684 (Karn):

In the A. Y. 2003-04, the assessee had opted for deferral scheme for payment of sales tax of Rs. 13,78,41,600/- under the deferral 1993 scheme of the Government of Maharashtra. The amount was allowed as deduction in the A. Y. 2003-04 treating the option as deemed payment for the purpose of section 43B of the Income-tax Act, 1961 according to the circulars. In the subsequent year, the assessee opted for the 2002 scheme for premature payment of net present value and paid an amount of Rs. 4,25,79,684/-. In the A. Y. 2004-05, the Assessing Officer added the difference amount of Rs. 9,52,61,916/- as deemed income u/s. 41(1) of the Act. The Tribunal deleted the addition and held that the amount was not taxable u/s. 41(1) of the Act.

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

“i) As per the scheme the assessee was allowed to retain the sales tax as determined by the competent authority and pay the tax 15 years thereafter. The tax collected was deemed to have been paid and, therefore, the tax so collected could not be construed as income in the hands of the assessee.

ii) The tax so retained by the assessee was in the nature of a loan given by the Government as an incentive for setting up the industrial unit in a rural area. The loan had to be repaid after 15 years. Again, it is an incentive.

iii) However, by a subsequent scheme, a provision was made for premature payment. When the assessee had the benefit of making the payment after 15 years, if he is making a premature payment, the amount equal to the net present value of the deferred tax was determined at Rs. 4,25,79,684/- and on such payment the entire liability to pay tax/loan stood discharged. Again, it is not a benefit conferred on the assessee. Therefore, section 41(1) of the Act was not attracted.”

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Capital gain-Ss. 45 and 48- A. Y. 2007-08- Gains on sale of TDR received as additional FSI as per the D. C. Regulations has no cost of acquisition and is not chargeable to capital gains tax

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CIT vs. Sambhaji Nagar Coop. Hsg. Society Ltd (Bom); ITA No. 1356 of 2012 dated 11/12/2014: www.itatonline.org:

In this case, the Tribunal held that the gains on sale of TDR received as additional FSI as per D. C. Regulations has no cost of acquisition and accordingly is not chargeable to capital gains tax.

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

i) Only an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head “Capital gains” as opposed to assets in the acquisition of which no cost at all can be conceived. In the present case as well, the situation was that the FSI/ TDR was generated by the plot itself. There was no cost of acquisition, which has been determined and on the basis of which the Assessing Officer could have proceeded to levy and assess the gains derived as capital gains.

ii) It may be that subsection (2) of s. 55 clause (a) having been amended, there is a stipulation with regard to the tenancy rights. In the present case, additional FSI/TDR is generated by change in the D. C. Rules. A specific insertion would therefore be necessary so as to ascertain its cost for computing the capital gains.

iii) Therefore, the Tribunal was in no error in concluding that the TDR which was generated by the plot/property/ land and came to be transferred under a document in favour of the purchaser would not result in the gains being assessed to capital gains.”

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Capital gain- Section 50C- A. Y 2009-10- Full value of consideration- Guideline value-Objection- Computation of capital gain by AO on basis of guideline value without referring to DVO u/s. 50C(2)- AO directed to work out capital gain invoking section 50C(2)

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S. Muthuraja vs. CIT; 369 ITR 423 (Mad)

In the A. Y. 2009-10, the assessee had sold a immovable property for a consideration of Rs. 25,60,000/- as distress sale. For computing the capital gain the Assessing Officer applied section 50C and treated the guideline value of Rs. 39,63,900/- as the full value of consideration. In the objection letter, the assessee specifically pointed out that the sale was more in the nature of a distress sale and requested to take the actual sale consideration for working out capital gain. The Assessing Officer rejected the claim u/s. 50C of the Act. The Tribunal confirmed the order of the Assessing Officer holding that there was nothing on record to show that the assessee had disputed the sale consideration of Rs. 39,63,900/- adopted for the purpose of stamp duty taken as basis under the Act and that the Assessing Officer had not rightly invoked section 50C.

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

“i) The Assessing Officer’s order showed that having found such an objection, he committed a serious error in not invoking section 50C(2), that the error continued through out before every appellate forum and that there was no justification in the order of the Tribunal for taking the view that there was nothing on record to show that the assessee had disputed the sale consideration of Rs. 39,63,900/- adopted for the purpose of stamp duty for the purpose of working out capital gains.

ii) Hence the matter was restored to the files of the Assessing Officer to work out long-term capital gains by invoking section 50C(2).”

Note: Also see Appadurai Vijayaraghavan vs. JCIT; 369 ITR 486 (Mad)

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Business income or house property income- Ss. 22 and 28- A. Ys. 2005-06 to 2009-10- Rent from letting out buildings with amenities in software technology park is assessable as business income

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CIT vs. Information Technology Park Ltd.; 369 ITR 460 (Karn):

For the A. Ys. 2005-06 to 2009-10, the assessee had claimed that the rent received from letting out buildings along with other amenities in a software technology park as income from business. The Assessing Officer assessed it as income from house property. The Tribunal held that it constituted business income and accepted the assessee’s claim.

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

“The assessee was engaged in the business of developing, operation and maintaining an industrial park and providing infrastructure facilities to different companies as its business. In view of that the lease rent was assessable as business income.”

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Business expenditure- Disallowance u/s. 40(a) (ia)- Despite stay by High Court, Special Bench verdict In Merilyn Shipping is binding on the ITAT due to judicial discipline

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CIT vs. Janapriya Engineers Syndicate (T & AP); ITA No. 352 of 2014 dated 24/06/2014; www.itatonline.org:

The
Tribunal had to consider whether in view of the Special Bench verdict
in Merilyn Shipping & Transport 146 TTJ 1 (Vizag), a disallowance
u/s 40(a)(ia) could be made in respect of the amounts that have already
been paid during the year and are not “payable” as of 31st March. The
Tribunal held that as the department’s appeal against the said verdict
was pending in the High Court and as the High Court had granted an
interim suspension, the AO should decide the issue after the disposal of
the appeal in the case of Merilyn Shipping by the High Court.

On appeal by the Revenue, the Telangana and Andhra Pradesh High Court held as under:

“We
are of the view that until and unless the decision of the Special Bench
is upset by this Court, it binds smaller Bench and coordinate Bench of
the Tribunal. Under the circumstances, it is not open to the Tribunal to
remand on the ground of pendency on the same issue before this Court,
overlooking and overruling, by necessary implication, the decision of
the Special Bench. We simply say that it is not permissible under quasi
judicial discipline. Under the circumstances, we set aside the impugned
judgment and order, and restore the matter to the file of the Tribunal
which will decide the issue in accordance with law and it would be open
to the Tribunal either to follow the Special Bench decision or not to
follow. If the Special Bench decision is not followed, obviously remedy
lies elsewhere.”

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Advance tax- Short payment- Interest u/s. 234CComputation of interest- A. Y. 2009-10- Interest u/s. 234C was to be calculated based on date of presentation of cheque for payment of tax and not on date of clearing of cheque

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CIT vs. REPCO Home Finance Ltd.;[2015] 53 taxmann. com 47 (Mad):

For the A. Y. 2009-10, the Assessing Officer charged interest u/s. 234C for late payment of advance tax on the basis of date of clearing of the cheque. The CIT(A) and the Tribunal held that the interest has to be charged on the basis of the date of presentation of the cheque and not date of clearing.

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

“i) The core issue to be considered in this case is whether interest u/s. 234C is to be calculated based on date of clearing of the cheque or date of presentation of the cheque.

ii) The issue raised in this appeal is no longer res integra in view of the decision of the Supreme Court in CIT vs. Ogale Glass Works Ltd. [1954] 25 ITR 529, where it is held that the position is that in one view of the matter an implied agreement under which the cheques were accepted unconditionally as payment and on another view, even if the cheques were taken conditionally, the cheques not having been dishonoured but having been cashed, the payment related back to the dates of the receipt of the cheques and in law that dates of payments were the dates of the delivery of the cheques.

iii) It is not the case of the department that the cheque issued by the assessee was dishonoured. Once the cheque issued by the assessee is encahsed, in the light of the decisions referred (supra), the payment relates back to the date of receipt of the cheque.”

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Housing project- Special deduction u/s. 80- IB(10)- A. Y. 2004-05: Not necessary that assesee has to develop flats: Residential area- Built-up area- Definition- Car park area not includible

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CIT vs. Subba Reddy (HUF); 373 ITR 103 (Mad):

The assessee is a promoter, claimed deduction u/s. 80- IB(10) of the Income-tax Act, 1961 on the housing project for the A. Y. 2004-05. The Assessing Officer denied the claim on two counts, viz., (i) that the assessee had not developed the flats, and (ii) that out of 66 flats constructed, the built up area of 25 flats exceeded the prescribed maximum limit of 1,500 sq. ft. if the car park area of 220 sq. ft. was included. The Commissioner (Appeals) allowed the deduction u/s. 80-IB(10) holding that the provisions of section 80-IB(10) did not warrant ownership of land. As regards car park area, he held that there was no definition for the term ‘common area” in the Act. He held that the car park area has to be treated as common area. Accordingly, he held that the assessee had not come under any of the disqualifications prescribed u/s. 80-IB(10). The Tribunal confirmed the order of the Commissioner (Appeals).

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

“i) The assessee was entitled to the benefit of the claim u/s. 80-IB(10) even though the assessee was not a developer but only a builder.

ii) In the absence of any specific definition of the term “built-up area” during the relevant period, the reasoning of the Commissioner (Appeals), which was confirmed by the Tribunal was justified. Nevertheless, section 80-IB(10) speaks about the residential unit having a maximum built up area of 1,500 sq. ft. to claim deduction. Even u/s. 80-IB(14)(a), which comes into effect from April 1, 2005, “built-up area is defined as inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls, meaning thereby, the actual residential portion of the property. It clearly states that it will not include common areas shared with other residential units. Thus, there was no justification in including the car park in the definition of the built-up area of the residential unit for the purpose of determining the maximum built-up area.”

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DTAA between India and Mauritius- Assessee, a Mauritius based company was engaged in business of telecasting TV channels- Assessee carried out entire activities from Mauritius and all contracts were concluded in Mauritius- Only activity which was carried out in India was incidental or auxiliary/preparatory in nature which was carried out in a routine manner as per direction of assessee without application of mind: In aforesaid circumstances, assessee’s agent did not have any PE in India and, co<

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DIT vs. B4U International Holdings Ltd.: [2015] 57 taxmann.com 146 (Bom)

The assessee is a Mauritius based company. The Revenue proceeded against it on the footing that it is engaged in the business of telecasting of TV channels such as B4U Music, MCM, etc. It is the case of the Revenue that the income of the assessee from India consisted of collections from time slots given to advertisers from India through its agents. The assessee claimed that it did not have any permanent establishment in India and has no tax liability in India. The Assessing Officer did not accept this contention of the assessee and held that affiliated entities of the assessee are basically an extension in India and constitute a permanent establishment of the assessee within the meaning of Article 5 of the DTAA . The Commissioner of Income Tax (Appeals) Mumbai, partly allowed the appeal in some cases and held that the entity in India cannot be treated as an independent agent of the assessee. Alternatively, and assuming that it could be treated as such if a dependent agent is paid remuneration at arm’s length, further proceedings cannot be taxed in India. The Tribunal upheld the decision of the Commissioner (Appeals).

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

“Assessee carried out entire activities from Mauritius and all contracts were concluded in Mauritius. It was also undisputed that only activity which was carried out in India was incidental or auxiliary/preparatory in nature which was carried out in a routine manner as per direction of assessee without application of mind. In aforesaid circumstances, assessee’s agent did not have any PE in India and, consequently, amount in question could not be brought to tax in India.”

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Capital or revenue receipt- A. Y. 1996-97- Noncompete fee- Goodwill- Assessee transferring technical know-how and other advantages to joint venture company- Payment in lieu of restrictive covenants as to manufacture- Assessee continuing business using its own logo, trade name- No intention to acquire goodwill of assessee- Non-compete fee received is capital in nature

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CIT vs. Hackbridge Hewittic and Easun Ltd.; 373 ITR 109 (Mad):

The assessee had two divisions: a transformer division manufacturing power transformers, and a tap changer division. It entered into an agreement with a German Company to sell plant and machinery of its tap changer division. Under the agreement, it undertook not to engage either directly or indirectly in the manufacture of the existing range of products. For the A. Y. 1996- 97, the assessee received a sum of Rs. 6.89 crore as a consideration for cessation of manufacturing activity. The Assessing Officer held that the receipt should be attributed to transfer of goodwill and restrictive covenants. Accordingly, he brought to tax the capital gains on the transfer of goodwill to the extent of Rs. 403.89 lakh adopting the cost of acquisition at Nil. The Commissioner (Appeals) deleted the addition holding that there was no element of goodwill in the agreement entered into by the assessee with the German company and the entire receipt should be attributed to restrictive covenants/noncompete fee. The Tribunal confirmed the decision of the Commissioner (Appeals).

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

“i) The assessee transferred the technical know-how and other advantages to the joint venture company consisting of the assessee and the German company and the assessee continued its business using its own logo, trade name, licenses, permits and approval under an agreement with another company. The Tribunal held that there was no intention to acquire the goodwill of the assessee and, therefore, the non-compete fee received by the assessee could not be treated as payment for goodwill taxable as income. Section 55(2) (a) of the Income-tax Act, 1961, came into effect in the year 1998-99, whereas the assessment year in question was 1996-97. Therefore, there was no basis to fall back on section 55(2). The non-compete fee received by the assessee was capital in nature.”

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Business income vs. Income from house property- A. Ys. 2004-05, 2005-06, 2007-08 and 2009- 10- Assessee letting out godowns and warehouses to manufacturers, traders and companies carrying on warehousing business- Income is assessable as business income

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CIT vs. NDR Warehousing Pvt. Ltd; 372 ITR 690 (Mad):

The assessee was engaged in the business of warehousing, handling and transport business. For the A.Ys. 2004-05, 2005-06, 2007-08 and 2009-10, the assessee showed the income from letting out of buildings and godowns as income from business. The Assessing Officer treated the income as income from house property. The assessee contended that its activity was not merely letting out of the warehouses but storage of goods with provision of several auxiliary services such as pest control, rodent control and preventive measures against decay of goods stored due to vagaries of moisture and temperature, fungus formation, etc., besides security and protection of the goods stored. The Commissioner (Appeals) allowed the assessee’s claim and held that the assessee carried out the activity in an organised business manner. These activities were more than mere letting out of the godowns for tenancy. The Department itself had accepted in the past that the income from warehousing was assessable as income from business. The Tribunal upheld the decision of the Commissioner (Appeals).

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

“i) T he Commissioner (Appeals) as well as the Tribunal had not only gone into the objects clauses of the memorandum of association of the assessee but also into individual aspects of the business to come to the conclusion that it was a case of warehousing business and, therefore, the income would fall under the head “Business income”.

ii) T hus, the income of the asessee from letting out its warehouses was chargeable under the head “Income from business” and not under the head “Income from house property”.

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Business expenditure- Disallowance u/s. 43B – Contribution to Provident Fund and Employees’ State Insurance – Provision that contribution should be paid before due date for filing of return is applicable to contribution by employees also –

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CIT vs. Magus Customers Dialog Pvt. Ltd.; 371 ITR 242 (Karn):

Considering the scope of section 43B the Karnataka High cOurt held as under:

“The employees’ contribution made to the provident fund and employees’ State insurance by the assessee on or before the due date for filing the return u/s. 139(1) of the Income-tax Act, 1961, would be eligible for the benefit conferred u/s. 43B(b).”

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Capital gain or perquisite- Sections. 45 and 17(2) – A. Ys. 1998-99 and 2002-03 – Amount received by assessee on redemption of Stock Appreciation Rights received under ESOP was to be taxed as capital gain and not as perquisite u/s. 17(2)(iii) –

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CIT vs. Bharat V. Patel; [2015] 54 taxmann.com 170 (Guj):

In the course of assessment, the Assessing Officer made addition to assessee’s income in respect of amount received on redemption of Stock Appreciation Rights received under ESOP as a perquisite u/s. 17(2)(iii). The Tribunal held that stock options were capital assets and gain therefrom was liable to capital gain tax.

On appeal by the Revenue the Gujarat High Court held as under:

“i) In the case of CIT vs. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204, it is held by the Supreme Court that the revenue had erred in treating amount being difference in market value of shares on the date of exercise of option and total amount ‘paid’ by employees consequent upon exercise of the said options as perquisite value as during the lock-in period there was no cash inflow to employees to foresee future market value of shares and the benefit if any which arose on date when option stood exercised was only a notional benefit whose value was unascertainable.

ii) In view of the above, the Tribunal was correct in treating the amount received on redemption of Stock Appreciation Rights as capital gain as against treated as perquisite u/s. 17(2)(iii) and in treating the amount received on exercising the option of Employee’s Stock Option Plan (EOSP) as long term capital gains instead of treating the same as short term capital gains.

iii) However, the Tribunal was not justified in holding that capital gain arose to the assessee on redemption of Stock Appreciation Rights which were having no cost of acquisition. Tax Appeals stand disposed of accordingly”

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Business expenditure – Section 37 – A. Y. 2009-10 – Business of selling mobile hand sets and other electronic items and accessories – Advertisement expenditure – Expenditure is revenue in nature – AO not justified in treating it as differed revenue expenditure

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CIT vs. Spice Distribution Ltd.: 374 ITR 30 (Del):

The assessee
was trading in mobile hand sets, other electronic items and accessories.
For the purpose of business it had incurred expenditure of Rs.11,51,40,004 on advertisement. The Assessing Officer treated the
expenditure as deffered revenue expenditure and allowed 25% thereof
observing that the balance amount would be allowed in the next three
years. The Tribunal allowed the full claim.

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

“i)
In the previous assessment year 2008-09 the Tribunal in the case of the
assessee allowed the advertisement expenditure as the expenditure of
revenue in nature. No information was available whether the Revenue has
preferred an appeal against the findings recorded by the Tribunal in the
assessee’s case for the A.Y. 2008-09. The reasoning given by the
Tribunal deserved affirmation.

ii) The Tribunal had rightly held
that the Assessing Officer could not treat the revenue expenditure as
deferred revenue expenditure because the Act itself does not have any
concept of differed revenue expenditure. Even otherwise, advertisement
expenditure normally is and should be treated as revenue in nature
because advertisements do not have long lasting effect and once the
advertisements stop, the effect thereof on the general public and
customer would diminish and vanish soon thereafter. Advertisement
expense is a day-to-day expense incurred for running the business and
improving sales.

iii) Keeping in view the nature and character
of the assessee’s business, every year expenditure has to be incurred to
make and keep the public informed and remain in the limelight. It is an
expenditure of trading nature. Therefore, the order of the Tribunal did
not call for interference.”

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Charitable purpose- Section 2(15)- scope of proviso-

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India Trade Promotion Organization vs.DGIT; [2015] 53 taxmann.com 404 (Delhi)

Considering the scope of proviso to section 2(15) of the Income-tax Act, 1961, the Delhi High Court has held as under:

“i) The correct interpretation of the proviso to section 2(15) of the Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen.

ii) If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a ‘charitable purpose’.

iii) On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes.”

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Capital or revenue expenditure- A. Y. 2000-01- One time lump sum payment for use of technology for a period of six years- Is licence fee for permitting assessee to use technology- Licence neither transferrable nor payment recoverable- No accretion to capital asset- No enduring benefit- Revenue expenditure:

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Timken India Ltd. vs. CIT; 369 ITR 645 (Cal):

For the A. Y. 2000-01 the assessee had claimed that the lump sum payment made for acquiring technical knowhow for a period of six years as revenue expenditure. The Assessing Officer and the Tribunal held the expenditure is capital expenditure and therefore disallowed the claim..

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

“i) The fact was that the payment made by the assessee was on account of licence fee. By making such payment, the assessee had got permission to use the technology. The money paid was irrecoverable. If the business of the assessee stopped for some reason or the other, no benefit from such payment was likely to accrue to assessee.

ii) The licence was not transferrable. Therefore, it could not be said with any amount of certainty that there had been an accretion to the capital asset of the assessee. If the assessee continued to do business and continued to exploit the technology for the agreed period of time, the assessee would be entitled to take the benefit thereof. But if it did not do so, the payment made was irrecoverable.

iii) Therefore, the one-time lump sum payment made by the assessee for acquiring technical know-how for a period of six years was revenue expenditure.”

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Capital gain- Long term- Investment in capital gains bonds- Section 54EC- A. Ys. 2008-09 and 2009-10- Assessee is entitled to exemption in respect of investment of Rs. 50 lakh each in two different financial years within the time limit

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CIT vs. C. Jaichander; 370 ITR 579 (Mad):

Assessee
sold a property for a consideration of Rs. 3,46,50,000/- and invested
Rs. 1 crore out of the sale proceeds in capital gains bonds in two
financial years 2007-08 and 2008-09 Rs. 50 lakh each within the
prescribed time limit of six months. For the A. Y. 2008- 09 the
Assessing Officer held that the assessee could take the benefit of
investment in specified bonds upto a maximum of Rs. 50 lakh only u/s.
54EC(1) of the Incometax Act, 1961. The Tribunal held that the exemption
granted under the proviso to section 54EC(1) should be construed not
transaction-wise but financial year-wise. If an assessee was able to
invest a sum of Rs. 50 lakh each in two different financial years,
within the period of six months from the dated of transfer of the
capital asset, it could not be said to be inadmissible. Accordingly, the
Tribunal allowed the assessee’s claim.

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

“The
assessee was entitled to exemption of Rs. 1 crore u/s. 54EC, in respect
of investment of Rs. 50 lakh each made in two different financial
years”

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Business expenditure- Section 37(1)- A. Ys. 2006-07 to 2008-09- Hire charges paid on plastic moulds could not be disallowed even if they were given to contract manufactures free of cost-

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CIT vs. Tupperware India (P) Ltd. ; [2015] 53 taxmann. com 232 (Delhi)

Assessee had entered into agreements with Dart Manufacturing India Private Ltd (‘DMI’) and Innosoft Technology Ltd (‘ITL’) to manufacture products to be sold under its brand name. It had imported moulds on hire basis from overseas group companies. These moulds were given on ‘free of cost basis’ to DMI and ITL. The Assessing Officer relied upon the order of SetCom passed under the Central Excise Act, 1944, holding that manufacturing cost would include rent paid for the moulds. Accordingly, he disallowed expenditure on plastic moulds on the ground that it should have been claimed by DMI and ITL, who were contract manufacturers of the assessee. The Tribunal allowed the assessee’s claim.

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

“i) How and in what context the finding recorded by the SetCom relating to valuation of good for levy of excise duty would be relevant for deciding whether rent paid for the moulds could be allowed as deduction u/s. 37(1)?

ii) The valuation or cost of manufacture would include cost of raw material as an expenditure but it would not mean that the assessee could not treat the price of raw material as an expenditure.

iii) In case the aforesaid two contract manufacturers had paid hire charges for the moulds, it would have resulted in increase in the purchase price in hands of assessee.

iv) Thus, assessee was entitled to deduction of hire charges paid for moulds. Disallowance made by Assessing Officer could not be sustained.”

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Business expenditure- Disallowance u/s. 40(a) (ia) r/w. s. 194H- A. Y. 2009-10- Bank providing swiping machine to assessee- Amount punched in swiping machine credited to account of retailer by bank- Bank providing banking services in form of payment and subsequently collection of payment- Bank does not act as agent- No obligation to deduct tax at source- Disallowance u/s. 40(a)(ia) is not warranted-

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CIT vs. JDS Apparels P. Ltd; 370 ITR 454 (Del):

Assessee was engaged in the business of trading in garments. HDFC provided swiping machine to assessee. Amount punched in swiping machine credited to the account of retailer by bank. Bank providing banking services in form of payment and subsequently collecting payment. For the A. Y. 2009-10 the Assessing Officer held that the amount earned by the HDFC was in the nature of commission and should have been subjected to deduction of tax at source u/s. 194H of the Income-tax Act, 1961. Since tax was not deducted at source, he disallowed an amount of Rs. 44,65,654/- u/s. 40(a)(ia) of the Act. The Tribunal held that the assessee had not violated section 194H and accordingly the Tribunal deleted the addition.

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

“i) HDFC was not acting as an agent of the assessee. Once the payment was made by HDFC, it was received and credited to the account of the assessee. In the process a small fee was deducted by HDFC. HDFC realized and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on “behalf” of the assessee. The relationship between HDFC and the assessee was not of an agency but that of two independent parties on principal to principal basis. Therefore, section 194H would not be attracted.

ii) Another reason why section 40(a)(ia) should not have been invoked was the principle of doubtful penalisation which required strict construction of penal provisions. The principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. HDFC would necessarily have acted as per law and it was not the case of the Revenue that HDFC had not paid taxes on its income. It was not a case of a loss of revenue as such or a case where the recipient did not pay its taxes.

iii) We do not find any merit in the present appeal and the same is dismissed.”

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Block assessment- Assessment of third person: Section 158BD- Limitation- Notice to third person to be issued immediately after completion of assessment of persons in respect of whom search was conducted- Notice issued to third person more than a year after completion of assessments of persons in respect of whom search was conducted- Notice not valid-

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CIT vs. Bharat Bhushan Jain; 370 ITR 695 (Del):

The respondent assessee is a third party who was issued notice u/s. 158BD, pursuant to search proceedings in case of M group. The satisfaction note was record almost a year after the assessment proceedings in the case of M group ware completed. The Tribunal held that notice u/s. 158BD was not valid.

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

“i) Revenue has to be vigilant in issuing notice to the third party u/s. 158BD, immediately after completion of assessment of the person in respect of whom search was conducted.

ii) Notice was not issued in conformity with the requirements of section 158BD and were unduly delayed. Tax appeal is dismissed.”

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Assessment- Amalgamation of companies- Sections 170, 176 and 292B- A. Ys. 2003-04 to 2008-09- Amalgamating company ceases to exist- After amalgamation assessment to be done on the amalgamated company- Order of assessment on amalgamating company is not valid-

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CIT vs. Dimention Apparels P. Ltd; 370 ITR 288 (Del):

For the A. Ys. 2003-04 to 2008-09 the assessment was made in the name of the amalgamating company instead of the amalgamated company. The assessee contended that it had ceased to exist from 07-12-2009 by virtue of amalgamation with another company u/s. 391(2) and 394 of the Companies Act, 1956.However, the assessment orders were made. The Tribunal held that the assessment orders were not valid.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal dismissed the appeal and held that the orders of assessment were invalid.

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TDS: DTAA between India and UAE- Capital gains arising to resident of UAE from sale of Government securities in India is not taxable in India- No obligation to deduct tax at source-

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DIT vs. ICICI Bank Ltd.; 370 ITR 17 (Bom):

The respondent-bank had allowed certain residents of UAE to open account in India with it, depositing in their accounts monies which were the income derived from sale of Government securities by them. The C. A.s certified that the capital gains had arisen to the concerned person on account of sale proceeds of Government securities and such gains being exempt under article 13 of the DTAA between India and UAE, no tax was liable to be deducted at source. The Assessing Officer held that the account holder or the constituent having earned the income from the sale of securities in India, that income had not been remitted from India to UAE and the bank was liable to deduct tax at source. The Tribunal accepted the assessee’s claim and held that there was no tax liability on the income by way of gains from sale proceeds of Government securities in India by the residents of UAE and accordingly, there is no liability to deduct tax at source.

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

“In view of the concurrent findings that there was no liability to tax on the capital gains arising to the individual constituent/investor on the transaction in the Government treasury bills undertaken through the bank, the bank was not obliged to deduct tax at source.”

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Speculative transaction- Section 43(5)- Stock and share broker- Hedging transactions- Loss due to price of shares continuing to rise- Not speculative loss- Transaction within the ambit of exception- Not disallowable-

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Maud Tea and Seed Co. Ltd. vs. CIT; 370 ITR 603 (Cal):

The assessee, a stock and share broker, entered in to three transactions of sale and purchase of shares for the purpose of hedging. It suffered loss of Rs. 14.82 lakh by reason of price of shares continuing to rise. The assessee claimed that the transaction is not a speculative transaction as it came within the exception provided for. The Revenue held that the loss of Rs. 14.82 lakh incurred by the assessee fell outside the purview of proviso (b) to section 43(5), because the market price of ACC shares continued to rise and there was no adverse price fluctuation. This was upheld by the Tribunal.

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

“The undisputed facts in the case contained the ingredients of hedging. The result of those transactions, however, was a gain in the holding of shares by the assessee. By incurring a loss in the sum of Rs. 14.82 lakh, the value of the holding of the assessee in the shares in that period increased. Therefore, when ultimately the assessee sold those shares at an even greater value, it was denied the wind fall profit it would have made if it had not hedged at all. The loss was allowable.”

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ITAT- Miscellaneous application- S/s. 254(2) and 260A- A. Y. 2007-08- Pendency of an appeal filed in the High Court u/s. 260A is no bar to the maintainability of a MA filed u/s. 254(2)- R. W. Promotions P. Ltd vs. ITAT (Bom)

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W. P. No. 2238 of 2014 dated 08/04/2015: www.itatonline. org

For the A. Y. 2007-08, the assessee had filed an appeal u/s .260A to the High Court against the order of the Tribunal. During the pendency of the appeal, the assessee filed a miscellaneous application (MA) before the Tribunal u/s. 254(2) to request it to rectify certain mistakes apparent from the record. The Tribunal dismissed the miscellaneous application on the ground that “judicial propriety does not allow the assessee to seek efficacious remedy simultaneously before two authorities and in particular where the issue is seized by a higher judicial forum, even if pending admission”.

On a Writ Petition filed by the assessee to challenge the order of the Tribunal dismissing the MA, the Bombay High Court allowed the petition and held as under:

“i) The least that can be said about the understanding of the legal provision by the Tribunal is that it is ex facie incorrect and erroneous. Merely because the assessee has challenged the order of the Tribunal in an Appeal u/s. 260A of the Incometax Act, 1961 before the High Court does not mean that the power under s/s. (2) of section 254 cannot be invoked either by the assessee or by the revenue/ Assessing Officer. Such a power enables the Tribunal to rectify any mistake apparent from the record and make amendments.

ii) That in a given case would not only save precious judicial time of the Tribunal but even of the higher Court. Only when the assessee or the Assessing Officer calls upon the Tribunal to undertake an exercise which is not permissible within the meaning of s/s. (2) of section 254 that the Tribunal can rely on the principle of judicial propriety or its reluctance or refusal to take upon itself the powers of the higher Court of Appeal. We can understand if the Tribunal had passed an order after considering the application made by the petitioner-assessee on its merits and in accordance with law.

iii) However, the refusal of the Tribunal to go ahead and reject the application only on the ground that the petitioner-assessee has invoked the appellate powers of higher Court cannot be sustained. That is contrary to the plain language of the two statutory provisions and which have been brought to our notice. Nothing contrary having been pointed out and such a view of the Tribunal may affect and prejudicially the interest of the revenue that all the more we cannot sustain the impugned order. The Writ Petition is allowed. The petitioner’s misc. application seeking to invoke the powers under s/s. (2) of section 254 of the Income-tax Act, 1961 shall now be heard by the Tribunal and it shall be decided in accordance with law.”

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Recovery of tax – Stay application – A. Y. 2011-12 – Authority to prima facie consider merits and balance of convenience and irreparable injury – Authority to record reasons and then conclude whether stay should be granted and if so on what condition – No examination and no consideration – Order rejecting stay is not valid –

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Hitech Outsourcing Services vs. ITO; 372 ITR 582 (Guj):

For the A. Y. 2011-12, the assessee challenged the assessment order filing appeal before Commissioner (Appeals) The assessee also filed stay application which was initially granted on the condition that the assessee furnished a bank guarantee but subsequently, as the bank guarantee was not furnished, the application was dismissed.

The assessee filed a writ petition challenging the dismissal order. The Gujarat High Court allowed the writ petition and held as under:

“The Revenue had not been able to show any reasons which had weighed the authority for passing the order. When the question of grant of stay against any demand of tax is to be considered, the authority may be required to prima facie consider the merits and balance of convenience and also irreparable injury. These had neither been examined nor considered. The authority was required to record the reasons and then reach an ultimate conclusion as to whether the stay should be granted and if so on what condition. In the absence of any reasons, the order rejecting the stay application could not be sustained.”

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Penalty – Sections 271D, 271E and 273B – A. Ys. 1996-97 to 1998-99 – Loan or deposit in cash exceeding prescribed limit – Payments from partners in cash – Firm and partner are not different entities – Penalty cannot be imposed u/s. 271D –

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CIT vs. Muthoot Financiers; 371 ITR 408 (Del): (2015) 55 taxmann.com 202 (Del):

The
assessee firm was involved in the business of banking. The Assessing
Officer found that the firm had accepted payments firm the partners,
during the relevant years corresponding to the A. Ys. 1996-97 to 1998-99
in cash. The Assessing Officer imposed penalty u/s. 271D of the
Income-tax Act, 1961. The Tribunal held that the advances made to the
firm by its partners could not be regarded as loans advanced to the
firms and deleted the penalty.

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

“i)
The transaction effected could not partake the colour of loan or
deposit and neither section 269SS nor section 271D of the Act would come
into play.

ii) It was an undisputed fact that the money was
brought in by the partners of the assessee firm. The source of money had
also not been doubted by the Revenue. The transactions are bonafide and
not aimed at avoiding any tax liability.

iii) The
creditworthiness of the partners and the genuineness of the transactions
coupled with the relationship between the “two persons” and two
different legal interpretations put forward could constitute a
reasonable cause in a given case for not invoking section 271D and
section 271E of the Act. Section 273B of the Act would come to the aid
and help the assessee. Penalty could not be levied.”

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Non-resident -Taxability in India – Royalty – Section 9(1)(vi) – Income from supply of software embedded in hardware equipment or otherwise to customers in India – Does not amount to royalty –

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CIT vs. Alcatel Lucent Canada; 372 ITR 476 (Del):

The assessee, a non-resident, manufactured, traded in and supplied equipment and services for global system for mobile cellular radio. The assessee supplied hardware and software to various entities in India. The software licensed by the assessee embodied the process required to control and manage the specific set of activities involved in the business use of the customers. The software also made available the process to its customers, who used it to carryout their business activities. The Assessing Officer held that the consideration for supply of the software amounted to royalty u/s. 9(1)(vi) of the Incometax Act, 1961. The Tribunal held that the payment did not constitute royalty and, therefore, section 9(1)(vi) was not attracted and for the same reasons, article 13(3) of the DTAA s between India and France, Canada, Germany, China were not attracted.

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

“The income of the assessee from supply of software embedded in the hardware equipment or otherwise to customers in India did not amount to royalty u/s. 9(1)(vi).”

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Income – Accrual of – A. Y. 1996-97 – Mercantile system – Civil construction – Sums retained for payment after expiry of defect free period – Right to receive amount contingent upon there being no defects – Accrual only on receipt of amount after defect free period –

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CIT vs. Shankar Constructions; 271 ITR 320(T&AP):

The assessee is a civil contractor. The contract provided for deduction of 7.5% of each bill. Out of this, 5% was payable on successful completion of the work and the balance 2.5% after the expiry of the defect-free period. For the A. Y. 1996-97 the assessee did not include the amount representing 2.5% of the bills. The Assessing Officer held that since the assessee was following the mercantile system of accounting, the amount of 2.5% of the bills could be said to have accrued to it, along with the amount paid under the bills and was liable to be treated as income for that year. The Tribunal held in favour of the assessee.

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

“The right to receive the amount was contingent upon there not being any defects in the work, during the stipulated period. It was then, and only then, that the amount could be said to have accrued to the assessee.”

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Constitutional validity – Amendment made in section 80-IB(9) by adding an Explanation was not clarificatory, declaratory, curative or made “small repair” in the Act – On the contrary, it takes away the accrued and vested right of the Petitioner which had matured after the judgments of ITAT. Therefore, the Explanation added by the Finance (No.2) Act 2009 was a substantive law – Explanation added to section 80-IB(9) by the Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of Arti<

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Niko Resources Ltd. vs. UOI: [2015] 55 taxmann.com 455 (Guj):

The
Petitioner is a foreign company based in Canada and has set up a
project office in India with the permission of Reserve Bank of India.
The Petitioner has been claiming benefit of deduction of 100% of the
profits and gains from the production of mineral oil and natural gas
u/s. 80-IB(9) of the Income Tax Act, 1961, as it stood prior to the
amendment by the Finance (No.2) Act 2009. In these proceedings, the
constitutional validity of the amendment to sub-section (9) of section
80-IB and Explanation added to it under the Act by the Finance (No.2)
Act, 2009, has been challenged.

The disputed question was as to
whether the benefits of tax holiday of seven years was available on each
undertaking which has now been taken away by the amendment made in
section 80-IB(9) by adding on Explanation that provides that all blocks
licensed under a single contract shall be treated as a single
undertaking.

The Gujarat High Court held as under:

“i)
Arbitrarily, the 100% tax deduction benefit could not be withdrawn by
the Finance Minister or the legislature by amending section 80-IB(9) of
the Act retrospectively from an anterior date.

ii) The amendment
in such cases where already tax benefit had accrued and vested in the
assessee could not be taken away by giving retrospective amendment to
section 80-IB(9) which is nothing but a substantive provision inserted
by amendment and it can only operate prospectively and not
retrospectively.

iii) Explanation added to section 80-IB(9) by
Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of
Article 14 of the Constitution of India and is liable to be struck
down.”

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Search and seizure – Block assessment – B. P. 1/04/1996 to 12/09/2002 – No incriminating material found during search – Survey – Incriminating material found in survey but no evidence that it related to assessee – Amounts based on survey not includible in block assessment –

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CIT vs. Smt. Yashoda Shetty; 371 ITR 75 (Karn):

In September
2002, search proceedings were initiated in the case of YS and were
concluded in November 2002. A statement of KB was recorded. No
incriminating materials were found. On 12th September, 2002, a survey
was conducted in the business premises of the Assessee and incriminating
materials were identified and were impounded. Such material contained
the extract of a savings bank account in the name of B. His statement
was recorded on 12th September, 2002. The bank account contained heavy
deposits and withdrawals. After going through the statement, the
Assessing Officer came to the conclusion that this bank account
contained transactions related to assessee and it contained deposits in
respect of unaccounted sales and withdrawals. Therefore, he estimated
the undisclosed income on the basis of the deposits made in the bank
account and applied a certain rate of profit and computed the
undisclosed income. Therefore, a block assessment order was passed. The
Tribunal held that the income computed in the hands of the assessee as
undisclosed income could not have been taxed under the block assessment
and the income had to be considered for regular assessment.

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

“On
the basis of the incriminating material found in the course of survey
mainly because the material was put to the assessee and his statement
was recorded subsequent to the search, the material could not be held to
be relatable to the assessee. Therefore, the Appellate Authorities were
justified in holding that the material found in the course of survey
can become the subject matter of regular assessment and it could not
become the subject matter of block assessment.”

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Revision – Jurisdiction of CIT – Sections 153A and 263 – A. Y. 2008-09 – Search and seizure – Once the proceedings u/s. 153A are initiated the Assessing Authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or/and any other income to find out what is the “total income” – By virtue of section 263, the CIT gets no jurisdiction to initiate proceedings under the said provisions –

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Canara Housing Development Company vs. Dy.CIT; 274 CTR 122 (Karn):

For the A. Y. 2008-09 the assessment was made u/s. 143(3) of the Income-tax Act, 1961 on 31/12/2010. Subsequently, search took place in the premises of the assessee and proceedings u/s. 153A of the Act were initiated. In the mean while CIT initiated proceedings u/s. 263 of the Act, on the ground that the order dated 31/12/2010 passed u/s. 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue. The assessee’s objection was rejected and an order u/s. 263 was passed directing the assessing authority to enhance the total income as directed. The Tribunal dismissed the assessee’s appeal.

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

“i) Once the proceedings are initiated u/s. 153A the assessing authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or/and also any other income which is not disclosed in the earlier return or which is not unearthed during the search, in order to find out what is the “total income” of each year and then pass the assessment order.

ii) Therefore, the CIT by virtue of the power u/s. 263 gets no jurisdiction to initiate proceedings under the said provisions.”

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Remuneration from foreign enterprise – Deduction u/s. 80-O – A. Y. 1994-95 – Assessee conducting services for benefit of foreign companies – Services rendered “from India” and “in India” – Distinction – Report of survey submitted by assessee not utilised in India though received by foreign agency in India – Mere submission of report within India does not take assessee out of purview of benefit –

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CIT vs. Peters and Prasad Association; 371 ITR 206 (T&AP):

The assessee was an agency undertaking the activity of conducting services for the benefit of foreign companies or agencies. After conducting a survey on the assigned subject, the reports were submitted to the foreign agencies. For the A. Y. 1994-95, the assessee claimed deduction u/s. 80-O in respect of the remuneration received from the foreign enterprise for such services. The Assessing Officer denied the deduction on the ground that the survey report was submitted in India and thereby section 80-O was not attracted. The Tribunal allowed the assessee’s claim..

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

“i) It was not the case of the Revenue that the report of survey submitted by the assessee was utilised within India, though it was received by the foreign agency within India. It is only when it was established that the survey report submitted to the foreign agency was, in fact, used or given effect to, in India, that the assessee becomes ineligible for deduction.

ii) The mere fact that the submission of the report was within India, did not take away the matter from the purview of section 80-O. If that was to be accepted, the very purpose of providing the Explanation becomes redundant.

iii) Thus, the assessee was entitled to deduction u/s. 80-O.”

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Recovery of tax- Garnishee proceedings u/s. 226(3) – Recovery of rent – TRO cannot enhance the rent unilaterally –

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Union Bank of India vs. TRO; 274 CTR 396 (Pat):

Petitioner bank was a tenant of the premises owned by one S. As a part of the tax recovery of S, garnishee notice u/s. 226(3) of the Income-tax Act, 1961 was issued and rent was recovered by the TRO from the petitioner bank. The petitioner was regularly paying the rent to the landlord, and after the premises was taken over by the IT Department by issuing notice u/s. 226(3) of the Act has been paying rent to TRO. TRO unilaterally sought to enhance the rent payable by the petitioner manifold and to recover the same from the account of the petitioner maintained by the RBI.

The Patna High Court allowed the writ petition filed by the petitioner challenging the action and held as under:

“i) TRO has no jurisdiction to unilaterally enhance the rent being paid by the assesses. The contention of the Department that the TRO has been compelled to take action in the matter by applying the provisions of section 23(1)(a) has no force. Provisions of section 23(1)(a) relate to the determination of income from house property for the purpose of filing returns and assessment thereof and the same has no relevance at all so far as the fixation of rent payable by a tenant to the landlord is concerned. Any such fixation of fair rent or higher rent can only be either on the basis of agreement between the parties or by the competent authorities under the Rent Control Act and not unilaterally by the TRO or any other officer of the Income Tax Department.

ii) Any amount which may have been recovered from the account of the petitioner is to be refunded to the petitioner forthwith.”

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The assessee was engaged in the business of manufacturing and selling of abrasives, refractories, grinding wheels etc. For the A. Y. 1992-93 the Assessing Officer allowed deduction u/s. 80-I of the Income-tax Act, 1961. Subsequently he rectified the assessment order u/s. 154 notionally carrying forward the losses of the earlier years and setting of the losses against the profit available during the A. Y. 1992-93 and thereby negative the claim for deduction u/s. 80-I.

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Carborundum Universal Ltd. vs. JCIT; 371 ITR 275 (Mad):

The assessee was engaged in the business of manufacturing and selling of abrasives, refractories, grinding wheels etc. For the A. Y. 1992-93 the Assessing Officer allowed deduction u/s. 80-I of the Income-tax Act, 1961. Subsequently he rectified the assessment order u/s. 154 notionally carrying forward the losses of the earlier years and setting of the losses against the profit available during the A. Y. 1992-93 and thereby negative the claim for deduction u/s. 80-I. Similarly, he also withdrew the deduction for the A. Y. 1993-94. The Tribunal upheld the order of the Assessing Officer:

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

“i) Once the depreciation allowance and the development rebate for the past assessment years were fully set off against the total income of the assessee for those assessment years, the question of carrying forward of losses does not arise, for the purpose of determining the deduction u/s. 80-I of the Income-tax Act, 1961.

ii) The losses incurred by the industrial undertaking claiming deduction u/s. 80-I, which had been already set off against the profits of the industrial undertaking, should not be notionally carried forward and set off against the profits generated by the industrial undertaking during the relevant assessment year for determining deduction u/s. 80-I.”

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Income or capital receipt – Section 4 – A. Ys. 2006-07 to 2009-10 – Entertainment tax exemption subsidy granted to assessee engaged in business of running of multiplex cinema halls and shopping malls is capital receipts –

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CIT vs. Bougainvillea Multiplex Entertainment Centre (P.) Ltd.; [2015] 55 taxmann.com 26 (Delhi):

The assessee was engaged in the business of running of multiplex cinema halls and shopping malls. It had been the beneficiary of a scheme promulgated by the State Government wherein it had been granted exemption from entertainment tax payment. It claimed deduction to the extent of entertainment tax collected in the corresponding financial years terming the amounts as capital receipts. The Assessing Officer disallowed the said claims. The Tribunal allowed the deduction claimed by the assessee.

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

“i) The UP Scheme under which the assessee claims exemption to the extent of entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to promote the investors in the cinema industry encouraging establishment of new multiplexes. A subsidy of such nature cannot possibly be granted by the Government directly. Entertainment tax is leviable on the admission tickets to cinema halls only after the facility becomes operational. Since the source of the subsidy is the public at large which is to be attracted as viewers to the cinema halls, the funds to support such an incentive cannot be generated until and unless the cinema halls become functional.

ii) The State Government had offered 100 per cent tax exemptions for the first three years reduced to 75 per cent in the remaining two years. Thus, the amount of subsidy earned would depend on the extent of viewership the cinema hall is able to attract. After all, the collections of entertainment tax would correspond to the number of admission tickets sold. Since the maximum amount of subsidy made available is subject to the ceiling equivalent to the amount invested by the assessee in the construction of the multiplex as also the actual cost incurred in arranging the requisite equipment installed therein, it naturally follows that the purpose is to assist the entrepreneur in meeting the expenditure incurred on such accounts. Given the uncertainties of a business of this nature, it is also possible that a multiplex owner may  not be able to muster enough viewership to recover all his investments in the five year period.

iii) Seen in the above light, it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade.

iv) The facts that the subsidy granted through deemed deposit of entertainment tax collected does not require it to be linked to any particular fixed asset or that is accorded ‘year after year’ do not make any difference. The scheme makes it clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors etc. included), even if it were ‘before completion of five years’.

v) For the foregoing reasons, the Tribunal in the impugned orders has taken a correct view of law on the basis of available facts to conclude that the assessee is entitled, in terms of the UP Scheme, to treat the amounts collected towards entertainment tax as capital.

vi) The question of law raised in these appeals is, thus, answered in the negative against the revenue.”

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Depreciation – Rate – Section 32 and R. 9B of I. T. Rules, 1962 – A. Y. 2010-11 – Broadcasting/ exhibition rights and satellite rights in feature films amount to distribution rights – Assessee entitled to 100% depreciation –

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CIT vs. Smt. Achila Sabharwal; 371 ITR 219 (Del):

For the A. Y. 2010-11, the assessee claimed depreciation of Rs. 1.2 crore on cinematographic film at 100%. The Assessing Officer allowed only 25% depreciation observing that the assessee did not purchase any cinematographic films for consumption but what was purchased were broadcasting or exhibition rights and satellite rights. The Tribunal allowed the assessee’s claim.

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

“i) The Assessing Officer took a very narrow view of the term “distribution rights” and held that exhibition rights, television rights and satellite rights cannot be treated as distribution rights. What was purchased and sold by the assessee were distribution rights.

ii) The right would include and consist of acquisition and transfer of rights to exhibit and broadcast and satellite rights. These rights are integral and form and represent rights of film distributor.

iii) Even otherwise, if Rule 9B of the Income-tax Rules 1962 would not be applicable, purchase and sale of film would result in a business transaction, i.e., sale consideration received less purchase price paid. Appeal is accordingly dismissed.”

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Educational institution- Exemption u/s. 11- A.Y. 2007-08- Capital expenditure incurred for attainment of object of institution is application of income- Assessee is entitled to exemption u/s. 11-

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CIT vs. Silicon Institute of Technology; 370 ITR 567 (Orissa)

The main object of the assessee trust was to impart education. Year after year the assessee generated profits and created fixed assets. The assessee claimed capital expenditure as application of income u/s. 11. The Assessing Officer held that the assessee was not entitled to exemption u/s. 11 inter alia on the ground that the capital expenses were not application of income. CIT(A) and the Tribunal allowed the assessee’s claim.

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

“If capital expenditure is incurred by an educational institution for attainment of the objects of the society, it would be entitled to exemption u/s. 11. Thererfore, the assessee was eligible for exemption u/s. 11.”

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company- Section 179- A. Y. 2003-04- Recovery proceedings on the ground of non-filing of the returns by company- Order u/s. 179 is not valid-

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Ram Prakash Singeshwar Rungta vs. ITO; 370 ITR 641 (Guj):

The Assessing Officer passed order u/s. 179 against the directors for recovery of the tax dues of the private company. The Gujarat High Court allowed the writ petition filed by the petitioner challenging the said order and held as under:

“The sole ground on the basis of which the order u/s. 179 had been passed was that the directors were responsible for the non-filing of returns of income and that the demand had been raised due to the inaction on the part of the directors. Clearly, therefore, the entire focus and discussion of the ITO in the order was in respect of the directors’ neglect in the functioning of the company when the company was functional. On a plain reading of the order, it was apparent that nothing had been stated therein regarding any gross negligence, misfeasance or breach of duty on the part of the directors due to which the tax dues of the company could not be recovered. The order u/s. 179 was not valid.”

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Business expenditure – Section 37 – A. Y. 2005- 06- Premium on keyman insurance on partners paid by firm – Premium is deductible

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CIT vs. Agarwal Enterprises; 374 ITR 240 (Bom):

The assessee
partnership firm had taken keyman insurance policies on its partners.
For the A.Y. 2005-06, the Assessing Officer disallowed the claim for
deduction of premium on such policies. The Tribunal allowed the claim.

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

“(i)
Keyman insurance is a life insurance taken by a person on the life of
another person who is or was the employee of the first mentioned person
or is or was connected in any manner whatsoever with the business of the
first mentioned person.

(ii) The record indicated that the firm
comprised of two partners. It was dealing in securities and shares. A
keyman insurance policy was obtained for the benefit of the firm
inasmuch as the firm’s business would be adversely affected, in the
event, one of the partners met with any untimely death. The premium on
the insurance was deductible.”

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Deemed dividend – Section 2(22)(e) – A. Y. 2007- 08 – Where assessee itself was not shareholder of lending company addition made by AO by invoking provisions of section 2(22)(e) was not sustainable –

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CIT vs. Jignesh P. Shah; [2015] 54 taxmann.com 293 (Bom): 274 CTR 198 (Bom):

The assessee was a 50 % shareholder of ‘L’. ‘L’ had advanced money to one ‘N’ company who in turn advanced money to assessee. The Assessing Officer brought to tax the amount of loan received by the assessee from ‘N’ as deemed dividend u/s. 2(22)(e). On appeal, the Commissioner (Appeals) held that the loan given by ‘N’ to the assessee was not the payment made by it to its shareholder and thus, section 2(22)(e) had no application. The Commissioner (Appeals) deleted the addition. The Tribunal upheld the order of the Commissioner (Appeals).

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

“i) In the present facts, it is an admitted position that assessee is not a shareholder of ‘N’ from whom he has received loan. Therefore, no fault can be found with the decision of the Tribunal in having followed the decision of the High Court in CIT vs. Universal Medicare (P.) Ltd. [2010] 324 ITR 263/190 Taxman 144 (Bom.). This view has been further reiterated by another division bench of this court in CIT vs. Impact Containers (P.) Ltd. [2014] 367 ITR 346/225 Taxman 322/48 taxmann.com 294 (Bom.)

ii) The issue raised by the revenue stands concluded by the order of this court, no sustainable question of law arises. Accordingly, appeal is dismissed.”

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Co-operative Society- Special deduction u/s. 80P- A. Y. 2010-11- Multi-purpose co-operative credit society registered under the Karnataka Act- Sub-section (4) of section 80P is not applicable- Society entitled to special deduction-

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Venugram Multipurpose Co-operative Credit Society Ltd. vs. ITO; 370 ITR 636 (Karn):

The assessee is a multi-purpose co-operative credit society. For the A. Y. 2010-11 the assessee claimed the entire amount as deduction u/s. 80P(2)(a)(i) of the Income-tax Act, 1961. The Assessing Officer declined deduction on the ground that the assessee was a primary co-operative bank disentitled to the benefit of deduction u/s. 80P(2)(a)(i), in the light of section 80P(4). This was confirmed by the Tribunal.

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

“i) Section 80P(4) of the Act disentitles any “co-operative bank” other than a “primary agricultural credit society” or “primary co-operative agricultural and rural development bank” to benefits of deduction u/s. 80P. The explanation to sub-section (4) states that “co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in part V of the Banking Regulation Act, 1949.

ii) The assessee was a multi-purpose co-operative credit society registered under the Karnataka Co-operative Societies Act, 1959 and it fell within the definition of multipurpose co-operative society u/s. 2(f)(1) of the 1959 Act, and also under the definition of the term primary agricultural credit co-operative society”. Regard being had to section 5(cciv) as provided u/s. 56 of the Banking Regulation Act, 1949, the assessee being a primary agricultural credit co-operative society, coupled with the fact that under its bye-laws, a co-operative society can not become a member, complied with the requirement of the Act.

iii) In that view of the matter, the exception carved out in subsection (4) of section 80P of the Act squarely applies to the assessee. Hence, the assessee was entitled to the deduction u/s. 80P(2)(a)(i).”

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Assessment pursuant to search in case of third party – Section 153C: A. Ys. 2006-07 to 2011- 12 – ‘Satisfaction’ that the documents found in search belong to third party is a precondition – ‘Satisfaction’ should be recorded and should be supported by material on recorded – Presumption that the document belongs to the searched person has to be rebutted:

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Pepsi Food (P) Ltd. vs. ACIT; 270 CTR 459 (Del); CIT vs. Pepsi India Holdings (P) Ltd. vs. ACIT; 270 CTR 467 (Del):

In these cases, the petitioners filed writ petitions and challenged the validity of notices issued u/s. 153C of the Income-tax Act, 1961. The Delhi High Court allowed the writ petitions and held as under:

“i) Whenever a document is found from a person who is being searched, the normal presumption is that the said document belongs to that person. It is for the Assessing Officer to rebut that presumption and come to the conclusion or “satisfaction” that the document in fact belongs to somebody else.

ii) There must be some cogent material available with the Assessing Officer before he arrives at the satisfaction that the seized document does not belong to the searched person but to somebody else. Surmises and conjectures do not take the place of “satisfaction”. Mere use or mention of the word “satisfaction” or the words “I am satisfied” in the order or the note would not meet the requirement of the concept of satisfaction as used in section 153C.

iii) In order that the Assessing Officer of the searched person comes to the satisfaction that documents or material found during the search belong to a person other than the searched person, it is necessary that he arrives at the satisfaction that the said documents or materials do not belong to the searched persons. First of all, it is nobody’s case that the J Group had disclaimed the documents in question as belonging to them. Unless and until it is established that the documents do not belong to searched person, the provisions of section 153C do not get attracted.

iv) In the satisfaction note, there is nothing to indicate that the seized documents do not belong to the J Group where search took place. Secondly, the finding of photocopies in the possession of the searched person does not necessarily mean and imply that they ‘belong’ to the person who holds the originals. Further, the Assessing Officer should not confuse the expression ‘belongs to’ with the expression ‘relates to’ or ‘refers to’.

v) Going through the contents of the satisfaction note, one is unable to discern any “satisfaction” of the kind required u/s. 153C. Ingredients of section 153C have not been satisfied in this case. Consequently, the notices u/s. 153C are quashed.”

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Appeal before CIT(A) – A. Y. 2003-04 – Claim made for the first time before CIT(A) – CIT(A) can allow the claim on the basis of material on record:

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CIT vs. Mitesh Impex; 367 ITR 85 (Guj): 270 CTR 66 (Guj):

In the return of income for the A. Y. 2003-04, the assessee had not made the claim for deduction u/s. 80HHC and 80- IB of the Income-tax Act, 1961 though the assessee was entitled to such deduction. For the first time the assessee made the claim for deduction before the CIT(A). CIT(A) allowed the claim on the basis of the material on record. The Tribunal upheld the order of the CIT(A).

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

“i) The Courts have recognised the jurisdiction of CIT(A) and Tribunal to entertain new ground or a legal contention. A ground would have a reference to an argument touching a question of fact or a question of law or mixed question of law and facts. A legal contention would ordinarily be a pure question of law without raising any dispute about the facts. Not only such additional ground or contention, the Courts have also recognised the powers of the CIT(A) and the Tribunal to entertain a new claim for the first time though not made before the Assessing Officer.

ii) This is primarily on the premise that if a claim though available in law is not made either inadvertently or on account of erroneous belief of complex legal position, such claim cannot be shut out for all times to come, merely because it is raised for the first time before the appellate authority without resorting to revising the return before the Assessing Officer.

iii) Therefore, any ground, legal contention or even a claim would be permissible to be raised for the first time before the appellate authority or the Tribunal when facts necessary to examine such ground, contention or claim are already on record. In such a case the situation would be akin to allowing a pure question of law to be raised at any stage of the proceedings.

iv) This is precisely what has happened in the present case. The CIT(A) and the Tribunal did not need to nor did they travel beyond the materials already on record, in order to examine the claims of the assessee for deduction u/ss. 80-IB and 80HHC of the Act. We answer the question against the revenue and in favour of the assessee.”

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