Category: Tribunal News: Part A-Domestic Taxation

The assessee was a university incorporated under the Haryana
Universities Act, 2006. As per the relevant Section of the Haryana Universities
Act, the assessee shall be a body corporate and shall have perpetual succession
and common seal. It shall have the power to sue and to be sued in its name.
However, it is not registered u/s.25 of the Companies Act and also not
registered under the Cooperative Societies Act. The assessee had applied for
registration u/s.12AA of the Act as a charitable institution.

The Ld. D.R. argued that, based on the facts, the university
was not a separate entity and was just an activity carried on by the sponsoring
body and therefore would not constitute a person u/s.2(31)(vii).

It was held by the Tribunal that the university established
and adopted by Assembly of State and with the character of a body corporate as
per the relevant Act, though not registered u/s.25 of the Companies Act or
though not registered under the Co-operative Societies Act, will fall within the
definition of person in section 2(31)(vii) i.e., an artificial juridical person.

The next question after being satisfied that the
assessee-university is person u/s.2(31)(vii) is whether it qualifies for
registration as a charitable institution u/s.12AA.

The Ld. A.R. argued that the assessee-university was engaged
in imparting education in the field of law and administration. Objects of the
assessee-university were primarily aimed at awarding diplomas and degrees
granting fellowships and scholarships.

The definition of charitable purpose which existed at the
relevant point of time was in an inclusive manner to include education as one of
the many activities. The Ld. A.R. also relied on the decision of the Supreme
Court in the case of Sole Trustee Loka Shikshana Trust, which restricted the
meaning of education to impart instruction, schooling and training to prepare
the youth for the works of life.

The Commissioner argued that the assessee university was
charging higher fees and was not meant for the benefit of people at large.

The University satisfied the condition of imparting education
and should be thus granted registration u/s.12AA. If the purpose is education,
the requirement will be fully satisfied even if an activity for profit is
carried on in the course of actual carrying out the primary purpose.

1. The assessee-company was engaged in the business of
manufacturing different types of carburettors. It entered in a Technical
Collaboration Agreement (TCA) with a Japanese company. As per the relevant
clause of the TCA, the assessee was entitled to use any improvement made in
technology of carburettors by the Japanese company. The Japanese company
developed a new product, in respect of which they refused to give any advice
to the assessee company.

2. Subsequently the matter was referred to the
International Court of Arbitration and the said Court awarded compensation and
interest in favour of the assessee-company.

3. The assessee-company claimed the same as capital receipt
and therefore not taxable. However the Assessing Officer treated the same as
revenue and charged to tax.

4. On appeal, the CIT(A) held that the compensation was in
the nature of capital receipt, hence out of the purview of tax. However
interest received on the compensation is revenue in nature and therefore
chargeable to tax.

5. The Ld. AR of the assessee submitted before the Tribunal
that the compensation awarded was in respect of the extinction of a source of
income and profit-earning apparatus and was not awarded for breach of a
contract of revenue nature. Hence it was capital in nature. Similarly interest
on compensation received by the assessee-company was attached to the
compensation awarded by the Court, hence it partakes the character of the
compensation.

6. Whereas Ld. DR argued that compensation was awarded for
non-existing income i.e., for future loss which is nothing but revenue in
nature.

1. The Tribunal upheld the decision of the CIT(A) in
respect of the compensation awarded to the assessee-company and treated the
same as capital receipt.

2. In respect of interest, the Tribunal held that it is a
well-settled principle that interest always bears the character of revenue
unless it is awarded as profit. Since interest received is for the loss to the
assessee for delay in receipt of compensation which the assessee was entitled
to receive in the year in which the breach occurred, it was of revenue nature
and consequently the Tribunal upheld the decision of the CIT(A) in respect of
interest on compensation.

The assessee was a company engaged in the business of
development of software both by way of on-site development and offshore
development and it has a branch in the USA. It being 100% EOU, had claimed
deduction u/s.10B in respect of the exports of software made. During the
assessment proceedings, the AO had observed that the assessee had total export
turnover of Rs.28.61 crores and out of this amount, the assessee had utilised
the export proceeds to the tune of Rs.15.14 crores in the USA for the purpose of
carrying on export activities. The AO was of the view that since the said amount
had not been received in convertible foreign exchange in India within the
prescribed time u/s.10B(3), the said amount utilised in the USA cannot be
treated as a part of export turnover for computing deduction u/s.10B.

Further, the assessee had incurred expenses of Rs.3.33 crores
in foreign currency on account of payroll, etc., which were claimed to have been
incurred in connection with staff of the foreign branch in foreign country. The
AO also excluded Rs.3.33 crores incurred by the assessee outside India in
foreign exchange considering it as expenses in providing technical services,
while computing deduction u/s.10B. The AO placed reliance on the definition of
‘export turnover’ given in
Explanation 2(iii) to section 10B which excludes expenses incurred in foreign
exchange in providing technical services outside India from export turnover.

The first Appellate Authority allowed the asses-see’s appeal
in respect of inclusion of Rs.15.14 crores in export turnover for computing
deduction u/s.10B, whereas he rejected the claim of the assessee in respect of
inclusion of Rs.3.33 crores incurred by the assessee outside India in providing
technical services.

The Department had not brought anything on record to show
during the hearing, that the assessee-company was involved in rendering any
managerial consultancy services at foreign country. Also it was not brought on
record that the company was involved in providing the technical services to
other personnel or any outside agency. All the services rendered by the company
were to its staff located at New Jersy for the fulfilment of objects, namely,
development of software. A person cannot provide services to self. Whatever
expenditure has been incurred on foreign soil in a sum of Rs.3.33 crores was
incurred in connection with development of software by the employees of the
assessee-company at foreign branch and nothing has been incurred on managerial
or technical services rendered to outsider in foreign soil and therefore, the
same cannot be excluded from the export turnover.

Regarding the export proceeds of Rs.15.14 crores retained
abroad, the decision of the Supreme Court in the case of J. B. Boda & Co. (P)
Ltd. 223 ITR 271 would apply to this case also, even though the said
decision was on section 80-O wherein it was held that “two-way traffic of
receiving foreign exchange here and sending it back is a ritual which is
unnecessary”.

The assessee showed gross receipts of Rs. 46.10 crore in its
profit and loss account. Against this, the
assessee claimed deduction of Rs. 31.30 crore towards raw material consumed. Out
of the total amount of customs duty of Rs. 15.82 crore, Rs. 4.59 crores
represented the provision made for customs duty in respect of goods lying in a
bonded warehouse. This amount was provided to the raw material purchases
account. Since the imported goods were not released from the bonded warehouse,
they were shown as closing stock in hand and the customs duty payable was
included in this closing stock. The AO made addition on the basis that the
customs duty was not paid but was charged to profit and loss account. On appeal
to Tribunal, the Accountant Member upheld the order of AO while the Judicial
Member held otherwise. Hence, the matter was referred to Third Member.

The Third Member upheld the order of the Judicial Member. It
was held that section 43B can be invoked only when the assessee claims any tax
or duty. There was no dispute regarding accrual of liability. Even the assessee
accepted that the liability to pay customs duty had accrued. However, the fact
that the element of customs duty was made a part of closing stock had to be
considered. Since the customs duty was included in closing stock, it could not
be said that the assessee claimed the deduction of customs duty. Hence,
provisions of section. 43B could not be invoked and no disallowance u/s 43B was
warranted.

ITO v. Emrald Construction Co. P. Ltd.

The assessee-company had made payment to three companies in
the nature of interest and contractor’s payment, but without TDS on the same.
The Assessing Officer levied interest u/s.201(1A) till the date of assessment
order. Before the CIT(A), the assessee contested that no tax was payable qua
contract or interest payments (incomes) or qua any other incomes of the
recipients, so the question of loss to the Revenue does not arise. Hence, no
interest was leviable u/s.201(1A). The CIT(A) upheld the levy of interest, but
restricted it till the date of assessment order of the recipients. On cross
appeals by the assessee and the Revenue, the ITAT held that

Deepak Nitrate v. Dy. CIT

According to the Assessing Officer the two amounts viz.
(i) provision made for obsolescence loss, and (ii) reduction due to change in
method of inventory valuation should be added back in computation of the book
profits as per S. 115JA. He therefore added the said amounts to the income of
the assessee invoking the provisions of S. 154. The CIT(A) upheld the addition
no. (i) and deleted the addition no. (ii).

On cross appeals by the assessee and Revenue, the Tribunal
observed as under :

Styler India Pvt. Ltd. v. JCIT 2008

The assessee-company was set up as a 100% sub-sidiary of S of
Austria with the aim to make available technical expertise to the Indian
industry in three main areas — technical design and con-sultancy services,
systems supplier with respect to vehicle components and parts, sourcing of
vehicle components and parts from India for the global market.

The assessee filed a return for the A.Y. 1998-99 showing a
receipt of Rs.3,91,780 as interest on fixed deposit with the banks and claiming
expenses of Rs.49,27,336 as administrative and selling expenses as against the
receipt. The Assessing Officer was of the opinion that expenses of Rs.17,92,600
were capital in nature and that exhibition and launch expenses of Rs.15,65,239
should be disallowed as preliminary expenses.

The assessee explained that repairs, improvement and
innovation expenses were incurred for carrying on the business which was done by
obtaining long lease and in regards to exhibition and launch expense of
Rs.15,65,239, these were incurred after the company was formed on September 15,
1997.

For substantiating its claim, the assessee stated that it had
attended an exhibition in January 1998 at Expo ’98 at Delhi and it had taken a
stall and participated in the exhibition to promote the business interest of the
company and to increase its visibility in the eyes of Indian automotive
industry. The Assessing Officer held that interest income was liable to be
assessed under the head ‘Other Sources’ and expenses claimed amounting to
Rs.49,27,336 were not admissible and were to be disallowed.

The Commissioner (Appeals) held that there was no sufficient
proof to hold that the business had commenced, that all expenses were incurred
by the assessee before setting up of the business and
were not permissible. He upheld assessment of interest income under the head
‘Other Sources’ and did not allow any expenses against the above receipt.

On appeal to the Appellate Tribunal :

Tata Consultancy Service Ltd. v. ACIT

The assessee company owned two STP units for export of
software. During the A.Y. 2003-04, STP Unit 1 earned profit, whereas STP Unit 2
suffered a loss. The assessee in its return of income claimed deduction u/s.10A
of the Act in respect of Unit 1. This deduction was computed with reference to
profits of Unit 1 without setting off the loss of STP Unit 2. No deduction
u/s.10A was claimed in respect of STP Unit 2.

The Assessing Officer (AO) while assessing the total income
of the assessee, accepted the manner of computation of deduction u/s.10A.

The CIT was of the opinion that deduction allowed u/s.10A in
respect of STP Unit 1 without setting off the loss of STP Unit 2 against income
of STP Unit 1 was not in accordance with law and that the order is prejudicial
to the interest of the Revenue. He accordingly directed the AO to modify the
order and allow deduction u/s.10A after setting off the loss from STP Unit 2
against the profit of STP Unit 1.

Aggrieved with the order of CIT u/s.263, the assessee
preferred an appeal to the Tribunal.

The Tribunal after considering various judicial precedents
and also the provisions of S. 10A(1), 10A(4), notes on clauses while introducing
amendment to S. 10A(4) by Finance Bill, 2001 held as under :

During the year ended 31-3-2003, V.S.T. Precision Components
Ltd. (‘VPCL’), a company which was subsidiary of the assessee company was
amalgamated with the assessee company. The amalgamation, approved by the
Karnataka High Court by its order dated 18th July 2003, was to be effective from
1-4-2002. The terms of amalgamation, as mentioned in paragraph 11 of the order
of the Court, inter alia stated that accumulated loss and depreciation of
VPCL shall be deemed to be the loss and depreciation of the assessee company as
provided u/s.72 of the Act.

The assessee returned an income of Rs. Nil after setting off
business loss and unabsorbed depreciation of VPCL. The assessee computed book
profit u/s.115JB by reducing from profit as per its profit & loss account the
brought forward loss as per profit & loss account of VPCL.

The book profit computed by the assessee was accepted by the
AO in the assessment u/s.143(3).

Subsequently, the CIT was of the opinion that since the
unabsorbed loss was not as per the books of account of the assessee company but
of VPCL, the same cannot be permitted to be reduced from the book profit for
purposes of S. 115JB. He, accordingly, directed the AO to modify the assessment
order by re-computing the tax liability u/s.115JB.

Aggrieved, the assessee preferred an appeal to the Tribunal.

The Tribunal noted that the effective date of amalgamation
was 1-4-2002. The Tribunal held that in view of the statutory provisions of S.
72A(1) and also the order of the High Court sanctioning the scheme, the
unabsorbed business loss and also unabsorbed depreciation of VPCL were deemed to
be loss and depreciation of the assessee company. U/s.115JB(2) lower of
unabsorbed loss or unabsorbed depreciation is to be set off against the book
profit. Since the unabsorbed loss of VPCL was lower than unabsorbed
depreciation, the assessee had rightly set off the unabsorbed loss against book
profit. The Tribunal held that the CIT was not correct in directing the AO to
compute book profit without setting off the unabsorbed loss of VPCL. The
Tribunal set aside the order of the CIT passed u/s.263 of the Act.

Dy. CIT v. Beck India Ltd.

For the relevant assessment year, the Assessing Officer held
that the assessee was bound to follow the decision of the High Court in
Melmould Corpn. v. CIT, (1993) 202 ITR 789/71 Taxman 47 (Bom.) and that if a
change in method of accounting results in change in value of closing stock, no
corresponding adjustment would be required in opening stock, since such a change
would have the effect of disturbing the accounts leading to a chain reaction,
and, therefore, he added back MODVAT credit balance to closing stock of the
assessee. The CIT(A) directed the Assessing Officer to make corresponding
adjustments in the opening stock.

The Tribunal, relying on the decision in the case of CIT
v. Mahavir Aluminium Ltd., (2008) 297 ITR 77/ 168 Taxman 27 (Delhi), upheld
the CIT(A)’s order. The Tribunal noted as under :

Mafatlal Securities Ltd. v. Jt. CIT

In the course of original hearing, the learned counsel for
the assessee stated that the facts of this case were identical to the facts of
another case decided by this Tribunal, wherein the Tribunal had decided in
favour of the assessee. Hence, the case was heard mainly as a covered case and
the result was pronounced during the course of the hearing itself.

Thereafter, during the course of further study of the files,
the Bench thought that certain observations in the decisions in two cases of
Mumbai Benches were relevant. Hence, the case was released for fresh hearing as
a part heard case so as to confront these two decisions to the assessee. The
learned counsel took a preliminary objection that the Tribunal had pronounced
the order, hence, if any decision was taken contrary to the decision pronounced,
it would amount to review of order and which was beyond its powers. The learned
Departmental Representative supported the approach of the Tribunal where an
adequate opportunity of hearing was given to the assessee before taking any
other view in the matter.

The Tribunal, relying on the decision of the Supreme Court in
the case of ITAT v. V. K. Agarwal, (1998) 150 CTR 513 (SC)/(1998) 101
Taxman 382 (SC), held that unless the order of the Bench was signed by all the
members of the Bench and was dated, it was not an order of the Tribunal. The
Tribunal noted as under :

For the relevant assessment years, the Assessing Officer
disallowed 50% of the expenditure claimed by the assessee assuming that
expenditure towards foreign travel was attributable to the wife of the managing
director, who accompanied him during such visits. The CIT(A) allowed the relief
following the decision of the Kerala High Court in the case of Appollo Tyres
Ltd. [CIT v. Appollo Tyres Ltd., (1998) 149 CTR 538 (Ker.)/(1999) 237 ITR
706 (Ker.)]. The learned AM upheld the order of the CIT(A) following the same
decision of the Kerala High Court. However, the learned JM reversed the order of
the CIT(A) following various other decisions. It was contended by the assessee’s
learned counsel before the TM that the learned JM has referred to such decisions
which were not relied upon or argued on behalf of the Department.