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Category: Tribunal News: Part A-Domestic Taxation

S. 115JB — Extra-ordinary items in profit and loss a/c to be deducted for MAT

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18 (2008) 111 ITD 124 (Hyd.)


Gulf Oil Corporation Ltd. v. ACIT,

Circle-1(4), Hyderabad

A.Y. 2002-2003. Dated : 21-9-2006

S. 115 JB — Extra-ordinary items appearing in profit and loss
a/c to be deducted in computing MAT liability.

The assessee company returned a loss of Rs.34.27 crores.
Provisions of S. 115JB were attracted. The as-sessee had shown two
extra-ordinary items — credit of write-offs/provisions : Rs.3.06 lacs and debit
of Advisory fee for sale of investments : Rs.109.96 lacs — in the P & L A/c. It
was contended by the Revenue that these items are generally classified as part
of P & L Appropriation A/c and hence should be ignored while computing MAT
liability. The assessee computed MAT liability on Rs.978.55 lacs, whereas the
Revenue contended that it should be on Rs.1085.45 lacs. (Ignoring the two referred above).

The learned CIT(A) confirmed the addition, on the ground that
the above items pertain to previous year. The Tribunal allowed the appeal and
referred to the following :

(a) Part-II and Part-III of Schedule VI does not make any
distinction between P & L A/c and P & L Appropriation A/c. It is a manner of
presentation.

(b) Generally, P & L Appropriation A/c includes items of
extra-ordinary nature, dividend, etc. However, as per schedule VI to Companies
Act, 1956, all these items form part of P & L A/c.

(c) The starting point for computing book profits should be
Profit & Loss A/c carried to balance sheet. From this amount, the various
adjustments (additions and deductions) as stated in S. 115 JB should be made.
Explanation to S. 115 JB does not provide for increase/decrease of
extra-ordinary items.

(d) AS-5 merely states that prior period expenses and
extra-ordinary items should be shown separately to know their impact on
operating results. It does not say that these items do not form part of P & L
A/c.


Cases referred :



(i) Apollo Tyres Ltd. v. CIT, (2002) 255 ITR 273

(ii) Bastar Wood Products Ltd. v. Dy. CIT, (1995) 78
Taxman 126

(iii) NSC Estates (P) Ltd. v. Dy. CIT, (2002) 125
Taxman 220







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S. 37 r.w. S. 43B — Interest on account of default in repaying interest-free sales tax loan is compensatory in nature and allowable — S. 43B are not applicable

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17 (2008) 111 ITD 1 (Hyd.)


Southern Electrodes Ltd. v. ACIT

A.Y. 2002-2003. Dated : 31-8-2006

S. 37 r.w. S. 43B of the Income-tax Act, 1961 — Interest
arising on account of default on part of the assessee in repaying interest-free
sales tax loan was compensatory in nature and was to be allowed u/s.37 and also
provisions of S. 43B are not applicable.

Facts :

The Govt. of Andhra Pradesh had given an interest-free sales
tax loan to the assessee company. When the loan was not repaid, interest was
charged to the assessee. The AO as well as the CIT(A) disallowed the said
interest on the following grounds :

(i) The assessee defaulted in repayment of loan and
interest is charged for non-payment of sales tax within the time allowed.

(ii) Interest charged is also in the nature of sales tax;
is penal and covered by S. 43B and hence not allowable.

On further appeal, the ITAT deleted the disallowance
referring to the following :


(a) The charging of interest in case of default is
automatic.

(b) The charging of interest is not within the discretion
of any authority.

(c) Interest payable is not an act of penal nature but it
is only compensatory in nature.



Cases referred to :



(i) Mewar Motors v. CIT, (2003) 260 ITR 218 (Raj.)

(ii) Swadeshi Cotton Mills Co. Ltd. v. CIT, (1998)
233 ITR 199 (SC)

(iii) Padmavati Raje Cotton Mills Ltd. (1999) 239
ITR 355 (Cal.)

(iv) Western Indian State Motors (1987) 167 ITR
395/31 Taxman 412 (Raj.) CIT v. Pheros & Co. (P.) Ltd., (1989) 178 ITR
472/44 Taxman 43 (Gauhati) and a few more.







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S. 147, S. 148 : (a) Notice not valid if issued on basis of transaction not made by assessee. 144 (b) Notice invalid if issued in status of individual while assessment in status of HUF

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16 (2007) 110 TTJ 834 (Del.) (TM)


Suraj Mal HUF v.
ITO

ITA No.1125 (Del.) of 2005

A.Y. 1996-97. Dated : 17-8-2007

S. 147 & 148 of the Income-tax Act, 1961 —




(a) Notice u/s.148 issued to the assessee on the
basis of a transaction which was made by some other person and not by the
assessee was not valid.


(b) Notice issued to the assessee in the status of
individual while the assessment was eventually made in the status of HUF.
Notice was invalid.


(c) After having issued notice u/s.148 to the
assessee as an individual, ITO had no jurisdiction to assess the HUF of the
assessee, even though the assessee had consented to assessment in the status
of HUF.



For A.Y. 1996-97, a notice u/s.147 was issued to Suraj Mal in
respect of land sold by him, in respect of which income from capital gains had
escaped assessment. The ITO, based on submissions made by Suraj Mal, passed
order u/s.148 in the name of Suraj Mal HUF. Before the CIT(A), the assessee
raised the issue that assessment was bad in law, as notice was issued in the
status of individual, whereas the assessment was made in the status of HUF. The
CIT(A), however, held that the Assessing Officer was fully justified in holding
the status of the assessee as that of HUF as against the claim of the status of
an individual.

The Tribunal held that the assessment was without
jurisdiction and could not be sustained. The Tribunal relied on the decisions in
the following cases :

(a) CIT v. K. Adinarayana Murty, (1967) 65 ITR 607
(SC)

(b) AAC v. Late B. Appaiah Naidu, 1974 CTR 147
(SC)/(1972) 84 ITR 259 (SC)


The Tribunal noted as under :

(a) The Impugned notice suffers from several legal
infirmities. In the first place, the transaction noticed related to sale of
some agricultural land sold to KS Ltd. not by the assessee. This is not the
transaction with which the assessee was connected. So, notice was issued in
respect of some other transaction carried out by some other person. Secondly,
the notice is admittedly issued to the assessee as individual. No notice was
issued to the HUF in which status the assessment was subsequently made. The
assessee has vehemently contended throughout that no notice u/s.148 was served
on the assessee. There is neither any finding, nor is there any material to
refute the claim of the assessee.

(b) Notices were issued without application of mind. It is
a settled law that there must be valid reasons, material and circumstances
leading to the belief that income had escaped assessment. Any good or bad
reason is not sufficient to sustain initiation of proceedings u/s.147/148 as
valid. Therefore, no valid proceedings were initiated u/s.147/148.

(c) The Income-tax Act recognises status of HUF different
from individual status of Karta of the HUF. The two are treated as different
legal entities. Therefore, it is necessary that notice u/s.148 should be sent
in a correct status, because jurisdiction to make assessment is assumed by
issuing valid notice.

(d) It is also settled law that assessment under the
Income-tax Act has to be made in accordance with statutory provisions and not
on agreement or consent of the assessee. Therefore, after having issued notice
u/s.148 to the individual, the ITO had no jurisdiction to assess HUF of the
assessee. He could assume jurisdiction by issuing valid notice u/s.148 after
satisfying conditions laid down u/s.147. This was not done and, therefore,
entire proceedings have to be held to be illegal and without jurisdiction.

(e) The Department cannot be permitted to change the status
from individual to HUF. In the first place, the Assessing Officer had no
jurisdiction to assess HUF, as he did not issue any notice u/s.147/148 in the
case of the HUF. This defect of jurisdiction could not be cured by obtaining
consent from the assessee.







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S. 48 capital gains — Tax on capital gains would arise in respect of only those capital assets in acquisition of which an element of cost is actually present or is capable of being reckoned — Since rulers of yester years did not acquire their kingdoms by

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  1. (2009) 118 ITD 190 (Mum.)

HUF of H.H. late Sir J. M. Scindia v. ACIT

A.Y. : 1997-98. Dated : 22-8-2007

 

The assessee HUF was issued a notice requiring to show
cause as to why for the purpose of computation of capital gains, value for the
purpose of wealth tax was taken as the value of the plot of land, instead of
the value determined by the Government- approved valuer.

The Scindia Family had acquired the land on the occasion of
marriage of one of the forefathers of J. M. Scindia to one ‘Chimanibai’,
daughter of the then ruler of Deccan, i.e., the Peshwa. The said
property was given to Chimanibai as ‘choli bangdi’ according to the
custom prevailing in those days amongst the royal families.

It was further submitted that neither of the then rulers,
the Peshwas, nor the Scindias incurred any cost for acquiring this property.
In view of this, it was evident that the said plot did not have any cost of
acquisition and therefore it fell outside the purview of capital gains. The
claim of the assessee was rejected by the AO who computed the capital gains
taking Rs.1,50,404 as the cost of acquisition of the land. It was also
contended that the said land was recorded in the old Revenue records as ‘Inam’
land.

On appeal, the CIT(A) did not accept the assessee’s
contention and confirmed the action of the AO. On appeal before the Tribunal,
it was held :

(1) The CIT(A) has recorded the fact that the land was
received in gift by the forebears and inherited by their progeny and its
cost was nil. In support of this proposition, the assessee produced old
Revenue records obtained from Government Archives, which showed that the
said plot of land was recorded as ‘Inam’ land. The extracts furnished stated
that ‘Inam’ documents in respect of the said land were not available, and
the assessee’s stand was rejected by the CIT(A) on that count alone.
Further, in absence of any evidence to show that the land was purchased by
paying cash, the assessee’s contention which was based on factual and
historical background was to be accepted.

(2) It is also settled principle that in order to make
this transaction liable for capital gains tax, it is for the Revenue to show
that the assessee had incurred a cost in acquiring the said plot of land.

(3) As per the decision of the Madhya Pradesh High Court
in the case of CIT v. H.H. Maharaja Sahib Shri Lokendra Singhji,
(1986) 162 ITR 93, it was clearly held that the liability to pay tax on
capital gains would arise only in case of those capital assets in the
acquisition of which an element of cost is actually present or is capable of
being reckoned and not in case of those assets where the element of cost is
altogether inconceivable.

In the light of the above discussion, the ITAT held that
the capital gain on the transfer of said land was not exigible to tax.


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S. 153C read with S. 153A — Documents found during search at the premises of another person which were in his own handwriting though may refer to the works proposed on behalf of the assessee, the same cannot be considered as ‘documents belonging to the as

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 Part A: Reported Decisions

 

18 (2010) 36 DTR (Ahd.) (Trib.) 187
Meghmani Organics Ltd. v. DCIT
A.Ys. : 2000-01 to 2004-05. Dated : 16-1-2009

 

S. 153C read with S. 153A — Documents found during search at
the premises of another person which were in his own handwriting though may
refer to the works proposed on behalf of the assessee, the same cannot be
considered as ‘documents belonging to the assessee’ which is a prerequisite for
initiating action u/s.153C — Re-agitating the concluded issues in S. 153C
proceedings without any documents relating thereto belonging to the assessee
cannot be considered in such assessment u/s.153C — In assessments u/s. 153C the
unconnected issue can be considered only if the pending assessment is abated and
not otherwise.

Facts :

Some handwritten documents were found and seized from the
residential premises of other persons. These documents showed estimate for the
purpose of land, building and machinery works for the assessee and statements of
steel and cement issued and deduction thereof for the purpose of computing the
amount payable to the contractor for the work carried out on behalf of the
assessee.

The Assessing Officer noted that although the seized
documents do not reveal any specific undisclosed income on verification, but the
proceedings validly initiated have to be completed in the manner prescribed
u/s.143(2) and u/s.143(3) of the Act. The Assessing Officer completed assessment
whereby the claim of deduction u/s.80HHC and u/s.80-IA of the Act was reduced.
No addition was either proposed or made in respect of so-called papers found
during the course of search and seized from the premises of other persons.

The original assessments were completed prior to initiation
of action u/s.153C of the Act and the issues regarding deductions u/s.80HHC and
u/s.80-IA were subject matter of earlier proceedings in original assessment and
were in further litigation before the CIT(A) and Tribunal.

Held :

Though these documents may refer to the work proposed on
behalf of the assessee, the same cannot be considered as ‘documents belonging to
the assessee’, which is a prerequisite for initiating action u/s.153C. If the
assessee has engaged the services of a professional and if the professional
maintains his own record for the purpose of rendering his services, the
documents cannot be said to be belonging to such assessee. Therefore, the
assessments were set aside.

Further, since the original assessments have been completed
before the initiation of action u/s.153C, these assessments have not abated. The
Assessing Officer was not competent to assume jurisdiction u/s.153C of the Act
(in relation to addition pertaining to deduction u/s.80HHC and u/s.80-IA) since
the original assessments have not abated. What were pending were only the
appeals. Since the appeals do not abate, the original assessments survive and
hence cannot be reopened u/s.153C proceedings. The Assessing Officer is
precluded from re-agitating the assessments that have attained finality in
original assessment proceedings, though pending in for the appeals. So far as
the Assessing Officer is concerned, his jurisdiction is ousted and is a ‘functus
officio’ so far as the original assessments are concerned. Therefore,
re-agitating the concluded issues in S. 153C proceedings without any documents
relating thereto belonging to the assessee cannot be considered in such
assessment u/s.153C of the Act.

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S. 40(a)(ia) — If the assessee has paid the impugned amount and the amount is not payable at the end of the year on the date of balance sheet, then the provisions of S. 40(a)(ia) are not applicable.

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 Part A: Reported Decisions

 

17 (2010) 36 DTR (Hyd.) (Trib.) 220
Teja Constructions v. ACIT
A.Y. : 2005-06. Dated : 23-11-2009

 

S. 40(a)(ia) — If the assessee has paid the impugned amount
and the amount is not payable at the end of the year on the date of balance
sheet, then the provisions of S. 40(a)(ia) are not applicable.

Facts :

Since the assessee was not maintaining proper books of
account and also failed to produce vouchers for verification, the Assessing
Officer rejected the books of account and estimated the income at certain
percentage of the gross receipts. Further, he disallowed certain payments made
to sub-contractors without deducting the TDS by invoking provisions of S.
40(a)(ia) of the Act.

Held :

It was held that the books of account of the assessee were
not relied, they were rejected by the Assessing Officer and the same was
confirmed. Now, based on the reliance on the same books, for the purpose of
invoking the provisions of S. 40(a)(ia) is improper. The estimation of income
takes care of the irregularities committed by the assessee. Further addition by
invoking S. 40(a)(ia) amounts to punishing the assessee for a same offence on
double occasions, which is not permitted by law.

Further, it was held that the bare provision of S. 40(a)(ia)
provides for non-deduction of amount which remains payable to a resident in
respect of fees for technical services, etc. It is not applicable where
expenditure is paid. It is applicable only in cases where the payments are due
and outstanding. S. 40(a)(ia) otherwise being a legal fiction needs to be
construed strictly in view of the decision of the Supreme Court in CIT v. Mother
India Refrigeration Industries (P) Ltd., (155 ITR 711). If the assessee has paid
the impugned amount and it is not payable at the end of the year on the date of
balance sheet, then the provisions of S. 40(a)(ia) are not applicable. It is
only applicable in respect of ‘payable amount’ shown in the balance sheet as
outstanding expenses on which TDS has not been made. There is a difference
between the words ‘paid’ and ‘payable’. The Legislature used the word very
carefully in S. 40(a)(ia) and in all its wisdom. The language used in the S.
40(a)(ia) is very simple, clear and unambiguous. Literal rule of interpretation
has to be applied.

 

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S. 36(1)(iii) — Issue of secured premium notes — Premium payable on the same — Allowable as it was very much in the nature of interest payable on the borrowings made.

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16 (2010) 123 ITD 1 (Mum.)
JCIT v. Bombay Dyeing Mfg. Co. Ltd.
A.Y. 1998-99. Dated : 16-4-2009

 

S. 36(1)(iii) — Issue of secured premium notes — Premium
payable on the same — Allowable as it was very much in the nature of interest
payable on the borrowings made.

The assessee-company raised funds by issue of Secured Premium
Notes. In respect of the same, it paid certain premium. The entire amount of
premium was payable before the date of final settlement. The premium was claimed
on proportionate basis in the form of provision made in the books of accounts.
Further, the liability to pay the premium arose in the fourth year, though the
assessee had utilised the funds from the first year itself. The deduction in
respect of the premium was claimed by the assessee u/s.36(1)(iii) of the Act.
The Assessing Officer disallowed the deduction on the ground that the funds
raised were for the purpose of expansion of business and therefore were capital
in nature.

On appeal to the Tribunal, it was held, that case was covered
in favour of the assessee in its own case for A.Y. 1996-97. In the order passed
earlier, the Tribunal held that the premium payable was nothing but in the
nature of interest for the borrowings made by the assessee. The assessee has
been following mercantile system of accounting and so provision has been made on
accrual basis towards the liability arising. The liability provided by the
assessee was an ascertained liability and not a contingent liability. The
Tribunal also relied on the decision of Madras Industrial Investment Corporation
Ltd. v. CIT, (225 ITR 892) (SC).

Further, it was held that though the liability to pay starts
from the fourth year, this does not mean that the funds for the first three
years were interest free. It was only in view of terms and conditions that
premium was payable from the fourth year. Hence the liability for the premium
was very much eligible for deduction.

 

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S. 41(1) — Loan taken by the assessee from a group company — Waiver of the loan by the group company — Whether the same should be taxable u/s.41(1) — Held, No.

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 Part A: Reported Decisions

 

15 (2010) 122 ITD 486 (Mum.)
Mindteck (India) Ltd. v. ITO
A.Y. : 1999-2000. Dated : 15-7-2008

 

S. 41(1) — Loan taken by the assessee from a group company —
Waiver of the loan by the group company — Whether the same should be taxable
u/s.41(1) — Held, No.

The assessee-company incurred huge losses and ran into
financial difficulties. It invited a new group to infuse capital into it. As per
the agreement entered into with this group, the assessee has to fulfil certain
conditions. One of these was to fulfil all existing liabilities so as to hand
over a clean balance sheet to the new management. For this, the assesee borrowed
certain amounts of money from a group company for four months. However, this
loan was later on waived off by the group company. The same was so written off
in the books of the assessee also.

The Assessing Officer held that the above loan was taxable
u/s.41(1) of the Act since the amount was received to recoup the losses. These
losses were incurred by the assessee over a period of time. The CIT(A) upheld
the assessment order. He held that even if the amount was a loan, it changes its
character at the time of forfeiture. Hence the same was taxable.

On appeal, the Tribunal held that, in the instant case, the
amount of loan received has no connection with the deduction or allowance
referred to in S. 41(1) of the Act. Although the assessee has received certain
benefits on remission or cessation of liability, the same in no way relates to
any trading liability. The said amount was given by the group company to make
the assessee company fit for the takeover. Provisions of S. 41(1) can be applied
only when a benefit is received in respect of a loss, expenditure or trading
liability, which was allowed as deduction or allowance in earlier years.

Further, it was also observed by the Hon’ble Tribunal that it
is a settled law that ‘a debt waived by the creditor cannot be the income of the
debtor’. [Relying on British Mexican Petroleum Co. Ltd. v. Jackson (1932) 16 TC
570 (HL) affirmed in the case of CIT v. P. Ganesa Chettair (1982) 133 ITR 103
(Mad.)]

 

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Block assessment : If in course of search of husband, any material incriminating his wife (assessee) had been found, proper course for AO was to issue notice u/s.158BD — he could not bypass prescribed procedure and issue notice u/s.158BC on assessee who w

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  1. (2009) 118 ITD 133 (Mum.)


Smt. Nasreen Yusuf Dhanani v.
ACIT

A.Y. : 1-4-1986 to 18-12-1996.

Dated : 5-10-2007

 

Search and seizure action u/s.132 was conducted at
residential premises where the assessee was staying with her husband — Search
warrant was issued in the name of the assessee’s husband — consequent to
search action, notice u/s.158BC was issued to the assessee, in response to
which she filed her return of income for block period declaring ‘nil’
undisclosed income — subsequently intimated to the AO that since warrant of
authorisation u/s.132 was not issued and served in her name, special procedure
for assessment of search cases was not applicable to her case — AO without
dealing with the objection, made huge additions of undisclosed income — The
CIT(A) upheld the block assessment.

On appeal before the Tribunal, it was held :

(1) That a reading of S. 132 makes it clear that the
Section is person-specific and not premise-specific as argued by the
Revenue. The primary target for the search action is the person in
possession of any undisclosed income. Thus, the arguments of the Revenue
that the premises where the search action was carried out belonged to the
assessee, and therefore, the block assessment u/s.158BC was validly passed
did not hold good.

(2) Another argument of the Revenue was that in the
course of search action, evidence was found showing undisclosed income in
the name of the assessee and thus, provisions of S. 158BC could be invoked.
In this case, it is provision of S. 158BD which is to be applied in a case
where there is no search warrant and evidence is found showing undisclosed
income in the course of search conducted in respect of any other person. The
proper course of action would therefore be to issue a notice u/s.158BD.

(3) In view of the above factual and legal position, the
entire proceedings undertaken by the AO were bad in law, and hence the
assessment was to be quashed.

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“Recommendation of getting accounts audited u/s.142(2A) should come from AO only — can not be substituted by another officer’s opinion.”

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  1. (2009) 118 ITD 99 (Mum.)


Rajendra C. Singh v.
JCIT

A.Y. : 1-4-1987 to 15-11-1997

Dated : 27-9-2007

 

A search was conducted at the assessee’s premises and after
completion thereof, the AO issued notice u/s.158BC to the assessee. In
response thereto, the assessee filed block return offering undisclosed income.
In the meanwhile, the Assistant Director, in the appraisal report recommended
an audit u/s. 142(2A). The AO requested the Commissioner to approve the said
proposal.

Accordingly, by a letter dated 5-5-1999, the assessee was
directed to get the accounts audited within 60 days from the receipt of the
letter. Before expiry of such period, the assessee applied for extension of
period of audit by two months, which was also granted. On 26-8-1999, the
assessee asked for a further extension of two months which was also granted on
the same date.

During the assessment proceedings, the AO was of the view
that in normal circumstances, the block assessment should have been completed
by 30-11-1999, however, considering the Explanation to S. 158BE, the period
got extended up to 31-5-2000 and hence he passed an assessment order on
31-5-2000.

On appeal before the CIT(A), the assessee argued that
assessment order was barred by time and also contended that the AO had passed
the order only on the basis of the appraisal report of the Assistant Director
and that he had not applied his mind to the proceedings carried out before him
as contemplated in S. 142(2A). It was further submitted that the AO had not
passed an order directing the audit, but merely had endorsed the
recommendation of the Assistant Director, who was not competent authority to
direct the audit.

The CIT(A) rejected the assessee’s claims and upheld the
order of the AO. On appeal before the Tribunal it was held :

(1) Reading of S. 142(2A) makes it clear that the
recommendation should come from the AO. The AO has to form an opinion having
regard to the nature and complexity of the accounts and also keeping in mind
the interests of the Revenue, that a special audit is required. If he forms
such an opinion, he has to seek prior approval of the Chief Commissioner or
the Commissioner to get the accounts audited.

(2) In the instant case, the initiation was done by the
Assistant Director and the AO had only requested the Commissioner to accept
the proposal of the Assistant Director.

(3) Therefore, in the above-mentioned case, since
recourse to S. 142(2A) was not valid, the finding of the Commissioner
(Appeals) that the assessment order was passed within time, is devoid of
merit. The order should have been passed by the AO on or before 30-11-1999,
as he himself had held that in the normal circumstances that was the last
date of passing the order. Therefore, the order of the AO was beyond time
contemplated u/s.158BE and accordingly, the appeal of the assessee was
allowed.



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S. 147 — Differences in account balances of various creditors added to the income of the assessee in re-assessment — Since neither the reassessment order nor the order of CIT(A) gave details of nature of differences in accounts, amount could not be ‘any o

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  1. (2009) 118 ITD 70 (Delhi)


Nuware India Ltd.
v.
DCIT

A.Y. : 1994-95. Dated : 31-1-2008

 

Facts :

The AO had found differences in the account balances of
various creditors on comparison of accounts of the assessee and concerned
creditors. Differences were found in the accounts of 20 parties totalling to
Rs.4,20,949. As these differences were not reconciled, the same was added to
assessee’s income. The Commissioner (Appeals) upheld the addition. On appeal
before the Tribunal, it was held :

(1) That neither the assessment order, nor the order of
the CIT(A) gave details of the nature of differences in the accounts, so to
say, whether the credit balances were more or less or both in the books of
the assessee when compared with the confirmed accounts received from the
parties.

(2) If it is the case of the AO that these liabilities
ceased to exist, it was for him to prove so by bringing the case within the
four corners of the provisions contained in S. 41(1). Reference was made to
the SC decision in the case of CIT v. Suguali Sugar Works (P) Ltd. in
which it was held that the entries made in the accounts of the debtor,
unilaterally writing off the debt, without any action on the part of the
creditor will not enable the debtor to say that the liability had come to an
end. Therefore, it was held that the amounts written off by the debtor would
not constitute income u/s.41(1).

(3) Thus, as the details of the differences were not
given, as also, it is not shown as to how the sum total of these differences
would be income of the assessee, the impugned amount cannot be said to be
income, and the CIT(A) has erred in upholding the additions.



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S. 44AA : Assessee in contract business : Provision for compulsory maintenance of books of accounts not applicable

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Part A — Reported Decisions



42 (2008) 300 ITR (AT) 310 (Cochin)

C. H. Aboobacker Haji v. ITO

A.Y. 2004-05. Dated : 14-7-2006

S. 44AA, S. 271A —Assessee engaged in contract business —
Provision for compulsory maintenance of books of accounts not applicable —
Survey action after issuing notice — Circumstances that AO unable to compute
income of assessee due to non-maintenance of accounts as required by S. 44AA(2)
does not arise — Held, penalty is not leviable.


Facts :

The assessee, a civil contractor had filed his return of
income for A.Y. 2004-05 showing a turnover of Rs.69,22,579 and he had estimated
the income at the rate of 5% of total contract receipts. For earlier years (A.Y.
2000-01 and 2001-02), the assessee had declared his income at the rate of 8% of
the gross contract receipts. Subsequently, there was a survey action against the
assessee u/s.133A and on finding that the assessee had omitted some contract
receipts, the AO concluded that the assessee had violated the provisions of S.
44AA and issued a notice u/s.274 r.w.s. 271A on 10-1-2005 while the actual
assessment order was passed on 23-6-2006. The assessee challenged the impugned
order of the AO before the CIT (A) but without any success.

On appeal to ITAT, the Tribunal held that the penalty was not
leviable and referred to the following :

(1) On the perusal of the provisions of S. 44AA held that
the assessee’s case was not covered by S. 44AA(1).

(2) At most, S. 44AA(2) may be applicable but for
attracting the said Section the condition that the AO was unable to compute
the income of the assessee was not satisfied, because the AO had passed the
penalty order prior to the completion of the assessment.

(3) It may be worth mentioning that the assessee had
offered Rs.5 lakhs as an additional income from his contract business, which
has been accepted without further comments or observation by the AO.

(4) Further, reliance was also placed on well-settled
principle of law as laid down by the Apex Court in the case of Hindustan Steel
Ltd. (1972) 83 ITR 26 (SC) that penalty proceedings are quasi-criminal in
nature and it must be brought on record by the AO that the assessee has
deliberately acted in defiance of law or was guilty of conduct contumacious or
dishonest, but in the reasoning given by the AO in the assessment order,
nothing has been mentioned. Hence, the penalty levied by the AO u/s.271A was
deleted.


Case referred to :

(i) Hindustan Steel Ltd. v. State of Orissa, (1972) 83 ITR 26 (SC).

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U/s. 80-IB : Profit out of processing, selling and exporting marine products is profit attributable to cold storage and hence entitled to deduction

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Part A — Reported Decisions



41 (2008) 300 ITR (AT) 182 (Mumbai)

Sumaraj Seafoods Pvt. Ltd. v. ITO

A.Y. 2001-02 to 2003-04.

Dated : 26-6-2007

U/s.80-IB — Profit out of processing, selling and exporting
marine products is profit attributable to cold storage and hence entitled to
deduction u/s. 80IB.

The assessee company was engaged in the business of marine
products, storing it in the cold storage and exporting it. The AO denied the
deduction u/s.80-IB on the ground that processing of fish could not be held as
an industrial undertaking. The Appellate Authority denied the deduction on the
ground that separate computation of profit from cold storage was not provided by
the assessee.

On appeal to ITAT, it allowed the deduction u/s.80-IB and
referred to the following :

(1) The only activity conducted by the assessee is to
purchase, process, store (fish and other sea foods) in its cold storage plant
and then export the same.

(2) Thus, the operation of its cold storage plant is a very
essential and critical element in this activity of undertaking.

(3) The operation of a cold storage plant would definitely
result in certain value addition to a product and such value addition should
be considered as profits derived from operation of a cold storage plant.

(4) The profits derived from the industrial undertaking
have a close and proximate nexus with the operation of its cold storage plant.


Cases referred to :



(i) CIT v. Asian Marine Products Pvt. Ltd., (1999)
239 ITR 349 (Mad.)

(ii) CIT v. George Marjo Exports Pvt. Ltd., (2001)
250 ITR 446 (Mad.)

(iii) CIT v. Relish Foods, (1999) 237 ITR 59 (SC)

(iv) CIT v. Sterling Foods, (1999) 237 579 (SC)

(v) National Thermal Power Corporation Ltd. v. Addl.
CIT, (2004) 91 ITD 101 (Delhi)

(vi) Pandian Chemicals Ltd. v. CIT, (2003) 262 ITR
278 (SC)



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S. 234B : Advance tax : Interest on shortfall in payment of advance tax — Interest is payable up to the date of regular assessment and not up to the date of AO consequential to the Tribunal order

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Part A — Reported Decisions



40 (2008) 300 ITR (AT) 96 (Delhi)

Freightship Consultants P. Ltd. v. ITO

A.Ys. 1996-97 & 1997-98.

Dated : 25-5-2007

S. 234B — Advance tax — Interest on shortfall in payment
of advance tax — Interest is payable up to the date of regular assessment and
not up to the date of order passed by Assessing Officer in consequence of the
order passed by the Tribunal.


Facts :

The Assessing Officer did not allow the claim of the assessee
u/s.80-O of the Income-tax Act, 1961 for A.Ys. 1996-97 and 1997-98. On appeal,
CIT(A) allowed it in totality. However, in second appeal before Tribunal filed
by the Revenue, ITAT directed the AO to allow deduction u/s.80-O of the Act on
net income. As per the order of ITAT, the Assessing Officer determined the
income for both the years and issued demand notices and also charged interest
u/s.234B up to the date of assessment orders. The said demands were paid by the
assessee.

The AO subsequently passed order u/s.154 of the Act as he was
of the opinion that interest charged by him u/s.234B up to the date of
assessment was wrong and it should have been charged up to the date of
reassessment framed u/s.254/143(3) of the Act. This order was upheld by the
CIT(A). On appeal to the Tribunal it was held that :

(1) As per Explanation 1 to S. 234B of the Act, ‘assessed
tax’ means the tax on the total income determined u/s.143(1) or on ‘regular
assessment’ as reduced by amount of tax deducted or collected at source in
accordance with provisions of chapter XVII on any income which is subject to
such deduction or collection.

2. The Supreme Court in Modi Industries Ltd. v. CIT,
(1995) 216 ITR 759 laid down that ‘regular assessment’ has been defined in S.
2(40) to mean the assessment made u/s.143 or u/s.144.

3. Hence, it was the duty of the assessing officer to
charge interest u/s.234B of the Act up to the date of passing the assessment
order and not up to the date of order passed by him in consequence of the
order passed by the Tribunal.


Cases referred to :



(i) CIT v. Anjum Ghaswala, (2001) 252 ITR 1 (SC)

(i) Modi Industries Ltd. v. CIT, (1995) 216 ITR 759
(SC)


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S. 80-I/80-IA : Assessee manufacturing gutka and pan masala containing tobacco not entitled to deduction

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Part A — Reported Decisions


39 (2008) 300 ITR (AT) 50 (Pune) (SB)

Dhariwal Industries Ltd. v. ACIT

A.Ys. 1993-94 to 1995-96 and 1997-98 to 2000-01. Dated :
14-8-2007

S. 80I, S. 80IA, S. 143, S. 263, Sch. XI (item 2) —Assessee
manufacturing gutka and pan masala containing tobacco claiming deduction
u/s.80-I and u/s.80-IA — Deduction not allowed stating that the item is covered
under ‘tobacco preparations’, ‘chewing tobacco’ as mentioned in item (2) of Sch.
XI — Held, gutka would fall within the meaning of term ‘tobacco preparations’
and ‘chewing tobacco’.

Facts :

The assessee, a company engaged in the business of
manufacturing gutka and pan masala containing tobacco, had claimed deduction
u/s.80-I/80-IA, which was allowed by the AO. The CIT invoked S. 263 by stating
that gutka manufactured by the assessee is a ‘tobacco preparation’ within the
meaning of item no. 2 in the Sch. XI and thus not eligible for deduction
u/s.80-I/80-IA and the order passed by the AO was erroneous and prejudicial to
the interest of the Revenue.

On appeal to the ITAT, the Special Bench of the Tribunal,
relying on the following grounds, held that the assessee’s business of
manufacturing gutka was not entitled to deduction u/s.80-IB, as the same is
covered by item no. 2 of Sch. XI :

(1) Reliance was placed on the decision of the Allahabad
Tribunal in the case of Kothari Products Ltd., (1991) 37 ITD 285 wherein it
was held that zarda yukt pan masala does not fall under the expression
‘tobacco preparation’. Further, the Allahabad High Court and also the Suprme
Court have declined to interfere with the aforesaid order, thus ruling that
the question under consideration is a question of fact and not a question of
law.

(2) Further, ‘tobacco preparation’ would cover all those
preparations and products which are prepared using tobacco, if the properties
of tobacco are retained in the preparation without undergoing any
metamorphosis as a result of addition of other ingredients. Hence, even 6–7%
content of tobacco in gutka is sufficient to call it ‘tobacco preparation’.

(3) The expression ‘tobacco preparation’ has to be
understood in contradistinction to a ‘tobacco-less preparation’. As a
‘tobacco-less preparation’ cannot become a ‘tobacco preparation’, by the same
logic ‘tobacco preparation’ cannot become ‘tobacco-less preparation’. Hence,
it cannot be said that ‘gutka’ is a ‘tobacco-less preparation’.

(4) Further, the words ‘such as’ used in item 2 of Sch. XI
do not limit the ambit to the specific 7 items in item no. 2. The words ‘such
as’ are illustrative and not exhaustive.

(5) In addition, without prejudice to the above, even if it
is assumed that the words ‘such as’ in item no. 2 of Sch. XI are in the nature
of limitation, gutka and pan masala would fall under ‘chewing tobacco’, an
item mentioned in item no. 2 of Sch. XI.

(6) Further, classification by various provisions of the
Acts dealing with Central Excise and Sales Tax, as relied upon by the
assessee’s authorised representative, is hardly relevant for deciding the
scope of ‘tobacco preparations’ and ‘chewing tobacco’ under the I.T. Act.

(7) Hence, the CIT was correct in invoking the provisions
of S. 263 as the presumptions made by the AO regarding the nature of the
business of the assessee and the profits arising from them were completely
incorrect and the AO had granted deduction without taking note of the most
crucial part of the case i.e., the assessee was manufacturing gutka and
it was held that the assessee was not entitled to deduction u/s.80-IB.


Cases referred to :




(i) Bajaj Tempo Ltd. v. CIT, (1992) 196 ITR 188
(SC);

(ii) Collector of Central Excise v. Parle Exports P.
Ltd., (1990) 183 ITR 624 (SC);

(iii) CIT v. Taj Mahal Hotel, (1971) 82 ITR 44 (SC);

(iv) CIT v. Venkateswara Hatcheries (P.), (1999) 237
174 (SC);

(v) Kothari Products Ltd. v. ACIT, (1991) 37 ITD 285
(All.);

(vi) Malabar Industrial Co. Ltd. v. CIT, (2000) 243
ITR 83 (SC) and many others.



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Income-tax Act, 1961 — Section 139A(5B) and S. 272B — Whether Press Release dated September 25, 2007 and February 12, 2008 issued by CBDT brings down the rigours of S. 139A(5B) —Held : Yes. Whether penalty u/s. 272B cannot be levied in a case where an ass

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  1. 2009-TIOL-257-ITAT-Bang

Hewlett-Packard Globalsoft Pvt. Ltd. vs. DCIT.

A.Y. : 2008-2009. Date of Order : 25.3.2009

Income-tax Act, 1961 — Section 139A(5B) and S. 272B —
Whether Press Release dated September 25, 2007 and February 12, 2008 issued by
CBDT brings down the rigours of S. 139A(5B) —Held : Yes. Whether penalty u/s.
272B cannot be levied in a case where an assessee has submitted Permanent
Account Number of such number of deductees as satisfies the threshold limit
mentioned in the Press Release issued by CBDT —Held : Yes.

 

Facts :

The Assessing Officer (AO) found that the assessee had
filed its quarterly statement in Form No. 24Q for the 3rd quarter of financial
year 2007-08 wherein it had not furnished Permanent Account Number (PAN) of
2154 deductees out of the total of 29,733 deductees. He also found that
details furnished for 38 deductees were not in accordance with the provisions
of S. 139A(5B) of the Act. In response to the show-cause notice issued by the
AO the assessee submitted that the number of deductees whose PAN had been
furnished by the assessee exceeded the threshold limit of 90% stated in the
press release issued by the CBDT and therefore penalty u/s. 272B is not
leviable. However, the AO was of the view that the compliance to the extent of
threshold limit stated in press release issued by the CBDT is only for filing
quarterly TDS statements and that such compliance does not debar an AO from
initiating penal action. He, accordingly, levied penalty u/s. 272B. The CIT(A)
confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to
the Tribunal.

Held :

The Tribunal upon going through the Press Release dated
September 25, 2007 and also subsequent Press Release dated February 12, 2008,
held that it is evident from paras 2 and 3 of the Press Release that the CBDT
has prescribed a threshold limit for compliance i.e., to provide
information of PAN data by virtue of S. 139A(5B)(iv) of the Act. It held that
the sole intention of the Press Release is to bring down the rigour of the
provision of S. 139A(5B) and 272B keeping in view the laborious and cumbersome
task of compliance.

Since the assessee had furnished PAN data to the extent of
93% of the total deductees there was compliance in furnishing PAN data in
accordance with the threshold limit of 90% prescribed in press release by the
CBDT, the penal provisions were held to be not attracted. Accordingly, the
Tribunal deleted the penalty levied u/s. 272B of the Act.


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Income-tax Act, 1961 — Section 271(1)(c) — Concealment penalty — Impact of the decision of the Apex Court in Dharmendra Textile Processors on the scheme of S. 271(1)(c) — Whether even a civil liability for penalty can be invoked only when the conditions f

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  1. 2009-TIOL-278-ITAT-Pune

Kanbay Software India Pvt. Ltd. vs. DCIT

A.Y. : 2002-2003. Date of Order : 28.4.2009

Income-tax Act, 1961 — Section 271(1)(c) — Concealment
penalty — Impact of the decision of the Apex Court in Dharmendra Textile
Processors on the scheme of S. 271(1)(c) — Whether even a civil liability for
penalty can be invoked only when the conditions for imposition of penalty
under Section are satisfied — Held : Yes. Whether once the mandate of S.
271(1)(c), read with Explanations thereto are satisfied, there is no further
onus on the AO to establish mens rea —Held : Yes. Whether ratio decidendi of
the judgment of Apex Court in Dharmendra Textile Processors and Ors. is
confined to treating the willful concealment as not vital for imposing penalty
u/s. 271(1)(c) and not that in all cases where addition is confirmed, the
penalty shall mechanically follow — Held, Yes.

 

Facts :

The assessee company was engaged in the business of
development and export of computer software. The assessee had two units
eligible for deduction u/s. 10A. For assessment year 2002-03, in the first
unit the assessee had made profits, while in the second unit, the assessee
incurred losses. The assessee filed a revised return of income for AY 2002-03,
wherein it claimed carry forward of loss and unabsorbed depreciation of second
unit and claimed a deduction u/s. 10A on the profits of first unit without
setting off loss and depreciation of the second unit. Appropriate disclosure
was made in the return of income. The Assessing Officer (AO) rejected this
claim and the assessee accepted the decision of the AO. The AO initiated
proceedings for furnishing inaccurate particulars of income and levied penalty
u/s. 271(1)(c) which action of the AO was confirmed by CIT(A). Aggrieved,
assessee preferred an appeal to the Tribunal.

Held :

The Tribunal deleted the penalty and held as under :

(a) On first principles, penalty u/s. 271(1)(c) is not
simply a consequence of an addition being made to the income of the
assessee. Unless it is established that there is concealment of income or
furnishing of inaccurate particulars or it is established that on the facts
of the case, concealment of income can be deemed in accordance with the
provisions of law, the penalty provisions cannot be invoked at all,
irrespective of whether penalty is a civil liability or a criminal
liability.

(b) The judgment of the Supreme Court (SC) in UOI vs.
Dharmendra Textile Processors (306 ITR 277) has to be understood in the
correct perspective. Penalty u/s. 271(1)(c) has been held to be a ‘civil
liability’ in contradistinction to prosecution u/s. 276C. It is wrong to
infer that because the liability is a ‘civil liability’ it ceases to be
penal in character. There is no contradistinction in a liability being a
civil liability and the same liability being a penal liability as well,
though a civil liability cannot certainly be a criminal liability as well.

(c) The only impact of a liability being a civil
liability is that mens rea or the intentions of the assessee need not
be proved. Unless contravention of law takes place and unless the conditions
for imposition of penalty u/s. 271(1)(c) are satisfied, even a civil
liability cannot be invoked. The action which triggers the civil liability
is the lapse on the part of the assessee.

(d) An addition made during the course of assessment
proceedings, by itself, cannot be enough to initiate, leave aside conclude,
penalty proceedings u/s. 271(1)(c).

(e) The proposition that mens rea need not be
proved before penalty u/s. 271(1)(c) can be imposed was not laid down by SC
in Dharmendra Textile for the first time. Even in the case of K. P.
Madhusudan (251 ITR 99), a three-judge Bench of SC had so held.

(f) Dharmendra Textiles is not an authority for the
proposition that penalty is an automatic consequence of an addition being
made to the income of the taxpayer for the reason that whether it is a civil
liability or a criminal liability, penalty can only come into play when
conditions are satisfied. All that Explanation 1 to S. 271(1)(c) is to shift
the onus of proof from AO to the assessee; instead of AO being under an
obligation to establish the mala fides of the assessee, the onus is
now on the assessee to establish his innocence and righteous conduct.

(g) The observations in Dharmendra Textile to the effect
that penalty is to provide a remedy for loss of Revenue cannot be construed
to mean that penalty can be imposed as an automatic consequence for addition
to returned income, given the scheme of S. 271(1)(c).

(h) An assessee’s statutory obligation u/s. 139(1) is to
give correct and complete information with the return of income. If this is
complied with, then there is no contravention which can attract even a civil
liability. The fact that additions and disallowances are made by the AO does
not mean that there is a breach of the obligation. The proposition that just
because penalty u/s. 271(1)(c) is a civil liability, it must mean that
penalty can automatically be levied on the basis of any addition to income
is not correct.

Section 143 — Notice under Section 143(2) is required to be served on assessee within 12 months from end of month in which return of income has been filed and mere issuance of notice within a period of 12 months is not sufficient —The onus to prove servic

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[2009] 116 ITD 123 (Del.)

BHPE Kinhill Joint Venture


vs. Additional DIT (Delhi).

A.Y. : 2000-01 Dtd. : December 14, 2007

Section 143 — Notice under Section 143(2) is required to be
served on assessee within 12 months from end of month in which return of
income has been filed and mere issuance of notice within a period of 12 months
is not sufficient —The onus to prove service of notice on assessee within
statutory period is upon Assessing Officer.

 


The assessee filed return of income on 22-10-2001. The
Assessing Officer issued notice by way of foreign air registered letter on
31-10-2002. The assessee contended that since the notice under Section 143(2),
dated 31-10-2002 had not been received by it by 31-10-2002, the assessment
proceedings were not valid in law. The Commissioner (Appeals) relying on the
decision of the Apex Court in Prima Realty vs. Union of India [1997]
223 ITR 655, held that the Post Office had acted as an agent of the assessee
and, therefore, the date of service under the provisions of Section 143(2)
would be treated as 31-10-2002, which was within time.

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

1) The onus to prove the service of notice on the
assessee within the statutory period is upon the Assessing Officer and not
upon the assessee.

2) In the instant case, the notice was only issued by the
Assessing Officer on 31-10-2002, but neither the same had been received back
by the Assessing Officer nor the Department was able to prove the service of
notice upon the assessee on 31-10-2002. Therefore, the notice under Section
143(2) was not proved to have been served upon the assessee on or before
31-10-2002 by the Department.

3) In the case of Prima Realty vs. Union of India
[supra] the Apex Court was dealing with the payment made by cheque.
The ratio of that case is that whether the addressee has shown his desire
either expressly or impliedly to send a cheque by post, the property in the
cheque passes to him as soon as it is posted. Therefore, the Post Office
acts as an agent of the person to whom the cheque is sent and so the facts
of that case are clearly distinguishable with the facts of the case of the
assessee.

4) In case the Revenue has failed to establish the
service of the notice upon the assessee under Section 143(2) within the
statutory period of limitation provided under the proviso to Section 143(2)
then the assessment proceedings completed by the Assessing Officer in
violation of statutory provision of Section 143(2) are liable to be
cancelled/quashed.

In support of his contention, the assessee has relied upon
the decision of the ITAT Delhi Bench ‘C’ in the case of Whirlpool India
Holdings Ltd. vs. Dy. DIT rendered in I.T. Appeal No. 330 (Delhi) of 2004
for the assessment year 2000-01, which has also considered the decision of the
Apex Court in the case of Prima Realty (supra). The Tribunal has also
placed reliance on the decision of jurisdictional High Court of Delhi in the
case of CIT vs. Lunar Diamonds Ltd. [2006] 281 ITR 1 (Delhi), wherein
Their Lordships have also discussed the decision of Apex Court delivered in
the case of Prima Realty (supra).

Cases relied upon :



1. Whirlpool India Holdings Ltd. vs. Dy. DIT [IT
Appeal No. 330/Delhi of 2004]

2. Raj Kumar Chawla vs. ITO [2005] 94 ITD 1
(Delhi) (SB).



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S. 50C — Difference between sale consideration of the property shown by assessee and FMV determined by DVO u/s.50C(2) was less than 10% — AO not justified in substituting value determined by DVO for sale consideration disclosed by assessee.

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Part
A: Reported Decisions

28 (2010) 38 DTR (Pune) (Trib) 19
Rahul Constructions v. DCIT
A.Y. : 2004-05. Dated : 12-1-2010

 

S. 50C — Difference between sale consideration of the
property shown by assessee and FMV determined by DVO u/s.50C(2) was less than
10% — AO not justified in substituting value determined by DVO for sale
consideration disclosed by assessee.

Facts :

The assessee received an amount of Rs.19,00,000 as sale
consideration on account of sale of basement of a building. The stamp valuation
authorities adopted the value of Rs.28,73,000. Since the assessee objected to
valuation of the stamp valuation authorities on various grounds, the AO referred
the matter to the DVO who valued the property at Rs.20,55,000. The AO thereafter
substituted this value for the purpose of calculating the capital gain.

The CIT(A) observed that the assessee has not objected to
this valuation either before the DVO or before the AO or even before him.
Distinguishing the decision of the Supreme Court in the case of C. B. Gautam v.
UOI, 199 ITR 530, the CIT(A) upheld the action of the AO.

Held :

As against value of Rs.28,73,000 adopted by stamp valuation
authorities, DVO has determined the FMV on the date of transfer at Rs.20,55,000.
This shows that there is wide variation between the two values. Further, value
adopted by the DVO is also based on some estimate. The difference between sale
consideration shown by the assessee and FMV determined by the DVO is less than
10%. Since such difference is less than 10% and considering that valuation is
always a matter of estimation where some degree of difference is bound to occur,
it was held that FMV determined by the DVO cannot be substituted for the sale
consideration received by the assessee.

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Additions made by AO u/s.40A(2)(b) — Penalty levied — Held : it is not a case of concealment of income or furnishing of inaccurate particulars.

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Part
A: Reported Decisions

27 Jhavar Properties (P.) Ltd.
123 ITD 429 (Mum.)
A.Y. 2001-02. Dated : 10-9-2008

 

Additions made by AO u/s.40A(2)(b) — Penalty levied — Held :
it is not a case of concealment of income or furnishing of inaccurate
particulars.

The assessee was engaged in business of real estate
development and construction. During assessment, it was found by the AO that the
assessee has claimed a sum of Rs.63 lakhs as payment made to sister concern for
job work. After examination of details, the AO found that the value of job
entrusted to the sister concern was only Rs.32,09,974 for which the appellant
made a payment of Rs.63,00,000. He thus disallowed a sum of Rs.30,82,026
u/s.40A(2)(b). This was confirmed by the CIT(A). The AO initiated penalty
proceedings and levied penalty.

Held :

Since, no specific disclosure is required to be made in
respect of income subject to scrutiny u/s.40A(2)(b) in Act or in Rules or in the
form of return of income, the assessee cannot be held guilty of non-disclosure
of income. It is not a case of concealment of income or furnishing of inaccurate
particulars. When additions are made on the basis of estimate and not on account
of any concrete evidence of concealment, penalty was not leviable.

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Exemption available under the law should be granted by the Assessing Officer, even if the assessee has not claimed it in its return of income.

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Part
A: Reported Decisions

26 ACWT v. Ku. Ragini Sanghi
123 ITD 384 (Indore)
A.Ys. : 1997-98 and 1998-99
Dated : 25-1-2008

 

Exemption available under the law should be granted by the
Assessing Officer, even if the assessee has not claimed it in its return of
income.

The assessees are beneficiaries of a trust and enjoy 50%
share of interest in the assets of this trust. The trust owned a flat which was
a residential house. As per the assessment order of the trust, the value of
assets owned by it was to be included in the hands of beneficiaries. Since no
interest in the assets of trust was shown in the original return of
beneficiaries, notice u/s.17 was issued to the beneficiaries. The assesses
submitted that the flat was exempt u/s.5(1)(vi) of the Wealth-tax Act since they
had no other residential house in their names. Thus the value of the flat was
shown as NIL. It was contended on behalf of Department that since the assessee
claimed deduction at the assessment stage and not in the return of wealth, it
should not be allowed.

Held :

S. 5(1)(vi) of the Wealth-tax Act clearly provides for the
exemption of one house and as such, the law as it stood should have been applied
by the AO for granting exemption. There is no need for the assessee to seek
exemption as per law. Even when the assessee has not sought exemption expressly,
the AO should apply the statutory provisions and grant exemption.

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S. 80P(2)(a)(i) — Interest on income-tax refund — Assessable under the head ‘Income from other sources’ — Since it is covered within the expression ‘profits and gains attributable to banking business’, deduction u/s.80P(2)(a)(i) is available.

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Part
A: Reported Decisions

25 (2010) 37 DTR (Mumbai) (SB) (Trib) 194
The Maharashtra State Co-Operative Bank Ltd. v. ACIT
A.Y. : 2000-01. Dated : 22-1-2010

 

S. 80P(2)(a)(i) — Interest on income-tax refund — Assessable
under the head ‘Income from other sources’ — Since it is covered within the
expression ‘profits and gains attributable to banking business’, deduction
u/s.80P(2)(a)(i) is available.

Facts :

The assessee received interest u/s.244A of Rs.34.33 crores
which was included in its total income under the head “Income from Business” and
deduction was claimed u/s.80P(2)(a)(i). This interest has arisen upon favourable
order of Tribunal for earlier assessment years and the resultant refund of
assessment dues collected. The AO denied the deduction u/s.80P(2)(a)(i) in
respect of the same.

Upon further appeal, the CIT(A) confirmed the order of the AO
and has held as under :

(i) The interest was assessable under the head ‘Income from
other sources’.

(ii) The interest on income-tax refund was not attributable
to the banking business.

(iii) The favourable decision of the Tribunal in assessee’s
own case for A.Y. 2001-02 was distinguishable, because in that case the issue
was about the interest u/s.244A arising out of excess deduction of tax at
source.

Held :

The principle of consistency qua the judicial forums is not
unexceptionable. If the subsequent Bench finds it difficult to follow the
earlier view due to any convincing reason such as change in the factual or legal
position or non-raising or non-consideration of an important argument by the
earlier Bench having bearing on the issue, then the earlier view cannot be
thrust upon it and in such a case a reference should be made to a larger Bench.
The appeal in the present case needs to be decided on merits rather than
following the earlier view taken by the Tribunal in its own case. Upon merits,
three issues were identified :

(1) Head of income under which interest on income-tax
refund falls :


In order to categorise income under the head ‘Profits and
gains of business of profession’, it is imperative that income should have
arisen from business carried on by the assessee and Business refers to a
systematic, real and organised activity conducted with a view to earn income.
Payment of income-tax is an event which takes place after the determination of
profits of the business for the year. Eventually when the income-tax was
refunded along with interest u/s.244A, that would also, naturally, be an event
after the determination of income on year-to-year basis. Payment of income-tax
cannot be held to be a business activity or a transaction done during carrying
on of the business. There cannot be an intention of the assessee to earn income
by paying income-tax. Interest on refund of income-tax does not and can never
fall under the head ‘Profits and gains of business or profession’, irrespective
of the fact that the assessee is in banking or non-banking business.

(2) Meaning of expression ‘profits and gains’ of
business as used in S. 80P :


The use of the expression ‘profits and gains of business’ in
S. 80P(2) is to be seen in contradiction to the expression ‘income chargeable
under the head ‘Profits and gains of business or profession’. The latter
expression is used in several Sections of the Act including S. 80E, S.
80HHC(baa), etc. The employment of the expression ‘profits and gains’ in S.
80P(2) demonstrates the intention of the Legislature that the benefit of
deduction is not confined to the income arising directly from the banking
business (as covered by ‘profits’), which falls under the head ‘Profits and
gains of business or profession’, but also includes other items of income (as
covered by ‘gains’), which have some relation with the business of banking even
though they do not fall under the head of business income. Since income-tax was
paid in relation to the banking business, the interest on income-tax refund will
be considered as ‘gain’ (not ‘profit’) of banking business covered within the
expression ‘profit and gains’ of banking business.

(3) Scope of phrase ‘attributable to’ eligible business
:


The scope of the phrase ‘attributable to’ is wider than
‘derived from’. Whereas in the case of the latter, the relation of the income
with the source must be direct and that of the first degree, but in the former
even some commercial or casual connection suffices the test. The expression
‘attributable to’ covers ‘receipts from sources other than the actual conduct of
the business’. The income-tax, on which interest was granted, was utilised to
satisfy the demand raised in relation to the banking business. It is for the
banking business that income-tax was originally paid and subsequently the amount
was refunded along with interest. There exists a commercial and causal
connection between the interest on income-tax refund and the banking business
and hence it can be regarded as attributable to the banking business.

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Undisclosed income on the basis of cheques found during the course of search — Cheques received from various parties as security against advances made in cash out of undisclosed income — Amount not recovered by assessee telescoped against undisclosed inco

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Part
A: Reported Decisions

24 (2010) 37 DTR (Chennai) (TM) (Trib) 233
ACIT v. M. N. Rajendhran
A.Y. : 1-4-1995 to 24-1-2002. Dated : 29-1-2010

 

Undisclosed income on the basis of cheques found during the
course of search — Cheques received from various parties as security against
advances made in cash out of undisclosed income — Amount not recovered by
assessee telescoped against undisclosed income assessed on basis of same
cheques.

Facts :

During course of search, certain cheques were found from
premises of the assessee, which were received from various parties as a security
against loans advanced to them by the assessee in cash out of undisclosed
income. Loans were not repaid as confirmed by the parties. Addition was made by
the AO as an undisclosed income.

Upon further appeal to the CIT(A), addition was deleted on
the basis of his own order in the assessee’s brother’s case on the inference
that on the face of evidence, money lent for money-lending business had not been
recovered as per the statements of debtors placed on record.

The decision of CIT(A) in the assessee’s brother’s case was
upheld by the Tribunal. However, the learned Judicial Member set aside the
matter on the ground that the decision of the Tribunal in the case of the
assessee’s brother is entirely on different point. The learned Accountant Member
did not agree and the matter was referred to the Third Member.

Held :

In the assessee’s brother’s case, the Tribunal accepted the
assessee’s plea that no income accrued to the assessee as the cheques remained
unencashed. The amount not recovered by the assessee is telescoped against the
undisclosed income assessed on the basis of same cheques. This ratio is
applicable in the present case also. On the same set of facts, a Co-ordinate
Bench of the Tribunal cannot come to a diametrically opposite conclusion than
arrived at in the earlier case. The names of creditors do not matter. Therefore,
the addition was deleted.

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The AO observed that the assessee has earned an amount of Rs.1,31,39,526 on account of trading in shares and also earned brokerage of Rs.1,49,75,135. He held that according to Explanation to S. 73, the nature of share trading business of the assessee is d

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23 2010 TIOL 232 ITAT (Mum.)
ACIT v. KNP Securities Pvt. Ltd.
A.Y. : 1999-2000. Dated : 26-3-2010
S. 28, S. 43(5) and S. 73 — Explanation 2 to S. 28 does not apply if the
assessee is dealing in delivery-based transactions.

Facts :

The AO observed that the assessee has earned an amount of
Rs.1,31,39,526 on account of trading in shares and also earned brokerage of
Rs.1,49,75,135. He held that according to Explanation to S. 73, the nature of
share trading business of the assessee is deemed to be speculative and as per
Explanation to S. 28, speculation business should be segregated from other
business. Therefore, he allocated the expenditure incurred to speculative
business and other business. He, accordingly, arrived at a speculation loss of
Rs.49,66,658.

The CIT(A) deleted the allocation of expenditure made by the
AO and allowed this ground.

The Revenue preferred an appeal to the Tribunal.

Held :

The CIT(A) has correctly held that considering the
transactions as speculative will come only when a particular transaction is
considered as speculative in nature u/s.43(5). So long as the assessee deals in
delivery-based transactions, Explanation to S. 28 does not come into operation
as there are no speculative transactions u/s.43(5). The issue can only be
considered with reference to Explanation to S. 73. That portion of the Section
will come into play after considering the income under the head ‘Income from
Business’ as also income under other heads. The allocation of expenditure and
segregation of business will come into picture only when the assessee indulges
in speculative nature of transactions. The order of the CIT(A) was held to be
correct both on facts as well as on law.

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Explanation 1 to S. 17(2), S. 192 — Assessee employer is not hit by the retrospective insertion of Explanation 1 to S. 17(2) in the absence of any such extension of retrospective effect either in S. 192 or S. 201.

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22 2010 TIOL 231 ITAT (Hyd.)
State Bank of India, IFB Branch, Hyderabad v. DCIT (TDS)
A.Ys. : 2004-2005 to 2007-08.
Dated : 3-12-2009

 

Explanation 1 to S. 17(2), S. 192 — Assessee employer is not
hit by the retrospective insertion of Explanation 1 to S. 17(2) in the absence
of any such extension of retrospective effect either in S. 192 or S. 201.

Facts :

The assessee employer took residential premises on lease and
provided them to its employees. It recovered from its employees standard rent
for the accommodation so provided. Lease rent paid by the assessee was greater
than amount recovered by it from its employees. In accordance with the ratio of
decisions of several High Courts including the jurisdictional High Court, the
difference between the amount of rent paid by the employer and the amount of
standard rent charged from the employee was not regarded as a perquisite.
Subsequently, the Finance Act, 2007 inserted Explanation 1 to S. 17(2)(ii) with
retrospective effect from 1-4-2002. As a result of the retrospective amendment
the employee became chargeable to tax on perquisite value of the accommodation
where the rent paid by the assessee was greater than the rent recovered from the
employee.

The AO held that the assessee has short-deducted income-tax
at source from salaries paid by it to its employees and consequently the AO held
the assessee to be an assessee in default and demanded the amount of income-tax
short-deducted along with interest u/s.201(1A). The CIT(A) upheld the action of
the AO.

The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that :

(a) at the relevant time, when the TDS was to be effected
by the assessee-bank, there was no such provision on the statute book and the
law was amended at a later date with retrospective effect from 1-4-2002.

(b) the issue under consideration is covered in favour of
the assessee with the decision of the Nagpur Bench of the Tribunal in the
group cases of Canara Bank where it has been held that as far as the
assessee-employer is concerned, it is not hit by the retrospective insertion
of Explanation 1 to S. 17(2) thereof in the absence of any such extension of
retrospective effect either to S. 192 or S. 201.

The Tribunal, agreeing with the ratio of the Nagpur Bench
division decided the issue in favour of the assessee.

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S. 2(15) — Provisions of proviso to S. 2(15) are prospective and not retrospective — not applicable to donations received up to 31-3-2009.

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21 2010 TIOL 226 ITAT (Hyd.)
The Andhra Pradesh Chambers of Commerce and Trade Secunderabad v. DDIT
Dated : 23-12-2009

 

S. 2(15) — Provisions of proviso to S. 2(15) are prospective
and not retrospective — not applicable to donations received up to 31-3-2009.

Facts :

The assessee-was registered under the provisions of Andhra
Pradesh (Telangana Area) Public Societies Registration Act in 1982. It was
established for promotion of trade and commerce and some other charitable
objects. It was granted registration u/s.12A and was also granted recognition
u/s.80G.

It’s application dated 8-3-2008 for renewal of recognition
u/s.80G was rejected by DIT on the ground that the Finance Act, 2008 has w.e.f.
1-4-2009 amended the definition of the term ‘charitable purpose’ by adding a
proviso to S. 2(15), which specifically lays down that advancement of any other
objects of general public utility shall not be ‘charitable purpose’ if it
involves carrying on of any activity in the nature of trade, commerce or
business for a cess or fee or any other consideration, irrespective of the
nature of use of application, or retention, of the income from such activity.

The assesee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that :

(a) there was no violation of S. 80G(5) by the assessee;

(b) the decision of the Tribunal, relied upon by the D.R.,
in Andhra Pradesh Federation of Textile Association (ITA No. 88/Hyd./08, dated
30-1-2009) is not applicable to the facts of this case, as in that case, it
was found that the element of charity in the activities of the assessee was
absent, and held that the association could not be considered as a charitable
association within the meaning of S. 2(15) of the Act;

(c) the issue is covered by the decision of the Tribunal in
DDIT v. Indian Electrical and Electronics Manufacturers Association, (2009) 31
SOT 346 (Mum.) where it has been held that the proviso to S. 2(15) is not
clarificatory in nature and would not apply retrospectively;

(d) Legislature has specified the date from which proviso
to S. 2(15) is applicable;

(e) the provisions of S. 80G allowing certain deductions to
the donors apply to specific act of donation made on particular date.

Held that, the provisions of proviso to S. 2(15) shall not
apply to donations received by the assessee up to 31-3-2009. In the absence of
any violation of provisions of S. 80G(5), the assessee is entitled for approval
u/s. 80G in respect of donations received up till 31-3-2009. The Tribunal
directed the DDIT accordingly and allowed the appeal of the assessee.

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S. 194C — Payments made to producers, directors, actors for financing film production are not covered by S. 194C.

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20 2010 TIOL 210 ITAT (Mum.)

Entertainment One Ltd. v. ITO (TDS)
A.Ys. : 2003-2004 to 2006-2007
Dated : 15-6-2009

S. 194C — Payments made to producers, directors, actors for
financing film production are not covered by S. 194C.

Facts :

The objects of the assessee company inter alia included
production of feature films, TV serials, video films and documentary films, etc.
In the course of survey action it was found that assessee had made payments to
various film and T.V. serial producers and directors under different agreements.
The AO, on examining the agreements entered into, came to the conclusion that
the assessee has incurred expenditure for production of films as a whole. After
the film is produced, it acquires the entire right of the film concerned,
including the intellectual property right as well as complete ownership of
distribution and exhibition rights of the film and serial.

He rejected the arguments of the assessee that

(a) it has merely financed the film and has retained
control over negative rights of the completed film as assurance of realisation
of money from the producer;

(b) control over distribution of the film has been taken to
ensure best price available can be recovered from the distribution of the
film;

(c) the producer is in full command of making the film and
not the assessee;

(d) the assessee has neither produced the film, nor has it
got it produced;

(e) the producers/directors with whom agreements are
entered into and to whom advances are made are not
contractors/sub-contractors. For all these reasons the assessee contended that
the provisions of S. 194C are not attracted to the payments made by ic.

The AO held that advances made by the assessee to producers
and directors are covered u/s.194C. He issued notice u/s.201 treating the
assessee as an assessee in default and raised demands for tax and interest
u/s.201(1)/(1A).

In appeal, the CIT(A) gave partial relief to the assessee.
The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal observed that :

(a) in majority of the agreements film-makers and producers
have right to participate in the surplus after repayment of the principal
amount and these terms support the case of the assessee that status of the
film-makers/ producers is also like principal, as in normal commercial
practice, once the contract is executed, the contractor is out of the project
and the entire surplus is enjoyed by the principal;

(b) while the relationships of the principal and contractor
can be determined on the basis of the terms of the agreement or contract, at
the same time, industry and trade practices and conventions are also to be
taken judicial note of, and considered before arriving at final conclusions,
in respect of the relationships created. In film industry, it is not uncommon
that the entire film project is financed by a third party, who otherwise is
not involved in the execution of a film project;

(c) the AO had admitted that the assessee has not hired the
services of the producer and director. This itself takes the
producers/directors out of the term “contractors” and hence, the first mandate
of S. 194C is not fulfilled;

(d) production of the film goes through many stages and it
is nowhere the case of the Revenue that the assessee has any active role in
the production of the film;

(e) Censor Board certificates in respect of the films which
the assessee has financed were all in the name of the producers. If the
assessee’s role was as a producer, then the Censor Board Certificates being
very important legal documents, would have shown the assessee as a producer.

On examining the agreements, the Tribunal concluded that no
relationship of ‘principal’ and ‘contractor’ was created between the assessee
and film-producers/directors, but all agreements were finance agreements with
unique features
to participate in the surplus by taking the risk of losses also.

The Tribunal held that the payments made by the assessee to
producers and directors of the film/TV serials cannot be said to be covered by
S. 194C. It held that the assessee is not a deemed defaulter u/s.201(1) and
there is no question of levy of interest u/s.201(1A).

The Tribunal allowed the appeal of the assessee.

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S. 35DDA — Claim for deduction of 1/5th of the expenditure incurred on VRS cannot be denied merely on the ground that there was no manufacturing activity during the year, particularly when similar expenses are allowed in the previous year.

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19 2010 TIOL 205 ITAT (Mum.)

Apte Amalgamations Ltd. v. DCIT
A.Y. : 2002-03. Dated : 9-3-2010

S. 35DDA — Claim for deduction of 1/5th of the expenditure
incurred on VRS cannot be denied merely on the ground that there was no
manufacturing activity during the year, particularly when similar expenses are
allowed in the previous year.

Facts :

The assessee-company had in its return of income claimed a
deduction of Rs.19,18,441 being 1/5th of the total expenditure incurred on VRS.
The Assessing Officer (AO) disallowed this on the ground that the expenditure
was incurred subsequent to closure of the business and hence VRS expenditure was
not wholly and exclusively incurred for the purpose of business.

In appeal to the CIT(A) observed that during the current year
there was no manufacturing activity, hence, the question of allowability of
expenses relating to manufacturing business did not arise. He confirmed the
disallowance on further appeal by the assessee:

Held :

The Tribunal noted that :

(a) the AO observed that “the assessee-company is engaged
in the business of manufacturing chemicals and trading of scientific
instruments”;

(b) the CIT(A) while considering the assessee’s claim of
depreciation has observed that during the year the assessee had not undertaken
any manufacturing activity and that the business income was by way of trading,
service charges and commission. He upheld the disallowance of depreciation on
plant and machinery, but allowed depreciation on non-manufacturing items
(computer, furniture and motor cars) as the assessee was having some business
activity during the year, and

(c) in the A.Y. 2001-02 similar disallowance made by the AO
on the ground that expenditure has been incurred subsequent to closure of
business was deleted by the CIT(A) and the Tribunal had, on an appeal by the
Revenue, upheld the action of the CIT(A),

Following the order of the Tribunal for the earlier year and
also keeping in view that merely because the assessee has closed its
manufacturing activity did not mean that the assessee has not carried out its
business activities, the claim of the assessee was held allowable.

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Income-tax Act, 1961 — Section 6(1)(c) and Explanation to S. 6(1) — In the case of an assessee who is sent on deputation by his Indian employer to a company outside India and his salary is borne and paid by the foreign company, can it be said that the ass

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  1. 2009-TIOL-261-ITAT-Mad.

DCIT vs. Ashok Kumar

A.Y. : 2004-2005. Date of Order : 6.3.2009

Income-tax Act, 1961 — Section 6(1)(c) and Explanation to
S. 6(1) — In the case of an assessee who is sent on deputation by his Indian
employer to a company outside India and his salary is borne and paid by the
foreign company, can it be said that the assessee has left India for the
purpose of employment and therefore his case is covered by clause (a) of
Explanation to S. 6(1) — Held : Yes.

 

Facts :

The assessee was an employee of ONGC. During the previous
year relevant to assessment year 2004-05, he was seconded to ONGC Nile Ganga
BV, a Dutch company. During the year under consideration his stay in India was
for 98 days. The AO held that in view of S. 6(1)(c) of the Act the assessee
became resident and accordingly he charged to tax salary received by the
assessee from ONGC Nile Ganga in Sudan. The AO held that the assessee did not
leave India for employment outside India but was sent for work of ONGC out of
India and, therefore, his income was chargeable to tax.

The CIT(A) held the assessee to be a non-resident and
directed the AO to exclude salary received by the assessee from ONGC Nile
Ganga by treating the assessee as a non-resident.

The Revenue filed an appeal to the Tribunal.

Held :

The Tribunal noted that during the period when the assessee
was deputed to ONGC Nile Ganga no salary was paid by ONGC. It held that since
ONGC Nile Ganga B.V. is a foreign company, a separate entity, the assessee can
be said to have left India but joined employment in a foreign country and,
therefore, the condition for treating him as resident would be for 180 days (sic
182 days) as against 60 days provided in the Explanation. Accordingly, it
held that the assessee was a non-resident and therefore, income received by
him from ONGC Nile Ganga in Sudan would not be taxable. It noted that this
view was also supported by the decision of AAR in the case of British Gas
India P. Ltd. (285 ITR 218). The Tribunal dismissed the appeal of the Revenue.


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Income-tax Act, 1961 — Sections 40(a)(i) and S. 195 — Whether provisions of S. 195 apply only to income chargeable to tax in India — Held : Yes. Whether in a case where amount paid to non-resident is not chargeable to tax in India and therefore provisions

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  1. 2009-TIOL-241-ITAT-Mad.

DCIT vs. Venkat Shoes Pvt. Ltd.

A.Y. : 2004-2005. Date of Order : 6.3.2009

Income-tax Act, 1961 — Sections 40(a)(i) and S. 195 —
Whether provisions of S. 195 apply only to income chargeable to tax in India —
Held : Yes. Whether in a case where amount paid to non-resident is not
chargeable to tax in India and therefore provisions of Chapter XVII-B are not
applicable, can such an amount be disallowed u/s. 40(a)(i) — Held : No.

 

Facts :

The assessee paid a sum of Rs.23,57,715 as commission to a
non-resident. The commission was paid for services rendered by the agent
outside India. The assessee did not deduct tax at source on the ground that
the services have been rendered outside India. The AO held that in view of the
ratio of the decision of the Supreme Court in the case of Transmission
Corporation of India the assessee ought to have deducted tax at source. The AO
disallowed this sum u/s. 40(a)(i) since according to the him tax was
deductible on this sum and the assessee had failed in its duty of deducting
tax as per S. 195.

The CIT(A) held that (a) the commission paid by the
assessee was not chargeable to tax in India as per Ss. 4 and 5 of the Act; (b)
the case of the assessee was supported by CBDT Circular No. 786, dated
7.2.2000. Accordingly, he held that the provisions of S. 195 and S. 40(a)(i)
were not applicable. He also accepted the assessee’s contention that the Apex
Court decision in the case of Transmission Corporation of AP Ltd. and Another
mandated deduction of tax at source only when the same is chargeable to tax in
India. Accordingly, he allowed the assessee’s appeal.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that as the non-resident rendered
services outside India, the amount under consideration could not be said to
have been deemed to accrue or arise in India and also the payment was remitted
abroad and therefore the amount was not exigible to tax in India. The Tribunal
held that since the payment was not chargeable to tax in India, the provisions
of S. 195(2) are not applicable.

The Tribunal also found the case of the assessee to be
fully meeting the criteria laid down by the CBDT in its Circular No. 786,
dated 7th February, 2000 and Circular No. 23, dated 23rd July, 1969 according
to which, no tax is deductible u/s. 195. The Tribunal noted that in view of
the decision of the Apex Court in Azadi Bachao Andolan the circulars of CBDT
are binding on the Revenue authorities.

The Tribunal held that it cannot be said that the decision
of the Apex Court in Transmission Corporation mandates deduction of tax at
source, if non-resident renders service outside India which is not chargeable
to tax. The Hon’ble Court’s exposition in that case was on the premise that at
least some part of the receipt may be chargeable to tax. The Apex Court has
clearly upheld that the obligation of the assessee to deduct tax at source is
limited to the appropriate portion of income chargeable under the Act. So when
there is no income chargeable to tax, the question of deduction at source does
not arise.


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Section 37(1)- Amount paid towards discharge of corporate guarantee obligation, which guarantee was issued for its subsidiary company and was in the interest of the assessee’s business, is allowable as a deduction while computing `Business Income’.

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45 2009-TIOL- 783-ITAT- MAD

ACIT vs. W S Industries (India)
Ltd.

ITA No. 1373/Mds/2008

Assessment Year: 2004-05.
Date of Order: 21.8.2009

Section 37(1)- Amount paid
towards discharge of corporate guarantee obligation, which guarantee was issued
for its subsidiary company and was in the interest of the assessee’s business,
is allowable as a deduction while computing `Business Income’.

Facts:

The assessee was engaged in the business of manufacturing
electro porcelain products. W. S. Telesystems (WSTL), a subsidiary of the
assessee, was supplying to the assessee the material required by the assessee
for executing its contracts. For this purpose, the assessee used to make
advances to WSTL from time to time. Over a period of time, amounts aggregating
to Rs 6.11 crores were advanced by the assessee in excess of the amounts billed.
The assessee had issued corporate guarantees in respect of borrowings of WSTL
from ICICI, Central Bank of India and Kirloskar Finance Ltd. Upon WSTL becoming
sick and being under the threat of invocation of guarantees, the assessee
entered into a onetime settlement with the lenders of WSTL, whom the assessee
had given corporate guarantees and paid amounts aggregating to Rs 13.07 crores
in consideration of discharge of corporate guarantees. Thus, a total Rs 19.18
crores was shown as receivable from WSTL. Upon closure of the WSTL factory and
WSTL becoming sick, the assessee, with the approval of the High Court of Madras,
u/s 391 of the Companies Act, 1956, debited the sum of Rs 19.18 crores to share
premium account in the books of the company, but claimed it as a deduction in
the course of assessment. The Assessing Officer (AO) allowed the deduction of Rs
6.11 crores, but did not allow the deduction of Rs 13.07 crores.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
allowed the deduction of Rs 13.07 crores towards discharge of corporate
guarantee obligation.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

Giving corporate guarantee was one of the objects under the
Memorandum of Association; and also since the subsidiary company was supplying
materials which were important for the assessee’s business, the action of giving
corporate guarantee as well as advances was held to be incidental to the
assessee’s business, and a commercially expedient decision. The Tribunal
observed that when the writing off of advances has been allowed as a deduction,
there is no reason why the amount paid towards discharge of corporate guarantee
should be treated any differently. Incurrence of expenditure was incidental to
the interest of the business of the assessee.

The appeal filed by the Revenue was dismissed.

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Section 45(3)- Provisions of S. 45(3) are attracted even when an asset held as stock-in-trade is introduced by an assessee into a partnership firm as its capital contribution.

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44 2010-TIOL-16-ITAT-D-L-SB
DLF Universal Ltd vs DCIT

ITA No. 3622/Del/1995

Assessment Year: 1992-93.
Date of Order – 4.1.2010

Section 45(3)- Provisions of S.
45(3) are attracted even when an asset held as stock-in-trade is introduced by
an assessee into a partnership firm as its capital contribution.

Facts:

The assessee was engaged in the business of real estate
development. The assessee held land costing Rs 4.40 crores as its
stock-in-trade. Vide a Memorandum of Partnership executed on 23rd March, 1992,
the assessee entered into a partnership with four of its subsidiaries and one
individual. The assessee contributed all its rights in the five plots of land to
the newly constituted partnership firm in which the assessee became a partner
with 76% share. The rights of the assessee in the land so contributed became the
property of the firm from 16th March, 1992. A sum of Rs 11.50 crores,
representing the market value of the land, was credited by the partnership firm
to the capital account of the assessee. The assessee credited its ‘profit and
loss’ account with Rs 6.01 crores, the sum being the difference between market
value of the land introduced into the firm and its book value. However, in the
return of income filed by the assessee, this sum of Rs 6.01 crores was claimed
to be not taxable on the ground that the introduction of an asset into a
partnership firm does not constitute sale. In support of its contention, the
assessee placed reliance on the decision of the Apex Court in the case of Hind
Construction Ltd. (83 ITR 211)(SC). The AO and the CIT (A), relying on the ratio
of the decision of the Apex Court in the case of Sunil Siddharthbhai, taxed this
amount.

Aggrieved, the assessee preferred an appeal to the Tribunal.

The Special Bench of the Tribunal, by the majority, held as
follows:

Held:



(i) The Apex Court has in the case of Sunil Siddharthbhai
held that when a partner introduces his asset into a firm as capital
contribution, there is a `transfer’, though the gains are not chargeable to
tax, as the consideration is not determinable. The Apex Court has clarified
that this principle does not apply if the partnership was non-genuine or a
sham or where the transaction of transferring personal assets to the
partnership firm was a device or ruse to convert personal assets into money
while evading tax on capital gains.

(ii) The bench, upon having noted that the assessee had
encashed its stock-in-trade and had derived gains, held that going by facts —
though there was no material to hold that the partnership was non-genuine or
sham — the assessee had adopted a calculated device of converting land into
money by withdrawing substantial sums from the firm and debiting the same to
its current account. Accordingly, the contribution by the assessee of its
personal land to the capital of the firm was a device or ruse for converting
land into money for its benefit. Thus, the entry of Rs 11.50 crores being the
value of land credited in the assessee’s capital account was not imaginary or
notional. The surplus was chargeable to tax.

(iii) S. 45(3) applies when a capital asset is introduced
into a firm as capital contribution. S. 45(3) applies also when stock-in-trade
is introduced into a firm. The transaction of introducing stock-in-trade into
a firm is on capital account. At the point of time of introduction, the
stock-in-trade does not retain its character as stock-in-trade. This is also
shown by the fact that the assessee revalued the stock-in-trade to its market
value prior to introduction into the firm. Consequently, the gains on such
transfer are taxable u/s 45(3);

(iv) As regards the contention whether the AO, after having
assessed the gain as business profits, is entitled to urge before the Tribunal
that the gains should be assessed as capital gains u/s 45(3), it held in the
affirmative for the reason that this is merely an alternative argument on the
same set of facts and not making out of a new case against the assessee. The
bench noted that in Sumit Bhattacharya 112 ITD 1 (Mum)(SB), it was held that
the Tribunal was competent to change the head of income even at the instance
of the respondent.

(v) The surplus to the assessee from the contribution of
land to the firm as capital was held to be assessable u/s 45(3). Even
otherwise, the surplus was taxable as the transaction was a colorable device.
Without prejudice, if it was held that the land should be treated as
stock-in-trade, the surplus is assessable as business income.

 


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S. 2(22)(e) — Whether deemed dividend can be assessed in hands of person other than a shareholder of lender — Held, No — Whether words ‘such shareholder’ in S. 2(22)(e) refer to shareholder who is both registered and also beneficial — Held, Yes.

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32 2008 TIOL 641 ITAT Mum-SB


ACIT v. Bhaumik Colour Pvt. Ltd.

ITA No. 5030/Mum./2004

A.Y. : 1997-98. Dated : 19-11-2008

S. 2(22)(e) of the Income-tax Act, 1961 — Assessee received
interest-bearing loan of Rs.9 lakhs from Umesh Pencils Pvt. Ltd. (UPPL) —
Narmadaben Nandlal Trust (NMT), a shareholder holding 20% shares in assessee
company held 10% shares in UPPL — Trustees of NMT were the registered
shareholders in both the companies, but the beneficiaries of NMT were different
from the trustees – Assessing Officer taxed the amount of loan received by
assessee as deemed dividend u/s.2(22)(e) — Whether deemed dividend can be
assessed in the hands of a person other than a shareholder of the lender — Held,
No — Whether the words ‘such shareholder’ in S. 2(22)(e) of the Act refer to a
shareholder who is both the registered shareholder and also the beneficial
shareholder — Held, Yes.

 

Facts :

Bhaumik Colour Pvt. Ltd. (BCPL), the assessee, was a company
engaged in the business of manufacture of pencil-paints. The assessee took an
interest-bearing loan of Rs.9 lakhs from UPPL. The AO found that though the
assessee was not a shareholder of UPPL, both the companies had one common
shareholder i.e., NNT. The said trust was holding 20% shares in
assessee-company i.e., holding substantial interest and 10% shares in
UPPL. The shares were held by the trust in the name of three trustees for and on
behalf of the trust and the beneficiaries of the trust were five in number and
none of the trustees was the beneficiary of the trust. The AO was of the view
that this transaction was covered by the second limb of provisions of S.
2(22)(e) of the Act. The AO taxed the sum of Rs.9 lakhs in the hands of the
assessee. The CIT(A) deleted the addition made by the AO for the reason that NNT
was not beneficial shareholder of shares in BCPL or UPPL and therefore the
second limb of the provisions of S. 2(22)(e) could not be applied vis-à-vis
the assessee. Aggrieved by the order of the CIT(A), the Revenue preferred an
appeal to the Tribunal. The Division Bench noted that there was a direct
conflict between the decisions in Nikko Technologies (I) Pvt. Ltd. and Seamist
Properties (P) Ltd., and was, therefore, of the opinion that the matter should
be heard by a Special Bench on the following questions :

(a) Whether deemed dividend u/s.2(22)(e) of the Act, can be
assessed in the hands of a person other than a shareholder of the lendor ?

(b) Whether the words ‘such shareholder’ occurring in S.
2(22)(e) refer to a shareholder who is both the ‘registered’ shareholder and
also the ‘beneficial’ shareholder ?

The Special Bench held as under :

(1) The provisions of S. 2(22)(e) of the Act, and the
provisions of S. 2(6A)(e) of the Income-tax Act, 1922 were considered. The
Bench analysed the amendments made in S. 2(22)(e) from time to time and
observed that under the 1922 Act, two categories of payment were considered as
dividend viz. (a) any payment by way of advances or loan to a
shareholder was considered as dividend paid to the shareholder, or (b) any
payment by any such company on behalf of or for the individual benefit of a
shareholder was considered as dividend. In the 1961 Act, the very same two
categories of payment were considered as dividend but an additional condition
that payment should be to a shareholder being a person who is the beneficial
owner of shares and who has a substantial interest in the company viz.,
share-holding which carries not less than twenty percent of the voting power,
was introduced.

(2) The Apex Court has in the case of C. P. Sarathy
Mudaliar (83 ITR 170), while dealing with provisions of S. 2(6A)(e),
(synonymous to the provisions of S. 2(22)(e) of the 1961 Act,) held that when
the Act speaks of shareholder, it refers to the registered shareholder. This
decision was followed by the Apex Court in Rameshwarlal Sanwarmal (122 ITR 1).
It is clear from these pronouncements that to attract the first limb of S.
2(22)(e), the payment must be to a person who is a registered holder of
shares.

(3) The word ‘shareholder’ is followed by the words ‘being
a person who is the beneficial owner of shares’. These provisions do not
substitute the aforesaid requirement to a requirement of merely holding a
beneficial interest in the shares without being a registered holder of shares.
Thus the expression ‘shareholder being a person who is the beneficial owner of
shares’ referred first time in S. 2(22)(e) means both a registered shareholder
and beneficial shareholder. If a person is a registered shareholder but not
the beneficial shareholder or vice versa, then the provisions of S.
2(22)(e) will not apply.

(4) There are divergent views on this issue of the person
in whose hands dividend is to be taxed viz. the ‘concern’ or the
‘shareholder’. The Rajasthan High Court in the case of Hotel Hilltop (217 CTR
527), held that the liability of tax, as deemed dividend, could be attracted
in the hands of the ‘shareholder’ and not the ‘concern’.

(5) The provisions of S. 2(22)(e) do not spell out as to
whether the income has to be taxed in the hands of the shareholder or the
concern. Since the provisions are ambiguous, the intention behind enacting the
provisions of S. 2(22)(e) should be examined. The intention of the Legislature
is to tax dividend only in the hands of the shareholder and not in the hands
of the concern.

(6) The decision of the Apex Court in the case of Kantilal
Manilal (41 ITR 275), explained the basic characteristic of dividend.
Provisions of S. 206 of the Companies Act prohibits payment of dividend to
persons other than shareholders and in the case of Nalin Beharilal (74 ITR
849), the Apex Court considered what can come within the artificial definition
of dividend u/s.2(22).

S. 36(1)(va), S. 43B, S. 37(1) — Delayed payment of employees contribution to PF/ESIC beyond the grace period but before due date of filing return of income is allowable. Unrecoverable advances made for purchase of capital asset are allowable as revenue e

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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.)

 




3. Pik Pen Private Ltd. v. ITO


ITAT ‘C’ Bench, Mumbai

Before P. M. Jagtap (AM) and

R. S. Padvekar (JM)

ITA No. 6847/Mum./2008

A.Y. : 2005-06. Decided on : 28-1-2010

Counsel for assessee/revenue : K. Shivaram/ Chandra
Ramakrishnan

S. 36(1)(va), S. 43B, S. 37(1) — Delayed payment of employees
contribution to PF/ESIC beyond the grace period but before due date of filing
return of income is allowable. Unrecoverable advances made for purchase of
capital asset are allowable as revenue expenditure u/s.37(1).

Per R. S. Padvekar :

Facts I :

The assessee made payment of employees contribution to PF/ESIC
for the month of February, beyond the grace period but before due date of filing
return of income. The Assessing Officer (AO) disallowed the payment of Rs.43,721
u/s.36(1)(va) as he was of the opinion that the employees’ contribution to PF/ESIC
even if made before filing of the return of income is not covered u/s.43B of the
Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
confirmed the action of the AO.

Facts II :

The assessee had debited a sum of Rs.2,96,135 which
represented advances made for purchase of machinery, but since the machinery was
not supplied the unrecovered amount of advances was written off and treated as
revenue expenditure allowable u/s. 37(1) of the Act. The Assessing Officer (AO)
was of the view that since the advances were made for purchase of capital asset,
un-recovered amount of advances represented a capital loss and was not
allowable. He disallowed the sum of Rs.2,96,135.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held I :

In the case of Alom Extrusion Ltd. 319 ITR 306 (SC) it has
been held that the omission of the second proviso to S. 43B of the Act by the
Finance Act, 2003 operated retrospectively w.e.f. 1-4-1988. In the said case
also, the issue was concerning the contribution payable by the employer to the
PF/Superannuation Fund or any other fund for the welfare of the employees. The
Court held that the contribution paid before due date of filing return of income
is allowable. Consequently, the Tribunal held that the issue is covered in
favour of the assessee and the deduction is allowable.

Held II :

The Tribunal following the principles laid down by the
Rajasthan High Court in the case of CIT v. Anjanikumar Co. Ltd., (259 ITR 114)
decided the issue in favour of the assessee and deleted the addition by treating
the write-off as revenue expenditure u/s.37(1) of the Act, as admittedly, no
capital asset came into existence. This ground was decided in favour of the
assessee.

 

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S. 40(b) — Remuneration to working partner as per the partnership deed — Partnership deed gave power to modify the terms of remuneration — Whether the existence of such term would render remuneration not qualified for deduction — Held, No.

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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.)

 



2. Shabro International v. Addl. CIT


ITAT ‘E’ Bench, Mumbai

Before R. S. Sayal (AM) and

V. Durga Rao (JM)

ITA No. 6629/Mum./2008

A.Y. : 2005-06. Decided on : 20-3-2010

Counsel for assessee/revenue : Pradip Kapasi/ A. K. Kadam

S. 40(b) — Remuneration to working partner as per the
partnership deed — Partnership deed gave power to modify the terms of
remuneration — Whether the existence of such term would render remuneration not
qualified for deduction — Held, No.

Per R. S. Sayal :

Facts :

The assessee, a firm, executed a supplementary partnership
deed on 20-6-2004 to provide for the payment of interest and remuneration to the
working partners. As per the deed, the remuneration was to be calculated as a
percentage of the profit as per S. 40(b) of the Act. One of the clauses in the
deed further provided that the partners may decide to pay remuneration at a
lower amount or not to pay remuneration or to pay remuneration on any other
criteria or ratio. According to the AO, as explained in Circular No. 739, dated
25-3-1996, since the partnership deed did not contain a specific provision for
calculating the amount of remuneration, no remuneration was allowable. He
further held that in any case, the remuneration for the period till 20-6-2004,
since it pertained to the period prior to the date of the execution of the deed,
cannot be allowed. The CIT(A) on appeal upheld the order of the AO.

Held :

According to the Tribunal, the Board Circular referred to by
the Tribunal required that either the remuneration payable to each of the
working partners is laid down in the deed or the deed must lay down the manner
of ascertaining such remuneration. Referring to the supplementary deed, the
Tribunal noted that the deed did provide the manner of quantifying the
remuneration to the partners. According to the Tribunal, the presence of clause
3(d) which empowered the partners to lower the remuneration or to not pay the
remuneration, did not erase the other clauses which clearly laid down the amount
of remuneration payable. It further observed that even in the absence of the
said clause 3(d), the partners had the power to alter the remuneration payable.
Accordingly, the orders of the lower authorities were modified to the said
extent.

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S. 41(1) — Remission or cessation of liability — Receipt of advance money against order remaining unclaimed — Creditor under liquidation — Whether AO justified in treating the unclaimed sum as income — Held, No.

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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.)

 

1. Nash Machines & Electronics Pvt. Ltd. v.
Jt. CIT

ITAT ’A’ Bench, Pune

Before Mukul Shrawat (JM) and

D. Karunakara Rao (AM)

ITA Nos. 163/PN/2008

A.Y. : 2004-05. Decided on : 30-11-2009

Counsel for assessee/revenue : C. N. Vaze/

Amrinder Kumar

S. 41(1) — Remission or cessation of liability — Receipt of
advance money against order remaining unclaimed — Creditor under liquidation —
Whether AO justified in treating the unclaimed sum as income — Held, No.

Per Mukul Shrawat :

Facts :

The assessee had received the sum of Rs.36.33 lacs in the F.Y.
1996-97 from a party called PMA Ltd. as advance against sales. Before the
assessee could supply the material, PMA went into liquidation. The last
correspondence with the party was in February 1999 when a liquidator informed
the assessee about the fact of liquidation.

Applying the ratio of the decision of the Supreme Court in
the case of T. V. Sundaram Iyenger & Sons Ltd., of the Chennai High Court in the
case of Aries Advertising Pvt. Ltd. and of the Delhi High Court in the case of
State Corporation of India Ltd., the AO treated the said unclaimed amount as the
income of the assessee. On appeal the CIT(A) agreed with the order of the AO and
noted that since the amount remained unpaid for a long period, it assumed the
character of trade receipt taxable u/s.41(1) of the Act. He also relied on the
decision of the Karnataka High Court in the case of Mysore Thermo Electric Pvt.
Ltd.

Held :

According to the Tribunal, the provisions of S. 41 would
apply where an allowance or deduction had been made of loss or expenditure in
the assessment of earlier year and in any subsequent years the assessee availed
the benefit by way of remission or cessation of such trading liability. In the
case of the assessee, the impugned amount was not of the character of ‘trading
liability’ for which the assessee had ever obtained any benefit or deduction or
allowance in any of the past years. Further, there was no evidence or any
specific communication to indicate the remission or waiver of debt by the
creditor. Hence, according to the Tribunal, the provisions of S. 41(1) were not
applicable. For the purpose it also relied on the decisions of the Calcutta High
Court in the case of S. K. Bhagat & Co. and of the Rajasthan High Court in the
case of Shree Pipes Ltd. According to it, all the decisions relied on by the
lower authorities were distinguishable on facts and hence, not applicable to the
case of the assessee.

Cases referred to :


1. S. K. Bhagat & Co. v. CIT, 275 ITR 464 (Cal.);

2. CIT v. Shree Pipes Ltd., 301 ITR 240 (Raj.);

3. U. B. Engineering Ltd., ITA No. 1368/PN/06 dated
31-8-2009;

4. T. V. Sundaram Iyenger & Sons Ltd., 222 ITR 344 (SC);

5. CIT v. Aries Advertising Pvt. Ltd., 255 ITR 510 (Mad.);

6. CIT v. State Corporation of India Ltd., 247 ITR 114
(Del.);

7. Mysore Thermo Electric Pvt. Ltd. v. CIT, 221 ITR
504 (Kar.)




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Income-tax Act, 1961 — S. 32(1)(ii) — Depreciation on Intangible Assets — Payment for Non-compete fees — Whether by payment of non-compete fees the assessee can be said to have acquired a commercial or business right similar to the intangible assets enume

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6 ITO v. Medicorp Technologies India Ltd.

ITAT ‘A’ Bench, Chennai

Before H. S. Sidhu (JM) and Ahmad Fareed (AM) ITA No. 2328/Mds./2007

A.Y. : 2002-03. Decided on : 16-1-2009
Counsel for revenue/assessee : Shahji P. Jacob/ K. Ravi

Income-tax Act, 1961 — S. 32(1)(ii) — Depreciation on Intangible Assets — Payment for Non-compete fees — Whether by payment of non-compete fees the assessee can be said to have acquired a commercial or business right similar to the intangible assets enumerated in S. 32(1)(ii)of the Act — Held, Yes. Whether claim of depreciation is admissible on non-compete fees paid by the assessee — Held, Yes.

Facts :

The assessee-company was in the business of manufacture and distribution of bulk drugs and intermediaries, and exporting these products to the USA, Canada, Europe and Australia. Another company, Medispan Limited (MS) was engaged in the business of development and production of medical and pharmaceutical formulations and had been exporting it to various South American, African and South-East Asian countries. The assessee with an intention to expand its market reach to South American and African countries, for its own products as well as for other formulations, drugs and medicines, entered into an agreement dated 12-7-2000, whereby MS agreed to transfer the business and activities of its export division to assessee for a consideration of Rs.5.33 crores. Clause III of the agreement inter alia provided for break-up of various components of the consideration of Rs.5.33 crores. It was provided that the consideration of Rs.5.33 crores comprises Rs.2 crores towards compensation for MS accepting noncompete obligation in respect of export of bulk drugs, pharmaceutical products and formulations. In the computation of total income filed along with the return of income, the assessee had claimed the payment of Rs.2 crores towards non-compete obligation as revenue expenditure. The AO rejected the claim. The assessee made an alternative claim before the AO that depreciation be allowed u/s.32(1) of the Act on the non-compete fee. The AO rejected this claim also. The CIT(A) held that depreciation on this sum of Rs.2 crores be granted u/s.32(1) of the Act. Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal considered the legislative history and scope of the provisions dealing with the benefit of ‘depreciation’ under the Act. It noted that the scope of S. 32(1) was widened by the Finance Act, 1999 by allowing depreciation in respect of ‘intangible assets’ w.e.f. 1-4-1999. This has been achieved by introducing clause (ii) in S. 32(1) of the Act. Prior to this, depreciation was allowable only in respect of ‘tangible assets’ viz. buildings, machinery, plant or furniture. It stated that the words ‘being intangible assets’ appear in clause (ii) by way of a nomenclature, to contradistinguish the items appearing in clause (ii) from those appearing in clause (i). It noted that the provisions of S. 32(1)(ii) w.e.f. 1-4-1999 not only extended the benefit of S. 32 to the ‘intangible assets’ but also gave therein an ‘inclusive’ definition of the ‘intangible assets’, for this purpose. It stated that one can say that clause (ii) contains an ‘inclusive’ definition of ‘intangible assets’, for the purpose of S. 32.

The Tribunal found that it was an admitted fact that the payment of Rs.2 crores was made by the asses-see-company to ward off competition in the export business which was acquired by it from MS. Therefore, it concluded that what was acquired by the assessee by paying this amount of Rs.2 crores was a business/commercial right. It observed that it is clear from the language of clause (ii) of S. 32(1) that each of the terms, know-how, patents, copyright, trade mark, licences, or franchises represents a ‘business or a commercial right’. It then proceeded to examine the ‘nature’ of these business/commercial rights and compared their ‘nature’ with the ‘nature’ of the impugned business/commercial right which was acquired by the assessee and concluded that in the case of copyright, trade mark, licence, and franchises also the owners have exclusive business/ commercial rights, and if there is a breach they can sue. It held that similar was the nature of the impugned right acquired by the assessee. It further stated that if the business/commercial right of a patent, copyright, trademark, licence and franchise fulfils the conditions of being intangible asset, then surely the impugned business/commercial right acquired by the assessee also fulfils that condition by way of a logical corollary. The decision of Madras Tribunal in the case of A. B. Mauria India Pvt. Ltd. was held to be not applicable in the facts of the present case. The Tribunal held that the payment of Rs.2 crores made by the assessee under agreement dated 12-7-2000 to ward off competition was a business/commercial right which was similar in nature to copyright, trade mark, licence and franchises and therefore qualified for depreciation u/s.32(1)(ii) of the Act. The Tribunal observed that the decision of ITAT, Chennai, in the case of A. B. Mauria India Pvt. Ltd., on which reliance was placed on behalf of the Revenue, does not support the case of the Department on the facts of the case in the present appeal.

Case referred to :

1. A. B. Mauria India Pvt. Ltd. (ITA No. 1293/ Mds./2006, dated 23-11-2007)

 

S. 133A of the Income-tax Act, 1961 — Whether an addition can be sustained merely on the basis of statement made at the time of Survey — Held, No.

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5 Dy. CIT v. Premsons

ITAT ‘B’ Bench, Mumbai
Before R. S. Syal (AM) and Asha Vijayaraghavan (JM) ITA No. 4698/Mum./2006

A.Y. : 2003-04. Decided on : 15-1-2009 Counsel for revenue/assessee : Pitambar Das/ Reepal Tralshawala

S. 133A of the Income-tax Act, 1961 — Whether an addition can be sustained merely on the basis of statement made at the time of Survey — Held, No.

Per R. S. Syal :

Facts :

A survey action u/s.133A of the Act was conducted on the office premises of the assessee along with its two sister concerns on 15-1-2003. During the course of survey, physical stock in the case of the assessee was found to be excessive by Rs.21,14,146. Statement of Mr. Bharat Gala, partner of the assessee firm, was recorded. The assessee admitted to surrender a sum of Rs.50 lakhs as additional income over and above the income recorded in the books of accounts with the following bifurcation :

Towards excess stock Rs.21 lakhs

Towards any other discrepancy Rs.29 lakhs

After the close of survey but before the close of the year the assessee retracted from the surrender made during survey, vide its letter dated 24-3-2003. The assessee mentioned in its letter that the surrender was obtained forcefully by the survey team.

The assessee filed its return of income declaring total income of Rs.25,20,483 which included the surrender of Rs.21.14 lakhs towards difference in closing stock. The remaining portion of Rs.28.85 lakhs agreed by the assessee at the time of survey was not offered for taxation.

While assessing the total income of the assessee, the AO held that retraction was an after thought and further since the assessee had not maintained quantitative stock register, it was not possible to check the sales and purchases of different items dealt in by it. He also held that accounting of sales was such that it was open to manipulation. He, therefore, made an addition of Rs.28.85 lakhs.

The CIT(A) held that the books of accounts ought not to have been rejected and also the addition of Rs.28.85 lakhs was deleted by him. Aggrieved, the Revenue preferred an appeal to the Tribunal on these two grounds.

Held :

As regards rejection of the books of accounts by the AO, the Tribunal held that the books of accounts can be said to be properly maintained when correct income can be deduced therefrom. It is not only the arithmetical inaccuracy in the books of accounts which would call for the resorting to the provisions of S. 145(3). Since during the course of survey physical stock was found to be excessive as compared to the books of accounts, the Tribunal held that the books of accounts were rightly rejected by the AO.

As regards the addition of Rs.28.85 lakhs, the Tribunal noted that the real question before it was whether addition can be sustained simply on the basis of statement recorded at the time of survey. The Tribunal noted that the Kerala High Court has in the case of Paul Mathew & Sons held that addition cannot be sustained simply on the basis of statement recorded at the time of survey. The Madras High Court has in the case of S. Khader Khan Son, held that S. 133A does not empower any Income-tax authority to examine any person on oath and hence such a statement has no evidentiary value. The Tribunal also observed that the Circular dated 10-3-2003 issued by the CBDT which makes it clear that no attempt should be made to obtain undue confession from the assessee during search or survey proceedings is indicative of the fact that the Department is also not oblivious of the practice by which the Revenue Authorities obtain undue confession from the assessee during search or survey. The Tribunal held that in view of the verdict of the two High Courts and the position reaffirmed by the CBDT through its Circular, it is abundantly clear that no addition can be made or sustained simply on the basis of statement recorded at the time of survey/search. It further held that in order to make an addition on the basis of surrender during search or survey, it is sine qua non that there should be some other material to correlate the undisclosed income with such statement. The Tribunal noted that the surrender to the extent of Rs.28.85 lakhs was specifically ‘towards other discrepancy’. The assessment order had no mention of any such discrepancy found as a result of survey throwing light on undisclosed income. There was nothing on record which could correlate such income offered by the assessee during the course of survey with any other discrepancy. The Tribunal was of the view that there is no basis for sustaining the addition in question.

Cases referred to :

  •     Paul Mathew & Sons v. CIT, (2003) 263 ITR 101 (Ker.)
  •     CIT v. S. Khader Khan Son, (2008) 300 ITR 157 (Mad.)

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for concealment — Claim made under bona fide belief rejected and penalty imposed — Whether penalty can be levied — Held, No.

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4 Kisanlal Sarda v. ACIT

ITAT Pune Bench ‘A’ Pune
Before Pramod Kumar (AM) and Mukul Shrawat (JM) ITA No. 241/PN/2006


A.Y. : 1994-95. Decided on : 29-8-2008 Counsel for assessee/revenue : B. V. Jhaveri/
S. Bains

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for concealment — Claim made under bona fide belief rejected and penalty imposed — Whether penalty can be levied — Held, No.

Per Mukul Shrawat :

Facts :

The case before the Tribunal was about a penalty being levied on account of the claim of inadmissible higher rate of depreciation. The facts of the case were, the assessee in the earlier two years had claimed depreciation @ 40% in respect of two vehicles which were given on hire and the same was allowed. The assessee’s claim for the same in the year under appeal was negatived by the AO on the ground that during the year, the main activity of the assessee was not that of running the vehicles on hire, hence he was entitled to depreciation @ 25% only. On appeal the CIT(A) confirmed the AO’s order. For claiming depreciation at the higher rate, the AO levied penalty of Rs.4.68 lacs, which was confirmed by the CIT(A).

Before the Tribunal the Revenue relied on the decision of the Bombay High Court in the case of Ramesh Chandra & Co. and contended that once the addition was accepted by not filing appeal against the same, the assessee has no right to challenge the levy of penalty.

Held :

The Tribunal noted that the claim by the assessee of depreciation at the higher rate was based on the advice given by his chartered accountant. Secondly, it was not the case of the Revenue that there was a deliberate attempt to conceal the vital facts of the case pertaining to the claim of depreciation, and all the necessary information on the basis of which the correct claim of depreciation had to be allowed was on record and furnished by the assessee. Accordingly, relying on the ratio in the decisions listed at S. Nos. 2 to 6 below, it held in favour of the assessee. Further, it also referred to the recent Supreme Court decision in the case of Dilip N. Shroff, where in the context of the penalty u/s.271(1)(c), the Court had observed that the AO was required to arrive at a finding that the explanation offered by the assessee was false. Based on the same, the Tribunal reversed the orders of the authorities below and allowed the appeal.

Cases referred to :

  •     Dilip N. Shroff 291 ITR 519 (SC)
  •     Orion Travels Pvt. Ltd. v. ACIT, 87 TTJ 246 (Mum.)
  •     Kalyani Enterprises v. ACIT, 86 TTJ 767 (Mad.)
  •     ITO v. Tolaram Phusanan, 88 TTJ 1040
  •     Udan Research & Flying Institute Pvt. Ltd. v. JCIT, (2007) 17 SOT 494 (Mum.)
  •     ACIT v. Malhotra Mukesh Satpal, (2008) 113 TTJ 401 (Pune)

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Income-tax Act, 1961 — S. 50C — Whether provisions of S. 50C are applicable only in respect of computation of income under the head ‘Income from Capital Gains’ and that the said Section cannot be invoked where the income is assessed as business income und

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3 Inderlok Hotels Pvt. Ltd. v. ITO, Circle 5(2)(1)
ITAT ‘I’ Bench, Mumbai
Before A. L. Gehlot (AM) and R. S. Padvekar (JM)
ITA No. 4376/Mum./2008

A.Y. : 2005-06. Decided on : 5-2-2009 Counsel for assessee/revenue : A. H. Dalal / S. K. Singh

Income-tax Act, 1961 — S. 50C — Whether provisions of S. 50C are applicable only in respect of computation of income under the head ‘Income from Capital Gains’ and that the said Section cannot be invoked where the income is assessed as business income under the head ‘profits and gains of business or profession’ — Held, Yes.

Per R. S. Padvekar : Facts :

The assessee had constructed a building on land held by it as stock-in-trade. During the previous year relevant to the assessment year under consideration two flats in the building constructed by the asses-see were sold for a consideration of Rs.60 lakhs and Rs.40 lakhs, respectively. The Stamp Authorities had for the purposes of levy of stamp duty valued the flats at Rs.78,41,500 and Rs.72,81,456, respectively. The assessee accepted the valuation done by the Stamp Authorities. The assessee declared profit @ 8% of the sale price. The profit declared by the assessee was offered for taxation under the head ‘Income from Business’. The AO assessed profit arising on sale of these two flats under the head ‘Income from Business’, but made an addition of Rs.51,22,956. This amount represented the difference between valuation adopted for the purpose of the stamp duty and actual sale consideration shown by the assessee. The CIT(A) confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted S. 50C deals with transfer of a ‘capital asset’ being land or building or both and it provides for replacing the value adopted or assessed for the purpose of stamp duty more particularly u/s.48 of the Act in place of value or sale consideration shown by the assessee if it is lower than the value adopted or assessed for the purpose of levy of stamp duty. It observed that the expression ‘capital asset’ has specific relevance with S. 45 which provides for taxing gain on transfer of ‘capital asset’ as capital gain. The Tribunal upon consideration of the language of the provisions of S. 50C of the Act and also the intention of insertion of the provisions of S. 50C as mentioned in the Explanatory Circular No. 8, dated 27-8-2002 issued by the CBDT, held that there should not be any cloud of doubt that S. 50C has application only to the extent of determining sale consideration for computation of capital gain and it cannot be applied for determining the income under other heads.

 

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S. 80IB of the Income-tax Act, 1961 — Whether income from DEPB and drawback eligible for deduction — Held, Yes.

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2 ACIT v. Podar Associates
ITAT ‘B’ Bench, Jaipur
Before I. C. Sudhir (JM) and B. P. Jain (AM) ITA No. 579/JP/2008

A.Y. : 2003-04. Decided on : 13-8-2008 Counsel for revenue/assessee : Jai Singh/ Mahendra Gargieya

S. 80IB of the Income-tax Act, 1961 — Whether income from DEPB and drawback eligible for deduction — Held, Yes.

Per B. P. Jain :

Facts :

One of the issues before the Tribunal was about the allowability of deduction u/s.80IB with respect to income earned by way of DEPB and drawback. The CIT(A) had held in favour of the assessee.

Held :

The Tribunal agreed with the assessee that the income from DEPB and drawback went to reduce the cost of purchase and therefore, income to that extent was derived from the eligible undertaking. According to it, a similar view was expressed by the Gujarat High Court in the case of India Gelatine and Chemical Ltd. where the Court had also distinguished the decision in the case of Cambay Electric Supply Co. Ltd.. Further, it also referred to the provisions of S. 28(iiid), whereunder such receipt is treated as business profit. Accordingly, relying on the decisions of the Jaipur Bench of the Tribunal in the case of Vijay Industries and in the case of Garment Craft India Ltd. and also on the Delhi High Court decision in the case of Eltek SGS Pvt. Ltd., it upheld the order of the CIT(A).

Cases referred to :

  1. CIT v. India Gelatine and Chemical Ltd., 275 ITR 284 (Guj.);


  2. Vijay Industries (ITA No. 247/JP/05 dated 29-6-2007);


  3. Garment Craft India Ltd. (ITA No. 105/JP/06 dated 28-9-2007);


  4. CIT v. Eltek SGS Pvt. Ltd., 300 ITR 06 (Del.);


  5. Cambay Electric Supply Co. Ltd., 113 ITR 84 (SC)

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Rule 8D read with S. 14A of the Income-tax Act, 1961 — Expenditure disallowable with reference to exempt income — Disallowed expenditure is the subject matter of appeal before the Tribunal — Whether Revenue justified in its contention to apply the ratio o

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1 ACIT v. Indexport Ltd.
ITAT ‘D’ Bench, Mumbai
Before Sushma Chowla (JM) and Abraham P. George (AM) ITA Nos. 1941 and 2200/Mum./2004

A.Y. : 2000-01. Decided on : 29-1-2009 Counsel for revenue/assessee : Sanjay Agarwal/ Nishant Thakkar

Rule 8D read with S. 14A of the Income-tax Act, 1961 — Expenditure disallowable with reference to exempt income — Disallowed expenditure is the subject matter of appeal before the Tribunal — Whether Revenue justified in its contention to apply the ratio of the Special Bench decision rendered in the matter — Held, Yes but the disallowance cannot exceed the amount originally disallowed by the AO.

Per Sushma Chowla :

Facts :

One of the issues before the Tribunal was regarding the disallowance of expenditure u/s.14A. The AO had disallowed the aggregate sum of Rs.15.2 lacs consisting of interest of Rs.8.46 lacs and other expenses of Rs.6.74 lacs under the said provisions of S. 14A. The interest amount was computed by applying the ratio of investment attributable to tax-free income earned by the assessee to total investments, including the current assets, to the sum of interest paid by the assessee. The other expenses were estimated at 10% of the total of other expenses incurred by the assessee. On appeal, the CIT(A) gave partial relief by restricting the disallowance of other expenses at 5% of the total of such expense. Being aggrieved with the order of the CIT(A) qua the other expenses, the assessee as well as the Revenue, both appealed before the Tribunal.

Before the Tribunal, the Revenue challenged the order of the CIT(A) in giving partial relief to the assessee and also sought to apply the ratio of the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd. in support of its contention for the enhanced sum of disallowance.

Held :

The Tribunal noted that the Special Bench in the case of Daga Capital Management Pvt. Ltd. has held that the provisions of Rule 8D are explanatory in nature and are applicable to all the pending cases. Therefore, even though the Tribunals in the case of the assessee in respect of the earlier years had fully allowed the expenses incurred, including the interest paid, following the Special Bench decision, it remitted back the matter to the AO with a direction to recalculate the disallowance. However, the order passed was with a condition that the amount of disallowance should not exceed the amount originally disallowed by the AO.

Case referred to :

ITO v. Daga Capital Management Pvt. Ltd., 26 SOT 603 (Mum.) (SB)

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S. 272A(2)(e) : No penalty imposable where net income before deduction u/s.11 below taxable limit

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Tribunal News

1) Hitesh D. Gajaria v. ACIT


ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 992/Mum./2007

A.Y. : 2003-04. Decided on : 22-2-2008

Counsel for assessee/revenue : Deepak Shah/

Manvendra Goyal

S. 271B r.w. S. 44AB of the Income-tax Act, 1961 — Penalty
for failure to get accounts audited — Assessee, a chartered accountant by
profession, being proprietor and also a partner in a firm — Gross receipts
excluding his share of income from the firm was less than Rs.10 lacs — Penalty
imposed for failure to get the accounts audited — Whether AO justified — Held,
No.

Per P. Madhavi Devi :

Facts :

The assessee was a chartered accountant by profession. He had
a proprietory concern besides being a partner in Bharat S. Raut & Co. During the
year, he received share of profit and remuneration from the said firm, each of
which was more than Rs.10 lacs. However, the gross receipts earned by his
proprietary concern were less than Rs.10 lacs. According to the AO, the
provisions of S. 44AB were applicable. However, the assessee relying on the
opinion of the senior counsel contended that partner’s allocated amounts were
not gross receipts as contemplated in S. 44AB and accordingly, he was not
required to get the accounts audited. However, the AO did not agree and levied a
penalty u/s.271B r.w. S. 274 of the Act. On appeal, the CIT(A) confirmed the
AO’s order.

Held :

The Tribunal noted that assessee’s major income was not from
profession, but from the share of his profit from the professional firm.
According to it, share of profit cannot be equated with income from profession.
Further, it noted that the assessee had relied on the opinion of the senior
counsel, where-in it was opined that it was not necessary to get the accounts
audited. Therefore, relying on the Jodhpur Bench decision in the case of Dr.
Sunderlal Surana, the Tribunal held that the assessee had reasonable cause for
the failure to get his accounts audited as required u/s.44AB of the Act.
Accordingly, the penalty imposed by the lower authorities was deleted.

Case referred to :


Dr. Sunderlal Surana v. ITO, (2006) 105 TTJ (Jd) 907


2) ITO
v.
Lalitaben B. Kapadia



ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 8763/Mum./2004

A.Y. : 2001-02. Decided on : 20-9-2007

Counsel for assessee/revenue : N. R. Agarwal/

Milind Bhusari

S. 55A of the Income-tax Act, 1961 — Reference to
Valuation Officer — Value returned by the assessee was more than the fair market
value arrived at by the Valuation Officer and accepted by the AO — Whether
action of the AO in making reference to the Valuer justifiable — Held, No.


Per P. Madhavi Devi :

Facts :

The assessee had returned income under the head long-term
capital gain from the sale of immovable property. For the purpose, the assessee
had shown fair market value (FMV) as on 1-4-1981 as Rs.10 lacs. U/s.55A, the AO
made reference to the Valuation Officer who valued the property at Rs.6.6 lacs
as on the said date. On appeal, the CIT(A) took the FMV at Rs.9.36 lacs. Being
aggrieved, the Revenue appealed before the Tribunal.

Held :

According to the Tribunal, reference u/s.55A could be made
only if the AO was of the opinion that the value returned by the assessee was
less than its FMV. The act of the AO in accepting the valuation made u/s.55A,
which was undoubtedly less than the FMV claimed by the assessee, proved that the
AO was of the opinion that the assessee’s claim was more than its FMV. Thus,
according to the Tribunal, the AO was not justified in making reference to the
Valuation Officer. Therefore, relying on the decision of the Mumbai Tribunal in
the case of Rubab M. Kazerani, the Tribunal dismissed the appeal filed by the
Revenue.

Case referred to :


Rubab M. Kazerani v. JCIT, 97 TTJ (TM) 698 (Mum.)


3. Manisha R. Chheda v. ITa Mukesh P. Chheda v. ITa ITAT ‘B’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and P. Madhavi Devi OM) ITA No. 5961 and 5962/Mum./2004
A.Y. : 2001-02. Decided on: 17-8-2007 Counsel for assessee/revenue: Pradeep Kapasi/ Chet Ram

s. 263 of the Income-tax Act, 1961 – Power to revise AO’s order – AO making certain additions to the income returned – Whether the Commissioner has power to revise AO’s order in order to sustain the addition but on different reasons – Held, No.

Per J. Sudhakar Reddy:

Facts:

In their return of income filed, both the assessees had returned besides other income, income from agriculture. According to the AO, the assessees had not proved with evidence that they were engaged in agricultural activities. Therefore, the income so declared was treated by the AO as income from other sources.

According to the CIT, the reasons for additions given by the AO were grossly inappropriate and inadequate for sustaining the additions. In order to strengthen the case of the Revenue, he held both the orders passed by the AO as erroneous and prejudicial to the interest of the Revenue. Accordingly, he directed the AO to make fresh assessment. The assessees challenged the orders passed by the CIT before the TribunaL

Held:

According to the Tribunal, the crr wanted to indicate the same thing what the AO had indicated, but for different reasons. It further observed that an order u/ s.263 cannot be passed for giving additional reasons or substituting reasons by a higher authority to support the same cause. According to it, when the AO had in fact rejected the claim of the assessee, it cannot be said that any prejudice was caused to the Revenue. Merely because the CIT was not happy with the reasons given by the AO, the same did not give jurisdiction to invoke the powers conferred on him u/ s.263. The Tribunal further observed that once an addition was made, the issue if appealed against, travelled to the First Appellate Authority whose powers were co-terminus with that of the Assessing Officer. The first appellate authority, according to the Tribunal, can always, if he feels that the reasoning given by the Assessing Officer was not sufficient, strengthen the order by giving his own reasons, if the situation so permitted. If the assessees did not carry the matter in appeal, the assessment orders attain finality. Thus, it was noted that, in either case, the scheme of the Act does not permit the supervisory Commissioner to give additional reasons for supporting the same additions that had been made by the AO.

For the reasons stated as above, the Tribunal quashed both the orders passed by the CIT u/ s.263 and allowed the appeals filed by the assessee.

4. Boon Industries v. ITO ITAT ‘K’ Bench, Mumbai Before O. K. Narayanan (AM) and Sushma Chowla OM) ITA No. 6736 and  6737/Mum./2006 A.Ys. : 1998-99 & 1999-2000. Decided on: 27-11-2007

Counsel  for assessee Zrevenue :

Prakash  Jhunjhunwala/Malathi Sridharan

S. 271(1)(b) read with S. 142(1) and S. 143(2) of the Income-tax Act, 1961 – Penalty for non-compliance with notices issued – On the facts held that penalty cannot be imposed.

Per O. K. Narayanan:

Held:

The penalty of Rs.0.2 lac each imposed for the years under appeal for non-compliance of statutory no-tices issued u/s.142(1) and S. 143(2) were deleted by the TribunaL According to it, it cannot be said that the assessee was indifferent in the matter and did not co-operate with the assessing authorities, when it complied with the requirements twelve times out of the sixteen times. It further held that the non-compliance cannot be said to be willful when the time given to the assessee to attend be-fore the AO was only four to six days. According to it, the failure of the assessee to sought adjournment or inform the AO was not that much material in the light of the conduct of the assessee by appearing before the AO for not  less  than twelve times.

5. Jayram Rajgopal Poduval v. ACIT ITAT ‘H’ Bench, Mumbai Before R. S. Syal (AM) and Sushma Chowla OM) ITA No.  7072/M/2004 AY. : 2001-02. Decided on:    18-1-2008 Counsel for assessee/revenue: Rajan Vora/ B. K. Singh

S. 6(6) of the Income tax Act, 1961 – Resident but not ordinarily resident – Whether the two conditions specified in the provisions are cumulative – Held, No.

Per  R. S. Syal :

Facts:

The  assessee’s stay in India in the  preceding 10 years was as under:


According to the AO, the assessee was not ‘non-resident’ in 9 out of 10 years and had also resided in India for more than 730 days in the preceding 7 years. Hence, he held that the status of the assessee was ‘Resident and ordinarily resident’ (ROR). According to the CIT(A), in order that a person could be considered as Resident but not ordinarily resident (RNOR), he must fulfil the following two conditions given in S. 6(6)(a) viz. :

  •     He has not been resident in India in nine out of the ten previous years; and


  •     He has not during the seven previous years preceding that year been in India for a period of 730 days or more.

 
Since the assessee’s stay in India was for more than 730 days in the 7 preceding years, he, relying on the decision of the Gujarat High Court in the case of Pradeep J. Mehta, dismissed the appeal filed by the assessee.

Held:

The Tribunal noted that the provisions of S. 6(6)(a) uses the term ‘or’ and not ‘and’ between the two conditions given therein. Accordingly, the person would be considered as RNOR if he complies with either of the two conditions given therein. It dis-agreed with the CIT(A) that in order to qualify as RNOR, the assessee should fulfil both the condi-tions. In the case of the assessee, since he was not resident in India in nine out of ten previous years, his status would be that of RNOR. In support it also relied on the decision of the Apex Court in the case 4 of Morgenstern Werner.

Cases referred to :

1. Cl’T and Another v. Morgenstern Werner, (2003) 259 ITR 486 (SC)
2. PradeepJ. Mehta v. CIT, (2202) 256 ITR 647 (Guj.)

Note: The provisions of S. 6(6) have been substituted by the Finance Act, 2003 w.e.f. 1-4-2004. As per the substituted provisions, in order to qualify as RNOR, the person should be non-resident in nine out of ten previous years. The other alternative condition remains unchanged.


6. Innerwheel Club of Bombay v. ADIT ITAT ‘e’ Bench, Mumbai Before O. K. Narayanan (AM) and P. Madhavi Devi OM) ITA No.  4855/Mum.l2003

AY. : 1999-2000.  Decided on: 12-10-2007 Counsel for assessee/revenue: Jayesh Dadia/ J. K. Garg

S. 272A(2)(e) r.w. S. 139(4A) of the Income-tax Act, 1961 – Penalty for failure to file return of income – Net income before claiming deduction u/s.11 be-low the taxable limit – Whether AO justified in levying penalty for delay in filing of return – Held, No.

Per  P. Madhavi Devi  :

Facts:

The assessee was a public charitable trust eligible for deduction u/s.ll. During the year under appeal, its gross total income was Rs.0.71 lac and after deducting establishment expenses of Rs.0.7Iac, the surplus remained was only Rs.353. It filed its return of income on 15-5-2000. For delay in filing return of income, the AO imposed a penalty of Rs.13,500 which was confirmed by the CIT(A).

Held:

The Tribunal noted that the AO had not rejected the audited accounts of the assessee. And as per the accounts, the net income of the assessee was below taxable limit even before claiming deduction u/s.11.
 
Therefore, relying on the decision of the Mumbai Tribunal in the case of Durgadevimata and of the Delhi Tribunal in the case of Purakh Chand Askaran Pugella Charitable Trust, the Tribunal held that the AO was not justified in levying penalty.

Cases  referred to:

1. Durgadevimata  v. lTG,  (ITA No. 36/M/2000)
2. Purakh Chand Askaran Pugella Charitable Trust, 124 Taxman (Mag) 74 (Del.)

S. 6(6) : The two conditions specified in the provision are not cumulative

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5) Jayram Rajgopal Poduval
v. ACIT


ITAT ‘H’ Bench, Mumbai

Before R. S. Syal (AM) and

Sushma Chowla (JM)

ITA No. 7072/M/2004

A.Y. : 2001-02. Decided on : 18-1-2008

Counsel for assessee/revenue : Rajan Vora/

B. K. Singh

S. 6(6) of the Income tax Act, 1961 — Resident but not
ordinarily resident — Whether the two conditions specified in the provisions are
cumulative — Held, No.

Per R. S. Syal :

Facts :

The assessee’s stay in India in the preceding 10 years was as
under :

No.


Assessment Year

No. of
days in India

1.

1991-92

29

2.

1992-93

15

3.

1993-94

23

 

(A)

67

 4.

1994-95

24

5.

1995-96

92

6.

1996-97

366

7.

1997-98

365

8.

1998-99

359

9.


1999-2000

365

10.

2000-01

366

 

(B)


1,937

 

(A)
+ (B)

2004

According to the AO, the assessee was not ‘non-resident’ in 9
out of 10 years and had also resided in India for more than 730 days in the
preceding 7 years. Hence, he held that the status of the assessee was ‘Resident
and ordinarily resident’ (ROR). According to the CIT(A), in order that a person
could be considered as Resident but not ordinarily resident (RNOR), he must
fulfil the following two conditions given in S. 6(6)(a) viz. :

  • He has not been resident in India in nine out of the ten previous years; and

  •     He has not during the seven previous years pre-ceding that year been in India for a period of 730 days or more.

Since the assessee’s stay in India was for more than 730 days in the 7 preceding years, he, relying on the decision of the Gujarat High Court in the case of Pradeep J. Mehta, dismissed the appeal filed by the assessee.

Held:

The Tribunal noted that the provisions of S. 6(6)(a) uses the term ‘or’ and not ‘and’ between the two conditions given therein. Accordingly, the person would be considered as RNOR if he complies with either of the two conditions given therein. It disagreed with the CIT(A) that in order to qualify as RNOR, the assessee should fulfil both the conditions. In the case of the assessee, since he was not resident in India in nine out of ten previous years, his status would be that of RNOR. In support it also relied on the decision of the Apex Court in the case 4 of Morgenstern Werner.

Cases referred to :

    1. CIT and Another v. Morgenstern Werner, (2003) 259 ITR 486 (SC)

    2. PradeepJ. Mehta v. CIT, (2202) 256 ITR 647 (Guj.)

Note: The provisions of S. 6(6) have been substituted by the Finance Act, 2003 w.e.f. 1-4-2004. As per the substituted provisions, in order to qualify as RNOR, the person should be non-resident in nine out of ten previous years. The other alternative condition remains unchanged.


S. 271(1)(b) : Penalty for non-compliance with notices deleted, where inadequate notice given

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4) Boon Industries v. ITO


ITAT ‘K’ Bench, Mumbai

Before O. K. Narayanan (AM) and

Sushma Chowla (JM)

ITA No. 6736 and 6737/Mum./2006

A.Ys. : 1998-99 & 1999-2000. Decided on : 27-11-2007

Counsel for assessee/revenue :

Prakash Jhunjhunwala/Malathi Sridharan

S. 271(1)(b) read with S. 142(1) and S. 143(2) of the
Income-tax Act, 1961 — Penalty for non-compliance with notices issued — On the
facts held that penalty cannot be imposed.

Per O. K. Narayanan :

Held :

The penalty of Rs.0.2 lac each imposed for the years under
appeal for non-compliance of statutory notices issued u/s.142(1) and S. 143(2)
were deleted by the Tribunal. According to it, it cannot be said that the
assessee was indifferent in the matter and did not co-operate with the assessing
authorities, when it complied with the requirements twelve times out of the
sixteen times. It further held that the non-compliance cannot be said to be
willful when the time given to the assessee to attend before the AO was only
four to six days. According to it, the failure of the assessee to sought
adjournment or inform the AO was not that much material in the light of the
conduct of the assessee by appearing before the AO for not less than twelve
times.

 

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S. 263 : Commissioner has no power to revise AO’s order by giving additional reasons for sustaining same additions

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3) Manisha R. Chheda
v.
ITO


Mukesh P. Chheda


v. ITO


ITAT ‘B’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 5961 and 5962/Mum./2004

A.Y. : 2001-02. Decided on : 17-8-2007

Counsel for assessee/revenue : Pradeep Kapasi/

Chet Ram


S. 263 of the Income-tax Act, 1961 — Power to revise AO’s
order — AO making certain additions to the income returned — Whether the
Commissioner has power to revise AO’s order in order to sustain the addition but
on different reasons — Held, No.

Per J. Sudhakar Reddy :

Facts :

In their return of income filed, both the assessees had
returned besides other income, income from agriculture. According to the AO, the
assessees had not proved with evidence that they were engaged in agricultural
activities. Therefore, the income so declared was treated by the AO as income
from other sources.

According to the CIT, the reasons for additions given by the
AO were grossly inappropriate and inadequate for sustaining the additions. In
order to strengthen the case of the Revenue, he held both the orders passed by
the AO as erroneous and prejudicial to the interest of the Revenue. Accordingly,
he directed the AO to make fresh assessment. The assessees challenged the orders
passed by the CIT before the Tribunal.

Held :

According to the Tribunal, the CIT wanted to indicate the
same thing what the AO had indicated, but for different reasons. It further
observed that an order u/s.263 cannot be passed for giving additional reasons or
substituting reasons by a higher authority to support the same cause. According
to it, when the AO had in fact rejected the claim of the assessee, it cannot be
said that any prejudice was caused to the Revenue. Merely because the CIT was
not happy with the reasons given by the AO, the same did not give jurisdiction
to invoke the powers conferred on him u/s.263. The Tribunal further observed
that once an addition was made, the issue if appealed against, travelled to the
First Appellate Authority whose powers were co-terminus with that of the
Assessing Officer. The first appellate authority, according to the Tribunal, can
always, if he feels that the reasoning given by the Assessing Officer was not
sufficient, strengthen the order by giving his own reasons, if the situation so
permitted. If the assessees did not carry the matter in appeal, the assessment
orders attain finality. Thus, it was noted that, in either case, the scheme of
the Act does not permit the supervisory Commissioner to give additional reasons
for supporting the same additions that had been made by the AO.

For the reasons stated as above, the Tribunal quashed both
the orders passed by the CIT u/s.263 and allowed the appeals filed by the
assessee.




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S. 55A : AO cannot make reference to valuation officer when value returned as at 1-4-1981 is more than fair market value determined by valuation officer

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2) ITO
v.
Lalitaben B. Kapadia



ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 8763/Mum./2004

A.Y. : 2001-02. Decided on : 20-9-2007

Counsel for assessee/revenue : N. R. Agarwal/

Milind Bhusari


S. 55A of the Income-tax Act, 1961 — Reference to
Valuation Officer — Value returned by the assessee was more than the fair market
value arrived at by the Valuation Officer and accepted by the AO — Whether
action of the AO in making reference to the Valuer justifiable — Held, No.

Per P. Madhavi Devi :


Facts :

The assessee had returned income under the head long-term
capital gain from the sale of immovable property. For the purpose, the assessee
had shown fair market value (FMV) as on 1-4-1981 as Rs.10 lacs. U/s.55A, the AO
made reference to the Valuation Officer who valued the property at Rs.6.6 lacs
as on the said date. On appeal, the CIT(A) took the FMV at Rs.9.36 lacs. Being
aggrieved, the Revenue appealed before the Tribunal.

Held :

According to the Tribunal, reference u/s.55A could be made
only if the AO was of the opinion that the value returned by the assessee was
less than its FMV. The act of the AO in accepting the valuation made u/s.55A,
which was undoubtedly less than the FMV claimed by the assessee, proved that the
AO was of the opinion that the assessee’s claim was more than its FMV. Thus,
according to the Tribunal, the AO was not justified in making reference to the
Valuation Officer. Therefore, relying on the decision of the Mumbai Tribunal in
the case of Rubab M. Kazerani, the Tribunal dismissed the appeal filed by the
Revenue.

Case referred to :


Rubab M. Kazerani v. JCIT, 97 TTJ (TM) 698 (Mum.)


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Payments made for charter hire charges to a non resident shipping company for transporting merchandise from one foreign port to another foreign port is not royalty chargeable to tax in term of provision of S. 9 of the Act.

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  1. M/s. ACIT v. Kin Ship Services India (P) Ltd.



(Cochin) (31 SOT 375)

S. 9, S. 40(a)(i), S. 195, Income-tax Act

A.Y. : 2004-05. Dated : 26-3-2009

Issue :

Payments made for charter hire charges to a non resident
shipping company for transporting merchandise from one foreign port to another
foreign port is not royalty chargeable to tax in term of provision of S. 9 of
the Act.

Facts :

The assessee is engaged in shipping and other related
activities such as stevedoring, clearing and forwarding. During A.Y. 2004-05,
the assessee made certain payments to non resident companies for charter hire
charges.

The Assessing Officer (AO) held that payments made by the
assessee on account of charter hire charges were in the nature royalties and
therefore such payments were taxable in the hands of recipients in term of S.
9(1)(vi) of the Act. The AO disallowed the payment by invoking provisions of
S. 40(a)(i) of the Act by alleging that the assessee failed to deduct tax at
source.

The assessee contended that the payments made for charter
ship hire is not in the nature of royalty. It was claimed that the assessee
had not acquired any right on the foreign ships nor had it acquired any
property in the ship by chartering it. The ships were hired following
international chartering protocol for transporting merchandise from foreign
port to another foreign port and hence the payments cannot be held to be in
the nature of royalty.

The CIT(A) accepted the contentions of the assessee by
relying on the ruling in the case of Ind Telesoft (P) Ltd. (267 ITR 725) (AAR
New Delhi).

Held :

The ITAT held :

(a) The payments made by the assessee company were in the
nature of payments for chartering ships on hire for doing the business
outside India. The payments did not satisfy the test laid down in S. 9 of
the Income-tax Act, 1961.

(b) To constitute royalty, payments have to be for use of
specified assets. The tribunal concluded that the ship hire charges did not
satisfy this test by observing :

‘Royalty means consideration for the transfer of all or
any rights in respect of a patent, invention, model design, secret formula
or processes or trade mark or similar property. A plain reading makes it
clear that the charter ship hire payments made by the assessee do not fall
under the above category. The royalty also means consideration for imparting
of any information concerning the working of, or the use of, a patent,
invention, model design, secret formula or process or trade mark or similar
property. The payments made by the assessee do not have nay of these
characteristics.’

(c) The liability to deduct tax at source u/s.195 is cast
on the assessee only when the payment is made to a non-resident which is
chargeable under the provisions of the Income-tax Act. In the present case
since payments made by the assessee do not fall u/s.9 and the payments do
not take the character of any sum chargeable to tax under this Act,
provisions of S. 195 are not applicable.

(d) When S. 195 does not apply, there cannot be a
violation of that section and consequently question of disallowance
u/s.40(a)(i) does not arise.

 

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German company is not liable to pay tax in respect of its supervision activity in India which is expected to last for about 2 months.

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  1. Pintsch Bamag

(AAR) (2009 TIOL 23 ARA IT)

AAR No. 790 of 2008

Dated : 11-9-2009

Issues :

German company is not liable to pay tax in respect of its
supervision activity in India which is expected to last for about 2 months.

Independent sub-contractor’s time is not to be added for
determining threshold for construction of PE.

Article 5, 12, India-Germany Treaty; S. 9(1)(vii),
Income-tax Act.

Facts :

The applicant, a German company, was awarded a contract by
Tuticorin Port Trust (TPT) on 28th November, 2006 through the process of
international bidding.

The scope of work for the contract was ‘work design,
fabrication supply, transportation, delivery, installation and maintenance of
mild steel, navigational channel and fairway buoys, mooring gear and solar
operated navigational lighting equipments’ in relation to Sethu Samudram Ship
Channel Project being executed by TPT in Tamil Nadu.

The applicant sub-contracted certain part of work to
independent third parties in India. Though the agreements with the
sub-contractors were entered into in 2006, formal permission for
sub-contracting was obtained from the TPT in June, 2009.

The following work was to be undertaken by the applicant :

(i) Study of the technical requirements in relation to
the execution of the Contract.

(ii) Designing of Fairway Buoys, Mooring Gears and Solar
Operated Navigational Equipments.

(iii) Supply of critical components to sub-contractors,
if required.

(iv) Supervision of installation of equipments and other
items mentioned in the Main Contract, as and when the installation is
carried out by the sub-contractor.

The scope of work mentioned in point (ii) and (iii) above
was to be executed by the applicant’s office in Germany.

(v) The work at point (iv) was to be carried out in India
and for this purpose two engineers were to be deputed to India. The work was
expected to last for not more than 2 months.

Before the AAR, the applicant contended that as per clause
(i) of Article 5.2 of the India Germany DTAA, it is not expected to have
Permanent Establishment in India and in absence thereof, no part of income is
liable to tax in India. In this regard the applicant placed reliance on the
decision of the Andhra Pradesh High Court in CIT v. Vishakapatnam Port
Trust, (144 ITR 146).

The revenue contended that the sub-contractor is
undertaking various activities which constitute the core of the contract work
entrusted to the applicant. All the activities undertaken by the
sub-contractor are on behalf of the applicant and in connection with the
execution of the contract between the applicant and TPT. As a result, length
of construction of PE needs to be reckoned having regard to time spent by the
sub contractor. Alternatively, place of manufacture of the sub-contractor
constitutes permanent establishment of the applicant itself. Still
alternatively, the revenue contended that length of construction PE needs to
be reckoned.

The revenue authorities also contended that the services
rendered for designing are taxable as fees for technical services under
Article 12.4 of the Indo German DTAA.1

Held :

AAR held :

  • The work/project of the
    applicant are in the nature of construction project. As a consequence,
    article 5.2 gets attracted and therefore duration test of six months
    necessarily applied to determine whether the applicant has taxable presence.

  • AAR referred to and relied on
    earlier ruling in the case of Cal Dive Marine Construction (Mauritius) Ltd.
    315 ITR 334 to conclude that once construction PE clause is attracted,
    minimum period test has to be necessarily applied. The fact that the
    applicant may have a project office or a workshop for the purpose of
    carrying out contract work does not bring the establishment of the applicant
    within the other clauses of Article 5(2) to the exclusion of requirement of
    minimum duration test of construction PE. In case of construction PE, a
    specific provision dealing with construction or assembly project, prevails
    over the other general clauses of Article 5(2). An office or workshop,
    established as a part of or incidental to the execution of a construction or
    assembly project does not alter the minimum period test contemplated by
    construction PE.

  • The fact that sub-contractor
    is only a nominee carrying out the work which otherwise would have been
    performed by the applicant does not transform the workshop of the
    sub-contractor into the PE of the applicant. The sub-contractor cannot be
    treated as a dependent agent of the applicant. Article 5 of the treaty
    regards a place to be a PE only if the applicant carries on business through
    such place. The concept of PE conveys the idea that the enterprise has
    visible presence in the other country. The presence can be either in the
    form of applicant’s own PE or the presence of dependent agent. The
    independent contractor does not satisfy any of these tests.

  • The revenue’s reliance on OECD
    commentary which indicates that the time taken by a sub-contractor needs to
    be added for reckoning threshold of PE of general contractor is limited in
    its application to a situation where the building site is set up by the main
    contractor and the services of the sub-contractor are deployed in aiding the
    execution of such building project with conjoint effort of contractor and
    sub-contractor. In case of the applicant, the sub-contractor carries out
    fabrication and assembly at a place away from the installation site by
    independently running such facility and does not get covered by this
    contingency.

  • The aspect of comprehensive
    responsibility being that of the contractor as also the furnishing of
    performance guarantee by applicant does not alter the legal position above.

S. 142(2A) and S. 142(2C). The amendment to S. 142(2C) by insertion of the words ‘suo moto or’ w.e.f. 1-4-2008 is prospective and prior to this date AO could not grant extension of time except on an application by the assessee.

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  1. Bishan Saroop Ram Kishan Agro Pvt. Ltd. v. DCIT

ITAT ‘A’ Bench, New Delhi

Before K. G. Bhansal (AM) and

George Mathan (JM)

ITA Nos. 3413, 3415, 3416, 3459, 3068 and

3670/Del./2008

A.Ys. : 1999-2000 to 2005-06. Decided on : 18-9-2009

Counsel for assessee/revenue : Rano Jain &

V. Mohan/Pratima Kaushik

S. 142(2A) and S. 142(2C). The amendment to S. 142(2C) by insertion of the words ‘suo moto or’ w.e.f. 1-4-2008 is prospective and prior to this date AO could not grant extension of time except on an application by the assessee.

Per Bench :

Facts :

On 7-10-2004 there was a search action on the assessee. The last panchnama was drawn on 6-12-2004. As per provisions of S. 153B(i), the assessment u/s.153A could be completed upto 31-12-2006. On 12-12-2006, the AO passed an order directing the assessee to get his accounts audited u/s.142(2A) and the time given for filing audit report was 90 days. Thus, due date for furnishing audit report u/s. 142(2A) was 12-3-2007.

Due to alleged non co-operation by the assessee, the AO, at the request of the auditor, vide order dated 7-3-2007 extended time from 12-3-2007 to 20-4-2007. Subsequently, two more extensions, of one month each, were granted vide orders dated 17-4-2007 and 17-5-2007. The audit report was finally submitted on 4-6-2007 and the assessment order was passed on 3-8-2007.

The assessment order passed u/s.153A was challenged on the ground that it was barred by limitation. It was contended that since special audit had been ordered on 12-12-2006 and was to be completed on 12-3-2007 and as per the provisions as they stood at the relevant point of time the AO did not have the power to suo moto extend the time limit for completion of special audit u/s.142(2A). Extension granted by the AO at the request of the auditor resulted into a suo moto extension being granted by the AO. Consequently, as per provisions of S. 153B(1) the time limit for completion of assessment expired on 11-5-2007. Since assessment order was passed on 3-8-2007 it was barred by limitation.

On an appeal to the Tribunal,

Held :

The provisions of S. 142(2A) do not provide for any time limit for completion of the special audit. However, S. 142(2C) specifies that the AO can, at his discretion, give any time limit subject to a maximum of 180 days from the date on which the direction u/s.142(2A) is received by the assessee. The provisions of S. (2A), S. (2B), S. (2C) and S. (2D) of S. 142 are to be read together as a complete code. It cannot be held that the provisions of S. 142(2A) have a stand alone position and are unfettered by S. 142(2C).

The Tribunal noticed that the assessee had not made an application for extension of time. The extension of time granted by the AO, at the request of the auditor, was held to be suo moto action of the AO. The Tribunal on perusal of the memorandum explaining the provisions of the Finance Bill, 2008 as also Circular No. 1 dated 27-3-2008 explaining the amendment to the proviso to S. 142(2C) held that the power to suo moto extend the time limit for completion of audit u/s.142(2A) was available to the AO w.e.f. 1-4-2008 and before such date, the extension could have been made only at the request of the assessee. The extensions granted by the AO were held to be without jurisdiction and accordingly such extensions could not extend the limitation. The exclusion as provided in Explanation (ii) to S. 153B was read to be 90 days being a period between 12-12-2006 to 12-3-2007.

The Tribunal upheld the claim of the assessee that the assessment was barred by limitation.

 

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S. 234C — Interest u/s.234C is not payable if, on the date of payment of advance tax it is not known whether the demerger scheme will be sanctioned or not and from which date it would be sanctioned.

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  1. Ultratech Cement Ltd. v. Dy. CIT



ITAT ‘E’ Bench, Mumbai

Before R. K. Gupta (JM) and

D. Karunakara Rao (AM)

ITA No. 7646 & 7647/Mum./2007

A.Y. : 2004-05. Decided on : 20-8-2009

Counsel for assessee/revenue : Arvind Sonde &

Sampat Kabra/K. K. Das

S. 234C — Interest u/s.234C is not payable if, on the date
of payment of advance tax it is not known whether the demerger scheme will be
sanctioned or not and from which date it would be sanctioned.

Per R. K. Gupta :

Facts :

The assessee, pursuant to a demerger scheme, acquired
cement business of L & T Limited from 1-4-2003. The scheme of demerger was
sanctioned by the Bombay High Court on 22-4-2004 effective from 1-4-2003 as a
result of which the income for the period from 1-4-2003 to 31-3-2004 became
taxable in the hands of the assessee. The assessee had not paid advance tax in
respect of this income. Consequently, the Assessing Officer charged interest
of Rs.44,94,392 u/s.234C.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where it contended that interest is not payable since on the due dates for
payment of advance tax there was no liability to pay tax. It was further
submitted that if the liability to pay advance tax arises on account of
subsequent event, i.e. demerger sanctioned after the end of the
previous year then in such an event it cannot be said that the assessee was
liable to pay advance tax on due dates specified in S. 210. The CIT(A)
dismissed the ground by observing that the assessee was liable for payment of
advance tax u/s.208 with all consequences of law to pay interest u/s.234B and
u/s.234C. He held that since there was a shortfall in payment of installments
of advance tax, liability of interest u/s.234C is automatically attracted.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it was also contended on behalf of the assessee that it was impossible
to pay advance tax as it was not aware whether the demerger scheme would be
sanctioned and if yes, from which date.

Held :

The Tribunal observed that the liability to pay advance tax
in respect of cement business had arisen consequent to the sanction of the
demerger scheme by the Bombay High Court on 22-4-2004 i.e. after the
due dates of payments of advance tax. The Tribunal noted that the tax
liability arising after the date of sanction of the demerger scheme has been
paid by the assessee while filing its return of income along with interest
u/s.234A & B. It held that payment of advance tax in respect of cement
division was an impossible situation. The Mumbai Bench of the Tribunal in the
case of Reliance Energy Ltd. in ITA No. 218/Mum./05 (order dated 24-1-2008)
has after considering several decisions of the Tribunal and discussing the
doctrine of impossibility held that an assessee cannot be forced to do an
impossible task.

S. 48 — Capital gains on sale of land — Land purchased out of borrowed funds — Whether registration charges and interest paid on borrowings eligible for deduction and indexation — Held, Yes.

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  1. Ishtiaque Ahmad v. ACIT



ITAT Bench ‘C’, New Delhi

Before D. R. Singh (JM) and

K. G. Bansal (AM)

ITA No. 863/D/2009

A.Y. : 2002-03. Decided on : 28-8-2009

Counsel for assessee/revenue : J. J. Mehrotra/

D. N. Kar

S. 48 — Capital gains on sale of land — Land purchased out
of borrowed funds — Whether registration charges and interest paid on
borrowings eligible for deduction and indexation — Held, Yes.

Per K. G. Bansal :

Facts :

The assessee had purchased a piece of land in October 2006
out of borrowed funds. The land was sold in the year under appeal. While
returning income as long term capital gains — it claimed registration charges
of Rs.4.63 lacs and the interest paid by him during the years 1997-98 to
2001-02 aggregating to Rs.72 29 lacs, as the cost of improvement. The claim
was disallowed by the AO. On appeal the CIT(A) allowed the claim qua the
registration charges, however, the claim for indexation was denied. In respect
of interest paid, the CIT(A) agreed with the AO and held that the interest
payable on loan taken for acquisition of the land was not part of the cost of
acquisition/improvement.

Held :

The Tribunal noted that the registration charges paid was
treated as cost of improvement of the land and as such allowed as deduction by
the CIT(A). Referring to the provisions of second proviso to S. 48, it agreed
with the submission of the assessee that the provisions contained in clause
(ii) shall have the effect as if for the words ‘cost of acquisition’ and ‘cost
of any improvement’, the words ‘indexed cost of acquisition’ and ‘indexed cost
of any improvement’ had respectively been substituted. Therefore, it was held
that the assessee was entitled to indexation with reference to the
registration charges paid.

In respect of interest paid — the Tribunal agreed with the
assessee that as held by the Delhi High Court in case of CIT v. Mithlesh
Kumari, the actual cost of the asset need not be only those costs incurred
on the date of acquisition. Accordingly, relying on the decision of the Delhi
High Court (supra), it held that interest paid on borrowed funds for
purchase of land after its actual purchase constituted cost of the land. It
further held that in terms of second proviso to S. 48, the cost has to be
indexed for working out the capital gains.

Case referred to :


CIT v. Mithlesh Kumari, (1973) 92 ITR 9 (Del.)

 

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S. 37(1) — Business expenditure — Reimbursement of expenditure incurred in running the school — Whether allowable — Held, Yes.

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  1. Tata International Ltd. v. ACIT



ITAT ‘I’ Bench, Mumbai

Before A. L. Gehlot (AM) and

Sushma Chowla (JM)

ITA No. 5591/M/2005

A.Y. : 1999-2000. Decided on : 11-9-2009

Counsel for assessee/revenue : Dinesh Vyas/

R. P. Meena

S. 37(1) — Business expenditure — Reimbursement of
expenditure incurred in running the school — Whether allowable — Held, Yes.

Per A. L. Gehlot :

Facts :

The assessee was engaged in the business of export. One of
the issues before the Tribunal was regarding the allowability of expenditure
incurred on the maintenance of a school run by TATA at Dewas. The school was
situated at the place where the assessee’s factory was located and substantial
number of students of the school were children of the assessee’s employees.
During the year the assessee had paid the sum of Rs.1,88,540 by way of
reimbursement, part of the expenditure incurred in running the School. The
same was disallowed by the lower authorities.

Held :

According to the Tribunal, the case of the assessee was
covered by the Tribunal decision in the assessee’s own case for the A.Ys.
1992-93, 1993-94 and 1994-95 which was later affirmed in the
assessee’s own case for the A.Ys. 1996-97 to 1998-99. Noting the fact that the
school was situated at the same place where the assessee’s factory was located
and substantial number of students of the school were children of the
assessee’s employees, the expenditure claimed was allowed.

Case referred to :

Tata International Ltd. ITA No. 4823 to 4825/M/2005 dated
26-3-2009.

 

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S. 28, S. 36(1)(vii), S. 37. Amount paid by the assessee under Performance Guarantee Bond is allowable as a business loss/expenditure. Mere fact that the assessee has claimed the amount written off in the course of business as ‘bad debt’ does not preclude

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6. Anang Tradevest Pvt. Ltd. v. ITO

ITAT ‘A’ Bench,
Mumbai

Before D.
Manmohan (VP) and

Abraham George
(AM)

ITA No.
10/Mum./2008

A.Y. : 2003-04.
Decided on : 10-8-2009

Counsel for assessee/revenue :

Prakash Jhunjhunwala/R.
S. Srivastava

S. 28, S.
36(1)(vii), S. 37. Amount paid by the assessee under Performance Guarantee
Bond is allowable as a business loss/expenditure. Mere fact that the assessee
has claimed the amount written off in the course of business as ‘bad debt’
does not preclude him from claiming the same as business loss/expenditure.

Per Abraham P.
George :

Facts :

The assessee, as a
part of its business activity, was introducing certain clients to M/s. Joindre
Capital Services Ltd., who entered into share purchase and sale transactions
for such clients. As per the terms of the agreement entered into between the
assessee and M/s. Joindre Capital Services Pvt. Ltd., assessee had to
indemnify Joindre Capital Services Ltd., in case clients introduced by the
assessee failed to honor any of their commitments.

During the previous
year in respect of three parties, assessee had shown a sum of Rs.11,90,779 as
bad debts written off. The Assessing Officer (AO) held that such claim could
not be allowed since assessee was a sub-broker and the debt was never taken
into account for computing the income of the assessee for the relevant
previous year or any preceding previous years.

The CIT(A) held that
the bad debt written off was rightly disallowed by the AO.

Aggrieved, the
assessee preferred an appeal to the Tribunal where disallowance of bad debt of
Rs. 11,90,779 was taken as a ground. In the course of the hearing, the
assessee withdrew the original ground and by way of an additional ground
claimed that this sum of Rs.11,90,779 paid under a performance guarantee bond
be allowed either as business expenditure u/s.37(1) or as business loss. On
behalf of the assessee it was contended that the Tribunal has in the case of
India Infoline Securities (P) Ltd. v. ACIT, (25 SOT 123) (Mum.) held
that losses incurred by an assessee in the course of his business as a stock
broker, on account of default of his clients, could be claimed as a business
loss.

Held :


Neither the AO nor the CIT(A) had gone through the agreement entered into by
the assessee with Joindre Capital Services Ltd., for verifying whether such
claim could be allowed as business expense or loss. The fact that the assessee
had claimed the amount as bad debt would not preclude it from claiming the
amount as business loss or expenses, since the write off was done in the
course of business only.

With a view to
verify whether the claim of the as-sessee was in relation to clients
introduced by it to M/s. Joindre Capital Services Ltd., as also whether the
indemnity agreement with Joindre Capital Services Ltd. was applicable, in
relation to such write off effected by the assessee, the Tribunal set aside
the orders of the AO and the CIT(A) and restored the matter back to the AO for
considering the issue afresh in accordance with law after giving proper
opportunity to the assessee to represent its case.

S. 271(1)(c) — Penalty for concealment of income — Whether non bifurcation of short term capital loss from the overall business loss amounted to concealment of income and furnishing of inaccurate particulars of income — Held, No.

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  1. Nera (India) Limited v. DCIT

ITAT ‘F’ Bench, New
Delhi

D. R. Singh (JM)
and K. G. Bansal (AM)

ITA No.
107/Del./2009

A.Y. : 2004-05.
Decided on : 4-8-2009

Counsel for assessee/revenue :
A. K. Mittal/

Sunita Singh

S. 271(1)(c) —
Penalty for concealment of income — Whether non bifurcation of short term
capital loss from the overall business loss amounted to concealment of income
and furnishing of inaccurate particulars of income — Held, No.

Per D. R.
Singh :

Facts :

The assessee had
filed return of income declaring business loss of Rs.1.37 crore. During the
course of assessment proceedings, it was noticed by the AO that the Auditors
in Form No. 3CD had reported that debit to the Profit & Loss account included
capital expenditure by way of fixed assets written off amounting to Rs.l0.17
lacs, which was not added back by the assessee. The same was added to the
income (reduced from the loss) of the assessee and the business loss was
assessed accordingly. According to the AO since the assessee accepted the
mistake only after the show cause was issued, he was of the view that the
assessee had concealed his income and furnished inaccurate particulars of
income. He therefore levied penalty of Rs.3.65 lacs u/s.271(1)(c) of the Act.
On appeal, the CIT(A) confirmed the same.

Before the Tribunal
the assessee explained that instead of classifying the sum of Rs.10.17 lacs as
short term capital loss, which was allowable to be carried forward u/s.70 of
the Act, the assessee in its return made a technical error of not bifurcating
short term capital loss from the overall business loss of the company. The
assessee claimed that the same cannot by any assumption be deemed to be
concealment of income or furnishing of inaccurate particulars of the income.

Held :

According to the
Tribunal, a mere omission or negligence would not constitute a deliberate act
of suppression. It agreed with the assessee that its explanation cannot be
treated as false and inaccurate simply because of its mistake in wrongly
classifying heads of loss. Accordingly, the penalty imposed was deleted.

S. 195, S. 244A. When tax which was deducted at source and deposited with the Government pursuant to an order passed u/s. 195(2) of the Act is refunded to the assessee, upon the CIT(A) deciding the appeal in favor of the assessee, the assessee is entitled

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  1. 2009 TIOL 602 ITAT Mum.

Addl DIT
v. Reliance Infocomm Ltd.

ITA No. 6100 to
6110/M/2008

Dated : 9-9-2009

S. 195, S. 244A.
When tax which was deducted at source and deposited with the Government
pursuant to an order passed u/s. 195(2) of the Act is refunded to the assessee,
upon the CIT(A) deciding the appeal in favor of the assessee, the assessee is
entitled to refund of amount paid with interest u/s.244A.

Facts :

The assessee
approached the DDIT, International Taxation, with a request to issue a
certificate for making payment to M/s. ECI Telecom — NGTS Ltd., Israel, for
purchase of certain software for the purpose of operation of Wireless
Telecommunication Network, without deduction of tax at source. The DDIT passed
an order u/s.195(2) of the Act holding that the payment was in the nature of
‘Royalty’ and accordingly, tax was required to be deducted at source. The
assessee deducted the tax and made payment to the authorities as directed by
the aforesaid order passed by the DDIT.

The assessee
preferred an appeal against the said order u/s.195(2) of the Act, which was
allowed by CIT(A). Pursuant to the appeal order, the DDIT passed an order
giving effect to the order of CIT(A) and granted refund of amount paid by the
assessee but did not grant interest on the amount refunded on the ground that
refund has arisen not under the Income-tax Act as such.

Aggrieved, assessee
preferred an appeal to the CIT(A) who held that the assessee was entitled to
interest u/s.244A of the Act on the refund of TDS u/s.195.

Aggrieved by the
order of CIT(A) directing the DDIT to grant interest on refund of TDS, Revenue
preferred an appeal to the Tribunal.

Held :

The Tribunal found
the issue under consideration to be covered against the revenue by various
decisions including the decision of ITAT in the case of Tata Chemicals Ltd.;
16 SOT 418 and in the case of Star Cruises India Travel Services Pvt. Ltd. in
ITA No. 6498 & 6500/Mum./06 order dated 24th March, 2009 (2009 TIOL 351 ITAT
Mum). Since the facts were identical to the decisions mentioned above the
Tribunal confirmed the order passed by CIT(A) and held that the assessee is
entitled to interest on refund of amount paid pursuant to an order passed u/s.
195(2).

The appeal filed by
the department was dismissed.

S. 70(3), S. 111A, S. 115D. As per the provisions of S. 70(3) r.w. S. 111A and S. 115AD, the assessee has an option to set off the short term capital loss against the short term capital gains. Short term capital loss suffered after 1-10-2004 could be set

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  1. 2009 TIOL 547 ITAT Mum.

First State
Investments (Hongkong) Ltd. v. Addl. DIT (International Tax)

ITA No.
2895/Mum./2008

A.Y. : 2005-06.
Dated : 23-7-2009

S. 70(3), S.
111A, S. 115D. As per the provisions of S. 70(3) r.w. S. 111A and S. 115AD,
the assessee has an option to set off the short term capital loss against the
short term capital gains. Short term capital loss suffered after 1-10-2004
could be set off against short term capital gains earned before 30-9-2004.

Facts :

For A.Y. 2005-06,
the assessee computed short term capital gain of Rs.331.33 lakhs. The amount
of short term capital gain and short term capital loss for the period upto
30-9-2004 and after 30-9-2004 was as under :

Particulars

upto 30-9-2004

after 30-9-2004

Total

 

Rupees in lakhs

Short term capital
gain

36.54

472.16

508.70

Short term capital
loss

8.14

169.23

177.37

Total

28.40

302.93

331.33

The assessee sought
to set off the short term capital loss suffered in the period after 30-9-2004
against short term capital gain for a period before 30-9-2004 and contended
that the short term capital gain upto 30-9-2004 was Rs.Nil and that the entire
short term capital gain was for a period after 30-9-2004 and therefore was
taxable @ 10%.

According to the
Assessing Officer, the assessee could not set off the short term capital loss
for a period after 30-9-2004 with the short term capital gain arising in a
period prior to 1-10-2004 since in the period prior to 1-10-2004 short term
capital gain was chargeable at normal rates whereas in the period after
30-9-2004 short term capital gain on which STT was paid was chargeable at
concessional rate of 10%. He, held that Rs.28.40 lakhs is capital gain for the
period upto 30-9-2004 and Rs.302.93 lakhs is capital gain arising during the
period after 30-9-2004.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

S. 80, S. 139(3) and S. 139(5) — Loss return filed within time could be revised and loss carried forward.

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  1. (2009) 119 ITD 119 (Delhi ITAT)

Escorts Mahle
Ltd. v. DCIT

A.Y. : 2001-02.
Dated : 21-3-2008

S. 80, S. 139(3)
and S. 139(5) — Loss return filed within time could be revised and loss
carried forward.

Facts :

The assessee company
filed a return of loss on 31-10-2001 which was accompanied by the unaudited
profit and loss account and balance sheet. Further the tax audit report was
also not filed. On 27-3-2003, the assessee company filed another return in
which a higher loss was claimed. The profit and loss account, balance sheet
and audit report were attached to subsequent return.

The assessing
officer took the view that since the return filed on 31-10-2001 was not
accompanied by audited accounts, the same was not a valid return. He,
therefore, considered the return filed on 27-3-2003 as the first valid return.
Further, he held that since the return filed on 27-3-2003 was filed beyond the
time limit prescribed u/s.139(1) of the Income-tax Act, 1961 (‘the Act’), the
loss declared therein could not be carried forward.

The CIT(Appeals)
held that the return filed on 27-3-2003 was revised return filed u/s.139(5) of
the Act and took the place of the original return filed on 31-10-2001. It
should, therefore, be taken to have been filed within the time limit
prescribed u/s.139(3) of the Act.

On Revenue’s appeal,
the Delhi ITAT observed that the assessing officer processed the return filed
on 31-10-2001 u/s.143(1) of the Act and also did not issue any defect notice
u/s.139(9) of the Act. Thus, the said return cannot be said to have been
considered as invalid return. This being the case, the return filed on
27-3-2003 was to be treated as valid revised return. The revised return took
the place of original return and the original return having been admittedly
filed within time allowed u/s.139(1) of the Act, the loss was to be carried
forward. The return of loss filed on 31-10-2001 was filed in accordance with
S. 139(3) of the Act and could be validly revised u/s.139(5) of the Act.

Even though assessee might have committed a serious economic offence, yet he could not be charged to income unless it was proved beyond doubt that said income was generated to him alone.

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  1. (2009) 119 ITD
    71 (Bang.)

Ibrahim Vittal
v. ITO, Ward 2(3), Mangalore

A.Y. : 2003-04.
Dated : 25-4-2008

Even though
assessee might have committed a serious economic offence, yet he could not be
charged to income unless it was proved beyond doubt that said income was
generated to him alone.

Facts :

A search was made in
the residence of appellant u/s.37(3) of Foreign Exchange Management Act, 1999
(FEMA) on the basis of certain information by Directorate of Enforcement
(DOE). During search, some documents were seized which disclosed that assessee
had received a cash of Rs.23,15,000. The contention of assessee that it was
received from his brothers and brother-in-law working abroad for construction
of their houses was rejected by DOE and penalty was imposed on him. On this
basis, AO treated the said money as unexplained and taxed it u/s.69A. On
appeal to CIT(A), it confirmed the addition. On appeal to Tribunal, it held
that the AO did not make any independent enquiries. Rather he relied upon the
letter received from one of the brothers-in-law which was signed by him on
behalf of all the other persons and hence was not having any evidential value.
In a search conducted under FEMA, no other property was confiscated from
assessee. Hence, the assessee had received the amount on behalf of his
brothers and brothers-in-law.

It was not the case
of the AO that the assessee had made any investments or the assessee was found
to be the owner of any bullion, jewellery or other valuable articles. So, the
AO was not right, in law, in completing the assessment u/s.69A.

S. 147 — Reopening of the assessment for the second time to take a different view on the same matter is bad in law and liable to be quashed.

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  1. (2009) 119 ITD 21 (Mum.)

Aum Chemicals
v.
ACIT, Palghar
Circle, Palghar

A.Y. : 1998-99.
Dated : 30-4-2008

Held 1 :

S. 147 —
Reopening of the assessment for the second time to take a different view on
the same matter is bad in law and liable to be quashed.

Held 2 :

S. 45 — A
partnership firm consisting of 2 partners was converted into company —
Partners were given shares of Company A to the extent of their credit balances
in Capital Account — It was held that since the condition of distribution of
capital assets on dissolution of firm is not fulfilled, S. 45(4) is not
applicable. Even otherwise after deducting cost of capital which was equal to
book value, capital gain would be nil.

Fact 1 :

The assessee firm
decided to sell its assets and liabilities to a private limited company.
Subsequently, the said consideration was distributed among partners and the
firm was dissolved. The Assessing Officer reopened the assessment and added
certain amount as Short Term Capital Gain u/s.45(4). The CIT(A) deleted the
addition. Afterwards AO again reopened the assessment on the ground that the
partners made an arrangement to avoid tax by not assigning values to
individual assets and added the value difference of assets to the income of
the assessee. On appeal to Tribunal, it held that there was nothing on record
to show that there was any failure on the part of assessee. It had disclosed
all material facts at the time of first reopening of assessment. Hence, it was
not permissible to reopen the assessment on the same reason to take different
view. Consequently, second time reopening of assessment was bad in law and
liable to be quashed.

Fact 2 :

On distribution of
assets and liabilities to the company, the company allotted shares to partners
in proportion to their capital contribution. The AO taxed short term capital
gain by invoking provisions of S. 45(4). It was held that for invoking S.
45(4) following two conditions are to be satisfied :

    1. Transfer by way
    of distribution of capital asset.

    2. Transfer should
    be on the dissolution of the firm or otherwise.

There is a
difference between vesting in private limited company and distribution of
capital assets. In case of vesting of property, the property vests in the
company as it exists. On the other hand, distribution on dissolution
presupposes processes of division, realisation, encashment of assets and
apportionment of the realised amount.

In the given case
there was no transfer of assets on dissolution of firm. Hence, first condition
is not satisfied. Further, even if S. 45(1) is applied, the full value of
consideration for the firm is book value of assets as allocation of shares had
no correlation of vesting of properties in company. Hence, capital gain would
be Nil.

Powers of CIT(A) — Rule 24 of Appellate Tribunal Rules, 1963 — Whether CIT(A) can dismiss appeal for want of prosecution by assessee — Held, No. Whether CIT(A) is bound to dispose of appeal on merits, even when there is default of non-appearance — Held, Y

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31 2008 TIOL 601 ITAT Mum.


British Pharmaceutical Laboratories v. ACIT

ITA No. 6263/Mum./2006

A.Y. : 1999-2000. Dated : 1-10-2008

Powers of CIT(A) — Rule 24 of Income-tax Appellate Tribunal
Rules, 1963 — Whether CIT(A) can dismiss the appeal for want of prosecution by
the assessee — Held, No. Whether CIT(A) is bound to dispose of the grounds of
appeal on merits, even when there is a default of non-appearance by the
appellant — Held, Yes.

 

Facts :

The assessee filed a return of income declaring a loss of
Rs.2,19,69,182. The Assessing Officer passed an order u/s.143(3) of the Act
assessing the total income of the assessee at Rs.19,75,603. Aggrieved, the
assessee preferred an appeal to the CIT(A), but failed to attend the
proceedings before the CIT(A). The CIT(A) did not record decision on merits on
the ground of assessee’s failure to attend the proceedings and by taking a
clue from the decision of the Delhi Tribunal in the case of Multiplan (India)
Ltd., he dismissed the appeal. Aggrieved, the assessee preferred an appeal to
the Tribunal.

 

Held :

The Tribunal noted that under Rule 24 of the Income Tax
Appellate Tribunal Rules, 1963 the Tribunal has the power to dismiss an appeal
for want of prosecution and it is also empowered to recall that order, if
satisfied about the existence of reasonable cause subsequently shown by the
appellant. The Tribunal held that since the CIT(A) does not have such a power
under the Income-tax Act, 1961, he is bound to dispose of the grounds of
appeal on merits, even when there is a default of non-appearance by the
appellant. Since the CIT(A) had not recorded decision on merits, the Tribunal
set aside his order and restored the appeal to the file of the CIT(A) for
fresh disposal in accordance with law, after giving reasonable opportunity of
being heard to the assessee.

 


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S. 254(2) — The order pronounced at the conclusion of the hearing is an order of the Tribunal — It cannot be called a tentative order or a prima facie view — If there is mistake apparent on record, the order pronounced in the Court which is an oral order

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 Part A: Reported Decisions

 

14 (2010) 36 DTR (Chennai) (TM) (Trib) 42
ITO v. M. Vijayan/ITO v. Smt. V. Meenakshi
A.Ys. : 1999-00 to 2004-05. Dated : 18-12-2009

 

S. 254(2) — The order pronounced at the conclusion of the
hearing is an order of the Tribunal — It cannot be called a tentative order or a
prima facie view — If there is mistake apparent on record, the order pronounced
in the Court which is an oral order can be recalled to rectify such mistake.

Facts :

In this case, a survey u/s.133A was conducted at the business
premises of the assessee (M. Vijayan). During the course of survey, certain
documents pertaining to income and investment were found. Sworn statements were
recorded from the assessee and his wife. On the basis of sworn statements
supplied during the course of the survey, the Assessing Officer inferred that
the income and investment shown in the name of the wife actually belonged to the
assessee and he therefore made the impugned addition in the hands of the
assessee on substantive basis and in thehands of the wife on protective basis.

Upon assessee’s appeal, the learned CIT (A) found that the
wife had independent sources of income. He also found that there is no finding
that the money was actually invested by the husband or that he enjoyed the
profits earned from the business and investment in the name of his wife. Hence,
he allowed the assessee’s appeal and deleted the addition in the hands of the
husband.

Upon further appeal by the Revenue, the Tribunal decided the
issue in favour of the assessee relying on the decision of the jurisdictional
High Court in the case of CIT v. S. Khader Khan Son, (300 ITR 157) (Mad.)
wherein it was held that the materials collected and the statements recorded
during the survey u/s.133A were not conclusive piece of evidence by itself. The
order was pronounced in the open Court as well as communicated orally to the
parties concerned.

The Judicial Member subsequently proposed to recall the order
on the ground of non-consideration of the judgment of the jurisdictional High
Court in the case of H. Shahul Hameed v. ACIT, (258 ITR 266) (Mad.). Difference
of opinion arose between the Members regarding refixing the matter for hearing
and also on merits of the issue and therefore the matter was referred to the
Third Member.

Held :

The order pronounced at the conclusion of the hearing is an
order of the Tribunal. It cannot be called a tentative order or a prima facie
view. In the present case, the order is pronounced as well as communicated
orally to the parties concerned and hence it is an order. De hors the facts of
the present case, if there is mistake apparent on record, the order pronounced
in the Court which is an oral order can be recalled to rectify such mistake.

In the present case, there was no search but only survey
u/s.133A. In the decision of S. Khader Khan Son (supra), the jurisdictional High
Court has distinguished the provisions of S. 132(4) with those of S. 133A and
held that the material collected and statements recorded during the survey
u/s.133A are not conclusive piece of evidence and that the same cannot be the
basis for making any addition. Therefore the judgment based upon which the
Judicial Member has proposed to recall the order is not applicable to the facts
of the case. Further, the fact that the Judicial Member had to devote nearly
twenty-five pages to point out the error and then to set it aside for
reconsideration, itself proves that the conclusion of the Judicial Member is the
result of a long drawn-out process of reasoning on points where there may
conceivably be two opinions and thus, there was no mistake apparent from record.

Further, instead of acting upon what had been conclusively
pronounced in the Court, the Judicial Member kept the matter pending with him
and expressed his opinion to reopen the case after three months as against the
long-standing convention of passing dissenting orders within fifteen days.
Therefore, the matter cannot be refixed for hearing on the ground that there is
a mistake apparent from record.

 

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S. 22 and S. 24 of the Income-tax Act, 1961 — Rent, being only a surrogate measure of annual value, has to be reduced by the expenses not connected with property but incurred by landlord for enjoyment of property by tenants, such as salary and bonus to sw

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  1. (2009) 120 TTJ 1127 (Ahd.)


J. B. Patel & Co. (Co-owners) v. Dy. CIT

ITA No. 4033 (Ahd.) of 2004

A.Y. : 1993-94. Dated : 29-2-2008

S. 22 and S. 24 of the Income-tax Act, 1961 — Rent, being
only a surrogate measure of annual value, has to be reduced by the expenses
not connected with property but incurred by landlord for enjoyment of property
by tenants, such as salary and bonus to sweeper, pumpman and liftman and
electricity charges for pump motor and common passage.

For the relevant assessment year, the assessee computed
rental income under ‘Income from House Property’ after claiming deductions in
respect of the following expenses :

(a) Salary and bonus paid to sweepers/pumpman/liftman

(b) Electricity charges for pump motor and common
passage.

Since these expenses were not covered by S. 23 and S. 24,
the Assessing Officer denied the assessee’s claim. The disallowance was upheld
by the CIT(A).

The Tribunal, deciding in assessee’s favour, noted as
under :

(1) The rent being charged by the assessee is only a
surrogate measure of the said annual value. The expenditure on the aforesaid
items, i.e. the salary (including bonus) to the maintenance staff of
the facilities such as electric motors, lift, cleaning, etc., as well as
that on the electricity consumed in respect of any common area and the
electric motors, is not attributable directly to the house property as such,
but to its enjoyment by the tenants/users thereof.

(2) In a given case it may happen that the said
expenditure is incurred by the tenant or tenants (collectively), with the
landlord having no locus standi or role therein. Who incurs the expenditure
in the first instance is only a matter of mutual arrangement or convenience
and thus, of no consequence where the bona fides of such expenditure are, as
in the present case, not in doubt. The rent being charged by the assessee,
which represents the measure of its annual value, would, in such a case
stand correspondingly reduced.

(3) As such, although the assessee, being entitled only
to the deductions in respect of the said expenditure in the computation of
income under the said head of income only in terms of its provisions, would
not be entitled to the impugned deductions, we consider that the annual
value of its house property be assumed at the reduced value, i.e.
after deducting the impugned amounts (from the rental), being only in
relation to the expenditure required to be necessarily incurred for the
enjoyment/user of the relevant property and, therefore, can only be
considered as having been included at the said amount, i.e. at cost
by the two parties in the determining of the rental.

(4) The standard deduction admissible to the assessee on
account of repairs @ 1/6th of the annual value of its house property is in
relation to the repairs, whether actually incurred or not, by the assessee
during the relevant year. The impugned sums are not in relation to any
repairs to the house property, but for the maintenance of the facilities
enjoined therewith and necessary for its useful enjoyment.

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S. 143(1) and S. 263 of the Income-tax Act, 1961 — Provisions of S. 263 are not applicable where only intimation u/s.143(1) has been issued.

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  1. (2009) 120 TTJ 1009 (Agra) (TM)


Vinod Kumar Rai v. CIT

ITA No. 234 (Agra) of 2005

A.Y. : 2002-03. Dated : 21-11-2008

S. 143(1) and S. 263 of the Income-tax Act, 1961 —
Provisions of S. 263 are not applicable where only intimation u/s.143(1) has
been issued.

For the relevant assessment year, the CIT passed a revision
order u/s.263 in respect of the return of income processed u/s.143(1). Before
the Tribunal, the assessee contended that the processing u/s.143(1) is neither
an assessment nor an assessment order and the same cannot be subjected to
revision u/s.263 and the revision order made by the CIT may, therefore, be
declared as bad in law.

On account of difference of opinion between members of the
Bench, the matter was referred to the Third member u/s.255(4).

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

(a) After an intimation u/s.143(1) is issued, the
Assessing Officer had full power to issue a notice u/s.143(2) and make a
regular assessment u/s.143(3). The Assessing Officer could also proceed
u/s.147/148, if applicable.

(b) There was no explanation as to why these provisions
were not applied in this case.

(c) Various High Courts in India are not unanimous
whether provisions of S. 263 are applicable where only intimation u/s.143(1)
has been issued, whether such intimation is an order or assessment to
attract provisions of S. 263. The Supreme Court, at an appropriate time,
will take up and settle the issue.

(d) It is clear from the record that two reasonable views
of the matter are possible. In such a situation, it has been laid down by
the Supreme Court in numerous cases that the view which is favoring the
assessee has to be taken.

Therefore, it was held that the intimation u/s.143(1)
cannot be sought to be revised u/s.263.

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S. 32 of the Income-tax Act, 1961 — Commercial right comes into existence whenever the assessee makes payment of non-compete fee and such non compete right is an intangible asset eligible for depreciation.

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  1. (2009) 120 TTJ 983 (Chennai)


ACIT v. Real Image Tech. (P) Ltd.

ITA No. 201 (Mad.) of 2007

A.Y. : 2001-02. Dated : 15-2-2008

S. 32 of the Income-tax Act, 1961 — Commercial right comes
into existence whenever the assessee makes payment of non-compete fee and such
non compete right is an intangible asset eligible for depreciation.

During the relevant assessment year, the non-compete fees
paid by the assessee in pursuance of non-compete agreements entered into by it
with certain companies was claimed as revenue expenditure and the claim was
disallowed by the Assessing Officer. Under an application to the Joint CIT
u/s.144A, the assessee made an alternate plea for treating such fees as
capital expenditure — it should be treated as an intangible asset u/s.32 and
depreciation be allowed accordingly. The Jt. CIT did not allow the same,
holding that the payment was capital in nature i.e. neither a revenue
expenditure nor a capital expenditure. The CIT(A) allowed the assessee’s
claim.

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

(b) ACIT v. Radaan Media Works India Ltd., ITA No.
2241 (Mad.) of 2006 dated 14-12-2007

(c) Techno Shares & Stocks Ltd. v. ITO, (2006) 101
TTJ 349 (Mum.)

The Tribunal noted as under :

(1) When a businessman pays money to another businessman
for restraining the other businessman from competing with the assessee, he
gets a vested right which can be enforced under law and without that the
other businessman can compete with the first businessman.

(2) When by payment of non-compete fee, the businessman
gets his right what he is practically getting is kind of monopoly to run his
business without bothering about the competition.

(3) Generally, non-compete fee is paid for a definite
period which in this case is five years. The idea is that by that time the
business would stand firmly on its own footing and can sustain later on.
This clearly shows that a commercial right comes into existence whenever the
assessee makes payment for non-compete fee.

(4) The term ‘or any other business or commercial rights
of similar nature’ has to be interpreted in such a way that it would have
some similarities as other assets mentioned in clause (b) of Expln. 3. The
other assets mentioned are know-how, patents, copyrights, trade marks,
licences, franchises, etc. In all these cases no physical asset comes into
possession of the assessee. What comes in is only a right to carry on the
business smoothly and successfully and, therefore, even the right obtained
by way of non-compete fee would also be covered by the term ‘or any other
business or commercial rights of similar nature’ because after obtaining
non-compete right, the assessee can develop and run his business without
bothering about the competition. The right acquired by payment of
non-compete fee is definitely an intangible asset.

(5) This right (asset) will evaporate over a period of
time (of five years in this case) because after that the protection of
non-competition will not be available to the assessee. This right is subject
to wear and tear by the passage of time, in the sense that after the lapse
of a definite period of five years, this asset will not be available to the
assessee and, therefore, this asset must be held to be subject to
depreciation.

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S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free loan obtained by assessee from sister concerns for purchase of a flat from one of them cannot be said to be without consideration because while the assessee was benefited by interest-free loan, lende

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  1. (2009) 121 TTJ 145 (Mumbai)


Chandrakant H. Shah v. ITO

ITA No. 3966 (Mum.) of 2008

A.Y. : 2005-06. Dated : 12-1-2009

S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free
loan obtained by assessee from sister concerns for purchase of a flat from one
of them cannot be said to be without consideration because while the assessee
was benefited by interest-free loan, lenders were benefited by profit embedded
in the sale consideration, hence not exigible to tax u/s.56(2)(v).

During the relevant assessment year, the assessee took
interest-free loans of Rs.54.70 lacs from four builders (sister concerns) for
purchasing a flat from one of them. The assessee was also employed with one of
the concerns. The Assessing Officer formed an opinion that the assessee was
working with the group for several decades and, hence, having regard to the
said association, these parties gave such a huge loan to the assessee without
any security and interest as a mark of gratitude irrespective of his repayment
capacity and, therefore, in the absence of any obligation on the part of the
assessee to repay these loans, the entire transaction was of the nature of
gift which was given a colour of loan. Accordingly, he added a sum of Rs.54.45
lacs after giving a rebate of Rs.25,000 u/s.56(2)(v) to the total income of
the assessee.

The CIT(A) held that such loan transactions were abnormal
in the sense that there was no interest or any repayment stipulation, and
hence, the said sums were without consideration and upheld the addition.

The Tribunal, relying on various decisions, deleted the
addition.

The Tribunal noted as under :

(1) All these loans have been shown in the balance sheet
submitted along with the return of income as loans and the lenders have also
confirmed the same as such. Thus, apparently, it is a case of loan
transactions and not a case of gift.

(2) Since some of the loans were repaid partly/fully, it
was a material fact so as to rebut the presumption of the Assessing Officer
that the assessee was not under any obligation to repay the loans and this
fact also proves the assessee’s claim that no opportunity was granted by the
Assessing Officer to the assessee before making such addition.

(3) This type of addition also leads to a situation of
having two provisions for charging one type of income i.e. the
legislature has provided two charging sections i.e. S. 68 and S. 56
(2)(v) which cannot be possible. In that case, the legislature would have
made the provisions of S. 56(2)(v) either of overriding nature by stating
that ‘notwithstanding anything contained in S. 68’ or by providing for
applicability of provisions of S. 56(2)(v) in any other manner, in case
provisions of S. 68 could not be invoked. When a specific provision exists
in law for a particular thing, then that thing is liable to be examined
thereunder only and if that item cannot be taxed under that provision, then
that thing cannot be charged to tax under other provisions of the Act.

(4) In the present case, it is not that provisions of S.
68 were not applicable at all and, hence, the Assessing Officer invoked the
provisions of S. 56(2)(v). On the contrary, the Assessing Officer has made
necessary enquiries in that regard and he has not made addition u/s.68 for
the reason that all the requirements of that section i.e. identity,
creditworthiness and genuineness of transactions have been proved. Hence, a
loan transaction has to be treated as a loan transaction only and it should
be examined in the light of provisions of S. 68 and not under provisions of
S. 56(2)(v) and for this reason alone, this addition is liable to be
deleted.

(5) It is important to note that in S. 56(2)(v), the term
‘consideration’ is neither prefixed by the word ‘adequate’ nor it is
suffixed by the words ‘money or money’s worth’. Hence, if in any transaction
there exists consideration as per the provisions of the Indian Contract Act,
1872 such transaction would not come into the ambit of this section.

(6) Consideration for a promise may consist of either
some benefit conferred on the promisor or detriment suffered by the promisee
or both. Hence, on this criteria, the assessee has gained by way of
interest-free loan and the lenders have suffered by giving interest-free
loans and such suffering has got some value and, therefore, the said
transaction cannot be said to be without consideration.

(7) There is another very important aspect of the matter,
i.e. lenders have sold the flat to the assessee. In that sale
consideration, they have earned profit because it is nobody’s case that the
flat to the assessee has been sold at cost. Therefore, lenders have also
derived some benefit which has got value and, therefore, the same forms
consideration for giving interest-free loans to the assessee. Other three
lenders are the sister concerns of the company who actually built or sold,
hence the benefit derived by such company is a good consideration for other
three lenders. Benefit conferred to a third party not connected with the
promissor or promise in a pecuniary capacity would also be a good
consideration to support the transaction. There can be consideration without
any apparent monetary consideration and the only requirement is that the
consideration should create a legal relationship between the contracting
parties and this fact is not in dispute in the present case. Hence, the
transaction is with consideration. The term ‘consideration’ in legal sense,
is somewhat different from what is generally understood and the Revenue’s
decision is based on general understanding and, therefore, the same is not
correct in law. The transaction meets all the requirements of general law
which is only to be looked into while invoking provisions of S. 56(2)(v)
and, therefore, it is a transaction having a consideration and, therefore,
the same does not fall within the ambit of the provisions of S. 56(2)(v) for
this reason also.

 

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S. 14A and S. 48 of the Income-tax Act, 1961 (i) Interest on funds borrowed for acquisition of shares is to be taken into account towards the cost of acquisition for the purpose of computation of capital gains as prescribed u/s.48(ii)

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  1. (2009) 120 TTJ 397 (Pune)


Balan alias Shanmugam Balkrishnan Chettiar v.
Dy. CIT

ITA No. 1859 (Pune) of 2005

A.Y. : 2002-03. Dated : 31-1-2008

S. 14A and S. 48 of the Income-tax Act, 1961 :


(i) Interest on funds borrowed for acquisition of
shares is to be taken into account towards the cost of acquisition for the
purpose of computation of capital gains as prescribed u/s.48(ii)


(ii) Capital gain on the sale of shares being part of
the total income of the assessee and not an exempt income, S. 14A has no
application.



For the relevant assessment year, the Assessing Officer and
the CIT(A) disallowed the assessee’s claim for inclusion of interest paid on
funds borrowed for investment in shares in the cost of acquisition for the
purpose of computing capital gains.

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

(a) CIT v. Mithilesh Kumari, (1973) 92 ITR 9
(Del.)

(b) Addl. CIT v. K. S. Gupta, (1979) 119 ITR 372
(AP)

(c) CIT v. Maithreyi Pai, (1984) 43 CTR 88 (Kar.)/
(1985) 152 ITR 247 (Kar.)

The Tribunal noted as under :

(1) In the past, the assessee had always capitalised the
interest.

(2) S. 48 says that capital gain is to be computed by
deducting from the consideration the cost of acquisition of the asset and
the cost of any improvement thereto.

(3) Once it is established that the assessee had borrowed
the funds for acquisition of shares and the burden of interest had been
capitalised, that interest burden cannot be segregated from the amount of
investment.

In response to the argument of the Revenue that since
interest had a nexus to exempt income, the provisions of S. 14A should be
applied, the Tribunal noted as under :

(1) The words ‘in relation to income which does not form
part of the total income under this Act’ mean if an income does form part of
the total income, then the related expenditure is out of the ambit of the
applicability of S. 14A. The capital gain shown by the assessee had formed
part of the total income of the assessee. Otherwise also, capital gain is
not exempt income and without any ifs and buts, always being taxed in the
hands of a taxpayer. Therefore, the Revenue authorities have proceeded on a
wrong premise that the interest expenditure was in respect of an income
which was exempt or did not form part of the total income.

 

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S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit from sale of shares out of investment portfolio was taxable as capital gains and not as business income.

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  1. (2009) 120 TTJ 216 (Luck.)


Sarnath Infrastructure (P) Ltd. v. ACIT

ITA No. 301 (Luck.) of 2006

A.Y. : 2004-05. Dated : 20-12-2007

S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit
from sale of shares out of investment portfolio was taxable as capital gains
and not as business income.

The assessee-company was dealing in shares both as business
as well as investment and keeping separate accounts in respect of the two
portfolios. Valuation of holdings in investment portfolio was done at cost
only and holdings were reflected in Balance Sheet as investment. For the
relevant assessment year, the profit on sale of shares out of the investment
portfolio was treated by the Assessing Officer as business income and not as
long term capital gain. The CIT(A) upheld the addition.

The Tribunal held that the said profit was to be treated as
long term capital gain and not as business income. The Tribunal’s decision was
arrived at after examining various decisions.

The Tribunal noted as under :

(1) The material on record showed that the assessee had
clear independent portfolios for investment in shares as well for trade and
it has kept separate accounts in respect of the two portfolios.

(2) The shares which were sold out of investment
portfolio during this year and on which capital gains have been offered by
the assessee were held by it for more than two years and in some cases for
more than three years.

(3) No material is brought on record by the Department to
show that demarcation line between business and investment is hazy or that
assessee has not maintained an investment portfolio and it was dealing in
shares only like a trader.

(4) Valuation of holdings has been done at cost for
investment portfolio. They were reflected in the Balance Sheet as
investment.

(5) The frequency of such purchase or sale in this
portfolio is not large enough to doubt that the investment portfolio is only
a device to pay lesser taxes by parking some stock-in-trade in the
investment portfolio.

(6) Turnover to stock ratio in investment portfolio is
very low as compared to that in trading portfolio. Further, there is no
material to show that these shares in the investment portfolio were also
traded in the same and like manner as those which were in stock-in trade
portfolio.

(7) All the sales out of the investment portfolio were
identifiable to purchases made in the same portfolio.

(8) In view of the above facts, the assessee had
discharged its primary onus by showing that it was maintaining separate
accounts for two portfolios and there was no intermingling. The onus then
shifted on the Revenue to show that apparent was not real. There was no
material brought in by the Revenue to show that separate accounts of two
portfolios were only a smoke screen and there was no real distinction
between the two types of holdings. This could have been done by showing that
there was intermingling of shares and transactions and the distinction
sought to be created between two types of portfolios was not real but only
artificial and arbitrary.

Therefore, in absence of any material to the contrary and
on appreciation of cumulative effect of several factors present, it was held
that the surplus was chargeable to capital gains only and the assessee was not
to be treated as trader in respect of sales and purchases of shares in the
investment port-folio.

 

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Income-tax Act, 1961 — S. 194A — Whether a chit fund agreement is not a money lending contract but a special type of contract — Held, Yes. Whether in a scheme of chit fund there is neither any money borrowed nor any debt incurred, the dividends paid by th

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  1. 2009 TIOL 328 ITAT (Bang.)


ITO v. Margasoochi Chits Pvt. Ltd.

ITA No. 995/Bang./2008

A.Y. : 2005-2006. Dated : 16-1-2009

Income-tax Act, 1961 — S. 194A — Whether a chit fund
agreement is not a money lending contract but a special type of contract —
Held, Yes. Whether in a scheme of chit fund there is neither any money
borrowed nor any debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest — Held, Yes.

Facts :

In these cases the AO relying on the instructions issued by
CBDT held that the dividend payments made to the subscribers of chit fund were
in the nature of interest and were liable for deduction of tax at source
u/s.194A. Since the assessees had not deducted tax u/s.194A, the AO passed
orders u/s.201(1) and u/s.201(1A) in respect of five assessees for the
impugned assessment years by creating demand on the dividends paid but not
subjected to tax deduction at source. Since identical orders were passed in
all the fifteen appeals they were taken up together by the Tribunal.

The CIT(A) held that a chit agreement is not a money
lending contract, but a special type of contract and any payment with
reference to a chit agreement being referred to as interest payment does not
arise and installments in chit fund being non-refundable in nature cannot be
equated with ‘deposit’ and consequently, the dividend or discount credited to
the account of the subscribers would not constitute interest. He also held
that the CBDT circulars are not binding on the appellate authorities.

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

Held :

The Tribunal noted that the scheme of Chit Funds is
regulated by The Chit Funds Act, 1982 and S. 3 in Chapter I of the Chit Funds
Act provides that the provisions of the Act override all other laws,
memoranda, articles, etc. save as otherwise expressly provided in the Act. In
view of the non obstante clause the Tribunal held that the definitions of the
expression ‘discounts’, ‘dividends’, ‘prize amount’ as given in the said Chit
Funds Act will prevail over similar definition as found in the Income-tax Act.
The Tribunal held that in a scheme of chit fund there is neither any money
borrowed nor a debt incurred and since interest is defined in the Income-tax
Act as interest payable in any manner in respect of any monies borrowed or
debt incurred (including deposit) and in a chit fund there is neither any
money borrowed nor a debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest. The Tribunal held that the demands created u/s.201(1) and
u/s.201(1A) were not justified. It upheld the order of the CIT(A) and
dismissed the appeals filed by the revenue.

 

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Income-tax Act, 1961 — S. 40(a)(ia) and S. 194C — Whether an agreement entered into by the assessee with distributors whereby revenue was shared was a works contract and therefore liable to TDS u/s.194C — Held, No.

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  1. 2009 TIOL 273 ITAT (Del.)


Competent Films Pvt. Ltd. v. ITO

ITA No. 3397/Del./2008

A.Y. : 2005-2006. Dated : 9-2-2009

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194C — Whether
an agreement entered into by the assessee with distributors whereby revenue
was shared was a works contract and therefore liable to TDS u/s.194C — Held,
No.

Facts :

The assessee company was engaged in the business of running
of cinema hall, canteen and food courts. It had entered into a Memorandum of
Understanding (MOU) with M/s. Mukta Movies Distributors (Distributors) which
inter alia provided that — the assessee was to be a booking agent for
the cinema hall for three years; the assessee had exclusive rights to book
Hindi films for the said cinema and to run a certain number of shows daily as
per the local laws; the MOU also fixed the rate of admission to the cinema
hall; stated revenue at full capacity and the amount due to the assessee on a
weekly basis subject to the exceptions provided in the MOU.

The distributor raised a bill on the assessee under which
the daily collections were shown and after reducing the payment to be made to
the assessee for the cinema hall hired, a bill was raised for the balance by
the Distributor which bills were paid by the assessee. The Assessing Officer
(AO) held that the MOU was in the nature of a works contract and held the
assessee liable to deduct tax at source u/s.194C. Since the assessee had not
deducted tax on payments made to distributor pursuant to the said MOU, the AO
disallowed a sum of Rs.72,43,965 by invoking provisions of S. 40(a)(ia).

The CIT(A) upheld the order of the AO. Aggrieved, assessee
preferred an appeal to the Tribunal.

Held :

The Tribunal upon a close reading of the agreement held it
to be a profit sharing agreement. It further held that the agreement was not
for services rendered but for sharing the profits with the assessee. Following
the ratio of the decisions of Ahmedabad Bench of ITAT in Sunsel
Drive-in-Cinema (P.) Ltd. v. ITO, (2006) 5 SOT 64 (Ahd.) and Mumbai Bench
of ITAT in ITO v. Shrinagar Cinemas (P.) Ltd., (2008) 20 SOT 480 (Mum.)
it held that there was no works contract and, therefore, the assessee was not
liable to deduct any tax u/s.194C of the Act. The Tribunal found that the
distributor has only given the right to exhibit the films and the assessee had
only rendered the services of exhibiting the films and therefore the question
of deduction of tax by the assessee did not arise. The claim of the assessee
was allowed.

 

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Income-tax Act, 1961 — S. 158BFA — Whether for levy of penalty u/s.158BFA issuance of notice is mandatory — Held, Yes. Whether in the absence of issuance of pre-requisite notice, the entire penalty proceedings are to be held as illegal and without jurisdi

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  1. 2009 TIOL 300 ITAT Bang.


ITO v. H. E. Distillery Pvt. Ltd.

IT(SS)A No. 28 (Bang.)/2008

Block Period : 1-4-1990 to 18-1-2001 Dated : 30-1-2009

Income-tax Act, 1961 — S. 158BFA — Whether for levy of
penalty u/s.158BFA issuance of notice is mandatory — Held, Yes. Whether in the
absence of issuance of pre-requisite notice, the entire penalty proceedings
are to be held as illegal and without jurisdiction — Held, Yes.

Facts :

The assessee, in response to notice u/s158BC, filed return
for block period on 13-8-2001 admitting undisclosed income of Rs.73,80,526.
The AO assessed the undisclosed income at Rs.2,42,47,658 and initiated
proceedings for levy of penalty u/s.158BFA(2) on the ground that the assessee
failed to disclose the income and furnished inaccurate particulars of income.
Against the order assessing undisclosed income the assessee filed an appeal on
the ground that business loss suffered by the assessee during the block period
and depreciation have to be set off against undisclosed income. The CIT(A) and
the Tribunal decided the appeal against the assessee.

The assessee vide letter dated 15-12-2005 was asked to
offer explanation to the proposed penalty. No reply was received from the
assessee. The AO levied a minimum penalty of Rs.1,18,40,726.

The assessee filed an appeal to the CIT(A) and challenged
levy of penalty on the ground that no notice for initiation of penalty was
issued. The CIT(A) cancelled the penalty.

Aggrieved, the revenue preferred an appeal to the Tribunal
where on behalf of the Revenue it was inter alia contended that the assessment
order did mention that penalty proceedings u/s.158BFA(2) are initiated; the
assessee attended the proceedings for levy of penalty; during the penalty
proceedings when the AO was transferred the new AO did issue a notice before
imposing penalty. It was submitted that CIT(A) took a rigid and narrow view
that physical service of notice was a must before imposition of penalty for
concealment. The intention of the AO to levy penalty was never in doubt.

Held :

The Tribunal relying on the decision of the Supreme Court
in the case of 82 ITR 821, 61 ITR 147, 76 ITR 696, 168 ITR 705 and also on the
decision of the co-ordinate bench of the Tribunal in IT(SS)A. No.
21/Bang./2001 in the case of Nemichand held that issuance of notice is a
pre-requisite for assuming jurisdiction to levy penalty u/s.158BFA(2) and in
the absence of issuance of a pre-requisite notice, the entire penalty
proceedings were held to be illegal and without jurisdiction. It held that
CIT(A) was perfectly justified in canceling the penalty. The Tribunal
confirmed the order of CIT(A) and dismissed the appeal filed by the revenue.

 

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Income-tax Act, 1961 — S. 36(1)(v), S. 40A(7) and S. 263 — Whether it is necessary for CIT to make further inquiries before cancelling the assessment order of the AO — Held, No. Whether the CIT can regard an order as erroneous on the ground that the AO sh

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  1. 2009 TIOL 317 ITAT (Mad.) SB


Rajalakshmi Mills Ltd.
v. ITO

ITA No. 1074/Mds./1987

A.Y. : 1981-82. Dated : 24-4-2009

Income-tax Act, 1961 — S. 36(1)(v), S. 40A(7) and S. 263 —
Whether it is necessary for CIT to make further inquiries before cancelling
the assessment order of the AO — Held, No. Whether the CIT can regard an order
as erroneous on the ground that the AO should have made further inquiries
before accepting the statements made by the assessee in his return — Held,
Yes. Whether the word ‘erroneous’ in S. 263 includes cases where there has
been failure to make the necessary inquiries — Held, Yes. Whether it is
incumbent on the AO to investigate the facts stated in the return when
circumstances would make such an inquiry prudent and the word ‘erroneous’ in
S. 263 includes cases where there has been failure to make such an enquiry —
Held, Yes. Whether it is correct to say that the provision made by the
assessee in the accounts for the purposes of making contributions to approved
gratuity fund should be allowed despite the fact that there was no incremental
liability towards the gratuity due for the assessment year under consideration
— Held, No.

Facts :

For the A.Y. 1981-82 the balance sheet of the assessee
company reflected provision for gratuity at Rs.7,85,600 which sum was claimed
by the assessee, in its return of income, u/s.36(1)(v). The AO allowed the
same without making any discussion in the assessment order. The Commissioner
of Income-tax (CIT) assumed jurisdiction u/s.263 as in his opinion the order
was erroneous and prejudicial to the interest of the revenue.

The CIT found that the approved (sic actuarial) gratuity
liability as on 31-3-1981 and 31-3-1980 was Rs.55,35,469 and Rs.51,974,80
respectively. Hence, the amount payable as contribution to the fund was
Rs.3,37,989. The AO had allowed Rs.7,85,600. Accordingly, the CIT by relying
on the decision of the Apex Court in the case of Shree Sajjan Mills Ltd. (156
ITR 585) directed the AO to withdraw the excess allowance of Rs.4,47,611.

In an appeal to the Tribunal the assessee contended that
the conditions precedent for invoking S. 263 have not been satisfied and also
that it is entitled to claim deduction of Rs.7,85,600 being provision for
gratuity actually paid to an approved gratuity fund.

The President of the ITAT constituted a Special Bench to
consider the following questions :

(1) Whether the CIT was correct in invoking the
provisions of S. 263 and in withdrawing the claim of deduction of
Rs.7,85,600, allowed by the AO, being the amount actually paid to an
approved gratuity fund and in allowing incremental actuarial liability
worked out at Rs.3,37,989 ?

(2) Whether the assessee was entitled to claim deduction
of Rs.7,85,600 being the provision of gratuity in terms of S. 36(1)(v) of
the Act, actually paid to an approved gratuity fund on the facts and in the
circumstances of the case ?

(3) Whether the Appellate Tribunal’s order dated
21-6-1990 in ITA No. 529(Mds.)/87 rendered in the assessee’s own case for
A.Y. 1982-83 could be said to be an order rendered per incuriam and not
binding in view of non-consideration of correct legal position in this
regard ?


Held :

The Special Bench (SB) found that the AO had not made any
inquiries regarding the allowability of the sum of Rs.7,85,600 claimed by the
assessee as provision for gratuity actually paid to an approved gratuity fund.
The SB after considering the ratio of the decision of the Apex Court in the
case of Rampyari Devi Saraogi v. CIT, (67 ITR 84) (SC) held as under :

“It is not necessary for the CIT to make further
enquiries before cancelling the assessment orders of the AO. The CIT can
regard the order as erroneous on the ground that in the circumstances of the
case the AO should have made further inquiries before accepting the
statements made by the assessee in his return. The reason is obvious. Unlike
a Civil Court which is neutral in giving a decision on the basis of evidence
produced before it, an AO is not only an adjudicator but also an
investigator. He cannot remain passive in the face of a return which is
apparently in order but calls for further enquiry. It is the duty of the AO
to ascertain the truth of the facts stated in the return when the
circumstances of the case are such as to provoke inquiry. The meaning to be
given to the word ‘erroneous’ emerges out of this context. The word
erroneous would include cases where there has been failure to make the
necessary inquiries. It is incumbent on the AO to investigate the facts
stated in the return when the circumstances would make such an inquiry
prudent and the word ‘erroneous’ in S. 263 includes the failure to make such
an enquiry. The order becomes erroneous because such an enquiry has not been
made and not because there is anything wrong with the order if all the facts
stated therein are assumed to be correct.”

Accordingly, it held that the order passed by AO was
erroneous and prejudicial to the interest of the revenue and that the
conditions precedent for exercising jurisdiction u/s.263 did exist in the
facts of the present case.

As regards the contention of the assessee that since the
provision was made by the assessee for the purpose of payment of a sum by way
of contribution towards the approved gratuity fund, the amount of provision
should be allowed within the meaning of S. 40A(7)(b), the SB following the
ratio of the decision of Madras High Court in CIT v. Loyal Textile Ltd.,
(231 ITR 573) held that it would be incorrect to say that provision made by
the assessee in the accounts for the purposes of making contributions to
approved gratuity fund should be allowed u/s.40A(7)(b)(i) despite the fact
that there was no incremental liability towards the gratuity due for the
assessment year under consideration. It held that an expenditure which is
deductible for income-tax purposes is towards a liability actually existing at
the time, but setting apart money which might become expenditure on the
happening of an event is not expenditure allowable under the law. Since the
assessee did not place anything to demonstrate the nature of liability nor was
there any material to come to a conclusion that the liability was an
ascertained liability the contention of the assessee was rejected.

No contract between assessee transporter and agents/suppliers who enabled the assessee to get the truck hired, but with truck owners and drivers — Deduction of tax u/s.194C not applicable

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38 Assessee engaged in Transportation of
goods — No contract between assessee and the agents/suppliers who enabled the
assessee get the truck hired, but with the truck owners and drivers — Deduction
of tax u/s.194C — Held, Not applicable.


 

Facts :

The assessee company is engaged in the business of
transportation of goods for various clients all over India on a contract basis.
The AO, subsequent to survey action u/s.133A, concluded that the appellant had
not deducted taxes properly on payments made to truck owners or agents in
accordance with the provisions of S. 194C. The assessee had made total payments
of Rs.17,08,39,119 to various parties whose trucks were engaged. The AO
estimated an ad hoc 90% of the total payment as payment exceeding
Rs.20,000 and computed tax liability thereon @ 1% + 2% surcharge. Further, he
also levied interest u/s.201(1A). The CIT(A) deleted the demand raised by the
AO, stating that the provisions of S. 194C were not applicable.

 

On appeal to the Tribunal, it was held that :

1. From various correspondences and confirmations, it is
clear that the suppliers/agents were contacted for reference purposes only and
the negotiations for a particular destination were made with the truck
drivers/owners and not with the suppliers/agents.

2. Further, no contracts were entered into between the
assessee and agent/supplier, but were entered into with the truck
owners/drivers. In addition, no payments exceeding Rs.20,000 were made to
truck owners/drivers and where the payment so exceeded, tax has been
appropriately deducted at source and deposited into the treasury.

3. Further, Circular 715 issued by the CBDT was squarely
applicable to the facts and thus, it was clear that if the contracts are with
the truck owners/drivers and GR is separate, then the payment made for the
truck has to be a separate payment. Consequently, it cannot be said that there
was contract with the suppliers and not with the truck owners/drivers. Hence,
the CIT(A) was held right in stating that the provisions of S. 194C were not
applicable.

 


Case referred to :


City Transport Corporation v. ITO, [(2007) 13 SOT 479 (Mum.)]

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Concept of ‘Real Income’ — Assessee-company did not recognise interest income on debentures due to financial difficulties of issues — No interest income accrued to the assessee.

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37 (2008) 300 ITR (AT) 159 (Delhi)


Pranav Vikas (India) Ltd. v.
ACIT

ITA No. 3322/Del./2004 (A.Y. 2001-02)

A.Y. 2001-02. Dated : 27-7-2007

Concept of ‘Real Income’ — Investment in debentures —
Assessee-company decided not to recognise interest income on debentures due to
financial difficulties of M/s. PAL Enterprise (P) Ltd. — Held that, No interest
income accrued to the assessee.

 

Facts :


The assessee-company had received interest free advance of
Rs.20 lakhs from M/s. Premier Automobiles Ltd. (PAL) for development of certain
products and since the said project was being delayed considerably, M/s. PAL
required the assessee to invest the said amount in their other group company
i.e., M/s. PAL Enterprise (P) Ltd. (PALEL) by way of 13% unsecured
optionally convertible debentures. For the F.Y. 2000-01, the assessee company
did not recognise the revenue arising out of interest on debenture, because both
M/s. PAL as well as M/s. PALEL became sick and there was no possibility of
recovery of any interest on the debenture. The AO made an addition of
Rs.2,40,000 disregarding AS-9 issued by ICAI, which was mandatory u/s.211(3C) of
the Companies Act, 1956 for the assessee company and the minutes of the BOD
acknowledging the uncertainty of collection of the said interest and the same
was also confirmed by the CIT(A).

 

On appeal to the Tribunal, it was held that :

1. The request of M/s. PALEL to treat the investment made
by the assessee-company as interest-free was accepted by it insofar as the
year under consideration is concerned and the right to receive interest income
on the said debentures, thus, was waived by it with prospective effect. The
decision to take the ‘appropriate measures’ as discussed in the meeting of the
BOD is to be understood to be restricted to the recovery of principal amount
and the interest accrued thereon for the earlier years.

2. Further, even if a decision of waiver is taken after the
F.Y., but within a reasonable proximity such that it results into a formal
resolution, it cannot be said that the said decision is inapplicable to the
relevant F.Y.

3. In the instant case, as the right to receive interest
income on the said debentures was waived by the assessee company for the year
under consideration, there was no real income that can be bought to tax in the
hands of the assessee company on accrual basis. Hence, the impugned order of
the CIT(A) was set aside deleting the addition of Rs.2,40,000.

 


Cases referred to :



(i) CCE v. Dai Ichi Karkaria Ltd., [(1995) 156 CTR
172];

(ii) Ashokbhai Chimanbhai [(1956) 56 ITR 42];

(iii) CIT v. Shoorji Vallabhdas and Co., [(1962) 46
ITR 144];

(iv) State Bank of Travancore v. CIT, [(1986) 158
ITR 102] and others.

 

(2008) 300 ITR (AT) 193 (Mumbai)

ITO v. Bhoruka Roadlines Ltd.

A.Y. 2002–03. Dated : 27-6-2007

S. 194C, S. 201 and S. 201(1A)


levitra

Sum received under non-compete agreement — Capital receipt.

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New Page 2

36 (2008) 300 ITR (AT) 113 (Delhi) (SB)


Saurabh Srivastava v. DCIT

ITA No. 3014 (Delhi) 2004

A.Y. 1998-99. Dated : 7-12-2007

S. 17(2)(v); S. 17(3)(i) and S. 28(ii)

Sum received under non-compete agreement — Held, that it is
capital receipt.

 


Facts :

The assessee, a computer engineer associated with software
and information technology, was the promoter, founder and the managing director
of a software company holding 866,450 shares therein. The company was taken over
by a U.K. group whereby 76% of the subscribed equity capital was agreed to be
transferred in favour of the U.K. company. In addition to share transfer
agreement, the U.K. group also entered into a non-compete agreement with the
assessee, whereby the assessee received a sum of Rs.1,07,36,570 as non-compete
fee for F.Y. 1997-98. Thereafter, under a new service agreement, the assessee
was employed as the managing director of the U.K. company and received salary
accordingly. The assessee claimed exemption of non-compete fees as being a
capital receipt.

 

The AO taxed the non-compete fee as revenue receipt
u/s.28(ii). The CIT(A) upheld the order of AO.

 

On appeal to ITAT, the Hon’ble Tribunal held that the said
non-compete fee is a capital receipt, not liable to tax and referred to the
following :

1. The non-compete agreement was independent, distinct and
separate from the service agreement.

2. It was not dependent on his continuing in employment
with the company.

3. It did not arise from employer-employee relationship.

4. The fee was received for accepting restrictive
covenants, as the assessee was restrained from carrying out any software
development activity for any other person who directly or indirectly competed
with the U.K. group.

5. Thus, the same was not taxable u/s.17.1

6. The assessee was not carrying on any business and the
non-compete fee did not arise in the course of business and hence was not
taxable as business income.

7. The same was also not liable to tax as capital gains or
as income from other sources.

 


Cases referred to :




(i) CIT v. Saroj Kumar Poddar, [(2005) 279 ITR 573
(Cal.)];

(ii) CIT v. A. S. Wardekar, [(2006) 283 ITR 432
(Cal.)];

(iii) Swamy (R.K.) v. Asst. CIT, [(2004) 88 ITD 185
(Chennai)] and others.

 

1 Clause (iii) of Ss.(3) of S. 17 was inserted w.e.f. the
Finance Act, 2001 and not with retrospective effect and hence was not
applicable for A.Y. 1998-99. However, the said amount, if received subsequent
to the introduction of the said sub-section may stand on a different footing
as compared to that, in the case discussed.


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S. 234B read with S. 208 & S. 209 : Assessee having only salary income not liable to pay advance tax.

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35 (2008) 21 SOT 549 (Delhi)


Asst. Director of Income-tax, International Taxation
v. Western Geco International Ltd.

ITA Nos. 4847 to 4941 (Delhi) of 2007

A.Y. 2006-07. Dated : 21-2-2008

S. 234B read with S. 208 and S. 209 of the Income-tax Act,
1961 — There is no question of payment of advance tax by an employee whose total
income comprises of salary from which tax at source is to be deducted as per
statutory provisions and, hence, there is no question of applying provisions of
S. 234B to such a person who is not liable to pay advance tax.

 

Company ‘G’ was agent of many foreign nationals. It paid
salary to different non-resident assessees and filed returns on their behalf.
The assessees/employees only had salary income, which was subjected to deduction
of tax at source. They claimed deduction u/s.10(10CC) on account of tax paid by
the employer on their salary as per agreement. The Assessing Officer refused to
allow the said deduction and added tax paid on income through multiple grossing
instead of single grossing. This led to additional liability and demand
representing the difference between the assessed tax and tax deducted at source
leading to levy of interest u/s.234B for non-payment of advance tax. On appeal,
the CIT(A) held that the Assessing Officer was not right in levying interest
u/s.234B upon the assessees and, accordingly, deleted the same.

 

The Tribunal, following the decision in the case of
Motorola Inc. v. Dy. CIT, (2005) 95 ITD 269 (Delhi) (SB) held that the
assessees were not liable to pay advance tax, and consequently, were also not
liable to pay any interest u/s.234B. The Tribunal noted as under :

(1) Clause (d) of S. 209(1) clearly provides that while
computing advance tax, the amount of income-tax which is deductible or
collectible at source, will be deducted from the advance tax payable. In other
words, advance tax payable will be reduced by the amount of tax at source
‘deductible or collectible’.

(2) Therefore, when tax is deductible or collectible at
source from salary, which is the only source of income, no advance tax would
be payable by such an employee.

(3) In the instant case, there was no dispute that total
income of the assessee was subjected to deduction of tax at source u/s.192.
The assessee had no amount of advance tax payable if tax at source deductible
from the assessee’s salary was taken into account.

(4) Advance tax is payable in the financial year on the
current income. It cannot be paid after the close of the year. However, a
salaried person, whose salary is subject to deduction of tax at source, cannot
come to know of any short recovery or no recovery of tax at source till the
close of the financial year in which tax is deductible. If the employer has
not correctly deducted tax at source from the salary in one month u/s.192, the
deficiency can be made good U/ss.(3) of S. 192. Therefore, the employer can
always make good the deficiency in deduction of tax at source within the
financial year. If in one month there is short deduction of tax at source, the
employer can make higher deduction in other months in the financial year and
make good the short deduction.

(5) Therefore, a salaried employee would not know that
there had been short, wrong or no deduction of tax at source unless the
financial year is over. By the time he would come to know about short recovery
or no recovery of tax at source in his case, the time for payment of advance
tax would be over. In case of short recovery the employer is liable to pay
interest and penalty and not the employee. That is the scheme of the Act.

(6) Therefore, there is no question of payment of advance
tax by an employee whose total income comprises of salary from which tax at
source is to be deducted as per statutory provisions. Further, there is no
question of applying provisions of S. 234B to such a person who is not liable
to pay advance tax.



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S. 115JB : Capital receipts which do not constitute income, cannot be brought to tax by S. 115JB.

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34 (2008) 21 SOT 79 (Mum.)


ITO v. Su-raj Jewellery (India) Ltd.

ITA Nos. 8800 and 8801 (Mum.) of 2004

A.Ys. 1997-98 and 2001-02.

Dated : 10-10-2007

S. 115JB of the Income-tax Act, 1961 — Capital receipts which
do not constitute income under the Act cannot be brought to tax by employing
mechanism of S. 115JB.

 

For A.Y. 2001-02, the assessee credited certain capital
receipts to its profit & loss appropriation account and claimed that such
capital receipts did not form part of its book profits for the purpose of MAT
profit u/s.115J since they were not liable to tax. The Assessing Officer
rejected the claim of the assessee and included these sums in book profits for
the purpose of calculating MAT. The CIT(A), however, upheld the assessee’s
claim.

 

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

(1) The intention of bringing S. 115JB on the statute was
that companies should be made to pay taxes on the basis of the net profits
shown in their profit and loss account. For the purpose of computing the MAT
profit u/s.115JB, business profits as declared in the profit and loss account
are to be considered by the Assessing Officer after making certain
adjustments.

(2) In this case, the assessee was not liable to pay any
tax on the capital receipt i.e., gain arising on transfer of its assets
to holding company. Such profit was exempt from tax u/s.47(v).

(3) Although for computing the MAT profit u/s.115JB,
business profits shown in the profit and loss account are to be adopted, in
case the said profits include certain receipts which are not in the nature of
income, the same are to be excluded before making any calculations in that
regard.

(4) Further, S. 349 of the Companies Act clearly provides
that credit for the profit arising on sale of any immovable property or fixed
assets of capital nature should not be taken into profit and loss account and,
accordingly, the profits/ gains arising on transfer of assets to the holding
company were not includible in the profits of the assessee-company.

(5) The CIT(A) had rightly held that capital receipts which
do not constitute income under the Act cannot be brought under the tax net by
employing the mechanism of S. 115JB and the said Section has not intended to
bring all non-income items within the domain of the Act.


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S. 14A : Interest paid on funds invested in shares which yielded no dividend income cannot be disallowed.

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33 (2008) 21 SOT 42 (Mum.) (SMC)


Shree Shyamkamal Finance & Leasing Co. (P) Ltd. v.
ITO

ITA No. 15 (Mum.) of 2006

A.Y. 2002-03. Dated : 15-10-2007

S. 14A of the Income-tax Act, 1961 — Interest paid on funds
invested in shares which have yielded no dividend income cannot be disallowed
u/s.14A.

 

During the relevant assessment year, the assessee-company
which was engaged in the business of finance and investment in equity shares,
acquired unquoted equity shares of its subsidiary company out of unsecured loan
taken. The interest paid on the loan was claimed as deductible expenditure. The
Assessing Officer required the assessee to explain as to when there was no
income from investment and if any income accrued at all as dividend which was
exempt from tax u/s.10(33), then why should not the disallowance of interest on
loan be made u/s.14A. The assessee’s contention that since it had not received
any dividend and, further, since it had not claimed any exemption of income, S.
14A could not be applied was not accepted by the Assessing Officer and he
disallowed the interest expense u/s.14A. The CIT(A) upheld the disallowance.

 

The Tribunal, relying on the decision in the case of Jt.
CIT v. Holland Equipment Co. B. V., (2005) 3 SOT 810, held that no
disallowance could be made u/s.14A.

 

The Tribunal noted as under :

(1) By virtue of S. 10(33), as it stood at relevant time,
dividend income referred to in S. 115-O does not form part of the total
income. If the assessee earned income which is not includible in the total
income, then the expenditure could be disallowed u/s.14A, because it speaks of
expenditure incurred by the assessee in relation to income which does not form
part of the total income.

(2) A reading of S. 14A makes it clear that while computing
the income under Chapter IV, deduction would not be allowed with regard to
expenditure incurred by the assessee in relation to an income which does not
form part of the total income under the Act.

(3) In the instant case, there was no dividend income
earned by the assessee. Therefore, there was no income which could be termed
as ‘income which does not form part of the total income under the Act’.
Therefore, the provisions of S. 14A were not applicable.



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S. 28(iv) : Gift received by assessee in return for helping the donor on various occasions was not income

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32 (2007) 18 SOT 362 (Delhi)


ITO v. Sunil Mittal

ITA No. 4350 (Delhi) of 2004

A.Y. 2001-02. Dated : 28-9-2007

S. 28(iv) of the Income-tax Act, 1961 — Gift received in
return for help rendered to a person on various occasions is not income within
the meaning of S. 28(iv).

 

During the year, the assessee received a gift of Rs.6 lacs
from a person whom he had helped on various occasions. The donor confirmed the
gift and the reason for giving the gift. The Assessing Officer, however, held
that gift was received during the course of the assessee’s business and,
accordingly, treated the same as income u/s.28(iv). The CIT(A) treated the gift
as genuine and deleted the addition made by the Assessing Officer.

 

The Tribunal held that the gift received by the assessee was
not income u/s.28(iv). The Tribunal observed as under :

(1) It was an accepted fact that the addition was not made
u/s.68 as unexplained cash credit. It was also accepted that the identity and
creditworthiness of the party were established and the transaction was
genuine.

(2) As per S. 28(iv), the value of any benefit or
perquisite, whether convertible into money or not, arising from the business
or the exercise of a profession, shall be treated as income chargeable to
income-tax under the head ‘Profits and gains of business or profession’.

(3) The amount was received by cheque and was not in any
intangible form in the nature of benefit or perquisite. The amount was not
received in kind. Thus, it could not be treated as benefit or perquisite.

(4) The assessee helped the donor on various occasions.
Thus, it was not in the course of carrying on the assessee’s business that any
benefit or perquisite was received.

 


Therefore, the gift amount was outside the scope of income in
terms of S. 28(iv).

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S. 43(5) r.w. S. 28 and S. 73 — In case of a company, if part of its business consists of dealing in shares, then all types of transactions, whether delivery-based or non-delivery-based, would be treated as speculative transactions.

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41. (2009) 33 SOT 168 (Mum.)


Metropolitan Traders (P.) Ltd. v. ITO

A.Y. : 2003-04. Dated : 30-6-2009

S. 43(5) r.w. S. 28 and S. 73 — In case of a company, if
part of its business consists of dealing in shares, then all types of
transactions, whether delivery-based or non-delivery-based, would be treated
as speculative transactions.

The assessee-company was dealing in cement and was also
engaged in the business of dealing in shares. During the relevant year, the
assessee had earned profit from sale of shares held as investments and
accounted for the same in the profit and loss account as speculation profit
and it set off the unabsorbed speculation loss brought forward from earlier
years from the aforesaid speculation profit and claimed allowance for the
same. The Assessing Officer referred to the definition of ‘speculation
transaction’ as contained on S. 43(5) and disallowed the assessee’s claim. The
CIT(A) confirmed the action of the Assessing Officer. He held, inter alia,
that as per the CBDT Circular No. 204 dated 24-7-1976, the object of the
provisions was to curb the device being resorted to by some business people to
manipulate and reduce the taxable income by booking speculative losses.

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

(a) Prasad Agents (P.) Ltd. v. ITO, (2009) 180
Taxman 178 (Bom.)

(b) Samba Trading & Investment (P.) Ltd. v. ACIT,
(1996) 58 ITD 360 (Bom.)

(c) ACIT v. Sucham Finance & Investment (I) Ltd.,
(2007) 105 ITD 353 (Mum.)

(d) Starline Ispat & Alloys v. Dy. CIT, (2007) 14
SOT 140 (Mum.)

(e) Jt. CIT v. Kalindi Holdings (P.) Ltd., (2007)
106 TTJ (Pune) 292

The Tribunal noted as under :

(1) Explanation to S. 73 states that if certain
conditions are fulfilled, then the transactions of purchase and sale of
shares would be treated as speculation transactions.

(2) The Legislature itself has used the phrase ‘purchase
and sale of shares’ in the Explanation without any qualification in
contradistinction to the term used in S. 43(5) where it is specifically
stated that the transactions are settled otherwise than by way of actual
delivery. Thus, the term ‘purchase and sale’ has to be given full effect and
its meaning cannot be restricted only with reference to such transaction
where delivery of shares has not been taken.

(3) The Revenue’s contention that only delivery-based
transactions as contemplated u/s.43(5) were to be considered as speculative
transaction was devoid of any merit, because then there was no necessity of
incorporating the Explanation to S. 73. The Explanation to S. 73 enlarges
the ambit of speculative transaction in case of such company where part of
its business is to deal in shares.

Provisions of clause (d) of S. 43(5) inserted with effect from 1-4-2006 which deem derivative transactions as non-speculative are clarificatory in nature and have retrospective application.

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New Page 1

  1. (2009) 33 SOT 1 (Mum.)


ACIT v.
Shreegopal Purohit

A.Y. : 2004-05. Dated : 30-6-2009

S. 43(5) — Derivative transactions — Whether speculative :




(a) Provisions of clause (d) of S. 43(5) inserted with
effect from 1-4-2006 which deem derivative transactions as non-speculative
are clarificatory in nature and have retrospective application.


(b) Therefore, income from F & O transactions, being
non-speculative in nature, cannot be set off against speculation loss.



The assessee had earned income from Future and Option (F &
O) transactions. It suffered share trading speculation loss, jobbing loss and
bought forward speculation loss in the relevant assessment year. It had set
off the speculation loss of the current year as well as brought forward
speculation loss against the income from F & O transactions, treating the
latter as speculative income. The Assessing Officer disallowed the claim. The
CIT(A) set aside the order of the Assessing Officer and allowed the claim of
the assessee.

The Tribunal, following the decision in the case of P.
S. Kapur v. ACIT, (2009) 29 SOT 587 (JP), disallowed the assessee’s claim.
The Tribunal, noted as under :

(1) Derivative products are intangible and are not
capable of delivery or transfer. The transactions in derivatives are, thus,
not speculative as these lack the basic ingredients of speculative
transactions.

(2) Clause (d) of proviso of S. 43(5) inserted by the
Finance Act, 2005 deeming the transaction in derivatives as non-speculative
was clarificatory in nature, as it only clarified the existing position.
Therefore, it has retrospective application. Thus, transactions in
derivatives were held to be non-speculative and the income from such
transaction could not be set off against the speculation loss.

 



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S 45. Beneficial ownership of the balance FSI and right to use TDR was that of the members of the society. The members transferred the rights and received consideration for such transfer.

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Part B :
Unreported Decisions




ITO v. Ashok Hindu Co-op Hsg. Soc. Ltd.

ITAT ‘D’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

R. K. Panda (AM)

ITA No. 630/Mum./2006

A.Y. : 2002-03. Decided on : 29-9-2008

Counsel for revenue/assessee :

K. K. Mahajan/Satish Modi

10. S 45. Beneficial ownership of the balance FSI and right
to use TDR was that of the members of the society. The members transferred the
rights and received consideration for such transfer.

Per N. V. Vasudevan :

Facts :

The assessee-society was the owner of land together with two
buildings situated thereon. The society had sixteen members who held, on
ownership basis, sixteen flats in the said buildings. It was possible to
construct additional flats on the existing buildings by utilising balance FSI of
the property and FSI that may be obtained from other properties under the TDR
scheme. The total area of the property was 1063.60 sq. mts., it was possible to
construct 11,448 sq. feet on the said property by procuring TDR FSI.

The society, at its Special General Body Meeting held on 15th
July, 2001 passed a resolution to the effect that the benefit of constructing
additional flats by utilising any FSI available on the said property and by
bringing in TDR/FSI belongs to the members equally. Each member thus became
entitled to 715.50 sq. feet by way of TDR/FSI. The society agreed that each
member would be entitled at their own costs to procure proportionate TDR/FSI and
to use his/her respective entitlement for constructing a new flat for himself or
each member may grant development rights to a common developer.

The developer vide agreement dated 29-8-2001 agreed to pay to
the society an amount of Rs.1,76,000 as well as carry out works of repairs and
improvements to the existing buildings and compound of the society in
consideration of the society permitting the developer to construct additional
floors from the entitlement of each of the members of the society.

The developers agreed to pay each of the members a lump sum
of Rs.7,00,000 as compensation for inconveniences and hardships faced or to be
faced by the members during and on account of additional construction. Further,
in consideration of the member granting development rights in respect of his/her
entitlement to the developers, the developers agreed to pay the member a lump
sum monetary consideration of Rs.7,20,000.

In the course of assessment proceedings u/s.147, the assessee
took the stand that by virtue of a resolution passed by the Managing Committee
of the society, the society has specifically authorised each of the members to
sell and transfer their proportionate rights in the FSI and development of the
building with the consent of the society, which means the society has renounced
its rights in favour of individual members and on the basis of this resolution
and upon renouncement of the rights in favour of individual members, the members
were fully authorised and having accepted the renunciation, have a legal
sanction to sell their proportionate right to the builders for development. The
income received by individual members is their individual income and the same is
not liable to be taxed in the hands of the society. The members had filed their
return of income offering to tax receipts on sale of their rights. The AO held
that since the society is the owner of the plot of land, the FSI/TDR is
available to the society and individual members cannot transfer the FSI/TDR
directly to the developers. He taxed the entire compensation received (including
amounts received by the members) in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the
Commissioner of Income-tax (Appeals) who upon considering the definition of the
term ‘society’ as defined in the Maharashtra Co-operative Societies Act and also
the fact that the Bombay Stamp Act provides for payment of stamp duty by each
member at the time of purchase of individual flat and that such registered
agreements are deemed to be conveyance, held that capital gains have to be taxed
in the hands of the members of the society who have accounted for the same in
their individual returns of income. He allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal held that the order passed by the CIT(A) does
not call for interference. It held that the beneficial ownership was that of the
members of the society. It was the members who transferred the rights and
received consideration for such transfer. The Tribunal agreed with the view of
the CIT(A) holding the conclusion of the AO to the contrary to be not proper.

The appeal filed by the Revenue was dismissed.

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S. 143(3) read with S. 252 — De novo Assessment pursuant to order of the Tribunal — Whether AO justified in enhancing assessed income while doing de novo assessment — Held, No.

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Part B : UNREPORTED DECISIONS


ITO v. Jabbal Woodcrafts India

ITAT ‘D’ Bench, New Delhi

Before C. L. Sethi (JM) and

K. G. Bansal (AM)

ITA No. 803/D/2009

A.Y. : 1997-98. Decided on : 24-9-2010

Counsel for revenue/assessee : A. K. Monga/

Salil Kapoor and Sonal Kapoor

9. S. 143(3) read with S. 252 — De novo Assessment pursuant
to order of the Tribunal — Whether AO justified in enhancing assessed income
while doing de novo assessment — Held, No.

Per K. G. Bansal :

Facts :

The assessee had filed return of income declaring total
income of Rs.1,980. The income was assessed u/s.143(3) at Rs.10.19 lac. This
order was set aside by the Tribunal to the file of the AO for making fresh
assessment after taking into account evidences including the evidence in the
form of books of accounts. In pursuance thereof, the assessment was framed
determining the total income at Rs.40.64 lac. The major addition was on account
of share application money of Rs.38.84 lac. The CIT(A) on appeal deleted the
addition made on this count.

Before the Tribunal, the Revenue contended that when the
Tribunal restored the matter to the file of the AO with a view to take into
account all the evidences, the AO was well within his right to consider all
matters, including the issue regarding share application money, which was not
the subject-matter of appeal before the Tribunal.

Held :

The Tribunal noted that although it has all the powers to
decide an issue before it, in any manner, the accepted position of law is that
it has no power to enhance the assessment. In such a situation, the order of the
Tribunal restoring the matter to the file of the AO cannot be construed in a
manner as to grant power to the AO to include a totally new issue, which has the
effect of enhancing the income. Thus, what cannot be done directly, cannot be
done indirectly also. Accordingly, it dismissed the appeal filed by the Revenue.


 

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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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New Page 4

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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  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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