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

Penalty : Ss. 44AB and 271B of I. T. Act, 1961 : A. Y. 1992 – 93 : Provisions of s. 44AB not complied with on the basis of legal opinion contained in Tax Audit Manual published by the Bombay Chartered Accounts’ Society : Reasonable cause for default : Pen

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40. Penalty : Ss. 44AB and 271B of I. T. Act, 1961 : A. Y.
1992 – 93 : Provisions of s. 44AB not complied with on the basis of legal
opinion contained in Tax Audit Manual published by the Bombay Chartered
Accounts’ Society :  Reasonable cause for default : Penalty u/s. 271B not
justified.

[ITO vs. Sachinum Trust, 223 CTR 152 (Guj.)]

For the A. Y. 1992 – 93, the assessee trust did not get its
accounts audited under the provisions of Section 44AB of the Income-tax Act,
1961, on the basis of the legal opinion contained in the Tax Audit Manual
published by the Bombay Chartered Accountants’ Society. The Assessing Officer
was of the view that the assessee was under an obligation to get its accounts
audited u/s. 44AB of the Act. He therefore, imposed penalty u/s. 271B of the
Act. The Tribunal cancelled the penalty.


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


“Legal opinion contained in Tax Audit Manual published by
the Bombay Chartered Accountants’ Society constituted reasonable cause for the
bona fide belief of the assessee that its interest receipts i.e.,
gross receipts, and not loan advanced i.e., turnover, being less than
Rs. 40 laks, the provisions of s. 44AB are not applicable in its case and,
therefore, penalty u/s. 271B is not leviable.”



 


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TDS : Ss. 194A, 201(1) and 201(1A) of I. T. Act 1961 : A. Y. 2000 – 01 : Assessee in default : Interest u/s. 201(1A) : Assessee, insurance co. failed to deduct tax at source on interest on compensation to the victims of motor vehicle accidents : Assessee

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41. TDS : Ss. 194A, 201(1) and 201(1A) of I. T. Act 1961 : A.
Y. 2000 – 01 : Assessee in default : Interest u/s. 201(1A) : Assessee, insurance
co. failed to deduct tax at source on interest on compensation to the victims of
motor vehicle accidents : Assessee liable to TDS and interest : Revenue directed
to collect tax from recipient of interest and refund the amount of TDS to the
assessee.

[CIT vs. Oriental Insurance Co. Ltd., 223 CTR 102 (Kar.)]

Pursuant to the order made under the Motor Vehicles Act,
the respondent insurance company paid compensation to the victims of motor
vehicle accidents. The award amount consisted of the compensation and interest
liability. The Assessing Officer held that the respondent assessee has failed
to deduct tax at source u/s. 194A of the Income-tax Act, 1961 and directed the
assessee company to deposit the TDS amount and interest on the TDS amount. The
Tribunal permitted the assessee to split the interest liability for the
respective assessment years and set aside the order for payment of interest
u/s. 201(1A) of the Act.


On appeal by the Revenue, the Karnataka High Court held as
under :


“i) Levy of interest u/s. 201(1A) cannot at any rate be
construed as penalty. In that view, the contrary finding of the Tribunal is
set aside.

ii) The Tribunal has rightly directed that the interest
paid above Rs. 50,000 is to be split and spread over the period from the
date interest is directed to be paid till its payment. If the spread over is
given, in majority of cases, the respondent may not incur liability to pay
any TDS.


iii) In the event, the respondent remits TDS amount as
directed by the Tribunal, the Revenue is directed to hold suo moto
enquiry by issuing notices to the persons who have received compensation to
find out their tax liability on the interest received. If it is found that
there is a tax liability on the person concerned, the Revenue should collect
the tax from the person concerned and refund the amount to the respondent. So
also, if there is no tax liability on the person concerned, the TDS collected
should be refunded to the respondent, of course, with interest in either
case.”

 

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Depreciation : Option to claim : Deduction under Chapter VI-A of I. T. Act, 1961 : A. Y. 1997 – 98 : Assessee did not claim depre-ciation for computing gross total income : Whether for the purposes of availing deduction under Chapter VI-A, gross total inc

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In the High Court

K. B. Bhujle
Advocate

38. Depreciation : Option to claim : Deduction under Chapter
VI-A of I. T. Act, 1961 : A. Y. 1997 – 98 : Assessee did not claim depre-ciation
for computing gross total income :  Whether for the purposes of availing
deduction under Chapter VI-A, gross total income is required to be computed by
deducting allowable depreciation ?  : Question referred to larger Bench.

[Plastiblends India Ltd. vs. Add. CIT, 223 CTR 291 (Bom.)]

In view of the contrary decisions in the case of Grasim
Industries Ltd. vs. ACIT 245 ITR 677 (Bom) and Scoop Industries (P)
Ltd. vs. ITO 289 ITR 195 (Bom) the following question has been referred
to the Larger Bench :

"Whether for the purposes of availing allowable special
deduction under Chapter VI-A, the gross total income is required to be
computed by deducting allowable depreciation even though the assessee has
disclaimed the same for the purposes of regular assessment ? ".

 

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Investment allowance : S. 32A of I. T. Act, 1961 : A. Y. 1991 – 92 : Purchase of plant and machinery in earlier years : Reserve account not created in earlier years in view of loss : Reserve account created and investment allowance claimed in the A. Y. 19

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39. Investment allowance : S. 32A of I. T. Act, 1961 : A. Y.
1991 – 92 : Purchase of plant and machinery in earlier years : Reserve account
not created in earlier years in view of loss : Reserve account created and
investment allowance claimed in the A. Y. 1991 – 92 : Assessee entitled to
investment allowance.

[Velan Textiles Pvt. Ltd., 312 ITR 56 (Karn.)]

For the A. Ys. 1985 – 86 to 1987 – 88 the assessee could
not claim investment allowance on account of the loss incurred in those years.
Accordingly, the assessee did not create reserve account in those years. For
the A. Y. 1991 – 92 the assessee filed the return of income disclosing income
of Rs. 39,78,083. In this year the assessee created the reserve account and
claimed investment allowance of Rs. 11,02,807 relating to A. Ys. 1985 – 86 to
1987 – 88. The Assessing Officer disallowed the claim. The Tribunal upheld the
disallowance and held that the claim for investment allowance had to be made
during the relevant assessment year and not when the assessee had adequate
funds for creation of the reserve.


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


“i) The purpose of the amendment to clause (ii) of
sub-Section (4) of Section 32A of the Income-tax Act, 1961, as brought about
by the Finance Act, 1990, retrospectively from 01/04/1976, is to enable the
assessee to create a reserve in any of the years between the year of
installation of plant and machinery and the year of actual deduction.
Consequently, the assessee need not create a reserve in the year of
installation. If there is no sufficient profit, the assessee can create it
in the year of actual deduction.

ii) It remained undisputed by the Department that the
assessee incurred losses in the A.Ys. 1985-86 to 1987-88. The question of
creating reserve account did not arise since it incurred loss during the A.
Ys. 1985 – 86 to 1987 – 88. Therefore, the Tribunal’s order was to be
quashed.”

 

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Capital gain/loss : Ss. 2(47) and 45 of I. T. Act, 1961 : A. Y. 1998 – 99 : Application for shares : Assessee failed to pay balance amount on allotment of shares : Forfeiture of share application money : Assessee’s right in shares extinguished : Loss on f

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36. Capital gain/loss : Ss. 2(47) and 45 of I. T. Act,
1961 : A. Y. 1998 – 99 : Application for shares : Assessee failed to pay balance
amount on allotment of shares : Forfeiture of share application money : Assessee’s
right in shares extinguished : Loss on forfeiture is short-term capital loss.

[Dy. CIT vs. BPL Sanyo Finance Ltd., 312 ITR 63 (Karn) : 223
CTR 461 (Karn.)]

The assessee company had applied for the shares of IDBI and
had remitted the share application money. IDBI allotted 89,200 shares to the
assessee and called upon the assessee to pay the balance sum for issuance of
shares in its favour. The assessee failed to remit the balance outstanding
allotment money. Therefore, the IDBI cancelled the allotment and forfeited the
share application money. In the return of income for the A. Y. 1998 – 99, the
assessee claimed the forfeited amount as short-term capital loss. The
Assessing Officer disallowed the claim. The Tribunal allowed the assessee’s
claim.

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

“Consequent to the assessee’s default of not paying the
balance of money on allotment, its rights in the shares stood extinguished on
forfeiture by IDBI. The loss suffered by the assessee, i.e., the
non-recovery of the share application money was consequent to the forfeiture
of its rights in the shares and was to be understood to be within the scope
and ambit of transfer. The Tribunal was justified in holding that it would
amount to short-term capital loss to the assessee.”

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Compounding of offences : S. 279(2) of I. T. Act, 1961 : Offences can be compounded during the pendency of appeal.

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37. Compounding of offences : S. 279(2) of I. T. Act,
1961 : Offences can be compounded during the pendency of appeal.

[Chairman CBDT vs. Smt. Umayal Ramanathan, 313 ITR
59 (Mad.)]

Against the conviction and sentence order passed by the
Trial Court, the respondent filed a petition u/s. 279(2) of the Income-tax
Act, 1961 seeking compounding of the offences u/s. 278 of the Act and Sections
120B, 420 read with Section 109 of the Indian Penal Code, 1860. The Joint
Director of Income-tax refused to compound the offences on the ground that the
respondent had been convicted by the Trial Court. The Single Judge set aside
the order passed by the Joint Director of Income-tax stating that the refusal
to compound the offence on the sole ground that the Criminal Court had
convicted her was discriminatory and that in the case of a similarly placed
assessee the appellants had compounded the offence.

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

“i) The appeal against the order of conviction and
sentence passed by the Trial Court was a prescribed course of action for
enforcing a legal right. The appellants could have compounded the offence
sought for by the respondent during the pendency of the appeal.

ii) The Single Judge had rightly set aside the order
passed by the Joint Director of Income-tax. The respondent was permitted to
pay the amount demanded by the appellants for compounding the offence.”

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S. 143(2) — Service of notice by Speed Post, in absence of material on record, no pre-sumption of service within 24 hours

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II. Reported :






 



52 Notice : Service by Speed Post : No
presumption of service within 24 hours : Notice u/s.143(2) dated 29-10-2002 sent
by Speed Post on 30-10-2002 at Delhi address given in the return and redirected
and served at Noida address of assessee on 6-11-2002 : No presumption that the
notice was served at the former address on or before 31-10-2002 in the absence
of material on record.

[Nulon India Ltd v. ITO, 216 CTR 142 (Del.)]

Pursuant to the return of income filed by the assessee on
31-10-2001, the Assessing Officer issued notice u/s.143(2) of the Income-tax
Act, 1961 on 29-10-2002, which was sent through Speed Post on 30-10-2002 at
Delhi address mentioned in the return. The notice was redirected and was served
at the Noida address of the assessee on 6-11-2002. The assessee challenged the
validity of the assessment order passed pursuant to the said notice, on the
ground that the notice was not served within the prescribed period. The Tribunal
rejected the assessee’s claim.

On appeal by the assessee, the Delhi High Court reversed the
decision of the Tribunal and held :

“(i) As per material placed on record, the notice in
question has been dispatched on 30-10-2002 and thereafter it has been
redirected to the Noida address of the assessee. There is nothing on record to
show as to on which date this notice was received at the given address of the
assessee and on which date the same was redirected. As per the order of the
CIT(A) placed on record, the Assessing Officer was asked for comments and vide
his letter dated 12/20th October, 2004, the Assessing Officer stated : “The
notice was served by Speed Post which must be delivered to the assessee within
24 hours, that is, by morning of 31st October.” So the AO is also not sure nor
specific as to when the notice in question has been served upon the assessee.
It is only a presumption that notice which has been sent by Speed Post on 30th
October 2002, must have been delivered to the assessee by 31st October 2002.

(ii) There is no presumption under law that any notice sent
by Speed Post must have been delivered to the assessee within 24 hours.
Moreover, there is nothing on record to show at whose instance the notice was
redirected and sent at the address of Noida. So, from the material available
on record, it may be concluded that no notice u/s.143(2), which is mandatory
requirement of law, has been served upon the assessee within prescribed
period.

(iii) Under the circumstances, the appeal filed by the
assessee is allowed and the impugned order passed by the Tribunal is set
aside.”

Capital gain : Capital asset : Agricultural land : S. 2(14) of I. T. Act, 1961 : Purchase of agricultural land in 1989 to set up industry : Shortly thereafter, land acquired by Government : AO treated land as capital asset and assessed capital gain : Not

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35. Capital gain : Capital asset : Agricultural land : S.
2(14) of I. T. Act, 1961 : Purchase of agricultural land in 1989 to set up
industry :  Shortly thereafter, land acquired by Government :  AO treated land
as capital asset and assessed capital gain : Not justified.

[Hindustan Industrial Resources Ltd vs. ACIT, 180
Taxman 114 (Del.)]

The assessee had purchased an agricultural land in 1989
with an object of setting up an industry. Shortly thereafter it was acquired
under the Land Acquisition Act, 1894 and compensation was paid to the assessee
by the Government. The assessee claimed that the land was an agricultural land
and therefore, no taxable capital gain accrued. The Assessing Officer assessed
the capital gains to tax, holding that land ceased to be agricultural land
when the assessee purchased it from the agriculturist for setting up an
industry. The Tribunal upheld the decision of the Assessing Officer.

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

“i) The Tribunal’s finding of fact was contrary to its
own record and, therefore, was in the realm of perversity. That was so,
because the Tribunal clearly held that at the point of time when the
assessee purchased the said land, it was an agricultural land. The Tribunal
also noted that the award passed on 01.04.1992 by the District Collector
(Land Acquisition) was a document which established beyond doubt that the
land in question was an agricultural land. Thus on the date of purchase, the
land in question was an agricultural land and on the date of acquisition,
the character of the land continued to be agricultural. When those two
findings had been returned, it was apparent that in the transitional period,
that was, between purchase and acquisition, the nature and character of the
land did not change.

ii) The fact that the assessee intended to use that land
for industrial purposes did not alter the nature and character of the land
in any way. The further fact that the assessee did not carry out any
agricultural operations also did not result in conversion of the
agricultural land into an industrial land. It was nobody’s case that the
assessee carried out any operations for setting up any plant and machinery
or of the like nature so as to lead to an inference that the nature and
character of the land had been changed from agricultural to industrial.

iii) In any event, that discussion was not relevant in
the backdrop of the clear finding given by the Tribunal that on the date of
the purchase and also on the date of acquisition, the land in question was
an agricultural land. Having come to such a conclusion, the Tribunal ought
not to have gone into the question of intention of the assessee and
definitely not into the question of intention of the land acquiring
authority, the later being a wholly irrelevant consideration.

iv) In those circumstances, the Tribunal was not
justified in holding that the land acquired from the ownership of the
assessee was not an agricultural land. The impugned order passed by the
Tribunal was to be set aside.”

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Free Trade Zone : Deduction u/s.10A of Income-tax Act, 1961 : A.Y. 2003-04 : Total turnover to exclude freight and insurance : Deduction allowable on foreign exchange gain : Deduction allowable on enhanced profit on account of disallowance of PF/ESIC.

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Unreported
 


39 Free Trade Zone : Deduction u/s.10A of Income-tax Act,
1961 : A.Y. 2003-04 : Total turnover to exclude freight and insurance :
Deduction allowable on foreign exchange gain : Deduction allowable on enhanced
profit on account of disallowance of PF/ESIC.


[CIT v. Gem Plus Jewellery India Ltd. (Bom.); ITA No.
2426 of 2009 dated 23-6-2010]

The following questions were raised in the appeal filed by
the Revenue :

“(a) Whether on the facts and in the circumstances of the
case, the Tribunal was justified in holding that the exemption u/s.10A of the
Act should be computed after excluding freight and insurance from the total
turnover ?

(b) Whether on the facts and in the circumstances of the
case, the Tribunal was justified in directing the Assessing Officer to grant
exemption u/s.10A on foreign exchange gain earned on realisation of export
receipts in the year of export and to exclude the gains on sales of earlier
years from the profits of the year under consideration and allow in those
years ?

(c) Whether on the facts and in the circumstances of the
case, the Tribunal was justified in directing the Assessing Officer to grant
the exemption u/s.10A of the Act on the assessed income, which was enhanced
due to disallowance of employer’s as well as employees’ contribution towards
PF/ESIC ?”

The Bombay High Court upheld the decision of the Tribunal,
answered the questions in favour of the assessee and held as under :

“(a-i) Ss.(4) of S. 10A provides the manner in which the
profits derived from the export shall be computed. U/ss.(4), the profits of
the business of the undertaking are multiplied by the export turnover and
divided by the total turnover of the business carried on by the undertaking.
Total turnover of the business would consist of the turnover from export and
the turnover from local sales.

(a-ii) In Explanation (2) to S. 10A, the expression ‘export
turnover’ is defined to mean the consideration in respect of export of
articles, etc., received in or brought into India by the assessee in
convertible foreign exchange but so as not to include inter alia freight and
insurance. Therefore in computing the export turnover, the Legislature has
made a specific exclusion of freight and insurance charges.

(a-iii) The export turnover in the numerator must have the
same meaning as the export turnover which is a constituent element of total
turnover in the denominator. Freight and insurance do not have an element of
turnover. These two items would have to be excluded from the total turnover.

(b-i) The Tribunal has followed a decision of its Special
Bench in coming to the conclusion that foreign exchange earned on the
realisation of export receipts in a year other than the year in which the
goods were exported would have to be considered in the year of export for the
for the purposes of exemption u/s.80HHC. The Tribunal has, however, directed
the Assessing Officer, while granting a deduction to the assessee u/s.10A in
the export to exclude the amount from the profits of the year under
consideration simultaneously. This is to ensure that the assessee does not
obtain a deduction twice over.

(b-ii) It has not been disputed on behalf of the Revenue
that the foreign exchange was realised by the assessee within the period
stipulated in law. The assessee realised a larger amount because of a foreign
exchange fluctuation. The fact that this forms part of the sale proceeds would
have to be accepted in view of the judgment of the Division Bench of this
Court in CIT v. Umber Export India, (ITA 1249 of 2007 decided on 18-2-2009).

(biii) In the present case, the assessee has realised a
larger amount in terms of Indian Rupees as a result of a foreign exchange
fluctuation that took place in the course of the export transaction.

(b-iv) For the aforesaid reasons, the question of law is
answered against the Revenue and in favour of the assesee.

(c-i) The assessed income was enhanced due to the
disallowance of the employer’s as well as employees’ contribution towards PF/ESIC
and the only question which is canvassed on behalf of the Revenue is whether
on that basis the Tribunal was justified in directing the Assessing Officer to
grant the exemption u/s.10A.

(c-ii) On this position, in the present case it can-not be
disputed that the net consequence of the disallowance of the employer’s and
the employees’ contribution is that the business profits have to that extent
been enhanced. There was an add back by the Assessing Officer to the income.
All profits of the unit of the assessee have been derived from manufacturing
activity. The salaries paid by the assessee relate to the manufacturing
activity. The disallowance of the PF/ESIC payments has been made because of
the statutory provisions. The plain consequence of the disallowance and the
add back that has been made by the Assessing Officer is an increase in the
business profits of the assessee.

(c-iii) The contention of the Revenue that in computing the
deduction u/s.10A the addition made on account of the disallowance of PF/ESIC
payments ought to be ignored cannot be accepted. No statutory provision to
that effect having been made, the plain consequence of the disallowance made
by the Assessing Officer must follow. The question shall accordingly stand
answered against the Revenue and in favour of the assessee.”
 

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Appellate Tribunal : Powers and duty : A.Y. 1997-98 : Order passed relying on decision not cited in the course of arguments : Assessee to be given opportunity to deal with distinguishable features of case relied on : Matter remanded.

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Reported :

40 Appellate Tribunal : Powers and duty : A.Y. 1997-98 :
Order passed relying on decision not cited in the course of arguments : Assessee
to be given opportunity to deal with distinguishable features of case relied on
: Matter remanded.


[Inventure Growth and Securities Ltd. v. ITAT; 324 ITR
319 (Bom.)]

In respect of the A.Y. 1997-98, the Tribunal decided an
appeal relying on the decision of the co-ordinate Bench which was not relied on
by either parties. The assessee therefore, filed a miscellaneous application
u/s.254(2) of the Income-tax Act, 1961 on the ground that the Tribunal, while
relying on the decision of the co-ordinate Bench, had not furnished an
opportunity to the assessee to deal with the decision which had not been cited
by either side when arguments were heard. The application was dismissed.

On writ petition filed by the assessee the Bombay High Court
set aside the order of the Tribunal and held as under :

“(i) It could not be laid down as an inflexible provision
of law that an order of remand on a miscellaneous application u/s.254(2) would
be warranted merely because the Tribunal had relied upon a judgment which was
not cited by either party before it. In each case, it was for the Court to
consider as to whether a prima facie or arguable distinction had been made and
which should have been considered by the Tribunal.

(ii) The distinguishing features in the case of Khandwala
Finace Ltd., which had been pointed out by the assessee were sufficient to
hold that an opportunity should be granted to the petitioner to place its case
on the applicability or otherwise of the decision in Khandwala Finance Ltd.
before the Tribunal. Therefore the appeal and the cross-objections were to be
restored for fresh consideration on the merits before the Tribunal.”

 

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Export profit : Deduction u/s.80HHC of Income-tax Act, 1961 : A.Y. 2000-01 : Profits of business : Expl. (baa) : Insurance claim relating to stock-in-trade not to be excluded.

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Unreported :


38 Export profit : Deduction u/s.80HHC of Income-tax Act,
1961 : A.Y. 2000-01 : Profits of business : Expl. (baa) : Insurance claim
relating to stock-in-trade not to be excluded.


[CIT v. The Pfizer Ltd. (Bom.); ITAL No. 128 of 2009
dated 18-6-2010]

The assessee is engaged in the manufacture and export of
pharmaceuticals and animal health products. For the A.Y. 2000-01, while
computing deduction u/s.80HHC, the Assessing Officer excluded 90% of the amount
of insurance claim which was related to the stock-in-trade of the assessee. The
Tribunal held that the insurance claim formed part of the income of the business
of the assesee and was liable to be considered as part of the profits of the
business in view of Explanation (baa) to S. 80HHC. The Tribunal was of the view
that the insurance claim was not in the nature of brokerage, commission,
interest, rent or charges and therefore was not any other receipt of a similar
nature within the meaning of Explanation (baa). The Tribunal, therefore, held
that 90% of the insurance claim could not be excluded.

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

“(i) Receipts by way of brokerage, commission, interest,
rent or charges in Explanation (baa) have been held, by the judgment of the
Supreme Court in CIT v. K. Ravindranathan Nair; 295 ITR 228 (SC), to
constitute independent incomes. Being independent incomes unrelated to export,
the Parliament contemplated that 90% of such receipts would have to be reduced
from the profits of business as defined in Explanation (baa).

(ii) The rationale for excluding 90% of the receipts by way
of brokerage, commission, interest, rent or charges is that these are
independent incomes and their inclusion in the profits of business would
result in a distortion. In determining whether any other receipt is liable to
undergo a reduction of 90%, the basic prescription which must be borne in mind
is whether the receipt is of a similar nature and is included in the profits
of business. To be susceptible of a reduction the receipt must be of a nature
similar to brokerage, commission, interest, rent or charges.

(iii) In the present case, the insurance claim, it must be
clarified, is related to the stock-in trade and it is only an insurance claim
of that nature which forms the subject matter of the appeal. Now it cannot be
disputed that if the stock-in-trade of the assessee were to be sold, the
income that was received from the sale of goods would constitute the profits
of the business as computed under the head profits and gains of business or
profession. The income emanating from the sale would not be sustainable to a
reduction of 90% for the simple reason that it would not constitute a receipt
of a nature similar to brokerage, commission, interest, rent or charges.

(iv) A contract of insurance is a contract of indemnity.
The insurance claim in essence indemnifies the assessee for the loss of the
stock-in-trade. The indemnification that is made to the assessee must stand on
the same footing as the income that would have been realised by the assessee
on the sale of the stock in trade.

(v) In these circumstances, we are clearly of the view that
the insurance claim on account of the stock-in-trade does not constitute an
independent income or a receipt of a nature similar to brokerage, commission,
interest, rent or charges. Hence, such a receipt would not be subject to a
deduction of 90% under clause (1) of Explanation (baa).”
 

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Deduction u/s.80RR of Income-tax Act, 1961 : A.Ys. 1999-00 to 2001-02 : Dress designer is artist entitled to deduction u/s. 80RR.

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 Unreported :

36 Deduction u/s.80RR of Income-tax Act, 1961 : A.Ys. 1999-00
to 2001-02 : Dress designer is artist entitled to deduction u/s. 80RR.

[CIT v. Tarun R. Tahiliani (Bom.); dated 14-6-2010]

The assesse is a dress designer. For the A.Ys. 1999-00 to
2001-02 the assessee claimed deduction u/s.80RR of the Income-tax Act, 1961 in
respect of the design fees received from persons not resident in India in
convertible foreign exchange. The Assessing Officer rejected the claim holding
that the assessee is not an author, or a playwright, artist, musician, actor or
a sportsman, and hence did not fall within one of the categories to whom a
deduction can be allowed. 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) Counsel appearing on behalf of the Revenue submitted
that (i) The expression ‘artist’ in S. 80RR must be restricted to the field of
fine arts; (ii) The purpose of the provision is to showcase Indian culture
abroad; and (iii) The field of design is an area of technical expertise and
not an art form.

(ii) In a circular (No. 31) of the Board dated 25-10-1969,
it was clarified that the expression artist includes photographers and T.V.
cameramen for S. 80RR. By circular (No. 675) dated 3-1-1994, the Board
clarified that a script writer is a playwright and that a director is an
artist for the purpose of S. 80RR. However, a producer does not fall in any of
the stated categories.

(iii) The expression ‘artist’ is not defined by the
statute. Hence, the Parliament must have intended that an artist must be
understood in its ordinary sense. No artificial constructs or deeming
fictions. There is nothing in the statutory provision which would confine the
meaning of the expression to a person
engaged in fine arts.

(iv) Simply stated, an artist is a person who engages in an
activity which is an art. Artist, as we understand them, use skill and
imagination in the creation of aesthetic objects and experience. Drawing,
painting, sculpture, acting, dancing, writing, film-making, photography and
music all involve imagination, talent and skill in the creation of works which
have an aesthetic value. A designer uses the process of design and her work
requires a distinct and significant element of creativity. The canvass of
design is diverse and includes graphic design and fashion design. An artist as
part of his or her creative work, seeks to arrange elements in a manner that
would affect human senses and emotions. Design, in a certain sense, can be
construed to be a rigorous form of art or art which has a clearly defined
purpose. Though the field of designing may be regarded as a rigorous facet of
art, creativity, imagination and visualisation are the core of design.

(v) Dress designing has assumed significance in the age in
which we live, influenced as it is by the media and entertainment. As a dress
designer, the assessee must bring to his work a high degree of imagination,
creativity and skill. The fact that designing involves skill and even
technical expertise does not detract from the fact that the designer must
visualise and imagine. A designer is an artist.

(vi) The Tribunal was not in error in holding that the
assessee is an artist for the purposes of S. 80RR.”

 

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Export profit : S. 80HHC of Income-tax Act, 1961 : In computing the amount deductible u/s.80HHC(3)(b) freight and insurance is not to be included in the direct cost.

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Unreported :


37 Export profit : S. 80HHC of Income-tax Act, 1961 : In
computing the amount deductible u/s.80HHC(3)(b) freight and insurance is not to
be included in the direct cost.


[CIT v. King Metal Works (Bom.); ITA(L) No. 801 of 2010,
dated 7-7-2010]

In this case, 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 Tribunal has erred in holding that while computing direct cost
attributable to export, the freight and insurance amounting to Rs.1,71,87,614
should be excluded for arriving at export profits while computing the
deduction u/s.80HHC ?”

The High Court answered the question in favour of the
assessee and held as under :

“(i) U/s.80HHC(3)(b), the export turnover has to be reduced
by the direct and indirect cost attributable to export in order to arrive at
profits derived from export.

(ii) While defining the expression ‘export turnover’, the
Parliament has evinced an intent to exclude freight and insurance attributable
to the transport of goods or merchandise beyond the customs station. Such
freight and insurance has to be excluded from the sale proceeds received in
India by the assessee in convertible foreign exchange. The object of the
exclusion of freight and insurance is to ensure that the benefit of the
deduction u/s.80HHC is confined to profits derived from export.

(iii) The case of the Revenue is that though freight and
insurance is excluded from the export turnover as a result of Explanation (b)
to Ss.(4C) of the Section, freight and insurance must be treated as direct
cost and must then be deducted from the export turnover. According to the
Revenue, freight and insurance would be ‘cost directly attributable to the
trading goods exported out of India’ within the meaning of Explanation (d) to
Ss.(3).

(iv) In considering the tenability of the submission which
has been urged on behalf of the Revenue, it has to be noted that for the
purposes of the formula in clause (b) of Ss.(3), the export turnover has to be
reduced by direct and indirect cost attributable to export. Freight and
insurance is expressly to be excluded from the sale proceeds received by the
assessee, in computing the export turnover. Freight and insurance cannot be
regarded as costs directly attributable to the trading goods within the
meaning of clause (b) of Explanation to Ss.(3).

(v) As a matter of fact, freight and insurance attributable
to the transport of goods or merchandise beyond the customs station is already
excluded from the sale proceeds in computing the export turnover. Such freight
and insurance cannot be regarded as part of the direct costs attributable to the
trading goods. To do so, would result in a situation where freight and insurance
attributable to the transport of the goods beyond the customs station, which has
already been reduced from the sale proceeds received by the assessee, would, in
addition, be added back as a part of the direct cost incurred by the assessee.
The language of the Section, in our view, does not warrant such a conclusion.”

 

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S. 133A and S. 132(4) : Statement in survey operation offering income : Not conclusive : Subsequent retraction of statement : Amount offered not assessable as income

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44 Survey : Statement : Difference between
S. 133A and S. 132(4) of Income-tax Act, 1961 : A.Y. 2001-02 : Statement in
survey operation offering income : Not conclusive : Subsequent retraction of
statement : Amount offered not assessable as income.


[CIT v. S. Khader Khan Son, 300 ITR 157 (Mad.)]

In the course of survey operation, a partner of the assessee-firm
made a statement offering additional income of Rs.20 lakhs. The said statement
was retracted by a letter dated 3-8-2001, stating that the partner from whom a
statement was recorded was new to the management and he could not answer the
enquiries made and as such, he agreed to an ad hoc addition. The Assessing Officer made the addition
on the basis of the statement. The Tribunal deleted the addition.

 

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

“(i) The principles relating to S. 133A of the Income-tax
Act, 1961 are as follows : (i) an admission is an extremely important piece of
evidence, but it cannot be said that it is conclusive and it is open to the
person who made the admission to show that it is incorrect. And that the
assessee should be given a proper opportunity to show that the books of
account do not correctly disclose the correct state of facts; (ii) in
contradistinction to the power u/s.133A, S. 132(4) enables the authorised
officer to examine a person on oath and any statement made by such person
during such examination can also be used in evidence under the Act. On the
other hand, whatever statement is recorded u/s.133A is not given any
evidentiary value, obviously for the reason that the officer is not authorised
to administer oath and to take any sworn statement which alone has evidentiary
value as contemplated under law; (iii) The expression “such other materials or
information as are available with the Assessing Officer” contained in S. 158BB
would include the materials gathered during the survey operation u/s.133A;
(iv) the material or information found in the course of survey proceeding
could not be a basis for making any addition in the block assessment; and (v)
the word ‘may’ used in S. 133A(3)(iii) of the Act, viz., “record the
statement of any person which may be useful for, or relevant to, any
proceeding under the Act” makes it clear that the materials collected and the
statement recorded during the survey u/s.133A are not conclusive piece of
evidence by itself.

(ii) In view of the scope and ambit of the materials
collected during the course of survey action u/s.133A shall not have any
evidentiary value, it could not be said solely on the basis of the statement
given by one of the partners of the assessee firm that the disclosed income
was assessable as lawful income of the assessee.”


 

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S. 281 : In order to declare a transfer as fraudulent, appropriate proceedings should be taken as required to be taken u/s.53 of Transfer of Property Act, 1882

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45 Void transfer u/s.281 of Income-tax Act,
1961 : In order to declare a transfer as fraudulent u/s.281, appropriate
proceedings should be taken as required to be taken u/s.53 of Transfer of
Property Act, 1882. Order of TRO declaring transfer void was without
jurisdiction.


[Ms. Ruchi Mehta v. UOI, 170 Taxman 289 (Bom.)]

The petitioner purchased rights, title and interest of one
‘S’ who was defaulter under the Act, in a shop and accordingly a sale deed was
executed between the builder and the petitioner. Later, the TRO attached the
said shop for recovery of tax dues of ‘S’. On appeal, the Commissioner set aside
the action of attachment of the subject property. Thereafter, the TRO in
exercise of his powers u/s.281, passed an order declaring the sale of shop as
null and void.

 

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

“(i) S. 281 had come up for consideration before the
Supreme Court in case of TRO v. Gangadhar Vishwanath Ranade, (1998) 234
ITR 188. The Supreme Court observed that S. 281 merely declared what the law
was. The Supreme Court further held that S. 281 does not prescribe any
adjudicatory machinery for deciding any question which may arise u/s.281. The
Court further observed that in order to declare a transfer as fraudulent under
this Section, appropriate proceedings would have to be taken in accordance
with law in the same manner as they are required to be taken u/s.53 of the
Transfer of Property Act, 1882.

(ii) Considering the law declared by the Supreme Court in
the case of Gangadhar Vishwanath Ranade, it would be clear that the action of
the TRO in declaring the transfer of the property in favour of the petitioner
as void was clearly without jurisdiction.

(iii) The impugned order also attached civil consequences.
The TRO, before passing any such order, ought to have given an opportunity to
the petitioner if, in law, the TRO could exercise jurisdiction u/s.281. That
opportunity was also not given. The order, therefore, must also be set aside for
violation of the principles of natural justice and fair play.”

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S. 132B : Cash found during search satisfactorily explained : Application for release made within 30 days : Cash should be released.

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43 Search and seizure : Release of cash : S.
132B of Income-tax Act, 1961 : Cash found in the course of search satisfactorily
explained : Application for release made within 30 days : Cash should be
released.


[Bipin Vimalchand Jain v. ADIT, 169 Taxman 396 (Bom.)]

In the course of the search action, cash amounting to
Rs.1,28,34,090 was found at the business premises of the petitioner. The
petitioner explained that out of the said amount, a sum of Rs.1.14 crores
belonged to one VJ and the explanation was verified and found to be correct by
the authorities. The petitioner filed application u/s.132B(1)(i) seeking release
of the said cash on the ground that it belonged to VJ. The Assessing Officer
rejected the application on the ground that assessment u/s.153A was pending and
seized cash was required to be applied for satisfying liabilities on completion
of that assessment.

 

The Bombay High Court allowed the writ petition filed by the
petitioner, directed release of cash and held as under :

“(i) Under the first proviso to S. 132B(1)(i), on an
application made for release of the seized asset within 30 days from the end
of the month in which the asset was seized, the Assessing Officer on being
satisfied regarding the nature and source of acquisition of such asset is
empowered to recover the existing liability out of such asset and release the
remaining portion of the asset.

(ii) In the instant case, it was not in dispute that the
application seeking release of the seized cash to the extent of Rs.1.14 crores
was made within 30 days of the seizure. Once the explanation given by the
petitioner regarding the nature and source of acquisition of the seized cash
was, on verification, found to be correct, then the amount of Rs.1.14 crores,
which belonged to VJ, could not be retained by the Assessing Officer by
rejecting the application filed by the petitioner.

(iii) The only reason given in the impugned order for
rejecting the application was that the assessment made u/s.153A was yet to be
finalised. In the absence of any material on record to suggest that the seized
cash represented the undisclosed income of the petitioner, respondent No. 2
could not have rejected the application made u/s.132B(1)(i) merely on the
ground that assessment u/s.153A was pending. In other words, application
u/s.132B(1)(i) could be rejected only if the Assessing Officer had reason to
believe that the seized cash represented the undisclosed income of the
petitioner liable to be assessed in the year in which search took place. In
the impugned order, it was not even remotely suggested that the seized cash
represented the undisclosed income of the petitioner.

(iv) In the circumstances, the impugned order was to be
quashed and set aside, with the direction to the Assessing Officer to release
the seized cash to the petitioner along with interest.”


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S. 263 : After certificate having been issued under KVSS, Commissioner not justified in exercising his revisionary power.

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42 Revision : S. 263 of Income-tax Act,
1961 : A.Y. 1995-96 : KVSS 1998 : After certificate having been issued under
KVSS, Commissioner not justified in exercising power u/s.263.


[Siddhartha Tubes Ltd. v. CIT, 170 Taxman 233 (Del.)]

For the A.Y. 1995-96, the assessment of the assessee company
was completed u/s.143(3) of the Income-tax Act, 1961. During the pendency of
appeal the assessee filed declaration under KVSS 1998. The declaration was
accepted and a certificate, as contemplated u/s.90(2) of the Scheme was duly
issued and the matter was finally settled. Thereafter, the Commissioner set
aside the assessment order u/s. 263 with a direction to recalculate the
deduction u/s.80HH, u/s.80-I and u/s.80HHC. The Tribunal upheld the order passed
by the Commissioner.

 

The Delhi High Court allowed the appeal filed by the assessee
and held as under :

“(i) The Commissioner, in his order, had duly observed that
the Assessing Officer was not satisfied with the explanation of the assessee
and had, thus, recalculated deduction u/s.80HH and u/s.80-I after excluding
the profit from export of trading goods. It was, therefore, not on any
concealment of information that it was proposed to procede u/s.263, nor any
steps were suggested for cancellation of the declaration as per the provisions
of the KVSS.

(ii) Under those circumstances, as after the certificate
having been issued under the KVSS, it was not permissible to revise the said
assessment order u/s.263 and the Tribunal, therefore, had erred in holding to
the contrary.”


 

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S. 69D : Where documents represented bilateral transaction and were not on hundi paper, the provisions not applicable

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41 Deemed income : S. 69D of Income-tax Act,
1961 : A.Y. 1998-99 : Amount borrowed or repaid on hundi : Document represented
bilateral transaction and not on hundi paper : S. 69D not applicable.


[CIT v. Ram Niwas, 170 Taxman 5 (Del.)]

Amongst the documents found in the course of search, one
document was drawn on a letter-head of the assessee and was treated as hundi. On
the basis of the said hundi and the presumption available u/s.69D of the
Income-tax Act, 1961, the Assessing Officer assessed the amount of such hundi in
the assessee’s hands. The Commissioner deleted the addition and the Tribunal
upheld the deletion.

 

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

“(i) The primary requirement for invoking the deeming
provision of S. 69D is that the document must be a hundi and it is only
thereafter that the deeming provision comes into play. The lower authorities
had found that the document was not a hundi. Clearly, the document in question
was not a hundi, because it represented a bilateral transaction and it was
also not on a hundi paper. In the absence of those vital ingredients, the
document could not be described as a hundi and, therefore, the presumption
u/s.69D would not be available to the Revenue.

(ii) The contention of the Revenue that the document was
found from the premises of ‘K’ and, therefore, it must be deemed to be a hundi,
could not be accepted. From where a document is found cannot, by any stretch
of imagination, explain the nature of the document.”
 


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S. 41(1) : Amount in question continued to be shown as liability in balance sheet. S. 41(1) not applicable

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40 Deemed income : S. 41(1) of Income-tax
Act, 1961 : A.Y. 1989-90 : Assessee continued to show amount in question as
liability in balance sheet : CIT set aside the assessment u/s.263 on the ground
that proper enquiry of assessability u/s.41(1) not made : Not justified.

[CIT v. Tamil Nadu Warehousing Corporation, 170 Taxman
123 (Mad.)]

After the completion of the assessment u/s.143(3) of the
Income-tax Act, 1961 the Commissioner set aside the assessment order exercising
powers u/s. 263 on the ground that the assessee had surrendered the Group
Gratuity Scheme to the LIC and received certain amount; and that while
completing the assessment, the Assessing Officer had not made any proper enquiry
with respect to assessability of the said sum and directed the AO to assess the
said amount u/s.41(1). The Tribunal cancelled the order of the Commissioner
passed u/s.263.

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

“(i) From the reasoning given by the Tribunal, it was clear
that the assessee had continued to show the admitted amount as a liability in
the balance sheet. The undisputed fact was that it was a liability reflected
in the balance sheet. Once it was shown as a liability by the assessee, the
Commissioner was wrong in holding that the same was assessable u/s.41(1).
Unless and until there is a cessation of liability, S. 41 will not be pressed
into service.

(ii) Thus the reasoning given by the Tribunal was based on
valid materials and evidence and, hence, there was no error or legal infirmity
in the order of the Tribunal so as to warrant interference.”

 

 

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S. 80-IB : Conversion of polymer granules into specialised polymer alloys in powder form amounts to manufacture

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39 Deduction u/s.80-IB of Income-tax Act,
1961 : A.Y. 2002-03 : Conversion of polymer granules into specialised polymer
alloys in powder form amounts to manufacture : Assessee entitled to deduction
u/s.80-IB.


[CIT v. Shri Swasan Chemicals (M) P. Ltd., 300 ITR 115
(Mad.)]

The assessee-company was engaged in the manufacture of
plastic powder out of plastic granules. For the A.Y. 2002-03, the assessee’s
claim for deduction u/s.80-IB of the Income-tax Act, 1961 was rejected by the
Assessing Officer on the ground that the activity undertaken by the assessee in
producing the plastic powder did not amount to manufacture. 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 Tribunal had recorded a finding that the assessee was
manufacturing various products of polymer powders. The finished products were
completely different from the raw materials. The product range itself was wide
and the products carried different technical nomenclature. The Tribunal had
come to the right conclusion which needed no interference.”


 

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S. 54B : Exemption from capital gains tax cannot be denied where land was purchased in the joint name of the son

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37 Capital gains : Exemption u/s.54B of
Income-tax Act, 1961 : B. P. 1-4-1988 to 15-7-1998 : Sale of agricultural land
and out of sale proceeds, purchase of agricultural land in his name and in the
name of his only son : Exemption u/s.54B allowable.


[CIT v. Gurnam Singh, 170 Taxman 160 (P&H)]

In the relevant period, the assessee had sold agricultural
land and out of the sale proceeds, the assessee, along with his son, had
purchased another agricultural land and claimed deduction u/s.54B of the
Income-tax Act, 1961. The Assessing Officer disallowed the claim on the ground
that exemption from capital gains was available only in case the sale proceed
was invested by the assessee for purchasing another agricultural land and not in
respect of the land purchased by any other person. The Tribunal allowed the
assessee’s claim.

 

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

“Undisputedly, the assessee had sold the agricultural land
which was being used by him for agricultural purposes. Out of its sale
proceeds, the assessee had purchased another piece of land in his name and in
the name of his only son, who was a bachelor and was dependent upon him, for
being used for agricultural purposes within the stipulated time. Undisputedly,
the purchased land was being used by the assessee only for agricultural
purposes and merely because in the sale deed his only son was also shown as
co-owner, it did not make any difference, because the purchased land was still
being used by the assessee for agricultural purposes. It was not the case of
the Revenue that the said land was being used exclusively by his son.”


 

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S. 80-IA : Twisting and texturising of Partially Oriented Yarn (POY) amounts to manufacturing or production

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38 Deduction u/s.80-IA of Income-tax Act,
1961 : A.Y. 1996-97 : Twisting and texturis-ing of Partially Oriented Yarn (POY)
amounts to manufacturing or production: Assessee entitled to deduction
u/s.80-IA.


[CIT v. Emptee Poly-Yarn (P) Ltd., 170 Taxman 332 (Bom.)]

For the A.Y. 1996-97, the assessee-company’s claim for
deduction u/s.80-IA was disallowed on the ground that the activity of processing
of Partially Oriented Yarn (POY) was not an industrial activity. The Tribunal
allowed the claim.

 

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

“From the material considered it would be clear that POY
has different physical and chemical properties and when POY chips undergo the
process of texturising and/or twisting the yarn, i.e., twisted and/or
texturised or both, result in a product having different physical and chemical
properties. In other words, the process applied to POY, either for the purpose
of texturising or twisting, constitutes manufacture as the article produced is
recognised in the trade as distinct commodity pursuant to the process it
undergoes and which amounts to manufacture. Under the Central Excise Act, the
Union of India itself treats POY as distinct from POY drawn twisted or
texturised or both. The process amounts to manufacture as the original
commodity loses its identity. Therefore, the view taken by the Tribunal would
have to be upheld.


 

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Travel business : Expenditure on development of website is revenue expenditure allowable u/s.37(1).

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57 Business expenditure : Revenue/Capital :
S. 37(1) of Income-tax Act, 1961 : A.Y. 2001-02 : Assessee in travel business :
Expenditure on development of its website : Is revenue expenditure allowable
u/s.37(1).


[CIT v. Indian Visit.com (P) Ltd., 176 Taxman 164 (Del.)]

The assessee was engaged in travel business. The assessee
made all kinds of arrangements for its clients such as booking of hotel rooms,
providing taxi services, booking of air tickets and railway tickets, etc. During
the relevant year the assessee had incurred an expenditure of Rs.20,23,317 on
development of its website. The assesse’s clients could use the said website for
the purpose of availing of the services provided by it. The assessee had claimed
the deduction of the said expenditure as business expenditure u/s.37(1) of the
Income-tax Act, 1961. The Assessing Officer disallowed the claim holding that
the expenditure was of capital nature inasmuch as the assessee had acquired an
asset, which would provide it with an enduring benefit. The Tribunal allowed the
assessee’s claim.

 

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

“(i) Considered in the light of the principles enunciated
by the Supreme Court, it is clear that just because a particular expenditure
may result in an enduring benefit it would not make such an expenditure
capital in nature. What is to be seen is what is the real intent and purpose
of the expenditure and as to whether there is any accretion to the fixed
capital of the assessee. In the case of expenditure on website, there is no
change in the fixed capital of the assessee. Although the website may provide
an enduring benefit to an assessee, the intent and purpose behind a website is
not to create an asset, but only to provide a means for disseminating the
information about the assessee. The same could very well have been achieved
and, indeed, in the past, it was achieved by printing travel brouchers and
other published material and pamphlets. The advance of technology and the
wide-spread use of the Internet has provided a very powerful medium to
companies to publicise their activities to a larger spectrum of people at a
much lower cost. Websites enable companies to do what the printed brouchers
did, but in a much more efficient manner as well as in a much shorter period
of time and covering a much larger set of people worldwide.

(ii) The Tribunal has correctly appreciated the facts as
well as the law on the subject and has come to the conclusion that the
expenditure on the website was of a revenue nature and not a capital nature.”


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Appellate : Powers in matters remitted by High Court restricted to directions by High Court.

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56 Appellate Tribunal : Powers in matters
remitted by High Court : Powers restricted to directions by the High Court.


[Harsingar Gutkha (P) Ltd. v. ITAT, 176 Taxman 137
(All.)]

In an appeal filed by the assessee against the order of the
Tribunal the Allahabad High Court remanded the matter back to the Tribunal to
redecide the case on the basis of the material on record. Thereafter, by its
order dated 25-7-2008 the Tribunal directed the Assessing Officer to record the
statements of D and G to ascertain certain facts.

On a writ petition filed by the assessee challenging the said
order of the Tribunal, the Allahabad High Court held as under :

“(i) We are of the view that it was not open for the
Income-tax Appellate Tribunal to take fresh material on record by the impugned
order dated 25-7-2008. The Tribunal has directed the Assessing Authority to
record the statements of Shri Dinesh Singh, ACA and Shri G. L. Lath,
chartered accountant, which will amount to additional evidence/material in
the case. By the judgment and order passed by this Court, the Tribunal was
directed to adjudicate the matter afresh on the basis of the material on
record.

(ii) When a direction is issued to an Authority or Tribunal
to do a thing in certain manner, the thing must be done in that manner and no
other manner. Other methods of performance are necessarily forbidden.

(iii) In the instant case, the matter was remitted to the
Tribunal by this Court with certain directions and it was not open for the
Tribunal to take fresh evidence in the matter, as no such direction was issued
by this Court. The impugned order by which a fresh direction has been issued
by the Tribunal to the Assessing Officer is legally not sustainable.”


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Appeal to Tribunal : Powers of Single member : S. 255(3) : Income computed by AO less than Rs.5 lakhs : CIT(A) enhanced it to more than Rs.5 lakhs : Single member can decide appeal.

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21 Appeal to Tribunal : Powers of Single
member : S. 255(3) of Income-tax Act, 1961 : A.Y. 1996-97 : Income computed by
AO less than Rs.5 lakhs : CIT(A) enhanced it to more than Rs.5 lakhs : Single
member can decide the appeal.


[CIT v. Mahakuteshwar Oil Industries, 298 ITR 390
(Kar.)]

The assessee was a manufacturer of edible oil. For the A.Y.
1996-97, it had declared the total income of Rs.8,660 in the return of income.
The Assessing Officer computed the total income at Rs.2,27,614. The Commissioner
enhanced the income to Rs.13,89,795. In appeal before the Tribunal, the Single
Member of the Tribunal decided the appeal and granted relief to the assessee.

 

In the appeal preferred by the Revenue, the following
questions were raised :

“(i) Whether the single member of the Tribunal had
jurisdiction to decide the appeal when the subject matter of appeal was
exceeding Rs.5,00,000 ?

(ii) Whether the Tribunal was justified in reversing the
findings of the Appellate Commissioner, when the assessee failed to discharge
the burden of proof as required u/s.68 of the Income-tax Act ?

 


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

“(i) A single member of the Tribunal can exercise powers if
the income computed by the Assessing Officer is less than Rs.5 lakhs, even
though the same has been enhanced by the Commissioner (Appeals) in excess of
Rs.5 lakhs.

(ii) The Tribunal had given a categorical finding that the
assessee was willing to examine the creditors as its witnesses to prove that
it had availed of loans from them. No records were produced to show that the
assessee had not made such a statement either before the Assessing Officer or
before the Commissioner (Appeals). When the Revenue had got the records to
show whether the assessee was willing to examine any of the witnesses or not,
when such documents were not placed before the Court, one would have to draw
an adverse inference against the Revenue.”

 


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Scientific Research and Development Expenditure : S. 35 : Whether machine being used for R&D purpose or for manufacturing, AO not authority to decide but prescribed authority u/s.35(3)

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10 Scientific Research and Development Expenditure :
Deduction u/s.35 of Income-tax Act, 1961 : A.Y. 1999-00 : Axial machine and
computers : Whether machine being used for research and development purposes or
for manufacturing activity : Assessing Officer not an authority to decide :
Matter to be referred to prescribed authority u/s.35(3)


[CIT v. Deltron Ltd., 297 ITR 426 (Del.)]

The assessee incurred an expenditure of Rs.87,22,447 on
purchasing an axial machine along with machinery spares and computers. For the
A.Y. 1999-2000, it claimed the expenditure as a research and development
expenditure u/s.35(1) of the Income-tax Act, 1961. The Assessing Officer looked
at the brochure of the machine and came to the conclusion that the machine was
not used for research and development work and disallowed the claim. The
Commissioner (Appeals) held that the AO could not have disallowed the
expenditure without following the procedure prescribed u/s.35(3). Thereafter,
the Revenue could have made an attempt to find out the actual use of the
machine, but it did not do so. The Tribunal confirmed the view taken by the
Commissioner (Appeals).

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

“(i) The prescribed authority in this case was not the
Assessing Officer and he could not determine whether the machinery was used by
the assessee for research and development purposes or not.

(ii) Even assuming that the Assessing Officer had the
authority, the least that would have been expected from him was to confirm
physically whether or not the machine was being used for research and
development purposes. No conclusion could be arrived at by the Assessing
Officer by merely looking at the brochure. Therefore, there was no error in
the order passed by the Tribunal.

(iii) Moreover, since there was a gap of so many years, it
would not be appropriate to remand the matter to the Assessing Officer to
refer the matter to the prescribed authority to decide the question whether
the machinery was used for research and development purposes or not.”




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Penalty : S. 271B r/w. ss. 44AB and 80P of I. T. Act, 1961 : Failure to get accounts audited within prescribed time : No tax payable by assessee society in view of s. 80P : Penalty u/s. 271B not to be imposed

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  1. Penalty : S. 271B r/w. ss. 44AB and 80P of I. T. Act,
    1961 : Failure to get accounts audited within prescribed time : No tax payable
    by assessee society in view of s. 80P : Penalty u/s. 271B not to be imposed.



 


[CIT vs. Iqbalpur Co-operative Cane Development Union
Ltd.; 179 Taxman 27 (Uttarakhand)].

The income of the assessee co-operative society was
exempted u/s. 80P of the Income-tax Act, 1961. The assessee society failed to
get its accounts audited u/s. 44AB of the Act within the prescribed time.
Therefore, the Assessing Officer imposed penalty u/s. 271B of the Act. The
Tribunal cancelled the penalty.

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

“i) There appeared no intention on the part of the
assessee to conceal the income or to deprive the Government of revenue as
there was no tax payable on the income of the assessee, in view of the
provisions of section 80P. Thus, it was not necessary for the Assessing
Officer to impose penalty u/s. 271B.

ii) On going through the impugned order passed by the
Tribunal, no sufficient reason was found to interfere with the satisfaction
recorded by the Tribunal as to the finding of fact that the assessee had no
intention to cause any loss to the revenue and as such, the penalty was not
necessarily required to be imposed by the Assessing Officer.

iii) Agreeing with the view of the Tribunal, it was to be
held that though an assessee is liable to penalty u/s. 271B for failure to
comply with the provisions of section 44AB but since in the instant case, no
tax was payable by the assessee in view of the provisions contained in
section 80P, the Tribunal had commited no error of law in setting aside the
penalty imposed by the Assessing Officer”.

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Refund : Interest u/s.244A of Income-tax Act, 1961 : A.Y. 2001-02 : TDS certificates submitted during assessment proceedings : Delay on refund not attributable to assessee : S. 244A(2) not attracted : Assessee entitled to interest u/s.244A.

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Reported :


27. Refund : Interest
u/s.244A of Income-tax Act, 1961 : A.Y. 2001-02 : TDS certificates submitted
during assessment proceedings : Delay on refund not attributable to assessee :
S. 244A(2) not attracted : Assessee entitled to interest u/s.244A.

[CIT v. Larsen & Toubro
Ltd., 235 CTR 108 (Bom.)]

For the A.Y. 2001-02, the
assessment was completed by an order dated 31-3-2003 passed u/s. 143(3) of the
Income-tax Act, 1961. TDS certificates were filed in the course of the
assessment proceedings. Interest u/s.244A was denied on the ground that the TDS
certificates were not furnished with the return of income. The Tribunal found
that tax was deducted and deposited in the exchequer in time and that the
proceedings resulting in refund, has not been delayed for reasons attributable
to assessee. The Tribunal accordingly directed the Assessing Officer to pay
interest u/s. 244A for the period from
1-4-2001 to the date of refund.

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

“(i) S. 244A(2) provides
that in the event the proceedings resulting in refund has been delayed for
reasons attributable to the assessee, the period of delay so attributable
shall be exclude from the period for which the interest is payable. In the
present case, S. 244A(2) is clearly not attracted. The proceedings resulting
in the refund was not delayed for reasons attributable to the assessee.

(ii) Though the TDS
certificates were not submitted with the return and were filed during the
course of the assessment proceedings, the Tribunal has noted that tax was in
fact deducted at source at the right time. In the circumstances, the Tribunal
was correct in holding that since the benefit of TDS has been allowed to the
assessee, interest u/s. 244A could not be denied only on the ground that the
TDS certificates were not furnished with the return of income. Tax was
deducted and deposited in the exchequer in time.

(iii) S. 244A(2) is not
attracted. The appeal, therefore, does not raise any substantial question of
law and is dismissed.”

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Transfer pricing: A. Y. 2006-07: The Assessing officer cannot substitute the method of ‘cost plus mark up’ with the method of ‘cost plus mark up on FOB’ value of exports without establishing that assessee bear significant risks or AEs would enjoy geographical benefits

46. Transfer pricing: A. Y. 2006-07: The Assessing officer cannot substitute the method of ‘cost plus mark up’ with the method of ‘cost plus mark up on FOB’ value of exports without establishing that assessee bear significant risks or AEs would enjoy geographical benefits:

Li and Fung India (P.) Ltd. vs. CIT; [2013] 40 taxmann.com 300 (Delhi):

The assessee, ‘LFIL’, entered into an agreement with its associate enterprise (‘AE’) for rendering sourcing support services for the supply of high volume, time sensitive consumer goods, for which it was remunerated at cost plus mark-up of 5 %.; During the course of Transfer Pricing assessment, the assessee contended that such a transaction was at Arm’s Length Price (‘ALP’) on an application of the TNM method. The Transfer Pricing Officer (‘TPO’) observed that assessee was performing all critical functions, had assumed significant risks and it had used both tangible and unique intangibles developed by it over a period of time, which had given an advantage to the AE in form of low cost of product, quality and had enhanced the profitability of AE. Thus, it held that the compensation of cost plus mark up of 5 % was not at ALP and applied a mark-up of 5 % on the FOB value of exports made by the Indian manufacturer to overseas third party customers. Therefore, the Assessing Officer made addition on the basis of order passed by TPO, which was further affirmed by the Tribunal

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

“i) The impugned order had not shown how and to what extent assessee bore significant risks, or that the AE enjoyed such location advantages, so as to justify rejection of the Transfer pricing exercise undertaken by assessee.

ii)    Tax authorities should base their conclusions on specific facts, and not on vague generalities, such as ‘significant risk’, ‘functional risk’, ‘enterprise risk’, etc., without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reasons, based on facts and the relative evaluation of their weight and significance.

iii)    Where all elements of a proper TNMM are detailed and disclosed in the assessee’s reports, care should be taken by the tax administrators and authorities to analyse them in details and then proceed to record reasons why some or all of them are unacceptable;?

iv)    The impugned order, upholding the determination of certain margin over the FOB value of the AE’s contract, was an error in law. Therefore, the TPO’s addition of the cost plus 5 % markup on the FOB value of exports was without foundation and was to be deleted.”

Educational Institution: Exemption u/s. 10(23C)(iiiad): A. Ys. 2000-01 to 2005-06: The assessee society running 25 educational institutions claimed exemption u/s. 10(23C)(iiiad) in respect of institutions satisfying the conditions: Denial of exemption on the ground that the aggregate receipts of all institutions exceeded limit of Rs. 1 crore: Denial of exemption not proper: Assessee entitled to exemption:

35. Educational Institution: Exemption u/s. 10(23C)(iiiad): A. Ys. 2000-01 to 2005-06: The assessee society running 25 educational institutions claimed exemption u/s. 10(23C)(iiiad) in respect of institutions satisfying the conditions: Denial of exemption on the ground that the aggregate receipts of all institutions exceeded limit of Rs. 1 crore: Denial of exemption not proper: Assessee entitled to exemption:

CIT vs. Childrens Education Society; 358 ITR 373 (Karn):

The assessee society was running around 25 educational institutions. In the relevant assessment years the assessee claimed exemption u/s. 10(23C)(iiiad) of the Income-tax Act, 1961 in respect of the educational institutions which satisfied the relevant conditions. The Assessing Officer denied exemption on the ground that the aggregate of the receipts of all the institutions run by the assessee was more than Rs. 1 crore which is the condition prescribed u/s. 10(23C)(iiiad) of the Act. The Tribunal allowed the assessee’s claim and held that the assessee was entitled to exemption us. 10(23C)(iiiad) for each of the institutions the annual receipts of which were less than Rs. 1 crore.  

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

“The Tribunal was correct in holding that the exemption in terms of the provisions of section 10(23C)(iiiad) was available to the assessee as annual receipt of each of the institutions of the assessee was less than the prescribed limit under the provision.”

Turnover and value of stock adopted by Sales Tax Authorities is binding on Income-tax Authorities: Addition merely on basis of statement of third parties is not proper:

20. Assessment:  A.  Y.  1998-99  to  2002-03:

Turnover and value of stock adopted by Sales Tax Authorities is binding on Income-tax Authorities: Addition merely on basis of statement of third parties is not proper:

CIT vs. Smt. Sakuntala Devi Khetan: 352 ITR 484 (Mad):

The assessee was a trader in turmeric. For the relevant assessment years the Assessing Officer made additions on the basis statement of third parties. The Tribunal directed the Assessing Officer to adopt the figures of turnover finally assessed by the Sales Tax Authorities and apply the GP rate accordingly.

On appeal by the Revenue, the following question was raised before the Madras High Court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the turnover and profit of the assessee for the assessment year under consideration could not be computed in the reassessment on the basis of information received in the course of search conducted in certain cases on the sole ground that the Sales Tax Authorities have accepted the assessee’s purchases, sales and closing stock?”

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

“i)    Unless and until the competent authority under the Sales Tax Act differs or varies with the closing stock of the assessee, the return accepted by the Commercial Tax Department is binding on the Income -tax Authorities and the Assessing Officer has no power to scrutinise the return submitted by the assessee to the Commercial Tax Department and accepted by the Authorities. The Assessing Officer has no jurisdiction to go beyond the value of the closing stock declared by the assessee and accepted by the Commercial Tax Department.

ii)    The assessee had placed the sales tax returns before the Assessing Officer in respect of the A. Ys. 1998-99 to 2001-02. Therefore, sufficient materials were placed before the Assessing Officer in respect of those assessment years and accepted by the Authorities.

iii)    The Tribunal rightly found that the Department could not have made the addition merely on the basis of the statement of third parties and, consequently, set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to adopt the figures of turnover finally assessed by the sales tax authorities and apply the gross profit rate accordingly.”