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Category: Tribunal News: Part A-Domestic Taxation

S. 11 read with S. 12A(1)(b) — Non-filing of Auditor’s Report in Form 10B — Whether AO’s action of denying exemption justified — Held, No.

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Part B :
Unreported Decisions


ITO v. Sir Kikabhai Premchand Trust




ITAT ‘E’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

R. K. Panda (AM)

ITA No. 5308/Mum./2009

A.Y. : 2006-07. Decided on : 22-9-2010

Counsel for revenue/assessee : Hemant Lal/

K. Shivaram and P. N. Shah

8. S. 11 read with S. 12A(1)(b) — Non-filing of Auditor’s
Report in Form 10B — Whether AO’s action of denying exemption justified — Held,
No.

Per N. V. Vasudevan :

Facts :

The assessee was registered as a charitable institution
u/s.12A of the Act. During the year, the assessee had earned capital gain on the
sale of immovable property, interest income, dividend and donation. It filed
return of income declaring total income at Nil. The AO noticed that the assessee
had not filed an Audit Report in Form 10B. The AO issued notices u/s.143(2) and
u/s.142(1) and amongst others, called for a copy of Form 10B. Simultaneously,
the AO also summoned one of the trustees u/s.131. During the interview on
3-10-2008 – to one of the questions viz., ‘Was any Audit Report prepared in Form
No. 10B which could not be filed for any reason ?’ the reply of the trustee was
‘No. Since the same was not applicable, no Audit Report in Form No. 10B was ever
prepared.’

The assessee, in response to the notices issued by the AO,
filed its reply and along with the same, it also filed an audit report in Form
10B dated 11-10-2006.

On 3-12-2008, the AO issued show-cause notice as to why the
exemption claimed u/s.11 should not be denied to the assessee. In reply, the
assessee filed two affidavits — one from the trustee who was interviewed by the
AO and second from the auditor who had audited the accounts. In his affidavit,
the trustee stated that his reply that he was a computer software consultant and
not an expert in the field of accountancy and taxation, and therefore, did not
know about the audit report in Form 10B had not been correctly recorded. He
further affirmed that he could not see what was being recorded by the AO on his
laptop and he had signed the statement without reading the content. While the
auditor in his affidavit confirmed that he had audited the accounts as per S.
12A(1)(b) and had issued his report in Form 10B on 11-10-2006.

However, the AO rejected the assessee’s explanation as
according to him :

  •   the statement recorded u/s.131 had evidentiary value;


  •   no explanation was offered in respect of omission to file report along
    with the return of income.


Accordingly, applying the provisions of S. 12A(1)(b), the
claim for exemption made u/s.11 was denied.

On appeal, the CIT(A) accepted the contention of the assessee
and allowed the appeal.

Before the Tribunal, the Revenue relied on the order of the
AO and submitted that the circumstances in which the Report was filed throw
doubts on the claim of the assessee that its books were duly audited as required
by the Act.

Held :

The Tribunal relied on the Calcutta High Court decision in
the case of CIT v. Hardeodas Agarwalla Trust, (198 ITR 511) where the audit
report obtained during the course of assessment proceedings was also accepted as
due compliance of law, and dismissed the appeal filed by the Revenue. In coming
to this conclusion, it also relied on the fact that along with the return, the
assessee had also filed the Auditor’s Report obtained under the Bombay Public
Trust Act. Thus, according to it, the plea of the assessee of bonafide omission
to file Form 10B should not be rejected.

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S. 40A(3) read with S. 145(3) — Assessment made u/s.143(3) read with S. 145(3) — No disallowance made u/s.40A(3) — Whether AO’s order could be considered as erroneous — Held, No.

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Part B : UNREPORTED DECISIONS



Singhal Builders Contractors
v. Addl. CIT


ITAT ‘A’ Bench, Jaipur

Before R. K. Gupta (JM) and

M. L. Gusia (AM)

ITA No. 393/JP/2010

A.Y. : 2005-06. Decided on : 3-9-2010

Counsel for assessee/revenue :

Mahendra Gargieya/Irina Garg



7. S. 40A(3) read with S. 145(3) — Assessment made u/s.143(3)
read with S. 145(3) — No disallowance made u/s.40A(3) — Whether AO’s order could
be considered as erroneous — Held, No.

Per R. K. Gupta :

Facts :

The assessment was made by invoking provisions of S. 145(3).
Net profit @12% on contract receipts subject to allowance of depreciation and
interest to banks was adopted. The CIT found that disallowance to be made
u/s.40A(3) was not considered by the AO while applying net profit rate, hence,
his order was erroneous and prejudicial to the interest of the Revenue. The
submissions of the assessee were rejected.

Held :

The Tribunal noted that as per the Allahabad High Court
decision in the case of CIT v. Banwarilal Banshidhar, (229 ITR 229), once the
net profit rate is applied by invoking the provisions of S. 145(3), no further
disallowance can be made u/s.40A(3). Further, since no contrary decision was
available, it held that the initiation of proceedings by the CIT u/s.263 was not
justified.

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S. 28 and S. 37(1) — Exchange loss arising on application of AS-11 — Allowable as business loss/expenditure — Ultimate utilisation of fund for investment purpose would not affect the al-lowability of loss.

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  1. Karisma Kapoor v. ACIT



ITAT ‘A’ Bench, Mumbai

Before D. K. Agarwal (JM) and

B. Ramakotaiah, (AM)

ITA No. 6780/Mum./2008

A.Y. : 2004-05. Decided on : 20-10-2009

Counsel for assessee/revenue : K. Gopal/

Virendra Ojha

S. 28 and S. 37(1) — Exchange loss arising on application
of AS-11 — Allowable as business loss/expenditure — Ultimate utilisation of
fund for investment purpose would not affect the al-lowability of loss.

Per B. Ramakotaiah :

Facts :

The assessee was a film actress. She had shown her
professional receipts to the tune of Rs.6.12 crore and declared a total income
of Rs.6.04 crore. During the course of assessment the AO noticed that the
assessee had claimed foreign exchange loss of Rs.7.25 lacs. As per the
assessee the loss was arising out of exchange rate difference in the EEFC
account. The assessee had a large amount of dollar fund in the account at the
beginning of the year and after deposits during the year into the same
account, it was closed and converted into Indian Rupees. On conversion, due to
reduction in the value of dollar vis-à-vis Rupee, there was a
loss/reduction in the professional income accounted, which was claimed as a
loss.

This method of accounting, which was based on Ac-counting
Standard 11, was consistently followed by the assessee and the Department had
also assessed the profits earned therefrom in earlier years. However, during
the year, the AO disallowed the exchange loss, holding that the funds after
conversion were utilised for investing in tax relief bonds/fixed deposits.
Thus, since according to the AO, the utili-sation
of foreign currency balance was not for profes-sional purposes, the exchange
loss was disallowed.

Before the Tribunal the Revenue contended that the
Assessing Officer’s finding was correct that the amount was not utilised for
professional activities. It also relied on the decision of the Calcutta High
Court in the case of invest import and contended that the capital loss cannot
he allowed.

Held :

According to the Tribunal the facts do indicate that the
assessee had deposited her professional receipts in the said EEFC account.
Secondly, as noted by the CIT(A), the assessee was consistently following the
Mercantile system of accounting and also AS-11. Further, according to it, the
ultimate utilisation of the professional receipts after its conversion from
dollar to Indian Rupee was not material (relevant). The subsequent utilisation
of the amount cannot convert such loss as capital loss. According to it, the
Calcutta high Court decision relied on by the revenue, was distinguishable by
facts and hence, cannot be applied to the facts of the assessee’s case.

If further observed that the CIT(A) also erred in
up-holding that it was a notional loss. This was an actual loss after
conversion of balance in US $ into Indian Rupee. Accordingly, it was held that
the loss was an allowable loss against professional receipts.

Case referred to :


CIT v. Invest Import, 137 ITR 310 (Cal.)



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S. 28 and S. 45 — Gains arising to the society on sale of 50% of the areas constructed by the builder, at his own cost, by utilising additional FSI received by society from BMC in lieu of roads taken over by BMC are chargeable to tax as Capital Gains.

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  1. ACIT v.




Sai Ashish Bandra Co-op. Hsg. Soc. Ltd.

ITAT ‘E’ Bench, Mumbai

Before R. K. Gupta (JM) and A. K. Garodia (AM)

ITA No. 5232/Mum./2004

A.Y. : 2000-2001. Decided on : 22-8-2007

Counsel for revenue/assessee : K. Kamakshi/

Vijay Mehta

S. 28 and S. 45 — Gains arising to the society on sale of
50% of the areas constructed by the builder, at his own cost, by utilising
additional FSI received by society from BMC in lieu of roads taken over by BMC
are chargeable to tax as Capital Gains.

Per R. K. Gupta :

Facts :

The assessee co-operative society was formed in 1971. The
land on which the building of the society stood had roads on two sides. The
BMC acquired some part of the society’s land in 1991 and again in 1994 for the
purposes of road widening and as compensation therefor granted additional FSI
to the society which the society decided to utilise on existing building.
Accordingly, the society entered into an Agreement with the builder pursuant
to which the builder agreed to put up the entire construction at his own cost
and in turn would be entitled to 50% of the area of the constructed flats. The
society was entitled to the balance 50% of the area of the constructed flats.
The construction was completed in 1999. Upon completion of construction, the
flats coming to the share of the society were sold for Rs.1,06,18,000. The
sale consideration of flats was returned by the society as long term capital
gains. The AO reassessed this amount under the head ‘Income from Business’ on
the ground that the society did not have funds for construction and therefore
it indirectly has obtained loan from the builder and has instructed the
builder for appointing architect for getting various sanctions of plans and
approvals to construct the flats. These factors, according to him, were
indicative that the society was engaged in a trade with profit motive.

Aggrieved, the society preferred an appeal to the CIT(A)
where it contended that the income be assessed as long term capital gains or
alternatively, if it is assessed as business income, then, in terms of S.
45(2), fair market value of FSI on date of conversion should be taken as cost
for computing profits of the said business. The CIT(A) held that the income
was chargeable to tax as ‘Income from Capital Gains’.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

There is no evidence on record that the amount spent by the
assessee was loan. The builder was to put up construction at its own cost and
in turn would be entitled to 50% of the area of the constructed flats and
after completion of the project the remaining 50% of the area shall be given
to the society which can be sold by the society. BMC had allowed FSI to the
society in lieu of land taken over by the BMC. The Tribunal concurred with the
findings and decision of the CIT(A) viz. that there were no business
considerations in undertaking the transaction by the assessee, the assessee
could have either sold FSI or utilised it by constructing additional areas; by
deciding to utilise it in construction of additional areas it had maximised
its gains but maximisation of gains cannot by itself impress a transaction
with the character of business; the society did not have profit sharing
arrangement with the builder; the transaction under consideration cannot be
held to be a business transaction.

The Tribunal dismissed the appeal filed by the Revenue.



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S. 50C in the event of the assessee contending that valuation as done by Stamp Valuation Authority is not acceptable to him and asking the Assessing Officer to make a reference to the Valuation Officer, it is mandatory on the part of the Assessing Officer

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  1. Kalpataru Industries v. ITO



ITAT ‘H’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

P. Madhavi Devi (JM)

ITA No. 5540/Mum/2007

A.Y. : 2005-06. Decided on : 24-8-2009

Counsel for assessee/revenue : K. Shivram/

Pradip Hedaoo

S. 50C in the event of the assessee contending that
valuation as done by Stamp Valuation Authority is not acceptable to him and
asking the Assessing Officer to make a reference to the Valuation Officer, it
is mandatory on the part of the Assessing Officer to make such a reference
notwithstanding that the assessee has not filed an appeal against such
valuation.

Per P. Madhavi Devi :

Facts :

The assessee, a partnership firm, filed its return of
income declaring total income of Rs.1,75,108. The assessee had sold its
factory premises for a consideration of Rs.15,05,000 and had shown profit on
sale of factory premises amounting to Rs.10,94,721. The market value of the
factory premises as per stamp valuation authorities was Rs.43,98,500. The
assessee drew the attention of the AO to the observations of the Bombay High
Court while admitting the petition filed by Practicing Valuers Association
and Others v. State of Maharashtra, (Writ Petition No. 2027 of 2001) and
contended that the valuation given in the stamp duty ready reckoner cannot be
universally accepted. It was also submitted that it had not preferred an
appeal against the valuation as done by Stamp Valuation Authorities since the
purchaser had already paid stamp duty. However, the assessee requested the AO
to make a reference to the valuation cell of the Department as per the
provisions of S. 50C. The AO held that the reference to the valuation officer
is optional and since the assessee had not objected to the value adopted by
the stamp valuation authority there was no need to refer the matter to the
valuation officer. He, accordingly, adopted the value of the property at
Rs.43,98,500 and computed short term capital gain at Rs.35,89,503.

The CIT(A) confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it mainly argued that the matter be sent back to the file of the AO with
a direction to refer the same to the valuation officer for valuing the
property at market rate. It was also pointed out that the assessee was not the
owner of the land but was only a lessee and capital gain has arisen on
transfer of leasehold rights. It was also contended that in the case of
assignment of rights after obtaining necessary permission, S. 50C is not
applicable.

Held :

The assessee had transferred leasehold rights and had
itself offered capital gain on the same. S. 50C is a special provision for
determining full value of consideration in certain cases. The assessee while
making the claim before the AO has to satisfy him that the valuation adopted
by the stamp valuation authority is not based on sound criteria. In such a
case, the AO is bound to refer the matter to the DVO for arriving at the fair
market value of the property. The assessee had vide its letter filed with the
AO relied upon two decisions to the effect that the valuation given in the
stamp duty ready reckoner cannot be universally adopted. In such cases, it is
necessary for the AO to refer the matter to the DVO. The Tribunal has in
ITO v. Smt. Manju Rani Jain, 24 SOT 24 (Del.) and Mehraj Baid v. ITO,
(2008) 23 SOT 25 (Jodh.) held that the word ‘may’ used in S. 50C should be
read as ‘should’ and the AO has no discretion but to refer the matter to the
DVO for the valuation of the property. The Tribunal remanded the issue to the
file of the AO with a direction to refer the valuation of the property to the
DVO and determine the value in accordance with law.

The assessee’s appeal was allowed.


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S. 271(1)(c) — Penalty for concealment of income — Additions/disallowances sustained by the appellate authority — Whether sufficient ground for levy of penalty — Since full disclosure of particulars of transactions were made and additions were on ac-count

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  1. ACIT v. Enpack Motors Pvt. Ltd.




ITAT ‘E’ Bench, Mumbai

Before D. Manoharan (VP) and

R. K. Panda (AM)

ITA No. 914/Mum./2008

A.Y. : 2004-05. Decided on : 23-10-2009

Counsel for revenue/assessee : S. K. Singh/

Arvind Dalal

S. 271(1)(c) — Penalty for concealment of income —
Additions/disallowances sustained by the appellate authority — Whether
sufficient ground for levy of penalty — Since full disclosure of particulars
of transactions were made and additions were on ac-count of different view
adopted, penalty cannot be imposed.

Per R. K. Panda :

Facts :

The assessee was a company incorporated in 1983. During the
year it had not carried on the business and it had returned a loss of Rs.1.41
crore. On account of the flood which took place on 26/27 July in Mumbai, all
its records and documents got destroyed and it was not able to produce
documents asked for by the AO. However, a copy of the police complaint and the
certificate issued by the Chartered Engineer evaluating the bad impact of the
flood and loss of material were furnished by the assessee. The AO however,
completed the assessment u/s.144 determining income at Nil after setting off
carried forward loss of Rs.11.15 lacs. The major disallowances made were as
under :


à
Stock valuation : A plot of land of Rs.6.56 crore, held as stock in
trade, was mortgaged to a bank. In order to recover its dues, the bank had
initiated the process of the sale of plot and the sale price mentioned was
Rs.5.2 crore. In view of the same, the assessee had valued the plot of land
at the said price thereby resulting into a loss of Rs.1.35 crore. The AO was
not satisfied with the explanation and disregarded the downward valuation of
stock;


à
Depreciation : Since the Company was defunct, according to the AO, it
cannot be allowed depreciation of Rs.9.74 lacs.


The assessee did not prefer any appeal when the AO’s order
was upheld by the CIT(A). The AO initiated penalty proceedings and after
hearing, held that the assessee was in default u/s.271(1)(c) read with
Explanation 4(a). He accordingly, levied penalty of Rs.54.46 lacs being the
minimum penalty @100% of tax sought to be evaded.

The CIT(A) on appeal cancelled the penalty levied as
according to him, no inaccurate particulars were furnished by the assessee and
the disallowance was not based on any independent evidence brought on record
by the AO.

Before the Tribunal the Revenue submitted that the
non-filing of any appeal against the assessment order amounted to the
acceptance by the assessee that it had furnished inaccurate particulars.
Further, relying on the decision of the Supreme Court in the case of
Dharmendra Textiles Processors & Others, it contended that mens rea was not an
essential condition for levying of penalty.

Held :

The Tribunal noted that the assessee had made full
disclosure of all the particulars relating to the transactions in its accounts
filed with the Income-tax Department. The additions were made merely because
the AO did not share the views of the assessee. It was not disputed that the
plot of land was treated as stock in trade and was sold at a loss. As regards
claim for depreciation, it was noted that there were diverse decisions, both
for and against the assessee when the business was discontinued. As regards
the other expenses disallowed, it agreed with the assessee that in order to
maintain the corporate entity, certain expenses need to be incurred. Thus,
according to it, the decision of the Supreme Court in the case of Dharmendra
Textiles was not applicable to the facts of the case of the assessee. Further,
according to it there was sufficient force in the assessee’s submission that,
in view of the huge amount of brought forward losses, no appeal was filed
against the CIT(A)’s order. For the reasons stated as above, it was held that
the CIT(A) was justified in cancelling the penalty.

Case referred to :

Dharmendra Textiles Processors & Others, 306 ITR 277 (SC).



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S. 70 read with S. 10A — Exemption u/s.10A was of income earned without setting off of loss of non-STPI unit — Loss of the non-STPI unit is allowed to be carried forward.

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  1. ACIT v. Honeywell Technology Solutions Lab
    Pvt. Ltd.




ITAT ‘A’ Bench, Bangalore

Before Shailendra Kumar Yadav (JM) and

A. Mohan Alankamony (AM)

ITA Nos. 344 & 345/Bang./2009

A.Ys. : 2003-04 & 2004-05. Decided on : 4-8-2009

Counsel for revenue/assessee :

Vishweshwar Mudigonda/Preeti Garg

S. 70 read with S. 10A — Exemption u/s.10A was of income
earned without setting off of loss of non-STPI unit — Loss of the non-STPI
unit is allowed to be carried forward.

Per Shailendra Kumar Yadav :

Facts :

The assessee, a wholly owned subsidiary of Honeywell, USA,
was engaged in the business of performing high quality software development,
offer testing and support services to other units of the Honeywell group. One
of its units was a 100% software development export oriented undertaking under
the Software Technology Parks Scheme of Government of India. One of the issues
before the tribunal was whether the exemption u/s.10A was of the income earned
without setting off of loss of the non-STPI unit.

Held :

Analysing the provisions of S. 10A, the tribunal noted
that :


à
The provisions of S. 10A were placed under Chapter III which only relates to
‘Incomes which do not form part of total income’;


à
The word ‘such’ refers to the profits and gains of the undertaking which is
engaged in the export of articles or things or computer software; and


à
The word ‘an’ which qualifies the word ‘undertaking’ means that it refers to
a single undertaking.


Referring to the provisions governing computation of
business income, it was noted that as per S. 29, profits and gains of business
are to be computed in accordance with the provisions contained u/s.30 to
u/s.43D. Thus, the provisions of S. 10A do not form part of the sections
mentioned in S. 29. It further noted that the provisions of S. 70 govern
setting off of a loss from one source against income from another source under
the same head of income. Therefore, it observed that since S. 10A was not
forming part of the sections mentioned in S. 29, business losses of the
undertaking whose income was not exempt u/s.10A cannot be set off against the
profits of the undertaking whose income is exempt u/s.10A. Further, relying on
the decisions of the Bangalore tribunal in the cases of Yokogawa India Ltd.
and in the case of Nous Infosystems Pvt. Ltd., the tribunal upheld the
decision of the CIT(A) directing the AO to allow exemption u/s.10A without
setting off of loss of non-STPI unit and consequently, allowing the carry
forward of such losses of non-STPI unit.

Cases referred to :



1. ACIT v. Yokogawa India Ltd., 111 TTJ 548/13 SOT
470 (Bang.);

2. Nous Infosystems Pvt. Ltd. v. ITO, (ITA No.
1042/ Bang./2007 dated 3-6-2008)



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S. 145 r.w. S. 35E — Change in method of accounting — Assessee engaged in prospecting and exploring minerals changed its method of capitalising expenditure incurred to charging same to P/L A/c. — Change bona fide.

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16 DCIT v. ACC Rio Tinto Exploration Ltd.


ITAT ‘C’ Bench, New Delhi

Before R. K. Gupta (JM) and

K. G. Bansal (AM)

ITA Nos. 4908 /Del./2005

A.Y. : 2001-02. Decided on : 26-9-2008

Counsel for revenue/assessee : Suresh K. Jain/

Salil Kapoor


S. 145 read with S. 35E of the Income-tax Act, 1961 — Change
in method of accounting — Assessee engaged in the business of prospecting and
exploring ores and minerals changed its earlier method of accounting of
capitalising the expenditure incurred to charging the same to profit and loss
account — Whether the change was bona fide — Held, Yes.


Per K. G. Bansal :

Facts :

The assessee was engaged in the business of prospecting and
exploring ores and minerals. As per its method of accounting, expenditure
incurred on such activities was capitalised. During the year under appeal the
assessee changed its accounting policy in respect of the same and the
expenditure incurred on such activities was charged to profit and loss account.
The AO did not accept the change for the following reasons :



  • Change was not bona fide and it was made only to get over the provisions of S.
    35E;



  • New method of accounting led to mismatch of the expenditure with the receipts;



  •  Business of the assessee i.e., mining minerals and ores, had not commenced;



  • To
    align its accounting policy with its parent company was not a good ground to
    justify the change.



The CIT(A) on appeal came to the conclusion that the assessee
was in the business of exploration, and not mining as held by the AO. Further,
being satisfied that the change made in accounting policy was bona fide, the
CIT(A) allowed the assessee’s appeal.

Before the Tribunal the Revenue contended that the assessee
had changed its policy only to frustrate the provisions contained in S. 35E of
the Act and submitted that the order of the AO be restored.

Held :

Referring to the main objects as per the Memorandum of
Association of the assessee company, the Tribunal noted that the assessee
company was formed to carry on the business of prospecting or exploring the ores
and minerals. According to it, the conclusion got further strength from the FIPB
approval received by the assessee, which was only for carrying out exploration
activity. Thus, the Tribunal held that the mainstay of AO that the business of
the assessee had not commenced and therefore, the expenses cannot be charged to
profit and loss account failed. Further, the Tribunal held that to align the
accounting policy with that of one’s parent, could be a valid ground and it did
not agree with the AO that it was not a good ground to permit the change.
According to it, the change would lead to more appropriate preparation and
presentation of the financial statement for the reason that the losses will not
unnecessarily be carried forward as work-in-progress, when there was none.


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S. 254 — When pendency of Department’s appeal not pointed out at hearing of appeal, no error in hearing only assessee’s appeal.

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15 ACIT v. Changepond Technologies Pvt. Ltd.


ITAT ‘A’ Bench, Chennai

Before T. R. Sood (AM) and Vijay Pal Rao (JM)

M.P. No. 137/Mds/08 in ITA No. 731/Mds/07

A.Y. : 2003-04. Decided on : 14-8-2008

Counsel for revenue/assessee : Shaji P. Jacob/

H. Padamchand Khincha

S. 254 of the Income-tax Act, 1961 (‘the Act’) — When the
fact of pendency of Department’s appeal was not pointed out at the time of
hearing of the appeal of the assessee, can it be said that the Tribunal has
committed an error while hearing only the assessee’s appeal — Held, No.

Per Vijay Pal Rao :

Facts :

The Tribunal in ITA No. 731/Mds./2007 passed an order on
15-2-2008 in an appeal filed by the assessee, whereas the appeal filed by the
Department was not disposed of together. The assessee had made a petition with
the registry of the Tribunal for clubbing of both the appeals and being heard
together. Since the appeal of the Department was not heard along with the
assessee’s appeal, the Revenue filed this miscellaneous petition contending that
there was an error in the order of the Tribunal dated 15-2-2008. The Revenue
pointed out that the Apex Court in the case of Vijai Int. Udyog has held that
cross appeals of the assessee and the department should be heard together and if
the Departmental appeal is not heard along with the assessee’s appeal, then the
order passed in the assessee’s appeal is clearly erroneous. Thus, it was
contended that the appeal was disposed of by overlooking the mandatory direction
of the Apex Court and the order dated 15-2-2008 of the Tribunal may be recalled
and heard along with the appeal of the Department.

Held :

The Tribunal noted that admittedly, the fact of pendency of
Department’s appeal was not pointed out at the time of hearing of the appeal of
the assessee. The Tribunal observed that the appeal of the Department was
allowed by the Apex Court in the case of Vijai Int. Udyog, because both the
parties consented to the rehearing of the case. It also noted that the Apex
Court has in para 13 of the decision in the case of Vasant Manganlal Chokshi
held that unless and until the Department had pointed out to the Tribunal that
its appeal was also pending, the Tribunal cannot be said to have committed an
error by adjudicating only the assessee’s appeal. The Tribunal also noted that
though the order of the Apex Court in the case of Vasant Manganlal Chokshi was
by way of dismissal of SLP, it was a case of dismissal with reasons. As the Apex
Court had in the case of Kunhayammed & Others held that when the Apex Court
passes an order in SLP and also gives reasons, then such order would also
constitute binding precedent on the lower Courts. Accordingly, the Tribunal held
that it has not committed an error while hearing only the assessee’s appeal. The
Tribunal found that there was no error apparent from the order of the Tribunal.
The miscellaneous petition was rejected.

Cases referred to :



1. Commissioner of Sales Tax v. Vijai Int. Udyog, (152 ITR
111)(SC)

2. Commissioner of Customs v. Vasant Manganlal Chokshi,
(204 ELT 5) (SC)

3. Kunhayammed & Others v. State of Kerala & Another, (245
ITR 360) (SC)

4. V. M. Salgaocar & Bros. (P) Ltd. v. CIT, 243 ITR 383
(SC)

5. CIT v. Balwant Singh Arora, (180 ITR 400) (Punjab &
Haryana)

6. DCIT v. Smt. P. Shanti, (MP No. 266/Mds./2005) (ITAT —
Chennai)


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S. 147 r.w. S. 158BC — If Assessing Officer makes any additions in block assessment proceedings, then he cannot include said income either on substantive or protective basis for initiating re-assessment proceedings.

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New Page 1

  1. (2009) 32 SOT 597 (Mum.)


M. P. Ramachandran v. Dy. CIT

A.Y. : 1997-98. Dated : 14-5-2009

S. 147 r.w. S. 158BC — If Assessing Officer makes any
additions in block assessment proceedings, then he cannot include said income
either on substantive or protective basis for initiating re-assessment
proceedings.

For the relevant assessment year, certain addition on
account of disallowance of advertisement expenditure made by the Assessing
Officer in block assessment proceedings was deleted by the CIT(A). In the
meantime the Assessing Officer re-opened the assessment. He held that since
substantive addition relating to the advertisement expenses made in the block
assessment was deleted by the first Appellate Authority and the appeal was yet
to be decided by the Tribunal, addition in the present assessment order was
also called for on protective basis. The CIT(A) upheld the assessment order on
the question of legality of the initiation of reassessment proceedings. On
merits, the CIT(A) reduced a part of addition made towards the advertisement
expenses.

The Tribunal held that the impugned amount did not qualify
for consideration in the reassessment. The Tribunal noted as under :

(2) Since the very foundation of S. 147 is to charge to
tax some income which has escaped assessment, it is sine qua non that
the income now sought to be taxed should be one which earlier escaped
assessment while determining the taxable income of the assessee. Once the
said income has been put to tax in the hands of the assessee, either under
the regular assessment or in the block assessment, the basic requisite
condition of the income ‘escaping assessment’ will become wanting.

(3) In this case, having made an addition in the block
assessment, the Assessing Officer was not justified in forming the belief
either on substantive or protective basis, that the same income has escaped
assessment in the instant year. Therefore, the initiation of reassessment
proceedings on this count could not be upheld.

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S. 22 and S. 28 — Income earned by company from leasing infotech park constructed by it on land (initially taken on lease and later acquired), construction financed by borrowings from banks secured on immovable property, providing various amenities charge

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14 Global Tech Park Pvt. Ltd. v. ACIT


ITAT ‘A’ Bench, Bangalore

Before P. Mohanarajan (JM) and

K. K. Gupta (AM)

ITA No. 1021/Bang./2007

A.Y. : 2003-04. Decided on : 30-6-2008

Counsel for assessee/revenue: H. N. Khincha/

Etwa Munda

S. 22 and S. 28 of the Income-tax Act, 1961 (‘the Act’) —
Whether income earned by a company from leasing information technology park,
constructed by it on land belonging to the company (which land was initially
taken on lease and was later on acquired) which construction was financed by
borrowings from banks secured on immovable property of the company, and
providing various amenities and services is chargeable to tax under the head
‘Income from Business’ and not ‘Income from House Property’ as assessed by the
AO — Held, Yes.

Per K. K. Gupta :

Facts :

The assessee developed the land allotted to it by Karnataka
Industrial Areas Development Board and constructed an information technology
park thereon. The information technology park consisted of two large blocks of
buildings with four floors in each block, service block, cafeteria, library,
gymnasium, utilities for staff, rest rooms, security, ATM, and Geodesic Dome.
The assessee provided/installed in the said information technology park
landscaping and construction of steel reinforced cement roads and high-security
compound wall fitted with motorised gate, huge water tank fitted with high
pressure-pumps, reservoir and sump, borewell, sewage treatment plant, lifts,
rainwater harvesting system, high-standard electrical installation including
transformer and generators, air conditioning, fire fighting and smoke detector
equipments, etc. Various amenities and services were provided in the nature of
maintenance of staff, monitoring of the generator room, water supply, etc. Land
and infrastructure were provided by the assessee by obtaining loan from a bank
which had mortgaged the immovable property and had also taken personal
guarantees of the Directors. The assessee received rental income from persons
with whom it entered into an agreement for leasing the information technology
park. The assessee considered rental income to be chargeable under the head
‘Income from Business’. The Assessing Officer was of the view that the lease
deed has been entered into by the assessee as absolute owner of the property
with the tenant and therefore placing reliance upon the decisions of Podar
Cement P. Ltd., East India Housing and Land Development Trust Ltd. and Bhoopalam
Enterprises, he assessed rental income under the head ‘Income from House
Property’. The Commissioner of Income-tax (Appeals) upheld the action of the
Assessing Officer. The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal observed that the assessee was incorporated with
the sole intention of developing technology park for which it obtained leasehold
land from the Karnataka Industrial Areas Development Board and also obtained
loan from Union Bank of India for constructing super structure thereon. Such
conduct according to the Tribunal could not be considered as investment in a
property for earning rental income only. The Tribunal noted that since the lease
of the property was shown as part of the business activity, the income received
therefrom cannot be said as income received as a land owner but as a trader.
According to the Tribunal, if the property is taken on lease and thereafter
developed and leased it, is part of the business activity of the assessee as an
owner, and the income has to be treated as business income. The Tribunal found
that the activity was done by the assessee as a business venture and was in
accordance with the main object of the company. It observed that the intention
of any prudent businessman is to earn profit at a maximum level and investment
made in the business never lost its main intention for which the assessee was
incorporated. Since the entire cost of construction was met by way of obtaining
loan, it was found to be a risk as adventure in the nature of trade. According
to the Tribunal, the conversion from leasehold to ownership leads to a pure
commercial proposition resulting in a business venture carried out by the
assessee company. The Tribunal was of the view that the assessee’s providing
amenities, such as ward and watch, maintenance of common area, maintenance of
light in the common area, supply of water, providing lift, installation of
electric transformer, power to the lessees, providing generator, overhead water
tanks, maintenance of drainage, etc. clearly establish that the entire activity
is carried on in an organised manner to earn profit out of investment made by
the assessee as a commercial venture. The Tribunal noted that the case law cited
by the jurisdictional High Court in the case of Balaji Enterprises had
considered the Apex Court decision in the case of S. G. Mercantile Corporation.
It found the case law relied upon by the learned CIT(A) (Bhoopalan Commercial
Complex & Industries Pvt. Ltd.) to be distinguishable on facts. It found force
in the submission of learned counsel that the term ‘business’, as defined in the
provision of infrastructure facility as provided in sub-clause (iv) of S. 80IA
clearly explains the development and operation of the technology park, has not
been controverted by the authorities below. It noted that in the assessee’s case
the main intention was to exploit the immovable property by way of commercial
application and there was no room for doubting that the intention of the
assessee was in providing software development facility in the Electronic City
in the industrial area within the limits of Bangalore South District, Bangalore.
According to the Tribunal, any activity undertaken with a profit motive would
amount to business and not a mere return on investment when it is exploited. It
found the facts of the assessee’s case to be similar to those of Balaji
Enterprises and also S. G. Mercantile Corporation. In view thereof, the Tribunal
directed the AO to assess the rental income as from business.

Cases referred to :




1. East India Housing and Land Development Trust Ltd. v.
CIT, 42 ITR 49

2. S. G. Mercantile Corporation (83 ITR 700) (SC)

3. CIT v. Podar Cement P. Ltd., 226 ITR 625 (SC)

Trading in derivatives — Derivatives are not a contract for purchase and sale — Consequently, trading in derivatives not speculative in terms of section 43(5) — Set-off of loss of derivative trading against gains of share trading permissible.

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26. (2010) 127 ITD
386(Chennai)

DCIT Circle (VI)

Vs

Paterson Securities (P) Ltd

A.Y.2004-05

Date: 26/12/2010

Trading in
derivatives-Derivatives are not a contract for purchase and sale- Consequently
trading in derivatives not speculative in terms of section 43(5)-Therefore
set-off of loss of derivative trading against gains of share trading
permissible.

Facts :

The assessee was a member of
the NSE and was engaged in purchase and sale of shares on his own account as
well as on behalf of constituents. The assessee filed a return claiming a set
off of the loss suffered on derivative transactions against profit from sale of
shares. The assessing officer was of the view that trading in derivatives was a
speculative transaction and therefore the loss suffered being in the nature of a
speculative loss could not be set off against other business income and was to
be carried forward.

Held :

A speculative transaction in
terms of section 43(5) is that transaction in which the contract for purchase or
sale is ultimately settled otherwise than by delivery. A derivative can be
traded on the exchange. But it is not a trade in share or stock. A derivative is
not a contract for purchase or sale of share, stock or commodity. A derivative
can be traded on the value of the underlying share or stock but is not a trade
in any actual share or stock. The definition of derivative in section 2(ac) of
the Securities Contract (Regulation) Act can also be referred to. The
transactions in derivatives are therefore not speculative transactions within
the meaning of section 43(5). The loss from these transactions had to be set off
against other income.

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Interest u/s.234B was not payable on advance tax liability due to sum payable on account of retrospective amendment.

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25. (2010) 46 DTR (Bang.)
(Trib.) 41

JSW Steel Ltd. v. ACIT

A.Y. : 2005-06. Dated :
31-5-2010

 

Interest u/s.234B was not
payable on advance tax liability due to sum payable on account of retrospective
amendment.

Facts :

The assessee, a public
limited company, in A.Y 2005-06 was not required to add back the amount set
aside for deferred tax liability to the net profits u/s.115JB. As such deferred
tax liability did not fall under any of the adjustments permitted in the first
part of the Explanation to S. 115JB. But the Finance Act, 2008 made a
retrospective amendment (from A.Y. 2001-02) whereby the book profit is required
to be increased by an amount of deferred tax and provision thereof. Interest
u/s. 234B was levied on the amount of tax payable u/s.115JB. However, the
assessee opposed such levy contending that when such retrospective amendment was
brought in, the impugned assessment year was already over and there arose no
occasion to provide for advance tax in case of deferred tax liability.

Held :

By the time the
retrospective amendment was made, the financial years 2004-05 to 2007-08 have
already been passed and hence the assessee had no occasion to add back the
deferred tax provision to compute the book profits u/s.115JB. Even though a
retrospective amendment is possible, a retrospective physical payment of advance
tax is not possible. The acclaimed principle lex non cogit ad impossibilia (law
does not command to do which is impossible to do) holds true.

Thus as the statutory
mandate to add back the deferred tax provision to the book profits u/s. 115JB
was unknown during the relevant previous year 2004-05, the levy of interest
u/s.234B on the incremental amount of tax computed u/.s115JB is not justified.

 

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Interest on loan taken for purchase of motor cars — In the absence of a specific provision in clause (H) of S. 115WB(2), the expenditure on payment of interest on loan taken for purchase of motor cars cannot be included to compute fringe benefits.

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24. (2010) 46 DTR (Pune)
(Trib.) 157

Brihan Maharashtra Sugar
Syndicate Ltd. v.
DCIT

A.Y. : 2006-07. Dated :
23-7-2010

 

Interest on loan taken for
purchase of motor cars — In the absence of a specific provision in clause (H) of
S. 115WB(2), the expenditure on payment of interest on loan taken for purchase
of motor cars cannot be included to compute fringe benefits.

Facts :

The assessee had incurred
Rs.54,28,382 as expenditure on running and maintenance of motor cars, which was
certified by the auditor. However, in the return of fringe benefits the assessee
had, from the aforementioned expense, excluded Rs.3,11,580 which pertained to
interest paid on loans taken for purchase of motor cars. The AO was of the view
that the words ‘repairs’, ‘running’ and ‘maintenance of motor cars’ shall cover
every expenses connected with use of motor cars in the business activities of
the assessee. Upon further appeal, the CIT(A) upheld the order of the AO.

Held :

In absence of specific
provision laid down u/s. 115WB(2)(H), the expenditure on payment of interest on
loan taken for purchase of motor cars cannot be included to compute fringe
benefits. Every required related expenses like repairs, running (including
fuel), maintenance of motor cars and amount of depreciation thereon have been
mentioned in specific wordings in the provision. Therefore, the interest paid on
loan taken for purchase of motor cars is not liable to Fringe Benefit Tax.

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S. 28(i) — Business Loss v. Capital Loss — securities held as current asset should be treated as stock-in-trade. The loss incurred on the same should be treated as business loss.S. 145 — Method followed by the assessee was cost or market price whichever

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23. (2010) 126 ITD 448
(Mum.)

DDIT v. Chohung Bank

A.Ys. : 1997-98, 1999-2000
to 2003-04

Dated : 25-6-2009

 

S. 28(i) — Business Loss v.
Capital Loss — securities held as current asset should be treated as
stock-in-trade. The loss incurred on the same should be treated as business
loss.

S. 145 — Method followed by
the assessee was cost or market price whichever is less — accordingly loss
should be recognised but appreciation in the value should not be booked.

Facts :

The assessee is a
non-resident banking company. It incurred a loss of Rs.77,000 on sale of
Government securities held as ‘current investments’. The Assessing Officer
treated the same as capital loss stated. The assessee contended that the
securities were as ‘current asset’ in the balance sheet as per the norms laid
down by the RBI. It was further contended that buying and selling of securities
was a normal business activity of a banking company and the current investments
were thus stock-in-trade.

Held :

As per the guidelines issued
by the RBI, the securities are to be divided into (i) permanent investments and
(ii) current investments. Permanent investments are the securities purchased
with the intention of retaining them while the current investments are the
securities purchased with an intention of trading to take advantage of
short-term price. Thus the securities in the nature of current investments
automatically become the stock-in-trade of the assessee and not investment. The
loss incurred is thus on account of stock-in-trade which is referred as current
investments by the assessee.

Facts :

The assessee had revalued
certain securities being a part of closing stock and incurred loss of Rs.45,000.
The same was debited to the profit and loss account. The Assessing Officer
observed during the course of assessment proceedings that the assessee had also
revalued certain other securities forming part of the closing stock and incurred
profit of Rs.15,43,400 on the same. This profit was not offered to tax. The
Assessing Officer held that the assessee incurred loss on revaluation of one
portion of the closing stock and profit on revaluation of the another portion of
the same closing stock. While the loss was claimed as deduction, the profit was
not offered to tax. The AO held that the assessee could not be allowed to follow
different methods for valuing different portions of stock. Accordingly, an
addition of Rs.15,43,400 was made.

Held :




1. The method ‘cost or
market price’ whichever is less is a recognised method of valuation of
closing stock. The logic behind this method is that the loss in the value be
recognised without recognising unduly the appreciation in the value of
stock.

2. The Circular issued
by the RBI for valuation and classification of investments states that the
valuation is to be done scripwise and further any appreciation in the value
should not be booked.

3. Further, this method
is being consistently followed by the assessee. Going by the method adopted
by the assessee as ‘cost or market price whichever is less’, there can be no
addition of appreciation on account of revaluation.




Note :
The other issues being minor, have been ignored
for the purpose of above gist.

 

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S. 271(1)(c) — A mere addition made by the Assessing Officer cannot be a ground to levy penalty.

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22. (2010) 126 ITD 416
(Ahd.)

Gruh Finance Ltd. v. ACIT

A.Y. : 1998-99. Dated :
16-5-2008

 

S. 271(1)(c) — A mere
addition made by the Assessing Officer cannot be a ground to levy penalty.

Facts :

For the year under
consideration, the assessee had claimed deduction u/s.36(1)(viii) to the tune of
Rs.1,55,75,000. The Assessing Officer recomputed the deduction to the extent of
Rs.84,24,228 and levied penalty u/s.271(1)(c).

Held :

Assessment proceedings and
penalty proceedings are both different. Explanation 1 to S. 271(1)(c) states
that amount added or disallowed in computing the total income shall be deemed to
be income in respect of which particulars have concealed. This deeming provision
is not an absolute one. The presumption is rebuttable and not conclusive. The
assessee in this case has duly submitted required explanation and other
documents. No material has been brought on record to show that the assessee has
concealed the income or has not provided sufficient explanation. A mere addition
made by the Assessing Officer cannot be a ground to levy penalty.

 

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S.194C and S. 194I — Payment made for hiring vehicles for transportation of its employees covered by S. 194C.

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21.  (2010) 126 ITD 289
(Delhi)

Royal Jordanian Airlines v.
DDIT

(Intl. taxation)

A.Ys. : 1995-96 to 1998-99
and 2000-01

Dated : 29-8-2008

S. 44BBA — provisions of
presumptive taxation cannot bring to tax notional income when actually there is
loss incurred by the assessee.

Facts :

The assessee is a
corporation established in Jordan and is engaged in the business of operation of
aircraft in international traffic. It filed nil returns for the relevant
assessment years. It was claimed that for these assessment years the assessee
had incurred losses both in its Indian and global operations and so no tax was
chargeable while computing income under the provisions of S. 44BBA.

The Assessing Officer on the
other hand contended that the assessee is governed by the provisions of S. 44BBA
and so 5% of the gross receipts should be chargeable to tax. The Revenue further
contended that S. 44BBA does not provide for computation at lower rate of profit
as provided in S. 44AD, S. 44AF, S. 44BB, etc.

Held :




1. Time and again
various courts have held that ‘income tax’ is a tax on income. S. 4 and S. 5
are the charging Sections and the pre-requisite of these Sections is
existence of income. Chapter IV is attracted for the purpose of computation
of income. Hence, unless and until there is income u/s.4 and u/s.5 there
cannot be computation of income. Chapter IV-D is a machinery provision and
S. 28 or Chapter IV-D itself does not create a charge.

2. Even though there is
no specific mention in S. 44BBA for computing tax at lower rate, in case of
losses, the provisions should be understood to have an inbuilt option for
the assessee to compute income at a lower sum.

3. The deeming provision
of S. 44BBA only deems 5% of certain receipts as income, however it does not
deem that every person is deemed to have earned income.

4. When there are
losses, the presumptive section cannot bring to charge what is otherwise not
chargeable to tax.



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If the capital asset is acquired out of borrowed funds and the interest paid on such amount borrowed has not been claimed as deduction, then the same may be added to the cost of asset while computing cost of acquisition on sale of asset.

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  1. (2009) 120 ITD 469 (Pune)


S. Balan alias Shanmugam v. DCIT

A.Y. : 2002-03. Dated : 31-1-2008

If the capital asset is acquired out of borrowed funds and
the interest paid on such amount borrowed has not been claimed as deduction,
then the same may be added to the cost of asset while computing cost of
acquisition on sale of asset.

The issue relates to disallowance of interest for computing
the cost of shares while working out the short-term capital gains.

Facts :

The assessee was an individual working as a promoter and
builder and also had income from salary, rent and other sources. In the A.Y.
2002-03, the assessee sold certain shares and computed short-term capital
loss. On perusal of details, it was noticed by the AO that cost price of the
shares included the amount of interest paid on the borrowed funds. The AO
mentioned that the funds were borrowed for investment in shares. The AO
disallowed the interest component from the working of capital gains on the
ground that it was neither covered under the term ‘expenditure incurred wholly
and exclusively in connection with the transfer’, nor under the term ‘cost of
improvement’. In the opinion of the AO, interest was not covered u/s.48 of the
Act.

The CIT(A) has given the following reasons for confirming
the action of the AO :


à The
amount of interest should not be taken into account for determining cost of
capital asset u/s.48 of the Act


à The
intention of investment in shares was earning of dividend and since the said
dividend is exempt, interest expenditure in that regard should also not be
allowed in view of provision of S. 14A of the Act


à Whenever
the Parliament intends to allow interest as a deduction, then specific
provisions are incorporated such as S. 36(3) and S. 24(b) of the Act,
however it is not so in S. 48 of the Act.


à The
appellant had dominant intention of earning dividend income, therefore, the
provision of S. 14A was to be applied.


Before the ITAT, the appellant argued that borrowed funds
were utilised for acquisition of shares, interest on these funds was never
claimed as revenue expenditure and the main intention was to invest in shares
and not to trade in shares.

Held :

The Tribunal observed that even if it is a situation where
a capital asset is acquired out of borrowed funds having liability of
interest, and since it has been capitalised as cost of asset in the books of
account and never claimed as a revenue expenditure, then that too is towards
enhancing cost of such capital asset and cannot be segregated from cost of
acquisition. The appellant is entitled to deduct interest for the purposes of
S. 48 of the Act.

Further, analysing S. 14A of the Act, the ITAT held that
the issue is related to the transfer of the capital asset and not the revenue
generated. A situation may arise that on transfer of a capital asset, the gain
is taxable but not the incidental income, and if so, the expenditure having
nexus with the cost of acquisition has to be taken into account for the
computation of gain as prescribed u/s.48 of the act.


(6) On the face of the evidence in the shape of
confirmation letters, bank accounts, passports, etc., in the hands of the
assessee, it might be valid gift that would have convinced a reasonably
minded person, specially a person exercising a judicial function. The
accepted position of law is that merely because an assessee had agreed to
the assessment, it cannot bring in automatic levy of penalty.

(7) Therefore, the CIT(A) was right in deleting the
penalty and his order was to be affirmed.

Allowabilty of provision for warranties u/s.37 — Provisioning done by the assessee was made against ascertained liability, very much reasonable and made on relevant data.

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  1. (2009) 120 ITD 237 (Mum.)


Indian Oiltanking Ltd. v. ITO

A.Y. : 2001-02. Dated : 23-1-2008

Fact I :

Allowabilty of provision for warranties u/s.37 —
Provisioning done by the assessee was made against ascertained liability, very
much reasonable and made on relevant data.

Fact II :

Book profits u/s.115JB — Provision for performance
warranties and preliminary and deferred revenue expenses added by the AO — As
regards preliminary and deferred revenue expenses there was change in the
accounting policy of the assessee — So the amount was written off — Nothing
against ICAI policy — So allowed as deduction for book profits u/s.115JB.

Fact I :

The assessee-company was engaged in providing oil terminal
services. During the relevant previous year, it started a new activity of
construction and operation of petroleum terminals also. Its first contract was
with the IOC wherein it was required to design and construct storage
facilities and also to provide services relating to handling, storage and
dispatch of petroleum products.

The assessee-company filed return of income declaring a
loss of Rs.14,73,34,669 as per normal provisions of the Income-tax Act, 1961
(‘the Act’). In the course of assessment proceedings the AO added Rs.
4,83,72,135 being provision for performance warranties while computing
income/loss under normal provisions of the Act.

The Tribunal discussed the following case laws dealing
basically with allowance of provision for warranties :

(i) Bharat Earth Movers v. CIT, (245 ITR 428) (SC)

(ii) CIT v. Vinitec Corpn. (P.) Ltd., (278 ITR
337) (Del. HC)

(iii) Mitsubishi Motors New Zealand Ltd. (222 ITR 697)
(Privy C.)

(iv) CIT v. Indian Transformers Ltd., (270 ITR
259) (Ker. HC)

It observed that the common vein running through all the
above cases was that there was sufficient past data with the assessee to
justify the reasonableness of the warranty provisioning done.

In the given case the assessee had for the first time
executed the work and hence no past data was available. Since there was no
past data, the assessee made technical assessment and had it vetted by an
independent agency.

The Tribunal observed that just because the assessee has no
past data, it cannot by itself make him ineligible from making the claim,
especially when he has just started this line of activity.

The assessee has a technical assessment which is vetted by
an independent agency. The assessee has also filed industrial experience which
gives instances of failure/development of defects in oil industry. Further the
assessee had also submitted details of expenses incurred for rectification of
various damages during defect liability period after 31-3-2001 which came to
Rs.3,06,79,133 as against warrant provisioning of Rs.4,83,72,135.

The Tribunal held that provisioning done by the assessee
was made against ascertained liability, very much reasonable and made on
relevant data.

Fact II :

For computing book profits u/s.115JB, the AO made two
additions which were provision for performance warranties (as discussed in
Fact-I) and preliminary and deferred revenue expenses.

Held :

Provision for warranty is already held as an ascertained
liability and so the AO cannot make any addition to the net profit for the
purposes of S. 115JB.

As regards preliminary and deferred revenue expenditure,
there was a change in the accounting policy of the assessee and so the amount
was written off.

By writing off the balance remaining under its head
‘Preliminary and deferred revenue expenditure’ the assessee was only doing
what was prudent, in that, it was removing from the asset side of its balance
sheet a non-productive item and which in any case was not an asset at all.
Therefore, it was not doing anything contrary to any ICAI guideline. The CIT(A)
was very much right in following the law laid down by Hon’ble Supreme Court in
Apollo Tyres Ltd.

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S. 194J r.w. S. 40(a)(ia) — S. 194J does not apply to fees paid by stockbroker to exchanges.

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30 (2008) 25 SOT 440 (Mum.)


Kotak Securities Ltd. v. Addl.CIT

ITA No. 1955 (Mum.) of 2008

A.Y. : 2005-06. Dated : 26-8-2008

S. 194J read with S. 40(a)(ia) of the Income-tax Act, 1961 —
S. 194J does not apply to transaction fees paid by stockbroker to stock
exchanges.

For the relevant assessment year, the Assessing Officer
invoked S. 40(a)(ia) in respect of transaction charges paid by the
assessee-broker to the stock exchanges and disallowed the transaction charges
paid on account of non-deduction of tax at source. The CIT(A) upheld the
disallowance.

The Tribunal, relying on the decisions in the following
cases, deleted the disallowance :

(a) Techno Shares & Stocks Ltd. v. ITO, [ITA No. 778
(Mum.) of 2004]

(b) Tata Warehouse Securities v. Dy. CIT, [ITA No.
6600 (Mum.) of 2004]

(c) Kandwalla Finance Ltd. [ITA No. 6986 (Mum.) of 2002]

(d) Manjesh J. Patel [ITA No. 3710 (Mum.) of 1997]

(e) Peninsular Capital Market Ltd. v. Asst. CIT,
(2008) 19 SOT 421 (Cochin)

(f) Omprakash B. Salicha [ITA No. 11 (Mum.) of 2007, dated
12-3-2008]

(g) Skycell Communications Ltd. v. Dy. CIT, (2001)
251 ITR 53/119 Taxman 496 (Mad.)

 

The Tribunal noted as under :

(1) To call a payment as ‘fees for technical services’ it
should have been paid in consideration of rendering by the recipient of
payment of (a) Managerial Service or (b) Technical or Consultancy Service.

(2) The stock exchanges merely provide facility to its
members to purchase and sell shares, securities, etc., within the framework of
its bye-laws. In the event of dispute it provides for mechanism for settlement
of dispute. It regulates conditions subject to which a person can be a member
and as to when and in what circumstances membership can be transferred,
cancelled, suspended, etc. The exchange provides for a place where the members
can meet and transact business. The stock exchanges do not render any
managerial service, nor do they render any technical consultancy service.

(3) The transaction fee paid is on the basis of volume of
transaction effected by a member. The transaction fee is not paid in
consideration of any service provided by the stock exchange. It is a payment
for use of facilities provided by the stock exchange and such facilities are
available for use by any member.

(4) Therefore, the transaction fee paid could not be said
to be a fee paid in consideration of any technical services rendered by the
stock exchange to the assessee. The provisions of S. 194J were, thus, not
attracted.

 


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S. 72A r.w. S. 35 — On demerger, unabsorbed capital expenditure on research u/s.35(1)(iv) not different from unabsorbed depreciation for S. 72A(4) and assessee entitled to carry forward unabsorbed research expenditure.

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29 (2008) 25 SOT 46 (Mum.)


ITO v. Mahyco Vegetable Seeds Ltd.

ITA No. 6171 (Mum.) of 2004

A.Y. : 2001-02. Dated : 28-7-2008

S. 72A read with S. 35 of the Income-tax Act, 1961 — On
demerger, unabsorbed capital expenditure on scientific research u/s.35(1)(iv) is
not different from unabsorbed depreciation for purposes of S. 72A(4) and,
therefore, assessee is entitled to carry forward unabsorbed scientific research
expenditure.

The assessee-company came into effect following demerger of a
division of ‘M’ Ltd. The assessee claimed the benefit of S. 72A(4) read with S.
35(4) in respect of unabsorbed depreciation and expenditure on scientific
research. The AO allowed the benefit of S. 72A(4) in respect of unabsorbed
depreciation. However, benefit of carry forward in respect of expenditure on
scientific research was denied. The CIT(A) allowed the assessee’s claim.

The Tribunal upheld the CIT(A)’s order and allowed the
unabsorbed capital expenditure on scientific research to be carried forward.

The Tribunal noted as under :

(a) ‘Unabsorbed depreciation’ for the purpose of S. 72A has
been defined in Ss.(7) to mean so much of the allowance for depreciation of
the demerged company which remains to be allowed and which would have been
allowed to the demerged company under the provisions of this Act if the
demerger had not taken place.

(b) In S. 35(1)(iv) it can be seen that the unabsorbed
capital expenditure on scientific research has to be dealt with in the same
manner as the unabsorbed depreciation u/s.32(2). There is no difference in the
depreciation allowance and the allowance of capital expenditure on scientific
research u/s.35 but for the fact that the deduction which would otherwise have
been spread over a number of years in the form of depreciation is allowed in
the year of incurring of such capital expenditure u/s.35.

(c) On a conjoint reading of these provisions the
inescapable conclusion which follows is that the unabsorbed capital
expenditure of scientific research of the demerged company has been considered
as similar to and at par with the unabsorbed depreciation. The amount
representing the unabsorbed capital expenditure on scientific research
u/s.35(1)(iv) was not different from the unabsorbed depreciation for the
purposes of S. 72A(7) and, hence, the assessee was entitled to carry forward
the unabsorbed scientific research expenditure.

 


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S. 41(1) — Remission of principal of loan cannot be waiver of trading liability and not within purview of S. 41(1); remission not remission of depreciation claimed by assessee on assets acquired by loan amount

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28 (2008) 118 TTJ 563 (Visakha)


Coastal Corporation Ltd. v. Jt. CIT

ITA No. 407 (Vizag.) of 2006

A.Y. : 1998-99. Dated : 30-5-2008

S. 41(1) of the Income-tax Act, 1961 — Remission of principal
portion of loan cannot be termed as waiver of trading liability and does not
fall within the purview of S. 41(1); remission of loan would not amount to
remission of depreciation claimed by the assessee on the assets acquired by
availing of the loan.

 

During the relevant assessment year, the company had, under
the Rehabilitation Scheme of the Government of India, opted for a one-time
settlement of term loans and interest. The reduction of principal amount payable
was credited to Capital Reserve. The waiver of the interest portion was
reflected as income and offered to tax. The Assessing Officer considered the
same in the assessment.

 

Subsequently, after the expiry of four years, a notice
u/s.148 was issued in respect of depreciation claimed by assessee on the fixed
assets in respect of which the term loan was reduced. The Assessing Officer held
that the claim of deduction towards depreciation is in the nature of expenditure
as it reduced the liability of the assessee to pay income-tax on such amount
and, thus, upon waiver of the loan liability which was utilised for purchase of
the asset, the consequent depreciation claimed thereon can be said to have been
recovered by the assessee and, therefore, provisions of S. 41(1) of the Act are
applicable. The CIT(A) upheld the disallowance.

 

The Tribunal, relying on the decisions in the following cases
held that remission of principal portion of loan does not fall within the
purview of S. 41(1) :

(a) Polyflex (India) (P) Ltd. v. CIT, (2002) 177 CTR
(SC) 93; (2002) 257 ITR 343 (SC)

(b) CIT v. Phool Chand Jiwan Ram, (1981) 131 ITR 37
(Del.)

(c) CIT v. Cochin Co. (P) Ltd., (1990) 81 CTR (Ker.)
115; (1990) 184 ITR 230 (Ker.)

 

The Tribunal noted as under :

1. As per the definition of ‘Actual Cost’ in S. 43(1), the
only deduction permissible from the actual cost is the amount which has been
met by any other person or authority. The words ‘which has been met by another
person or authority’ would mean the non-refundable amount given by any other
person or authority for the purpose of meeting the cost of the asset.

2. If the term loan is utilised for acquiring any asset, it
cannot be termed as ‘meeting of a portion of cost of the asset’.

3. There is no force in the contention of the Revenue that
in view of nexus between the term loan and acquisition of assets, remission of
loan will amount to remission of depreciation.

4. The principal portion of loan amount, which has been
waived, has not been claimed as deduction in any of the years. Hence, waiver
of principal portion of loan cannot be termed as waiver of trading liability
and, hence, the second clause of S. 41(1), relating to trading liability,
shall not be applicable in this case.


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S. 32(1)(i) and (ii) — Catering right acquired for consideration was tool for business and eligible for depreciation u/s.32(1)(ii).

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27 (2008) 118 TTJ 344 (Mum.)


Skyline Caterers (P) Ltd. v. ITO

ITA No. 2965 (Mum.) of 2007

A.Y. : 2003-04. Dated : 28-12-2007

S. 32(1)(i) and (ii) of the Income-tax Act, 1961 — Right of
catering acquired for a consideration was a tool to carry on business and
eligible for depreciation u/s.32(1)(ii).

 

As per agreement dated 16-8-2000, the assessee paid Rs.27
lacs for acquiring the catering business for HLL along with equipment, etc.
lying at HLL canteen and debited the same to ‘Goodwill’ account in its books.
Depreciation @ 25% claimed by the assessee was disallowed by the Assessing
Officer on the following grounds :

(a) Goodwill does not find place in S. 32 as part of
intangible assets, which included only know-how, patents, copyrights,
trademarks, etc.

(b) The expression ‘similar nature’ in S. 32(1)(ii) would
not include the goodwill.

 

The assessee’s appeal did not find favour with the CIT(A) who
upheld the disallowance on the grounds that :

(a) the assessee had not acquired any commercial right.

(b) the entire payment was in fact on account of
non-compete clause which amounted to capital expenditure not covered by S.
32(1)(ii) of the Act.

 

The Tribunal, applying the decision in the case of
Kedarnath Jute Mfg. Co. Ltd. v. CIT, (1971) 82 ITR 363 (SC), held in favour
of the assessee. The Tribunal noted as under :

1. The combined reading of all the clauses and the preamble
of the agreement reveals that the assessee had paid the sum of Rs.25 lacs for
acquiring all the rights under the contract between the first party and HLL as
well as certain assets belonging to the first party. On the other hand, the
sum of Rs.2 lacs has been paid on the ground that the first party shall not
compete with the assessee either by himself or through his agents in any
business of catering at HLL canteen.

2. The payment of Rs.25 lacs was specifically made for
acquiring all the rights under the catering contract between R and HLL and for
acquiring articles and paraphernalia belonging to the first party which were
lying in the canteen.

3. Since the payment related to the acquisition of rights
under the contract, it cannot be said that the payment was either on account
of goodwill or on account of non-compete clause.

4. Merely because the assessee showed the said payment on
account of goodwill in the books of accounts, no adverse inference can be
drawn against the assessee.

5. A perusal of S. 32(1)(ii) shows that the Legislature has
specified certain intangible assets on which depreciation can be claimed,
namely, know-how, patents, copyrights, trademarks, licences, franchises. These
specific intangible assets are followed by the expression ‘any other business
or commercial rights of similar nature’. In such a situation, the rule of
ejusdem generis would apply. The general words take the colour from the
specific words. The specific words in the above Section reveal the similarity
in the sense that all the intangible assets specified are tools of the trade
which facilitate the carrying on of the business.

6. If this test is applied, then the rights acquired by the
assessee under the agreement would fall within the expression mentioned above
since the catering business at HLL canteen could be carried on only with the
help of such rights under the contract and, consequently, the assessee would
be entitled to depreciation.

7. The articles and paraphernalia lying in the canteen of
HLL acquired by the assessee, being tangible assets, would be eligible for
depreciation under clause (i) of S. 32(1) and, therefore, their value will
have to be ascertained by the Assessing Officer and the balance amount shall
be allocated for the intangible asset for the purpose of granting depreciation
under clause (ii) of S. 32(1).

 


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Assessment done u/s.16(3) — Whether it can be done after 4 years from end of A.Y. without assessee’s failure to disclose facts — Held, No.

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26 (2008) 303 ITR (AT) 145


C. K. Govindankutty Nair v. WTO


A.Ys. : 1989-90 to 1991-92. Dated : 31-5-2006

Where the original assessment has been completed u/s.16(3),
whether reassessment can be done after expiry of 4 years from the end of
assessment year without assessee’s failure to disclose facts — Held, No.

 

For A.Y. 1989-90, the assessee has adopted a particular value
of land (with area of 40 cents) and building for determining value of his
interest in the firm. Subsequently he filed a revised return to avail the
benefit of valuation under Schedule III read with S. 7(2) and declared a much
lower value of the said land and building. The Assessing Officer accepted such
lower valuations. The said firm was dissolved in 1986 and the Assessing Officer
held that assessee’s share — 10.580 cents of land and building was distinctly
identifiable and hence valuation of entire plot of 40 cents and building as one
unit resulted in escapement of wealth. The Assessing Officer initiated
reassessment u/s.17 which was upheld by the Commissioner (Appeals).

 

On further appeal by the assessee, the ITAT held that :

1. S. 17 of the Wealth Tax Act is analogous to S. 147 of
the Income-tax Act.

2. Once assessment is completed u/s.16(3) of the Act, no
action can be taken by the Assessing Officer after the expiry of 4 years from
the end of the assessment year, unless

(a) there is a failure on the part of the assessee to
make a return under S. 14 or S. 15 or in response to a notice U/ss.(4) of S.
16 or S. 17(1); or

(b) the assessee fails to disclose fully and truly all
material facts necessary for his assessment.

3. A perusal of the assessment order clearly showed that
the fact of dissolution of the firm and the method of valuation was duly
disclosed before the Assessing Officer and he has applied his mind on the said
facts at the time of framing the original assessment.

4. Reassessment cannot be initiated on mere change of
opinion of the Assessing Officer. Therefore the reassessment proceedings
initiated by the Assessing Officer u/s.17 of the Act need to be cancelled.

 

Case relied upon :

(i) CIT v. Foramer France, (2003) 264 ITR 566 (SC)

 


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Whether claim for deduction made for first time before Commissioner (Appeal) is to be considered by him — Held, Yes.

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25 (2008) 303 ITR (AT) 110 (Cochin)


Thomas Kurian v. ACIT

A.Y. : 1999-2000. Dated : 5-5-2006

Whether a claim for deduction made for the first time before
the Commissioner (Appeal) is to be considered by him — Held, Yes.

The assessee, an exporter, did not claim deduction u/s.80HHC
in the return of income and not even before the Assessing Officer. Such claim
was made for the first time before the Commissioner (Appeals), who rejected the
claim.

On assessee’s appeal, the ITAT held that :

(i) Being a quasi-judicial authority, the Assessing Officer
must act in a fair and not in a partisan manner. He is duty bound to determine
the correct tax liability of the assessee.

(ii) In discharging such duty, he is bound to consider all
the deductions and exemptions available to the assessee.

(iii) When the facts were available with the Assessing
Officer that the assessee was in the export business of seafoods, he should
have asked the assessee why deduction u/s.80HHC has not been claimed.

(iv) The Commissioner (Appeal) should have asked for a
remand report from the Assessing Officer to verify the claim of deduction and
then decide the issue in accordance with law. He cannot plainly refuse to
consider a legal claim made by the assessee.

(v) The judgment of a larger Bench of Supreme Court in the
case of National Thermal Power Co. Ltd. v. CIT, (229 ITR 383) should
prevail over the judgment of Division Bench in the case of Stepwell Industries
Ltd. (228 ITR 171). Hence the Department cannot reject the assessee’s claim by
relying on Stepwell Industries case.

Based on the above reasonings, the ITAT restored the matter
to the Assessing Officer for considering the assessee’s claim for deduction
u/s.80HHC in accordance with law.

Cases referred to :


(i) National Thermal Power Co. Ltd. v. CIT, 229 ITR
383

(ii) Stepwell Industries Ltd., 228 ITR 171

 


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Whether CIT can pass order u/s.263 on grounds different from those in notice for revision — Held, No

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24 303 ITR (AT) 7


Colorcraft v. ITO (Mum.)

A.Y. : 2000-01. Dated : 12-5-2006

Whether the CIT can pass order u/s.263 on grounds different
from those specified in the notice issued for initiating revision proceedings —
Held, No.

 

The assessee filed its return for A.Y. 2000-01 claiming
deduction u/s.80HHC, which was allowed by the Assessing Officer during
assessment u/s.143(3). Subsequently, the Commissioner issued notice u/s. 263.
One of the grounds for revision stated in the notice was that deduction
u/s.80HHC was allowed on export profits including duty drawbacks which did not
qualify for deduction u/s.80HHC. However, subsequently a revision order was
passed holding that excessive deduction u/s.80HHC was allowed for 3 reasons :

(i) Export incentive should have been excluded in entirety
instead of 90%.

(ii) Excise Refund and Sales Tax Set-off should have been
included in the total turnover, and

(iii) Excise Refund and Sales Tax Set-off should have been
excluded from export profits.

 

On assessee’s appeal against the above order of revision
u/s.263, the ITAT held that :

(a) Before assuming jurisdiction u/s.263, the assessee
should be given an opportunity of being heard, by issue of a show-cause
notice.

(b) A person, who is required to show cause against a
proposed action, must know the basis of the proposed action. Then only the
opportunity granted will be an effective opportunity.

(c) There must be a nexus between the reasons stated in the
notice and the order passed u/s. 263.

 

Applying the above principles, the ITAT held that since in
the instant case, notice was issued for excluding duty drawback from the quantum
of deduction u/s.80HHC, but the revision order was passed on 3 altogether
different grounds, the revision order was not valid.

 

Cases referred to :


(i) Bagsu Devi Bafna v. CIT, (1966) 62 ITR 506
(Cal.)

(ii) CIT v. G. K. Kabra, (1995) 211 ITR 366 (AP)

 


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S. 2(14), 45 – For charging income under the head ‘capital gains’ it is not necessary for an assessee to be owner of the asset transferred.

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





4. Asian PPG Industries Ltd. v. DCIT


ITAT ‘A’ Bench, Mumbai

Before R. K. Gupta (JM) and

A. L. Gehlot (AM)

ITA No. 648/M/2009

A.Y. : 2004-05. Decided on : 9-2-2010

Counsel for assessee/revenue : H. N. Shah/Daya Shankar

S. 2(14), 45 – For charging income under the head ‘capital
gains’ it is not necessary for an assessee to be owner of the asset transferred.

Per A. L. Gehlot :

Facts :

Under an agreement to lease entered into by the assessee with
MIDC on 27-1-1999 the assessee paid consideration of Rs.10 crores and took
possession of land. The agreement provided several conditions upon fulfilment of
which MIDC would execute a lease deed in favour of the assessee for a period of
95 years. The assessee could not comply with the conditions laid down in the
agreement dated 27-1-1999. Vide letter dated 22-1-2003, the assessee surrendered
the original documents, lease agreement and possession receipt dated 27-1-1999
to MIDC and also requested MIDC to sub-divide the plot into two parts. The
assessee received order dated 16-6-2003 from MIDC agreeing to refund a sum of
Rs.9,49,99,995 against a premium of Rs.10,00,00,000 paid towards acquisition of
leasehold land at Chakan. One part of the sub-divided plot was surrendered by
the assessee to MIDC and one part of the sub-divided plot was transferred by the
assessee to Lucas TVS by paying to MIDC transfer charges and balance
consideration payable on execution of supplemental agreement. Tripartite
agreement was entered into between the assessee, MIDC and Lucas Ltd. on
11-3-2004.

In the return of income the assessee claimed long-term
capital loss of Rs.3,69,08,837. The Assessing Officer was of the view that the
assessee had entered into a conditional MOU with MIDC, which entitled the
assessee to lease of land on long-term basis upon fulfilment of the conditions
mentioned in the MOU. Since the assessee did not fulfil the conditions, it never
got lease of land and consequently it never became owner of a capital asset, nor
did any right accrue in favour of the assessee. The AO held that since the
assessee never owned the capital asset which he could transfer there is no
capital gain/loss and the assessee was not entitled to carry forward the
long-term capital loss claimed by it.

Aggrieved the assessee preferred an appeal to the CIT(A) who
dismissed the appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal held that S. 2(14) which defines the term
‘capital asset’ uses the words ‘property of any kind held by an assessee’, these
words do not necessarily mean that the property which the assessee holds must be
his own. Any kindly of property by the assessee would come within the
definition. It is not possible to read the definition of capital asset in a
restrictive manner to mean that the property which the assessee owned by himself
alone would come within the meaning of ‘capital asset’.

The Tribunal noted the agreement was executed, consideration
was paid and possession of the plot was taken by the assessee. The assessee was
having rights in the plot was evident from the fact that after sub-division of
the plot one portion of the plot was given to M/s. Lucas TVS Ltd. vide agreement
dated 11-3-2004 wherein the assessee was one party along with MIDC and consent
of the assessee was taken. The Tribunal held that the surrender of rights of the
assessee amounted to extinguishment of his rights in land/capital asset and
therefore it attracts capital gains/loss.

The Tribunal set aside the orders of the Revenue authorities and allowed the
claim of the assessee.

levitra

S. 254 of the Income-tax Act, 1961 read with Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 — Rule 29 of ITAT Rules permits Tribunal to admit additional evidence for any substantial cause and for said purpose there is no requirement therein th

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66 (2010) 37 SOT 202 (Chennai) (TM)

Mascon Global Ltd. v. ACIT

A.Y. : 2002-03. Dated : 26-8-2009

S. 254 of the Income-tax Act, 1961 read with Rule 29 of the
Income Tax (Appellate Tribunal) Rules, 1963 — Rule 29 of ITAT Rules permits
Tribunal to admit additional evidence for any substantial cause and for said
purpose there is no requirement therein that there should be a formal written
application before Tribunal for admission of additional evidence.

On appeal to the Tribunal, the assessee filed some additional
evidence in support of its claim. Although the Accountant Member accepted the
additional evidence, the Judicial Member objected that there was no formal
application u/r.29 of the ITAT Rules for admission of additional evidence.

The Third Member held that on going through the rule, no
requirement was found therein that there should be a formal written application
before the Tribunal for admission of the additional evidence.

The Tribunal noted as under :

(1) These are rules of procedure and in a fit case and
depending on the circumstances it would be open to the Tribunal to admit
additional evidence when it is produced in the Court and an oral application
is made.

(2) Rule 29 permits the Tribunal to admit the additional
evidence for any substantial cause. The intention behind the rule is that
substantial justice should be done and the interest of justice should be the
overriding consideration.

(3) Therefore, there was no error in the Accountant Member admitting the
additional evidence.

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S. 69 read with S. 5(2)(b) of the Income-tax Act, 1961 — When assessee brings money into India through banking channel, onus on assessee u/s.69 stands discharged and S. 5(2)(b) does not apply.

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65 (2010) 37 SOT 146 (Chennai)

Smt. Sushila Ramasamy v. ACIT

A.Y. : 1995-96. Dated : 2-4-2009

S. 69 read with S. 5(2)(b) of the Income-tax Act, 1961 — When
assessee brings money into India through banking channel, onus on assessee
u/s.69 stands discharged and S. 5(2)(b) does not apply.

The assessee, a non-resident, had made substantial deposits
in non-resident accounts in Indian Bank. She filed her return of income showing
total income as NIL. The Assessing Officer passed assessment order and assessed
the aforesaid deposits as the income of the assessee u/s.69. On appeal, the
CIT(A) confirmed the Assessing Officer’s action.

The Tribunal held that since the assessee had brought the
money into India through banking channel, the onus on the assessee u/s.69 stood
discharged, and, therefore, it was not taxable in India u/s.5(2)(b). The CBDT
Circular No. 5 in F.No.73A/2(69)-IT(A-II), dated 20-2-1969 squarely supports the
case of the assessee.

The Tribunal noted as under :

(1) It is seen from Ss.(2) of S. 5 that a person, who is
a non-resident, has to pay tax only on that income which is either received
by him in India or is deemed to be received by him in India or accrues to
him in India or arises to him in India or is deemed to accrue to him in
India or is deemed to arise to him in India during the year. The words ‘in
India’ appearing in Ss.(2) of S. 5 are crucial. The principle underlying S.
5 makes the chargeability of income depend upon the ‘locality’ of accrual or
receipt.

(2) A non-resident person, having money in a foreign
country, could not be called upon to pay income-tax on that money in India
because in respect of that money it will not be possible for the Assessing
Officer to say that it was either received by him in India or it was deemed
to be received by him in India or it accrued to him in India or it arose to

him in India or it was deemed to accrue to him in India or it was deemed to
arise to him in India.

(3) If a non-resident person, having money in a foreign
country, brings that money to India, through a banking channel, he cannot be
called upon to pay income-tax on that money in India, firstly for the
reasons stated above and secondly because the remittance of money into India
through banking channel will make the onus on the assessee u/s.69
discharged.

(4) If certain income, profits or gains was ‘received’ by
the assessee outside India, it does not become chargeable to income-tax in
India by reason of that money having been brought into India. This is
because what is chargeable is the first ‘receipt’ of the money and not a
subsequent dealing by the assessee with the said money. In that event, the
money is brought by the assessee as his own money which he had already
‘received’ and had control over it and it does not take the character of
income, profits and gains after being brought in India.

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S. 4 of the Income-tax Act, 1961 — If goodwill of business is damaged and later on some compensation is awarded in lieu of that, it would fall in category of loss to source of income and such receipt would be a capital receipt.

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64 (2010) 37 SOT 45 (Mum.)

Inter Gold (India) Pvt. Ltd. v. Jt. CIT

A.Y. : 1998-99. Dated : 5-1-2010

S. 4 of the Income-tax Act, 1961 — If goodwill of business is
damaged and later on some compensation is awarded in lieu of that, it would fall
in category of loss to source of income and such receipt would be a capital
receipt.

The assessee was importing gold bars from Union Bank of
Switzerland (UBS). In one consignment shipped by UBS there was excess supply of
some gold bars. The customs authorities seized the excess quantity and also took
legal action against the assessee-company. UBS accepted its mistake and admitted
the human error at their end. The appellate customs authority absolved and
acquitted the company. The company filed a suit against UBS in the High Court of
London. Finally, an out-of-court settlement was reached between UBS and the
company and UBS paid Rs.41.58 lacs as compensation against loss of reputation
and goodwill and Rs.14.46 lacs towards legal expenses, etc. The assessee offered
the sum of Rs.14.46 lacs for taxation voluntarily by including it in the
miscellaneous income and claimed the amount of Rs.41.58 lacs as capital receipt
not chargeable to tax in the computation of income. The Assessing Officer held
that the amount of Rs.41.58 lacs representing compensation received by the
assessee was a revenue receipt chargeable to tax. On appeal, the CIT(A) upheld
the action of the Assessing Officer.

The Tribunal, relying on the decisions in the following
cases, ruled in favour of the assessee :

(1) CIT v. A.R.J. Security Printers, (2003) 264 ITR
206/131 Taxman 297 (Delhi)

(2) Oberoi Hotel (P.) Ltd. v. CIT, (1999) 236 ITR 903/103
Taxman 236 (SC)

(3) CIT v. Bombay Burmah Trading Corpn. Ltd., (1986) 161
ITR 386/27 Taxman 314 (SC)

(4) Rohitasava Chand v. CIT, (2008) 306 ITR 242/ 171
Taxman 147 (Delhi)

(5) Serum Institute of India v. Dy. CIT, (2008) 111 ITD
259 (Pune)

While treating the amount of Rs.41.58 lacs as a capital
receipt, the Tribunal noted as under :

(1) The word ‘income’ has to be understood in the generic
sense. If a receipt bears the traits of income as per the plain and natural
meaning, the same will still be included within the scope of S. 2(24) even
if there is no specific mention of such item in the definition clause.

(2) It is trite law that any receipt in the nature of
compensation, costs, damage, etc., by whatever name called, towards loss of
income is a revenue receipt. However, any receipt to compensate for the loss
of source of income is a capital receipt.

(3) Loss of source of income does not necessarily mean
that the source must be absolutely extinguished. If the source of income has
been severely beaten, thereby causing serious damage to the income-earning
apparatus itself, it will also be construed as the loss of source of income.

(4) As in this case, if goodwill of the business is
damaged and later on some compensation is awarded in lieu of that, it will
also fall in the same category of loss to the source of income and,
consequently, such a receipt will also qualify to be characterised as a
capital receipt.


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Income-tax Act, 1961 — S. 40(a)(ia), S. 44AE. Provisions of S. 44AE will be applicable to a person who has entered into an agreement with truck owner, by virtue of which he became owner of the trucks for the period of contract and his accounts are not aud

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63 (2010) TIOL 420 ITAT (Bang.)

B. V. Prabhu v. ITO

A.Y. : 2006-07. Dated : 29-1-2010


Income-tax Act, 1961 — S. 40(a)(ia), S. 44AE. Provisions of
S. 44AE will be applicable to a person who has entered into an agreement with
truck owner, by virtue of which he became owner of the trucks for the period of
contract and his accounts are not audited. Provisions of S. 40(a)(ia) will not
be applicable in respect of transport contract business when the income is
ascertained as per S. 44AE of the Act and accounts are not audited.

Facts :

The assessee obtained a contract from Indian Oil Corporation
Ltd. (IOC) for transportation of LPG cylinders and in turn, such transportation
was being done through another contractor. The balance sheet filed alongwith the
return of income showed amount receivable from IOC and also showed the amount
payable to transport contractor. No profit and loss account was prepared. Fixed
percentage of gross receipts was considered by the assessee to be its income.
The assessee used to retain a percentage of amounts received by IOC and the
balance was paid to truck owners with whom the assessee was having agreements.
The payments were made without deduction of income-tax at source. Credit was
claimed in respect of income-tax deducted at source by IOC. Before the Assessing
Officer (AO), it was contended that the provisions of S. 44AE are applicable and
therefore the provisions of S. 40(a)(ia) do not apply. The AO held that the
transport business of the assessee was a contract with IOC and a sub-contract
with the truck owners and therefore, in view of the proviso to S. 194C(2), the
assessee was required to deduct tax at source in respect of payments made to
sub-contractors. Since no tax was deducted at source, he disallowed the
expenditure of Rs.11,26,500 u/s. 40(a)(ia).

Aggrieved the assessee preferred an appeal to the CIT(A)
where it contended that it merely acted on behalf of the truck owners and had
not entered into any sub-contract with the truck owners and also that it had not
debited the amount to profit and loss account and therefore the same cannot be
treated as expenditure to be disallowed u/s. 40(a)(ia). The CIT(A) noted that
the assessee had entered into a contract with IOC and had entered into agreement
with truck owners wherein he was described as transporter and truck owner was
treated as contractors. He held that the payments made to truck owners
constituted sub-contract payments and hence the provisions of S. 194C(2) were
applicable. He also held that the assessee did not own trucks and therefore the
provisions of
S. 44AE are not applicable. He confirmed the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal on perusal of the agreement entered into by the
assessee with IOC noted that it mentioned that the contractor (the assessee) was
owner and operator of new/old capacity trucks and had undertaken to maintain the
trucks in good working order for the period of the contract, the agreement inter
alia provided that the contractor had to pay the entire operation cost of the
trucks which include and be deemed always to include the expenses enumerated in
the agreement and the agreement also provided that the contractor shall not be
entitled to assign, subrogate, subject or part with his right under the contract
or change the ownership of the trucks. The contractor (assessee) was also
prohibited from changing constitution of its firm without obtaining prior
written consent of the Corporation.

The Tribunal also noted that in order to comply with the
clauses of the agreement entered into by the assessee with IOC, the assessee had
entered into an MOU with a truck owner wherein the truck owner agreed to act as
a manager of the transport business of the assessee. This MOU also provided that
upon the expiry of the contract the truck will be resold by the assessee to Shri
Athaulla Khan (the truck owner). The assessee under this agreement was entitled
to retain 3% of the commission.

As regards the contention on behalf of the assessee that the
assessee was registered with IOC and the truck owner was not registered with IOC
and therefore the contract was taken for the benefit of the person owning the
truck, the Tribunal observed that this may be de facto relationship. However,
one has to consider the legal agreements between the assessee and the IOC and
also considering the MOU between the assessee and the truck owner and from such
agreements, one has to draw a conclusion that de jure relationship of the
assessee with IOC was in the form of a person who has been awarded the contract.
The assessee was required to abide by the conditions mentioned in the agreement.

The Tribunal held that as per the agreement with the truck
owner, the assessee became the owner of two trucks for the period of contract.
The original truck owner became a manager for the transport business of the
assessee. In respect of contract with IOC, the assessee was owner of two trucks.
Since there was no tax audit report in respect of transport contract business,
therefore the income was to be ascertained as per S. 44AE of the Act. Once
income has been ascertained as per provisions of S. 44AE of the Act, then
provisions of S. 40(a)(ia) will not be applicable.

The Tribunal also upheld the alternative contention on behalf
of the assessee viz. that the AO should have restricted the disallowance to
Rs.5,14,725 being the amount paid by the assessee to the truck owner. From the
gross amount due to the assessee from IOC, deductions were made by IOC towards
diesel and TDS. IOC made deduction towards diesel made available for plying the
truck. The amount deducted by IOC was not paid to the truck owner, but only the
net amount received from IOC was paid to the truck owner and hence the amount on
which tax was deductible at source was the net amount of Rs.5,14,725.


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Income-tax Act, 1961 — S. 10A. Hiving off of a unit which was in the form of a branch office into a subsidiary company does not cause conversion of an existing unit into a new unit so as to disentitle the claim of deduction u/s.10A.

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62 (2010) TIOL 395 ITAT (Bang.)

DCIT v. LG Soft India Pvt. Ltd.

A.Ys. : 2004-05 & 2005-06. Dated : 19-5-2010

Income-tax Act, 1961 — S. 10A. Hiving off of a unit which was
in the form of a branch office into a subsidiary company does not cause
conversion of an existing unit into a new unit so as to disentitle the claim of
deduction u/s.10A.

Facts :

The assessee-company had claimed deduction u/s. 10A for both
the assessment years under appeal. The eligible undertaking which was earlier a
branch of a non-resident company/foreign company was hived off as a subsidiary
company. The Assessing Officer held that the new unit stated to be set up by the
assessee was made on reconstructing/splitting up of the existing unit and
pursuant to the provisions of S. 10A(2)(ii), the assessee is not entitled to
deduction u/s.10A. He also held that the plant and machinery in the new unit
have been installed by way of transfer. He denied the claim made by the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A) who
allowed the appeal.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

As rightly pointed out by the CIT(A), the asses-see’s
undertaking existed in the same place, form and substance and did carry on the
same business before and after the change in the legal character of the form of
organisation. Formerly, it was a branch establishment of a non-resident
company/foreign company, but later on it was converted into a subsidiary
company. But for the above change of the organisational status, the same unit
continued to function throughout the time. Therefore, it is quite fruitless to
argue that the organisational change has caused conversion of the existing unit
to a new unit. There is no such splitting up or reconstruction of an existing
business in the case of a branch establishment becoming a subsidiary
establishment. The assessee’s unit satisfied all the conditions stipulated in
the Act and was entitled for the benefit. Therefore, as rightly held by the
CIT(A), a mere organisational change is not a ground to hold that the assessee
has violated the conditions stated in S. 10A(2)(ii). It is a case of only change
in the name and style. It is clearly possible to state that there was no
violation of the conditions laid down in S. 10A(2)(iii) as well.

The Tribunal dismissed the appeal filed by the Revenue.

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Income-tax Act, 1961 — S. 36(1)(vii), S. 36(2) — If brokerage is offered to tax, a sharebroker is entitled to deduction by way of bad debts u/s. 36(1)(vii) r.w. S. 36(2) in respect of the amount which could not be recovered from its clients in respect of

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61 (2010) TIOL 390 ITAT Mum.-SB

DCIT v. Shreyas S. Morakhia

A.Y. : 1998-99. Dated : 16-7-2010


Income-tax Act, 1961 — S. 36(1)(vii), S. 36(2) — If brokerage
is offered to tax, a sharebroker is entitled to deduction by way of bad debts
u/s. 36(1)(vii) r.w. S. 36(2) in respect of the amount which could not be
recovered from its clients in respect of transactions effected by him on behalf
of his client, apart from brokerage earned by him.

Facts :

During the assessment years under consideration the assessee
in its return of income claimed deduction of Rs.28,24,296 on account of amount
due to the assessee by his clients on account of transactions of shares effected
by him on their behalf. It was contended that the amount has become
irrecoverable and the same has been claimed as deduction after having written it
off from the books of account. Copies of ledger accounts were filed.

The Assessing Officer (AO) disallowed the claim of the
assessee on the ground that there was no other evidence filed by the assessee
except copies of ledger account to show that any action was taken against the
concerned parties to recover the amounts due from them. He also noted that the
Bombay Stock Exchange Card held by the assessee was already sold by him and the
business in respect of which the debt in question had arisen had ceased to exist
in the year under consideration.

Aggrieved the assessee preferred an appeal to the CIT(A) who
noted that the assessee had carried on business as a sub-broker and there was
hardly any difference between the business of share-broker and sub-broker. He
held that the business of the assessee had not ceased to exist on transfer of
membership card but the same continued during the year under consideration. He
also held that failure on the part of assessee to initiate recovery proceedings
could not be a ground for denying the assessee’s claim for bad debt u/s.
36(1)(vii). Accordingly, he allowed the claim of the assessee for deduction on
account of bad debt.

Aggrieved, the Department preferred an appeal to the
Tribunal. In view of the conflicting decisions on the subject, the following
question was sought to be referred by the Division Bench to the Special Bench.
The President constituted a Special Bench to consider the following question :

“Whether on the facts and circumstances of the case and in
law, the assessee, who is a share-broker, is entitled to deduction by way of bad
debts u/s.36(1)(vii) read with S. 36(2) of the Income-tax Act, 1961 in respect
of the amount which could not be recovered from its clients in respect of
transactions effected by him on behalf of his client, apart from the commission
earned by him.”

Held :

The Special Bench having noted that in order to claim
deduction u/s.36(1)(vii), one of the conditions that is required to be satisfied
as laid down u/s.36(2)(i) is that the debt claimed to be deductible as bad or
part thereof has been taken into account in computing the income of the assessee
of the relevant previous year or of any earlier previous year, observed that the
fundamental question is whether the said condition is satisfied in case of
share-broker where only the brokerage income is credited to the P & L account
and not the value of purchase of shares made on behalf of the clients. The SB
noted that the Supreme Court has in the case of T. Veerabhadra Rao K. Koteshwar
Rao & Co. (155 ITTR 152), in the context of loan given on interest, has held
that the debt was taken into account in computing the income of the assessee
when the interest income accruing thereon was taxed in the hands of the assessee.
It noted that the Supreme Court has clearly laid down that in order to satisfy
the condition stipulated in S. 36(2)(i), it is not necessary that the entire
amount of debt has to be taken into account in computing the income of the
assessee and it will be sufficient even if part of such debt is taken into
account in computing the income of the assessee. Applying this principle to the
share-broker, it was held that the amount receivable by the assessee on account
of brokerage is thus a part of debt receivable by the share-broker from his
clients against purchase of shares and once such brokerage is credited to P & L
account of the broker and the same is taken into account in computing his
income, the condition stipulated in S. 36(2)(i) gets satisfied.

The argument that the loss was suffered owing to breach of
SEBI guidelines framed to safeguard the interest of brokers the SB held that
when a share-broker has actually suffered a loss, whether such loss is suffered
by assessee as a result of not following the guidelines or even after following
such guidelines, is not going to change the fact that assessee has suffered such
loss. If the assessee broker has not followed such guidelines in a particular
case, it is a decision taken by him as a businessman taking into consideration
all the relevant facts and circumstances including his business relations with
the concerned clients. Even if it is assumed that such loss has been incurred by
the assessee as a result of not following the rules and regulations and
guidelines issued by the SEBI, the same cannot be equated to expenditure
incurred by the assessee for any purpose which is an offence or which is
prohibited by law.

The contention of the Revenue that the sale value of shares
remaining with the assessee should be adjusted against the amount receivable
from the client so as to arrive at the actual amount of bad debt should be
raised, if permissible, before the Division Bench.

The Special Bench held that the assessee, who is a
share-broker, is entitled to deduction by way of bad debts u/s.36(1)(vii) r.w.
S. 36(2) of the Income-tax Act, 1961 in respect of the amount which could not be
recovered from its clients in respect of transactions effected by him on behalf
of his client, apart from the commission earned by him.

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Income-tax Act, 1961 — S. 251, S. 254. While the powers of CIT(A) are co-terminus with the powers of Assessing Officer, AO has no power to admit fresh claim otherwise than by way of revised return but Appellate Authorities including CIT(A) and ITAT have p

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60 (2010) TIOL 377 ITAT (Mum.)

Asian Paints Ltd. v. Addl. CIT

A.Y. : 2003-04. Dated : 23-3-2009

Income-tax Act, 1961 — S. 251, S. 254. While the powers of
CIT(A) are co-terminus with the powers of Assessing Officer, AO has no power to
admit fresh claim otherwise than by way of revised return but Appellate
Authorities including CIT(A) and ITAT have power to admit such claim. The Apex
Court in the case of Goetze (India) Ltd. has itself clarified that their finding
does not impinge on the power of ITAT u/s.254 of the Act, CIT(A) has similar
power u/s.251(1)(c).

Facts :

The assessee in its return of income did not make any claim
of Rs.98.36 lakhs on account of prior period adjustments. In the course of
assessment proceedings, it pressed such claim. The Assessing Officer (AO) did
not entertain the claim.

Aggrieved the assessee preferred an appeal to the CIT(A) who
relying on the decision of the Supreme Court in Goetze (India) Ltd. (284 ITR
323) (SC) held that the claim for deduction can be made only in the return of
income filed and that a claim which is not made in the return of income cannot
be subsequently made. He upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal having considered the observations of the
Supreme Court in the case of Goetze (India) Ltd. (supra) and also the powers of
the first Appellate Authority as examined by the Supreme Court in CIT v.
Nirbheram Deluram, (224 ITR 610) (SC) held as under :

(1) The Apex Court clarified in Goetze (India) Ltd.
(supra) itself that their finding does not impinge on the power of the
Income-tax Appellate Tribunal u/s.254 of the Act. We find that the CIT(A)
has also similar power u/s.251(1)(c) of the Act.

(2) The AO has no power to admit fresh claim otherwise
than revised return but Appellate Authorities including the CIT(A) and ITAT
have power to admit such claim.

The Tribunal held that without prejudice to its above finding
the claim of the assessee is in accordance with the judgment of the Apex Court
in the case of Goetze (India) Ltd. The Tribunal in the interest of natural
justice and keeping in view the ratio laid down by the Apex Court in the case of
Goetze (India) Ltd. remitted the matter back to the file of the CIT(A) with a
direction to decide the issue on merit in accordance with law and after
providing reasonable opportunity of hearing to both the sides.

Compiler’s Note :

The above was one of the grounds before the Tribunal. Other
minor issues have not been covered above.

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S. 115JB — Long-term capital gain which is exempt u/s.47(iv) cannot be excluded from the book profits for the purpose of S. 115JB.

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59 (2010) 41 DTR (Hyd.) (SB) (Trib.) 449

Rain Commodities Ltd. v. DCIT

A.Y. : 2004-05. Dated : 2-7-2010

S. 115JB — Long-term capital gain which is exempt u/s.47(iv)
cannot be excluded from the book profits for the purpose of S. 115JB.

Facts :

The assessee credited an amount of Rs.149.77 crores as profit
on transfer of assets to its wholly-owned subsidiary to its profit & loss
account. It claimed the exemption u/s.47(iv) of the Act. While working out the
book profits for the purpose of S. 115JB, the assessee reduced this profit and
claimed that it cannot form part of the book profits. A Special Bench was
constituted to adjudicate the matter.

Held :

The AO has power to alter the net profits as shown in the P &
L A/c only in two cases; (1) if it is discovered that P & L A/c is not drawn up
in accordance with Part II and Part III of Schedule VI of the Companies Act, (2)
if accounting policies, accounting standards are not adopted for preparing such
accounts and methods, rates of depreciation which have been incorrectly adopted
for preparation of P & L A/c laid before the annual general meeting.

Part II & Part III of Schedule VI of the Companies Act
require the P & L A/c of a company to disclose every material feature including
credits or receipts and debits or expenses in respect of non-recurring
transactions or transactions of an exceptional nature. As held by the Bombay
High Court in the case of CIT v. Veekaylal Investment Co. (P) Ltd., 249 ITR 597,
the capital gain should be included for the purposes of computing book profits
under MAT provisions.

It is an undisputed fact that the long-term capital gain
earned by the assessee is included in the net profit determined as per P & L A/c
prepared as per Part II and Part III of Schedule VI of the Companies Act. It is
not the case of the assessee that the capital gain earned by the assessee was
not included in the net profit determined as per P & L A/c of the assessee
prepared under the Companies Act. The taxability of capital gain is relevant
only for the purpose of computation of income under the normal provisions of the
Income-tax Act, and has nothing to do with the preparation of P & L A/c in
accordance with the provisions of Part II and Part III of Schedule VI of the
Companies Act. Under these circumstances, as long as long-term capital gain is
part of profit included in the P & L A/c prepared in accordance with the
provisions contained in Parts II and III of Schedule VI of the Companies Act, it
cannot be excluded from the net profit unless so provided under Explanation to
S. 115JB for the purpose of computing book profit. In the absence of any
provision for exclusion of capital gains in the computation of book profit under
the above provision, the assessee is not entitled to the exclusion claimed. The
decision of the Calcutta Special Bench of the Tribunal in the case of Sutlej
Cotton Mills Ltd. v. ACIT, 45 ITD 22 held to be reversed by the decision of the
Bombay High Court in the case of Veekaylal Investment Co. (P) Ltd. (supra).

The Ss.(5) of S. 115JB provides that “save as otherwise
provided in this Section, all other provisions of this Act shall apply to every
assessee, being a company, mentioned in this Section”. The contention of the
assessee that since all other provisions of this Act shall also apply, it is
entitled to reduce the long-term capital gain exempted u/s.47(iv) is not
accepted. All other provisions of the Act shall apply, but subject to the
provisions otherwise provided in S. 115JB. The provision for computing book
profit by increasing or reducing the net profit as shown in the P & L A/c
prepared in accordance with the provisions of Part II and Part III of Schedule
VI of the Companies Act are specifically provided in S. 115J or S. 115JA or S.
115JB itself, as the case may be, and consequently all other provisions of the
Act providing the manner of computation of total income under normal provisions
of the Act cannot be applied while computing book profit u/s.115J or u/s.115JA
or u/s.115JB, as the case may be. The decision of ITO v. Frigsales (India) Ltd.,
4 SOT 376 (Mum.) is overruled.


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Capital gains vis-à-vis business income — Transactions in shares.

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58 (2010) 41 DTR (Mumbai) (Trib.) 426

Management Structure & Systems (P) Ltd. v. ITO

A.Y. : 2004-05. Dated : 30-4-2010

Capital gains vis-à-vis business income — Transactions in
shares.

Facts :

The assessee company is engaged in the management
consultancy, investment advisory and equity research services and also dealing
in investments. It filed return of income declaring profits of Rs.1.03 crores
earned by it on sale of shares as long-term and short-term capital gains. The AO
noted that the assessee was regularly dealing in the shares throughout the year
and held that the profit/gain earned from dealing in the shares is a business
income. Upon further appeal, the CIT(A) also confirmed the assessment order on
this issue.

Held :

The balance sheet filed by the assessee and as per the books
of account, the assessee has treated the entire investment in the shares as an
investment only and not as a stock-in-trade. Another important aspect to be
considered here is that the assessee is not a share-broker, nor is he having a
registration with any stock exchange. Moreover, some scrips are held for more
than five years and it is not the case of the AO that there were any derivative
transactions by the assessee, nor is it a case of the AO that there were
transactions without delivery. In the present case, both the authorities have
not disputed that the transactions are complete with delivery. The assessee has
not borrowed any money for investing in shares and used his own surplus funds
and these facts have not been disputed by the AO. In the case of the assessee,
in the preceding years, the assessee is consistently declaring the gain/profit
on the sale of the shares under the head ‘capital gains’ either
long-term or short-term and the same has been accepted by the AO. It is true
that the rule of res judicata is not applicable to the income-tax proceedings,
but at the same time, it is also well-settled principle that if there is no
change in the facts, then there should be consistency in the approach of the
Revenue authorities while deciding the tax liability of the assessee. Another
aspect to be considered here is that the assessee has received substantial
dividend and that is also disclosed. After considering the totality of the
facts, it was held that the transactions of sale and purchase of the shares by
the assessee cannot be treated in the line of trading in the shares, nor can it
be treated as an adventure in the nature of the trade.


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S. 194J — Various charges like VSAT charges, lease line charges, BOLT charges, Demat charges, etc. paid to stock exchange by member — Not in the nature of fees for technical services.

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57 (2010) 41 DTR (Mumbai) (Trib.) 296

DCIT v. Angel Broking Ltd.

A.Y. : 2005-06. Dated : 9-12-2009

S. 194J — Various charges like VSAT charges, lease line
charges, BOLT charges, Demat charges, etc. paid to stock exchange by member —
Not in the nature of fees for technical services.

Facts :

As a member of BSE and NSE, the assessee company had paid
various charges like VSAT charges, lease line charges, BOLT charges, Demat
charges, etc. to the stock exchange. According to the AO, the aforesaid sum paid
by the assessee to the stock exchange was a fee for technical services and,
therefore, the assessee ought to have deducted tax at source on such payment.
Since, the assessee had not deducted tax at source on such payment, the
aforesaid sum claimed as deduction was disallowed by the AO.

Held :

Following the decision of Skycell Communications Ltd. v. DCIT,
251 ITR 53 (Mad.) it was held that stock exchanges do not provide any technical
services by installing VSAT network. It is the facility provided to its members
and hence such payment cannot be said to be fees for any technical services
rendered. The AO in coming to the conclusion that the payment was for fees for
technical services has relied on the fact that the screen-based trading is a
sophisticated method of trading. This by itself will not be sufficient to hold
that technical services are rendered. The AO has held that services are not
available to the public at large but only to registered members, again this by
itself will not make the services in question as technical services. Another
reason given by the AO is the speed at which transactions were completed. This
again is not a relevant criteria for holding that the services rendered were
technical services. All the above features present in screen-based trading saves
time. This is the result of improved technology. That does not mean that stock
exchange is providing technical services. Stock exchanges are not the owner of
this technology to provide them for a fee to prospective users. They are
themselves consumers of the technology. Therefore the payment in question is not
fee for technical services.


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S. 271(1)(c) r.w. S. 2(24) and S. 10(10D) — Taxability of assignment of Keyman Insurance Policy based on surrender value was highly debatable as to the year of taxability and also as to the amount — Penalty not leviable u/s.271(1)(c).

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New Page 1Part A: Reported
Decisions

34 (2010) 127 ITD 116
(Delhi)

Rajan Nanda v. Dy. CIT,
Central Cir. 3,

New Delhi

A.Ys. : 2003-04, 2004-05.
Dated : 15-5-2009

 

S. 271(1)(c) r.w. S. 2(24)
and S. 10(10D) — Taxability of assignment of Keyman Insurance Policy based on
surrender value was highly debatable as to the year of taxability and also as to
the amount of taxability, so it was held that penalty is not leviable
u/s.271(1)(c).

Facts :

1. Keyman Insurance Policy
taken on the assessee by the employer company was assigned to him in the year
subsequent to the year of the policy at a much lower value.

2. However the value was
paid by the assessee in a different year and the policy was assigned to him in a
different year. The case of assessee subsequently went to the Tribunal so as to
decide the year of taxability and amount of taxable benefits.

3. The Tribunal held that
the surrender value of the policy less value paid by the assignee to the
assignor and less subsequent premium paid will be the benefits accruing to the
assessee. The decision of the Tribunal was, in a way, against the assessee.

4. The AO subsequently
initiated penalty proceedings u/s.271(1)(c) for concealment of income.

5. Also in A.Y. 2004-05 the
assessee received Rs.2.85 crore on maturity, which he claimed as exempt
u/s.10(10D) for an amount equal to 2.51 crore. The AO disallowed the exemption
and also initiated penalty proceedings for entering wrong amount and also for
concealment of income.

6. The above actions of the
AO was upheld by the learned CIT(A).

Held :

1. The assessee had
disclosed complete facts to the Department during the course of hearing and the
addition was entirely due the difference of opinion between the assessee and the
AO.

2. Since the year in which
the amount paid by the assessee to the assignor was different from the year in
which the policy was assigned to him, the issue was a matter of considerable
debate and discussion.

3. It was held that the
explanation tendered by the assessee was bona fide notwithstanding the fact that
sketchy disclosure was made in the return of income and the whole issue of
taxation of the amount was highly debatable.

4. Also for the A.Y. 2004-05
the issue of taxability of sum received on maturity of erstwhile Keyman
Insurance Policy, from the LIC was highly debatable.

5. Hence penalty
u/s.271(1)(c) was not leviable.

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S. 45 r.w. S. 28(i) — Assessee in business of real estate — Land held as investment — Agreement of sale entered in F.Y. 2002-03 — Full consideration received by F.Y. 2004-05 — Capital gains offered to tax in A.Y. 2005-06 — Taxed as business income in A.Y

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New Page 1

Part A: Reported
Decisions


33 (2010) 127 ITD 94 (Bang.)

Asha Housing Enterprises v.
DCIT

A.Y. 2003-04. Dated :
31-3-2010

 

S. 45 r.w. S. 28(i) —
Assessee was in the business of real estate — Land was held as investment —
Agreement of sale entered in F.Y. 2002-03 — Full sale consideration received by
F.Y. 2004-05 — Long-term capital gains offered to tax in A.Y. 2005-06 — AO held
it as business income for A.Y. 2003-04 — Held : Land to be treated as investment
and transfer is said to be complete in F.Y. 2004-05.

Facts :

The assessee firm was
engaged in real estate business. It had purchased land in the year 1992. On
22-6-2002, the assessee had entered into agreement of sale with A Developers for
Rs.12.25 crores. On the date of agreement, the assessee received a part payment
of Rs.5.25 crores. Thereafter, sale consideration was received in piecemeal in
the F.Ys. 2002-03, 2003-04 and 2004-05. The assessee offered to tax the income
arising out of this transaction as long-term capital gains in the A.Y. 2005-06.

The Assessing Officer
assessed the income as business income arising in A.Y. 2003-04. The AO observed
that general power of attorney (GPOA) in the favour of developers was executed
in F.Y. 2002-03 and therefore transfer had taken place in A.Y. 2003-04.

Held :

1. The execution of GPOA
cannot be construed as transfer of property.

2. The AO was not having any
conclusive evidence to show that possession of property was indeed handed over
to the developers.

3. The agreement of sale
clearly stated that the vendor shall deliver the possession of property on the
date of sale and against payment of entire sale consideration. The supplemental
agreement also had stated that the vendors at request of purchasers have
permitted by way of licence to enter upon the property to do the work of
property and that the licence granted to the purchasers was on specific
condition that the same shall not be construed as possession u/s.53A of the
Transfer of Property Act.

4. The assessee had held the
said land as investment right from the time the land was purchased. In the F.Y.
2000-01, the assessee had sold a portion of property and treated the gain out of
the same as long-term capital gain. The Department had accepted the same. The
Department cannot now treat the land as stock-in-trade. A firm involved in real
estate business can hold land as investment and/or stock-in-trade.

5. In view of the above, the
assessee had correctly offered income as long-term capital gains for A.Y.
2005-06.

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S. 68 — cannot be invoked when source of the gift is properly explained and when the donor himself appears before the AO, confirming the gift.

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New Page 1Part A: Reported
Decisions

32 (2010) 126 ITD 145 (AGRA)
(TM)

Avnish Kumar Singh v. ITO

A.Y. 2002-03. Dated :
30-4-2009

 

S. 68 — Provisions of S. 68
cannot be invoked when source of the gift is properly explained and also when
the donor himself appears before the Assessing Officer (AO), confirming the gift
made.

Facts :

1. The assessee received an
amount of Rs.2,50,000 as a gift from Mr. Rakesh Walia (donor), a resident of
Delhi. The donor was friend of the assessee’s father, and had received some help
from the assesse’s father earlier. So he had made a gift to the assessee.

2. The assessee, during
assessment, produced before the AO copy of deed of declaration of gift dated
24-1-2002 executed by the donor, his affidavit confirming the gift with his
complete address, a copy of his PAN Card and proof that he is an old income
tax-assessee, a photocopy of his ration card, a copy of accounts of the donor in
the books of Balaji Trading Corporation, Delhi (Balaji) and his Balance Sheet as
on 31-3-2001. Also the donor himself was produced before the AO and he confirmed
the gift and also gave reasons to the AO for giving the gift.

3. The AO observed that the
donor himself was a person of low financial status having monthly income of
Rs.5,000. He has no fixed assets of his own including any immovable property or
fixed deposits. He had a deposit of Rs.1,25,000 with Balaji, from which he
received Rs.2,46,000 which he forwarded to the assessee as gift. However the
reason of deposit with Balaji was not explained.

4. The Assessing Officer was
satisfied with the identity of the owner, however he was not satisfied with the
source of the income. So he invoked the provisions of S. 68 which was upheld by
the CIT(A).

Held :

1. The ITAT observed that
there could be two possibilities of the situation :

Possibility 1 :

Genuiness of the gifts
stands to be proved in the lights of all the evidences brought on record by the
assessee (in the favour of the assessee).

Possibility 2 :

Considering the
creditworthiness and capacity of the donor and closeness and natural love and
affection between the donor and the donee, the source of the gift is doubtful
(in the favour of Revenue).

2. S. 68 provides for
charging the sum credited in the books of the assessee as the income of the
assessee, if the assessee offers no explanation as to the nature and source of
the same.

3. Since the assessee has
explained the nature and sources of the credit by way of a gift, which
satisfactorily explains the genuineness of the gift, it cannot be added to the
income of the assessee as unexplained income u/s.68.

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S. 40(a)(ia) as amended w.e.f. 1-4-2010 is clarificatory and to be treated as retrospective w.e.f. 1-4-2005.

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Part A: Reported
Decisions

31 (2010) TIOL 765 ITAT-Ahm.

Shri Kanubhai Ramji Makwana
v. ITO

ITA No. 3983/Ahd./2008

A.Y. : 2005-06. Dated :
3-12-2010

 

Income-tax Act, 1961 — S.
40(a)(ia) — Provisions of S. 40(a)(ia) as amended by the Finance Act, 2010 w.e.f.
1-4-2010 are clarificatory in nature and therefore to be treated as
retrospective w.e.f. 1-4-2005, the date on which S. 40(a)(ia) has been inserted
by the Finance (No. 2) Act, 2004.

Facts :

The assessee, a contractor,
was required to get work done through sub-contractors. While assessing the total
income of the assessee, the AO disallowed a sum of Rs.1,16,58,614 u/s.40(a)(ia)
of the Act on the ground that the amount of tax deducted at source was not
deposited before the last day of the previous year.

Aggrieved by the order of
the AO the assessee preferred an appeal to the CIT(A) who observed that the AO
has disallowed the amounts based on unamended provisions of S. 40(a)(ia). The
CIT(A) observed that the provisions of S. 40(a)(ia) have been amended by the
Finance Act, 2008 w.e.f. 1-4-2005, and the amended provisions provide that tax
deducted in the last month of the previous year can be deposited before due date
specified u/s.139(1) of the Act for furnishing return of income. Accordingly, he
granted relief to the extent of payments aggregating to Rs.53,02,227 in respect
of which tax was deducted in the month of March 2004 and was paid on 19-7-2005
i.e., before the due date of filing return of income.

Aggrieved the assessee
preferred an appeal to the Tribunal where it contended that the amendment made
by the Finance Act, 2010 to provisions of
S. 40(a)(ia) w.e.f. 1-4-2010 is clarificatory in nature and since the tax
deducted has been deposited before the due date of filing return of income, no
disallowance u/s.40(a)(ia) is called for.

Held :

The Tribunal after going
through the history of the provisions of S. 40(a)(ia) observed that the
amendments brought out in S. 40(a)(ia) of the Act from time to time were
clarificatory and when an amendment is declaratory and clarificatory in nature,
the presumption against its retrospectivity is not applicable and amendments of
this kind only declare. It observed that it is no doubt true that, ordinarily, a
statute, and particularly when the same has been made applicable with effect
from a particular date should be construed prospectively and not
retrospectively. But this principle will not be applicable in a case where the
provision construed is merely explanatory, clarificatory or declaratory.

The Tribunal held that the
provisions of S. 40(a)(ia) as amended by the Finance Act, 2010 w.e.f. 1-4-2010,
which has newly been inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005
to S. 40 of the Act is remedial in nature, designed to eliminate unintended
consequences which may cause undue hardship to the taxpayers and which made the
provision unworkable or unjust in a specific situation, and is of clarificatory
nature and, therefore, has to be treated as retrospective with effect from 1st
April, 2005, the date on which S. 40(a)(ia) has been inserted by The Finance
(No. 2) Act, 2004.

The Tribunal allowed the
appeal filed by the assessee.

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S. 244A — Interest on excess payment of S.A. tax becomes due from the date of payment of S.A. tax.

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30 (2010) TIOL 760 ITAT-Bang.

Addl. CIT v. Vijaya Bank

ITA No. 105/Bang./2009

A.Y. : 2002-03. Dated :
30-9-2010

 


Income-tax Act, 1961 — S. 244A — Interest on excess payment of self-assessment
tax becomes due from the date of payment of self-assessment tax.

 

Facts :

The assessment of total
income of the assessee, a nationalised bank, was completed u/s.143(3) of the
Act. Aggrieved by the additions made by the Assessing Officer (AO) the assessee
preferred an appeal to the CIT(A) who partly allowed the appeal of the assessee.
While giving effect to the order passed by the CIT(A) the AO did not grant
interest u/s.244A on the self-assessment tax, amounting to Rs.15.50 crores, paid
by the assessee. The AO declined to pay interest on self-assessment tax on the
ground that there is no provision for allowing interest u/s.244A on the
self-assessment tax.

Aggrieved by the order of
the AO refusing to grant interest on self-assessment tax paid, the assessee
preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.
The AO pursuant to the CIT(A)’s order granted interest on self-assessment tax
paid from the date of regular assessment, as against the claim of the assessee
that the interest ought to have been calculated from the date of payment of
self-assessment tax.

Aggrieved by the order of
the AO granting interest on self-assessment tax paid from the date of regular
assessment, the assessee preferred an appeal to the CIT(A) who held that the
assessee is entitled to interest u/s.244A on the excess payment of
self-assessment tax with effect from the date on which it was paid by the
assessee and directed the AO to grant interest u/s.244A to the assessee
accordingly. He also held that the assessee is entitled to interest on interest
u/s.244A of the Act by following the decision of the SC in the case of Sandvik
Asia v. CIT, (280 ITR 643).

Aggrieved, the Revenue
preferred an appeal to the Tribunal.

Held :

The Tribunal having
considered the Circular No. 549, dated 31st October, 1989 and also the decision
of the Delhi High Court in the case of CIT v. Sutlej Industries Ltd., (325 ITR
331) (Del.), which decision follows the decision of the Madras High Court in the
case of Cholamandalam Investment and Finance Co. Ltd., 294 ITR 438, upheld the
decision of the CIT(A) that the assessee is entitled to interest u/s.244A on
excess payment of self-assessment tax with effect from the date of payment of
self-assessment tax. The Tribunal held that the decision of the jurisdictional
High Court in the case of CIT v. MICO, (ITA No. 419 of 2003 dated 9th July,
2008), on which reliance was placed by the Revenue, is distinguishable on facts
since in that case the Court was dealing with payment of interest u/s.244A on
excess payment of advance tax, unlike the present case where interest is being
claimed on excess payment of self-assessment tax paid u/s.140A of the Act.

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S. 201(1) and S. 201(1A) — Where deductees have paid taxes, assessee not liable to make good short deduction. Interest not chargeable for period after payment by deductees.

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Part A: Reported
Decisions


29 (2010) TIOL 751 ITAT-Del.

The Executive Engineer,
Haryana State

Agricultural Marketing Board
v. ITO

ITA No. 2011 to
2014/Del./2010

A.Ys. : 2006-07 to 2009-10.
Dated : 10-9-2010

Income-tax Act, 1961 — S.
201(1) and S. 201(1A) — In a case where deductees have paid their taxes, the
assessee cannot be held liable to make good the short deduction of tax. Interest
cannot be levied after the date on which the tax has been actually paid by the
deductees.

Facts :

The assessee, an autonomous
body controlled by the Government of Haryana, short deducted tax at source. The
Assessing Officer (AO) issued a notice of demand for the amount of tax short
deducted by the assessee. He also levied interest u/s.201(1A).

Aggrieved the assessee
preferred an appeal to CIT(A) and contended that since the deductees have paid
their tax dues, the tax cannot be recovered from the assessee. Proof with regard
to some of the deductees was sought to be filed before the CIT(A) but the
assessee could not explain why the same was not filed before the AO. The CIT(A)
did not take into consideration the said evidence filed by the assessee and
rejected the appeals filed by the assessee.

Aggrieved, the assessee
preferred an appeal to the Tribunal where it was contended that the short
deduction was due to the fact that the assessee being government-controlled body
did not have provision of engaging private consultant and the staff being not
conversant with the provisions of the Act could not deduct proper TDS, deductees
have paid the taxes due from them, interest cannot be levied for a period after
the date when the deductees have paid their taxes and in respect of delay in
depositing TDS interest be levied up to the date of tender of the cheque and not
up to the date of its encashment.

Held :

The Tribunal held this to be
a case of genuine hardship faced by the assessee and observed that if such
payment is made by the assessee, then from whom the payment can be recovered as
the deductees are stated to have already paid the taxes and have submitted their
returns.

The Tribunal restored the
matter back to the file of the AO with a direction to verify the contention of
the assessee that deductees having paid their taxes, the assessee cannot be held
liable to make good the short deduction of tax. It also held that interest
cannot be levied after the date on which the tax has actually been paid by the
deductees. The AO was directed to give reasonable opportunity to the assessee to
place the evidence on record and thereafter re-compute the liability of the
assessee u/s.201 and u/s.201(1A).

As regards interest on
belated payments, following the decision of the Supreme Court in the case of CIT
v. Ogala Glass Works Ltd., (25 ITR 529) (SC), the Tribunal directed the AO that,
for computing interest u/s.201(1A), date of tendering of cheque be taken into
consideration and if the cheque is tendered within the due date and has also not
been dishonoured, then no interest be charged on the assessee for belated
payment on account of late encashment of cheques.

The appeal filed by the
assessee was allowed.

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S. 44AE — Assessee engaged in transport business employing own as well as the hired vehicles S. 44AE can be applied to business carried with own vehicles.

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Part A: Reported
Decisions


28 (2010) 47 DTR (Pune)
(Trib) 513

Anil Ramgopal Mali (HUF) v.
ACIT

A.Y. : 2006-07. Dated :
31-12-2009

 

S. 44AE — Even when an
assessee is engaged in the composite business employing both own as well as the
hired vehicles from others, provisions of S. 44AE can be applied with respect to
business carried on through own vehicles.

Facts :

The assessee conducted
transportation business not only with two light commercial vehicles (LCVs) owned
by the assessee but also hired vehicles owned by others. The annual gross
receipts were Rs.91,33,192. The break-up of the turnover was : (a) on account of
two LCVs owned : Rs.63,93,234 and (b) other vehicles : 27,39,958. The Assessing
Officer levied penalty u/s.271B for not getting the books of accounts audited.
The CIT(A) also confirmed the order of penalty on the ground that the assessee,
who is engaged with the composite business employing both own as well as the
hired vehicles from others, is outside the ambit of S. 44AE.

Held :

The assessees with multiple
businesses are not barred entirely from availing the benefits of the provisions
of S. 44AE. The assessee with multiple businesses, which include the business of
plying etc. with their own goods carriage, are not only entitled to the benefits
of S. 44AE but also for the exclusion of the relevant turnover from the total
turnover of all the businesses of the assessee for the purpose of computation of
monetary limits for S. 44AB of the Act in view of the existence of S. 44AE(5).


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S. 292BB — Notice by an AO not having jurisdiction over the assessee — Not a mere irregularity, but an incurable illegality, incapable of being cured by recourse to S. 292BB.

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Part A: Reported
Decisions


27 (2010) 47 DTR (Del.) (Trib.)
33

ITO v. Naseman Farms (P)
Ltd.

A.Y. : 2001-02. Dated :
14-9-2010

S. 292BB — The
jurisdictional defect of the notice having been issued by an AO not having
jurisdiction over the assessee, as such, is not a mere irregularity, but an
incurable illegality and is incapable of being cured by seeking recourse to the
provisions of S. 292BB.

Facts :

The assessee company,
registered with RoC, Delhi, was having its office at Delhi and it had filed its
tax returns for A.Y. 1998-99 to 2000-01 in Delhi. On the basis of enquiry
conducted by the Investigation Wing of the IT Department, reassessment
proceedings were initiated against the assessee for A.Y. 2001-02 by issuance of
notice u/s.148 by the AO at Agra. Then subsequently the case was transferred to
the AO at Delhi for completion of assessment, it having been found by the AO at
Agra that the return had been filed with AO at Delhi. The CIT(A) annulled the
reassessment on the ground that reassessment notice issued from Agra was without
any jurisdiction.

Held :

It is only an AO within the
meaning of S. 2(7A) of the Act, who can assess or reassess any escaped income
u/s.147 of the Act, of an assessee. It is only an AO within the meaning of S.
2(7A) of the Act, who can serve a notice u/s.148 of the Act on an assessee.
Herein, the AO at Agra not being the AO qua the assessee, he could not have
assessed or reassessed any escaped income of the assessee and he could not have
served the assessee with a notice u/s.148 of the Act.

S. 292BB seeks to deem an
action as provided under the Act, to have been done in accordance with the
provisions of the Act. But when, as in the present case, the notice itself was
not in accordance with the provisions of the Act, it was a jurisdictional
defect, which the provisions of S. 292BB of the Act cannot, by any stretch of
imagination, be canvassed to cure.

A ‘proceeding’ as envisaged
by S. 292BB has to be a legally valid proceeding which here it is not, since the
notice for reassessment is bad in law. This also goes for the ‘inquiry’
mentioned in S. 292BB. The assessee, therefore, never appeared in any
proceeding, nor co-operated in any inquiry as required u/s.292BB and so S. 292BB
does not at all come into play.

Further, in the present
case, the assessee is nowhere aggrieved of any of the three situations i.e., (1)
that the notice has not been served on him, or (2) it has not been served on him
in time, or (3) it has been served on him in an improper manner. Rather, the
grievance of the assessee is that the notice served on him was not issued by an
AO having jurisdiction over him. Now this is a jurisdictional issue which goes
to the very root of the matter.

The jurisdictional defect of
the notice having been issued by an AO not having jurisdiction over the assessee,
as such, is not a mere irregularity, but an incurable illegality and is
incapable of being cured by seeking recourse to the provisions of S. 292BB.

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Section 54F r.w.s. 54 Investment in vacant land appurtenant to and forming a part of a residential unit is eligible for exemption u/s.54F, even if no construction is done on the appurtenant land.

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52 (2009) 34 SOT 152 (Delhi)

Addl.CIT vs Narendra Mohan
Uniyal

ITA No.1624 (Delhi) of 2009 and
Cross Objection No.157 (Delhi) of 2009.

A.Y.2006-07. Dated 31.08.2009.

Section 54F r.w.s. 54 Investment
in vacant land appurtenant to and forming a part of a residential unit is
eligible for exemption u/s.54F, even if no construction is done on the
appurtenant land.

Facts:

During the relevant assessment year, the assessee sold land
and invested the capital gains in a plot of land on which a residential house
was under construction and claimed exemption u/s.54F. The assessee also claimed
exemption u/s.54F in respect of investment in another continuous plot of land
which, according to him, was land appurtenant to the building constructed on the
first plot. The Assessing Officer held that exemption u/s.54F is provided only
if investment is in respect of a residential house and not for an empty plot.
He, therefore, held that the consideration invested in the purchase of the
second plot was not entitled to exemption u/s.54F, and restricted the exemption
to the extent of amount invested in purchase of the first plot. On appeal, the
CIT(A) held that the Assessing Officer had not adduced any evidence that the
second plot was not a contiguous one and it did not constitute a land
appurtenant to the building constructed within the statutory time limit u/s.54F.
He therefore, allowed the claim of deduction u/s.54F in respect of second plot.

Held:

The Tribunal allowed the assessee’s claim. The Tribunal noted
as under:

a. There is no rider u/s.54F that no deduction would be
allowed in respect of investment of capital gains made on acquisition of land
appurtenant to the building or on the investment on land on which a building
is being constructed. When the land is purchased and the building constructed
thereon, it is not necessary that such construction should be on the entire
plot of land, i.e., there is no denial of exemption on investment in a piece
of land which is appurtenant to the building and on which no construction is
made.

b. In the instant case, there was no dispute in the fact
that investment of capital gains was made within the statutory period and
within the same financial year. Another plot of land which was purchased by
the assessee was adjacent to the plot already purchased during the relevant
year itself out of capital gains. Only because construction was made on the
first plot of land, the exemption claimed in respect of investment made in
Adjacent plot of land, could not be declined when all the other conditions as
stipulated u/s.54F were satisfied.

c. Both the plots formed part of one residential unit and
were contiguous and adjoining to each other. Had it been a case of land not

appurtenant to the building so constructed, then the contention of the
Assessing Officer to the effect that investment of capital gains made in the
second plot not appurtenant to the building so constructed was not eligible
for exemption, could be favourably accepted.



d. On a proper appreciation of material available on record, it was clear
that the property purchased by the assessee was a single unit and was being
used for residential purposes.

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Section 50 r.w.s. 32 and 50C 1961: Depreciation u/s. 32 can be claimed on WDV only if on the last day of the year: (1) there is at least one asset in the block, and (2) there is some value of the block.

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51 (2009) 34 SOT 64 (Mum.)

Asst.CIT vs Roger Pereira
Communications (P.) Ltd.

ITA No.2099 (Mum.) of 2008.

A.Y.2004-05. Dated August 2009.

Section 50 r.w.s. 32 and 50C
1961: Depreciation u/s. 32 can be claimed on WDV only if on the last day of the
year: (1) there is at least one asset in the block, and (2) there is some value
of the block.

Facts:

During the relevant assessment year, the assessee sold one of
its four office premises. The Assessing Officer revoked Section 50C and taxed
the difference between the agreement value and the value adopted by the stamp
duty authorities as short-term capital gains u/s. 50. The CIT (A) deleted the
addition observing that Section 50 does not have any mention of stamp duty
valuation as is mentioned in Section 50C.

Held:

The Tribunal upheld the CIT (A)’s order. The Tribunal noted
as under:

a. Section 50 is a special provision which provides for
bringing to tax by way of short-term capital gains depreciable assets which
are transferred during the previous year. This section creates a deeming
faction and it cannot be extended beyond the purpose for which it has been
enacted.

b. Further, since the block of assets continued to exist
even after the sale of the first office premises and the block had not become
negative, no capital gain arose.


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Section 32 of the Income Tax Act, 1961: Depreciation is allowable on goodwill u/s 32 (1)(ii).

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50 (2009) 33 SOT 237 (Mum.)

Kotak Forex Brokerage Ltd. vs.
Asst. CIT

ITA No.2692 (Mum.) of 2007

A.Y.2001-02. Dated August 2009.

Section 32 of the Income Tax
Act, 1961: Depreciation is allowable on goodwill u/s 32 (1)(ii).

Facts:

Pursuant to an agreement, the assessee acquired the foreign
exchange broking business of a company for which it paid a certain amount
towards broking rights and towards goodwill and claimed depreciation on the
same. The Assessing Officer allowed depreciation on the business rights (being
commercial rights), but disallowed deprecation on goodwill on the ground that
goodwill had not been included in the definition of intangible assets which
included know-how, patents, copyrights, trademarks, licenses, franchises or any
other business or commercial right. The CIT (A) confirmed the order of the
Assessing Officer.

Held:

The Tribunal, following the decision in the case of Skyline
Caterers (P.) Ltd. V. ITO [2008] 20 SOT 266 (Mum.) (SMC), allowed the assessee’s
claim. The Tribunal noted as under:

1. Goodwill paid by the assessee was towards the use of the
name ‘Kotak’ with the name of the assessee-company.

2. Goodwill was a bundle of rights which included, inter
alia, patents, trademarks, licenses, franchises, etc. Therefore, all these
rights are similar to the rights under goodwill. Applying the principles of
ejusdem generis, the meaning has to be extended to the phrase “other business
or commercial rights of similar nature”.

3. Business or commercial rights are rights obtained for
effectively carrying on business or commerce. Commerce is a wider term which
encompasses business in its fold. Therefore, any right which is obtained for
carrying on the business effectively and profitably has to fall within the
meaning of intangible asset.

4. Business or commercial rights should be of similar
nature as know-how, patents, copyrights, trademarks, licenses, franchises,
etc.— all these are assets which are not manufactured or produced overnight,
but are brought into existence by experience and reputation. They assume
importance in the commercial world as they represent a particular benefit or
advantage or reputation built over a period of time, and customers associate
themselves with such assets. Similarly, goodwill is nothing but positive
reputation built by a person / company / business-house over a period of time.
Thus, goodwill is a “business or commercial right of similar nature”.

5. Thus, goodwill is also an intangible asset of the
similar nature referred to in clause (ii) of Section 32(1) and, therefore,
deprecation is allowable on the same.


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Disallowance u/s 40A(3) to be made only when there is expenditure claimed in return of income. Mere entries in books will not change the character of transaction.

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49 Saral Motors & General
Finance Ltd. vs Asstt. CIT

[2009] 121 ITD 50 (Delhi
Tribunal)

A.Y. 2001-02

Date of order: May 30, 2008

Disallowance u/s 40A(3) to be
made only when there is expenditure claimed in return of income. Mere entries in
books will not change the character of transaction.

Facts:

The assessee was engaged in the business of financing second
hand motor vehicles on hire purchase basis. The assessee financed the vehicles
identified by the purchaser and entered into hire purchase agreement. The
assessee in its profit and loss account had shown purchase price of these second hand motor vehicles as Rs.
79,14,700 and on the credit side, there was a contra entry of Rs.79,14,700
showing it as sale on hire purchase. The AO found that payments in excess of Rs.
20,000 aggregating to Rs. 23,37,000 were made to 32 parties. The AO required the
assessee to explain as to why 20% of the sum of Rs. 79,14,000 should not be
disallowed. The assessee submitted that transactions were not in the nature of
expenditure. They were simply loan transactions.

The AO observed that the real test, whether a particular
transaction was in the nature of expenditure was to be decided taking into
account how the transactions were entered in the books of account and treatment
thereof. The alleged advances formed part of trading activity. The AO further
observed that in the balance sheet stock on hire under hire purchase basis was
shown, which was nothing but stock in trade. Therefore, such transactions could
not be treated as advances. On this basis, the AO made a disallowance under
section 40A(3) of the Act.


Held:

On appeal, the Hon’ble tribunal held that assessee was not a
dealer in second hand motor cars. He let out the same. Only part of the amount
was financed by the assessee. The invoices were made in the name of the
purchaser. The past behaviour of the assessee also showed that it did not intend
to deal in cars. The assessee did not earn any profit on purchase or sale of
vehicles. It earned income on hire purchase transactions. For invoking the
provisions of section 40A(3), the amount must be claimed as expenditure. When
amounts paid have not been claimed as deductible expenditure while computing
business income, provisions of section 40A(3) cannot be applied. Mere entries in
the books of account will not change the character of financial transactions.
The addition so made was thus deleted.

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Exemption u/s 10(10C) to be allowed even if the scheme is not in accordance with Rule 2BA

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48 Dy CIT vs Krishna Gopal Saha

[2009] 121 ITD 368 (Kol.) (TM)

A.Y. 2002-03

Date of Order: July 31, 2009

Exemption u/s 10(10C) to be
allowed even if the scheme is not in accordance with Rule 2BA

Facts:

The assessee is a retired employee of State Bank. During the
year under consideration, the assessee opted for voluntary retirement under a
scheme named “Early Separation Plan” (ESP) floated by the bank. He received a
compensation of Rs. 18,87,798. The employer, vide its letter, stated that
employees availing the ESP Scheme are not eligible for exemption u/s 10(10C) of
the Act as the scheme was not in conformity with Rule 2BA(i) to (v). Therefore,
no deduction under section 10(10C) was allowed in the Form 16 issued by the
employer. The assessee, however, claimed exemption under section 10(10C) in the
return of income filed. The same was processed under section 143(1) of the Act.
The assessment was reopened u/s 147 and the claim u/s 10(10C) was disallowed by
the AO.

The CIT(A) allowed the assessee’s claim. On Revenue’s appeal,
there was a difference of opinion between the members, and the matter was
referred to the “Third Member”.

Held:

The Third Member, in his order, relied on the case of SAIL
DSP VR Employees Association v UOI (262 ITR 638) (Cal.) which squarely applied
to the assessee. Their Lordship in the said judgment observed that section
10(10C) was inserted in order to make voluntary retirement attractive so as to
reduce human complements for securing economic viability of certain companies.
This object was elaborated by various departmental circulars and explanatory
statements issued from time to time. All these go to show that this was intended
to make voluntary retirement more attractive and beneficial to the employees
opting for voluntary retirement. Therefore, this has to be interpreted in a
manner beneficial to the optee for voluntary retirement, if there is any
ambiguity. A similar view was taken by the Hon’ble Bombay High Court in the case
of CIT vs. Nagesh Devidas Kulkarni (291 ITR 407) and the Karnataka High Court in
the case of CIT v P. Surendra Prabhu (279 ITR 402).

Following the above decisions, the amount received by the
assessee was allowed.

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The ratio of Supreme Court’s judgment in the case of Arun Kumar vs. UOI – amended Rule 3 – retrospective amendment – is valid for levy of tax on employee, but not on employer for deduction of tax at source.

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47 Canara Bank vs. ITO 8(3),
Nagpur

121 ITD 1 (Nagpur)

A.Y. 2002-03 to 2006-07

Date of Order: July 4, 2008

The ratio of Supreme Court’s
judgment in the case of Arun Kumar vs. UOI – amended Rule 3 – retrospective
amendment – is valid for levy of tax on employee, but not on employer for
deduction of tax at source.

Facts:

The assessee, a public sector company, had provided
residential accommodation to its employees in addition to salaries. The rent in
respect of such accommodation was recovered from the employees. The rent charged
to employees was as per the Service Regulations, approved by the central
government.

The assessing officer, relying on the Supreme Court’s
judgment in the case of Arun Kumar vs. Union of India [2006] (286 ITR 89),
required the assessee to deduct tax and pay the tax on the concessional
accommodation provided to its employees, from assessment year 2001-02, i.e.,
retrospectively. As per the AO, the difference in the rate specified in amended
Rule 3 and the rent charged by the assessee was a benefit in the nature of
concession and, therefore, perquisite under Section 17(2) of the Income-tax Act,
1961 (‘the Act’). The assessee ought to have deducted tax. Since the tax had not
been deducted, the assessee was in default under Section 192 read with Section
201(1A) of the Act.

Held:

On appeal to the Tribunal, the ITAT observed that a
retrospective amendment was to be given effect to, as it was there in existence
on the date from which it came into effect. The Tribunal, therefore, held that
the perquisite value is to be worked out on the basis of the amended provision
of Section 17(2) of the Act.

The Tribunal also held that a retrospective amendment could
be valid for levy of tax on the employee, but there exists no force in the
contention of the revenue that the employer would also be under responsibility
to deduct tax at source retrospectively.

Further, it observed, analysing the provisions of Sections
192(1), 192(1A) and 192(1B), Section 200 and Rule 30, that liability to deduct
tax is there on the date(s) when the salary is actually paid. If there was no
perquisite at the time when the tax was to be deducted at source, there would be
no liability to deduct tax. If a perquisite value is assumed by the
retrospective amendment after the period during which it was deducted, how can a
deduction be made on an earlier date? The retrospective amendment is for deeming
valuation of perquisites and cannot extend to deduction of tax at source
thereon.

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S. 271(1)(c) read with S. 271(1B) — The penalty was initiated for filing inaccurate particulars of income, but it was levied for concealment of income

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 Part A: Reported Decisions

 

13 (2010) 36 DTR (Agra) (Trib.) 453
ITO v. Chhail Behari
A.Y. : 2002-03 Dated : 15-10-2009

 

S. 271(1)(c) read with S. 271(1B) — The penalty was initiated
for filing inaccurate particulars of income, but it was levied for concealment
of income — If the satisfaction arrived at during the assessment proceedings was
for one reason, penalty cannot be levied for another reason — Even after
retrospective insertion of S. 271(1B), the difference between the two limbs of
S. 271(1)(c) is not erased and still remains.

Facts :

The Tribunal in appeal against the order levying penalty
u/s.271(1)(c) held that there was no proper satisfaction arrived at as required
u/s.271(1)(c) of the Act. It was held that the satisfaction was qua ‘furnishing
inaccurate particulars of income’ as recorded in the assessment order, but in
the order levying penalty u/s.271(1)(c), the same was qua ‘concealment of
particulars of income’. Hence, the penalty was
deleted.

The Revenue filed a miscellaneous application and contended
that by the Finance Act, 2008, an amendment has been made retrospectively w.e.f.
1st April, 1989 to provide that where an assessment order contains a direction
for initiation of penalty proceedings, such an order of assessment shall be
deemed to constitute satisfaction of the Assessing Officer for initiation of
penalty proceedings for concealment in respect of any amount added or disallowed
in computing the total income or loss of the assessee. Thus it can be said that
the mention by the Assessing Officer of direction for initiation of proceedings
u/s.271(1)(c) of the Act in the assessment order would cover both the actions of
the assessee i.e., ‘concealment of particulars of income’ as well as ‘furnishing
of inaccurate particulars of income.’

Held :

If the satisfaction arrived at during the assessment
proceedings was for one reason, penalty cannot be levied for another reason
relying upon the decision of the Supreme Court in the case of Dilip N. Shroff
(291 ITR 519) (SC). Thus the Tribunal had not cancelled the penalty on the
ground that there was no satisfaction recorded in the assessment order. Even
after retrospective amendment, since the difference between two limbs of S.
271(1)(c) is not erased or is considered as one, the distinction between
‘concealment of particulars of income’ and ‘furnishing of inaccurate particulars
of income’ is still maintained. Hence it cannot be said that there is any
mistake apparent on record.

 

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S. 144 — CIT(A) set aside the assessment — No direction to re-do the assessment given — Assessing Officer has no jurisdiction to re-do the assessment.

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 Part A: Reported Decisions

 

12 (2010) 123 ITD 53 (Chennai)
DCIT v. Jaya Publication
A.Ys. : 1991-92 to 1993-94. Dated : 30-11-2007

S. 144 — CIT(A) set aside the assessment — No direction to
re-do the assessment given — Assessing Officer has no jurisdiction to re-do the
assessment.

The original assessment was set aside by the CIT(A).
Subsequently, the Assessing Officer issued notice u/s.142(1) of the Act. The
assessee complied with the said notice. However, not satisfied by the assessee’s
explanations, the Assessing Officer completed the assessment u/s.144 considering
the entire issues and making various additions. The assessee went in to appeal
on the ground that the assessment done by the Assessing Officer was without
jurisdiction and without any specific direction from the CIT(A).

Relying on various decisions, the Tribunal held that the
CIT(A) has set aside the assessment means that he has annulled the assessment,
since he has not given any direction to re-do the assessment. Hence, the
Assessing Officer had no jurisdiction to re-do he assessment. The only remedy
with the Department was that it has to file an appeal against the order of the
CIT(A).

 

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S. 153A — In an assessment u/s.153A of the Act addition can be made only on the basis of material found as a result of search.

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 Part A: Reported Decisions

 

11 2010 TIOL 177 ITAT (Mum.)
Anil Khimani v. DCIT
A.Ys. : 1999-2000 to 2004-05.
Dated : 23-2-2010

 

S. 153A — In an assessment u/s.153A of the Act addition can
be made only on the basis of material found as a result of search.

Facts :

The assessee was the proprietor of M/s. Ronak Enterprises
trading in oil and electrical contract works. In an action conducted u/s.132A of
the Act about 4 kgs of gold and cash of Rs.79,000 was seized from the assessee.
Earlier the assessee had filed returns of incomes. In response of notice issued
u/s.153A the assessee filed the same return of income, as was originally filed.
For all the assessment years, the Assessing Officer (AO) completed the
assessments u/s.143(3) read with S. 153A by making addition on account of low
withdrawal and from opening
balance in capital account. None of the additions were based on any material
found during the course of search. Aggrieved the assessee preferred an
appeal to the CIT(A).

The CIT(A) deleted the addition made on account of opening
capital account. On the issue of additions made on account of low withdrawals,
he confirmed the same.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the only addition in each of the
assessment years was on account of low withdrawals and that the addition was not
based on any material found either during the course of search or during the
course of assessment proceedings. The Tribunal made a reference to the decision
of the Delhi Bench of ITAT in the case of Anil Kumar Bhatia v. ACIT, where it
has been held that :

(i) S. 153A does not authorize the making of a de novo
assessment. While under the 1st proviso, the AO is empowered to frame
assessment for six years, under the 2nd proviso, only the assessments which
are pending on the date of initiation of search abate. The effect is that
complete assessments do not abate. There can be two assessments for the same
assessment year. Assessments which are not pending before the AO on the date
of search but are pending before an Appellate Authority will survive.

(ii) An assessment can be said to be ‘pending’ only if the
AO is statutorily required to do something further. If a S. 143(2) notice has
been issued, the assessment is pending. However, the assessment in respect of
a return processed u/s.143(1) is not ‘pending’ because the AO is not required
to do anything further about such a return.

(iii) The power given by the proviso to ‘assess’ income for
six assessment years has to be confined to the undisclosed income unearthed
during search and cannot include items which are disclosed in the original
assessment proceedings.

(iv) On facts, the returns had been processed u/s. 143(1),
the assessments were not ‘pending’ and as no material was found during the
search, the additions could not be sustained.

Following the ratio laid down by the above- mentioned
decision, the Tribunal deleted all the additions and allowed the appeals filed
by the assessee.

 

.

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S. 195, S. 234B — Once the income is subjected to TDS provision, then that amount is outside the provisions of the advance tax as per the mandate of S. 209 of the Act. Merely because there is a failure on the part of the person who made payments to the as

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 Part A: Reported Decisions

 

10 2010 TIOL 172 ITAT (Mum.)
DDIT v. Daimler Chrysler AG
A.Y. : 1997-98. Dated : 24-3-2010

 

S. 195, S. 234B — Once the income is subjected to TDS
provision, then that amount is outside the provisions of the advance tax as per
the mandate of S. 209 of the Act. Merely because there is a failure on the part
of the person who made payments to the assessee to deduct tax at source to which
provisions of S. 195(1) are attracted, no liability to pay advance tax is put on
the recipient.

Facts :

The assessee, a tax resident of Germany, filed return of
income in which royalty received from Bajaj Tempo was declared. Originally, the
as-sessee’s assessment was completed u/s.143(3) r.w. S. 147 of the Act
determining the income at Rs.6,93,14,161. The said assessment order was subject
matter of challenge before the CIT(A) and then to the ITAT. The Tribunal set
aside the matter to the file of the Assessing Officer (AO). As per the
directions of the Tribunal, the AO passed assessment order determining the total
income at Rs.3,54,28,070 and also charged interest u/s.234B of the Act.
Aggrieved by the levy of interest u/s. 234B, the assessee preferred an appeal to
the CIT(A).

The CIT(A) held that the assessee is a foreign company and
its income was subject to the provisions of TDS u/s.195 and hence the assessee
was not required to pay any advance tax u/s.208 r.w. S. 209. The CIT(A) placed
reliance on the following decisions :

(i) CIT v. Halliburton Offshore Services Inc., 271 ITR 395
(Uttaranchal)

(ii) Motorola Inc. v. DCIT, 95 ITD 269 (Del.) (SB)

(iii) SNC-Lavalin International Inc. v. DCIT, 13 DTR 449
(Del.) (Trib.)

(iv) Sedco Forex International, 75 ITD 415 (Del.)

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the assessee is a non-resident and
payments made to it are subjected to TDS u/s.195(1) of the Act. Merely because
there is a failure on the part of the person who made payments to the assessee
to deduct tax at source to which the provisions of S. 195(1) are attracted, to
the extent of the income/payments which are in the mischief of TDS provision no
liability to pay advance tax is put on the recipient. Once the income is
subjected to TDS provision, then that is outside the provisions of the advance
tax as per mandate of S. 209 of the Act. The Tribunal observed that this view
has been fortified by the decision of the Bombay High Court in the case of NGC
Network Asia LLC (222 CTR 86) (Bom.). The principles laid down in the case of
NGC Network Asia LLC were held to be squarely applicable to the facts of the
case.

The Tribunal dismissed the appeal filed by the Revenue.

 

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S. 115JAA, S. 234C and S. 244A — MAT credit which is available for set-off falls within the meaning of ‘advance tax’. If the credit of MAT u/s.115JAA has to be allowed first before working out the liability of the assessee to pay advance tax, the refund g

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 Part A: Reported Decisions

9 2010 TIOL 171 ITAT (Mum.)
DCIT v. Bharat Aluminium Co. Ltd.
A.Y. : 1998-1999. Dated : 19-2-2010

 

S. 115JAA, S. 234C and S. 244A — MAT credit which is
available for set-off falls within the meaning of ‘advance tax’. If the credit
of MAT u/s.115JAA has to be allowed first before working out the liability of
the assessee to pay advance tax, the refund granted to the assessee was held to
be not out of MAT credit available to the assessee, but out of excess amount of
advance tax paid by the assessee.

Facts :

In an order passed u/s.154/254 of the Act, the Assessing
Officer (AO) held that the assessee was entitled to tax credit u/s.115JAA of the
Act to the extent of Rs.9,61,45,549. He allowed the credit of this amount as per
provisions of S. 115JAA(1) r.w. S. 115JAA(5) of the Act. He also held that no
interest u/s.244A is to be allowed to the assessee on this amount of tax credit
of Rs.9,61,45,549 in view of the proviso to S. 115JAA(2). The AO had also
charged interest u/s.234C amounting to Rs.55.52 lakhs before giving effect to
MAT credit relief u/s.115JAA. Aggrieved, the assessee preferred an appeal to the
CIT(A) on both the issues.

The CIT(A) allowed the appeal of the assessee on both the
grounds.

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

Held :

The Tribunal noted that the Delhi High Court has in the case
of Jindal Exports Ltd. (314 ITR 137) (Del.) considered the question whether
prior to 1-4-2007, while computing the interest u/s.234B and u/s.234C, credit
for tax paid u/s.115JAA was to be considered and has held that in the year when
the assessee is eligible for tax credit u/s.115JAA, such tax credit represents
tax already paid and available as credit at the beginning of the year and
consequently the assessee cannot be charged interest on something which it had
already paid. Following the ratio of this decision, the Tribunal held that for
charging interest u/s.234C, tax credit available to the assessee u/s.115JAA has
to be reduced from the liability of the assessee for making payment of advance
tax and such interest has to be computed after setting off the tax credit
available to the assessee.

The Tribunal held that the order of the CIT(A) does not call
for any interference because as per the decision of the Delhi High Court in the
case of Jindal Exports, credit of MAT u/s.115JAA has to be allowed first before
working out the liability of the assessee to pay advance tax, therefore, the
refund granted to the assessee is not out of MAT credit available, but is out of
excess amount of advance tax paid by the assessee. There is no dispute that if
the refund is on account of excess payment of advance tax, interest u/s.244A is
allowable to the assessee as per S. 244A(1)(a) of the Act. As to whether the
refund granted is out of MAT credit or out of advance tax, the Tribunal agreed
with the CIT(A) that, following the ratio of the decision of the Delhi High
Court, effect of MAT credit u/s. 115JAA has to be first considered and the
assessee is liable to pay only the balance amount as advance tax and if the
assessee paid lesser amount of advance tax as compared to this amount of advance
tax payable by the assessee after considering MAT credit u/s.115JAA, the
assessee is liable to pay interest u/s.234B and u/s.234C and if such payment of
advance tax by the assessee is in excess than this amount of advance tax payable
by the assessee, then the refund is on account of excess payment of advance tax
which is eligible for interest u/s.244A.

The appeal filed by the Revenue was dismissed by the
Tribunal.

 

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Section 244/244A, Proviso to S. 115JAA and Circular No. 763 issued by CBDT — Income-tax Act, 1961 — Assessment Year 2003-04 — Whether where after giving credit for MAT paid in earlier years, there is still tax payable and further credit is given to TDS an

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  1. 2009-TIOL-215-ITAT-MAD

Hyundai Motor India Ltd. vs. DCIT

A.Y. : 2003-2004.

Date of Order : 21.11.2008

Section 244/244A, Proviso to S. 115JAA and Circular No. 763
issued by CBDT — Income-tax Act, 1961 — Assessment Year 2003-04 — Whether
where after giving credit for MAT paid in earlier years, there is still tax
payable and further credit is given to TDS and Advance Tax, can refund, if
any, be said to have been originating from payment of Advance Tax or credit of
TDS —Held : Yes. Whether such a refund becomes entitled to interest in terms
of S. 244 and S. 244A —Held : Yes.

 

Facts :

Vide an order passed u/s. 154 of the Act, the Assessing
Officer (AO) granted credit for MAT at Rs.6,36,82,480. After having granted
credit for MAT the AO gave credit for TDS and Advance Tax and there was a net
refund due to the assessee. No interest was granted on such refund due to the
assessee.


The CIT(A) rejected the claim of the assessee on the basis
of Circular No. 763, dated 18.2.1998, which clarifies that credit allowed
against MAT will not bear any interest.


Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal upon considering the provisions of S. 115JAA
of the Act held that the only interpretation which could be given to the
Circular which has explained the proviso to S. 115JAA is that interest cannot
be allowed for intervening period. That is, if MAT is paid, for example, in AY
2001-02 and the same is credited in AY 2003-04, then for the intervening years
of 2001-02 and 2002-03 no interest is payable on such MAT credit. However, for
the year in which ultimately MAT credit is given and credit for other tax
payments is also given, then refund becomes due not because of MAT credit but
because of other tax. This legal position is absolutely clear from the fact
that payment of MAT is not refundable and it can only be used as a matter of
credit, that too, subject to the conditions laid down in S. 115JAA of the Act.


The Tribunal noted that the issue about priority of various
credits to be allowed against tax payable by an assessee was considered by the
Delhi Bench of the Tribunal in the case of Ajanta Offset
(2008-TIOL-164-ITAT-Del) and concurred with the Delhi Bench that first of all
the credit for MAT has to be given and then only credit for TDS and Advance
Tax, etc. has to be given.


The Tribunal noted that the AO had himself, in the order
passed u/s. 154, allowed the MAT credit before the credit for TDS and Advance
Tax. It stated that it is absolutely clear that refund is originating not
because of MAT credit but because of TDS and Advance Tax and, therefore, the
assessee has to be paid interest on such excess payment of TDS or Advance Tax.


The Tribunal set aside the order of CIT(A) and directed the AO to allow
interest in accordance with law.


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S. 32(1) — exercising of option under Rule 5(1A) for higher depreciation — Claim made in return of income is sufficient — No separate procedure to exercise the option of higher depreciation is required.

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(2010) 126 ITD 215 (Chennai)

K.K.S.K. Leather Processors
(P.) Ltd. v. ITO

A.Ys. : 2003-04 & 2005-06.
Dated : 20-11-2009

 

11. S. 32(1) — exercising of
option under Rule 5(1A) for higher depreciation — Claim made in return of income
is sufficient — No separate procedure to exercise the option of higher
depreciation
is required.

Facts :

For the A.Y. 2003-04, the
return of income was filed on due date but the return of income for A.Y. 2005-06
was filed after the due date. The assessee had a windmill which was entitled to
higher rate of depreciation as per Appendix IA to Rule 5(1A).

The Assessing Officer
disallowed the claim of higher depreciation on the ground that the option of
higher depreciation was not ‘exercised’ by the assessee ‘before’ the due date of
filing return of income.

The contention of the
Revenue was that the assessee should have exercised the option by writing a
simple letter and submitting the same before the due date. Merely claiming
higher depreciation in the return along with audit report filed on due date
would not suffice.

Before the Tribunal, two
questions arose for consideration :

(i) Whether filing of
return of income along with audit report showing the claim of higher
depreciation amounts to exercising option required under second proviso to
Rule 5(1A) ?

(ii) Whether return filed
on due date would be considered as exercising option before the due date ?

Held :

(i) Explanation 5 to
Ss.(1) of S. 32 clarifies that provisions of S. 32(1) shall apply whether or
not assessee has claimed depreciation.

(ii) The above shows that
the Assessing Officer is duty-bound to allow deduction of depreciation as per
S. 32(1).

(iii) Though the proviso
stipulates that the option has to be exercised by the assessee before the due
date of filing return, the same is only to facilitate the AO in discharging
its obligation. The AO is otherwise under an obligation to allow the
depreciation.

(iv) The option to be
exercised is mentioned in the Rules and Rules cannot override the provision in
the statute. The requirement of Proviso 2 of Rule 5(1A) cannot be held of the
nature that the failure of the same would prove fatal and the very object of
provision of higher depreciation is defeated.

(v) When there is no
prescribed procedure or mode of exercising option, then the option exercised
by claiming deduction in return is sufficient.

(vi) The meaning of
‘before’, includes the return filed on the last date also. It simply means not
after the due date.

(vii) As far as A.Y.
2003-04 is concerned, the return was filed on due date claiming higher
depreciation. Hence, the required conditions of claiming on or before the due
date are fulfilled. As far as A.Y. 2005-06 is concerned, the third proviso to
Rule 5(1A) states than once the option is exercised, the same shall be final
and apply to all the subsequent years. Hence, late filing of return for A.Y.
2005-06 would have no consequence since the option was already exercised in
return filed on due date for A.Y. 2003-04.

 

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S. 40(a)(ia) — After applying a net profit rate on gross receipts, there is no further scope for making any other addition in view of S. 44AD of the Act.

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(2010) TIOL 552 ITAT (Mad.)

D. Rathinam v. DCIT

A.Y. : 2005-06. Dated :
18-6-2010

 

10. S. 40(a)(ia) — After
applying a net profit rate on gross receipts, there is no further scope for
making any other addition in view of S. 44AD of the Act.

Facts :

The assessee was engaged in
the business of construction of highways and rural roads. The assessee had
declared gross receipts of
Rs. 1.81 crores, but could not produce books of accounts for scrutiny. He
submitted before the Assessing Officer (AO) that his income may be estimated @
8% of the total contract receipts received by him. Accordingly, the AO
determined the business income at Rs. 14,48,480. The AO noticed that the
assessee had made payments to sub-contractors on which tax was not deducted at
source u/s.194C. He rejected the contention of the assessee that the provisions
were brought on the statute book w.e.f. 1-6-2007. He disallowed a sum of Rs.
52.22 lakhs u/s.40(a)(ia). Aggrieved the assessee preferred an appeal to the
CIT(A).

The CIT(A) granted relief
only to the extent of payment made for supply of labourers, but sustained the
major part of addition made by the AO.

Aggrieved the assessee
preferred an appeal to the Tribunal.

Held :

The provisions of tax
deduction at source in respect of payments made by individuals to
sub-contractors were brought on the statute book w.e.f. 1-6-2007 and were not
applicable for the assessment year under consideration. Moreover, after applying
a net profit rate on gross receipts, there is no further scope for making any
other addition in view of S. 44AD of the Act. The Tribunal held the disallowance
to be not as per law.

The appeal filed by the
assessee was allowed.

 

 

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S. 40(a)(ia) — When there is no element of income and the payment is only as a reimbursement of expenses incurred by the payee, then no disallowance can be made u/s. 40(a)(ia).

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New Page 1

 (2010) TIOL 545 ITAT (Mum.)

Utility Powertech Ltd. v.
ACIT

A.Y. : 2005-06. Dated :
19-4-2010

 

9. S. 40(a)(ia) — When there
is no element of income and the payment is only as a reimbursement of expenses
incurred by the payee, then no disallowance can be made u/s. 40(a)(ia).

Facts :

The assessee-company, a
joint venture between BSES Ltd. and NTPC Ltd., was engaged in the business of
undertaking construction, erection, renovation, modernisation and other project
management activities in the power sector. The AO noted that the assessee had
made payment of Rs. 12,00,000 being office rent and Rs. 7,66,246 being office
upkeeping expenses to Reliance Energy Ltd. The assessee deducted TDS on payment
made towards office rent, but did not deduct tax from payment towards
office upkeeping. The AO disallowed Rs. 7,66,246 u/s.40(a)(ia).

Aggrieved the assessee
preferred an appeal to the CIT(A) who confirmed the disallowance made by the AO.

Aggrieved, the Revenue
preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the
AO has not given a finding that the expenses for office upkeeping were revenue
receipt in the hands of Reliance Energy Ltd. and not a pure reimbursement of
expenses. The Tribunal, following the decision of the Bombay High Court in the
case of CIT v. Siemens Aktiongesellschaft, (2008 TIOL 569 HC-Mum.), held that it
is a settled proposition that when there is no element of income and the payment
is only a reimbursement of expenses incurred by the payee, then no disallowance
can be made u/s.40(a)(ia). It decided the ground in favour of the assessee and
against the Revenue.

S. 246A — An order giving effect to the order of CIT(A) is an assessment order and therefore it is amenable to the jurisdiction of the CIT(A).

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New Page 1

 (2010) TIOL 518 ITAT (Bang.)

Cypress Semi Conductor
Technologies India Pvt. Ltd. v. ITO

A.Ys. : 2002-03 and 2003-04

Dated : 20-5-2010

8. S. 246A — An order giving
effect to the order of CIT(A) is an assessment order and therefore it is
amenable to the jurisdiction of the CIT(A).

Facts :

While assessing the total
income of the assessee u/s.147 of the Act, the Assessing Officer (AO) disallowed
deduction u/s.10A in respect of Unit I and Unit III. Aggrieved the assessee
preferred an appeal to the CIT(A) who held that Unit I is not entitled to
deduction beyond A.Y. 1998-99. As regarded deduction u/s.10A with regard to STPI
Unit III, he held that business of STPI Unit III was not set up by splitting of
any existing business and he directed the AO to allow deduction u/s.10A in
respect of STPI undertaking unit III, if other conditions are satisfied.

The AO while giving effect
to the order of the CIT(A) computed deduction u/s.10A of the Act by reducing
data link charges from export turnover of the undertaking, but he did not deduct
the same from the total turnover of the undertaking. As a result, the deduction
u/s.10A was reduced.

Aggrieved the assessee
preferred an appeal to the CIT(A) who dismissed the appeal without admitting the
same.

Aggrieved, the assessee
preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the
ITAT ‘A’ Bench has in ITA No. 1122/Bang./09, Asiatic Industrial Gases Ltd., to
which the Accountant Member was a party, after referring to various decisions of
the High Courts, held that order of the AO giving effect to the direction given
by the ITAT is appealable before the CIT(A). The Tribunal allowed this ground
and remitted the matter back to the file of the CIT(A) for adjudication on
merits.

 

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S. 14A and S. 44 — S. 44 provides for application of special provisions for computation of profits and gains of insurance business in accordance with Rule 5 of Schedule 1 and, therefore, Assessing Officer cannot make disallowance by applying S. 14A.

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New Page 1

(2010) 130 TTJ 388 (Delhi)

Oriental Insurance Co. Ltd.
v. ACIT

A.Ys. : 2000-01 and 2001-02

Dated : 27-2-2009

7. S. 14A and S. 44 — S. 44
provides for application of special provisions for computation of profits and
gains of insurance business in accordance with Rule 5 of Schedule 1 and,
therefore, Assessing Officer cannot make disallowance by applying S. 14A.

For the relevant assessment
year, the Assessing Officer held that the investments made by the assessee are
both taxable as well as tax-free. An estimated disallowance of 50% out of the
management expenses incurred and claimed in the P & L a/c was treated as
expenses incurred in connection with the tax-free investment. The CIT(A)
confirmed the disallowance. The Tribunal deleted the addition and noted as under
:

1. The income of the
assessee is to be computed u/s.44 r.w.r. 5 of Schedule I of the Income-tax
Act, 1961. S. 44 is a non obstante clause and applies notwithstanding anything
to the contrary contained within the provisions of the Act relating to
computation of income chargeable under different heads other than the income
to be computed under the head ‘Profits and gains of business or profession’.

2. In case of the
computation of profits and gains of any business of insurance, the same shall
be done in accordance with the rules prescribed in First Schedule of the Act,
meaning thereby Ss.28 to Ss.43B shall not apply. No other provision pertaining
to computation of income will become relevant.

3. In light of these
special provisions coupled with the non obstante clause, the Assessing Officer
is not permitted to travel beyond these provisions. S. 14A contemplates an
exception for deductions as allowable under the Act contained u/s.28 to
u/s.43B. S. 44 creates special application of these provisions in case of
insurance companies.

4. Therefore, the
disallowance made by the Assessing Officer which is based on the application
of S. 14A is deleted as it is not permissible to the Assessing Officer to
travel beyond S. 44 and First Schedule of the Income-tax Act.

 

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S. 37(1) : Expenses to keep company afloat is allowable business expenditure

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New Page 1

14 (2007) 110 TTJ 445 (Del.)


ITO v. Mokul Finance (P.) Ltd.

ITA Nos. 4562 & 4563 (Del.) of 2005

A.Ys. 2002-03 & 2003-04. Dated : 13-7-2007

S. 37(1) of the Income-tax Act, 1961 — Company having not
closed its business, expenditure incurred during the period of dormancy of
business in order to keep the company afloat is allowable business expenditure.

During the relevant assessment year, the company had income
only from interest and dividend and no business activity was carried on.

The Assessing Officer disallowed the loss claimed by the
assessee, holding that since there was no business activity during the year, no
expenses could be allowed. The CIT(A), however, allowed the assessee’s claim of
loss.

The Tribunal, relying on the decisions in the following
cases, allowed the assessee’s claim :

(a) CIT v. Ganga Properties Ltd., (1993) 199 ITR 94
(Cal.)

(b) Nakodar Bus Service (P) Ltd. v. CIT, (1990) 85
CTR (P & H) 25/(1989) 179 ITR 506 (P & H)

(c) CIT v. Rampur Timbery & Turnery Co. Ltd., (1981)
21 CTR (All.) 76/(1981) 129 ITR 58 (All.)

(d) L. VE. Vairavan Chettiar v. CIT, (1969) 72 ITR
114 (Mad.)


The Tribunal noted as under :

(a) The assessee being an artificial juridical person, it
needs to incur certain expenditure to keep itself afloat and have its
continued existence. Unlike a natural person, a company can only operate
through other natural persons — whether employees or others.

(b) In the case of corporate assessees, such expenses have
to be allowed as deduction, irrespective of whether or not the assessee is
engaged in active business and even if assessee has only passive incomes.

(c) Not carrying on business activity in a particular
period cannot be equated with closure of business, as it takes an
unsustainably narrow view of the scope of cessation of a business.

(d) Unless the business is abandoned or closed and even if
business is at a dormant stage waiting for proper market conditions to
develop, the expenditure incurred in the course of such a business is to be
allowed as deduction.







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S. 143 r.w. S. 133A : Assessee can retract offer of additional income by furnishing details of income in course of assessment proceedings

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New Page 1

13 (2007) 17 SOT 574


Jain Trading Co. v. ITO

ITA No.5935 (Mum.) of 2002.

A.Y. 1999-2000. Dated : 30-10-2006

S. 143 read with S. 133A of the Income-tax Act, 1961 — An
assessee who makes an offer of additional income during the course of an inquiry
can retract by furnishing full details of his income in the course of assessment
proceedings.

During the course of survey proceedings u/s.133A, the
assessee offered an additional income of Rs.25 lacs, but did not disclose such
income in the return of income filed. The assessee contended that since in the
assessment proceedings it had furnished complete particulars of its business
transactions and disclosed the complete details of trading results, it was not
bound by the additional income offered at the time of survey. The Assessing
Officer did not accept the explanation of the assessee and held that after
having admitted suppression of business income to the extent of 25 lacs, it was
not open to the assessee to retract from the additional income declared during
the survey proceedings. He, therefore, added Rs.25 lacs to the income of the
assessee. On appeal, the CIT(A) upheld the order of the Assessing Officer.

The Tribunal deleted the addition and noted as under :

(1) An assessee who makes an offer of additional income
during course of an enquiry by Income-tax authorities is not bound by his
offer of additional income for all time to come. At the same time, the burden
cast upon an assessee, who chooses to retract his earlier statement, is very
heavy.

(2) In the instant case, during the course of assessment
proceedings, the assessee had completely explained entire business
transactions leading up to the date of survey and had given the details of its
trading activity.

(3) The Assessing Officer had not raised even a finger of
doubt at the account statement furnished by the assessee during the course of
assessment proceedings.

(4) Therefore, the assessee had been able to discharge the
heavy burden that rested upon him while retracting from offer of additional
income at the time of survey. Even at that stage, the case of the assessee was
that the offer was made to buy peace and not because of any concealment of
income or discrepancy in accounts detected by survey party.






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S. 23 : If property held with intention to let out and efforts made to let it out, annual letting value to be calculated u/s.23(1)(c)

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New Page 1

12 (2007) 17 SOT 293 (Mum.)


Premsudha Exports (P.) Ltd. v. ACIT

ITA No. 6277 and 6278 (Mum.) of 2006

A.Y. 2003-04. Dated : 31-5-2007

S. 23 of the Income-tax Act, 1961 — If a property is held
with an intention to let out and efforts are made to let it out, the annual
letting value will be calculated u/s.23(1)(c) as if it is a let-out property.

As per its Memorandum of Association, the assessee-company
was entitled to purchase property for letting it out and to earn rental income.
During the year, the assessee’s property remained vacant, though the assessee
made continuous efforts to let out the property. The assessee submitted that the
annual letting value (ALV) of the property should be computed as per provisions
of clause (c) of S. 23 (1), and that since the property remained vacant for the
whole year, the ALV of the property had to be taken as NIL. The Assessing
Officer did not deliberate on the submission of the assessee and computed the
ALV of the impugned property as per clause (a) of S. 23(1) and determined it at
8.5% of the cost of property. The CIT(A) upheld the order.

The Tribunal set aside the order of the lower authorities and
upheld the assessee’s claim.

The Tribunal noted as under :

(1) The sole dispute, in the instant case, was regarding
the interpretation of the words ‘property is let’ in clause (c) of S. 23(1).
For this, it is to be determined as to whether actual letting out is a must
for a property to fall within the purview of clause (c) of S. 23(1).

(2) From a reading of the provisions of sub-section (3) of
S. 23, it appears that the Legislatures in their wisdom have used the words
‘house is actually let’. This shows that the words ‘property is let’ cannot
mean actual letting out of the property, because, had it been so, there was be
no need to use the word ‘actually’ in sub-section (3) of S. 23.

(3) If the property is held by the owner for letting out
and efforts are made to let it out, that property is covered by clause (c) and
this requirement has to be satisfied in each year that the property was being
held to let out, but remained vacant for whole or part of the year.

(4) In the instant case, the assessee-company was entitled
to purchase the property for its let out and to earn rental income. Copy of
resolution of the board of directors was also placed on record, wherefrom it
was evident that one of the directors was authorised to take necessary steps
to let out the property in question. The assessee had also fixed the monthly
rent and the security deposit of the property. Consequent to the resolution,
the assessee had approached various estate and finance consultants for letting
out the property and the request was also duly acknowledged by those
consultants. Unfortunately, during the year under appeal, the assessee could
not get a suitable tenant on account of hefty rent and security deposit. Thus,
during the whole year, the assessee made continuous efforts to let out the
property and, under these circumstances, this property could be called as to
be let out property in terms of observations made above. Since the property
had been held to be let out property, its annual letting value could only be
worked out as per clause (c) of S. 23(1) and, since the rent received or
receivable from the said property during the year was nil, the same was to be
taken as the annual value of the property in order to compute the income from
house property.



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S. 12AA r.w. S. 12A : If order u/s.12AA not passed within stipulated period, registration deemed to have been granted

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New Page 1

11 (2007) 17 SOT 281 (Delhi) (SB)

Bhagwad Swarup Shri Shri Devraha Baba Memorial

Shri Hari Parmarth Dham Trust v. CIT

ITA Nos. 363 (Delhi) of 2003

Dated : 31-8-2007

S. 12AA read with S. 12A of the Income-tax Act, 1961 — If
order u/s.12AA is not passed within the stipulated period, then registration is
deemed to have been granted.

The CIT passed the order refusing registration u/s.12A to the
assessee-trust beyond the stipulated period of six months from the end of the
month in which application for registration was filed. The assessee appealed
before the Tribunal and contended that once the time limit fixed by S. 12AA(2)
expired without the CIT having passed any order, it must be deemed that the
registration had been granted.

The Special Bench, following the decisions in the
undermentioned cases, allowed the assessee’s appeal :

(a) Karnataka Golf Association v. DIT, (2004) 91 ITD
1 (Bang.)

(b) Sardari Lal Oberoi Memorial Charitable Trust v. ITO,
(2005) 3 SOT 229 (Delhi)

(c) People Education & Economic Development Society v.
ITO, (2006) 100 ITD 87 (TM) (Chennai).

The Special Bench noted as under :

(1) The statutory authorities have no option, but to obey
the mandate of the law.

(2) Unless the statute provides for exceptions, the order
must be passed by statutory authorities in accordance with the time limit set
by the law. Ss.(2) of S. 12AA does not admit of any exception to the rule.

(3) Therefore, it is mandatory for the CIT to dispose of
the application for registration made u/s.12A within six months from the end
of the month in which the application was filed.

(4) While exercising such an important power available
u/s.12AA, the CIT should also pass an order within the time limit provided. It
would be incongruous to hold that conducting an enquiry into the claim for
registration is an important excise of the power, whereas passing of the order
within the time limit provided is not, and it can be done at any time.





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S. 115JA : Lease equalisation charges debited not to be added back for book profit

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New Page 1

10 (2007) 17 SOT 173 (Delhi)


GE Capital Transportation Financial Services Ltd. v.
ACIT

ITA No.2362 (Del.) of 2002

A.Y. 1998-99. Dated : 20-7-2007

S. 115JA of the Income-tax Act, 1961 — Lease equalisation
charges debited to Profit & Loss A/c. cannot be added back while computing book
profit u/s.115JA.

In the Profit and Loss A/c. filed along with the return of
income for the A.Y. 1998-99, the assessee leasing company had deducted the
amount of lease equalisation charges from the lease rental income. In the
computation of total income, the said amount had been added back; but the same
was not added to the profit while computing book profit u/s. 115JA.

The Assessing Officer and the CIT(A) held that lease
equalisation charges debited to the Profit & Loss A/c. by the assessee leasing
company was a notional charge on the profits of the company and represented an
amount set aside out of profits/surplus to equalise the imbalance between lease
rental and depreciation charges over the period of lease. The impugned amount
was added back to the book profit under Explanation (1) to S. 115JA(2).

The Tribunal, relying on the decision of the Supreme Court in
respect of the distinction between a ‘provision’ and a ‘reserve’ in the case of
State Bank of Patiala v. CIT, (1996) 219 ITR 706/85 Taxman 416, set aside
the orders of the lower authorities.

The Tribunal noted as under :

1. The provision for lease equalisation charges was made
following the guidelines issued by the Institute of Chartered Accountants of
India (ICAI) on ‘Accounting of income, depreciation and other aspects for
leasing company’. The Assessing Officer held that the said guidelines issued
by ICAI on creation of lease equalisation charge were only recommendatory and
not mandatory.

2. The amount to be transferred to a reserve is debited to
Profit and Loss Appropriation A/c. and the purpose of creating the reserve is
to enable the firm to tide over a difficult financial period and not to meet
any particular contingency. The amount of lease equalisation charges, however,
was not debited by the assessee-company to its Profit and Loss Appropriation
A/c. and the purpose of the same was not to enable the assessee to tide over a
difficult financial period.

3. The amount provided for the lease equalisation charges
was not transferred by the assessee-company in its books of account to any
reserve account, but the same was adjusted against depreciation/WDV of the
relevant fixed assets given on lease.

4. The amount of lease equalisation charge, however, is
neither the portion of earnings/profits of an enterprise, nor is the same
appropriated for a general or specific purpose. The same is a charge against
the profit to arrive at true and correct profits of the leasing business,
which by no means can be treated as part of undistributed profits or capital
of the business.

5. If the nature and character of lease equalisation
charge, as is evident from the purpose for which the same was provided as well
as the accounting treatment given thereto in the books of account, was
considered in the light of the meaning of the expression ‘reserve’ as defined
in the context of terms commonly used in financial statements as well as by
the Apex Court in the judicial pronouncement, it was to be held that the
provision made for lease equalisation charges could not be regarded as an
amount transferred to reserves as envisaged in Explanation (b) to S. 115JA
(2).

6. Therefore, the adjustment made by the Assessing Officer
by adding the amount of lease equalisation charges while computing the book
profit u/s.115JA was not permissible, since the said amount was not covered
within any of the clauses of Explanation below S. 115JA(2) including clause
(b).



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S. 36(1)(iii) r.w. S. 43(1) : Interest on capital borrowed for acquiring machinery, deductible u/s.36(1)(iii), whether put to use or not

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New Page 1

9 (2007) 17 SOT 90 (Del.)


Simbhaoli Sugar Mills Ltd. v. ACIT

ITA Nos. 2856 and 2857 (Delhi) of 2005

A.Ys. 2000-01 and 2001-02

Dated : 11-5-2007

S. 36(1)(iii) read with S. 43(1) of the Income-tax Act, 1961
— Interest on capital borrowed for acquiring machinery required to be used for
its business is eligible for deduction u/s.36(1)(iii), irrespective of fact
whether machinery was put to use or not in accounting year.

The AO and the CIT(A) held that since machinery acquired by
the assessee was not put to use in the year under consideration, the assessee in
view of Explanation 8 to S. 43(1), was not entitled to claim deduction
u/s.36(1)(iii) in respect of interest paid
on the capital borrowed for acquiring the machinery.

The Tribunal allowed the assessee’s claim. The Tribunal noted
as under :

(1) In view of a catena of decisions of the Supreme Court
and various High Courts on the question of allowability of interest
u/s.36(1)(iii), it is clear that the expenditure incurred on interest on
capital borrowed for acquiring the machinery required to be used for the
business of the assessee is eligible for deduction u/s.36(1)(iii),
irrespective of the fact whether the machinery was put to use or not in the
accounting year relevant to assessment year under consideration.

The Tribunal referred to the following cases :

(a) CIT v. Associated Fibre & Rubber Industries (P.)
Ltd., (1999) 236 ITR 471/102 Taxman 700 (SC)

(b) CIT v. Modi Industries, (1993) 200 ITR 341/68
Taxman 114 (Delhi)

(c) CIT v. Dalmia Cement (Bharat) Ltd., (2000) 242
ITR 129/109 Taxman 363 (Delhi)

(d) CIT v. Orissa Cement Ltd., (2003) 260 ITR 626
(Delhi)

(e) CIT v. J. K. Synthetics Ltd., (1988) 169 ITR
267/22 Taxman 260 (All.)

(f) ITO v. Malwa Vanaspati & Chemical Co. Ltd.,
(1997) 226 ITR 253/92 Taxman 262 (M.P.)

(g) CIT v. Bhillai Iron Foundry (P.) Ltd., (1998)
234 ITR 661 (M.P.)



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S. 33AC : Profit from business means profit generated during course of business of operation of ships and not only from operation of ships

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New Page 1

8 (2007) 17 SOT 54 (Mum.)


Mercator Lines Ltd. v. Dy. CIT

ITA Nos. 8045 to 8047 (Mum.) of 2003

and 53 (Mum.) of 2004

A.Ys. 1997-1998, 1999-2000 and 2001-02. Dated : 25-6-2007

S. 33AC of the Income-tax Act, 1961 — Profit from business
means any profit generated during course of business of operation of ships and
is not confined only to income from operations of ships — Sale of
scrap is an income derived from business of shipping operation and was eligible
for deduction u/s.33AC.

The Assessing Officer and the CIT(A) disallowed the
assessee’s claim for deduction u/s.33AC in respect of income from sale of scrap
and income from interest on FDRs.

The Tribunal allowed the claim of the assessee and noted as
under :

(1) ‘Profit derived from business’ used in S. 33AC means
any profit generated during the course of business of operation of ships and
does not confine only to operation of ships.

(2) Income from sale of scrap is certainly an income
generated during the course of business of operation of ships — it is an
income derived from the business of shipping operation and is eligible for
deduction u/s.33AC.

(3) In respect of interest earned on FDRs, since nothing
had been placed on record by the assessee regarding whether it was received
during the course of business of operation of ships, the matter was restored
to the file of the Assessing Officer to re-adjudicate the issue. However, if
the FDRs were purchased to obtain the credit limit or on account of business
exigencies, the interest generated thereon would certainly be business income
and was eligible for deduction u/s.33AC. In case surplus funds were put in
FDRs and interest was generated thereon, that interest income would not
qualify to be business income of the assessee and also would not be eligible
for deduction u/s.33AC.





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S. 12A, S. 12AA : CIT cannot refuse registration to trust on extraneous considerations, when no fault with objects, genuineness of activities

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New Page 1

7 (2007) 109 TTJ (Asr.) 850


Dream Land Educational Trust. v. CIT

ITA No. 481 (Asr.) 2005

Dated : 5-4-2007

S. 12A and S. 12AA of the Income-tax Act, 1961 — CIT, having
found no fault with objects of the trust and genuineness of its activities, was
not justified in refusing registration u/s.12A on extraneous considerations.

The CIT rejected the assessee’s application for registration
u/s.12A, on the following grounds :

(a) Dissolution deed of the firm of which property was
settled on trust was not registered.

(b) No transfer deed was executed regarding property
transferred to trust.

(c) The takeover action was unilateral.

(d) No objection certificate was not obtained from bankers.

(e) On dissolution of firm, it was left to the trustees to
decide the fate of net assets.


The Tribunal held that the CIT was not justified in refusing
registration u/s.12A. The Tribunal noted as under :

(1) U/s.12AA, the CIT was only required to satisfy himself
with regard to the objects and genuineness of the activities of the trust.

(2) The CIT has not, anywhere in the impugned order,
doubted either the genuineness of the activities of the trust or its objects.
It has not been stated that any object of the trust is not that of charity or
that the income of the trust has been used for the purpose of the trustee or
their families and has not been utilised for charity.

(3) In the absence of any dissatisfaction of the CIT with
regard to either the objects or the genuineness of the activities of the
trust, registration has been refused to the trust in violation of the
provision of S. 12AA. The reasons recorded for such rejection of registration
are entirely extraneous to the requirement of the said Section.


The Tribunal relied on the decisions in the following cases :

(1) Sanjeevamma Hanumanthe Gowda Charitable Trust v.
Director of IT (Exemption), (2006) 203 CTR (Kar.) 533; (2006) 285 ITR 327
(Kar.)

(2) St. Don Bosco Educational Society v. CIT, (2004)
84 TTJ (Lucknow) 805; (2004) 90 ITD 477 (Lucknow)

(3) Smt. Mansukhi Devi Bihani Jan Hitkari Trust v. CIT,
(2004) 83 TTJ (Jd) 763; (2005) 94 ITD 1 (Jd)

(4) People Education & Economic Development Society (Peeds)
v. ITO, (2006) 104 TTJ (Chennai) (TM) 467; (2006) 100 ITD 87 (Chennai)
(TM)

(5) Acharya Sewa Niyas Uttaranchal v. CIT, (2006)
105 TTJ (Del.) 761






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S. 154 r.w. S. 43B: Relief entitled can not be denied merely because omitted by mistake

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New Page 1

6 (2007) 109 TTJ (Jp.) 794


Lustre Tiles Ltd. v. Addl. CIT

ITA No. 489 (Jp.) 2003

A.Y. 1995-96. Dated : 28-7-2006

S. 154 read with S. 43B of the Income-tax Act, 1961 — If on
the basis of material on record, the assessee is entitled to a relief which has
remained to be allowed, then it would constitute mistake apparent from record
and, consequently, such relief cannot be denied merely because the assessee, by
oversight, had omitted to make the claim.

The assessee’s application for rectification u/s.154 for
allowing claim u/s.43B was rejected by the Assessing Officer and the CIT(A), on
the ground that no such claim was made in the return of income, nor in
subsequent proceedings.

The Tribunal allowed the assessee’s claim and observed as
under :

(1) In a Note in Schedule 1 to the balance sheet, it has
been clearly mentioned in the balance sheet that Rs.53 lacs being interest on
the term loan has been converted into equity shares of equal value.

(2) CBDT Circular No. 669, dated 25th October 1993,
allowing entertainment of rectification application in such matters, is
binding on the Department.

(3) ‘Record’ for purposes of S. 154 would include all
documents available at the time of passing of order subjected to rectification
proceedings and the claim was clearly reflected in the Note appended to
Schedule 1 of the balance sheet.

(4) The Supreme Court in the case of Anchor Pressings P.
Ltd. v. CIT, (1986) 58 CTR 126 held that the jurisdiction u/s.154 to
rectify a mistake is very wide and relief could be allowed in the
rectification proceedings if all factual materials necessary for allowing the
relief were available on record and such relief could not be denied merely
because the assessee had omitted to claim the same.


The Tribunal relied on the following further decisions :

(1) CIT v. K. N. Oil Industries, (1982) 30 CTR (MP)
137; (1983) 142 ITR 13 (MP)

(2) West Bengal Warehousing Corpn. v. CIT, (1986) 54
CTR (Cal.) 21; (1986) 157 ITR 149 (Cal.)

(3) CIT v. Smt. Aruna Luthra, (2001) 170 CTR (P&H) (FB)
73; (2001) 252 ITR 76 (P&H) (FB)






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S. 37(1) : (a) One-time charges paid by assessee company to NSDL for converting shares into demat form, allowed as revenue expenditure (b) Expenditure on installation of traffic signal for benefit of employees is allowable business expenditure (c) Deduc

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New Page 1

5 (2007) 109 TTJ (Bang.) 631


Infosys Technologies Ltd. v.
Jt. CIT

ITA No. 1022 (Bang.) 2003

A.Y. 1998-99. Dated : 7-4-2006




(a) S. 37(1) of the Income-tax Act, 1961 — Payment
made by assessee company as one-time charges to National Security Depository
Ltd. (NSDL) for converting shares of company from physical into dematerialised
form is allowable as revenue expenditure.


(b) S. 37(1) of the Income-tax Act, 1961 — Assessee
installed traffic signals at a circle in the vicinity of its office premises
to help its employees out of traffic jams, so that they may reach the office
in time, and handing over the same to traffic police, expenditure was
allowable being wholly and exclusively for assessee’s business.


(c) S. 80G read with S. 10A & S. 14A of the
Income-tax Act, 1961 — Deduction u/s.80G is allowable even if it is made out
of exempted income; S. 14A does not apply to S. 80G.



(a) Relying on the decisions in the cases of CIT v.
Tirrihannah Co. Ltd., (1992) 195 ITR 393 (Cal.) and Karjan Cooperative
Cotton Sales Ginning & Pressing Society v. CIT, (1992) 106 CTR (Guj.)
47/(1993) 199 ITR 17 (Guj.), the Tribunal allowed the assessee’s claim of
Rs.44.43 lacs paid to NSDL as one-time charges for converting the company’s
shares from physical to dematerialised form. The Tribunal, inter alia,
observed that :

(1) The dematerialisation has helped significantly in
reducing the administrative costs. Even if certain expenses result into some
benefit to the shareholders, the expenditure incurred in respect of or in
connection with the shareholders, is allowable as revenue expenditure.

(2) The expenditure can even be considered in the nature of
compliance with listing requirements. The CBDT by its Circular Letter
F.No.10/67/65-IT(A-1), dated 26th August 1965 opined that expenses incurred by
company on getting its shares listed in stock exchange should be considered as
laid out wholly and exclusively for the purpose of business and therefore
admissible as business expenditure u/s.37(1).

(3) The guidelines of SEBI mandate that the shares to be
traded in stock exchange can only be in dematerialised form. Thus, the charges
paid to NSDL, having not brought into existence any capital asset and being
for the purpose of efficient functioning of the business, are to be held as
business revenue expenses and allowable as such.


(b) The Tribunal allowed the expenditure of Rs.7.38 lacs
incurred by the assessee for installation of traffic signals as business
expenditure. The Tribunal relied on the decisions in the following cases :

(1) Atherton v. British Insulated & Helsby Cables Ltd.,
(1925) 10 Tax Case 155

(2) 191 (HL), Eastern Investment Ltd. v. CIT, (1951)
20 ITR 1 (SC); SCR 594

(3) CIT v. Chandulal Keshavlal & Co., (1960) 38 ITR
601 (SC)

(4) Mysore Kirloskar Ltd. v. CIT, (1987) 61 CTR (Kar.)
265; (1987) 166 ITR 836 (Kar.)

(5) CIT v. Royal Calcutta Turf Club, (1961) 41 ITR
414 (SC)

(6) CIT v. Madras Refineries Ltd., (2004) 266 ITR
170 (Mad.)


The Tribunal noted as under :

(1) As a result of getting repeatedly involved in traffic
jams and other hazards, the workers are a distressed lot. The incurrence of
expenditure was prompted solely with a view to benefit its employees. The
expenditure was incurred in the character as a trader and was prompted by
commercial expediency.

(2) What is to be seen is not whether it was compulsory for
the assessee to make the payment or not, but the correct test is that of
commercial expediency.

(3) As long as the payment which is made is for the
purposes of the business, and not disallowable specifically under the Act, the
same would be allowable as a deduction. If there is incidental benefit to a
party other than the assessee, it could not be relevant to decide whether the
expenditure is allowable or not.

(4) Since the expenditure was incurred to secure the
benefit to its employees, which in turn has also achieved its social objects,
it can still be considered as “wholly and exclusively for the purpose of
business” and, hence, allowable u/s.37(1).


(c) The donation of Rs.15.00 lacs made by the assessee was
paid out of ‘K’ unit, the profit of which was exempt u/s.10A. The Assessing
Officer and the CIT(A) disallowed deduction u/s.80G, holding that since the
expenditure is made out of exempt income, the issue is covered u/s.14A. the
Tribunal allowed the deduction and noted as under :

(1) The donation cannot be considered as ‘expenditure
incurred’ for the purpose of earning income, which is exempt under the Act.

(2) S. 10A is an exemption Section, whereas S. 80G is a
deduction Section and, therefore, there would be no double deduction of the
same item even if a benefit under both the Sections has been claimed. There
has been no double deduction in respect of the same item of expenditure.

(3) There is no stipulation in S. 80G that the donation has
to be made out of taxable income only for qualifying as a deduction.

(4) The provisions of S. 14A would not be applicable to a
deduction u/s.80G, as S. 14A is limited in its operation to chapter IV only,
where-as deduction u/s.80G falls under chapter VI-A and donation made does not
constitute expenditure. S. 14A applies to expenditure only.

(5) S. 80G would be available even when the said donations are made out of capital or gifts received or exempted income or income of earlier years.

S. 199 : Credit for TDS to be given pro rata in assessment year in which corresponding income assessable

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New Page 1

4 (2007) 109 TTJ (Chd.) (TM) 445


Pradeep Kumar Dhir v. ACIT

ITA No. 798 (Chd.) 2006

A.Y. 2003-04. Dated : 27-4-2007

S. 199 of the Income-tax Act, 1961 — Credit for TDS is to be
given to the assessee in the assessment year in which the corresponding income
is assessable. If only a portion of income is found assessable in the relevant
assessment year, credit has to be allowed only on that portion on pro-rata basis
and the credit for the balance TDS is to be allowed only in future when the
remaining income is assessable.

The assessee was following cash system of accounting. The
Assessing Officer and the CIT(A) held that the credit for TDS was allowable only
with respect to the income which was assessable for this year and not the entire
amount of TDS claimed by the assessee as per the TDS certificates.

The Third Member, relying on the decisions in the following
cases, also confirmed the order of the lower authorities :

(a) Smt.Varsha G. Salunke v. Dy. CIT, (2006) 101 TTJ
(Mum.) (TM) 703

(b) Tej Ram v. ITO, (2005) 92 TTJ (Chd.) 1185/(2005)
93 ITD (Chd.)


The Third Member noted as under :

(1) Important conditions for getting benefit of TDS as per
S. 199 are :

(a) The assessee should produce the certificate for the
amount of TDS.

(b) The assessee should show that income subjected to TDS
is disclosed in the return of the assessment year as ‘assessable’.

Both the abovementioned conditions are to be satisfied.

(2) Therefore, the assessee will not be entitled to have
benefit or credit for the amount, though mentioned in the certificate for the
assessment year, if income relatable to the amount is not shown and is not
assessable in that assessment year. If instead of entire income referable to
amount of tax deducted, only a portion of income is found assessable, the
benefit has to be allowed only on the portion shown. If balance income on
account of system of accounting followed by the assessee or for some other
reason is found to be assessable in future, then the credit for the balance
TDS can be allowed only in future when income is assessable.

(3) The CBDT Circular No. 5 of 2001, dated 2nd March 2001
also supports the view that where tax is deducted from the amount which is
liable to be assessed and spread over more than one financial year, credit
shall be allowed for TDS on pro-rata basis and in the same proportion
in which such income is offered for taxation in different assessment years.



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S. 115JB r.w. S. 2(1A) — Agricultural income does not form part of book profit for purposes of S. 115JB.

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New Page 1

  1. (2009) 32 SOT 497 (Cochin)


Harrisons Malayalam Ltd. v.
ACIT

A.Y. : 2005-06. Dated : 12-5-2009



(a) S. 115JB r.w. S. 2(1A) — Agricultural income does
not form part of book profit for purposes of S. 115JB.


(b) S. 50B r.w. S. 2(42C) — Profit on sale of
agricultural land was agricultural income in nature; hence, it would not be
covered by provisions of S. 50B.



During the relevant assessment year, the assessee sold its
rubber estate situated in a rural area and outside the purview of any
municipal limit, along with standing trees and other equipment as a going
concern. While computing its book profit for the purpose of S. 115JB, the
Assessing Officer had added the profit arising to the assessee on the sale of
the said rubber estate as forming part of the book profit. The CIT(A) upheld
the order of the Assessing Officer. The CIT(A) also enhanced the assessment by
holding that the surplus arising to the assessee on sale of its rubber estate
was taxable as capital gain u/s.50B, as the rubber estate owned by the
assessee was sold as a going concern, which showed that the sale was a slump
sale of an undertaking in its entirety.

The Tribunal held in favour of the assessee on both
matters.

In the matter of S. 115JB :

(1) Since the rubber estate was in a rural area and it
was outside the purview of any municipal limit and following the judgment of
the Supreme Court in the case of CIT v. All India Tea & Trading Co. Ltd.,
(1996) 219 ITR 544/85 Taxman 391 and of the Kerala High Court in the case of
CIT v. Alanickal Co. Ltd., (1986) 158 ITR 630/28 Taxman 504, it would
have to be held that the profit arising to the assessee on transfer of the
said rubber estate amounted to agricultural income as provided u/s.2(1A).

(2) It is a settled law that the profits arising on
transfer of agricultural land partake the character of agriculture income
and agricultural income is not to be included in the total income as
provided in S. 10(1). S. 115JB provides that any income listed u/s.10, other
than listed in clause (38), shall be reduced from the book profit, meaning
that agricultural income shall not form part of book profit for the purpose
of S. 115JB.

In the matter of S. 50B :

(1) The assessee-company was engaged in different types
of businesses.

(2) In its agricultural division, the assessee was having
a number of estates growing tea, rubber, cocoa, cardamom, etc. In the case
of rubber itself, the assessee was having about 12 different estates. During
the relevant previous year, the assessee had sold one of its rubber estates.
The estate had been sold on the basis of a detailed agreement executed
between the vendor and the vendee. The total consideration stipulated for
the transfer of the estate had been split over different assets, both
movable and immovable, enumerated in different Schedules and Annexures.

(3) The items sold did not include liabilities. The sale
agreement did not include investments and deposits. All the investments,
deposits, receivables, stock and such other current assets in the form of
financial and other assets remained with the assessee-company along with the
liabilities. Only those assets which were enumerated in the Schedules and
Annexures were sold to the vendee. Therefore, the instant case was one of
split sale and not a case of slump sale.

(4) The assets sold by the assessee had been listed out
in different Schedules and Annexures. The consideration had been
specifically assigned to the sale of immovable property by way of rubber
estate. Separate consideration had been assigned to the sale of movable
properties, including vehicles and other properties. Therefore, it was not a
case of slump sale for a lump sum amount of consideration.

(5) The profit arising on sale of agricultural land was
agricultural income in nature and, therefore, the surplus did not come
within the meaning of capital assets and by the nature of the income, it
would not come under the provisions of S. 50B. Therefore, the CIT(A) had
erred in directing the Assessing Officer to levy long-term capital gains
u/s.50B on the surplus arising to the assessee on sale of its estate.

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S. 37(1) — Premium on Keyman Insurance Policy is allowable business expenditure

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New Page 1

21 (2008) 118 TTJ 263


Sunita Finlease Ltd. v. Dy. CIT

ITA No. 203 (Nagpur) of 2007

A.Y. : 2004-05. Dated : 15-2-2008

S. 37(1) of the Income-tax Act, 1961 — In view of CBDT
Circular No. 762, dated 18th February 1998, premium on Keyman Insurance Policy
is allowable business expenditure.

 

The premium paid by the assessee-company on a Keyman
Insurance Policy was disallowed by the Assessing Officer to the extent of 30%,
on the grounds that the sum assured and the premium paid were excessive
vis-à-vis the worth of the company. The disallowance was confirmed by the
CIT(A).

 

The Tribunal allowed the assessee’s claim on the basis of
Circular No. 762, dated 18-2-1998 [(1998) 145 CTR (St.) 5]. The Tribunal noted
as under :

(1) The policy known as ‘Keyman Insurance Policy’ provides
for an insurance policy taken by a business organisation on the life of some
important persons in the organisation, generally called as Keyman in the
insurance nomenclature.

(2) In Circular No. 762, dated 18th February 1998,
clarifying with regard to the treatment of the premium paid of Keyman
Insurance Policy whether it should be allowed as a capital expenditure or a
revenue expenditure, the Board has clarified that the premium paid on the
Keyman Insurance Policy be allowed as business expenditure.

 


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S. 263 — In revision proceedings CIT cannot travel beyond reasons for revision given by him in show-cause notice.

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New Page 1

  1. (2009) 32 SOT 428 (Mum.)


Geometric Software Solution Co. Ltd. v. ACIT

A.Y. : 2003-04. Dated : 10-7-2009

S. 263 — In revision proceedings CIT cannot travel beyond
reasons for revision given by him in show-cause notice.

For the relevant assessment year, the assessee’s claim for
deduction u/s.10A was allowed in the assessment u/s.143(3). The CIT noticed
that the assessee had incurred certain expenses in foreign currency in the
relevant assessment year, which were mainly in the nature of travel expenses
and sales and marketing expenses which were to be excluded while working out
the deduction u/s.10A and not doing so had resulted in excess allowance of
deduction. The CIT, accordingly, issued show-cause notice to the assessee as
to why the assessment order passed by the Assessing Officer should not be set
aside. Thereafter, the CIT, having considered the assessee’s reply, set aside
the assessment order stating another ground also that some of the sale
proceeds were yet to be received by the assessee in India at the relevant
time.

The Tribunal held as under :

(1) The CIT had revised the assessment order passed
u/s.143(3) by issuing show-cause notice only with regard to not reducing the
expenditure incurred in foreign currency from the total export turnover
while computing the deduction u/s.10A, but in the revision order the
assessment was set aside on another ground also that some of the sale
proceeds were yet to be received by the assessee.

(2) The revision u/s.263 is not like the reopening of the
assessment where once the assessment is reopened entire assessment is open
before the Assessing Officer to be reconsidered in accordance with law.

(3) In the revision proceedings the CIT cannot travel
beyond the reasons given by him for revision in the show-cause notice.
Therefore, the revision on the ground that part of the sale proceeds were
yet to be received by the assessee was not tenable.

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S. 50B r.w. S. 2(19AA) and S. 2(42C) — Basic condition to be satisfied to qualify as slump sale is that there should be a transfer of undertaking i.e., either business as a whole is transferred or any part of undertaking or unit or division of undertaking

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New Page 1



36. (2009) 32 SOT 183 (Mum.)


Duchem Laboratories Ltd. v. ACIT

A.Y. : 2000-01. Dated : 12-6-2009

S. 50B r.w. S. 2(19AA) and S. 2(42C) — Basic condition to
be satisfied to qualify as slump sale is that there should be a transfer of
undertaking i.e., either business as a whole is transferred or
any part of undertaking or unit or division of undertaking is transferred.


During the year, the assessee sold its business of hospital
products pursuant to a business transfer agreement. The Assessing Officer held
that such sale was a transfer of assets and liabilities relating to
identifiable parts of a business and was not a transfer of business as a
whole, for attracting the provision of S. 50B. The CIT(A) upheld the Assessing
Officer’s order.

The Tribunal held in favour of the assessee. The Tribunal
noted as under :

(1) The purchase price agreed between the parties was a
comprehensive purchase price for the sale of business. There was no
apportionment of purchase price to the different assets and liabilities
being taken over.

(2) A perusal of the business transfer agreement and the
schedules attached thereto confirmed that the intention of the parties was
to sell the entire business as a whole and no particular consideration was
attributed to any particular asset or liability transferred.

(3) The steps taken by the assessee clearly reflected
that the line of business sold by the assessee was an identifiable line of
business being carried on by the assessee from year to year and all the
transactions, rights and liabilities in connection with the said line of
business were transferred by the assessee to the purchaser.

(4) The transfer of business was as an ongoing concern
and the amount received for the transfer of inventory, contract, licence
agreements, accounts receivables including vendor lists, etc., relating to
the business would fall within the definition of ‘slump sale’ and was to be
considered for computation of capital gains in line with the provisions of
S. 50B.




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S. 115JA r.w. S. 14A — Provisions of Ss.(2) and Ss.(3) of S. 14A cannot be imported into clause (f) of Explanation to S. 115JA while computing adjusted book profit.

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New Page 1

  1. (2009) 32 SOT 101 (Delhi)


Goetze (India) Ltd. v. CIT

A.Y. : 2000-01. Dated : 20-5-2009

S. 115JA r.w. S. 14A — Provisions of Ss.(2) and Ss.(3) of
S. 14A cannot be imported into clause (f) of Explanation to S. 115JA while
computing adjusted book profit.

For the relevant assessments year, the CIT, acting u/s.263,
estimated certain expenditure for earning dividend income and added said
amount to book profit of assessee for purpose of computing adjusted book
profits u/s.115JA.

The Tribunal set aside the CIT’s order. The Tribunal noted
as under :

(1) Under the provision contained in S. 14A, no deduction
is to be allowed in respect of expenditure incurred by the assessee in
relation to income which does not form part of the total income under this
Act.

(2) Under clause (f) of the Explanation to S. 115JA, the
amount of expenditure relatable to any income to which any of the provisions
of Chapter III apply has to be added to the book profit.

(3) Since the issue of expenditure related to divided
income, which is a matter falling under Chapter III, it was clear on perusal
of these two provisions that they are similar in nature. Clause (f) uses the
words ‘expenditure relatable to any
income’ while S. 14A uses the words ‘expenditure incurred by the assessee in
relation to income’. These words have the same meaning.

(4) Further, S. 14A contains two more sub-sections,
Ss.(2) and Ss.(3), which do not find a place in clause (f).

(5) Therefore, insofar as computation of adjusted book
profit is concerned, provisions of Ss.(2) and Ss.(3) of S. 14A cannot be
imported into clause (f) of the Explanation to S. 115JA.

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S. 254 — A Division Bench decision which is directly contrary to a Larger Bench decision cannot be said to have any binding force.

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New Page 1

  1. (2009) 32 SOT 132 (Mum.)


ACIT v. MSS India (P.) Ltd.

A.Y. : 2003-04. Dated : 29-5-2009

S. 254 — A Division Bench decision which is directly
contrary to a Larger Bench decision cannot be said to have any binding force.

For the relevant assessment year, the Transfer Pricing
Officer made certain additions to the total income of the assessee. The CIT(A)
deleted the additions. Before the Tribunal, the Revenue relied upon the
decision of Five-Member Bench of the Tribunal in the case of Aztec Software
& Technology Services Ltd. v. Asstt. CIT, (2007) 107 ITD 141 (Bang.) (SB).
The assessee, however, relied upon the decision of a Division Bench in the
case of Philips Software Centre (P.) Ltd. v. Asstt. CIT, (2008) 26 SOT
226 (Bang.) submitting that the Bangalore Bench had duly considered the impact
of Aztec decision (supra) by the Five-Member Bench of the Tribunal.

The Tribunal held as under :

(1) The view of the Division Bench of the Bangalore
Tribunal was diametrically opposite to the decision of an earlier
Five-Member Special Bench of the Tribunal in the case of Aztec Software &
Technology Services Ltd. (supra).

(2) It is only elementary that a judicial forum’s
approach to disregard a binding precedent from a superior judicial forum,
including by Larger Benches of the same judicial institution, is contrary to
the first principle of the theory of judicial precedence.

(3) A Division Bench cannot even disregard decision of
another Division Bench of equal strength leave aside a Larger Bench.

(4) When the law mandates that a Division Bench cannot
disregard another Division Bench and there is a Division Bench decision
which is directly contrary to a Larger Bench decision, the order so
disregarding the Larger Bench cannot be said to have any binding force.

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S. 37(1) — For the expenditure to be allowable u/s.37(1), it may be incurred ‘voluntarily’ and without any ‘necessity’ and if it is incurred for promoting business and to earn profits, assessee can claim deduction u/s.37(1), even though there was no compe

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New Page 1

  1. (2009) 32 SOT 9 (Pune)


Dy. CIT v. Kolhapur Zilla Sahakari Dudh
Utpadak Sangh Ltd.

A.Ys. : 1993-94, 1995-96 to 1999-2000 and 2001-02 Dated :
28-3-2008

S. 37(1) — For the expenditure to be allowable u/s.37(1),
it may be incurred ‘voluntarily’ and without any ‘necessity’ and if it is
incurred for promoting business and to earn profits, assessee can claim
deduction u/s.37(1), even though there was no compelling necessity to incur
such expenditure.

For the relevant assessment years, the Assessing Officer
disallowed animal husbandry expenditure incurred by the assessee on the
following grounds :

(a) Assessee did not own any cattle.

(b) It did not procure milk directly from cattle owners.

(c) It collected milk from primary societies which, in
turn, collected milk from the cattle owners.

(d) Providing services for animal husbandry was not a
business activity of the assessee.

(e) The animal husbandry expenditure benefited the cattle
owners and not the business of the assessee, particularly because the
assessee-society was not buying milk directly from the cattle owners.

The CIT(A) deleted the disallowance made by the Assessing
Officer on the ground that the expenditure incurred by the assessee resulted
in increasing the quality and productivity of milk which the assessee was
purchasing as part of its business.

The Tribunal upheld the CIT(A)’s order. The Tribunal noted
as under :

(1) Although one might argue that the assessee could have
carried on its business without incurring the above expenditure and that it
was not ‘necessary’ for the assessee to incur that expenditure in order to
carry on its business of purchase and sale of milk, such an argument was not
relevant for deciding the question whether an expenditure was allowable
u/s.37(1).

(2) The expression ‘wholly and exclusively’ used in S.
37(1) does not mean ‘necessarily’.

(3) An expenditure may be incurred ‘voluntarily’ and
without any ‘necessity’ and if it is incurred for promoting the business and
to earn profits, the assessee can claim deduction u/s.37(1) even though
there was no compelling necessity to incur such expenditure. The fact that
somebody other than the assessee is also benefited by the expenditure should
not come in the way of an expenditure being allowed by way of deduction
u/s.37(1).

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S. 271(1)(c) — AO must have definite evidence to refuse assessee’s claim or explanation — Mere non-acceptance of explanation cannot indicate concealment of income.

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New Page 1

  1. (2009) 31 SOT 474 (Mum.)

Twin Star Jupiter Co-operative Hsg.

Society Ltd. v. ITO

A.Ys. : 1998-99, 1999-2000 and 2000-01

Dated : 15-4-2009

S. 271(1)(c) — AO must have definite evidence to refuse
assessee’s claim or explanation — Mere non-acceptance of explanation cannot
indicate concealment of income.

For the relevant assessment year, the Assessing Officer
made certain additions to the total income of assessee and, thereafter, levied
penalty u/s. 271(1)(c). The CIT(A) deleted the penalty partly.

The Tribunal deleted the entire penalty. The Tribunal noted
as follows :

(1) The proceedings u/s.271(1)(c) can be initiated only
if the Assessing Officer or the first appellate authority is satisfied, in
the course of any proceeding under the Act, as per clause (c) that any
person has concealed the particulars of his income or has furnished
inaccurate particulars of such income.

(2) There cannot be a straitjacket formula for detection
of these defaults of concealments or of furnishing inaccurate particulars of
income and indeed concealment of particulars of income and furnishing of
inaccurate particulars of income may at times overlap.

(3) The Assessing Officer cannot invoke provisions of S.
271(1)(c) on the basis of routine and general presumptions. Whether it be a
case of only concealment or of only inaccuracy or both, the particulars of
income so vitiated would be specific and definite and be known in the
assessment proceedings by the Assessing Officer who, on being satisfied
about each concealment or inaccuracy of particulars of income, would be in a
position to initiate the penalty proceedings on one or both of the grounds
of defaults as may have been specifically and directly detected.

(4) Part A of the Explanation 1 to S. 271(1)(c) states
that “if the assessee fails to offer an explanation or offers an explanation
which is found by the AO or the CIT(A) or the CIT to be false”. This
Explanation can, therefore, be applied only where the assessee has either
not offered any explanation or where he has offered any explanation, the
same is found to be false by the AO, etc. Mere non-acceptance of explanation
offered by the assessee cannot form a basis for the satisfaction of the AO
to the effect that the assessee has concealed particulars of his income. The
AO must have some definite evidence to refuse the assessee’s claim or
explanation.

(5) When the assessee is able to offer a reasonable
explanation based on some evidence, the AO cannot invoke Part B of the
Explanation 1 unless he has given a finding based on some contradictory
evidence to disapprove that explanation offered by the assessee which the
assessee is not able to substantiate and fails to prove that such
explanation is bona fide and that all the facts relating to the same
and material to the computation of his total income have been disclosed by
him.

(6) In this case, the assessee had disclosed all relevant
material for the purpose of computation of total income. It was also found
that the assessee had furnished an explanation in this regard, which was not
found false by the Assessing Officer. When the assessee had filed all the
particulars of income, the correct assessment and calculation of total
income had to be done by the Assessing Officer. If in such process the
Assessing Officer found different total income to be assessed than the
income offered by the assessee, in such case it was not automatically a case
where penalty u/s.271(1)(c) was leviable.

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If assessee offers income or furnishes accurate particulars of income before the AO takes up the issue and comes across information, then there was no concealment of income or furnishing of inaccurate particulars of income.

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New Page 1

  1. (2009) 31 SOT 97 (Delhi) (TM)


Addl. CIT v. Prem Chand Garg

A.Ys. : 2003-04 and 2004-05

Dated : 11-5-2009

S. 271(1)(c) r.w. S. 68 :



(a) If assessee offers income or furnishes accurate
particulars of income before the AO takes up the issue and comes across
information, then there was no concealment of income or furnishing of
inaccurate particulars of income.


(b) Mere omission of surrendered amount from the
return of income is neither concealment of income nor furnishing of
inaccurate particulars of income unless and until there is some evidence to
show or some circumstances are found from which it can be gathered that
omission was attributable to an intention or a desire on part of assessee to
hide or conceal income so as to avoid imposition of tax thereon.



During the previous years relevant to the assessment years
in question, the assessee had received two gifts. Consequent upon the search,
a notice u/s.153A was issued to the assessee. In response to the said notice,
the assessee replied that the original returns filed be taken as returns under
the aforesaid provision. Thereafter, the assessee offered/surrendered the
amount of gifts within four days of the receipt of the notice u/s.153A for
taxation by way of a letter. The Assessing Officer held that the assessee had
furnished inaccurate particulars of income and concealed the particulars of
income in both the years and he levied penalty u/s.271(1)(c). The CIT(A)
deleted the penalty on the following grounds :



  •  No evidence was found in the course of search
    indicating that these gifts were not genuine.


  •  The only question asked by the Assessing Officer in the
    course of assessment proceedings was whether the assessee had taken or given
    any loan or gift in the period under consideration and to give details
    thereof.


  •  The assessee furnished the details of the gifts from
    NRIs, furnished copies of gift deeds and also mentioned that the gifts were
    surrendered for taxation to buy peace and to avoid dispute in the matter;
    that the surrender was made subject to the condition that penalty
    proceedings would not be initiated.


  •  The course of events narrated above showed that the AO
    did not have any information to hold that the gifts were not genuine or that
    they formed part of the total income of the assessee.


Since there was a difference of opinion between the
Members, the matter was referred to the Third Member u/s.255(4).

The Third Member upheld the order of the CIT(A) deleting
the penalty. The Third Member noted as under :

(1) It was true that the letter of surrender did not
obliterate the original return and suppression of income therein, but when
the surrender was made before detection or without any material on record
suggesting that income was withheld, it would be a case of voluntary offer
and, in that case, there would not be concealment of income by the assessee.

(2) The surrender of the amount after receipt of the
questionnaire could not lead to an inference that it was not voluntary in
absence of any material on record suggesting it to be bogus or untrue.

(3) The question, whether there is concealment of income
or whether inaccurate particulars thereof have been furnished, is
essentially a question of fact. To find out or to decide the same, all the
attending circumstances have to be taken into account. The question is at
what point of time this material fact is to be found out. Generally, it is
with reference to the return of income and at that time it is to be seen
whether there was concealment of income or furnishing of inaccurate
particulars thereof in the return of income chargeable to tax. By the time
the Assessing Officer takes up the issue and comes across the information in
his possession, if the assessee makes up the deficiency and offers the
income or furnishes accurate particulars thereof, he cannot be held guilty
of concealment of income or furnishing of inaccurate particular of his
income. Any action rectified relates back to the original act and to the
date and time of filing the return. When the Assessing Officer started
scrutiny of the return and initiated assessment proceedings there was
nothing concealed and the inaccuracy, if any, disappeared. Therefore, the
assessee could not be held guilty of concealment.

(4) The correct and accurate disclosure may be made by
filing the revised return or by furnishing the particulars of such income
before the detection by the Assessing Officer. The mere fact that the
assessee had not revised his returns or that the offer was made by letter to
avoid harassment to the assessee and the donors who were non-resident
persons, it could not convert an offer to tax as concealment of income.
Therefore, the assessee had not furnished inaccurate particulars of the
income in the returns before detection by the Revenue.

(5) Apart from the surrender, there was nothing more on
record to hold the assessee guilty of offering the said amount on detection
of the concealment. Even in the assessment order there was nothing of that
sort. On a perusal of the questionnaire, it was evident that it was general
in nature, without specifying the name of the donors or any other such
details. On the basis of the questionnaire, it could not be presumed that
the AO had information to call for specific information. There was neither
any detection nor any information in the possession of the Revenue nor in
the manner of its communication to the assessee, which might lead to a
detection of concealment.

(6) On the face of the evidence in the shape of
confirmation letters, bank accounts, passports, etc., in the hands of the
assessee, it might be valid gift that would have convinced a reasonably
minded person, specially a person exercising a judicial function. The
accepted position of law is that merely because an assessee had agreed to
the assessment, it cannot bring in automatic levy of penalty.

(7) Therefore, the CIT(A) was right in deleting the
penalty and his order was to be affirmed.

 

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S. 2(22)(e) — Deemed dividend can be assessed only in the hands of a person who is a registered shareholder of lender company.

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  1. (2009) 31 SOT 76 (Delhi)


Dy. CIT v. National Travel Services

A.Ys. : 2003-04 and 2004-05

Dated : 31-3-2009

S. 2(22)(e) — Deemed dividend can be assessed only in the
hands of a person who is a registered shareholder of lender company.

For the relevant assessment year, the Assessing Officer
invoked the provisions of S. 2(22)(e) in respect of a loan taken by the
assessee-firm from a company in which the assessee-firm was a shareholder
through its partners. The AO treated the loan of Rs.21.95 lacs given by the
company to the assessee-firm as deemed dividend. The CIT(A) held that since
the assessee-firm was not a registered shareholder, the loan could not be
treated as deemed dividend in the hands of the assessee-firm.

The Tribunal, relying on the Special Bench decision of the
Mumbai Tribunal in the case of ACIT v. Bhaumik Colour (P.) Ltd., (2009)
27 SOT 270 upheld the CIT(A)’s order. The Tribunal noted as under :

(1) The assessee-firm on whose behalf the partners had
become the shareholders in the company which had given the loan to it could
not be said to be a registered shareholder for the purpose of S. 2(22)(e).

(2) Since the assessee-firm was not a registered
shareholder of the company, the condition necessary to invoke S. 2(22)(e)
was not satisfied.

(3) The deemed dividend can be assessed only in the hands
of a person who is a registered shareholder of the lender company and not in
the hands of a person other than a registered shareholder.

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S. 50 r.w. S. 54EC — Since depreciation was never claimed by assessee on the building sold, S. 50 was not applicable.

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29. (2009) 31 SOT 38 (Mum.)


Dr. (Mrs.) Sudha S. Trivedi v. ITO

A.Y. : 2002-03. Dated : 20-2-2009

S. 50 r.w. S. 54EC — Since depreciation was never claimed
by assessee on the building sold, S. 50 was not applicable.

For the relevant assessment year, the assessee claimed
exemption u/s.54EC in respect of capital gains arising to her from sale of her
business premises on which she had not claimed any depreciation in the past.
The Assessing Officer held that even if no depreciation was allowed to the
assessee in the earlier years, the mandate of Explanation 5 to S. 32(1) would
be attracted since the building sold by the assessee was falling within the
‘block of asset’ and the resultant capital gain would be covered u/s.50 being
taxable as short-term capital gain. The Assessing Officer, therefore, denied
the exemption u/s.54EC and computed the short-term capital gain. The CIT(A)
upheld the order of the Assessee Officer.

The Tribunal, relying on the decision in the case of CIT
v. Ace Builders (P.) Ltd., (2006) 281 ITR 210/ (2005) 144 Taxman 855, held
that the assessee was eligible for exemption u/s.54EC. The Tribunal noted as
under :

2. In order to be covered within the provisions of S. 50,
the following two conditions should be simultaneously fulfilled :

à the capital asset transferred should be an asset
forming part of the ‘block of assets’; and

à the capital asset is such in respect of which
depreciation has been allowed under this Act.

3. Explanation 5 to S. 32(1) was inserted by the Finance
Act 2001 w.e.f. 1-4-2002. It is, therefore, clear that from the A.Y. 2002-03
the deduction in respect of depreciation shall be granted automatically,
notwithstanding the fact that the assessee has not claimed this deduction.

4. Therefore, from the A.Y. 2002-03, Explanation 5 to S.
32(1) would apply only if the assessee has not claimed depreciation. If,
however, the asset has been sold in the previous year, relevant to the A.Y.
2003-03 and there is no other asset in that block, then there cannot be any
question of allowing depreciation on the asset sold and, as such, the
application of Explanation 5 would be ruled out.

5. Since the assessee had not claimed depreciation on the
building in any of the earlier years, the denial of exemption u/s.54EC on the
ground that Explanation 5 to S. 32(1) would apply was out of place. Further,
since the second condition of S. 50, being ‘in respect of which depreciation
has been allowed under this Act’, was wanting in the instant case, the
provisions of S. 50 treating the capital gains arising from the transfer of
such capital asset as short-term capital gain would not be applicable.



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S. 28(i) read with S. 56 of the Income-tax Act — Whether the amount received by licensed bookmaker from hedge bets placed with another bookmaker was integral part of his business activity as a bookmaker and was not liable to be taxed u/s.115BB — Held, Yes

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23 (2008) 114 ITD 638 (Pune)


ACIT v. Raghunath B. Taware

A.Ys. : 1991-92, 1992-93, 1994-95

Dated : 31-5-2007

S. 28(i) read with S. 56 of the Income-tax Act — Assessee was
a licensed bookmaker who ran a business of booking races — Besides, he also used
to bet on horse races to minimise his probable losses —Whether the amount so
received by the assessee from hedge bets placed with another bookmaker had close
nexus or link with total amount received or paid for bets accepted by him on a
particular horse, and hence, same was integral part of his business activity as
a bookmaker and was not liable to be taxed u/s.115BB — Held, Yes.

 

Facts :

The assessee was a licensed bookmaker operating at the Pune
race course, under the terms and conditions for a bookmaker’s licence formulated
by Royal Western India Turf Club (RWITC). The assessee used to accept bets for
‘win’ or ‘place’ from the punters on the horse races as per the guidelines
formulated by RWITC. To minimise losses, a bookmaker, under the club rules, is
permitted to make a hedge bet with another bookmaker, subject to the condition
that total amount of such hedge bet laid over by one bookmaker should not exceed
the total amount of the bets accepted by him on a particular horse, at the time
of such lay-over. In case, the amount of laid-over bet exceeds the total amount
of bets accepted, then the last laid-over bet will be treated as independent
bet. Winnings from such hedge bets was called ‘Tote Winnings’.

 

During the relevant assessment years, the assessee had earned
income from tote winnings. The AO was of the view that such income was taxable
under the head ‘Income from Other Sources’ u/s.56(2)(ib), and not as business
income.

 

On appeal, the CIT(A) held that hedge betting was a part of
the business transactions in respect of business of bookmaking, inasmuch as
hedging was permitted, and such tote winnings was to be brought to tax as
business income.

 

On Revenue’s appeal, the Tribunal held as under :

1. The bookmaker is allowed to make hedge bet with another
bookmaker to the extent of total amount of bets collected by him on horsewise
basis and not with reference to aggregate total amount of bets collected by him
on all the horses. Thus, hedge betting by one bookmaker with another in respect
of the bets already accepted by him on a particular horse is an integral part of
the activity of a bookmaker accepting bets on horse races from others. The
position of the assessee-bookmaker is distinct and different from that of a
punter, and he cannot be deemed to have stepped in the shoes of the punter while
making a hedge bet.

2. Taking reference to CBDT Circular No. 461, dated 9-7-1986,
the Tribunal observed that where there is an integral relation of any payment as
to the very source of activity, the same should be treated as a part of the same
primary transaction or activity, and cannot be viewed independently so as to
divorce the same from its source. Thus, as is in the case of gross winnings from
lotteries and certain percentage deducted therefrom by the Government or lottery
agencies conducting the lottery, hedge betting by a bookmaker will also be
considered to be an integral part of the same activity.

3. The receipts from hedge betting cannot be considered in
isolation from the receipts and payments made by the assessee as a bookmaker on
bets accepted by him, so as to permit the revenue authority to tax the same
independently, at the rates specified u/s.115BB. Therefore, the same were
chargeable to tax as business income, and not income from other sources.

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S. 43B — Business disallowance — Certain deductions to be made only on actual payment — A service provider acts as an agent of the Government and is not entitled to claim deduction on account of service tax — S. 43B not applicable to service tax

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New Page 1

22 114 ITD 573 (Mad.)


ACIT v. Real Image Media Technologies (P.) Ltd.

A.Y. : 2002-03. Dated : 31-12-2007

 

S. 43B of Income-tax Act — Business disallowance — Certain
deductions to be made only on actual payment — A service provider acts as an
agent of the Government and is not entitled to claim deduction on account of
service tax. — For applicability of S. 43B, claim should be first preferred by
assessee, and the same should be disallowed for reason of failure to make
payment — in the instant case, assessee had not even preferred a claim towards
service tax — Whether on this account alone, addition u/s.43B could not have
been made, and CIT(A) had correctly deleted addition so made — Held, Yes.

 

Facts :

The assessee company was engaged in the business of running a
recording and dubbing studio, production of advertisement films, software
development, etc. During the assessment proceedings, the AO noticed that service
tax was not being routed through the Profit & Loss Account, and the assessee had
shown a liability towards service tax of Rs. 5,72,374 as on 31-3-2002 in its
balance sheet. The AO made additions to the assessee’s income contending that
the service tax had been collected, but had not been paid to the Government.

 

In its appeal before the CIT, the assessee made two-fold
submission, stating that for the applicability of S. 43B, claim should be
preferred by the assessee, and disallowance could be made only on account of
failure to make actual payment, and secondly with reference to Rule 6 of Service
Tax Rules, service tax is required to be paid only on the value of taxable
service received in a month or quarter and not on the gross amount charged or
billed. The CIT(A) having found force in the assessee’s submissions deleted the
addition.

 

On Revenue’s appeal before the Tribunal, it was held as under
:

1. S. 43B starts with the non-obstante clause and specifies
that the deduction ‘otherwise allowable’ under the Act shall not be allowed
unless it is actually paid. The rigour of S. 43B might be applicable to excise
or sales tax, but the same could not be applicable in the case of service tax
due to two reasons :

(i) The assessee merely acts as an agent of the
Government in collection of service tax, and is not entitled to claim
deduction on account of service tax.

(ii) S. 43B(c) uses the expression ‘any sum payable’. For
making any disallowance, it has to be established that such sum is payable.
A reading of Rule 6 of the Service Tax Rules states that the liability to
pay such service tax arises on receipt of payments towards the value of
taxable service. If there is no liability to make the payment to the
Government, because of non-receipt of payments from the receiver of
services, then it cannot be said that such service tax had become payable in
terms of S. 43B(a).

2. S. 145A includes sales tax, excise duty, etc. in the
turnover of purchases and sales of goods, but it does not apply to services
and hence service tax cannot be included in the turnover.

3. In the given case, the assessee had not preferred a
claim for the amount of service tax. Further, there was no liability on the
assessee to make payments to the credit of Central Government because of
non-receipt of payments from the receiver of services. Therefore, the rigour
of S. 43B is not attracted and the CIT(A) was right in deleting the additions
made on account of disallowance u/s.43B.

 

Case referred to :

(i) Srikaollu Subbarao & Co. v. Union of India,
(1988) 173 ITR 708 (AP)

 


Case distinguished :



(i) Chowranghee Sales Bureau Ltd. v. CIT, (1977) 110
ITR 385 (Cal.)

 

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S. 45 — Conversion of shares into stock-in-trade valid u/s.45(2) even if assessee not carrying on the business of shares and securities before such conversion

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New Page 1

20 (2008) 23 SOT 512 (Mum.)


ACIT v. Jehangir T. Nagree

ITA No. 7503 (Mum.) of 2004 and

3927 (Mum.) of 2005

A.Y. : 2001-02. Dated : 10-4-2008

S. 45 of the Income-tax Act, 1961 — Conversion of shares into
stock-in-trade would be valid u/s.45(2) even if the assessee was not carrying on
the business of shares and securities before such conversion.

 

On 1-4-2000 the assessee, a manufacturer and seller of
furniture, having short-term capital loss in earlier years, converted his
investment in shares brought forward from A.Y. 2000-01 into stock-in-trade.

 

Besides trading in shares and securities which were
converted, the assessee had made further purchases of shares and securities and
during the accounting year he had engaged himself in speculation of shares of
very high volume. The assessee incurred loss in share transaction activity and
also in speculation of shares and claimed deduction of the same as business
loss. The Assessing Officer rejected the assessee’s claim, holding that the
provision of S. 45(2) contained the words ‘of business carried by him’ and since
as on date of conversion the assessee had no business of share transaction, the
said conversion was not valid. The Assessing Officer, accordingly, held that by
this arrangement, the assessee had gained immensely by setting off income in
various other heads against the business loss, which benefit would not have been
available had this loss been treated as a short-term capital loss and disallowed
the assessee’s claim.

 

The CIT(A) held that the conversion made by the assessee was
valid and not a device, especially in view of the fact that the assessee had
done large volume of transactions during the year in speculation account and had
also made fresh purchases of shares for share business.

 

The Tribunal held that the assessee was entitled to benefit
u/s.45(2). The Tribunal noted as under :

(1) Having seen the volume of transactions undertaken by
the assessee in the impugned assessment year, it was very difficult to hold
that the assessee still held the investment in shares and securities. It was
the sweet will of the assessee to decide as to when he intended to convert his
investment in stock-in-trade.

(2) In S. 45(2), the words ‘business carried on by him’ do
not mean that before conversion of investment or capital assets into
stock-in-trade the assessee must carry on business of share transaction or
such a business must be in existence.

(3) The restrictive meaning as suggested by the Revenue
should not be given to the words ‘business carried on by him’ in the light of
the use of the words in other Sections like S. 28(i).

(4) The assessee could undertake multiple business
activities under his proprietary concern. Besides the manufacturing and sale
of furniture, the assessee could also deal in trading in shares in the name of
same proprietary concern keeping the stock-in-trade of shares separate.

(5) Thus, conversion of investment in shares and securities
into stock-in-trade would be valid u/s.45(2) even if business of trading of
shares is not carried on by the assessee before such conversion.

 


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S. 80IB — Production of masala varieties, is manufacture of goods

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New Page 1

13 ACIT v. Empire Spices & Foods Mumbai Ltd.


ITAT ‘G’ Bench, Mumbai

Before Sunil Kumar Yadav (JM) and

Rajendra Singh (AM)

ITA No. 4477/M/06

A.Y. : 2003-04. Decided on : 18-9-2008

Counsel for revenue/assessee : D. Songate/

B. V. Jhaveri

S. 80IB of the Income-tax Act, 1961 (‘the Act’) — Whether
business of the assessee, which is producing masala of different varieties, is
manufacture of goods or is only processing of goods — Held, it is manufacture of
goods.

Per Rajendra Singh :

Facts :

The assessee, engaged in business of masala, claimed for the
relevant assessment year, deduction u/s.80IB of the Act by treating the business
as industrial undertaking for manufacture and sale of masala. The Assessing
Officer (AO) noted that the assessee was only purchasing raw material in the
form of different spices which were grinded and mixed and filled in pouches and
then sold. The AO placed reliance on the judgments of the Supreme Court
(sic-Calcutta High Court) in the case of Apeejay Plantation and also in the case
of Indian Hotels and on the judgment of Madras High Court in the case of Sacs
Eagles Chicory and held that the activity of the assessee amounts to processing
and not manufacture and accordingly he disallowed the claim of deduction
u/s.80IB. Before the CIT(A) it was contended by the assessee that it was
manufacturing various types of masala, such as chivda masala, pickle masala,
etc. which involved different formulas and process; the raw material i.e., raw
spices underwent changes and the final product was masala which was sold in the
market as a distinct and different commercial product; each type of masala was
different in taste and uses; the manufacturing process involved various
activities such as cleaning of various raw spices, roasting, frying, polishing,
mixing, boiling, pulping, grinding, etc. which are done with the help of
machinery. Reliance was placed by the assessee on the judgment of the Supreme
Court in the case of Aspinwall & Co. Reference was also made to the decision of
the Mumbai Tribunal in the cases of Pankaj Jain and Comet Foods & Metals Ltd.
The CIT(A) being satisfied with the explanation, held that the end product in
this case was completely different from the raw material and therefore the
activity carried on by the assessee was manufacture and not processing. He also
observed that the Department had allowed the
claim of manufacture in earlier years. Accordingly, he allowed the claim for
deduction u/s.80IB treating the business as manufacture of masala. Aggrieved,
the Revenue preferred an appeal to the Tribunal.

Held :

It is settled legal position that producing articles whether
by any labour or by machine will amount to manufacture if the final product is
different from the input and is known as a commercially different product in the
business parlance. The assessee is producing different variety of masala, such
as chiwda masala, pickle masala, etc. which are commercially known products in
the market and these products are different from the different spices used in
the process. In case of the assessee, different raw spices which are inputs are
combined in different proportions and undergo different processes to produce the
final product which is masala and which is different from the input raw
material. The assessee is producing different types of masala using different
formula with the help of input spices and these products are commercially known
products, such as garam masala, mutton masala, pav bhaji masala and have
different uses. The Tribunal noted that the judgment of the Supreme Court in
Aspinwall & Co. supports the case of the assessee and that the decision of the
Tribunal in the case of Tirupathi Microtech Pvt. Ltd. is in favour of the
assessee. The judgments relied upon by the AO viz. Appejay Plantation, Indian
Hotels and Sacs Eagles Chicory were found to be distinguishable. Accordingly,
the Tribunal held that the assessee is a manufacturing concern entitled to
deduction u/s.80IB.

Cases referred to :



1. Indian Hotels Co. Ltd. & Ors. v. Income Tax Officer &
Ors., (245 ITR 538) (SC)

2. Aspinwall and Co. Ltd. v. Commissioner of Income-tax,
(251 ITR 323) (SC)

3. Apeejay Plantation (206 ITR 367) (Cal.)

4. Commissioner of Income-tax v. Sacs Eagles Chicory, (241
ITR 319) (Mad.)

5. Comet Foods & Metals Ltd. v. ITO, (95 TTJ 440) (Mum.)

6. Pankaj Jain v. ITO, (97 TTJ 28) (Asr.)

7. ACIT v. Tirupathi Microtech Pvt. Ltd., (111 TTJ 149) (Jodh.)

8. ACIT v. Panachayil Industries, (7 SOT 96) (Coch.)




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Section 50C – Transfer of tenancy right – Held such transaction not covered under the provisions of section 50C.

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Tribunal News

Part B — Unreported Decisions

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



23 Kishori Sharad Gaitonde vs. ITO

ITAT Mumbai Bench ‘SMC’, Mumbai

Before A. L. Gehlot (A. M.)

ITA No. 1561 / M / 09

A.Y. 2005-06. Decided on 27.11.2009

Counsel for Assessee / Revenue: L. K. Doshi / S. K. Madhukar

Section 50C – Transfer of tenancy right – Held such
transaction not covered under the provisions of section 50C.


Facts:

During the year, the assessee had sold a tenancy right for Rs.
30 lakhs. In her return of income, the assessee had computed the long term
capital gain based on the said consideration. However, the AO observed that for
the purpose of stamp duty, the Sub-Registrar had adopted the market value of Rs.
33.11 lakhs. Therefore, applying the provisions of section 50C, he computed the
capital gain based on the market value of Rs. 33.11 lakhs.

One of the issues raised before the tribunal was whether the
provisions of section 50C were applicable to a tenancy right.

Held:

The tribunal noted that by virtue of section 50C, a legal
fiction had been created for assuming the value adopted or assessed by any
authority of the State Government as the full value of sale consideration
received in respect of transfer of land or building. Relying on the decisions of
the Supreme Court in the case of Amar Chand Shroff and in the case of Mother
India Refrigeration Industries Pvt. Ltd., the tribunal observed that the legal
fiction cannot be extended beyond the purpose for which it was enacted.
Accordingly, it noted that as per the plain reading of the provisions of section
50C, it applies only to those items of capital assets which are either land or
building or both. Since in the case of the assessee, the capital assets
transferred was tenancy right, it held that the provisions of section 50C were
not applicable.

Cases referred to:



1. CIT vs. Amar Chand Shroff 48 ITR 59 (S.C.);

2. CIT vs. Mother India Refrigeration Industries Pvt. Ltd.
155 ITR 711 (S.C.)


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S. 271(1)(c) — Whether penalty can be levied in case where rental income is assessed under head ‘Income from House Property’ as against ‘Income from Business’ — Held, No.

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New Page 1

Part B — Unreported Decisions

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





27 ACIT 8(3) v. Vazir Glass
Works Ltd.


ITAT ‘F’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

V. D. Rao (JM)

ITA No. 332/Mum./2007

A.Y. : 2001-02. Decided on : 24-11-2008

Counsel for revenue/assessee : J. V. D. Langstein/ B. V.
Jhaveri

S. 271(1)(c) of the Income-tax Act, 1961 — Whether penalty
can be levied in a case where rental income is assessed under the head ‘Income
from House Property’ as against ‘Income from Business’ as returned by the
assessee – Held, No.

 



Per S. V. Mehrotra :

Facts :


The assessee-company was engaged in the business of glass
vials and bottles. One of the issues before the Tribunal was whether the AO was
justified in levying a penalty u/s.271(1)(c) in respect of the assessment of
rental income under the head ‘Income from House Property’ as against the
assessee’s claim of it being chargeable under the head ‘Income from Business’.

Held :

The Tribunal found that out of the gross receipt of Rs.23.14
lacs, the sum of Rs.11.14 lacs received by the assessee was by way of
reimbursement of expenses incurred towards electricity and telephone. And the
balance sum of Rs.12 lacs was credited by the assessee to miscellaneous receipts
account and shown accordingly in the Profit and Loss Account. According to the
Tribunal this was a case of honest difference of opinion between the assessee
and the Department on whether rental income was assessable as ‘Income from House
Property’ or as ‘Business Income’. The Tribunal also observed that it was not
the case of the AO that the expenses incurred were not genuine. Thus, the
explanation of the assessee that the income was assessable as income from
business was found bona fide one. Therefore, the Tribunal held that this
case cannot be said to be a case of furnishing inaccurate particulars of income.
According to the Tribunal the assessee had not concealed any facts from the
Department and, therefore, no penalty can be levied u/s. 271(1)(c).

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S. 145 — Method of accounting — Assessee has more sources of income under head ‘Business income’ — Whether assessee can follow different method of accounting for each source — Held, Yes.

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New Page 1

Part B — Unreported Decisions

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





26 ACIT v. Mehul J. Somaiya


ITAT ‘B’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

Karunakara Rao (AM)

ITA No. 7118/Mum./2006

A.Y. : 2002-03. Decided on : 10-12-2008

Counsel for revenue/assessee : G. Gurusamy/

C. N. Vaze

S. 145 of the Income-tax Act, 1961 — Method of accounting —
Assessee having more than one source of income under the head ‘Business income’
— Whether the assessee has the option to follow different method of accounting
in respect of each of the different sources of income under the head — Held,
Yes.

 

Per N. V. Vasudevan :

Facts :

During the year the assessee had returned income under the
head salary, business and income from other sources. In respect of income under
the head business, he had three different sources of income viz., (i)
Remuneration from partnership firm where he was a partner; (ii) income from
proprietary concern; and (iii) consultancy fee. In respect of the first two
sources of business income, the assessee was following mercantile system of
accounting, while in case of the latter, the assessee claimed that it was
following cash method of accounting. Accordingly, from the consultancy fee of
Rs.7.87 lacs receivable, he offered to tax the sum of Rs.41,344 i.e., the
sum equal to the tax deducted at source by the client and for which the TDS
certificate was received by him, for tax.

 

According to the AO, the assessee was not allowed to adopt
different methods of accounting for different sources of income falling under
the same head. Therefore, he brought to tax the entire consultancy fee of
Rs.7.87 lacs. On appeal, the CIT(A) allowed the appeal of the assessee.

 

Held :

The Tribunal noted that the object of the amendment of S. 145
made by the Finance Act, 1995 was only to do away with the mixed system of
accounting, by which certain transactions relating to a particular source
were recorded following one system and the other transactions following the
other system of accounting. According to the Tribunal, if there were more than
one sources of income falling under the same head of income, and the assessee
follows either cash or mercantile system of accounting for different sources
income, it cannot be said that the hybrid system of accounting for different
sources of income is being followed. According to it, so long as for a
particular source either cash or mercantile system was followed, there can be no
objection. Thus, as noted by the CIT(A), since the assessee was consistently
following the cash system of accounting for his consultancy income, it accepted
the submission of the assessee and dismissed the appeal filed by the Revenue.

 

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Sale of depreciable assets — Sale of two units — Consideration for both units based on individual value of land, building, plant and machinery –– Whether sale of two units covered by S. 50 and not by S. 50B — Held, Yes.

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New Page 1

Part B — Unreported Decisions

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


25 Accelerated Freeze Drying Co. Ltd.
v. DCIT


ITAT Cochin

Before N. Barathvaja Sankar (AM) and

N. Vijayakumaran (JM)

ITA No. 611/Coch/08

A.Y. : 2002-03. Decided on : 5-12-2008

Counsel for assessee/revenue : R. Sreenivasan/

V. M. Thyagarajan

S. 50 and S. 50B of the Income-tax Act, 1961 — Sale of
depreciable assets or slump sales — Sale of two manufacturing units along with
immovables and movables — Consideration for both the units was based on the
individual value of each of the lands, buildings and plant and machinery ––
Whether the sale of these two units was covered by S. 50 and not by S. 50B —
Held, Yes.

 

Per N. Vijayakumaran :

Facts :

The assessee is engaged in the business of processing frozen
foods. During the relevant assessment year, the assessee sold two of its units
for valuable considerations. Both the units were sold to two different buyers
and the consideration for both the units was arrived at based on the separate
valuations done for land, building and each of the items of plant and machinery.
The assessee regarded these transactions as sale of depreciable assets as per
provisions of S. 50 of the Act. The Assessing Officer by way of reassessment
u/s.148, brought these amounts to tax as slump sale within the meaning of S. 50B
of the Act. Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld
the action of the AO. Aggrieved by the order of the CIT(A), the assessee
preferred an appeal to the Tribunal.

 

Held :

The Tribunal observed that there is ample evidence which
shows that there is bifurcation of sale profits, splitting up of the value
between movable and immovable assets and the assets are depreciable assets. The
Tribunal held that this is a case where S. 50 is squarely applicable. It is not
the aggregate value taken as the net worth for the purpose of application of
slump sale provision as u/s.50B. The Tribunal found the decision of the Cochin
Tribunal in the case of International Creative Foods P. Ltd. to be squarely
applicable to the facts of the case. Accordingly, the Tribunal set aside the
order of the authorities below and following the decision of the Cochin Tribunal
in the case of International Creative Foods P. Ltd. allowed the claim of the
assessee.

 

Cases referred to :


ACIT v. International Creative Foods P. Ltd., ITA Nos.
227/Coch./2006 and 447/Coch./2007, dated 10-9-2008.

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S. 14A — Disallowance of expenditure incurred to earn exempt income — Where no nexus between expenditure & income, expenditure not disallowed.

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12 Indo German International Pvt. Ltd. v. DCIT


ITAT ‘C’ Bench, New Delhi

Before I. P. Bansal (JM) and Deepak R. Shah (AM)

ITA Nos. 4971/Del./2007

A.Y. : 2004-05. Decided on : 9-5-2008

Counsel for assessee/revenue : Ramo Jain/

M. P. Singh

S. 14A of the Income-tax Act, 1961 — Disallowance of
expenditure incurred to earn exempt income — Where no nexus is established
between the expenditure and the income earned, can the expenditure be disallowed
— Held, No.

Per Deepak R. Shah :

Facts :

The assessee was engaged in the business of export and import
of iron, steel and allied products and as commission agent. During the year it
earned dividend income of Rs.78.05 lacs which was claimed as exempt u/s.10(33).
According to the AO, the provisions of S. 14A were applicable and as the
assessee had not furnished any evidence to establish that no expenses had been
incurred in earning the dividend income, it was held that 5% of dividend income
was incurred for earning dividend income.

The CIT(A) on appeal held that the AO had rightly applied the
provisions of S. 14A, as incurring of expenditure had to be inferred from the
accounts. According to it, if no expenses were debited against the exempt
income, the AO was justified in estimating the same.

Before the Tribunal, the Revenue relied on the Mumbai Bench
Tribunal decision in the case of Citicorp Finance (India) Ltd. and contended
that the orders of the lower authorities be upheld.

Held :

According to the Tribunal, the pre-requisite for disallowance
u/s.14A is that the expenditure should have been incurred in relation to exempt
income. In the given case, the assessee had all along claimed that it had not
incurred any expenditure. It further noted that the AO had not been able to
correlate any expenditure, which could be said to have been incurred for earning
exempt income. According to it, the decision in the case of Citicorp Finance
(India) Ltd. relied on by the Revenue was based on the provisions in Ss.(2) and
(3) which were inserted by the Finance Act, 2006 w.e.f. 1-4-2007. According to
it, the insertion of the said provisions was not retrospective in nature. Hence,
the ratio as laid down in the said Tribunal decision cannot be applied to the
case of the assessee. Further, relying on the decision of the Delhi Tribunal in
the case of Wimco Seedling Ltd., the Tribunal allowed the appeal of the assessee.

Cases referred to :



1. ACIT v. Citicorp Finance (India) Ltd., 12 SOT 248 (Mum.)

2. Wimco Seedling Ltd. v. DCIT, 107 TTJ 267 (Del)


Note :

Attention of the readers is drawn to the insertion of Ss.(2)
and (3) to S. 14A by the Finance Act, 2006 w.e.f. 1-4-2007 and the Rule 8D which
prescribes the method in which expenditure incurred to earn exempt income could
be determined.

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S. 79 and S. 115JB — In computing book profit u/s.115JB, lower of brought forward loss or unabsorbed depreciation to be reduced, irrespective of whether allowable u/s.79

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10 (2008) 117 TTJ 891 (Ahd.)

Fascel Ltd. v. ITO

ITA No. 1195 (Ahd.) of 2007

A.Y. : 2003-04. Dated : 17-8-2007

S. 79 and S. 115JB of the Income-tax Act, 1961 — In arriving
at the book profit u/s.115JB, the lower of the amount of brought forward loss or
unabsorbed depreciation as appearing in the books of account of the assessee has
to be reduced, irrespective of the fact whether the same is allowable u/s.79 or
not.

 


While computing the book profit u/s.115JB for A.Y. 2003-04,
the Assessing Officer held that since there was a substantial change in
shareholding in A.Y. 2000-01, the provisions of S. 79 were attracted. Therefore,
the brought forward loss/depreciation up to A.Y. 2000-01 is not to be carried
forward for computing the business income as well as for the purposes of S.
115JB. The Assessing Officer also held that there is no direct case law on the
subject, but logic demands that prohibition u/s.79 shall apply both to normal
computation u/s.28 to u/s.43C as well as u/s.115JB. The CIT(A) upheld the
Assessing Officer’s order.


 

The Tribunal held in favour of the assessee. The Tribunal
noted as under :

(a) Clause (iii) of the Explanation to S. 115JB(2)
specifically provides that the amount of loss brought forward or unabsorbed
depreciation as per the books of account is to be reduced from the book profit
and it is lower of the two amounts that is to be reduced. It is the amount
which is as per the books of accounts that is to be reduced and not as per the
income-tax records which has been computed under the provisions of the Act.


(b) The admissibility of loss as per other provisions of
the Act has nothing to do with the computation of book profit and that is made
clear by the provisions of clause (iii) of the Explanation. If it is appearing
in the books of accounts and not set off in the subsequent year’s profit, the
effect is to be given in the impugned year of profit while computing the book
profit of the assessee.




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S. 67A — Share of loss of company in AOP could be set-off against other income.

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9 (2008) 117 TTJ 721 (Mum.) (TM)

Mahindra Holdings & Finance Ltd. v. ITO

ITA Nos. 5319 & 6074 (Mum.) of 2004

A.Ys. : 2000-01 and 2001-02. Dated : 23-6-2008

S. 67A of the Income-tax Act, 1961 — Share of loss of company
in an AOP could be set off against other income of the company.

For the relevant year, the assessee-company, which was a
member of an AOP, set off its share of loss from the AOP against its other
income. The claim of the assessee was rejected by the Assessing Officer on the
following grounds :



  • that S. 67A is not applicable in the assessee’s case.

  •  the provisions of S. 67A can only be applied in those cases where a member of
    an AOP or a BOI is not a company or a co-operative society or a society
    registered under the Societies Registration Act.



  • since the assessee is a company, its total income cannot be computed as per
    provisions of S. 67A and as such, the loss booked by the assessee cannot be
    allowed to be set off against the other income of the assessee.


The CIT(A) also disallowed the assessee’s claim.

Since there was a difference of opinion between the members,
the matter was referred to the Third Member u/s.255(4).

The Third Member, relying on the decision in the case of
CIT v. Salem District Urban Bank Ltd., (1940) 8 ITR 269 (Mad.), held in
favour of the assessee. The Third Member noted as under :

(a) The purpose of S. 67A is to compute the share of
income/loss in the AOP/BOI. If all the provisions are read together, the
entities specified in the parenthesis in S. 67A would qualify the AOP/BOI and
not the member of such AOP/BOI.


(b) Reference to S. 2(17) indicates that the expression
‘AOP’ includes a company or a cooperative society or a society mentioned in
parenthesis in S. 67A.


(c) The purpose of S. 67A is to determine the share of
income/loss in the profits/losses of the AOP since share is to be included in
the income of the member of AOP for rate purpose as per the provisions of S.
86. However, in the case of a company, cooperative society or society, the
income is not apportioned amongst the members constituting these entities.
Such entities may have income, but may not declare dividend and thus nothing
would be includible in the income of the members of such entities. On the
other hand, these entities may not have income, still they may declare
dividend out of their accumulated profits. Therefore, despite there being no
income in the hands of such entities, the dividend declared by them would be
assessable as income in the hands of members. Therefore, considering the
different schemes of taxation in respect of income received by members from
such entities, the Legislature has excluded these entities from the ambit of
the expression ‘AOP/BOI’.


(d) Had the Legislature not excluded the entities specified
in the parenthesis, it would have resulted in double taxation — once as per
share determined u/s.67A read with S. 86, and again when dividend income is
distributed by such entities to its members.


(e) If the contention of the Revenue is accepted, then it
will lead to absurd result not intended by the Legislature and also will be
detrimental to the interest of the Revenue itself. If it is held that the
words in the parenthesis qualify the word ‘member’ and not the AOP/BOI, then
the company or a cooperative society or a society or other entities in the
parenthesis would not be liable to pay any tax in respect of their share of
income in the AOP/BOI as per the provisions of S. 86, even though such share
of income is includible in the total income. In such cases, the companies or
societies by themselves may not carry on any business and may form various
AOPs/BOIs and may get away by paying lesser rate of tax on such AOP/BOI, since
AOP/BOI (having members whose shares are determinate or known) would be
chargeable to normal rate of tax applicable to individuals. The interpretation
put forth by the Revenue would give birth to legal device for evading the tax
by the entities specified in the parenthesis. Such absurd result could never
have been intended by the Legislature.


(f) It is a well-settled rule of interpretation that
provisions of a statute should be interpreted in a manner which augments the
object behind the legislation and not in a manner which frustrates the object.




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S. 10BA — DEPB/DDB credit part of profits of business for S. 10BA(4) and will not enter into total or export turnover for calculating profits derived from business.

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8 (2008) 117 TTJ 672 (Jd.)


ITO v. Bothra International

ITA Nos. 607 & 608 (Jd.) of 2007

A.Ys. : 2004-05 and 2005-06. Dated : 27-6-2008

S. 10BA of the Income-tax Act, 1961 — Amount of credit on
account of DEPB/Duty Drawback (DDB) has to be included as profits of the
business of the undertaking for the purpose of S. 10BA(4) and the said amount of
credit of DEPB or DDB will not enter into the total turnover or export turnover
of the undertaking for the purpose of calculating profits derived from the
business of the undertaking of the assessee within the meaning of Ss.(4).

 

For the relevant assessment year, the Assessing Officer
rejected the assessee’s claim for deduction of DEPB and DDB u/s.10BA. The
CIT(A), however, allowed the claim for deduction.

 

The Tribunal upheld the CIT(A)’s order and allowed the
deduction u/s.10BA. In arriving at this decision the Tribunal relied upon the
decisions in the case of B. Desraj v. CIT, (2008) 7 DTR (SC) 54 and
Kerala State Co-op. Marketing Federation Ltd. & Ors. v. CIT, (1998) 147 CTR
(SC) 29/231 ITR 814 (SC).

 

The Tribunal noted as under :

(a) By the use of expression ‘subject to’ in Ss.(1) of S.
10BA, it is clear that the provision contained U/ss.(4) shall override the
provisions of Ss.(1) of S. 10BA.

(b) Once the assessing authority has found the assessee
eligible for deduction u/s.10BA(1), then the only scope available to the
assessing authority was to find out the quantum of the deduction as per
prescription of Ss.(4) of S. 10BA and no other method or manner could be used,
as the answer is available from the scheme contained in the special provision
of S. 10BA itself, where allowability of deduction was by mandate subjected to
such provisions contained therein.

(c) When the profits are derived from manufacture and
export of eligible articles, the solitary business activity of the
undertaking, then the incentive such as DEPB/DDB irrespective of its real
character or source has to be taken into account and has to be included as
profits of the business of the undertaking, in particular when the expression
used in Ss.(4) of S. 10BA is the ‘profits of the business of undertaking’.

(d) The Legislature in its wisdom did not use the
expression ‘profit’ in singular, but used it as ‘profits’ in plural. Thus,
there can be profits not only by exporting the eligible articles or things,
but also can be those profits which are related to export of such articles or
things, which in the present case are DEPB and DDB determined with relation to
export sales effected by these assessees.


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S. 234D has no retrospective effect — Applicable only from A.Y. 2004-05.

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7 ITO v. Ekta Promoters (P) Ltd.

ITA Nos. 2551 to 2553 (Del.) of 2006

A.Ys. : 1998-99 to 2000-01. Dated : 11-7-2008

S. 234D of the Income-tax Act, 1961 — S. 234D, inserted
w.e.f. 1-6-2003, being substantive in nature has no retrospective effect — It is
applicable only from A.Y. 2004-05 and cannot be charged for earlier assessment
years even though assessments are pending as on 1-6-2003.

 

A Special Bench was constituted to answer the following
question :

“Whether, in the facts and circumstances of the case,
interest u/s.234D should be charged from A.Y. 2004-05 or with reference to
regular assessment framed after 1-6-2003, irrespective of the assessment years
involved or irrespective of the date when refund was granted ?”

 


The Special Bench, relying on the decisions in the following
cases, held that the provisions of S. 234D are substantive and they cannot be
retrospective :

(a) J. K. Synthetics Ltd. v. CTO, (1994) 119 CTR
(SC) 222

(b) Padmasundara Rao (Decd.) & Ors. v. State of Tamil
Nadu & Ors., (2002) 176 CTR (SC) 104; (2002) 255 ITR 147 (SC)

(c) Reliance Jute & Industries Ltd. v. CIT, (1979)
13 CTR (SC) 186; (1979) 120 ITR 921 (SC)


The Special Bench noted as under :

(a) The argument that Legislature has brought this
provision just to fill the lacuna in the law and, therefore, these provisions
should be construed retrospective cannot be accepted, more particularly when
these provisions have been inserted on the statute w.e.f. 1-6-2003 and not
with retrospective effect.

(b) The Legislature has specifically mentioned the date of
applicability i.e., 1-6-2003 and the Legislature was not incompetent to
make retrospective provision, if it was so intended.

(c) In a fiscal legislation, if a provision is brought for
imposing any liability, the normal presumption will be that it has no
retrospective operation and it is a cardinal principle of tax law that law to
be applied is the law which is in force in the assessment year, unless
otherwise provided expressly or by necessary implication.

(d) The provisions regarding levy and collection of
interest even if construed as forming part of the machinery provisions are
substantive law for the simple reason that in the absence of contract or
usage, interest can be levied under law and it cannot be recovered by way of
damages for wrongful detention of amount.

(e) Thus, the contention of the Revenue that the provision
of S. 234D being under Chapter XVII under the head ‘Collection and recovery’
should be construed to be a procedural or machinery section and, therefore,
should be applied retrospectively has to be rejected.

(f) If the provisions of S. 234D are substantive, then the
same cannot be held to be retrospective, unless specifically provided in the
statute itself.

(g) While applying Heydon’s Rule, (mischief rule of
purposive construction) a word of caution is necessary that text of statute is
not to be sacrificed and the Court cannot rewrite the statute on the
assumption that whatever furthers the purpose of the Act must have been
sanctioned and, therefore, the Court cannot add to the means enacted by the
Legislature for achieving the object of the Act. Moreover, the application of
Heydon’s Rule itself does not confirm retrospective operation of a provision
brought under that rule. This is irrespective of the fact that for application
of that rule it is a condition precedent to find out that there existed a
mischief. Mere fact that earlier there was no provision to charge interest on
the refund issued on processing of return cannot by itself be described as
‘mischief’ or ‘defect’.



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S. 120, S. 124(3) and S. 148 — Reassessment initiated by AO not having jurisdiction, completed by AO having jurisdiction — Reassessment invalid.

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6 (2008) 117 TTJ 42 (Lucknow)


M. I. Builders (P.) Ltd. v. ITO

ITA No. 111 (Lucknow) of 2006

A.Y.  : 1997-98. Dated : 7-9-2007

S. 120, S. 124(3) and S. 148 of the Income-tax Act, 1961 —
Reassessment proceedings initiated by AO not having jurisdiction — Reassessment
completed in continuation of such initiation by AO having jurisdiction —
Reassessment was invalid.

For the relevant assessment year, notice u/s.148(1) was
issued by an Assessing Officer having no jurisdiction over the assessee. On
protest by the assessee within one month of such notice, the case was
transferred to the Assessing Officer having jurisdiction over the assessee and
this Assessing Officer finally passed the reassessment order. The assessee
contended before the CIT(A), inter alia, that the notice u/s.148(1) was
devoid of proper jurisdiction and, therefore, void ab initio.

The CIT(A), however, upheld the reassessment order.

The Tribunal, relying on the decisions in the following
cases, held that the reassessment was invalid :

(a) Lt. Col. Paramjit Singh v. CIT, (1996) 135 CTR
(P&H) 8; (1996) 220 ITR 446 (P&H)

(b) Naginimara Veneer & Saw Mills (P) Ltd. v. Dy. CIT,
(1996) 136 CTR (Gau.) 134; (1996) 219 ITR 527 (Gau.)

(c) Anant Mills Ltd. (In Liquidation) v. CIT, (1993)
109 CTR (Guj.) 231; (1994) 206 ITR 582 (Guj.)

(d) P. A. Ahammed v. Chief CIT, (2006) 200 CTR
(Ker.) 378; (2006) 282 ITR 334 (Ker.)

(e) CIT v. Metal Goods Manufacturing Co. (P) Ltd.,
(1992) 197 ITR 230 (All)

(f) K. V. Kader Haji (Decd.) through LR v. CIT,
(2004) 189 CTR (Ker.) 313; (2004) 268 ITR 465 (Ker.)

(g) ITO v. Ashoke Glass Works, (1980) 125 ITR 491
(Cal.)

The Tribunal noted that the issuance of notice u/s. 148(1) by
the first Assessing Officer was without jurisdiction and, therefore, invalid.
The assessment framed on that basis by the jurisdictional Assessing Officer was
also invalid and, therefore, cancelled.

The Revenue’s stand for protection u/s.124 was also not
allowed by the Tribunal. It noted as follows :

(a) Invoking of S. 124(2) would arise if there was any
chance of validation of proceedings by virtue of S. 124(3) which is not
available to the Assessing Officer in the present case, either under clause
(a) or under clause (b) of S. 124(3).

(b) Protection of the proceedings and assessment thereafter
on account of failure of the assessee to object within the time allowed
u/s.124(3) is available to specific proceedings and not to every proceeding.
Erroneous assumption of jurisdiction cannot, in general, be validated. Such
validation is specific in S. 124(3).

 

(2008) 117 TTJ 289 (Delhi) (SB)


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S. 40A(3) — Cash payment exceeding prescribed limits — S. 40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in business of processing and export of meat and meat products — Allowable under clause (l) of Rule 6DD — Also as per claus

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  1. (


  1. (2009) 120 itd 89 (Delhi)


Dy. CIT v.
Hind Industries Ltd.

A.Y. : 2003-04. Dated : 26-9-2008

 

S. 40A(3) — Cash payment exceeding prescribed limits — S.
40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in
business of processing and export of meat and meat products — Allowable under
clause (l) of Rule 6DD — Also as per clause (f) of Rule 6DD and, therefore, no
disallowance could be made u/s.40A(3).

The assessee-company was engaged in the business of
processing and export of meat and meat products. The assessee had made all the
purchases in cash and had regularly withdrawn huge cash from bank and
ostensibly made payments for supplies of carcass. The Assessing Officer was of
the view that the payments made in cash would be hit by provisions of S.
40A(3). On appeal, the Commissioner (Appeals) opined that since the payments
had been made to agents in respect of purchases of carcass, there was no room
to interpret clause (f) of Rule 6DD in favour of the assessee. However, so far
as the assessee’s claim for exclusion under clause (l) of Rule 6DD was
concerned, the Commissioner (Appeals) held that payments in cash to agents for
purchases of products of animal husbandry could not be disallowed u/s.40A(3).

 

On the Revenue’s appeal, the ITAT held that :

(1) The AO had disallowed the claim of the assessee in
view of the decision of the Allahabad High Court in the case of CIT v.
Pehlaj Raj Daryanmal, (1991) 190 ITR 242. The decision by the Allahabad
High Court was rendered in 1991 whereas clause (l) was inserted by the IT
Amendment Rules in the year 1995. Therefore, the ratio of the decision of
the Allahabad High Court would not be applicable to the facts of the instant
case.

(2) The contention of the department, that there was no
agent, did not sound good because the AO himself had disallowed the payments
for the reason that they were not made directly to producers/cultivators but
through intermediaries or agents.

(3) Though the Commissioner (Appeals) had rejected the
claim under clause (f), yet, in view of Rule 27 of the Income-tax (Appellate
Tribunal) Rules, 1963, the claim of the assessee was allowable as per clause
(f) of Rule 6DD.

Accordingly, the order of the Commissioner (Appeals) was to
be confirmed.


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S. 32 — Whether road is eligible for depreciation in category of ‘building’ at rate applicable to buildings — Held, Yes.

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New Page 2

  1. (2009) 120 ITD 20 (Chennai)


Tamil Nadu Road Development Co. Ltd. v. ACIT/ITO

A.Ys. : 2003-04 and 2004-05

Dated : 24-10-2008

S. 32 — Whether road is eligible for depreciation in
category of ‘building’ at rate applicable to buildings — Held, Yes.

The assessee-company was incorporated for construction,
development and maintenance of roads at various places in Tamil Nadu as per
the agreement entered into with the Government of Tamil Nadu. Its claim for
depreciation on roads at the rate of 25% (as plant and machinery), was
rejected by the Assessing Officer as road did not figure in the depreciation
schedule. He further observed that roads were not buildings, entitled to
depreciation. On appeal, the Commissioner (Appeals) upheld the Assessing
Officer’s view.

On second appeal by the assessee, the Tribunal held that :

(1) Merely because some optical fibre lines or connection
lines had been laid, the road could not get converted into a plant.

(2) The assessee-company was entitled to collect fixed
amount of toll per vehicle for which it could have created any kind of
barrier for collection of such toll. If the assessee had chosen to install
automated toll plaza, then mere construction of one toll plaza would not
change the nature of the asset which remained the road.

(3) After the A.Y. 1988-89, all the appendices,
prescribing the table of rates of depreciation had the note that building
would include road. Therefore, the assessee would become entitled to
depreciation on the road in the category of ‘building’.

 


In these circumstances, the order of the Commissioner
(Appeals) was set aside and the Assessing Officer was directed to allow
depreciation on the road at the rate applicable to the buildings.


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