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Category: Tribunal News: Part A-Domestic Taxation

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

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 Part A: Reported Decisions

 

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

 

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

Facts :

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

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

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

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

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

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

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

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

 

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

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 Part A: Reported Decisions

 

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

 

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

Facts :

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

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

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

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

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

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

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

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

The Tribunal dismissed the appeal filed by the Revenue.

 

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

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 Part A: Reported Decisions

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

 

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

Facts :

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

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

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

Held :

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

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

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

 

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

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  1. 2009-TIOL-215-ITAT-MAD

Hyundai Motor India Ltd. vs. DCIT

A.Y. : 2003-2004.

Date of Order : 21.11.2008

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

 

Facts :

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


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


Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

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


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


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


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


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

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(2010) 126 ITD 215 (Chennai)

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

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

 

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

Facts :

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

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

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

Before the Tribunal, two
questions arose for consideration :

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

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

Held :

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

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

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

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

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

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

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

 

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

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(2010) TIOL 552 ITAT (Mad.)

D. Rathinam v. DCIT

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

 

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

Facts :

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

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

Aggrieved the assessee
preferred an appeal to the Tribunal.

Held :

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

The appeal filed by the
assessee was allowed.

 

 

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

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 (2010) TIOL 545 ITAT (Mum.)

Utility Powertech Ltd. v.
ACIT

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

 

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

Facts :

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

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

Aggrieved, the Revenue
preferred an appeal to the Tribunal.

Held :

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

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

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 (2010) TIOL 518 ITAT (Bang.)

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

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

Dated : 20-5-2010

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

Facts :

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

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

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

Aggrieved, the assessee
preferred an appeal to the Tribunal.

Held :

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

 

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

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(2010) 130 TTJ 388 (Delhi)

Oriental Insurance Co. Ltd.
v. ACIT

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

Dated : 27-2-2009

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

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

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

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

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

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

 

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

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14 (2007) 110 TTJ 445 (Del.)


ITO v. Mokul Finance (P.) Ltd.

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

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

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

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

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

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

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

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

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

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


The Tribunal noted as under :

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

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

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

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







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

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13 (2007) 17 SOT 574


Jain Trading Co. v. ITO

ITA No.5935 (Mum.) of 2002.

A.Y. 1999-2000. Dated : 30-10-2006

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

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

The Tribunal deleted the addition and noted as under :

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

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

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

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






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

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12 (2007) 17 SOT 293 (Mum.)


Premsudha Exports (P.) Ltd. v. ACIT

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

A.Y. 2003-04. Dated : 31-5-2007

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

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

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

The Tribunal noted as under :

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

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

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

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



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

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

Bhagwad Swarup Shri Shri Devraha Baba Memorial

Shri Hari Parmarth Dham Trust v. CIT

ITA Nos. 363 (Delhi) of 2003

Dated : 31-8-2007

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

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

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

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

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

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

The Special Bench noted as under :

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

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

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

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





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

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10 (2007) 17 SOT 173 (Delhi)


GE Capital Transportation Financial Services Ltd. v.
ACIT

ITA No.2362 (Del.) of 2002

A.Y. 1998-99. Dated : 20-7-2007

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

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

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

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

The Tribunal noted as under :

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

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

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

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

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

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



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

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9 (2007) 17 SOT 90 (Del.)


Simbhaoli Sugar Mills Ltd. v. ACIT

ITA Nos. 2856 and 2857 (Delhi) of 2005

A.Ys. 2000-01 and 2001-02

Dated : 11-5-2007

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

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

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

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

The Tribunal referred to the following cases :

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

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

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

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

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

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

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



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

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8 (2007) 17 SOT 54 (Mum.)


Mercator Lines Ltd. v. Dy. CIT

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

and 53 (Mum.) of 2004

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

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

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

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

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

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

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





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

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7 (2007) 109 TTJ (Asr.) 850


Dream Land Educational Trust. v. CIT

ITA No. 481 (Asr.) 2005

Dated : 5-4-2007

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

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

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

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

(c) The takeover action was unilateral.

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

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


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

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

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

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


The Tribunal relied on the decisions in the following cases :

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

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

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

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

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






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

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6 (2007) 109 TTJ (Jp.) 794


Lustre Tiles Ltd. v. Addl. CIT

ITA No. 489 (Jp.) 2003

A.Y. 1995-96. Dated : 28-7-2006

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

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

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

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

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

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

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


The Tribunal relied on the following further decisions :

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

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

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






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

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5 (2007) 109 TTJ (Bang.) 631


Infosys Technologies Ltd. v.
Jt. CIT

ITA No. 1022 (Bang.) 2003

A.Y. 1998-99. Dated : 7-4-2006




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


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


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



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

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

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

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


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

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

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

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

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

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

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


The Tribunal noted as under :

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

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

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

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


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

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

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

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

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

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

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

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


Pradeep Kumar Dhir v. ACIT

ITA No. 798 (Chd.) 2006

A.Y. 2003-04. Dated : 27-4-2007

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

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

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

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

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


The Third Member noted as under :

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

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

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

Both the abovementioned conditions are to be satisfied.

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

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



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

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  1. (2009) 32 SOT 497 (Cochin)


Harrisons Malayalam Ltd. v.
ACIT

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



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


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



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

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

In the matter of S. 115JB :

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

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

In the matter of S. 50B :

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

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

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

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

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

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

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New Page 1

21 (2008) 118 TTJ 263


Sunita Finlease Ltd. v. Dy. CIT

ITA No. 203 (Nagpur) of 2007

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

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

 

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

 

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

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

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

 


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

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New Page 1

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


Geometric Software Solution Co. Ltd. v. ACIT

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

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

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

The Tribunal held as under :

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

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

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

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

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


Duchem Laboratories Ltd. v. ACIT

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

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


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

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

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

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

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

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




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

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New Page 1

  1. (2009) 32 SOT 101 (Delhi)


Goetze (India) Ltd. v. CIT

A.Y. : 2000-01. Dated : 20-5-2009

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

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

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

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

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

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

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

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

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

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New Page 1

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


ACIT v. MSS India (P.) Ltd.

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

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

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

The Tribunal held as under :

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

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

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

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

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S. 37(1) — For the expenditure to be allowable u/s.37(1), it may be incurred ‘voluntarily’ and without any ‘necessity’ and if it is incurred for promoting business and to earn profits, assessee can claim deduction u/s.37(1), even though there was no compe

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New Page 1

  1. (2009) 32 SOT 9 (Pune)


Dy. CIT v. Kolhapur Zilla Sahakari Dudh
Utpadak Sangh Ltd.

A.Ys. : 1993-94, 1995-96 to 1999-2000 and 2001-02 Dated :
28-3-2008

S. 37(1) — For the expenditure to be allowable u/s.37(1),
it may be incurred ‘voluntarily’ and without any ‘necessity’ and if it is
incurred for promoting business and to earn profits, assessee can claim
deduction u/s.37(1), even though there was no compelling necessity to incur
such expenditure.

For the relevant assessment years, the Assessing Officer
disallowed animal husbandry expenditure incurred by the assessee on the
following grounds :

(a) Assessee did not own any cattle.

(b) It did not procure milk directly from cattle owners.

(c) It collected milk from primary societies which, in
turn, collected milk from the cattle owners.

(d) Providing services for animal husbandry was not a
business activity of the assessee.

(e) The animal husbandry expenditure benefited the cattle
owners and not the business of the assessee, particularly because the
assessee-society was not buying milk directly from the cattle owners.

The CIT(A) deleted the disallowance made by the Assessing
Officer on the ground that the expenditure incurred by the assessee resulted
in increasing the quality and productivity of milk which the assessee was
purchasing as part of its business.

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

(1) Although one might argue that the assessee could have
carried on its business without incurring the above expenditure and that it
was not ‘necessary’ for the assessee to incur that expenditure in order to
carry on its business of purchase and sale of milk, such an argument was not
relevant for deciding the question whether an expenditure was allowable
u/s.37(1).

(2) The expression ‘wholly and exclusively’ used in S.
37(1) does not mean ‘necessarily’.

(3) An expenditure may be incurred ‘voluntarily’ and
without any ‘necessity’ and if it is incurred for promoting the business and
to earn profits, the assessee can claim deduction u/s.37(1) even though
there was no compelling necessity to incur such expenditure. The fact that
somebody other than the assessee is also benefited by the expenditure should
not come in the way of an expenditure being allowed by way of deduction
u/s.37(1).

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S. 271(1)(c) — AO must have definite evidence to refuse assessee’s claim or explanation — Mere non-acceptance of explanation cannot indicate concealment of income.

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New Page 1

  1. (2009) 31 SOT 474 (Mum.)

Twin Star Jupiter Co-operative Hsg.

Society Ltd. v. ITO

A.Ys. : 1998-99, 1999-2000 and 2000-01

Dated : 15-4-2009

S. 271(1)(c) — AO must have definite evidence to refuse
assessee’s claim or explanation — Mere non-acceptance of explanation cannot
indicate concealment of income.

For the relevant assessment year, the Assessing Officer
made certain additions to the total income of assessee and, thereafter, levied
penalty u/s. 271(1)(c). The CIT(A) deleted the penalty partly.

The Tribunal deleted the entire penalty. The Tribunal noted
as follows :

(1) The proceedings u/s.271(1)(c) can be initiated only
if the Assessing Officer or the first appellate authority is satisfied, in
the course of any proceeding under the Act, as per clause (c) that any
person has concealed the particulars of his income or has furnished
inaccurate particulars of such income.

(2) There cannot be a straitjacket formula for detection
of these defaults of concealments or of furnishing inaccurate particulars of
income and indeed concealment of particulars of income and furnishing of
inaccurate particulars of income may at times overlap.

(3) The Assessing Officer cannot invoke provisions of S.
271(1)(c) on the basis of routine and general presumptions. Whether it be a
case of only concealment or of only inaccuracy or both, the particulars of
income so vitiated would be specific and definite and be known in the
assessment proceedings by the Assessing Officer who, on being satisfied
about each concealment or inaccuracy of particulars of income, would be in a
position to initiate the penalty proceedings on one or both of the grounds
of defaults as may have been specifically and directly detected.

(4) Part A of the Explanation 1 to S. 271(1)(c) states
that “if the assessee fails to offer an explanation or offers an explanation
which is found by the AO or the CIT(A) or the CIT to be false”. This
Explanation can, therefore, be applied only where the assessee has either
not offered any explanation or where he has offered any explanation, the
same is found to be false by the AO, etc. Mere non-acceptance of explanation
offered by the assessee cannot form a basis for the satisfaction of the AO
to the effect that the assessee has concealed particulars of his income. The
AO must have some definite evidence to refuse the assessee’s claim or
explanation.

(5) When the assessee is able to offer a reasonable
explanation based on some evidence, the AO cannot invoke Part B of the
Explanation 1 unless he has given a finding based on some contradictory
evidence to disapprove that explanation offered by the assessee which the
assessee is not able to substantiate and fails to prove that such
explanation is bona fide and that all the facts relating to the same
and material to the computation of his total income have been disclosed by
him.

(6) In this case, the assessee had disclosed all relevant
material for the purpose of computation of total income. It was also found
that the assessee had furnished an explanation in this regard, which was not
found false by the Assessing Officer. When the assessee had filed all the
particulars of income, the correct assessment and calculation of total
income had to be done by the Assessing Officer. If in such process the
Assessing Officer found different total income to be assessed than the
income offered by the assessee, in such case it was not automatically a case
where penalty u/s.271(1)(c) was leviable.

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If assessee offers income or furnishes accurate particulars of income before the AO takes up the issue and comes across information, then there was no concealment of income or furnishing of inaccurate particulars of income.

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New Page 1

  1. (2009) 31 SOT 97 (Delhi) (TM)


Addl. CIT v. Prem Chand Garg

A.Ys. : 2003-04 and 2004-05

Dated : 11-5-2009

S. 271(1)(c) r.w. S. 68 :



(a) If assessee offers income or furnishes accurate
particulars of income before the AO takes up the issue and comes across
information, then there was no concealment of income or furnishing of
inaccurate particulars of income.


(b) Mere omission of surrendered amount from the
return of income is neither concealment of income nor furnishing of
inaccurate particulars of income unless and until there is some evidence to
show or some circumstances are found from which it can be gathered that
omission was attributable to an intention or a desire on part of assessee to
hide or conceal income so as to avoid imposition of tax thereon.



During the previous years relevant to the assessment years
in question, the assessee had received two gifts. Consequent upon the search,
a notice u/s.153A was issued to the assessee. In response to the said notice,
the assessee replied that the original returns filed be taken as returns under
the aforesaid provision. Thereafter, the assessee offered/surrendered the
amount of gifts within four days of the receipt of the notice u/s.153A for
taxation by way of a letter. The Assessing Officer held that the assessee had
furnished inaccurate particulars of income and concealed the particulars of
income in both the years and he levied penalty u/s.271(1)(c). The CIT(A)
deleted the penalty on the following grounds :



  •  No evidence was found in the course of search
    indicating that these gifts were not genuine.


  •  The only question asked by the Assessing Officer in the
    course of assessment proceedings was whether the assessee had taken or given
    any loan or gift in the period under consideration and to give details
    thereof.


  •  The assessee furnished the details of the gifts from
    NRIs, furnished copies of gift deeds and also mentioned that the gifts were
    surrendered for taxation to buy peace and to avoid dispute in the matter;
    that the surrender was made subject to the condition that penalty
    proceedings would not be initiated.


  •  The course of events narrated above showed that the AO
    did not have any information to hold that the gifts were not genuine or that
    they formed part of the total income of the assessee.


Since there was a difference of opinion between the
Members, the matter was referred to the Third Member u/s.255(4).

The Third Member upheld the order of the CIT(A) deleting
the penalty. The Third Member noted as under :

(1) It was true that the letter of surrender did not
obliterate the original return and suppression of income therein, but when
the surrender was made before detection or without any material on record
suggesting that income was withheld, it would be a case of voluntary offer
and, in that case, there would not be concealment of income by the assessee.

(2) The surrender of the amount after receipt of the
questionnaire could not lead to an inference that it was not voluntary in
absence of any material on record suggesting it to be bogus or untrue.

(3) The question, whether there is concealment of income
or whether inaccurate particulars thereof have been furnished, is
essentially a question of fact. To find out or to decide the same, all the
attending circumstances have to be taken into account. The question is at
what point of time this material fact is to be found out. Generally, it is
with reference to the return of income and at that time it is to be seen
whether there was concealment of income or furnishing of inaccurate
particulars thereof in the return of income chargeable to tax. By the time
the Assessing Officer takes up the issue and comes across the information in
his possession, if the assessee makes up the deficiency and offers the
income or furnishes accurate particulars thereof, he cannot be held guilty
of concealment of income or furnishing of inaccurate particular of his
income. Any action rectified relates back to the original act and to the
date and time of filing the return. When the Assessing Officer started
scrutiny of the return and initiated assessment proceedings there was
nothing concealed and the inaccuracy, if any, disappeared. Therefore, the
assessee could not be held guilty of concealment.

(4) The correct and accurate disclosure may be made by
filing the revised return or by furnishing the particulars of such income
before the detection by the Assessing Officer. The mere fact that the
assessee had not revised his returns or that the offer was made by letter to
avoid harassment to the assessee and the donors who were non-resident
persons, it could not convert an offer to tax as concealment of income.
Therefore, the assessee had not furnished inaccurate particulars of the
income in the returns before detection by the Revenue.

(5) Apart from the surrender, there was nothing more on
record to hold the assessee guilty of offering the said amount on detection
of the concealment. Even in the assessment order there was nothing of that
sort. On a perusal of the questionnaire, it was evident that it was general
in nature, without specifying the name of the donors or any other such
details. On the basis of the questionnaire, it could not be presumed that
the AO had information to call for specific information. There was neither
any detection nor any information in the possession of the Revenue nor in
the manner of its communication to the assessee, which might lead to a
detection of concealment.

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

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

 

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S. 2(22)(e) — Deemed dividend can be assessed only in the hands of a person who is a registered shareholder of lender company.

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New Page 1

  1. (2009) 31 SOT 76 (Delhi)


Dy. CIT v. National Travel Services

A.Ys. : 2003-04 and 2004-05

Dated : 31-3-2009

S. 2(22)(e) — Deemed dividend can be assessed only in the
hands of a person who is a registered shareholder of lender company.

For the relevant assessment year, the Assessing Officer
invoked the provisions of S. 2(22)(e) in respect of a loan taken by the
assessee-firm from a company in which the assessee-firm was a shareholder
through its partners. The AO treated the loan of Rs.21.95 lacs given by the
company to the assessee-firm as deemed dividend. The CIT(A) held that since
the assessee-firm was not a registered shareholder, the loan could not be
treated as deemed dividend in the hands of the assessee-firm.

The Tribunal, relying on the Special Bench decision of the
Mumbai Tribunal in the case of ACIT v. Bhaumik Colour (P.) Ltd., (2009)
27 SOT 270 upheld the CIT(A)’s order. The Tribunal noted as under :

(1) The assessee-firm on whose behalf the partners had
become the shareholders in the company which had given the loan to it could
not be said to be a registered shareholder for the purpose of S. 2(22)(e).

(2) Since the assessee-firm was not a registered
shareholder of the company, the condition necessary to invoke S. 2(22)(e)
was not satisfied.

(3) The deemed dividend can be assessed only in the hands
of a person who is a registered shareholder of the lender company and not in
the hands of a person other than a registered shareholder.

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S. 50 r.w. S. 54EC — Since depreciation was never claimed by assessee on the building sold, S. 50 was not applicable.

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29. (2009) 31 SOT 38 (Mum.)


Dr. (Mrs.) Sudha S. Trivedi v. ITO

A.Y. : 2002-03. Dated : 20-2-2009

S. 50 r.w. S. 54EC — Since depreciation was never claimed
by assessee on the building sold, S. 50 was not applicable.

For the relevant assessment year, the assessee claimed
exemption u/s.54EC in respect of capital gains arising to her from sale of her
business premises on which she had not claimed any depreciation in the past.
The Assessing Officer held that even if no depreciation was allowed to the
assessee in the earlier years, the mandate of Explanation 5 to S. 32(1) would
be attracted since the building sold by the assessee was falling within the
‘block of asset’ and the resultant capital gain would be covered u/s.50 being
taxable as short-term capital gain. The Assessing Officer, therefore, denied
the exemption u/s.54EC and computed the short-term capital gain. The CIT(A)
upheld the order of the Assessee Officer.

The Tribunal, relying on the decision in the case of CIT
v. Ace Builders (P.) Ltd., (2006) 281 ITR 210/ (2005) 144 Taxman 855, held
that the assessee was eligible for exemption u/s.54EC. The Tribunal noted as
under :

2. In order to be covered within the provisions of S. 50,
the following two conditions should be simultaneously fulfilled :

à the capital asset transferred should be an asset
forming part of the ‘block of assets’; and

à the capital asset is such in respect of which
depreciation has been allowed under this Act.

3. Explanation 5 to S. 32(1) was inserted by the Finance
Act 2001 w.e.f. 1-4-2002. It is, therefore, clear that from the A.Y. 2002-03
the deduction in respect of depreciation shall be granted automatically,
notwithstanding the fact that the assessee has not claimed this deduction.

4. Therefore, from the A.Y. 2002-03, Explanation 5 to S.
32(1) would apply only if the assessee has not claimed depreciation. If,
however, the asset has been sold in the previous year, relevant to the A.Y.
2003-03 and there is no other asset in that block, then there cannot be any
question of allowing depreciation on the asset sold and, as such, the
application of Explanation 5 would be ruled out.

5. Since the assessee had not claimed depreciation on the
building in any of the earlier years, the denial of exemption u/s.54EC on the
ground that Explanation 5 to S. 32(1) would apply was out of place. Further,
since the second condition of S. 50, being ‘in respect of which depreciation
has been allowed under this Act’, was wanting in the instant case, the
provisions of S. 50 treating the capital gains arising from the transfer of
such capital asset as short-term capital gain would not be applicable.



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S. 28(i) read with S. 56 of the Income-tax Act — Whether the amount received by licensed bookmaker from hedge bets placed with another bookmaker was integral part of his business activity as a bookmaker and was not liable to be taxed u/s.115BB — Held, Yes

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New Page 1

23 (2008) 114 ITD 638 (Pune)


ACIT v. Raghunath B. Taware

A.Ys. : 1991-92, 1992-93, 1994-95

Dated : 31-5-2007

S. 28(i) read with S. 56 of the Income-tax Act — Assessee was
a licensed bookmaker who ran a business of booking races — Besides, he also used
to bet on horse races to minimise his probable losses —Whether the amount so
received by the assessee from hedge bets placed with another bookmaker had close
nexus or link with total amount received or paid for bets accepted by him on a
particular horse, and hence, same was integral part of his business activity as
a bookmaker and was not liable to be taxed u/s.115BB — Held, Yes.

 

Facts :

The assessee was a licensed bookmaker operating at the Pune
race course, under the terms and conditions for a bookmaker’s licence formulated
by Royal Western India Turf Club (RWITC). The assessee used to accept bets for
‘win’ or ‘place’ from the punters on the horse races as per the guidelines
formulated by RWITC. To minimise losses, a bookmaker, under the club rules, is
permitted to make a hedge bet with another bookmaker, subject to the condition
that total amount of such hedge bet laid over by one bookmaker should not exceed
the total amount of the bets accepted by him on a particular horse, at the time
of such lay-over. In case, the amount of laid-over bet exceeds the total amount
of bets accepted, then the last laid-over bet will be treated as independent
bet. Winnings from such hedge bets was called ‘Tote Winnings’.

 

During the relevant assessment years, the assessee had earned
income from tote winnings. The AO was of the view that such income was taxable
under the head ‘Income from Other Sources’ u/s.56(2)(ib), and not as business
income.

 

On appeal, the CIT(A) held that hedge betting was a part of
the business transactions in respect of business of bookmaking, inasmuch as
hedging was permitted, and such tote winnings was to be brought to tax as
business income.

 

On Revenue’s appeal, the Tribunal held as under :

1. The bookmaker is allowed to make hedge bet with another
bookmaker to the extent of total amount of bets collected by him on horsewise
basis and not with reference to aggregate total amount of bets collected by him
on all the horses. Thus, hedge betting by one bookmaker with another in respect
of the bets already accepted by him on a particular horse is an integral part of
the activity of a bookmaker accepting bets on horse races from others. The
position of the assessee-bookmaker is distinct and different from that of a
punter, and he cannot be deemed to have stepped in the shoes of the punter while
making a hedge bet.

2. Taking reference to CBDT Circular No. 461, dated 9-7-1986,
the Tribunal observed that where there is an integral relation of any payment as
to the very source of activity, the same should be treated as a part of the same
primary transaction or activity, and cannot be viewed independently so as to
divorce the same from its source. Thus, as is in the case of gross winnings from
lotteries and certain percentage deducted therefrom by the Government or lottery
agencies conducting the lottery, hedge betting by a bookmaker will also be
considered to be an integral part of the same activity.

3. The receipts from hedge betting cannot be considered in
isolation from the receipts and payments made by the assessee as a bookmaker on
bets accepted by him, so as to permit the revenue authority to tax the same
independently, at the rates specified u/s.115BB. Therefore, the same were
chargeable to tax as business income, and not income from other sources.

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S. 43B — Business disallowance — Certain deductions to be made only on actual payment — A service provider acts as an agent of the Government and is not entitled to claim deduction on account of service tax — S. 43B not applicable to service tax

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22 114 ITD 573 (Mad.)


ACIT v. Real Image Media Technologies (P.) Ltd.

A.Y. : 2002-03. Dated : 31-12-2007

 

S. 43B of Income-tax Act — Business disallowance — Certain
deductions to be made only on actual payment — A service provider acts as an
agent of the Government and is not entitled to claim deduction on account of
service tax. — For applicability of S. 43B, claim should be first preferred by
assessee, and the same should be disallowed for reason of failure to make
payment — in the instant case, assessee had not even preferred a claim towards
service tax — Whether on this account alone, addition u/s.43B could not have
been made, and CIT(A) had correctly deleted addition so made — Held, Yes.

 

Facts :

The assessee company was engaged in the business of running a
recording and dubbing studio, production of advertisement films, software
development, etc. During the assessment proceedings, the AO noticed that service
tax was not being routed through the Profit & Loss Account, and the assessee had
shown a liability towards service tax of Rs. 5,72,374 as on 31-3-2002 in its
balance sheet. The AO made additions to the assessee’s income contending that
the service tax had been collected, but had not been paid to the Government.

 

In its appeal before the CIT, the assessee made two-fold
submission, stating that for the applicability of S. 43B, claim should be
preferred by the assessee, and disallowance could be made only on account of
failure to make actual payment, and secondly with reference to Rule 6 of Service
Tax Rules, service tax is required to be paid only on the value of taxable
service received in a month or quarter and not on the gross amount charged or
billed. The CIT(A) having found force in the assessee’s submissions deleted the
addition.

 

On Revenue’s appeal before the Tribunal, it was held as under
:

1. S. 43B starts with the non-obstante clause and specifies
that the deduction ‘otherwise allowable’ under the Act shall not be allowed
unless it is actually paid. The rigour of S. 43B might be applicable to excise
or sales tax, but the same could not be applicable in the case of service tax
due to two reasons :

(i) The assessee merely acts as an agent of the
Government in collection of service tax, and is not entitled to claim
deduction on account of service tax.

(ii) S. 43B(c) uses the expression ‘any sum payable’. For
making any disallowance, it has to be established that such sum is payable.
A reading of Rule 6 of the Service Tax Rules states that the liability to
pay such service tax arises on receipt of payments towards the value of
taxable service. If there is no liability to make the payment to the
Government, because of non-receipt of payments from the receiver of
services, then it cannot be said that such service tax had become payable in
terms of S. 43B(a).

2. S. 145A includes sales tax, excise duty, etc. in the
turnover of purchases and sales of goods, but it does not apply to services
and hence service tax cannot be included in the turnover.

3. In the given case, the assessee had not preferred a
claim for the amount of service tax. Further, there was no liability on the
assessee to make payments to the credit of Central Government because of
non-receipt of payments from the receiver of services. Therefore, the rigour
of S. 43B is not attracted and the CIT(A) was right in deleting the additions
made on account of disallowance u/s.43B.

 

Case referred to :

(i) Srikaollu Subbarao & Co. v. Union of India,
(1988) 173 ITR 708 (AP)

 


Case distinguished :



(i) Chowranghee Sales Bureau Ltd. v. CIT, (1977) 110
ITR 385 (Cal.)

 

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S. 45 — Conversion of shares into stock-in-trade valid u/s.45(2) even if assessee not carrying on the business of shares and securities before such conversion

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20 (2008) 23 SOT 512 (Mum.)


ACIT v. Jehangir T. Nagree

ITA No. 7503 (Mum.) of 2004 and

3927 (Mum.) of 2005

A.Y. : 2001-02. Dated : 10-4-2008

S. 45 of the Income-tax Act, 1961 — Conversion of shares into
stock-in-trade would be valid u/s.45(2) even if the assessee was not carrying on
the business of shares and securities before such conversion.

 

On 1-4-2000 the assessee, a manufacturer and seller of
furniture, having short-term capital loss in earlier years, converted his
investment in shares brought forward from A.Y. 2000-01 into stock-in-trade.

 

Besides trading in shares and securities which were
converted, the assessee had made further purchases of shares and securities and
during the accounting year he had engaged himself in speculation of shares of
very high volume. The assessee incurred loss in share transaction activity and
also in speculation of shares and claimed deduction of the same as business
loss. The Assessing Officer rejected the assessee’s claim, holding that the
provision of S. 45(2) contained the words ‘of business carried by him’ and since
as on date of conversion the assessee had no business of share transaction, the
said conversion was not valid. The Assessing Officer, accordingly, held that by
this arrangement, the assessee had gained immensely by setting off income in
various other heads against the business loss, which benefit would not have been
available had this loss been treated as a short-term capital loss and disallowed
the assessee’s claim.

 

The CIT(A) held that the conversion made by the assessee was
valid and not a device, especially in view of the fact that the assessee had
done large volume of transactions during the year in speculation account and had
also made fresh purchases of shares for share business.

 

The Tribunal held that the assessee was entitled to benefit
u/s.45(2). The Tribunal noted as under :

(1) Having seen the volume of transactions undertaken by
the assessee in the impugned assessment year, it was very difficult to hold
that the assessee still held the investment in shares and securities. It was
the sweet will of the assessee to decide as to when he intended to convert his
investment in stock-in-trade.

(2) In S. 45(2), the words ‘business carried on by him’ do
not mean that before conversion of investment or capital assets into
stock-in-trade the assessee must carry on business of share transaction or
such a business must be in existence.

(3) The restrictive meaning as suggested by the Revenue
should not be given to the words ‘business carried on by him’ in the light of
the use of the words in other Sections like S. 28(i).

(4) The assessee could undertake multiple business
activities under his proprietary concern. Besides the manufacturing and sale
of furniture, the assessee could also deal in trading in shares in the name of
same proprietary concern keeping the stock-in-trade of shares separate.

(5) Thus, conversion of investment in shares and securities
into stock-in-trade would be valid u/s.45(2) even if business of trading of
shares is not carried on by the assessee before such conversion.

 


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S. 80IB — Production of masala varieties, is manufacture of goods

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13 ACIT v. Empire Spices & Foods Mumbai Ltd.


ITAT ‘G’ Bench, Mumbai

Before Sunil Kumar Yadav (JM) and

Rajendra Singh (AM)

ITA No. 4477/M/06

A.Y. : 2003-04. Decided on : 18-9-2008

Counsel for revenue/assessee : D. Songate/

B. V. Jhaveri

S. 80IB of the Income-tax Act, 1961 (‘the Act’) — Whether
business of the assessee, which is producing masala of different varieties, is
manufacture of goods or is only processing of goods — Held, it is manufacture of
goods.

Per Rajendra Singh :

Facts :

The assessee, engaged in business of masala, claimed for the
relevant assessment year, deduction u/s.80IB of the Act by treating the business
as industrial undertaking for manufacture and sale of masala. The Assessing
Officer (AO) noted that the assessee was only purchasing raw material in the
form of different spices which were grinded and mixed and filled in pouches and
then sold. The AO placed reliance on the judgments of the Supreme Court
(sic-Calcutta High Court) in the case of Apeejay Plantation and also in the case
of Indian Hotels and on the judgment of Madras High Court in the case of Sacs
Eagles Chicory and held that the activity of the assessee amounts to processing
and not manufacture and accordingly he disallowed the claim of deduction
u/s.80IB. Before the CIT(A) it was contended by the assessee that it was
manufacturing various types of masala, such as chivda masala, pickle masala,
etc. which involved different formulas and process; the raw material i.e., raw
spices underwent changes and the final product was masala which was sold in the
market as a distinct and different commercial product; each type of masala was
different in taste and uses; the manufacturing process involved various
activities such as cleaning of various raw spices, roasting, frying, polishing,
mixing, boiling, pulping, grinding, etc. which are done with the help of
machinery. Reliance was placed by the assessee on the judgment of the Supreme
Court in the case of Aspinwall & Co. Reference was also made to the decision of
the Mumbai Tribunal in the cases of Pankaj Jain and Comet Foods & Metals Ltd.
The CIT(A) being satisfied with the explanation, held that the end product in
this case was completely different from the raw material and therefore the
activity carried on by the assessee was manufacture and not processing. He also
observed that the Department had allowed the
claim of manufacture in earlier years. Accordingly, he allowed the claim for
deduction u/s.80IB treating the business as manufacture of masala. Aggrieved,
the Revenue preferred an appeal to the Tribunal.

Held :

It is settled legal position that producing articles whether
by any labour or by machine will amount to manufacture if the final product is
different from the input and is known as a commercially different product in the
business parlance. The assessee is producing different variety of masala, such
as chiwda masala, pickle masala, etc. which are commercially known products in
the market and these products are different from the different spices used in
the process. In case of the assessee, different raw spices which are inputs are
combined in different proportions and undergo different processes to produce the
final product which is masala and which is different from the input raw
material. The assessee is producing different types of masala using different
formula with the help of input spices and these products are commercially known
products, such as garam masala, mutton masala, pav bhaji masala and have
different uses. The Tribunal noted that the judgment of the Supreme Court in
Aspinwall & Co. supports the case of the assessee and that the decision of the
Tribunal in the case of Tirupathi Microtech Pvt. Ltd. is in favour of the
assessee. The judgments relied upon by the AO viz. Appejay Plantation, Indian
Hotels and Sacs Eagles Chicory were found to be distinguishable. Accordingly,
the Tribunal held that the assessee is a manufacturing concern entitled to
deduction u/s.80IB.

Cases referred to :



1. Indian Hotels Co. Ltd. & Ors. v. Income Tax Officer &
Ors., (245 ITR 538) (SC)

2. Aspinwall and Co. Ltd. v. Commissioner of Income-tax,
(251 ITR 323) (SC)

3. Apeejay Plantation (206 ITR 367) (Cal.)

4. Commissioner of Income-tax v. Sacs Eagles Chicory, (241
ITR 319) (Mad.)

5. Comet Foods & Metals Ltd. v. ITO, (95 TTJ 440) (Mum.)

6. Pankaj Jain v. ITO, (97 TTJ 28) (Asr.)

7. ACIT v. Tirupathi Microtech Pvt. Ltd., (111 TTJ 149) (Jodh.)

8. ACIT v. Panachayil Industries, (7 SOT 96) (Coch.)




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Section 50C – Transfer of tenancy right – Held such transaction not covered under the provisions of section 50C.

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Tribunal News

Part B — Unreported Decisions

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



23 Kishori Sharad Gaitonde vs. ITO

ITAT Mumbai Bench ‘SMC’, Mumbai

Before A. L. Gehlot (A. M.)

ITA No. 1561 / M / 09

A.Y. 2005-06. Decided on 27.11.2009

Counsel for Assessee / Revenue: L. K. Doshi / S. K. Madhukar

Section 50C – Transfer of tenancy right – Held such
transaction not covered under the provisions of section 50C.


Facts:

During the year, the assessee had sold a tenancy right for Rs.
30 lakhs. In her return of income, the assessee had computed the long term
capital gain based on the said consideration. However, the AO observed that for
the purpose of stamp duty, the Sub-Registrar had adopted the market value of Rs.
33.11 lakhs. Therefore, applying the provisions of section 50C, he computed the
capital gain based on the market value of Rs. 33.11 lakhs.

One of the issues raised before the tribunal was whether the
provisions of section 50C were applicable to a tenancy right.

Held:

The tribunal noted that by virtue of section 50C, a legal
fiction had been created for assuming the value adopted or assessed by any
authority of the State Government as the full value of sale consideration
received in respect of transfer of land or building. Relying on the decisions of
the Supreme Court in the case of Amar Chand Shroff and in the case of Mother
India Refrigeration Industries Pvt. Ltd., the tribunal observed that the legal
fiction cannot be extended beyond the purpose for which it was enacted.
Accordingly, it noted that as per the plain reading of the provisions of section
50C, it applies only to those items of capital assets which are either land or
building or both. Since in the case of the assessee, the capital assets
transferred was tenancy right, it held that the provisions of section 50C were
not applicable.

Cases referred to:



1. CIT vs. Amar Chand Shroff 48 ITR 59 (S.C.);

2. CIT vs. Mother India Refrigeration Industries Pvt. Ltd.
155 ITR 711 (S.C.)


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S. 271(1)(c) — Whether penalty can be levied in case where rental income is assessed under head ‘Income from House Property’ as against ‘Income from Business’ — Held, No.

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New Page 1

Part B — Unreported Decisions

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





27 ACIT 8(3) v. Vazir Glass
Works Ltd.


ITAT ‘F’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

V. D. Rao (JM)

ITA No. 332/Mum./2007

A.Y. : 2001-02. Decided on : 24-11-2008

Counsel for revenue/assessee : J. V. D. Langstein/ B. V.
Jhaveri

S. 271(1)(c) of the Income-tax Act, 1961 — Whether penalty
can be levied in a case where rental income is assessed under the head ‘Income
from House Property’ as against ‘Income from Business’ as returned by the
assessee – Held, No.

 



Per S. V. Mehrotra :

Facts :


The assessee-company was engaged in the business of glass
vials and bottles. One of the issues before the Tribunal was whether the AO was
justified in levying a penalty u/s.271(1)(c) in respect of the assessment of
rental income under the head ‘Income from House Property’ as against the
assessee’s claim of it being chargeable under the head ‘Income from Business’.

Held :

The Tribunal found that out of the gross receipt of Rs.23.14
lacs, the sum of Rs.11.14 lacs received by the assessee was by way of
reimbursement of expenses incurred towards electricity and telephone. And the
balance sum of Rs.12 lacs was credited by the assessee to miscellaneous receipts
account and shown accordingly in the Profit and Loss Account. According to the
Tribunal this was a case of honest difference of opinion between the assessee
and the Department on whether rental income was assessable as ‘Income from House
Property’ or as ‘Business Income’. The Tribunal also observed that it was not
the case of the AO that the expenses incurred were not genuine. Thus, the
explanation of the assessee that the income was assessable as income from
business was found bona fide one. Therefore, the Tribunal held that this
case cannot be said to be a case of furnishing inaccurate particulars of income.
According to the Tribunal the assessee had not concealed any facts from the
Department and, therefore, no penalty can be levied u/s. 271(1)(c).

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S. 145 — Method of accounting — Assessee has more sources of income under head ‘Business income’ — Whether assessee can follow different method of accounting for each source — Held, Yes.

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New Page 1

Part B — Unreported Decisions

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





26 ACIT v. Mehul J. Somaiya


ITAT ‘B’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

Karunakara Rao (AM)

ITA No. 7118/Mum./2006

A.Y. : 2002-03. Decided on : 10-12-2008

Counsel for revenue/assessee : G. Gurusamy/

C. N. Vaze

S. 145 of the Income-tax Act, 1961 — Method of accounting —
Assessee having more than one source of income under the head ‘Business income’
— Whether the assessee has the option to follow different method of accounting
in respect of each of the different sources of income under the head — Held,
Yes.

 

Per N. V. Vasudevan :

Facts :

During the year the assessee had returned income under the
head salary, business and income from other sources. In respect of income under
the head business, he had three different sources of income viz., (i)
Remuneration from partnership firm where he was a partner; (ii) income from
proprietary concern; and (iii) consultancy fee. In respect of the first two
sources of business income, the assessee was following mercantile system of
accounting, while in case of the latter, the assessee claimed that it was
following cash method of accounting. Accordingly, from the consultancy fee of
Rs.7.87 lacs receivable, he offered to tax the sum of Rs.41,344 i.e., the
sum equal to the tax deducted at source by the client and for which the TDS
certificate was received by him, for tax.

 

According to the AO, the assessee was not allowed to adopt
different methods of accounting for different sources of income falling under
the same head. Therefore, he brought to tax the entire consultancy fee of
Rs.7.87 lacs. On appeal, the CIT(A) allowed the appeal of the assessee.

 

Held :

The Tribunal noted that the object of the amendment of S. 145
made by the Finance Act, 1995 was only to do away with the mixed system of
accounting, by which certain transactions relating to a particular source
were recorded following one system and the other transactions following the
other system of accounting. According to the Tribunal, if there were more than
one sources of income falling under the same head of income, and the assessee
follows either cash or mercantile system of accounting for different sources
income, it cannot be said that the hybrid system of accounting for different
sources of income is being followed. According to it, so long as for a
particular source either cash or mercantile system was followed, there can be no
objection. Thus, as noted by the CIT(A), since the assessee was consistently
following the cash system of accounting for his consultancy income, it accepted
the submission of the assessee and dismissed the appeal filed by the Revenue.

 

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Sale of depreciable assets — Sale of two units — Consideration for both units based on individual value of land, building, plant and machinery –– Whether sale of two units covered by S. 50 and not by S. 50B — Held, Yes.

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Part B — Unreported Decisions

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


25 Accelerated Freeze Drying Co. Ltd.
v. DCIT


ITAT Cochin

Before N. Barathvaja Sankar (AM) and

N. Vijayakumaran (JM)

ITA No. 611/Coch/08

A.Y. : 2002-03. Decided on : 5-12-2008

Counsel for assessee/revenue : R. Sreenivasan/

V. M. Thyagarajan

S. 50 and S. 50B of the Income-tax Act, 1961 — Sale of
depreciable assets or slump sales — Sale of two manufacturing units along with
immovables and movables — Consideration for both the units was based on the
individual value of each of the lands, buildings and plant and machinery ––
Whether the sale of these two units was covered by S. 50 and not by S. 50B —
Held, Yes.

 

Per N. Vijayakumaran :

Facts :

The assessee is engaged in the business of processing frozen
foods. During the relevant assessment year, the assessee sold two of its units
for valuable considerations. Both the units were sold to two different buyers
and the consideration for both the units was arrived at based on the separate
valuations done for land, building and each of the items of plant and machinery.
The assessee regarded these transactions as sale of depreciable assets as per
provisions of S. 50 of the Act. The Assessing Officer by way of reassessment
u/s.148, brought these amounts to tax as slump sale within the meaning of S. 50B
of the Act. Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld
the action of the AO. Aggrieved by the order of the CIT(A), the assessee
preferred an appeal to the Tribunal.

 

Held :

The Tribunal observed that there is ample evidence which
shows that there is bifurcation of sale profits, splitting up of the value
between movable and immovable assets and the assets are depreciable assets. The
Tribunal held that this is a case where S. 50 is squarely applicable. It is not
the aggregate value taken as the net worth for the purpose of application of
slump sale provision as u/s.50B. The Tribunal found the decision of the Cochin
Tribunal in the case of International Creative Foods P. Ltd. to be squarely
applicable to the facts of the case. Accordingly, the Tribunal set aside the
order of the authorities below and following the decision of the Cochin Tribunal
in the case of International Creative Foods P. Ltd. allowed the claim of the
assessee.

 

Cases referred to :


ACIT v. International Creative Foods P. Ltd., ITA Nos.
227/Coch./2006 and 447/Coch./2007, dated 10-9-2008.

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S. 14A — Disallowance of expenditure incurred to earn exempt income — Where no nexus between expenditure & income, expenditure not disallowed.

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12 Indo German International Pvt. Ltd. v. DCIT


ITAT ‘C’ Bench, New Delhi

Before I. P. Bansal (JM) and Deepak R. Shah (AM)

ITA Nos. 4971/Del./2007

A.Y. : 2004-05. Decided on : 9-5-2008

Counsel for assessee/revenue : Ramo Jain/

M. P. Singh

S. 14A of the Income-tax Act, 1961 — Disallowance of
expenditure incurred to earn exempt income — Where no nexus is established
between the expenditure and the income earned, can the expenditure be disallowed
— Held, No.

Per Deepak R. Shah :

Facts :

The assessee was engaged in the business of export and import
of iron, steel and allied products and as commission agent. During the year it
earned dividend income of Rs.78.05 lacs which was claimed as exempt u/s.10(33).
According to the AO, the provisions of S. 14A were applicable and as the
assessee had not furnished any evidence to establish that no expenses had been
incurred in earning the dividend income, it was held that 5% of dividend income
was incurred for earning dividend income.

The CIT(A) on appeal held that the AO had rightly applied the
provisions of S. 14A, as incurring of expenditure had to be inferred from the
accounts. According to it, if no expenses were debited against the exempt
income, the AO was justified in estimating the same.

Before the Tribunal, the Revenue relied on the Mumbai Bench
Tribunal decision in the case of Citicorp Finance (India) Ltd. and contended
that the orders of the lower authorities be upheld.

Held :

According to the Tribunal, the pre-requisite for disallowance
u/s.14A is that the expenditure should have been incurred in relation to exempt
income. In the given case, the assessee had all along claimed that it had not
incurred any expenditure. It further noted that the AO had not been able to
correlate any expenditure, which could be said to have been incurred for earning
exempt income. According to it, the decision in the case of Citicorp Finance
(India) Ltd. relied on by the Revenue was based on the provisions in Ss.(2) and
(3) which were inserted by the Finance Act, 2006 w.e.f. 1-4-2007. According to
it, the insertion of the said provisions was not retrospective in nature. Hence,
the ratio as laid down in the said Tribunal decision cannot be applied to the
case of the assessee. Further, relying on the decision of the Delhi Tribunal in
the case of Wimco Seedling Ltd., the Tribunal allowed the appeal of the assessee.

Cases referred to :



1. ACIT v. Citicorp Finance (India) Ltd., 12 SOT 248 (Mum.)

2. Wimco Seedling Ltd. v. DCIT, 107 TTJ 267 (Del)


Note :

Attention of the readers is drawn to the insertion of Ss.(2)
and (3) to S. 14A by the Finance Act, 2006 w.e.f. 1-4-2007 and the Rule 8D which
prescribes the method in which expenditure incurred to earn exempt income could
be determined.

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S. 79 and S. 115JB — In computing book profit u/s.115JB, lower of brought forward loss or unabsorbed depreciation to be reduced, irrespective of whether allowable u/s.79

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10 (2008) 117 TTJ 891 (Ahd.)

Fascel Ltd. v. ITO

ITA No. 1195 (Ahd.) of 2007

A.Y. : 2003-04. Dated : 17-8-2007

S. 79 and S. 115JB of the Income-tax Act, 1961 — In arriving
at the book profit u/s.115JB, the lower of the amount of brought forward loss or
unabsorbed depreciation as appearing in the books of account of the assessee has
to be reduced, irrespective of the fact whether the same is allowable u/s.79 or
not.

 


While computing the book profit u/s.115JB for A.Y. 2003-04,
the Assessing Officer held that since there was a substantial change in
shareholding in A.Y. 2000-01, the provisions of S. 79 were attracted. Therefore,
the brought forward loss/depreciation up to A.Y. 2000-01 is not to be carried
forward for computing the business income as well as for the purposes of S.
115JB. The Assessing Officer also held that there is no direct case law on the
subject, but logic demands that prohibition u/s.79 shall apply both to normal
computation u/s.28 to u/s.43C as well as u/s.115JB. The CIT(A) upheld the
Assessing Officer’s order.


 

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

(a) Clause (iii) of the Explanation to S. 115JB(2)
specifically provides that the amount of loss brought forward or unabsorbed
depreciation as per the books of account is to be reduced from the book profit
and it is lower of the two amounts that is to be reduced. It is the amount
which is as per the books of accounts that is to be reduced and not as per the
income-tax records which has been computed under the provisions of the Act.


(b) The admissibility of loss as per other provisions of
the Act has nothing to do with the computation of book profit and that is made
clear by the provisions of clause (iii) of the Explanation. If it is appearing
in the books of accounts and not set off in the subsequent year’s profit, the
effect is to be given in the impugned year of profit while computing the book
profit of the assessee.




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S. 67A — Share of loss of company in AOP could be set-off against other income.

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New Page 2

9 (2008) 117 TTJ 721 (Mum.) (TM)

Mahindra Holdings & Finance Ltd. v. ITO

ITA Nos. 5319 & 6074 (Mum.) of 2004

A.Ys. : 2000-01 and 2001-02. Dated : 23-6-2008

S. 67A of the Income-tax Act, 1961 — Share of loss of company
in an AOP could be set off against other income of the company.

For the relevant year, the assessee-company, which was a
member of an AOP, set off its share of loss from the AOP against its other
income. The claim of the assessee was rejected by the Assessing Officer on the
following grounds :



  • that S. 67A is not applicable in the assessee’s case.

  •  the provisions of S. 67A can only be applied in those cases where a member of
    an AOP or a BOI is not a company or a co-operative society or a society
    registered under the Societies Registration Act.



  • since the assessee is a company, its total income cannot be computed as per
    provisions of S. 67A and as such, the loss booked by the assessee cannot be
    allowed to be set off against the other income of the assessee.


The CIT(A) also disallowed the assessee’s claim.

Since there was a difference of opinion between the members,
the matter was referred to the Third Member u/s.255(4).

The Third Member, relying on the decision in the case of
CIT v. Salem District Urban Bank Ltd., (1940) 8 ITR 269 (Mad.), held in
favour of the assessee. The Third Member noted as under :

(a) The purpose of S. 67A is to compute the share of
income/loss in the AOP/BOI. If all the provisions are read together, the
entities specified in the parenthesis in S. 67A would qualify the AOP/BOI and
not the member of such AOP/BOI.


(b) Reference to S. 2(17) indicates that the expression
‘AOP’ includes a company or a cooperative society or a society mentioned in
parenthesis in S. 67A.


(c) The purpose of S. 67A is to determine the share of
income/loss in the profits/losses of the AOP since share is to be included in
the income of the member of AOP for rate purpose as per the provisions of S.
86. However, in the case of a company, cooperative society or society, the
income is not apportioned amongst the members constituting these entities.
Such entities may have income, but may not declare dividend and thus nothing
would be includible in the income of the members of such entities. On the
other hand, these entities may not have income, still they may declare
dividend out of their accumulated profits. Therefore, despite there being no
income in the hands of such entities, the dividend declared by them would be
assessable as income in the hands of members. Therefore, considering the
different schemes of taxation in respect of income received by members from
such entities, the Legislature has excluded these entities from the ambit of
the expression ‘AOP/BOI’.


(d) Had the Legislature not excluded the entities specified
in the parenthesis, it would have resulted in double taxation — once as per
share determined u/s.67A read with S. 86, and again when dividend income is
distributed by such entities to its members.


(e) If the contention of the Revenue is accepted, then it
will lead to absurd result not intended by the Legislature and also will be
detrimental to the interest of the Revenue itself. If it is held that the
words in the parenthesis qualify the word ‘member’ and not the AOP/BOI, then
the company or a cooperative society or a society or other entities in the
parenthesis would not be liable to pay any tax in respect of their share of
income in the AOP/BOI as per the provisions of S. 86, even though such share
of income is includible in the total income. In such cases, the companies or
societies by themselves may not carry on any business and may form various
AOPs/BOIs and may get away by paying lesser rate of tax on such AOP/BOI, since
AOP/BOI (having members whose shares are determinate or known) would be
chargeable to normal rate of tax applicable to individuals. The interpretation
put forth by the Revenue would give birth to legal device for evading the tax
by the entities specified in the parenthesis. Such absurd result could never
have been intended by the Legislature.


(f) It is a well-settled rule of interpretation that
provisions of a statute should be interpreted in a manner which augments the
object behind the legislation and not in a manner which frustrates the object.




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S. 10BA — DEPB/DDB credit part of profits of business for S. 10BA(4) and will not enter into total or export turnover for calculating profits derived from business.

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New Page 2

8 (2008) 117 TTJ 672 (Jd.)


ITO v. Bothra International

ITA Nos. 607 & 608 (Jd.) of 2007

A.Ys. : 2004-05 and 2005-06. Dated : 27-6-2008

S. 10BA of the Income-tax Act, 1961 — Amount of credit on
account of DEPB/Duty Drawback (DDB) has to be included as profits of the
business of the undertaking for the purpose of S. 10BA(4) and the said amount of
credit of DEPB or DDB will not enter into the total turnover or export turnover
of the undertaking for the purpose of calculating profits derived from the
business of the undertaking of the assessee within the meaning of Ss.(4).

 

For the relevant assessment year, the Assessing Officer
rejected the assessee’s claim for deduction of DEPB and DDB u/s.10BA. The
CIT(A), however, allowed the claim for deduction.

 

The Tribunal upheld the CIT(A)’s order and allowed the
deduction u/s.10BA. In arriving at this decision the Tribunal relied upon the
decisions in the case of B. Desraj v. CIT, (2008) 7 DTR (SC) 54 and
Kerala State Co-op. Marketing Federation Ltd. & Ors. v. CIT, (1998) 147 CTR
(SC) 29/231 ITR 814 (SC).

 

The Tribunal noted as under :

(a) By the use of expression ‘subject to’ in Ss.(1) of S.
10BA, it is clear that the provision contained U/ss.(4) shall override the
provisions of Ss.(1) of S. 10BA.

(b) Once the assessing authority has found the assessee
eligible for deduction u/s.10BA(1), then the only scope available to the
assessing authority was to find out the quantum of the deduction as per
prescription of Ss.(4) of S. 10BA and no other method or manner could be used,
as the answer is available from the scheme contained in the special provision
of S. 10BA itself, where allowability of deduction was by mandate subjected to
such provisions contained therein.

(c) When the profits are derived from manufacture and
export of eligible articles, the solitary business activity of the
undertaking, then the incentive such as DEPB/DDB irrespective of its real
character or source has to be taken into account and has to be included as
profits of the business of the undertaking, in particular when the expression
used in Ss.(4) of S. 10BA is the ‘profits of the business of undertaking’.

(d) The Legislature in its wisdom did not use the
expression ‘profit’ in singular, but used it as ‘profits’ in plural. Thus,
there can be profits not only by exporting the eligible articles or things,
but also can be those profits which are related to export of such articles or
things, which in the present case are DEPB and DDB determined with relation to
export sales effected by these assessees.


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S. 234D has no retrospective effect — Applicable only from A.Y. 2004-05.

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New Page 2

7 ITO v. Ekta Promoters (P) Ltd.

ITA Nos. 2551 to 2553 (Del.) of 2006

A.Ys. : 1998-99 to 2000-01. Dated : 11-7-2008

S. 234D of the Income-tax Act, 1961 — S. 234D, inserted
w.e.f. 1-6-2003, being substantive in nature has no retrospective effect — It is
applicable only from A.Y. 2004-05 and cannot be charged for earlier assessment
years even though assessments are pending as on 1-6-2003.

 

A Special Bench was constituted to answer the following
question :

“Whether, in the facts and circumstances of the case,
interest u/s.234D should be charged from A.Y. 2004-05 or with reference to
regular assessment framed after 1-6-2003, irrespective of the assessment years
involved or irrespective of the date when refund was granted ?”

 


The Special Bench, relying on the decisions in the following
cases, held that the provisions of S. 234D are substantive and they cannot be
retrospective :

(a) J. K. Synthetics Ltd. v. CTO, (1994) 119 CTR
(SC) 222

(b) Padmasundara Rao (Decd.) & Ors. v. State of Tamil
Nadu & Ors., (2002) 176 CTR (SC) 104; (2002) 255 ITR 147 (SC)

(c) Reliance Jute & Industries Ltd. v. CIT, (1979)
13 CTR (SC) 186; (1979) 120 ITR 921 (SC)


The Special Bench noted as under :

(a) The argument that Legislature has brought this
provision just to fill the lacuna in the law and, therefore, these provisions
should be construed retrospective cannot be accepted, more particularly when
these provisions have been inserted on the statute w.e.f. 1-6-2003 and not
with retrospective effect.

(b) The Legislature has specifically mentioned the date of
applicability i.e., 1-6-2003 and the Legislature was not incompetent to
make retrospective provision, if it was so intended.

(c) In a fiscal legislation, if a provision is brought for
imposing any liability, the normal presumption will be that it has no
retrospective operation and it is a cardinal principle of tax law that law to
be applied is the law which is in force in the assessment year, unless
otherwise provided expressly or by necessary implication.

(d) The provisions regarding levy and collection of
interest even if construed as forming part of the machinery provisions are
substantive law for the simple reason that in the absence of contract or
usage, interest can be levied under law and it cannot be recovered by way of
damages for wrongful detention of amount.

(e) Thus, the contention of the Revenue that the provision
of S. 234D being under Chapter XVII under the head ‘Collection and recovery’
should be construed to be a procedural or machinery section and, therefore,
should be applied retrospectively has to be rejected.

(f) If the provisions of S. 234D are substantive, then the
same cannot be held to be retrospective, unless specifically provided in the
statute itself.

(g) While applying Heydon’s Rule, (mischief rule of
purposive construction) a word of caution is necessary that text of statute is
not to be sacrificed and the Court cannot rewrite the statute on the
assumption that whatever furthers the purpose of the Act must have been
sanctioned and, therefore, the Court cannot add to the means enacted by the
Legislature for achieving the object of the Act. Moreover, the application of
Heydon’s Rule itself does not confirm retrospective operation of a provision
brought under that rule. This is irrespective of the fact that for application
of that rule it is a condition precedent to find out that there existed a
mischief. Mere fact that earlier there was no provision to charge interest on
the refund issued on processing of return cannot by itself be described as
‘mischief’ or ‘defect’.



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S. 120, S. 124(3) and S. 148 — Reassessment initiated by AO not having jurisdiction, completed by AO having jurisdiction — Reassessment invalid.

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New Page 2

6 (2008) 117 TTJ 42 (Lucknow)


M. I. Builders (P.) Ltd. v. ITO

ITA No. 111 (Lucknow) of 2006

A.Y.  : 1997-98. Dated : 7-9-2007

S. 120, S. 124(3) and S. 148 of the Income-tax Act, 1961 —
Reassessment proceedings initiated by AO not having jurisdiction — Reassessment
completed in continuation of such initiation by AO having jurisdiction —
Reassessment was invalid.

For the relevant assessment year, notice u/s.148(1) was
issued by an Assessing Officer having no jurisdiction over the assessee. On
protest by the assessee within one month of such notice, the case was
transferred to the Assessing Officer having jurisdiction over the assessee and
this Assessing Officer finally passed the reassessment order. The assessee
contended before the CIT(A), inter alia, that the notice u/s.148(1) was
devoid of proper jurisdiction and, therefore, void ab initio.

The CIT(A), however, upheld the reassessment order.

The Tribunal, relying on the decisions in the following
cases, held that the reassessment was invalid :

(a) Lt. Col. Paramjit Singh v. CIT, (1996) 135 CTR
(P&H) 8; (1996) 220 ITR 446 (P&H)

(b) Naginimara Veneer & Saw Mills (P) Ltd. v. Dy. CIT,
(1996) 136 CTR (Gau.) 134; (1996) 219 ITR 527 (Gau.)

(c) Anant Mills Ltd. (In Liquidation) v. CIT, (1993)
109 CTR (Guj.) 231; (1994) 206 ITR 582 (Guj.)

(d) P. A. Ahammed v. Chief CIT, (2006) 200 CTR
(Ker.) 378; (2006) 282 ITR 334 (Ker.)

(e) CIT v. Metal Goods Manufacturing Co. (P) Ltd.,
(1992) 197 ITR 230 (All)

(f) K. V. Kader Haji (Decd.) through LR v. CIT,
(2004) 189 CTR (Ker.) 313; (2004) 268 ITR 465 (Ker.)

(g) ITO v. Ashoke Glass Works, (1980) 125 ITR 491
(Cal.)

The Tribunal noted that the issuance of notice u/s. 148(1) by
the first Assessing Officer was without jurisdiction and, therefore, invalid.
The assessment framed on that basis by the jurisdictional Assessing Officer was
also invalid and, therefore, cancelled.

The Revenue’s stand for protection u/s.124 was also not
allowed by the Tribunal. It noted as follows :

(a) Invoking of S. 124(2) would arise if there was any
chance of validation of proceedings by virtue of S. 124(3) which is not
available to the Assessing Officer in the present case, either under clause
(a) or under clause (b) of S. 124(3).

(b) Protection of the proceedings and assessment thereafter
on account of failure of the assessee to object within the time allowed
u/s.124(3) is available to specific proceedings and not to every proceeding.
Erroneous assumption of jurisdiction cannot, in general, be validated. Such
validation is specific in S. 124(3).

 

(2008) 117 TTJ 289 (Delhi) (SB)


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S. 40A(3) — Cash payment exceeding prescribed limits — S. 40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in business of processing and export of meat and meat products — Allowable under clause (l) of Rule 6DD — Also as per claus

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New Page 2

  1. (


  1. (2009) 120 itd 89 (Delhi)


Dy. CIT v.
Hind Industries Ltd.

A.Y. : 2003-04. Dated : 26-9-2008

 

S. 40A(3) — Cash payment exceeding prescribed limits — S.
40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in
business of processing and export of meat and meat products — Allowable under
clause (l) of Rule 6DD — Also as per clause (f) of Rule 6DD and, therefore, no
disallowance could be made u/s.40A(3).

The assessee-company was engaged in the business of
processing and export of meat and meat products. The assessee had made all the
purchases in cash and had regularly withdrawn huge cash from bank and
ostensibly made payments for supplies of carcass. The Assessing Officer was of
the view that the payments made in cash would be hit by provisions of S.
40A(3). On appeal, the Commissioner (Appeals) opined that since the payments
had been made to agents in respect of purchases of carcass, there was no room
to interpret clause (f) of Rule 6DD in favour of the assessee. However, so far
as the assessee’s claim for exclusion under clause (l) of Rule 6DD was
concerned, the Commissioner (Appeals) held that payments in cash to agents for
purchases of products of animal husbandry could not be disallowed u/s.40A(3).

 

On the Revenue’s appeal, the ITAT held that :

(1) The AO had disallowed the claim of the assessee in
view of the decision of the Allahabad High Court in the case of CIT v.
Pehlaj Raj Daryanmal, (1991) 190 ITR 242. The decision by the Allahabad
High Court was rendered in 1991 whereas clause (l) was inserted by the IT
Amendment Rules in the year 1995. Therefore, the ratio of the decision of
the Allahabad High Court would not be applicable to the facts of the instant
case.

(2) The contention of the department, that there was no
agent, did not sound good because the AO himself had disallowed the payments
for the reason that they were not made directly to producers/cultivators but
through intermediaries or agents.

(3) Though the Commissioner (Appeals) had rejected the
claim under clause (f), yet, in view of Rule 27 of the Income-tax (Appellate
Tribunal) Rules, 1963, the claim of the assessee was allowable as per clause
(f) of Rule 6DD.

Accordingly, the order of the Commissioner (Appeals) was to
be confirmed.


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S. 32 — Whether road is eligible for depreciation in category of ‘building’ at rate applicable to buildings — Held, Yes.

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New Page 2

  1. (2009) 120 ITD 20 (Chennai)


Tamil Nadu Road Development Co. Ltd. v. ACIT/ITO

A.Ys. : 2003-04 and 2004-05

Dated : 24-10-2008

S. 32 — Whether road is eligible for depreciation in
category of ‘building’ at rate applicable to buildings — Held, Yes.

The assessee-company was incorporated for construction,
development and maintenance of roads at various places in Tamil Nadu as per
the agreement entered into with the Government of Tamil Nadu. Its claim for
depreciation on roads at the rate of 25% (as plant and machinery), was
rejected by the Assessing Officer as road did not figure in the depreciation
schedule. He further observed that roads were not buildings, entitled to
depreciation. On appeal, the Commissioner (Appeals) upheld the Assessing
Officer’s view.

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

(1) Merely because some optical fibre lines or connection
lines had been laid, the road could not get converted into a plant.

(2) The assessee-company was entitled to collect fixed
amount of toll per vehicle for which it could have created any kind of
barrier for collection of such toll. If the assessee had chosen to install
automated toll plaza, then mere construction of one toll plaza would not
change the nature of the asset which remained the road.

(3) After the A.Y. 1988-89, all the appendices,
prescribing the table of rates of depreciation had the note that building
would include road. Therefore, the assessee would become entitled to
depreciation on the road in the category of ‘building’.

 


In these circumstances, the order of the Commissioner
(Appeals) was set aside and the Assessing Officer was directed to allow
depreciation on the road at the rate applicable to the buildings.


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Collection of tax at source u/s.206C — Collection of octroi under Bombay Provincial Municipal Corporation Act, 1949 was neither for parking lot nor at toll plaza nor for mining or quarrying nor it was for purpose of business, and, therefore, collection of

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New Page 2

  1. (2009) 120 ITD 7 (Nag.)


Akola Municipal Corporation v. ITO

A.Ys. : 2005-06 to 2007-08

Dated : 21-5-2008

 

Collection of tax at source u/s.206C — Collection of octroi
under Bombay Provincial Municipal Corporation Act, 1949 was neither for
parking lot nor at toll plaza nor for mining or quarrying nor it was for
purpose of business, and, therefore, collection of octroi by agent appointed
by assessee would not fall in S. 206C(1C).

 

The assessee-corporation had appointed an agent for
collection of octroi, as levied by the assessee under the Bombay Provincial
Municipal Corporation Act, 1949. The assessing authority held that the
assessee was to collect tax at source on the octroi which was in the nature of
‘Toll Plaza’ within meaning of S. 206C(1C). On appeal, the Commissioner
(Appeals) confirmed the order of the assessing authority.

 

On second appeal by the assessee :

(1) On a close reading of the legislation like the Bombay
Provincial Municipal Corporation Act, 1949, the Constitution, the Tolls Act,
1851 and the Supreme Court and the High Courts’ decisions and various
dictionary meanings, it could be said that ‘toll’ is a different thing than
‘octroi’. Octroi is normally a tax levied on entry of goods into local
areas, whereas ‘toll’ is a tax levied as compensation for the purpose of
temporary use of land or allowing passage of vehicles through the land.

(2) In the instant case, the contract of the
assessee-corporation with the agent for collecting octroi, was different
from clause (e) of the said section dealing with ‘toll’.

 


Accordingly, the orders of the Commissioner (Appeals) as
well as the Assessing Officer were to be vacated and the appeal of the
assessee was to be allowed.


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Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S. 80-IB are to be fulfilled only if eligible assessee is an industrial undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where assessee was engaged in business of carrying out scient

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New Page 2

  1. (2009) 119 itd 427 (Mum.)


Enem Nostrum Remedies (P.) Ltd. v. ACIT

A.Ys. : 2003-04 and 2004-05

Dated : 28-8-2008

Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S.
80-IB are to be fulfilled only if eligible assessee is an industrial
undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where
assessee was engaged in business of carrying out scientific research and
development and was not an industrial undertaking and had been approved by
Government of India, for claiming benefit of deduction u/s.80-IB(8A),
conditions of Ss.(2) of S. 80-IB were not required to be fulfilled by it.

 

The assessee-company had been approved as an R&D company by
the department of scientific and industrial research. It claimed deduction
u/s.80-IB(8A). The Assessing Officer denied the deduction u/s.80-IB(8A) by
observing that :

(1) The assessee had not claimed deduction u/s.80-IB(8A)
in the initial year,

(2) Subsequent claim made by it in the relevant
assessment years could only lead to the surmise that its business was formed
by splitting up, or the reconstruction of a business already in existence;

(3) The certificate by the Chartered Accountant in Form
10CCB was not produced.

 


On appeal, the Commissioner (Appeals) held that the
assessee did not fulfill the conditions of S. 80-IB(2)(iii) as it was not
manufacturing or producing any article or thing, and, accordingly, upheld the
view of the Assessing Officer on a different count.

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

(1) The four conditions stipulated U/ss.(2) of S. 80-IB
are to be fulfilled only if the eligible assessee is an industrial
undertaking within the meaning of S. (3) to S. (5) of said Section, as the
case may be.

(2) If the assessee is not an ‘industrial undertaking’
but is otherwise eligible for deduction under any of other sub-sections of
S. 80-IB, then there is no requirement for importing the conditions
stipulated in Ss.(2) of S. 80-IB which are applicable to industrial
undertakings.

(3) Since in the instant case, the assessee was engaged
in the business of carrying out scientific research and development and had
been approved by the Government of India, for claiming the benefit of
deduction u/s.80-IB(8A), the conditions of Ss.(2) of S. 80-IB were not
required to be fulfilled by it.

Based on the above observations, the Tribunal directed the
Assessing Officer to allow deduction as claimed by the assessee.


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S. 194J of the Act are applicable to payments made for availing bandwidth services and port charges — Held, No.

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New Page 26
2009 TIOL 130 ITAT Mum.


Pacific Internet (India) Pvt. Ltd.
ITA Nos. 1607 to 1609 (Mum.) of 2006
A.Ys. : 2003-04 to 2005-06. Dated : 23-12-2008



Whether payments made to MTNL/VSNL for availing
bandwidth services and port charges are technical services — Held, No. Whether
provisions of


S. 194J of the Act are applicable to payments
made for availing bandwidth services and port charges
— Held, No.

Facts :

The assessee-company was engaged in the business
of providing internet access services to corporate clients and consumers. In
the course of survey action u/s.133A of the Act against the assessee, on
29-10-2004, it was found that the assessee had made huge payments to avail
services of MTNL and VSNL for using bandwidth and network operating. The
Assessing Officer was of the opinion that in respect of payments made to MTNL/VSNL
for availing bandwidth services and port charges, the assessee should have
deducted tax at source as required u/s.194J of the Act. The Assessing Officer,
therefore, treated the assessee as in default within the meaning of S. 201(1)
and passed the order, raising the demand against the assessee for failure to
deduct tax in respect of payments made to MTNL/VSNL and also levied interest
as per the provisions of S.


201(1A) of the Act. Aggrieved, the assessee
preferred an appeal to CIT(A), challenging the order passed by the Assessing
Officer treating the assessee in default within the meaning of S. 201(1), but
did not find favour.

On an appeal by the assessee to the Tribunal,

Held :

The bandwidth services and other infrastructure
availed by the assessee for providing Internet access to its customers are
standard facilities. The Tribunal was of the view that the case of the
assessee is covered by the decision of Delhi High Court in the case of Estel
Communications (P.) Ltd. and accordingly held that payment made by the
assessee company to MTNL/VSNL and other concerns for availing the service of
bandwidth network infrastructure cannot be said to be technical services
within the meaning of S. 194J of the Act read with Explanation 2 to clause
(vii) of S. 9(1) of the Act. The appeal filed by the assessee was allowed and
the orders passed by the Assessing Officer u/s.201(1) and u/s.201(1A) of the
Act were cancelled.

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S. 23 of the Income-tax Act, 1961 — Annual Value — In respect of a let-out property whether association maintenance charges are deductible while computing annual letting value of the property u/s.23 of the Act — Held, Yes.

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New Page 25 2009 TIOL 126 ITAT Bang.


Sheriff Constructions v. ACIT
ITA No. 975/Bang./2008
A.Y. : 2005-2006. Dated : 23-12-2008

 




S. 23 of the Income-tax Act, 1961 — Annual
Value — In
respect of a let-out property whether association maintenance charges are
deductible while computing annual letting value of the property u/s.23 of
the Act — Held, Yes.

Facts :

The assessee-firm was owner of a property by
the name ‘The Summit’ from which rent of Rs.18,39,027 was declared and in
doing so, the assessee deducted association maintenance charges of
Rs.1,77,000. The AO disallowed the claim by holding that this is not an
allowable expenditure u/s.24 of the Act.

The CIT(A) upheld the order of the AO.

In an appeal before the Tribunal, the assessee
contended that since the association maintenance charges have to be paid by
the owner of the property, it depresses the annual letting value of the
property and thus the amount of rent which the property may be reasonably
expected to let from year to year would be an amount against which the
maintenance charges have to be reckoned with. Therefore, the association
maintenance charges were claimed u/s.23(1)(b) of the Act while computing the
annual letting value of the property.

Held :

The issue under consideration is squarely
covered in favour of the assessee in view of the decision of the Delhi Bench
of the Tribunal in the case of Neelam Cable Manufacturing Co. and the
decisions of Mumbai Bench of Tribunal in the case of Sharmila Tagore and
also in the case of Bombay Oil Industries Ltd. The Tribunal observed that no
order or judgment taking a contrary view was brought to its notice by the
Department. Accordingly, the AO was directed to deduct association
maintenance charges paid by the assessee to the Summit Apartment Owners’
Association while computing the annual letting value of the property u/s.23
of the Act.

Cases referred to :

  1. Neelam Cable Manufacturing Co. v. ACIT, (1997) 63 ITD 1 (Del.)

  2. Sharmila Tagore v.
    JCIT,     (2005) 93 TTJ 483 (Mum.)

  3. Bombay Oil Industries,
    ITA No. 550/Mum./ 2000 dated 15-11-2000.

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S. 10B of the Income-tax Act, 1961 — Second proviso to S. 10B(1) and Ss.(4) of S. 10B — When the assessee had domestic sales of more than 25% of total sales value during A.Y. 2001-02, is the asses-see still entitled to partial deduction proportionately on

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New Page 24 2009 TIOL 124 ITAT Mad.-TM


Tube Investments of India Ltd. v. ACIT
ITA No. 12/Mds./2006
A.Y. : 2001-2002. Dated : 5-1-2009

S. 10B of the Income-tax Act, 1961 — Second
proviso to S. 10B(1) and Ss.(4) of S. 10B — When the assessee had domestic
sales of more than 25% of total sales value during A.Y. 2001-02, is the
asses-see still entitled to partial deduction proportionately on export
turnover in view of S. 10B(4) — Held, Yes. Whether excise duty needs to be
included in domestic turnover while computing the value of domestic sales to
find out the domestic sales as a percentage of total turnover — Held, Yes.

Facts :

The assessee had in its return of income claimed
a sum of Rs.2,88,84,327 as exempt u/s.10B of the Act in respect of income of
100% EOU. In the course of assessment proceedings, the AO noted that the
details of sales were as under :

Domestic Sales     Rs. 901.40 lakhs

Export Sales         Rs. 2,227.34 lakhs

Total Sales           Rs. 3,128.74 lakhs

The AO held that since the domestic sales were
28.8%, the assessee was not entitled to deduction u/s.10B of the Act. The
domestic sales as mentioned above were taken to be inclusive of excise duty.

On an appeal by the assessee, the CIT(A)
confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to
the Tribunal where it contended that the amount of domestic sales to be
considered should be exclusive of excise duty. Also, since during the
assessment year under consideration, second proviso to as well as Ss.(4) were
both on the Statute Book, therefore, it is entitled to claim deduction
u/s.10B, if not at 100%, on proportionate basis in terms of Ss.(4) of S. 10B.

As regards inclusion of excise duty in computing
the value of domestic sales, the Tribunal held that in view of the ratio of
the decision of SC in the case of Chowranghee Sales Bureau P. Ltd., excise
duty and sales tax are part of trading turnover and therefore, excise duty
needs to be included in domestic sales to find out the value of domestic
sales.

The Accountant Member held that since during the
assessment year, both, the second proviso as well as Ss.(4) were on the
statute book, an assessee whose domestic sales were less than 25% would be
covered by the second proviso and would be entitled to 100% deduction and if
the domestic sales exceeded this limit of 25%, then Ss.(4) would apply and the
assessee would be entitled to deduction on a proportionate basis. In the
present case, since the domestic sales exceeded 25% of the total sales, the AO
was directed to allow deduction on a proportionate basis u/s.10B(4).

The Judicial Member disagreed with the Accountant
Member on the issue of grant of proportionate deduction and held that during
the period relevant to the A.Y. 2001-02, if an assessee had domestic sale of
more than 25%, then the assessee would not be entitled to exemption u/s.10B of
the Act.

Upon a difference of opinion amongst the Members,
the TM was asked to consider the question as to whether when the assessee had
domestic sales of more than 25% of the total sale value during the A.Y.
2001-02, he is still entitled to partial deduction on export turnover in view
of provisions of 10B(4) ?

On a reference the Third Member

Held :

The eligibility criteria are laid down in Ss.(1).
The second proviso is an additional incentive which has been granted to the
assessee to provide economic flexibility and to allow it to dispose of the
export-rejects and by-products, etc. The second proviso no way governs the
eligibility criteria. No interdict is laid down in the statute to withdraw the
total benefit of S. 10B in the eventuality of domestic sales being in excess
of 25% limit. There is no ambiguity in the language of the statute. The
interpretation that benefit of S. 10B is not available in the eventuality of
domestic sales exceeding the percentage mentioned in the second proviso would
render the provisions of Ss.(4) otiose. On the panoply of the second proviso
deduction cannot be denied. Accordingly, he held that the assessee was
entitled to claim deduction proportionately on export turnover in view of the
provisions of S.10B(4).



The view of the Accountant Member became the
majority view. The ground raised by the assessee stood allowed.

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S. 10(10D) read with S. 37(1) of the Income-tax Act, 1961 — Keyman Insurance Policy premium paid by firm in respect of policy on lives of partners is an allowable deduction.

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New Page 23 (2009) 27 SOT 476 (Mum.)


 ITO v. Modi Motors
 ITA No. 6900 (Mum.) of 2006

A.Y. : 2003-04. Dated : 12-12-2008
 

 
S. 10(10D) read with S. 37(1) of the Income-tax Act, 1961
— Keyman Insurance Policy premium paid by firm in respect of policy on
lives of partners is an allowable deduction.

For the relevant assessment year, the assessee’s
claim for deduction of premium paid by it on the Keyman Insurance Policy in
respect of the lives of two working partners u/s.37(1) was disallowed by the
Assessing Officer on the grounds that :

  1. Keyman Insurance Policy
    premium was allowable only in case an assessee who was an employer, paid the
    amount in respect of the life of an employee.

  2. the partnership firm could
    not be termed as ‘Another person’ within the meaning of S. 10(10D), as a
    firm is not independent and distinct from its partners.

The CIT(A) held that the Assessing Officer was
not justified in presuming that there was no distinction between the partners
and the firm, and the conditions of S. 37 were also satisfied because that
expenditure had been incurred for the purpose of business and, accordingly, he
deleted the disallowance made by the Assessing Officer.

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


  1. In view of
    the various judicial opinions and also the legislative change in the Act, it
    was to be held that under the Income-tax Act, a partnership firm is an
    entity separate from its partners and if there exists any specific provision
    in the Income Tax law modifying the partnership law, then such specific
    provision shall be applied.




  2. The
    wordings of Explanation to S. 10(10D) are also relevant, wherein it has been
    mentioned that “Keyman Insurance Policy life insurance taken by the person
    on the life of another person who is or was the employee of a
    first-mentioned person or is or was connected in any manner whatsoever with
    the business of the first-mentioned person”. Hence, the Legislature has also
    envisaged various kinds of relationships (in addition to employer-employee
    relationship) which may exist between the person paying the premium and the
    person on whose life such

     





Keyman Insurance Policy is taken.


  1. The CBDT
    vide its Circular No. 762, dated 182-1998 has explained the provisions of S.
    10(10D) wherefrom it is abundantly clear that in order to allow the premium
    paid on Keyman Insurance Policy as business expenditure, there can exist
    relationships other than that of an employer and employee.




  2. The amount
    received on maturity or surrender of Keyman Insurance Policy is taxable
    under the head ‘Income from salary’ u/s.17(3)(ii) or ‘Income from profits
    and gains of business or profession’ u/s.28(1)(vii) or ‘Income from other
    sources u/s.56(2)(iv)’. Hence, if the Legislature would have intended that
    such premium was allowable as deduction only in cases where employer and
    employee relationship existed, then the amount received on
    maturity/surrender would have been made taxable only under the head `Income
    from salary’.





  3. In view of
    the above, Keyman Insurance Premium paid by the firm on the life of its
    partners is allowable as business expenditure.



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Tax avoidance — For application of Ss.(7) of S. 94, all the three conditions mentioned in clauses (a), (b) and (c) thereof must be cumulatively satisfied; conditions of three months before and after record date for purchase and sale respectively of units

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New Page 22 (2008) 304 ITR (AT) 36 (Delhi)


ITO v. Shambhu Mercantile Ltd. ITA No. 2056/Del./2006
A.Y. : 2004-2005. Dated : 29-2-2008

S. 94(7) and CBDT Circular No. 14 of 2001

Tax avoidance — For application of Ss.(7) of
S. 94, all the three conditions mentioned in clauses (a), (b) and (c) thereof
must be cumulatively satisfied; conditions of three months before and after
record date for purchase and sale respectively of units not having been
satisfied cumulatively in all the transactions, loss incurred in those
transactions could not be disallowed by invoking Ss.(7) of S. 94.

The assessee had purchased units of three mutual
funds on the record date for declaration of dividend. These units were sold
after a period of three months from the said record date at a loss of
Rs.1,88,47,816.

The Assessing Officer held that S. 94(7) can be
invoked even if any one of the conditions is fulfilled. Since the units were
purchased on the record date, he held the case to be one of dividend stripping
and disallowed the loss invoking the provisions of S. 94(7), even though they
were sold after three months from the record date. The CIT(A) accepted the
claim of the assessee that all three conditions of S. 94(7) are to be
cumulatively satisfied. On Revenue’s appeal, the ITAT held that :

  1. The question that arises for consideration is as to whether clauses (a), (b)
    and (c) of S. 94(7) need to be satisfied cumulatively or not. One may take a
    look at the language used in other portions of the IT Act, 1961, where such
    requirement for satisfying one of the many conditions or all conditions
    cumulatively is laid down.

  2. The case where only one condition is needed to be satisfied as laid down in
    the proviso to S. 139(1) relating to one by six scheme, may be taken for
    instance. The language of such provision uses the expression ‘or’ at the end
    of each condition.

  3. The Legislature, when it desired that all conditions are to be satisfied
    cumulatively, has used the word ‘and’ in the relevant provision. For
    example, one may take the language used in provisions of S. 80-O, where the
    conditions of receipt of income in convertible foreign exchange and such
    income should be for services rendered outside India are cumulatively
    required to be satisfied.

  4. A
    plain reading of the provision of S. 94(7) shows that it has neither used
    the expression ‘or’ nor the expression ‘and’. The Revenue wants to say that
    each of the conditions laid down in S. 94(7) is independent and if an
    assessee satisfies any one of the conditions, then he should be held to be
    covered within the mischief of the law. But the use of words, ‘such person’,
    ‘such unit’, ‘such date’, ‘such securities or units’ in clauses (b) and (c)
    of S. 94(7) also indicates that the three clauses have to be read
    together—Such an interpretation also finds support from CBDT Circular No. 14
    of 2001.

On these reasonings, the ITAT upheld the claim of
the assessee that all the conditions laid down in clauses (a), (b) and (c) of
Ss.(7) of S. 94 have to be satisfied before the said provisions can be applied
in a given case.

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Assessee engaged in loading and unloading iron and steel at railway siding using a mobile crane cannot be said to be carrying on civil construction work within the meaning of S. 44AD and, therefore, she is not liable to penalty u/s.271B for failure to get

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New Page 21 (2008) 304 ITR (AT) 246 (Patna)


Nirmal Jain (Smt.) v. ITO
ITA No. 273/Pat./2005
A.Y. : 2000-01. Dated : 8-2-2007

S. 44AB, S. 44AD, S. 271B, S. 273B

Assessee engaged in loading and unloading iron
and steel at railway siding using a mobile crane cannot be said to be carrying
on civil construction work within the meaning of S. 44AD and, therefore, she is
not liable to penalty u/s.271B for failure to get accounts audited u/s.44AB,
even though she has shown income below 8% of the gross receipts.

The assessee was engaged in loading and unloading
iron and steel at railway siding using a mobile crane. She declared net profit
at a rate lower than 8% of the gross receipts. The Assessing Officer held that
she should have got her accounts audited as required under clause (c) of S. 44AB
and accordingly imposed penalty u/s.271B. The said order of penalty was upheld
by the CIT(A). On second appeal, the ITAT held that :

1. Use of mobile crane for loading and unloading iron and steel cannot be said to be civil construction work. Once the provisions of S. 44AD are enacted for computing profits and gains of business of civil construction, then any other work which is not in the nature of civil construction cannot be brought within the mischief of this Section.

2. ‘Works contract’ cannot be construed to mean any contract relating to work. Therefore, the assessee was under a bona fide belief that her case does not fall u/s.44AD and that she was not required to get her accounts audited, even though she has shown income below 8% of the gross receipts.

3. Her gross receipts being less than Rs. 40 lacs, there was no compulsion to get the accounts audited u/s.44AB.

4. The principle of ejusdem generis has to be invoked when particular words pertaining to a class or category or genre are followed by general words, and the general words are construed as limited to words of the same kind as those specified. This principle would apply when : (i) the statute contains an enumeration of specified words; (ii) the subject of enumeration constitutes a class or category; (iii) that class or category is not entrusted by enumeration; (iv) each term follows enumeration; and (v) there is no indication of a different legislative intent.

5. There is no legislative intent to infer that works contract can mean any works contract other than civil construction. The heading of S. 44AD clearly says “Special provision for computing profits and gains of business of civil construction, etc.” Ss.(1) of S. 44AD provides that a sum equal to 8% of the gross receipts paid or payable to the assessee can be assessed as income from civil construction or supply of labour for civil construction. Therefore, intention of the Legislature is clear that S. 44AD has been enacted for the purpose of computing profits and gains of business of civil construction and nothing else.

Cases referred to :

    CIT v. Shree Warna Sahakari Sakhar Karkhana, (2002) 253 ITR 226 (Bom.), and

    CIT v. Mohd. Ishaque Gulam, (1998) 232 ITR 869 (MP)

Payment of tax by employer on behalf of employee is a non-monetary perquisite — Tax on such tax is exempt u/s.10(10CC)

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New Page 2

3) (2007) 109 ITD 141 (Delhi) (SB)


RBF Rig Corpn. LIC (RBFRC) v. ACIT

A.Y. 2004-05. Dated : 30-11-2007

 

Payment of tax by employer on behalf of employee is a
non-monetary perquisite and hence tax on such tax is not liable to be again
included in the total income of the employee by virtue of clause 10CC of S. 10.

 

For A.Y. 2004-05, the returns of income of non-resident
foreign national employees employed in India were filed by the employer as their
statutory agents. These employees were paid salary ‘net of taxes’ and the taxes
were borne by the employer company. Accordingly, the taxes borne by the employer
were added to the income of the employees and tax was calculated on the
grossed-up salary. However, the Assessing Officer held that the tax borne by the
employer was also a monetary perquisite and hence further tax on such tax should
also be added to the salary by multiple-stage grossing up process. The assessee
appealed to CIT(A), but without success.

 

In the following two cases, the Delhi Bench of the Tribunal
held that tax on tax borne by the employer was a monetary perquisite and hence
not exempt u/s.10(10CC) :

(1) B.J. Services Co. Middle East Ltd. v. ACIT, (IT
Appeal No. 4033 to 4053 of 2005)

(2) Western Geo International Ltd. v. ACIT, (2007)
16 SOT 459

 


In the circumstances, a Special Bench was constituted at the
request of the assessee and recommended by the Regular Bench to consider the
operation of S. 10(10CC) and to review the above decisions.

 

The Special Bench observed that :

(1) The Finance Act 2002 has inserted Clause 10CC in S. 10
to exempt tax on non-monetary perquisites paid by the employer on behalf of
the employees.

(2) The above clause overrides S. 200 of the Companies Act,
1956, which prohibits payment of tax-free salary by a Company.

(3) Combined reading of S. 10(10CC) along with other
consequential amendments by the Finance Act, 2002 like insertion of S.
192(1A), S. 40(a)(v), amendment of S. 195A, etc. suggests that the employer
has an option to pay the taxes on behalf of the employee. Once this option is
exercised by the employer, it is nothing but discharge of an obligation by the
employer, which but for such payment by the employer would have been payable
by the employee. Thus it is a perquisite fully covered by sub-clause (iv) of
clause (2) of S. 17.

(4) A payment by the employer to a third party on behalf of
the employee cannot be considered as a monetary payment to the employee. It
may be a monetary gain or monetary benefit or monetary allowance for the
employee, but it is definitely not a monetary payment to the employee.

(5) S. 10(10CC) excludes from its operation tax on direct
monetary payments to the employees. Tax paid to the Government is a payment to
a third party and hence cannot be excluded from the operation of S. 10(10CC).

 


Thus, taxes paid by employer on behalf of employees is a
non-monetary perquisite within the meaning of S. 17(2)(iv) and hence tax on such
tax is exempt u/s.10(10CC). Such taxes can be added in the salary of the
employees for the purpose of grossing up, but the tax on such tax can not be
again added for multiple-stage grossing up.

 

Case relied upon :

 CIT v. Mafatlal Gangabhai & Co. (P) Ltd., (1966) 219 ITR 644 (SC)

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S. 43B : (a) Advance payment of excise duty allowable without incurring of prior liability. (b) Modvat credit available does not amount to payment, hence not allowable.

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New Page 2

2) (2007) 110 TTJ 183 (Chd.) (SB)


Dy. CIT v.
Glaxo Smithkline Consumer Healthcare Ltd.

ITA No. 343 (Chd.) 2005

A.Y.2001-02. Dated : 20-7-2007

S. 43B of the Income-tax Act, 1961 –




(a) Deduction for tax, duty, etc. is allowable u/s.
43B on payment basis before incurring the liability to pay such amounts;
excess amount of excise duty reflected in the account-current is, therefore,
nothing but actual payment of excise duty, even though mentioned as advance
payments. Hence, it is allowable deduction u/s.43B.


(b) Modvat credit available to assessee, as on the
last day of the previous year does not amount to payment of excise duty and,
hence, not allowable u/s.43B.


 


Allowability u/s.43B on payment :

The assessee’s claim before the Assessing Officer was that
the balance of Central Excise Duty lying in the PLA and RG-23 registers should
be allowed as a deduction u/s.43B. The CIT(A) allowed the claim, relying on the
decisions in the following cases :

(a) Raj & Sandeep Ltd. v. Asst. CIT, (ITA No.
1853/Chd./1992 dated 18-2-1993)

(b) Modipon Ltd. v. IAC, (1995) 52 TTJ (Del.) 477

(c) Honda Siel Power Products Ltd. v. Dy. CIT,
(2000) 69 TTJ 97 (Del.)/(2001) 77 ITD 123 (Del.)

 


The Regular Division Bench at Chandigarh found that divergent
views have been expressed by the co-ordinate Benches of the Tribunal on this
issue and there is no judgment of any superior Court so as to settle the
divergent views. The Special Bench was constituted to decide the following
issue :

“Whether deduction for tax, duty, etc. is allowed on
payment basis without incurring of prior liability to pay such amount u/s.43B
of the Act ?”

 


The Special Bench held that deduction for tax, duty, etc. is
allowable u/s.43B on payment basis before incurring the liability to pay such
amounts; excess amount of excise duty reflected in the account-current is,
therefore, nothing but actual payment of excise duty even though mentioned as
advance payments. Hence, it is allowable as deduction u/s.43B. The Special Bench
relied on the decisions in the following cases :

(a) Indian Communication Network (P) Ltd. v. IAC,
(1994) 48 TTJ (Del.) (SB) 604; (1994) 49 ITD 56 (Del.) (SB)

(b) Lakhanpal National Ltd. v. ITO, (1986) 54 CTR
(Guj.) 241; (1986) 162 ITR 240 (Guj.)

(c) Berger Paints India Ltd. v. CIT, (2004) 187 CTR
(SC) 193; (2004) 266 ITR 99 (SC)

 


The Special Bench noted as under :

(a) S. 43B provides for the deduction of sums payable
mentioned in clauses (a) to (f), only if actually paid, but it shall be
allowed irrespective of the previous year in which the liability to pay such
sum was incurred by the assessee. The intention of the legislature is apparent
in the language used in S. 43B that the deduction in respect of tax or duty,
which was actually paid by the assessee has to be allowed as deduction without
looking into the year of incurring the liability. The expression ‘irrespective
of the previous year’ dispenses with the concept of previous year in the
matter of the sums covered by S. 43B.

(b) Any reference to the time of incurring or accruing of
the liability is dispensed with by the statute, while concentration is made on
the point of actual payment of the sum to the treasury of the Government.

(c) The payments made to the credit of the accounts-current
are nothing but substantial/actual payments of central excise duty. The
assessee has no option to pay or not to pay such deposits in that running
account to meet the liability of central excise duty arising from time to
time. The payments of advance deposits in the account-current are necessitated
by the mandate of law and not by the option of the assessee. The advance
payments of central excise duty, therefore, satisfy the character of exaction
made by the sovereign under authority of law.

(d) S. 43B has brought in a change in the normal rule of
deduction of expense based on the accounting method followed by an assessee.
The normal principles and practices are done away. Accordingly, there is no
force in the argument of the Revenue that the deduction can be granted only if
the liability is incurred during the previous year even when the payment was
made by the assessee.

(e) The nature of the account-current brings home the point
that the advance payments of excise duties are actual payments of duties.
Therefore, when the payments are understood as actual payments, those
payments, even if mentioned as advance payments, need to be allowed as
deduction u/s.43B.

 


Modvat credit not allowable u/s.43B :

The other issue considered by the Special Bench was whether
Modvat credit available to the assessee as on the last day of the previous year
amounts to payment of central excise duty u/s.43B.

 

The Special Bench held that Modvat credit available to the
assessee on the last day of the year does not amount to payment of excise duty
and, hence, it is not allowable u/s.43B.

 

The Special Bench noted as under :

(a) There is a distinction between unexpired Modvat credit
available in the hands of the assessee as well as the set-off of the credit
balance against actual liability. The time lag between the two points cannot
be ignored. On actual set-off of the unexpired Modvat credit against the
liability towards the payment of duty may be as good as tax paid, but the
unexpired Modvat credit before the point of such set-off cannot be treated as
tax paid.

    b) In the case of unexpired Modvat credit, there is no question of set-off on the last day of the previous year and, therefore, there is no occasion to treat the unexpired credit as equivalent to tax paid. In fact, the unexpired Modvat credit available to an assessee is in the nature of a future entitlement which cannot be considered as equivalent to advance payment of duty.

    c) In a case of advance payment of central excise duty, there is a defacto payment of duty by cash in the Government treasury. The payment is made towards the central excise account which has been already held as actual payment of excise duty itself. However, in the scheme of Modvat, there is no such payment of excise duty. The credit is available to an assessee under the scheme of Modvat in order to minimise the escalation effect of payment of excise duty by successive manufacturers. Therefore, the excise duty paid at the earlier point is set off against the central excise liability at the next point. Till the set-off is availed at the next point, the duty available for set-off by the assessee is nothing but part of the cost of the materials purchased by him. That is not a payment per se made towards excise duty, but it was in fact a payment made towards the purchase cost.

    d) The balance of Modvat credit becomes equivalent to the payment only at the point of time the assessee exercises his option to set off the credit balance against the central excise liability and not before.

S. 147 : In proceedings /s.147, AO cannot probe if any other income had escaped assessment.

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New Page 2

1 ) (2007) 110 TTJ 118 (Jp)


Silver Mines
v. ITO

ITA No. 426 (Jp) 2005

A.Y. 2000-01. Dated : 21-5-2007

S. 147 of the Income-tax Act, 1961 – When proceedings u/s.147
are initiated, Assessing Officer cannot probe if any other income had escaped
assessment.

 

In the course of reassessment proceedings, the Assessing
Officer made various additions to the assessee’s income. The CIT(A) held that
when proceedings u/s.147 of the Act are initiated, the proceedings are open only
qua items of underassessment. Further, finality of assessment proceedings on
other issues remains undisturbed. He noted that no assessment was framed
u/s.143(3), nor notice u/s. 143(2) was issued within the time allowed and,
therefore, other issues which are not covered by escaped income cannot be
disturbed. Accordingly, he deleted such additions. He relied on the decisions in
the cases of Vipin Khanna v. CIT, (2002) 175 CTR (P & H) 335 and CIT
v. Sun Engineering Works (P.) Ltd., (1992) 107 CTR (SC) 209.

 

The Tribunal, also relying on the decisions in the above
cases, upheld the CIT(A)’s order. The Tribunal noted as under :

(a) No notice u/s.143(2) had been served on the assessee
within the stipulated time, indicating that the Assessing Officer had not
found it necessary to require the assessee to produce any evidence in support
of the return. Therefore, the return filed by the assessee had become final.

(b) Therefore, when proceedings u/s.147 are initiated, the
proceedings are open only qua items of underassessment and the finality of
assessment proceedings on other issues remains undisturbed. The amendments
made in S. 143 and S. 147 w.e.f. 1st April 1989 do not in any manner negate
this proposition of law.

(c) The Assessing Officer is not permitted to make fishing
inquiries to probe if any other income had escaped assessment or not, and such
inquiries can only be permitted if, in the first instance, some material comes
to his notice to suggest that some other item of income may have escaped
assessment or had been underassessed.



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I S. 2(47), 54EC- Transfer of shares is completed only on final delivery of shares and upon all covenants of the share purchase agreement becoming finally irrevocable and not on the date of execution of the share purchase agreement.

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New Page 1

46 2009-TIOL- 789-ITAT- MUM

Mrs. Hami Aspi Balsara vs ACIT

ITA No. 6402/Mum/2008

Assessment Year: 2005-06.
Date of Order: 22.5.2009

I S. 2(47), 54EC- Transfer of
shares is completed only on final delivery of shares and upon all covenants of
the share purchase agreement becoming finally irrevocable and not on the date of
execution of the share purchase agreement.


II Ss. 28(va), 55(2)(a)- Section
28(va) would be attracted where the assessee was carrying on business and not
where the assessee only had right to carry on business in the form of capital
asset— Where capital asset is in the nature of right to carry on business, then
the consideration for non-compete will come within the ambit of capital gains
tax.

Fact I:

The assessee, on 27.1.2005, entered into an agreement for the
sale of shares held by the assessee and other persons in three companies viz.
Balsara Home Products Ltd., Balsara Hygiene Products Ltd. and Besta Cosmetics
Ltd. (i.e. target companies) to Dabur India Ltd. (the buyer). A sum of Rs
10,65,06,753 was received by the assessee on 28.1.2005. As per the terms of the
share purchase agreement, the transfer of shares was effective from 1.4.2005.
The assessee regarded 1.4.2005 to be the date of transfer, and investments
qualifying for exemption u/s 54EC were made within a period of six months from
1.4.2005.

The Assessing Officer (AO) held that since various covenants
in the share purchase agreement resulted in substantial extinguishment of the
rights of the assessee in the target company, and also since the sale
consideration was not refundable to the assessee, the transfer of shares had
taken place on 27.1.2005, it being the date of the share purchase agreement. He
taxed capital gains in the assessment year 2005-06. He also held that the
investment had not been made within six months from the date of transfer and,
therefore, denied exemption u/s 54EC.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.


Fact II:

The sale consideration for shares of companies having
Intellectual Property Rights, was in excess of the book value of the shares.
Since the share purchase agreement had a non-compete covenant and no specific
consideration was assigned to it, the AO considered the difference between the
sale consideration for the transfer of shares and the book value of the shares —
which was approximately 80% of the sale consideration — to be the consideration
for non-compete, and charged it to tax u/s 28(va).

The CIT(A) confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held I:



(i) `Sale’, as contemplated u/s 2(47)(i), and
extinguishment of rights, as contemplated u/s 2(47)(ii), are not mutually
interchangeable. If a particular transaction is a transaction of sale, then,
unless the sale is complete, no transfer can be said to have taken place;
because there will always be extinguishment of rights in the case of a sale —
and if a single right out of the entire bundle of the property in a capital
asset is extinguished, then, the transfer would be complete. This will lead to
an absurd situation.

(ii) A case of sale and that of extinguishment of rights
are mutually exclusive. It could not be said that there was extinguishment of
rights on 27.1.2005 because extinguishment of rights implies that the right
cannot be revived. However, till the time the right is revocable, it could not
be said that there was extinguishment of rights. At best it can be said to be
a case of suspension of rights till all the requirements for completing the
sale were over. It was only on execution of the second amendment to the share
purchase agreement on 1.4.2005 that the Escrow Agreement and the power of
attorney became incapable of being revoked, modified or altered unilaterally
by the sellers. Therefore, prior to this date, the sellers had the right to
revoke the share purchase agreement.

(iii) Clause (c) of Section 372A of the Companies Act, 1956
mandates that a company cannot acquire by way of subscription, purchase or
otherwise the securities of any other corporate body, unless previously
authorized by a special resolution passed in a general meeting. This special
resolution was passed by Dabur India Ltd. on 28.3.2005. Therefore, in any
case, prior to this date, it cannot be said that the shares of the assessee
were acquired by Dabur India Ltd.

(iv) The definition of the term `sale’ as per the Sale of
Goods Act assumes importance since this term is not defined in the Income-tax
Act. On a reading of S. 4 of the Sale of Goods Act, it becomes evident that an
agreement to sell becomes complete when the conditions contemplated in the
agreement are fulfilled.

(v) S. 65 of the Indian Contract and Specific Relief Act
makes it very clear that if, for any reason, the terms of a contract cannot be
fulfilled, then the assessee is bound to restore the benefits she had
received, including the consideration to the purchaser.

(vi) The decision of the Amritsar Bench of ITAT, in the
case of Maxtelcon Ventures Ltd. (301 ITR (AT) 90), was rendered with reference
to K N Narayanan (145 ITR 373)(Ker) without considering the subsequent
decision of the same High Court in the case of 203 ITR 663.

In view of specific provision in Indo-Swiss treaty, income from shipping business does not qualify for benefit under DTAA and hence, such income would be taxable in terms of provisions of Income-tax Act.

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  1. Gearbulk AG (AAR)

(2009 TIOL 24 ARA IT)

AAR No. 803 of 2009

Article 7, 22, India-Switzerland Treaty

Dated : 30-9-2009

 

Issue :

In view of specific provision in Indo-Swiss treaty, income
from shipping business does not qualify for benefit under DTAA and hence, such
income would be taxable in terms of provisions of Income-tax Act.

Facts :


The applicant is a non-resident shipping Company
incorporated under the laws of Switzerland. The applicant enters into medium
and long term shipping contracts for the transportation of cargo worldwide.

During the financial years 2007-08 and 2008-09, the
applicant entered into a shipping contract with non resident charter for
transportation of cargo from Indian ports to overseas ports. The customers
were procured with the help of assistance of independent agents in UK. In
India, independent agent was appointed for shipping agency, clearing &
forwarding services and for acting as port agent. Admittedly, the applicant
had no physical presence or dependent agent anywhere including in India.

There was no dispute that the applicant trigged tax
liability in India in terms of provisions of S. 172 of the Act but, claimed
exemption by relying on treaty provisions.

Treaty between India and Switzerland as signed in the year
1994 is peculiarly worded. Article 7(1) of the treaty specifically excludes
profits from the operation of ships in international traffic. Article 8 of the
treaty is restricted in its application to the operation of aircraft in
international traffic. The treaty was amended in the year 2001 and ‘other
income’ article was added. In terms of ‘other income’ article, income not
dealt with in the foregoing articles was made taxable only in the Country of
Residence (COR) unless right or property in respect of which income paid is
effectively connected with PE in source country.

The applicant’s contention was that the profits from the
operation of ships in international traffic which stands excluded by Article 7
of the DTAA, is covered by ‘other income’ Article of the treaty; and in
absence of PE in India, the income cannot be taxed in India after amendment of
treaty in the year 2001.

Held :

The AAR held :

The Treaty provisions show that shipping business income
earned by a non-resident is not intended to be covered by Indo–Swiss treaty.
The language and scheme of the provisions of the treaty as also a comparative
study of Treaties of India & Switzerland with others lead to the inevitable
conclusion that shipping income derived from international operations is
sought to be kept outside the purview of the Treaty.

Article 7 of the treaty is explicit and specifically
excludes profits from shipping activity. While specific provision is made for
air transportation business, no such provision was made in the treaty for
shipping business.

The residuary Article 22, concerning ‘other incomes’ was
introduced in 2001. Till then, there was no dispute that the profits derived
from the operation of ships in international traffic was left untouched by the
Treaty because of the specific exclusion in Article 7. The obvious implication
of the exclusion is that such income is subjected to domestic tax law
provisions.

If such legal position was intended to be changed by the
amendments made to the treaty in 2001, specific reference to that effect was
required by amendment to Article 7 and/or in ‘other income’ Article. The AAR
observed :

‘Nor is there explicit language in Article 22 to bring it
within the coverage of the Article. When a particular species of income
excluded from the ambit of the Treaty is sought to be brought within the
scope of the Treaty for the first time, we would expect clear and specific
language to express the intendment rather than leaving it to be taken care
of by Article 22 by implication’.

Shipping profits is specie of business income. As a result
profits of shipping business can be considered to have been dealt with by
Article 7. In any case, when an article concerning business profits
specifically refers to profits from the operation of ships in international
traffic, it can be said that the shipping profits have been dealt with in a
manner as provided by Article 7 of DTAA and the exclusion clause clearly
depicts the intention of the authors of the treaty not to treat the shipping
profits at par with the business profits. As a result, for the purpose of
Article 22, Article 22 cannot apply as the profits arising from the operation
of ships cannot be treated as an item not dealt with in the preceding articles
of the treaty.

The AAR noted the commentary on UNMC and Prof. Klaus Vogel,
which was brought to the notice of the AAR by the applicant, on the rationale
of the provision of reserving the right of taxation to the country of
residence in respect of aircraft and shipping operations. The AAR however
contended that in the absence of clear words in the Indo Swiss Treaty, the
shipping profits could not be placed at par with international air transport.


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S. 263 — Assessing Officer adopted one of the permissible view — Such order cannot be said to be erroneous.

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Part A: Reported Decisions


(2010) 126 ITD 141 (Bang.)

Siemens Public Communication Networks Ltd. v. CIT

A.Y. : 2003-04. Dated : 16-1-2009

20. Provision of warranty created on accrual basis
is an allowable expenditure.

S. 263 — Assessing Officer adopted one of the
permissible view — Such order cannot be said to be erroneous.

Notional income cannot be considered for deduction
u/s.10B as the assessee is the same.

Facts:

The assessee created provision for warranty on
accrual basis on the last day of each quarter. The actual warranty-related
expenses were adjusted against the provision. The assessee claimed the provision
for warranty as expenditure in its computation of income. The Assessing Officer
allowed the assessee’s claim. The CIT invoked S. 263 and disallowed the
provision for warranty.

The main contention of the assessee was that
provision for warranty was made on the basis of past experience. It placed
reliance on the decision of Wipro-GE Medical Systems Ltd. v. DCIT, (81 TTJ 455)
(Bang.).

Held:

Following the decision of CIT v. Wipro GE Medical
Systems, (supra), the provision for warranty was held to be an allowable
expenditure.

The Tribunal further held that the Assessing
Officer had adopted one of the permissible views. An order is not erroneous or
prejudicial to the interest of Revenue, unless the view taken by the AO is
unsustainable in law.

Facts:

The assessee company had two units — SCS & TCM. SCS
unit’s income was exempt u/s.10B. The company maintains a common bank account
where the amounts received by both the units are deposited. As such no separate
balance sheets for both the units were prepared. The amounts received were
identified by the invoices in the name of respective units and necessary entries
passed in accounts maintained in SAP. Hence it was natural that the funds earned
by S. 10B unit were also utilised by non-10B unit. Based on the fund
utilisation, a monthly cross-charge interest at a suitable rate of interest was
made. Hence, the surplus funds which were available from the EOU have been used
by the other unit. The assessee booked a notional interest income in the account
of EOU unit and claimed expenditure u/s.10B for the said interest income.

Held:

The interest income booked by the assessee is only
a cross entry. As such the assessee has not earned any interest income. The
assessee is the same. There is no relationship of borrower or lender. Such
interest derived on notional basis cannot be considered for the purpose of
deduction u/s.10B.

Note : Though the judgment as regards second issue is
against the assessee, it discusses an important aspect of notional income which
cannot be taxed as the assessee remains the same.


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Deeming fiction in S. 50C in respect of the words ‘full value of consideration’ applicable only to S. 48 — Meaning of full value of consideration in Explanation to S. 54F(1) not governed by S. 50C — For S. 54F, sale deed value is the full value of conside

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Part A: Reported Decisions



(2010) 45 DTR (JP) (Trib) 41

Gyan Chand Batra v. ITO

A.Y. : 2006-07. Dated : 13-8-2010

 

19. Deeming fiction in S. 50C in respect of the
words ‘full value of consideration’ applicable only to S. 48 — Meaning of full
value of consideration in Explanation to S. 54F(1) not governed by S. 50C — For
S. 54F, sale deed value is the full value of consideration.

Facts :

The assessee had sold a plot of land for sale
consideration of Rs.10.81 lac and declared a long-term capital gain of Rs.5,558.
The AO invoked provisions of S. 50C and the full consideration was taken as
Rs.19,24,987 and reworked capital gain accordingly.

The assessee has purchased a flat within a period
of two years from the date of transfer of the plot. The assessee has made total
investment of Rs.21,14,986, out of which Rs.16.74 lac was paid before the date
of filing of return for concerned assessment year. Therefore, before the learned
CIT(A), the assessee contended that the assessee may be allowed relief u/s.54F
by considering the full value of the consideration as shown by the assessee in
the sale deed as compared to the full value of consideration adopted by the AO
in view of S. 50C of the Act. The learned CIT(A) rejected the claim of the
assessee by observing that the assessee had not claimed S. 54F deduction at the
time of filing of return of income or during the course of assessment
proceedings. Further, the learned CIT(A) held that the availability of deduction
u/s.54F is subject to fulfilment of various conditions and those conditions were
not fulfilled by the assessee.

Held :

The deeming fiction as provided in S. 50C in
respect of the words, ‘full value of consideration’ is to be applied only for S.
48 of the Income-tax Act. The words ‘full value of consideration’ as mentioned
in other provisions of the Act are not governed by the meaning as provided in S.
50C. For the meaning of full value of consideration as mentioned in different
provisions of the Act except in S. 48, one will have to consider the full value
of consideration as specified in the sale deed.

For claiming exemption u/s.54F, net consideration
received upon transfer of original asset is compared with the cost of the new
asset. In Explanation to S. 54F(1), it is mentioned that net consideration means
the full value of consideration received or accruing as a result of the transfer
of the capital asset as reduced by any expenditure incurred wholly and
exclusively in connection with such transfer. The meaning of full value of
consideration in Explanation to S. 54F(1) will not be governed by meaning of
words ‘full value of consideration’ as mentioned in S. 50C. In the instant case,
the cost of new asset is not less than the net consideration as per sale deed,
thus the whole of the capital gains will not be charged even if the capital
gains have been computed by adopting the value adopted by the stamp registration
authority.

The decision of Goetze (India) Ltd. v. CIT, (2006)
204 CTR (SC) 182 restricts the power of the AO to entertain the claim for
deduction otherwise than by revised return and did not impinge on the power of
the Tribunal u/s.254 of the Act. In the instant case, the assessee has claimed
the deduction u/s.54F before the learned CIT(A) and the learned CIT(A) has
entertained such claim. Therefore, the issue of claim can be considered.

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Security deposit received from the licensee with a view to secure due performance of its obligations under the leave-and-licence agreement is in the nature of loan and is in the capital field — Forfeiture of such security deposit upon premature terminatio

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Part A: Reported Decisions



(2010) 44 DTR (Mumbai) (Trib.) 124

ACIT v. Das & Co.

A.Y. : 2003-04. Dated : 27-8-2009

 

18. Security deposit received from the licensee
with a view to secure due performance of its obligations under the
leave-and-licence agreement is in the nature of loan and is in the capital field
— Forfeiture of such security deposit upon premature termination of lease does
not partake the character of income as a capital receipt cannot be said to have
converted itself into a trading receipt on signing of the termination agreement.

Facts :

The assessee was into the business of warehousing,
property leasing, trading in chemical and textile auxiliaries. The assessee
entered into a leave-and-licence agreement with Concord Motors Ltd., a
subsidiary of Tata Motors Ltd. for a period of two terms of three years each. A
lock-in period of five years and six months was provided in the agreement. The
lease rent was treated as business income. During the assessment year under
consideration, the agreement was terminated prematurely by the licensee when 16
months were still remaining out of the lock-in period. On termination of the
lease, the assessee forfeited the interest-free security deposit received by it
from the licensee which was for an amount of Rs.1.50 crore under a separate
security deposit agreement and Rs.5 lakh under a leave-and-licence agreement.
Further, the assessee had received an amount of Rs.24,37,500 as damages for
premature termination from the licensee. This amount was paid on account of
hardship and inconvenience suffered by the assessee as damages. The assessee
treated entire receipt as capital receipt. The AO treated it as revenue receipts
and as taxable income. Upon further appeal, the CIT(A) upheld the order of the
AO.

Held :

A perusal of the terms of agreements clearly shows
that the security deposit is a capital receipt. The deposit is not in the nature
of advance for goods or services, nor could it be qualified as in relation to
the rental component. It is in the nature of loan and is in the capital field.
On a perusal of the termination agreement, it is clear that the forfeiture of
security deposit in question is not in lieu of rental payments and the assessee
is not in default. The forfeiture of security deposit does not partake the
character of income, because a capital receipt cannot be said to have converted
itself into a trading receipt on signing the agreement.

In a decision of Morely (Inspector of Taxes) v.
Tattersall, (1939) 7 ITR 316 (CA), it is clearly laid down that the quality and
nature of receipt for income-tax purpose are fixed once and for all when it is
received and that it does not change its character subsequently. This decision
has been followed in the case of K.M.S. Lakshmanier & Sons v. CIT, (1953) 23 ITR
202 (SC) and it has been observed that one of the conditions is that it is to be
adjusted against a claim arising out of a possible default of a depositor,
cannot alter the character of the transaction or the fact that the purpose for
which the deposit is made is to provide a security for the due performance of a
collateral contract, cannot invest the deposit with a different character. It
remains a loan of which the repayment in full is conditioned by the due
fulfilment of obligations under the collateral contract.

In a subsequent decision of CIT v. T.V. Sundaram
Iyengar & Sons Ltd., (1996) 222 ITR 344 (SC), the above decision of Morely
(Inspector of Taxes) v. Tattersall was considered and held that if an amount is
received in the course of trading transaction, even though it is not taxable in
the year of receipt as being of revenue character, the amount changes its
character when the amount becomes the assessee’s own money because of limitation
or by any other statutory or contractual right. In the case on hand, the
original receipt was in the nature of a loan and never had a revenue character
as it was not at any time a trading receipt as in the case of T.V. Sundaram
Iyengar & Sons.

Further, in the case of Mahindra & Mahindra Ltd. v.
CIT, (2003) 261 ITR 501 (Bom.), it is held that subsequent waiver of principal
amount of loan was not assessable u/s.28(iv) of the Act.

Therefore, the forfeiture of security deposit
amounting to Rs.1.55 crore is not taxable. However, the payment of lump sum
consideration of Rs.24.37 lac is in lieu of the rents and is in the revenue
field unlike the remission of a loan liability. Therefore the same was rightly
taxed as such.

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S. 80IB(10) — Merely because some flats are larger than 1500 sq. feet, the assessee will not lose the benefit in its entirety — Only with reference to the flats which have area more than the prescribed area the assessee will lose the benefit — While compu

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Part A: Reported Decisions



(2010) TIOL 619 ITAT-Bang.

SJR Builders v. ACIT

ITA No. 1192/Bang./2008

A.Y. : 2005-06. Dated : 21-8-2009

 

17. S. 80IB(10) — Merely because some flats are
larger than 1500 sq. feet, the assessee will not lose the benefit in its
entirety — Only with reference to the flats which have area more than the
prescribed area the assessee will lose the benefit — While computing the
built-up area of 1500 sq. feet for the purpose of deduction u/s.80IB(10), the
mezzanine floor and common areas are to be excluded.

Facts :

The assessee firm was engaged in the construction
and real estate business. In the return of income filed, the assessee claimed
deduction u/s.80IB(10) in respect of the projects developed and built by it. The
Assessing Officer (AO) in a survey action found that some of the flats in the
project undertaken by the assessee, in respect of which deduction u/s.80IB(10)
was claimed were more than 1500 sq. feet. He held that the assessee was not
entitled to the benefit of S. 80IB(10).

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

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal held that the assessee is entitled to
deduction u/s.80IB(10) to the extent of flats the built-up area of which is not
more than 1500 sq. feet. In respect of penthouses, the built-up area of which
was more than 1500 sq. feet, the Tribunal held that they may be excluded for
exemption. The Tribunal held that in the light of the decision of the Special
Bench in the case of Brahma Associates, merely because some flats are larger
than 1500 sq. feet the assessee will not lose the benefit in its entirety. It
held that the assessee will lose the benefit only with reference to the flats
which have area more than the prescribed area. It also held that while
considering the built-up area of 1500 sq. feet for the purpose of exemption
u/s.80IB(10), the mezzanine floor and common areas are to be excluded. It
directed the AO accordingly.

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S. 194C and S. 194I — Payment made by an assessee for hiring vehicles for transportation of its employees qualifies for TDS u/s.194C.

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Part A: Reported Decisions


(2010) TIOL 618 ITAT-Mum.

ACIT v. Accenture Services P. Ltd.

ITA No. 5920, 5921 and 5922/Mum./2009

A.Ys. : 2007-08, 2008-09 and 2009-10

Dated : 20-10-2010

 


16. S. 194C and S. 194I — Payment made by an
assessee for hiring vehicles for transportation of its employees qualifies for
TDS u/s.194C.

Facts :

The assessee entered into agreements with various
transport service providers. Under the agreements entered into, the service
provider was to provide transport service at particular locations for
transportation of the assessee’s employees to different destinations and
locations mentioned in the agreement. The transport service provider had to
provide vehicles along with the requisite staff and relevant facilities, full
maintenance and repairs of vehicles, etc.

The assessee deducted income-tax u/s.194C on
payments made under the above-referred agreements. The Assessing Officer was of
the view that the payments under the above-referred agreements were covered by
provisions of S. 194I. The AO held the assessee to be in default as per
provisions of S. 201(1) and also charged interest u/s.201(1A) for all the
assessment years.

Aggrieved, the assessee preferred an appeal to
CIT(A) who held the contract entered by the assessee with the transport service
provider to be covered by Explanation 3 to S. 194C. He held the assessee should
not be treated as an assessee in default u/s.201(1) as well as also not liable
for levy of interest u/s.201(1A).

Aggrieved, the Revenue preferred an appeal to the
Tribunal.

Held :

The Tribunal upon going through the agreements
entered by the assessee noted that the assessee was not required to provide
anything, but was availing the services of the transport for picking up and
dropping of its employees from its offices at different locations to the places
of its clients. It observed that though as per the agreements, the vehicles
provided for the requirements of the assessee were dedicated but it is not a
case of hiring of vehicles only without other facilities. It observed that in
the case of the assessee, all the facilities along with the vehicles were to be
provided by the transport service provider and he was under the obligation to
replace the vehicles as well as the driver and other staff after running certain
hours. It also noted that each vehicle was provided appropriate number of
drivers and time directives to enable the vehicle to be operated 24 hours a day
and 7 days per week. The service provider was responsible for ensuring all legal
and operational obligations. Thus, it was a kind of wet lease, wherein the
assessee was utilising the transport services provided by the service provider
without making any arrangement of its own, but all the arrangements were the
responsibility and obligation of the service provider.

The Tribunal noted that the CBDT has in para 8(ii)
of Circular No. 681, dated 8-3-1994 clarified that transport contract would be
in addition to contract for transportation of loading and unloading of goods;
also covers contracts for plying buses, ferried, etc. along with the staff. It
noted that the Board has also considered this issue in Circular No. 558, dated
28-3-1990 in paragraph 3. It also noted that in Circular No. 715, dated 8-8-1992
the CBDT has in answer to question no. 6 clarified that the provisions of S.
194C shall apply when a plane or a bus or any other mode of transport is
chartered by one of the entities mentioned in S. 194C of the Act. It held that
the classification of vehicles as Plant for the purposes of claiming
depreciation cannot be stretched to determine the nature of services provided
which is otherwise clear from the agreement between the parties. It noted the
observations of the Bombay High Court in the case of Indian National Ship Owners
Association and Others v CIT, (TDS).

Upon going through paragraphs 56.2 and 56.3 of
Circular No. 3 of 2008, dated 12-3-2007 dealing with Explanatory notes on
provisions of the Finance Act, 2007, it held that the provisions of S. 194I are
confined to payment for rent on hiring of land or building including factory
building, furniture or fittings, but not for transport vehicle and other mode of
transportation, particularly when the same is in the nature of providing and
availing transport services. It also held that the expression plant and
machinery used in explanation to S. 194I refers to only plant and machinery used
by the assessee in the business of hiring them, but not the hiring of transport
service.

The appeal filed by the Revenue was dismissed.

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Reassessment u/s.147 — When the assessee has made full and true disclosure of all the facts to the AO, the assessment cannot be reopened on the same ground of failure to disclose all the material facts. Further, once the assessee has disclosed all the mat

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New Page 2

  1. (2009) 120 ITD 374 (Delhi)

Moonbeam Finvest Lease Ltd. v. ITO, Ward-5(4), New
Delhi

A.Y. : 1998-99. Dated : 31-1-2008

Reassessment u/s.147 — When the assessee has made full and
true disclosure of all the facts to the AO, the assessment cannot be reopened
on the same ground of failure to disclose all the material facts. Further,
once the assessee has disclosed all the material facts, the proviso to S. 147
cannot be applied and hence reopening is invalid beyond 4 years from the
relevant assessment year.

Facts :

The assessee’s return for A.Y. 1998-99 was processed
u/s.143(1)(a). In the course of assessment proceedings, the details of ‘Lease
Equalisation Account’ charges were asked for by the AO The assessee submitted
his reply and assessment was completed u/s.143(3). On 7-3-2005 the AO reopened
the assessment by issuing notice u/s.148 on the ground of failure on the part
of the assessee to disclose fully and truly all the material facts. The
assessee challenged the reopening of the assessment on the ground of mere
change of opinion as well as on the ground that it was barred by limitation as
notice was issued after 4 years from the end of relevant A.Y. The CIT(A)
confirmed the action of AO. On appeal to Tribunal, it held that the duty of
the assessee was to make full and true disclosure of all material facts and
the AO had to decide what inference can be drawn therefrom. If assessee had
disclosed all the material facts, reopening could not be justified as it would
amount to mere change of opinion on the part of the AO. Since, in the instant
case the AO was satisfied with the explanation of the assessee at the time of
original assessment, it was not allowed to him to reopen the assessment on the
same ground. Further, as there was no failure on the part of the assessee to
disclose all the facts, proviso to S. 147 could not be applied and notice
u/s.148 could not be validly issued beyond 4 years from the end of relevant
assessment year.



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S. 50C — When the stamp valuation authority has accepted the consideration declared by the assessee in the sale deed, there is no question of once again referring the matter to Departmental Valuation Officer (DVO) u/s.50C.

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New Page 2

  1. (2009) 120 ITD 233 (ASR)


Punjab Poly Jute Corpn. v. ACIT, Cir.-1,
Bhatinda

A.Y. : 2005-06. Dated : 11-4-2008

S. 50C — When the stamp valuation authority has accepted
the consideration declared by the assessee in the sale deed, there is no
question of once again referring the matter to Departmental Valuation Officer
(DVO) u/s.50C.

Facts :

The assessee had sold certain land at the rate of Rs.
220.81 per sq.yd. (total consideration Rs.16.34 lakhs) which rate was accepted
by stamp valuation authority. However, according to AO the value applicable to
the land as per Punjab State Rules, was at the rate of Rs.500 per sq.yd.
Hence, he referred the matter to DVO thus determining full value of
consideration at Rs.72 lakhs and capital gains at Rs.62.40 lakhs. On appeal to
CIT (A), it confirmed the order of the AO.

On appeal to Tribunal, it held that S. 50C comes into play
only when there is valuation at a higher value for stamp valuation purposes by
the State Authority than declared by assessee in sale deed. When there is such
difference noticed, valuation adopted by stamp valuation authority has to be
substituted with the sale consideration of such property mentioned in the sale
deed. In the instant case, the value of sale consideration was accepted by the
stamp valuation authority as the property was registered with the rate of
Rs.220.81 i.e. rate at which sale of land was made. When the stamp
valuation authority has accepted the consideration declared by the assessee in
the sale deed, there can not be any question of once again referring the
matter to Departmental Valuation Officer (DVO) u/s.50C.

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Penalty u/s.271(1)(c) — When the explanation offered by the assessee was bona fide but assessee could not establish its case for deduction in quantum proceedings that would not automatically become a case for levy of penalty for concealment or furnishing

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  1. (


  1. (2009) 120 ITD 151 (Luck.)


Ashok Grih Udyog Kendra (P.) Ltd. v. ACIT-VI,
Kanpur

A.Y. : 2000-01. Dated : 11-4-2008

Penalty u/s.271(1)(c) — When the explanation offered by the
assessee was bona fide but assessee could not establish its case for deduction
in quantum proceedings that would not automatically become a case for levy of
penalty for concealment or furnishing of inaccurate particulars of income.

Facts :

The assessee company filed its return of income for A.Y.
2000-01 claiming an expenditure of Rs.2.37 lakhs as LTC paid to an employee
under the head travelling expenses. The AO disallowed the expenditure on the
ground that the expenditure had not been incurred for the purposes of
business. Further, it was also contended by the Department that if expenses
were incurred on account of travelling of the employee, no TDS had been
deducted and also that the employee was closely related to the director of the
company and hence the expenditure was disallowable u/s.40A(2)(b) as well. The
AO also imposed penalty u/s.271(1)(c) for claiming wrong deduction. The CIT(A)
confirmed the action of AO. On appeal to Tribunal regarding the allowability
of the expenditure, it confirmed the action of AO. Thereafter the assessee
preferred appeal for imposition of penalty u/s.271(1)(c). The Tribunal held
that there was only difference of opinion regarding the allowablility of
expenditure between assessee and department. Although, the disallowance of
expenditure has been upheld by the Tribunal, the department has never
challenged the genuineness of expenditure. It is well settled law that
findings in the assessment proceedings are relevant but not conclusive in
penalty proceedings because the considerations that arise in penalty
proceedings are different from those that arise in the assessment proceedings.
In the instant case, the assessee had disclosed all the material facts
necessary for assessment. Consequently, although the expenditure is
disallowed, the penalty u/s. 271(1)(c) for concealment or furnishing of
inaccurate particulars of income cannot be imposed.

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S. 80HHC r. w. S. 147 — Assessee filed original return but did not claim deduction u/s.80HHC since no positive business income — Case reopened and certain disallowances made — Consequently business income turned positive — Assessee claimed deduction u/s.8

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37 ITO v. Tamilnadu Minerals Ltd.
(2010) 124 ITD 156 (Chennai TM)
A.Ys. : 2001-02 & 2002-03. Dated : 13-10-2009


 

S. 80HHC r. w. S. 147 — Assessee filed original return but
did not claim deduction u/s.80HHC since no positive business income — Case
reopened and certain disallowances made — Consequently business income turned
positive — Assessee claimed deduction u/s.80HHC — AO did not allow the claim
since it was not claimed in the original return and no tax audit report was
filed. Held—Assessee rightfully claimed deduction.

Facts :

The assessee company is a Government of Tamil Nadu
undertaking engaged in the manufacture and export of granites. During the year
under consideration, the total income declared by the assessee was
Rs.2,97,86,549. This total income constituted entirely of income from other
sources. There was no positive income under the head ‘business income’.
Subsequently the assessment was reopened u/s.147 and the AO made certain
disallowance u/s.43B and u/s.14A. This resulted into positive business income.
The assessee thus contended that it should be allowed deduction u/s. 80HHC. The
Assessing Officer rejected the plea on the ground that the deduction was not
claimed in the original return despite there being a positive income, the
assessee had also not filed the audit report and the proceedings u/s.147 are for
the benefit of the revenue and so the assessee cannot claim a benefit which it
had not claimed in the original return.

Held :

(i) S. 147 being for the benefit of the revenue, the
assessee cannot be permitted to convert the reassessment proceedings into an
appeal or revision in disguise, and seek relief in respect of items not
claimed into the original assessment proceedings. However, in the given case,
the assessee could not have claimed the deduction in absence of any business
profits. Further, no sooner the disallowance u/s.43B was proposed by the AO,
the assessee immediately put forth its claim for deduction u/s.80HHC. This it
did because as a result of disallowance, the business income turned positive.
The assessee thus claimed a rightful deduction.

(ii) The argument of the Revenue that the assessee could
have filed a revised return has no force.

(iii) In original return since the deduction was not
claimed, there was no question of filing the audit report as well. But when
the business income became positive and when the assessee made a claim for the
deduction, it is well within its right to file the audit report at the time of
making the claim.

S. 194C(2) — Assessee hired lorries from other tank lorry owners to carry out the activity of transportation — Whether payments made to the tank lorry owners would amount to sub-contract within the meaning of S. 194C(2) — Held, No.

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36 Mythri Transport Corporation v. ACIT
(2010) 124 ITD 40 (Visakhapatnam)
A.Y. : 2005-06. Dated : 9-1-2009

S. 194C(2) — Assessee hired lorries from other tank lorry
owners to carry out the activity of transportation — Whether payments made to
the tank lorry owners would amount to sub-contract within the meaning of S.
194C(2) — Held, No.

Facts :

The assessee was a transport contractor engaged in
transporting bitumen to various points. Since the assessee did not have enough
number of lorries, it hired lorries from others. The tank lorry owners from whom
the lorries were hired were paid amounts after the receipt of bills from the
contractees by the assessee after retaining a certain amount termed as
commission.

The Assessing Officer and the CIT(A) held that the tank lorry
owners were sub-contractors and any payment made to tank lorry owners would come
within the purview of S. 194C.

Held :

As per the provisions of S. 194C(2), the sub-contractor
should carry out whole or any part of the work undertaken by the assessee. It
signifies positive involvement in the execution of the whole or any part of the
main work by spending his time, money and energy. In the instant case, there is
no material to suggest that the other lorry owners involved themselves by
spending their time, money and energy or by taking risk associated with the main
contract work. Hence, the payment made to the lorry owners would not fall within
the purview of S. 194C(2).

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S. 271(1)(c) — Mere change of head of income by AO cannot be construed as concealment of income — Valuation made by DVO cannot be construed as basis for levying penalty — Valuation done by DVO can be adopted by AO only when there is material on record tha

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35 DCIT v. JMD Advisors (P) Ltd.
(2010) 124 ITD 223 (Delhi)
A.Y. : 2003-04. Dated : 8-2-2008


 

S. 271(1)(c) — Mere change of head of income by AO cannot be
construed as concealment of income — Valuation made by DVO cannot be construed
as basis for levying penalty — Valuation done by DVO can be adopted by AO only
when there is material on record that sale consideration received by assessee is
more than that declared by him.

Facts :

The assessee-company was engaged in the business of real
estate. It purchased a property and carried on construction work on the same.
The constructed building alongwith the land was then sold at a loss. This loss
was claimed as business loss by the company. The Assessing Officer observed that
the said property was shown in the balance sheet as ‘fixed assets’ and not as
stock in trade. He thus held that the loss incurred was a long-term capital loss
and not business loss. He further referred the matter to the DVO to estimate the
sale consideration and the cost of construction of the property. Based on the
valuation figures given by the DVO, the AO worked out figure of long-term
capital loss.

He also initiated penalty proceedings u/s.271(1)(c) of the
Act.

Held :

(a) The Assessing Officer ignored the fact that the
assessee-company was incorporated with the main object of carrying on real
estate business. Further, the assessee had shown the property as ‘work in
progress’ in the balance sheets of prior years. Hence the action of the AO to
treat the property as capital asset was not well founded.

(b) Even though the action of the AO was not challenged in
the quantum proceedings as the income assessed was finally a loss, this cannot
draw any adverse inference in the penalty proceedings. Also, a mere change in
the head of income cannot be construed as concealment of income.

(c) Further, for reference to the DVO for valuation of the
fair market value, the AO first needs to bring the material on record to prove
that the assessee has received more consideration than that declared by him.
Since there was no material on record, the action of AO was not tenable in law
and addition made on this basis cannot be treated as concealed income of the
assessee to attract penalty.

(d) The AO had further substituted the cost of construction
recorded in the books of the assessee with the valuation of DVO. However, no
material was brought on record by the AO that the cost of construction was an
inflated one in the books of account of the assessee. Hence, the addition made
by the AO by substituting the cost of construction by the valuation of DVO was
not justified, much less the imposition of penalty.

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S. 55A—Bearing in mind that in the 1980s, it was common practice to pay a part of sale consideration by unaccounted cash, the rates given by independent media and press like Times of India/Accommodation Times is certainly more reliable indicator of the pr

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34 2010 TIOL 277 ITAT (Mum.)
Kumar K. Chhabria v.
ITO
A.Y. : 2005-06. Dated : 30-3-2010


 

S. 55A—Bearing in mind that in the 1980s, it was common
practice to pay a part of sale consideration by unaccounted cash, the rates
given by independent media and press like Times of India/Accommodation Times is
certainly more reliable indicator of the prevailing market value of properties
than comparable sale instances.

Facts :

The assessee, while computing long-term capital gain arising
on transfer of office premises purchased by him for Rs.69,000 on 1st October,
1978, considered the fair market value of this property as on 1st April, 1981 to
be its cost of acquisition. The fair market value claimed to be Rs.16,20,000 was
backed by a valuation report by an approved valuer which report relied upon
certain press reports about prevailing market prices and not on any comparable
sale instances.

The Assessing Officer (AO) found the value as per comparable
sale instances in the same society to be much lower. The assessee on being
confronted with these instances submitted that these transactions apparently had
cash element in the consideration and that the valuation of the assessee was
also in consonance with Indian Valuer Directory and Reference Book. The AO
referred the matter to the DVO who valued the premises at Rs.3,00,000 on the
basis of certain sale transactions at Cuffe Parade area. The AO adopted this
amount of Rs.3,00,000 as fair market value of the property on 1-4-1981 and
computed long-term capital gains on that basis. He rejected the assessee’s
objection to the DVO report by stating that this report is binding on the AO.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

(i) A Third Member decision of the Tribunal in the case of
Rubab M. Kazerani v. JCIT, 91 ITD 429 (TM) has concluded that reference to DVO
u/s.55A can be made when value of the property as disclosed by the assessee is
less than the fair market value and not vice-versa. In the present case, on
the contrary, AO was of the prima facie view that the fair market value is
less than the value disclosed by the assessee. Thus, the learned CIT(A)’s
emphasis on binding nature of DVO valuation is wholly devoid of legally
sustainable basis.

(ii) It is not even in dispute that at least in eighties,
it was a common practice to pay a part of sale consideration by unaccounted
cash and it was because of this practice several legislative measures had to
be taken to combat tax evasion in property sale transactions. Bearing this in
mind, the rates given by independent media and press like Times of India/Accomodation
Times is certainly more reliable indicator of the prevailing market value of
properties. The market prices given in ‘Indian Valuer Directory & Reference
Book’, also partly supports the valuation by valuation report as filed by the
assessee.

(iii) The Tribunal noted that as against the assessee’s
valuation @ Rs.2,700 per sq.ft., the Directory & Reference Book states the
value of office premises in Nariman Point area @ Rs.2000 per sq.ft. The
valuation as per ‘Accommodation Times’, ranges from Rs.2,400 per sq.ft. to
Rs.3,200 per sq.ft. for commercial area.

(iv) The Tribunal adopted the rate of Rs.2,000 per sq.ft.
as given in the refrencer as against the valuation @ Rs.500 per sq.ft, adopted
by D.V.O. and valuation @ Rs.2,700 per sq.ft. as adopted by the assessee’s
valuer.

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S. 133(6)—Merely for want of Permanent Account Numbers, the AO is not justified in disbelieving the transactions by doubting the creditworthiness of the karigars and disallowing the payments made to karigars who have confirmed the receipt of amounts.

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33 2010 TIOL 272 ITAT (Mum.)
ACIT v. Lakhi Games Impex Pvt. Ltd.
A.Y. : 2003-04. Dated : 29-1-2010


 

S. 133(6)—Merely for want of Permanent Account Numbers, the
AO is not justified in disbelieving the transactions by doubting the
creditworthiness of the karigars and disallowing the payments made to karigars
who have confirmed the receipt of amounts.

Facts :

The assessee company was engaged in the business of import of
rough diamonds, cutting and polishing and thereafter export of the same. It had
claimed a sum of Rs.22,69,75,283 as labour charges paid to karigars. In the
course of assessment proceedings, particulars of individual recipients of labour
charges were furnished. The Assessing Officer (AO) issued notices u/s.133(6) to
five parties. Notice was served to one party and the other four notices were
returned unserved by the postal authorities. No reply was received from the
party to whom the notice was served. On being confronted, the assessee filed a
confirmation in respect of the said party. The assessee company also filed
confirmations of the other four parties to whom notices were issued but were
returned unserved. Since PAN in respect of all these five parties did not exist
in the confirmations, the AO doubted the creditworthiness of the parties and the
genuineness of the transactions. He disallowed the labour charges in respect of
these five parties.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
observed that this is not a case of cash credit where creditworthiness has to be
examined. He held that non-availability of PAN cannot make a transaction as
non-genuine. He allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal agreed with the finding of the CIT(A) that this
is not a case of cash credit and the issue relates to the allowability of
expenditure. Since the parties have confirmed to have received the payments,
merely for want of permanent account numbers the AO was not justified in
disbelieving the transactions by doubting the creditworthiness of the karigars.

The Tribunal upheld the order of the CIT(A) and the ground
raised by the Revenue was dismissed.

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Capital gains — Since sale consideration of the industrial unit has been arrived at by ‘capitalisation of profits’ and not challenged by any of the authorities below, it cannot be said that the sale of unit is an itemised sale of assets of the unit.

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42 (2010) 38 DTR (Pune) (TM) (Trib.) 393
J. B. Electronics v. JCIT
A.Y. : 1997-98. Dated : 31-12-2009

 

Capital gains — Since sale consideration of the industrial
unit has been arrived at by ‘capitalisation of profits’ and not challenged by
any of the authorities below, it cannot be said that the sale of unit is an
itemised sale of assets of the unit.

Facts :

The assessee-firm sold its industrial unit to the sister
concern and surplus of Rs.3,90,75,996 arising was claimed to be exempt on the
ground that it was a slump sale of its business. The price for transfer was
arrived at by capitalisation of profits method. The weighted average of net
profits for 3 preceding years has been capitalised and the consideration is
arrived at on the basis of 5 times of such weighted average. Accordingly the
sale consideration of Rs.5,64,79,500 was fixed. Individual value of assets and
liabilities was not considered in computation of price of sale of business.

The AO noted that the assessee had got its assets revalued at
Rs.1,71,85,000 as on 31st March, 1995 on the basis of valuation report of an
independent valuer. It was thus clear that the value of assets was not more than
Rs.1,71,85,000 shortly before the date of transfer of assets. The difference
between Rs.1,71,85,000 and WDV of assets was taxed as short-term capital gain
and difference between the consideration i.e., Rs.5,64,79,500 and Rs.1,71,85,000
was taxed as long-term capital gain as goodwill u/s.55(2)(ii).

Aggrieved, the assessee carried the matter in appeal before
the CIT(A) but without any success. Not satisfied with the order of the CIT(A),
the assessee carried the matter in appeal before the Tribunal. There was a
difference of opinion between the members, and the matter was referred to the
Third Member.

Held :

None of the authorities below had any issues with genuineness
or bona fides of the valuation method adopted for sale of the unit. It has never
been the case of any of the authorities below that the consideration arrived at
was part of the sham arrangement and that inter se relationship between the
buyer and the seller has vitiated the bona fides of the sale agreement.

There is no dispute that valuation as on 1st May 1996, which
was the date of transfer of the business, for individual assets is not
available, and the valuation report relied upon by the authorities below is
dated 12th April, 1995 estimating value of the assets as on 31st March, 1995.
The value of an asset as on 1st May 1996 cannot be the same as on 31st March,
1995. The decision of CIT v. Artex Manufacturing Co., 227 ITR 260 (SC), which
has been relied upon by the lower authorities will be relevant only in a case in
which sale consideration of the business is computed on the basis of values of
specific assets and liabilities.

The other aspect of the matter is that the unit has been
transferred as a going concern. Even the manpower, registrations, contracts,
permissions and sanctions were to be transferred to the buyer. The unit has been
transferred to the buyer in a fully functional state along with all the
employees and all the contracts.

Regarding the argument raised that the sale transaction is a
collusive transaction between the sister concerns and the whole theory of
valuation on the basis of capitalisation of profits is an afterthought, it has
not been the case of any of the authorities below that the sale agreement is a
sham agreement or that valuation method adopted by the assessee is not bona
fide. The payments have been made in accordance with this agreement on 1st May,
1996 itself, and therefore it cannot be said that the quantification of sales
consideration was an afterthought. As for the assessee and the buyer being
sister concerns, merely because an agreement is entered into by related parties
the effect of the agreement cannot be ignored. Therefore, the impugned
transaction is not a case of itemised sale and it is clearly a case of slump
sale of the business.

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S. 80HH and S. 80-I — New industrial undertaking vis-à-vis expansion of production capacity of existing unit.

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41 (2010) 38 DTR (Delhi) (SB) (Trib.) 137
JCIT v. Thirani Chemicals Ltd.
A.Y. : 1992-93. Dated : 9-4-2010

 

S. 80HH and S. 80-I — New industrial undertaking vis-à-vis
expansion of production capacity of existing unit.

Facts :

The assessee is engaged in the business of manufacturing
calcium carbonate since 1978 with a starting production capacity of 5,000 MT
annually, which was enhanced in various stages — to 7,500 MT in 1986-97 — to
9,600 MT in the year 1988-89 — to 11,000 MT in 1990-91 and 70,000 MT in 1991-92,
which resulted in corresponding increase in the production. The assessee claimed
deductions u/s.80HH and u/s.80-I in these years on the basis that with each
expansion a new industrial undertaking came into existence in the year in which
the production capacity was increased and the period of allowability of
deductions will increase accordingly.

For A.Y. 1991-92 and 1992-93, the AO rejected such claims of
the assessee holding that it was a case of gradual expansion and reconstruction
of existing unit and the increase in the production capacity cannot be held as
establishment of new industrial undertaking. The CIT(A) confirmed the view of
the AO in A.Y. 1991-92. However for A.Y. 1992-93, the CIT(A) took a different
view than his predecessor and allowed the claim of the assessee.

The Tribunal decided the appeal for A.Y. 1991-92 in favour of
the assessee relying on the observations of the CIT(A) for A.Y. 1992-93. Whereas
for A.Y. 1992-93 the Tribunal considered the matter afresh without being
influenced by the earlier order on the ground that the fact that the appeal
against the order of the CIT(A) for A.Y. 1992-93 was pending before the Tribunal
was not brought to the notice of the Tribunal at the time when the appeal for
A.Y. 1991-92 was heard. Upon considering the matter afresh, the Tribunal decided
against the assessee.

Upon further appeal to the High Court, it was directed to
form a Special Bench to resolve the controversy.

Held :

The true test is, there must emerge a new and identifiable
undertaking, separate and distinct from the existing unit. In the present case,
there is no dispute that so-called expanded new plant and machinery were
installed in the existing building, on same process line-up and infrastructure
and new equipments were connected to the old machinery set-up. The rotary gas
producer was common for the old and the new plant. Similarly, all the raw
material processed passed through a common lime holding tank. The old and the
new plant were integrated in such a manner that it was difficult to identify the
input of raw material and final product whether it was produced through the
so-called expanded plant and machinery or through the old plant and machinery.
Raw material, finished products, employees, electric connection, maintenance of
books of accounts, etc. were all common and could not be identified as coming
from new or old plant. Further, the assessee was not able to ascertain the exact
profits independently from old and expanded plant, that is why the assessee
computed its profits on proportionate basis. Therefore no independent and
distinct unit came into existence for the purpose of claiming deduction either
u/s.80HH or u/s.80-I.

 

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S. 80-I r/w S. 80-IA — Where old business is carried on and on growth of business, new units established, benefit of S. 80-I/80-IA available to new unit, if said unit is ‘undertaking’ — A unit qualifies as industrial undertaking when it produces articles

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11 114 ITD 189 (Mum.)


Jt. Commissioner of Income-tax v.


Associated Capsules (P) Ltd.

A.Ys. : 1994-95 to 1997-98. Dated : 5-2-2008

S. 80-I r/w S. 80-IA — Whether where an old business is
carried on by the assessee and commensurate with the growth of the business, new
units are established, benefit of S. 80-I/80-IA will be available to a unit or
new unit, if said unit is in the nature of ‘undertaking’ — Held, Yes; Whether a
unit qualifies to be called an industrial undertaking when it undertakes
production or manufacture of articles or things in its own right and produces
such articles or things by itself as a separate and independent unit — Held,
Yes.

 

Facts :

The assessee had been engaged in the business of production
of empty hard gelatine capsules and their sale to pharmaceutical companies. The
manufacturing activities were carried out by the assessee with the help of
capsule manufacturing machines. In the relevant assessment year, the assessee
had seventeen capsule manufacturing machines installed in four separate
undertakings. It claimed deduction u/s.80-I and u/s.80-IA in respect of its
undertakings.

The AO noticed that the departmental authorities in a survey
u/s.133A at the factory premises of the assessee-company had found that all the
four undertakings were located in the same premises of the factory and all of
them were involved in the production of capsules; that the source of power for
all the units was one, inasmuch as there was one electricity bill for the
factory; that air-conditioning plant for all the units was common; and that
certain ancillary activities, pre and post-manufacturing were common. He held
that all the four undertakings, which were claimed by the assessee to be
separate and independent of each other were essentially one undertaking. He
therefore concluded that undertakings in question could not be regarded as
separate and independent for the purpose of deduction u/s.80-I and u/s.80-IA
and, accordingly, denied the deduction claimed by the assessee.

On appeal, the CIT(A) held that though all the machines and
undertakings involved in the manufacturing of the same article, i.e.,
capsules, were located in the same premises, yet the area of each of the four
undertakings was clearly demarcated and separated from each other; that though
the main source of power in the entire factory was common, yet the power
consumed by each machine was clearly and separately recorded; that though
centralised air-conditioning was provided to all the undertakings, it could be
shutoff for any undertaking without affecting the others; the supply of raw
materials was monitored machinewise and under-takingwise; in a nutshell, each of
the undertaking was working independently of the others. He, therefore, held
each of the undertaking to be separate and independent, and to be producing
capsules in its own right. He, therefore, allowed assessee’s claim for deduction
u/s.80-I and u/s.80-IA.

On Revenue’s appeal, the Tribunal made the following
observations :

1. A perusal of S. 80-I and S. 80-IA establishes that the
notion of ‘undertaking’ is a core jurisdictional element for the application
of S. 80-I and S. 80-IA. The other conditions stipulated can be satisfied only
when there is an ‘undertaking’. The undertaking should be new, in the sense
that it should have begun to manufacture or produce specified articles or
things after the prescribed time schedule.

2. Application of S. 80-I/S. 80-IA to new industrial
undertakings started for the first time by the assessee is usually devoid of
any difficulties. Controversies arise where the old business is being carried
out by the assessee and the new activity is launched by him establishing new
plants and machinery by investing substantial funds to produce the articles or
things which are the same as those from of the old business or to produce some
distinct marketable products
which may feed the old business. It is the general contention of the Revenue
in these cases that establishment of a new undertaking manufacturing the same
product is not a new undertaking eligible for tax incentives. Benefit under
the said Sections is available to a unit or a new unit only if it is in the
nature of an ‘undertaking’.

3. The term ‘undertaking’ has not been statutorily defined
in the Income-tax Act, and the crucial question of whether a unit is to be
considered as an undertaking is left to be decided by the Tribunals/Courts.
The Tribunal further observed that a unit qualifies to be an undertaking when
it undertakes production or manufacture of articles or things in its own right
and produces such articles or things by itself as a separate or independent
unit.

4. The CIT(A) on examination of the material on record had
held that the units in question were well-integrated units producing capsules
on their own, and had a separate and distinct identity of their own, which had
not been shown to be incorrect or based on no material. The Department had
also not rebutted the assessee’s claim that it had treated each undertaking as
separate and independent in its accounts. It was also not the case of the
Department that any of the negative tests laid down in S. 80I(2) was attracted
in this case. Therefore, the CIT(A) had decided the issue correctly.
Therefore, the appeal filed by the Revenue was liable to be dismissed.

 


Cases referred to :



(i) Textile Machinery Corpn. Ltd. v. CIT, (1997) 107
ITR 195 (SC) (para 7)

(ii) Periyar Chemicals Ltd. v. CIT, (1997) 226 ITR
467 (Ker.) (para 9)

S. 11(1)(a) — Application of income should result and should be for the purpose of charitable purposes in India and application need not be in India.

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40 (2010) 38 DTR (Delhi) (Trib.) 105
National Association of Software & Services Companies (NASSCOM) v.

Dy. DIT (E)
A.Ys. : 1998-99, 2004-05 & 2005-06

Dated : 12-3-2010

 

S. 11(1)(a) — Application of income should result and should
be for the purpose of charitable purposes in India and application need not be
in India.

Facts :

The assessee incurred expenditure at an event at Hannover,
Germany, which was claimed as application of income within the meaning of S.
11(1)(a). The AO and CIT(A) were of the opinion that the expenditure should have
been incurred in India in order to be eligible for exemption.

Held :

A perusal of the provisions of S. 11(1)(a) of the Act clearly
shows that the words used are ‘is applied to such purpose in India’. The words
are not ‘is applied in India’. The fact that the Legislature has put the words
‘to such purpose’ between ‘is applied’ and ‘in India’ shows that the application
of income need not be in India, but the application should result and should be
for the purpose of charitable and religious purpose in India. It is not the case
of the Revenue that the expenditure incurred by the assessee in Hannover,
Germany has not resulted in the benefit being derived in India. In these
circumstances, it cannot be said that the expenditure incurred by the assessee
in Hannover, Germany, which resulted in and which was for the purpose of
attaining the charitable object in India, is not application of income. The
decision in the case of Gem & Jewellery Export Promotion Council v. ITO, 68 ITD
95 (Mum.) was followed.

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S. 145 — Entire amount of time-share membership fee receivable by assessee upfront at time of enrolment of a member is not income chargeable to tax in initial year on account of contractual obligation fastened to the receipt to provide services in future

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32 2010 TIOL 262 ITAT (Mad.) (SB)
ACIT v. Mahindra Holidays & Resorts (India) Ltd.
A.Ys. : 1998-99 to 2002-03. Dated : 26-5-2010

S. 145 — Entire amount of time-share membership fee
receivable by assessee upfront at time of enrolment of a member is not income
chargeable to tax in initial year on account of contractual obligation fastened
to the receipt to provide services in future over term of contract.

Facts :

The assessee was in the business of selling time share units
in its various resorts. It granted membership for a period of 25/33 years on
payment of a certain amount as membership fee. During the currency of the
membership, the member had a right to holiday for one week in a year at the
place of his choice from amongst the resorts of the assessee. He also had a
right to transfer, bequeath or gift his membership/time-share unit to any
person. The membership fee was received either in lump sum or in instalments. In
addition to the membership fee, the member was liable to pay annual maintenance
charges, irrespective of whether he made use of the resort or not. These charges
were for the maintenance and upkeep of the various resorts. Additional payment
towards utilities like electricity, water, etc. was payable if the resort was
utilised. The assessee was following the mercantile system of accounting. It
treated the membership fee as revenue receipt. However only 40% of the amount
received was offered for taxation in the year of receipt and the balance was
equally spread over the period of membership of 25 or 33 years on the ground
that it was relatable to the services to be offered to the members. The
Assessing Officer (AO) held that as per the accrual system of accounting, the
entire receipt had to be assessed as income in the year of receipt; the Act does
not recognise the concept of deferred income. He made an addition of 60% of the
receipts shown by the assessee as advance subscriptions.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
upheld the contentions of the assessee and deleted the addition in all the
years.

Aggrieved, the Department preferred an appeal to the
Tribunal. At the instance of the assessee a Special Bench was constituted to
consider the following question :

“Whether the entire amount of the time-share membership fee
receivable by the assessee upfront at the time of enrolment of a member is the
income chargeable to tax in the initial year when there is a contractual
obligation fastened to the receipt to provide the services in future over the
term of the contract ?”

Held :

(i) From the observations of the Supreme Court in E. D.
Sassoon & Co. Ltd v. CIT, (26 ITR 27) (SC), it is evident that two conditions
are necessary to say that income has accrued to or earned by the assessee.
They are, (i) it is necessary that the assessee must have contributed to its
accruing or arising by rendering services or otherwise, and (ii) a debt must
have come into existence and he must have acquired a right to receive the
payment. In the present case, a debt is created in favour of the assessee
immediately on execution of the agreement. However, it cannot be said that the
assessee has fully contributed to its accruing by rendering services. The
assessee is bound to provide accommodation to the members for one week every
year till the currency of the membership. Till the assessee fulfils its
promise, the parenthood cannot be traced to it.

(ii) The argument of the assessee that the main reason to
spread the balance amount of membership fee over the tenure of membership was
due to the fact that the assessee has to incur heavy expenditure for the
upkeep and maintenance of its resorts was not accepted since the assessee was
collecting separate charges for maintenance and use of utilities and therefore
it was held that matching concept cannot be pressed into service with regard
to the membership fee.

(iii) If the assessee is not able to provide accommodation
in any of its notified resorts, it will try to procure alternate
accommodation. This also will entail additional expenditure on the part of the
assessee over and above paying liquidated damages to the assessee. Unlike the
case in Calcuta Co. Ltd. (37 ITR 1) (SC), the liability in this case is
difficult not only to quantify but also to reasonably estimate it. The
liability is undoubtedly there. However, no scientific basis has been brought
to our notice to quantify the same even reasonably. Even if the assessee had
chosen to provide for the liability every year to comply with the matching
concept, it would have been wholly unscientific and arbitrary.

(iv) In the case of Rotork Controls India, 314 ITR 62 (SC),
the Supreme Court has observed that a provision is recognised when (a) an
enterprise has a present obligation as a result of a past event; (b) it is
probable that an outflow of resources will be required to settle the
obligation; and (c) a reliable estimate can be made of the amount of the
obligation. If these conditions are not met, no provision can be recognised.
In the present case, the assessee has a present obligation as a result of a
past event and outflow of resources is probable to settle the obligation.
Thus, first two conditions are satisfied. However, considering the nature of
activity, it is the third condition which is difficult to satisfy.

(v) Recognising the entire receipt as income can lead to
distortion. Somewhat similar, though not exactly identical, situation was face
by the Supreme Court in the case of Madras Industrial Investment Corporation
Ltd. v. CIT, 255 ITR 802 (SC). The only difference is that in the case of
Madras Industrial Investment Corporation the distortion was supposed to be on
account of expenditure, in the present case the distortion is on account of
the entire income being accounted in the year of receipt.

(vi) Since it is difficult to estimate the liability which
is likely to be incurred in future, more so in the absence of any scientific
basis or historical data, the only way to minimise the distortion is to spread
over a part of the income over the ensuing years.

(vii) The entire amount of time-share membership fee
receivable by the assessee upfront at the time of enrolment of a member is not
the income chargeable to tax in the initial year on account of contractual
obligation that is fastened to the receipt to provide services in future over
the term of contract.

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S. 45, S. 48 and S. 55(2) — Assessee, CHS, owned land and building — Upon enactment of DCR, assessee became entitled to additional FSI which was transferred for consideration — Is right transferred covered by S. 55(2) — Held, No. Whether since right trans

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Part B — Unreported Decisions

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


24 New Shailaja CHS Limited
v. ITO, 22(1)(4)


ITAT ‘B’ Bench, Mumbai

Before R. S. Syal (AM) and

V. Durga Rao (JM)

ITA No. 512/Mum./2007

A.Y. : 2003-04. Decided on : 2-12-2008

Counsel for assessee/revenue : Tarun Ghia/

Pitamber Das

S. 45, S. 48 and S. 55(2) of the Income-tax Act, 1961 (‘the
Act’) — A.Y. 2003-04 — Assessee, a co-operative housing society, owned land and
building — Upon enactment of Development Control Regulations, 1991 (DCR), the
assessee became entitled to additional FSI of around 11,000 sq.ft. which
additional FSI was transferred by the assessee for a consideration of
Rs.48,96,225 — Is the right transferred covered by any of the items mentioned in
S. 55(2) of the Act — Held, No. Whether since the right transferred emanated
from amendment to DCR and is not covered by any of the items of S. 55(2) and
does not have any cost of acquisition no capital gain can be charged on transfer
of additional FSI — Held, Yes.

 

Per R. S. Syal :

Facts :

The assessee, a co-operative housing society, had acquired
land in the year 1972 along with building thereon constructed by use of FSI of
approx. 11,000 sq.ft. Upon enactment of Development Control Regulations, 1991
(DCR) the assessee became entitled to an additional FSI of around 11,000 sq. ft.
The assessee sold such entitlement/right to M/s. D. K. Builders for a
consideration of Rs.48,96,225. The Assessing Officer (AO) computed capital gain
arising on sale of this entitlement to be Rs.1.22 crores, by considering the
value of residential flat as arrived at by stamp valuation authorities. The
assessee preferred an appeal to the CIT(A) who dismissed the same. Aggrieved,
the assessee preferred an appeal to the Tribunal.

 

Held :

The Tribunal noted that the concept of transferable
development right has been introduced in Mumbai in the Development Control
Rules, 1991 of the Bombay Municipal Corporation. These rights are given in the
form of a Development Right Certificate (DRC) which is issued by the Municipal
Corporation. TDR means the development potential. The FSI of a plot of land is
separated from the plot and is allowed to be transferred. TDR can be used by the
person/ owner/lessee in whose favour it is granted on his land in the receiving
zone. He can use it fully or partly or sell it fully or partly at will. The
Tribunal stated that while it is true that such right is a capital asset as per
the provisions of S. 2(14) but in order to compute capital gain, apart from the
existence of capital asset there should be sale consideration accruing as a
result of the transfer of capital asset as well as the cost of acquisition of
the asset along with the cost of improvement, if any. The Tribunal observed that
the cost of land and the existing building structure could not be attributed in
the additional FSI received by means of 1991 rules since the assessee was the
owner of the land and building and continued to remain the same even after the
transfer of the said capital asset. The Tribunal noted that the Apex Court has
in B. C. Srinivasa Shetty’s case held that transfer of capital asset which does
not have any cost of acquisition does not result into capital gain chargeable
u/s.45. The Tribunal held that there is a difference in the situation when cost
of acquisition is Rs.Nil and where the cost of acquisition cannot be ascertained
or no cost of acquisition has been incurred. The Tribunal noted that the items
of capital assets specified in S. 55(2) are those for which the cost of
acquisition shall be taken to be Nil for computing capital gain. It held that if
the assessee had not incurred any cost of acquisition on a capital asset and
such capital asset does not fall in the category of the capital assets specified
in S. 55(2), then the judgment of the Apex Court in the case of B. C. Srinivasa
Shetty shall apply and no capital gains shall be charged. In the light of the
above, the Tribunal held that the right transferred emanated from the 1991 rules
making the assessee eligible to additional FSI. The right transferred is not
covered by any of the items mentioned in S. 55(2) and it does not have any cost
of acquisition and therefore no capital gain can be charged on transfer of
additional FSI for sale consideration of Rs.48.06 lakhs for the reason that it
has no cost of acquisition. It held that its view is fortified by the decision
of the Mumbai Bench in Jethalal D. Mehta, which decision has not been modified
or reversed by the Hon’ble High Court.

 

Cases referred to :



(1) Jethalal D. Mehta v. DCIT, (ITA No. 672/Mum./2000)
(Mum.)

(2) CIT v. B. C. Srinivasa Shetty, (1981) 128 ITR 294 (SC)

 


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S. 10B — Gain on account of foreign exchange rate fluctuation qua export proceeds credited/deposited in EEFC account of assessee in foreign exchange is export realisation which constitutes profits derived from export business eligible for exemption u/s.10

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59.    (2009) 121 TTJ 751 (Ahd.) (TM)


ITO v. Banyan Chemicals Ltd.

A.Y. 2001-02. Dated 29-12-2008

S. 10B — Gain on account of foreign exchange rate
fluctuation qua export proceeds credited/deposited in EEFC account of
assessee in foreign exchange is export realisation which constitutes profits
derived from export business eligible for exemption u/s.10B.

The assessee-company was a 100% EOU. For the relevant
assessment year, the Assessing Officer excluded the amount of net foreign
exchange gain which it received on account of gain on foreign exchange on
conversion of receipts from export sales. The learned CIT(A), by following the
decisions in the cases of K. Uttamlal Exports Ltd. v. Dy. CIT, (2003)
133 Taxman 196 (Mumbai) (Mag.) and Mohindra Impex v. Asstt. CIT, (2002)
121 Taxman 326 (Del.) (Mag.), allowed the claim of exemption u/s. 10B of the
Act. Since there was a difference of opinion between the Members, the matter
was referred to the Third Member u/s.255(4).

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

(1) The receipt of the sale consideration was in US
dollars. It was credited/deposited in the EEFC account of the assessee to be
retained in US dollars as per guidelines for operating this account. In this
account, the receipts may be kept in foreign currency instead of converting
it to Indian rupees.

(2) The gain on account of exchange fluctuation is part
of the receipt of foreign currency of export sales made by an assessee. It
is a part of the receipt of sale proceeds converted into Indian rupees.
There is no exception in S. 10B like that in Expln.(baa) to S. 80HHC.

(3) The gain accounted for by the assessee is the excess
rupee value of US dollars on the date of realisation of sale proceeds
credited. Therefore, the exchange gain on the date of deposit in the EEFC
account has to be treated as sales realised in US dollars on that date. The
exchange gain is thus sales realisation of the billed amount in US dollar
and would be an income derived from the export of goods and articles.

 


However, in respect of gains arising at the time of
withdrawal of amount from the EEFC account by way of difference in exchange
rates between the date of deposit into the account and the date of withdrawal
from the EEFC account, the Third Member noted adversely as under :

(1) Such gain would not be part of sales as once the sale
consideration is deposited in EEFC account, the exchange gain accrued
thereafter would not be a part of the turnover and, consequently, not a
profit arising from the export of goods.

The Third Member relied on the decisions in the following
cases :

(a) Smt. Sujata Grover v. Asst. CIT, (2002) 74
(Mumbai) TTJ (Del.) 347

(b) Renaissance Jewellery (P) Ltd. v. ITO, (2006)
104 TTJ (Mumbai) 382/(2006) 101 ITD 380 (Mumbai)

(c) Shah Originals v. Asst. CIT, (2007) 112 TTJ
(Mumbai) 754

(d) Priyanka Gems v. Asst. CIT, (2005) 94 TTJ (Ahd.)
557



 

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S. 140C, S. 244A(2) — Where power of attorney has not been attached to the return of income filed by a non-resident Company, which has been processed u/s.143(1)(a) and also assessment made u/s.143(3) without power of attorney, grant of interest u/s.244A(2

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58.    2009 TIOL 483 ITAT (Del.)


China Trust Commercial Bank v. ADIT

(International Taxation)

A.Y. : 1998-99. Dated : 15-5-2009

S. 140C, S. 244A(2) — Where power of attorney has not been
attached to the return of income filed by a non-resident Company, which has
been processed u/s.143(1)(a) and also assessment made u/s.143(3) without power
of attorney, grant of interest u/s.244A(2) cannot be denied on the ground that
the delay is attributable to the assessee.

Facts :

The assessee, M/s. China Trust Commercial Bank incorporated
in Taiwan was engaged in the business of international banking services. The
assessee filed its return of income for A.Y. 1998-99 on 28-11-1998 declaring
taxable income of Rs.71,94,840. The return was processed u/s.143(1)(a) on
31-3-1999 and the assessment order u/s.143(3) was passed on 29-12-2000
accepting the income declared in the return of income. The Assessing Officer
issued a refund as claimed in the return of income, however, he did not grant
interest u/s.244A of the Act. The assessee filed an application u/s.154 of the
Act requesting the AO to rectify the mistake by granting interest u/s.244A.
The application u/s.154 of the Act was rejected on the ground that the
assessee had not filed valid power of attorney in due time, which was filed
only after the lapse of a long delay and, therefore, delay in issuing refund
was attributable to the assessee. He, therefore, denied granting interest
u/s.244A of the Act.

The CIT(A) held that the issue of declining interest
u/s.244A(2) to the assessee is well beyond the scope of proceedings u/s.154
being an issue on which two views are always possible. He upheld the order of
the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal noted that the power of attorney was filed on
30-9-2002. Non-grant of interest was because the power of attorney was not
filed alongwith the return. The refund became due on processing the return
u/s.143(1)(a) on 31-3-1999. The Tribunal noted the provisions of S. 140C of
the Act which mandate that in case of a non-resident company, the return of
income is to be signed and verified by a person who holds a valid power of
attorney and the power of attorney be attached to the return. The Tribunal
also noted that the return was processed without the power of attorney, the
assessment u/s. 143(3) was also made without the power of attorney. In the
circumstances, the Tribunal held that the refund due on such processing or on
making the assessment cannot be withheld because of the absence of such power
of attorney. The Tribunal held that if without the power of attorney the
return could be processed and assessment could be made, the refund could also
be prepared and made to the assessee. The Tribunal held that from a bare
reading of the Section it is evident that the delay is to be seen with
reference to the proceedings resulting in refund and the delay is attributable
in such proceedings, to the assessee. The proceedings which result in refund
are the processing of the return or making an assessment u/s.143(3) and since
these proceedings were completed long back even without the power of attorney,
the delay in filing the power of attorney was not the cause for delay in the
proceedings resulting in refund.

However, the Tribunal noted that the provisions of S.
244A(2) provide that where the question arises as to which period is to be
excluded, it shall be decided by the Chief Commissioner or the Commissioner
whose decision thereon shall be final. Since the AO had not referred the
matter for the decision of the Chief Commissioner or the Commissioner the
Tribunal set aside the order of the CIT(A) and the AO and remitted the matter
back to the file of the AO to decide the issue of excluding the period for
granting interest to be decided by the Chief Commissioner or the Commissioner,
as the case may be, and follow his decision on that.

 

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S. 54 — Where assessee paid advance to a builder for purchase of a house, but due to inability to arrange funds, could not purchase the property and got the advance back, the conditions of purchase/construction within time specified in S. 54 are not satis

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57.    2009 TIOL 512 ITAT (Bang.)


Mrs. Shakuntala Devi v. DDIT (International
Taxation)

A.Y. : 2005-06. Dated : 23-6-2009

S. 54 — Where assessee paid advance to a builder for
purchase of a house, but due to inability to arrange funds, could not purchase
the property and got the advance back, the conditions of purchase/construction
within time specified in S. 54 are not satisfied. In such a case, exemption
can be denied only on expiry of time period of 3 years from date of transfer
of original asset.

Facts :

During the previous year relevant to assessment year
2005-06 the assessee sold two flats — one at Prithvi Apartments and another at
Embassy Diamante, Bangalore. Long-term capital gain arising on sale of these
two flats was worked out at Rs.46,51,537. The assessee advanced a sum of
Rs.98,69,970 to the builder towards the purchase of the flat at Embassy
Habitat. Accordingly, it claimed the sum of Rs.46,51,537 to be deductible
u/s.54 of the Act. In an order passed u/s.143(3) r.w.s. 147 of the Act, the
Assessing Officer stated that the assessee failed to furnish either the
registered sale deed or the purchase agreements to substantiate her claim both
for sale of two properties and also for purchase of the flat at Embassy
Habitat. He also noted that the statement of affairs as on 31-3-2006 did not
reflect the flat at Embassy Habitat as her asset. He held that the since the
title of the property was not transferred to the assessee the provisions of S.
54 were violated and accordingly, he denied the exemption claimed by the
assessee u/s.54 of the Act.

The CIT(A) confirmed the order of the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal. On behalf of the assessee it was submitted that the assessee had
entered into an agreement for purchase of a house and had paid an advance, but
subsequent to the payment of advance the assessee could not raise the
necessary funds for purchase of the flat and therefore, the agreement entered
into by the assessee was terminated and cancelled and the assessee received
back the advance paid by her. It was also contended that it is premature to
decide upon denial of exemption. It was submitted that unutilised amount is to
be brought to tax in the assessment year relevant to the previous year in
which the period of three years from the time of transfer of original asset
ends. For this proposition reliance was placed on provisions of S. 54(2) of
the Act which provides for depositing the amount of gain into a Capital Gain
Account and utilisation therefrom within the prescribed time period. Upon
failure to utilise the amount deposited in Capital Gain Account for purchase
or construction within the prescribed time period, the unutilised amount is
charged to tax in the previous year relevant to the assessment year in which
the period of three years from the time of transfer of original asset (that
resulted in the capital gains arising in the first place) ends.

Held :

Since the transaction entered into by the assessee did not
culminate into purchase of residential house either one year before or two
years after the date of transfer nor a residential house was constructed
within a period of three years after the date of transfer, the CIT(A) was
justified in denying the claim of exemption u/s.54 of the Act.

As regards the alternative contention raised the Tribunal
restored the issue to AO with a direction to decide the same as per facts and
law, after providing due opportunity of hearing to the assessee.

 

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S. 28, S. 45 — Gain arising on transfer of land held by the assessee as its capital asset in lieu of 50% of the constructed areas to be constructed by the developer at his own cost without any construction activity to be carried on by the assessee is char

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56.    2009 TIOL 477 ITAT (Mum.)


ACIT v. Shree Dhootapapeshwar Ltd.

A.Ys. : 2001-02 and 2002-03.

Dated : 30-3-2009

S. 28, S. 45 — Gain arising on transfer of land held by the
assessee as its capital asset in lieu of 50% of the constructed areas to be
constructed by the developer at his own cost without any construction activity
to be carried on by the assessee is chargeable to tax as capital gains.

Facts :

The assessee company was engaged in the business of
manufacturing and trading in ayurvedic medicines. It was owner of land
acquired by it in 1936 on which it had constructed a factory for manufacturing
ayurvedic products. The land was held by it as a fixed asset and was
consistently shown as fixed asset in its accounts. The assessee had not
converted this land into its stock-in-trade. The development agreement entered
into by the assessee recorded that the assessee did not have the requisite
expertise and know-how to undertake the development of the said land. As per
the agreement, the assessee was to part with the land and in lieu thereof was
entitled to receive 50% of the constructed area without carrying out any task
of development. The assessee was not required to meet any of the expenses
towards construction of the buildings.

The AO noted that — (i) the agreement described the
assessee as the owner and the developer as the licensee; and (ii) under the
agreement the assessee was given absolute rights to sell all the residential
as well as commercial property developed and handed over by the developers at
whatever rate as per the prevalent market conditions. Considering these, the
AO charged the profit arising on transfer of land under the head ‘Income from
Business’.

The CIT(A) allowed the assessee’s appeal.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that CIT(A) has observed that (a) the
constructed area was to be shared amongst the parties; (b) the parties were
free to deal with their respective areas in the manner they thought fit; (c)
this was not a case where the parties by virtue of the agreement have decided
to share the profit from the project; (d) the assessee was to receive 50% of
the constructed area, irrespective of the cost of development incurred by the
developer.

On facts and having noted the observations of the CIT(A),
the Tribunal held that the agreement could not be regarded as a joint venture
and the constructed area received by the assessee was consideration for
transfer of land. The Tribunal agreed with the conclusion of the CIT(A) and
noted that the conclusion of the CIT(A) is supported by the following judicial
decisions :

(a) CIT v. Smt. Radha Bai, (272 ITR 265) (Del.)

(b) CIT v. B. K. Bhaumik, (245 ITR 614) (Del.)

(c) CIT v. Mohakampur Ice and Cold Storage, (281
ITR 354) (All.)

The appeal filed by the Revenue was dismissed.

 


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S. 28, S. 45 and S. 56 — Amount of liquidated damages received by the assessee from the vendor of the property under an agreement for purchase of property constitutes a capital receipt not chargeable to tax.

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55.    2009 TIOL 511 ITAT (Bang.)


Mrs. Yogesh Aurora v. ITO

A.Y. : 2005-06. Dated : 9-4-2009

S. 28, S. 45 and S. 56 — Amount of liquidated
damages received by the assessee from the vendor of the property under an
agreement for purchase of property constitutes a capital receipt not
chargeable to tax.

Facts :

The assessee was working as a consultant with a
pharmaceutical company. She had entered into an agreement for purchase of
property for Rs.17,95,175 and paid an advance of Rs.10 lakhs. The agreement
for purchase inter alia provided that if the vendor fails to register a
sale deed within the period mentioned in the agreement in favour of the
assessee or her nominee he shall be liable to pay liquidated damages of Rs.5
lakhs. The vendor did not execute the sale deed. The assessee obtained legal
opinion and was advised that the only legal recourse available to her was to
accept liquidated damages. The assessee contended that the amount of
liquidated damages received by her constituted capital receipt not exigible to
tax.

The Assessing Officer (AO) charged this sum to
tax.

The CIT(A) was of the view that the property
sought to be purchased was huge considering the fact that the assessee was a
professional. He, therefore, held that the transaction was an adventure in the
nature of trade. However, since on the date of receipt of the amount the
adventure in the nature of trade had not come into full-fledged existence, he
held that the amount be charged to tax under the head ‘Income from Other
Sources’.

Aggrieved, the assessee preferred an appeal to
the Tribunal where it was contended that the compensation was received on
foregoing a right to acquire a capital asset and therefore, it is a capital
receipt. Reliance was placed on the decision of the Apex Court in the case of
Kettlewell Bullen and Co. Ltd. v. CIT, (53 ITR 261) and also in the
case of Oberoi Hotels Pvt. Ltd. v. CIT, (236 ITR 903).

Held :

The Tribunal noted that the Gujarat High Court in
the case of CIT v. Hiralal Manilal Mody, (131 ITR 421) and Calcutta
High Court in the case of CIT v. Ashoka Marketing Ltd., (164 ITR 664)
had considered similar issue. Following the ratio of the decisions of these
two Courts the Tribunal held the amount of liquidated damages to be capital
receipt. It also observed that because no cost can be attached to the right,
therefore, following the ratio of the decision of the Apex Court in the case
of CIT v. B. C. Srinivasa Shetty, (128 ITR 294) the amount cannot be
taxed as capital gain.

The appeal filed by the assessee was allowed.

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S. 142A r/w S. 143 — Reference to valuation cell u/s.142A can be made during the course of assessment and reassessment, and not for the purpose of initiating reassessment — Where Assessing Officer had not rejected books of accounts by pointing out any def

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54.    (2009) 118 ITD 382 (Luck.)


ITO v. Vijeta Educational Society

A.Ys. : 1998-99 to 2001-02 and 2003-04 to 2004-05

Dated : 28-9-2007

S. 142A r/w S. 143 — Reference to valuation cell u/s.142A
can be made during the course of assessment and reassessment, and not for the
purpose of initiating reassessment — Where Assessing Officer had not rejected
books of accounts by pointing out any defect, reference to DVO for valuation
of cost of construction of building incurred by the assessee was not valid,
and hence, the DVO’s report could not be utilised for framing
assessment/reassessment even though the same was obtained u/s.142A.

The assessee society was granted registration u/s. 12A. In
the course of assessment, the AO referred the valuation of building
constructed by the assessee to valuation cell. However the AO completed the
assessment without considering the report as the DVO’s report was not received
in time. Subsequently, the AO received the report from the DVO, wherein it was
shown that the assessee had made additional investment of Rs.46.87 lacs in the
building. On the basis of the said report, the AO initiated reassessment
proceedings, treating the differential amount as income from undisclosed
sources.

The CIT(A) held that even if the said addition was to be
added to the assessee’s income, the same would be exempt u/s.11, and deleted
the addition.

On second appeal by the department, it was held :

1. If the assessee has maintained proper books of
accounts and all details are mentioned in such books, which are duly
supported by vouchers, no defects are pointed out and the books are not
rejected, then the figures mentioned therein will have to be followed. The
valuation report has to be taken into consideration only when the books of
accounts are not reliable, in the opinion of the ITO.

2. Further, there cannot be any reference u/s.142A when
there is no process of assessment which is initiated after filing of return
of income, or issuance of notice u/s.142(1).

3. The process of reassessment can be initiated only
after issuance of notice u/s.148(1) after duly fulfilling the formalities
mentioned therein. It is clear that invoking S. 142A is a process after
re-opening of the assessment. The use of the word ‘require’ in S. 142A is
not superfluous but signifies a definite meaning, whereby some preliminary
formation of mind by the Assessing Officer is necessary which requires him
to make a reference to the DVO u/s.142A.

4. The provisions of S. 142A cannot be read in isolation
to S. 145. If books of accounts are found to be correct & complete in all
cases, no defect being pointed out therein, then addition made on account of
difference in cost of construction on the basis of DVO’s report is not
correct. Use of such a report obtained u/s.142A is not mandatory, but
discretionary.

Hence, the order of the CIT(A) was to be upheld, though on
different grounds.

 

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Assessee was a mutual concern in the strict sense as all the members were travel agents in India, and convention receipts, membership and subscription fees and interest therefrom were exempt being in the nature of mutual receipts — Hence, having regard to

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53.    (2009) 118 ITD 285 (Mum.)


Travel Agents Association of India v. ACIT

A.Ys. : 1997-98, 1998-99, 2001-02

Dated : 10-2-2008

Assessee was a mutual concern in the strict sense as all
the members were travel agents in India, and convention receipts, membership
and subscription fees and interest therefrom were exempt being in the nature
of mutual receipts — Hence, having regard to the fact that once said receipts
were taken out of computation of excess of income over expenditure, such
receipts could not decide the character of activities carried out by the
assessee and in such circumstances, when assessee was held to be a mutual
concern, S. 115JA was not applicable to it.

The assessee was a company incorporated u/s.25 of the
Companies Act, to promote interests of travel agents in India. Distribution of
income or property was prohibited by the Memorandum of Association & Articles
of Association. The assessee contended that it conformed with the requirements
of a mutual association and hence income was exempt from taxation on the
grounds of mutuality. The assessing authority held that even if the assessee
was a company registered u/s.25, it was liable for assessment u/s.115JA. The
CIT(A) held that as the Profit & Loss A/c had been prepared in accordance with
Schedule VI, book profit was liable to be taxed u/s.115JA.

On appeal to the Tribunal it was held :

1. S. 115JA deals with companies earning normal business
profits. The assessee was earning ‘income’ and not profits. The expression
‘income’ was a little different from ‘profits’, and hence S. 25 of the
Companies Act provides that such company has to prepare ‘Income &
Expenditure Account’, instead of ‘Profit & Loss A/c’. Companies carrying on
activities of charitable purposes or mutual interest are registered u/s.25.

2. Where the mutual association like the assessee does
not carry on any business and almost entire income is derived from mutual
activities, it is exempt from tax. Only when such a company indulges in
activity of earning profits and distributing the same, it comes out of the
tax exemption.

3. It is possible that a mutual association may earn
income from services/facilities provided to non-members. If such activity is
the major activity, then the question of taxability would arise in a
substantial way, and the rule of mutuality would be questioned.

4. In the instant case, the assessee was a professional
association and there was no case of non-members being involved in the
affairs of the company. Therefore, the activities carried on by the assessee
company were meant only for the member travel agents and were mutual in
character. It was held that the assessee was a mutual concern, it did not
declare dividends, nor distribute its income. Therefore, it did not come
under the MAT regime.

Hence, the computation of income made for the relevant
assessment years u/s.115JA was to be set aside.

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Articles 5 & 7 of India-Korea DTAA —arrangement between the parties did not give rise to emergence of AOP — Income from offshore supply is not taxable in India — In calculating threshold for Supervisory PE, duration of each project to be considered separa

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Part C — Tribunal & International Tax Decisions



  1. Hyosung Corporation

Authority for Advance Ruling

224 CTR 329 (AAR)

Dated : 17-6-2009

Facts :

The applicant, a company incorporated in Korea, is engaged
in the business of setting up of power stations. The applicant successfully
bid for the contract awarded by Power Grid Corporation of India Ltd. (PGCIL)
for execution of works related to 800KV/400KV Tehri Pooling Station Package
associated with Koteshwar Transmission System (Project).

According to the terms and conditions of the bid and with
PGCIL’s approval, the applicant assigned a part of the contract related to
onshore supply/ services to Larsen & Toubro (L&T). The overall responsibility
for successful performance of the project continued to be on the applicant.
The applicant gave guarantee to PGCIL for successful completion of the project
and in turn, the applicant obtained a counter-guarantee from L&T for the part
assigned to L&T.

PGCIL entered into 3 separate contracts in the following
manner :


  • Contract no. 1     : Offshore supply contract with the applicant for design,
    engineering, manufacture, testing at manufacturer’s works, Free-On-Board
    (FOB) dispatch, shipment, marine transportation and insurance and CIF supply
    of all offshore equipment and materials, including mandatory spares from
    countries outside India and testing and training to be conducted outside
    India.




  • Contract no. 2     : Onshore supply contract with L&T for supply of certain
    equipment and materials in India.




  • Contract no. 3     : Onshore service contract with L&T for inland
    transportation, insurance, storage, erection including associated civil
    works, testing and commissioning of all equipment and materials, including
    offshore equipments.



On the aspect of taxation of offshore supply, the applicant
argued that the title to the equipment and material was passed outside India
and the payment for offshore supply was also received in foreign currency
outside India. Therefore, no income accrued or arose to the applicant in India
in respect of the offshore supply contract.

The tax authorities argued that as the applicant had to
bear the overall responsibility of commissioning the project, the transfer of
property in goods and sale can be regarded completed in India. Accordingly,
part of the profits from supply of equipment was taxable in India.

In the background aforesaid, the following issues were
raised before the AAR :

  • Whether
    the applicant, along with L&T, can be said to constitute an AOP and,
    accordingly, be assessed as an AOP in relation to all the 3 components of
    the contract of the project.



  • Whether
    the consideration for offshore supply of equipment, materials, etc., is
    taxable in India under the provisions of the domestic law and the applicable
    Treaty between India-Korea (Treaty).




Ruling of AAR :

On the point of AOP emergence :

Based on the Memorandum of Understanding (MOU) entered into
between the parties, the Tax Department contended that the arrangement between
the applicant and L&T constituted an AOP. For this, the Tax Department relied
on the recitals of the MOU which stated that the parties desired to co-operate
with each other for the purpose of submitting a single bid for the project and
in the event of the bid being accepted, the parties would be jointly and
severally responsible for execution of the contract. The Tax Department also
referred to other clauses dealing with joint and several responsibility,
possibility of applicant paying liquidated damages for the fault of L&T, etc.

The AAR held that on the facts of the case, the
relationship did not give rise to AOP. The AAR noted that separate contracts
were entered into by PGCIL with the applicant and L&T. The assignment of
onshore supply/services by the applicant was as permitted in the bid and there
was a separate contract directly between L&T with PGCIL. L&T had worked as an
independent contractor and was entitled to separately raise and realise the
bills for the work L&T carried out for PGCIL. The individual identity of each
party, in doing the part of the work entrusted to it was preserved despite the
co-ordination between them and the overall responsibility of the applicant.

The AAR concluded that :

(a) Mere collaborative effort and the overall
responsibility assumed by the applicant for the successful performance of
the project was not sufficient to constitute an AOP.

(b) The requirement for the applicant to provide
performance guarantees for all the 3 contracts was not in furtherance of a
joint venture or a common design to produce income, but it was a special
stipulation insisted by PGCIL in the overall interest of the project. The
requisite cohesion, unity of action and the common objective of sharing the
revenue or profit were lacking and hence there was no PE.

The facts in the case of Geoconsult (304 ITR 283), wherein
the parties had entered into an arrangement as a ’consortium’ which was held
by the AAR to meet the requisites of an AOP, was held distinguishable from the
facts in the present case.

Royalty income, where payment is subject to fulfilment of certain conditions, accrues only on fulfilment of conditions specified

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Part C —
International Tax Decisions




17 Guardian Industries Corporation v. ADIT
(2008) (Unreported)

S. 5, IT Act

A.Y. : 2002-2003. Dated : 31-3-2008

Issue :

Point of time for accrual of royalty income where payment is
subject to fulfilment of certain conditions.

Facts :

The assessee was an American company (‘USCo’). USCo had
entered into a technical licence agreement with an Indian company (‘IndCo’). In
terms of the agreement, IndCo was required to pay certain royalty to USCo for a
period of 8 years.

IndCo had obtained loans for its project from IDBI. Under the
loan agreement, IDBI had stipulated a condition that IndCo shall not pay royalty
to USCo till such time payments of instalments of principal, interest and any
other monies to IDBI were outstanding. USCo had also agreed to the said
condition.

IndCo defaulted in making payments to IDBI. Hence, it could
not pay any royalty to USCo between the periods 1st March 1993 to 31st March
1999. Thereafter, vide its letter dated 26th November 1999, IDBI allowed payment
of royalty for the period 1st April 1999 to 28th February 2001. Subsequently,
vide its letter dated 26th April 2001, IDBI gave its approval for payment of
past royalty (i.e., up to 31st March 1999). This was subject to two
conditions, namely, IndCo had adequate cash flows and it had no overdues to any
financial institutions or bank at the time of payment of each installment The
past royalty was permitted to be paid in 6 half-yearly installments during the
period 1st October 2001 to 1st April 2004.

On the basis that the royalty income had accrued at the time
when IDBI issued its letter of approval, the AO brought to tax the entire
royalty in the relevant previous year. In appeal, the CIT(A) confirmed the order
of the AO.

The Tribunal observed that notwithstanding that an assessee
was following mercantile or cash system of accounting, such income cannot be
brought to tax if the assessee does not have the right to receive such income
due to non-fulfilment of certain terms and conditions. The Tribunal referred to
AS-9 issued by the Institute of Chartered Accountants of India, which mentions
that revenue is to be recognised only at the time when it would be reasonable to
expect the ultimate collection; and, revenue recognition needs to be postponed
if there is uncertainty as to ultimate collection. The Tribunal observed that
the right to receive income from IndCo arose to USCo as per IDBI’s letter of
26th April 2001 and therefore, applying the ratio of E D Sassoon & Company
Ltd. v. CIT, (1954) 26 ITR 27 (SC), it held that only that portion of income
for which IndCo had complied with the terms and conditions of the said letter
can be said to have accrued.

Accordingly, only the instalments actually remitted during
the year upon fulfilment of attached conditions were held to be chargeable to
tax.

Held :

Notwithstanding the mercantile system of accounting followed
by USCo, the royalty income accrued in its favour only when both conditions
stipulated by IDBI were complied.

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(i) Outright sale of documentation pertaining to plant supplied does not constitute royalty, either u/s.9(1)(vi) or under Article 12. 572 (ii) Mere shareholding by foreign supplier of plant in purchaser Indian company does not result in business connect

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Part C —
International Tax Decisions



16 ADIT (IT) v. Zimmer AG

(2008) 22 SOT 297 (Kol.)

S. 9(1)(i), (vi), IT Act; Article 12,

India-Germany DTAA

A.Y. : 2001-2002. Dated : 19-12-2007

Issue :



(i) Outright sale of documentation pertaining to the
plant supplied does not constitute royalty, either u/s.9(1)(vi) or under
Article12.



(ii)
Mere shareholding by a foreign
supplier of plant in the purchaser Indian company does not result in business
connection.



Facts :

The assessee was a German company engaged in manufacture of
plant and machineries. It had entered into three separate agreements — Equipment
Supply Agreement, Engineering and Know-how Supply Agreement and Technical
Assistance Agreement — with an Indian company, which proposed to set up a plant
for manufacture of certain petrochemicals products. Under the Engineering and
Know-how Supply Agreement, the German company had undertaken to supply a fully
integrated plant. Under Engineering and Know-how Supply Agreement, the German
company agreed to sell engineering information, drawings and designs to Indian
company on outright basis. The transfer of ownership and title in the
documentation took place in Germany. The payment was also made by remittance to
Germany. Thereafter, the Indian company imported these in physical form into
India. These were required for installation and commissioning of the plant.

The Indian company’s contention was that: the import of the
documentation was similar to the import of plant; it was purchase on outright
basis of a capital asset on which depreciation was permissible and not a case of
mere right to use of engineering information and know-how; the technical
documentation formed integral part of the plant since in its absence, the Indian
company could not have set up, operated or maintained the plant; and as such the
consideration payable under the Engineering and Know-how Supply Agreement did
not constitute royalty and therefore it was not taxable either u/s. 9(1)(vi) of
the Income-tax Act or under Article 12 of the India-Germany DTAA.

The Department’s representative contended that under the
Engineering and Know-how Supply Agreement, the Indian company paid lump sum
consideration for transfer of technical know-how, design and secret process and
therefore, the payment was taxable in India (which was the country of source of
income) as royalty, not only u/s.9(1)(vi) of the Income-tax Act, but also under
Article 12(3) of the India-Germany DTAA. He also referred to the secrecy clause
in the said agreement which prohibited the Indian company from disclosing the
confidential information to any person and submitted that this made it apparent
that the German company had not sold these on outright basis, but allowed mere
use and hence, the payment was royalty u/s.9(1)(vi) of the Income-tax Act as
well as under Article 12(3) of the India-Germany DTAA. He, then, referred to the
order of the AO and argued that the German company was one of the promoters of
Indian company and therefore, there was a business connection between the German
company and the Indian company and hence, the income should be taxable
u/s.9(1)(i) itself. He also referred to the decisions in N. V. Philips’
Gloeilempenfabrieken v. CIT, (1988) 172 ITR 541(Cal.) and N. V. Philips
v. CIT, (1988) 172 ITR 521 (Cal.) to substantiate that even lump sum
payments were taxable in India as royalty.

The Tribunal referred to various relevant clauses of the
Engineering and Know-how Supply Agreement and found that : ownership, title and
risk in documentation was transferred in Germany; consideration was also paid
outside India; documentation was imported into India; the engineering supplied
by the German company was limited to designs of plant supplied by it; and supply
of engineering, drawings and designs was incidental to sale of plant which was
tailor-made to suit specific requirements of the Indian company. Considering
these factors, the Tribunal observed that supply of engineering, drawings and
designs was integral part of supply of plant and it could not be viewed in
isolation and therefore, the payment was not for acquiring mere right to use,
which would constitute royalty. The Tribunal found that even under Article 12(3)
of the India-Germany DTAA, it could not be considered as royalty. It then
referred to the decision in Scientific Engineering House P. Ltd. (1986) 157 ITR
86 (SC) wherein the Supreme Court had held that lump sum payment made to acquire
technical know-how to facilitate operations and process amounted to acquisition
of capital asset and technical drawings, designs, charts, processing data and
other literature fell within the definitions of ‘plant’. In light of that it
agreed with the German company’s contention that what was acquired was ‘plant’,
it was acquired outside India and therefore, the payment could not be taxed as
royalty in India. The Tribunal, thereafter, referred to and discussed the
following decisions and observed that these decisions squarely supported the
contention that the consideration received by the German company under the
Engineering and Know-how Supply Agreement was not in the nature of royalty,
either u/s.9(1)(vi) of Income-tax Act or under Article12 of India-Germany DTAA.

(a) DCIT v. Finolex Pipes Ltd., (2007) 106 TTJ 741 (Pune)

(b) Skoda Export Co. Ltd. v. DCIT, (2003) 81 TTJ 633
(Visakha.)

(c) ACIT v. King Taudevin & Gregson Ltd., (2002) 80
ITD 281 (Bang.)

(d) CIT v. Klayman Porcelains Ltd., (1998) 229 ITR
735 (AP)

(e) CIT v. Neyveli Lignite Corporation Ltd., (2000)
243 ITR 459 (Mad.)

(f) CIT v. Davy Ashmore India Ltd., (1991) 190 ITR
626 (Cal.)


Held :



(i) Where both the plant as well as the engineering documentation were delivered outside India, payments for them were made outside India, supply of plant alongwith documentation represented a composite supply and hence, the payment for documentation cannot be considered separately as royalty, either u/s.9(1)(vi) of the Income-tax Act or under Article 12 of the India-Germany DTAA.

(ii) Merely because the German company is one of the shareholders of Indian company, payments made by the Indian company to the German company for supply of plant cannot be brought to tax as income in India on the ground of existence of business connection of German Company in India.

(i) S. 44BB : Actual reimbursements cannot be considered as income for the purpose of S. 44BB. 571 (ii) Article 12(2) of DTAA : Interest on Income-tax refund is subject to Article 12(2) of DTAA and not under Article 12(5).

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Part C —
International Tax Decisions



15 ACIT v. Pride Foramer France Sas (2008) 116
TTJ 369 (Del.)

S. 44BB, IT Act; Article 12,

India-France DTAA

A.Y. : 2002-2003. Dated : 22-2-2008

Issue :



(i) Actual reimbursements cannot be considered as income
for the purpose of S. 44BB.



(ii)
Interest on income-tax refund is
subject to Article 12(2) of DTAA and not under Article 12(5).



Facts :

(i) The assessee was a French company operating in India in
oil drilling operations and related services under several contracts with ONGC.
Under one of the contracts, the assessee had charter-hired its drilling rig and
received gross fee for drilling operations and had offered the income for
taxation in accordance with S. 44BB of Income-tax Act. While working out the
receipts, the assessee had not taken into computation gross sum of Rs.34.73
lakhs, which was received by it from ONGC by way of reimbursements. Relying on
the Delhi Tribunal’s decision in Sedco Forex International Drilling Inc v.
Deputy CIT, (2000) 67 TTJ 670 (Del.), the assessee claimed that
reimbursements of actual cost of supply should not be included for the purpose
of computing receipts in terms of S. 44BB of Income-tax Act. The AO observed
that the reimbursements were part of contractual receipts and hence were
includible while computing profit u/s.44BB of Income-tax Act.

The assessee’s contention was that the reimbursements were
wholly unrelated to the project. For instance, these pertained to loss of
equipment, use of satellite communication and supply of dry fruits. After
considering that the AO had found that there was no element of profit in
reimbursements, CIT(A) found that supply of material was obligation of ONGC and
assessee had merely provided these services to ONGC. Relying on the Delhi
Tribunal’s decision in Sedco forex International Inc (supra),
CIT(A) held that the reimbursed expenses were not taxable u/s.44BB.

The Tribunal noted that S. 44BB is a code in itself, which
excludes application of normal business income computation provisions and to
assess any income u/s.44BB, the activity should be the one described in S.
44BB(2). The reimbursements made by ONGC had nothing to do with activity of
prospecting for, or extraction, or production of, mineral oils. Also, the
reimbursements were based on actual expenditure and there was no element of
profit. Hence, reimbursements were rightly held to be excludible by CIT(A).

(ii) The assessee had received interest on income-tax refund.
The assessee claimed that such interest should be taxed at the rate applicable
in terms of Article 12(2) of India-France DTAA (which restricts the tax rate to
15%). According to AO, the interest should be considered in terms of Article
12(5) (which applies in case the recipient of interest carries on business
through a PE) read with Article 7 of DTAA, since interest had accrued to the
assessee through its PE in India. The assessee’s contention was that the
interest received by it was not in respect of debt which was effectively
connected with PE, which is one of the conditions under Article 12(5) and
therefore, Article 12(5) could not be applied. The AO, however, considered
interest as chargeable to tax under Article 12(5) at the rate of tax applicable
to a foreign company. In appeal, the CIT(A) upheld the order of the AO.

The Tribunal noted that similar issue was considered in
Application No P 17 of 1998, In re (1999) 236 ITR 637 (AAR) wherein the
AAR had held that such case was covered under Article 12(2) of DTAA. The
Tribunal observed that although the order of AAR would not have a binding force,
it would have persuasive value. Further, the tax authorities did not bring any
contrary decision to the effect that the interest should be considered under
Article 12(5) of DTAA to the notice of the Tribunal. The Tribunal also noted
that in the assessee’s own case in earlier year, the Tribunal had observed that
the assessee was not in the business of obtaining income-tax refunds and earning
interest thereon and therefore, the interest was neither derived from, nor
attributable to the business activity of the assessee. Considering both the
abovementioned reasons, the Tribunal held that the interest cannot be taxed
under Article 12(5) of DTAA.

Held :



(i) If reimbursements were based on actual expenditure, had
no element of profit and had no relation to activity described in S. 44BB(2),
provisions of S. 44BB cannot be applied.

(ii) Interest received on delayed issue of income-tax
refunds would be chargeable to tax under Article 12(2) of DTAA and not under
Article 12(5) even though the assessee had PE in India, since the interest was
neither derived from, nor attributable to the business activity of the
assessee.


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S. 9(1)(ii) : Salary relatable to visits outside India in respect of expatriate deputed to India held taxable.

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International Tax Decisions



14 ACIT v.
Unger Booke David (2008)

(Unreported)

S. 9(1)(ii), IT Act

A.Y. : 2001-2002. Dated : 15-2-2008

Issue :

Taxability u/s.9(1)(ii) of salary relatable to visits outside
India in respect of expatriate deputed to India being R but NOR.

Facts :

The assessee was deputed to India as South East Asia Bureau
Chief of The Economist, UK for collection of news and views. He was having his
permanent base in India, controlling the operations from India and staying in
India with his family. During relevant year, the assessee visited Pakistan for 7
days, Sri Lanka for 14 days and the UK for 38 days, aggregating to a stay of 59
days outside India. Since his residential status during the relevant year was
resident but not ordinarily resident, he claimed that the remuneration received
for 59 days did not relate to services rendered to India and hence, it was not
taxable in India.

To examine the claim, the AO asked the assessee to furnish
copy of appointment/deputation letter, which the assessee did not furnish. Since
the assessee was responsible for South East Asian countries and the salary was
received because of his assignment in India, the AO held that the visits outside
India were incidental to the assignment in India and hence the salary for 59
days outside India was also taxable in India.

In appeal before CIT(A), the assessee furnished several
documents including the deputation letter and news stories/articles collected
from Pakistan, Sri Lanka, discussion with London editors on SEA Region
activities. After reviewing the documents, the CIT(A) held that the assessee’s
visits to Pakistan and Sri Lanka were for work done in those countries and hence
the remuneration relatable to stay in those countries was not taxable in India.
In respect of the assessee’s stay of 38 days in the UK at a stretch, the CIT(A)
held that entire period of 38 days cannot be considered as towards briefing
London editors about developments in SEA Region. The CIT(A) concluded that
period of 18 days could be considered for briefing and hence, remuneration
relatable to that period was not taxable in India but remuneration of balance
days was held taxable in India.

The Tribunal found that: the assessee was appointed as South
East Asia Bureau Chief for collection of news, views and information on various
aspects pertaining to that region; he was staying in India with his family; he
had no establishment in Pakistan and Sri Lanka; there was no material on record
to indicate that the terms of his appointment varied when he visited those
countries; and during visits to countries outside India he had not shifted his
family to those countries. The Tribunal observed that the assignment terms
contained provision for gathering news from neighbouring countries and
therefore, short visits to Pakistan and Sri Lanka for collection of news and to
London Head Quarters to brief the editors were also in connection with the
employment in India. The Tribunal, then, observed that the issue in question was
squarely covered by the decision in CIT v. Halliburton Offshore Services Inc,
(2004) 271 ITR 395 (Uttaranchal), wherein the Court had observed that S.
9(1)(ii) read with the Explanation provides for an artificial place of accrual
for income taxable under the head ‘Salaries’ and in such case, the place of
receipt or accrual of salary is immaterial. The Tribunal also referred to the
decision in the case of Hiromi Hirose in ITA No. 4506/Del./2003 for A.Y. 2003-04
and observed that the facts in that case were identical to those of the
assessee’s case.

Held :

Following the precedent in case of Hiromi Hirose, the
Tribunal held that the CIT(A) was not justified in treating that the salary
relatable to Pakistan, Sri Lanka and UK was for performance of duties outside
India and held that such salary was taxable in India.


Editorial Note : The abovementioned decision of the Delhi
Tribunal appears to be taking a position different than that taken by the Delhi
Tribunal in its two decisions in DCIT v. Mr. Erick Moroux C/o. Air France and
Others, (BCAJ July 2008 Page 455) and DCIT v. Vivek Paul, [82 TTJ
(Del.) 699], wherein it had held that Salary income of an expatriate who partly
rendered services in India and partly outside India would not be chargeable to
tax in India in respect of proportionate period for which services are performed
outside India.


levitra

S. 195 would not apply to payments made to a resident holding power of attorney from non-residents.

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Tribunal News

Geeta Jani, Dhishat B. Mehta


Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions

3. Rakesh Chauhan v. DDIT

(2010) 128 TTJ (Chd.) 116

S. 195, Income-tax Act

A.Y. : 2005-06. Dated : 27-11-2009

S. 195 would not apply to payments made to a
resident holding power of attorney from non-residents.

Facts :

Five individuals based in the UK owned land in
India as co-owners. The non-resident co-owners had issued a power of attorney in
respect of the land in favour of one PS who was a resident in terms of the
Income-tax Act. PS was vested with the rights to sell the land as well as
receive the payment. The appellant purchased the land and paid the consideration
to PS.

In his order, the AO noted that the appellant had
not furnished any explanation for non-deduction of tax from payment made to PS,
who acted as representative of non-residents. The AO also noted that the
appellant had not applied u/s.195(2) of the Income-tax Act and hence, relying on
the Supreme Court’s decision in Transmission Corporation of AP Ltd. v. CIT,
(1999) 239 ITR 587 (SC), he concluded that the appellant had made payment to
non-resident without deducting tax, which he was required to deduct u/s.195 of
the Income-tax Act. As the appellant had not so deducted the tax, he was an
assessee in default u/s.201 and u/s.201(1A) of the Income-tax Act. The AO, thus,
raised demand of tax and interest on the appellant. In appeal, the CIT(A)
concluded that as the sale deeds were executed by PS on behalf of non-residents,
and as PS was acting on behalf of non-residents, he received the money on their
behalf. Hence, the
payment was to be considered as payment to non-residents.

The Tribunal observed that though the payment was
made for purchase of land which belonged to non-residents, rights therein were
assigned unequivocally to PS. PS was not merely acting as an agent of the
non-residents to receive money, but as a person who had the right to alienate
the land by the virtue of rights vested in him by the power of attorneys signed
by the co-owners. The payment was not made to PS as a representative nominated
by non-residents. The Tribunal noted the decision of the Bombay High Court in
Narsee Nagsee & Co. v. CIT, (1959) 35 ITR 134 (Bom.) to the effect that if the
non-resident nominates a particular agent to whom
payment is to be made and pursuant to that direction, a taxpayer makes payment
to that nominee-agent, S. 195 would apply. However, the facts in case of the
appellant were materially different as the rights in the land were assigned to
PS and thus, PS was not merely acting as agent of non-residents to receive money
by virtue of rights vested in him by co-owners. The Tribunal further observed
that in Tecumesh Products (I) Ltd. v. DCIT, (2007) 13 SOT 489 (Hyd.), it was
held that when a payment is made to resident even on behalf of non-residents, S.
195 does not apply.

Held :

The Tribunal held that S. 195 would not apply when
the appellant made the payment to the power of attorney holder, but it would
apply when payment is made to non-residents. Hence, it will come into play only
when PS makes the payment to the actual owners of the land.

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If India-specific accounts are furnished to the tax authorities, normative attribution of profits cannot be made.

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New Page 2


Tribunal News




Part C : Tribunal & AAR International Tax Decisions

4. BBC Worldwide Ltd. v. DDIT, New
Delhi

(2010) TIOL 59 ITAT (Del.)

S. 92, Circular No. 742, Article 5 of India UK DTAA

A.Y. : 2000-01. Dated : 15-1-2010

If the commission paid to dependant agenfor
rendering agency services in India is on an arm’s-length basis, no further
attribution of profits is required in the hands of the assessee.

If India-specific accounts are furnished to the tax
authorities, normative attribution of profits cannot be made.



Facts :




The assessee, a British company, was operating
as an international consumer media company in the areas of television,
publishing, programme licensing, etc. The assessee had appointed BBC
Worldwide (India) Pvt. Ltd. (ICO), its indirect subsidiary, as its
authorised agent in India under the Airtime Sales Agreement (ASA) to market
and procure orders for the sale of airtime on its news channel.

ICO was paid marketing commission at 15% of the
advertisement revenue received by the assessee from Indian customers.

The assessee claimed that it did not attract
tax liability in India in the absence of permanent establishment (PE) in
India and in any case there was no tax attribution possible as its agent was
remunerated at fair price.

The Assessing Officer rejected the contention
of the assessee and estimated 20% of the advertisement revenue as income
attributable to Dependant Agent PE of the taxpayer in India.

The CIT(A) upheld the order of the Assessing
Officer, but reduced the estimated attributable profits to 10%, based on the
CBDT Circular 742, dated 2nd May 19961.

Before the ITAT, the assessee contended
that :

(a) It did not have a business connection or PE
in India.

(b) In any case ICO was remunerated on fair
transfer price. In support of this, reliance was placed on own transfer
pricing order of the ICO for the subsequent year. Reliance was also placed
by the assessee on the decisions in the case of Set Satellite Singapore Pte
Limited (2008 TIOL 414 HC Mum.) and Galileo International Inc, (2007 TIOL
447 ITAT DEL) to support that payment of commission exhausted charge of
taxation in respect of dependant agent PE.

(c) The assessee also placed reliance on the
CBDT Circular No. 23 of 1969, which states that if the commission paid fully
represents the value of profit attributable to the services, it would prima
facie extinguish the assessment of the foreign principal.

(d) The assessee also contended that since
audited accounts were filed indicating the allocation of revenue and
expenses of the Indian activity, the CBDT’s Circular No. 742, which was
relied on by the Department, was not applicable.



ITAT held :






(a) The ITAT proceeded on the basis that the
issue of PE or absence of business connection was not challenged before it.
Having admitted that, the ITAT confirmed that upon payment of arm’s-length
remuneration, the agent would extinguish the charge arising on account of
presence of dependant agent. For this purpose it relied on the following :

Set Satellite Singapore Pte Limited (2008
TIOL 414 HC Mum.);

Galileo International Inc, (2007 TIOL 447 ITAT
DEL); and

Circular No. 23 of 1969




(b) The CBDT Circular permitting normative taxation @ 10% of
receipts net of commission is not applicable to the facts of the case as the
applicant made available India-specific accounts to the tax officer which
revealed that the taxpayer had incurred loss in the Indian segment.

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On facts, where technical knowledge, etc. was ‘made available’, fees paid held taxable in terms of Article 13(4)(c) of India-UK DTAA.

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New Page 1


Tribunal News

Geeta Jani, Dhishat B. Mehta

Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions


 

1. TVS Motor Co. Ltd. v. ITO

(2010) 35 SOT 230 (Chennai)

Articles 7, 13, India-UK DTAA

A.Ys. : 2001-02 and 2002-03

Dated : 18-9-2009

On facts, where technical knowledge, etc. was ‘made
available’, fees paid held taxable in terms of Article 13(4)(c) of India-UK DTAA.

Facts :

The appellant is an Indian company manufacturing
motorcycles. The appellant engaged a UK company (UK Co) for two projects.

Under first project, UK Co was to :



à
fully document and make available future design solutions to the appellant;

à encourage
active participation of engineers of the appellant and share relevant
information with them; and

à provide
specific training to engineers of the appellant in test techniques and
procedures.


Under the second project, UK Co was to carry out
appraisal of motorcycles manufactured by the appellant. UK Co had extensive
experience of product development, including use of experimental and analytical
techniques, to improve the dynamic behavior (ride, handling, vibration, etc.) of
vehicle system.

The appellant filed returns of income for UK Co as
a representative assessee and claimed that the fees for technical services
received by UK Co were exempt particularly in terms of provisions of India- UK
treaty. The AO rejected the claim and concluded that the income was taxable in
India. On appeal, the CIT(A) confirmed the AO’s order.

Before the Tribunal, the appellant contended that :



à UK Co did not
provide any technical know-how, plan or design;

à UK Co was in
business of testing vehicles and it did not have PE in India;

à the appellant
had sent the prototype machines to UK Co in UK;

à UK Co merely
carried out the tests and no technical knowledge, experience, skill,
know-how or processes were ‘made available’ (in terms of Article 13(4)(c) of
India-UK DTAA) by UK Co to the appellant;

à no ‘development
and transfer of a technical plan or design’ had occurred;

à the payments
were towards business income covered by Article 7 and not royalties or fees
for included services in terms of Article 13; and

à
in terms of Article 7, business profits cannot be taxed in India, if UK Co
does not have PE in India as the entire services were rendered only in UK.


The tax authorities contended that from perusal of
the contract between the appellant and UK Co, particularly ‘Objectives’ and
‘Project Scope and Technical Content’, UK Co had ‘made available’ technical
knowledge, experience, skill, know-how or processes to the appellant and hence,
the payments were covered by Article 13(4)(c) of India-UK DTAA.

As regards the first project, the Tribunal referred
to ‘Objectives’ and ‘Project Scope and Technical Content’ and observed that UK
Co was to provide training in test techniques and procedures to the appellant’s
staff. UK Co was also to undertake data collection, measurement of dynamic
properties of machineries and to fully document and make available the model to
enable the appellant to investigate future design solutions.

As regards the second project, the Tribunal
observed that UK Co was merely to provide an independent pre-launch evaluation
of the motorcycle.

Held :

On facts, the Tribunal held that in respect of the
first project where UK Co ‘made available’ technical knowledge, experience,
skill, know-how and processes, the payments were fees for technical services
within the meaning of Article 13(4)(c) and were taxable accordingly. As regards
the second project where UK Co merely provided pre-launch independent evaluation
of the motorcycle, no technical knowledge, experience, skill, know-how or
processes was ‘made available’ and hence, it was not taxable.


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Payments made to American company for supply of personnel are not ‘fees for included services’ under Article 12(4)(b) of India-USA DTAA.

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New Page 1


Tribunal News

Geeta Jani, Dhishat B. Mehta

Chartered
Accountants

Part C : Tribunal & AAR International Tax Decisions


2. ACIT v. IIC Systems (P) Ltd.

(2010) 127 TTJ 435 (Hyderabad)

S. 9(1)(vii), S. 90, S. 195 & S. 201(1)

Income-tax Act; Article 12(4),

India-USA DTAA

A.Ys. : 2005-06 and 2006-07. Dated : 9-10-2009

Payments made to American company for supply of
personnel are not ‘fees for included services’ under Article 12(4)(b) of
India-USA DTAA.

Facts :

The appellant is an Indian company. It is
subsidiary of an American company. The appellant entered into a contract with
another Indian company (which was an affiliate of IBM) in Bangalore for
providing software personnel by the appellant for global (including the USA)
projects of IBM. The appellant, in turn, entered into contract with another US
company by name ACSC. In terms of the contract between the appellant and ACSC,
ACSC was to supply software personnel in the USA for projects of IBM (which were
awarded to the appellant) in the USA. Thus, whenever IBM Bangalore required
personnel for a project in the USA, it instructed the appellant. The appellant,
in turn, would instruct ACSC and procure the personnel from ACSC and would
deploy them for IBM projects in the USA. ACSC raised invoice on the appellant on
monthly basis and the appellant, in turn, raised its invoice on IBM. The
appellant remitted the payments to ACSC in US $, but had not deducted tax at
source on the same.

The AO was of the view that (i) the payments made
by the appellant to ACSC were for supply of software professionals for executing
on site work in the USA in connection with the appellant’s contract with IBM
Bangalore; (ii) they were ‘fees for technical services’ and chargeable in terms
of S. 9(1)(vii)(b) of the Income-tax Act; and (iii) as the appellant had not
deducted the tax on such payments, the appellant should be treated as an
‘assessee in default’. While admitting that the recipient (namely, ACSC) is
entitled to be taxed either under the Income-tax Act or the India-USA DTAA,
whichever is beneficial, the AO did not accept the appellant’s contention that
the payment made by it was not covered under Article 12(4)(a) or (b) of the
India-USA DTAA. Finally, the AO concluded that the payments made by the
appellant to ACSC were covered u/s.9(1)(vii)(b) of the Income-tax Act as well as
under Article 12(4)(b) of the India-USA DTAA and accordingly, the appellant was
required to deduct u/s.195 of the Income-tax Act. As the appellant had not so
deducted the tax, he was an assessee in default u/s.201 and u/s.201(1A) of the
Income-tax Act. The AO, thus, raised demand of tax on the appellant.

In appeal, the CIT(A) annulled the order of the AO
and deleted the demand.

The Tribunal observed that the questions were:
firstly, whether the payments were towards ‘fees for technical services’ or
merely for supply of personnel; secondly, whether the payments could be
considered ‘fees for included services’; and thirdly, whether the payments would
be ‘business profits’ in the hands of ACSC. Also, under the India-USA DTAA,
non-technical consultancy services cannot be treated as ‘fees for included
services’.

The Tribunal noted that what was ordered was
certain amount of manpower at a specified unit price per hour and no detail as
to the work to be done was stipulated by the appellant, which showed that the
payments were made only for supply of manpower. It observed that the India-USA
DTAA also clarified that provision of technical input by the person providing
the services does not per se mean that technical knowledge or skill is ‘made
available’. Similarly, use of the product embodying the technology also does not
per se mean that the technology is ‘made available’. Even if there is a transfer
of developed work, software, etc. it is not ACSC, but the appellant who
transfers the same. Also, neither the appellant nor ACSC appear to be engaged in
computer programming and the developed work never belonged to the appellant or
ACSC.

Held :

Since no technology, skill, experience, technical
plan, design, etc. was made available either by the appellant or by ACSC,
provisions of Article 12(4)(b) could not be invoked.

Even if payments were to constitute ‘fees for
technical services’ u/s.9(1)(vii), in view of S. 90(2) the appellant has option
to be governed by the provisions of the DTAA.


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Proportionate cost of technical personnel working at HO for PE in India does not trigger disallowance in terms of S. 44C of the Act.

 4 DCIT v. M/s. Stock Engineer & Contractors BV

(2009 TIOL 30 ITAT Mum.)

S. 40(a)(i), S. 44C. Article 5(2)(i) of India-Malaysia Double Tax Avoidance Agreement, Article 5(2)(j) and 5(2)(k) of India-UK Double Tax Avoidance  A.Y. : 2000-01. Dated : 5-12-2008

Issues :

India-Malaysia Treaty

  •     Manning services provided by a Malaysian company are not taxable in India.

  •     Proportionate cost of technical personnel working at HO for PE in India does not trigger disallowance in terms of S. 44C of the Act.

India-UK Treaty

1. There is no tax implication for supervisory activity in India if the duration of such activity is less than the threshold of Supervisory PE — though the duration of such activity exceeded Service PE threshold of the treaty.

Issue 1 :

Manning services provided by a Malaysian company are not taxable in India :

Facts :

The assessee, a tax resident of Netherlands, is engaged in design and construction of oil and gas products, oil refining, chemicals and petro-chemicals. The assessee was awarded a contract in India by Indian Oil Corporation Ltd. (‘IOCL’) for engineering, procurement and construction of the Sulphur Block for the Haldia Refinery Project on turnkey basis. For the purpose of executing the contract, the assessee set up a project office in Mumbai and a site office in Haldia.

The assessee awarded a sub-contract in favour of its subsidiary company, namely, Stock Comprimo (Malaysia) Sdn. Bhd. (hereinafter called as ‘Malaysian company’). Under the agreement the Malaysian company was required to supply personnel to the assessee company for the purpose of execution of its project at Haldia.

The assessee did not deduct tax at source in respect of the payment to Malaysian company. Relying on AAR ruling in the case of Tekniskil (1996) 222 ITR 551, it was argued that the Malaysian company supplied the personnel; that, personnel supplied by the Malaysian company to the assessee were working under the direction, supervision and control of the assessee and, therefore, it could not be said that services were rendered by the Malaysian company in India.

The Assessing Officer (AO), however, held that :

(a) Malaysian company deputed its own technical personnel;

     
(b) the deputed personnel continued to be Malaysian company’s employees;

     
(c) through the employees, Malaysian company rendered project supervisory services in India;

     

(d) Since duration of such services exceeded 6 months threshold of Construction PE, Malaysian company was liable to tax in India. Since the assessee failed to deduct tax at source with regard to payment made, the same was disallowable in computation of PE income in terms of S. 40(a)(i) of the Act. The CIT(A) accepted the assessee’s contention that :

     

(a) Malaysian company merely rendered services of supplying the personnel;

     
(b) since India-Malaysia treaty does not have FTS article, such amount is not taxable in India in absence of PE or presence of Malaysian company in India.

Held :

1. The ITAT noted that the following features of the service agreement between Malaysian company and the assessee supported that the role of Malaysian company was limited to supply of personnel and the Malaysian company did not have responsibility of performing supervisory activities in India.

(a) Malaysian company was engaged in the business of supplying skilled and unskilled personnel. In order to execute the contract, the assessee sought personnel from Malaysian company.

(b) Malaysian entity had no role to play after the personnel were supplied. It was not involved in carrying out supervision over the personnel supplied.

     
(c) The assessee was responsible for imparting/conducting training to the personnel and to equip them to carry out the desired work.

     
(d) Personnel performed and worked under the directions and control of the assessee.

Manning services provided by a Malaysian company are not taxable in India.

 4 DCIT v. M/s. Stock Engineer & Contractors BV

(2009 TIOL 30 ITAT Mum.)

S. 40(a)(i), S. 44C. Article 5(2)(i) of India-Malaysia Double Tax Avoidance Agreement, Article 5(2)(j) and 5(2)(k) of India-UK Double Tax Avoidance  A.Y. : 2000-01. Dated : 5-12-2008

Issues :

India-Malaysia Treaty

    Manning services provided by a Malaysian company are not taxable in India.

    Proportionate cost of technical personnel working at HO for PE in India does not trigger disallowance in terms of S. 44C of the Act.

India-UK Treaty

1. There is no tax implication for supervisory activity in India if the duration of such activity is less than the threshold of Supervisory PE — though the duration of such activity exceeded Service PE threshold of the treaty.

Issue 1 :

Manning services provided by a Malaysian company are not taxable in India :

Facts :

The assessee, a tax resident of Netherlands, is engaged in design and construction of oil and gas products, oil refining, chemicals and petro-chemicals. The assessee was awarded a contract in India by Indian Oil Corporation Ltd. (‘IOCL’) for engineering, procurement and construction of the Sulphur Block for the Haldia Refinery Project on turnkey basis. For the purpose of executing the contract, the assessee set up a project office in Mumbai and a site office in Haldia.

The assessee awarded a sub-contract in favour of its subsidiary company, namely, Stock Comprimo (Malaysia) Sdn. Bhd. (hereinafter called as ‘Malaysian company’). Under the agreement the Malaysian company was required to supply personnel to the assessee company for the purpose of execution of its project at Haldia.

The assessee did not deduct tax at source in respect of the payment to Malaysian company. Relying on AAR ruling in the case of Tekniskil (1996) 222 ITR 551, it was argued that the Malaysian company supplied the personnel; that, personnel supplied by the Malaysian company to the assessee were working under the direction, supervision and control of the assessee and, therefore, it could not be said that services were rendered by the Malaysian company in India.

The Assessing Officer (AO), however, held that :

(a) Malaysian company deputed its own technical personnel;

     
(b) the deputed personnel continued to be Malaysian company’s employees;

     
(c) through the employees, Malaysian company rendered project supervisory services in India;

     

(d) Since duration of such services exceeded 6 months threshold of Construction PE, Malaysian company was liable to tax in India. Since the assessee failed to deduct tax at source with regard to payment made, the same was disallowable in computation of PE income in terms of S. 40(a)(i) of the Act. The CIT(A) accepted the assessee’s contention that :

     

(a) Malaysian company merely rendered services of supplying the personnel;

     
(b) since India-Malaysia treaty does not have FTS article, such amount is not taxable in India in absence of PE or presence of Malaysian company in India.

Held :

1. The ITAT noted that the following features of the service agreement between Malaysian company and the assessee supported that the role of Malaysian company was limited to supply of personnel and the Malaysian company did not have responsibility of performing supervisory activities in India.

(a) Malaysian company was engaged in the business of supplying skilled and unskilled person-nel. In order to execute the contract, the assessee sought personnel from Malaysian company.

(b) Malaysian entity had no role to play after the personnel were supplied. It was not involved in carrying out supervision over the personnel supplied.

     
(c) The assessee was responsible for imparting/conducting training to the personnel and to equip them to carry out the desired work.

     
(d) Personnel performed and worked under the directions and control of the assessee.

Services rendered outside India by R but NOR are not taxable in India if the taxpayer can substantiate that presence outside India does not relate to his employment in India.

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New Page 1

3 ACIT v. Shri Ellis ‘D’ Rozario (2009 TIOL 138 ITAT Del.) Section/Article : S. 5

A.Y. : 2001-02. Dated : 5-12-2008

Issue :

Services rendered outside India by R but NOR are not taxable in India if the taxpayer can substantiate that presence outside India does not relate to his employment in India.

Facts :

The assessee, an Australian National, was Resident but Not Ordinarily Resident (R but NOR). The assessee was employed by a UAE Company and was posted to India as a regional manager of the Indian sub-continent. The UAE company was in the process of establishing a liaison office for collection of information from India. For the year under reference, the assessee was in India for 224 days, while he was outside India for 51 days. The assessee claimed that proportionate salary for 51 days pertaining to the period for which he was outside India was not taxable in India, as (i) his residential status was that of R but NOR; and (ii) the visits outside India were on assignments totally unrelated to Indian assignment.

The CIT(A) accepted the claim of the assessee.

Before the Tribunal, the Department claimed that the visits outside India were in connection with assessee’s employment in India and hence the entirety of salary was chargeable to tax in India. The Tax Department also claimed that as per the assessee’s own admission, he had undertaken debriefing of his Indian activities during one of his visits abroad.

The assessee relied on the following decisions to claim that having regard to his status of R but NOR, salary pertaining to the period of stay outside India is not chargeable to tax in India :

  • W/A Kielmann (ITR No. 4/1979) dated 9-8-1984 (Delhi HC)



  • J Callo and Others (ITA No. 5921-5929/Del/86) dated 2-8-1989 (Delhi)


The assessee also relied on the decision of the Delhi Tribunal in the case of Eric Marou (ITA No. 1174/ Del./2005), dated 15-2-2008 to support the proposition that no inference can be drawn as to ‘while being outside India the employee rendered services in respect of their operations in India’ and that the period of employment outside India should not be considered as services rendered in India.

Held :

The Tribunal observed :

    (1) The decisions relied on by the assessee involved cases where the employment contract specifically required of the assessee to work outside India for a particular period of time. As against that, in the case of the assessee, the employment contract required the assessee to be based in India and undertake overseas travel in connection with his employment in India. According to the Tribunal, as compared to other cases, the period for which the assessee was liable to work outside India was not specified in the agreement.

(2) The facts on record showed that while being outside India, the assessee held debriefing meeting about his Indian activities. Thus, even while being outside India, certain activities relating to the Indian activities were undertaken. The Tribunal held that such part of the salary was taxable as the income can be regarded as arising in India.

    (3) The Tribunal set aside the matter with a direction that to the extent the assessee can substantiate with evidence, that while being outside India the assessee did not do any activity in relation to India-specific employment, the amount of such salary would be excluded from the scope of total income.

S. 48 — When interest-bearing borrowed funds are utilised for making an application for allotment of shares and the number of shares allotted is less than the number of shares applied for, the entire interest (including interest on funds borrowed for shar

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New Page 1Part B : UNREPORTED DECISIONS

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



10 Smt. Neera Jain v. ACIT
ITAT ‘B’ Bench, Mumbai
Before R. S. Syal (AM) and R. S. Padvekar (JM)
ITA No. 1861/Mum./2009

A.Y. : 2005-06. Decided on : 22-2-2010

Counsel for assessee/revenue : Dharmesh Shah/S. S. Rana and
Peeyush Jain

S. 48 — When interest-bearing borrowed funds are utilised for
making an application for allotment of shares and the number of shares allotted
is less than the number of shares applied for, the entire interest (including
interest on funds borrowed for shares applied for but not allotted) is to be
treated as cost of acquisition of shares allotted.

Per R. S. Padvekar :

Facts :

The assessee applied for 1,26,000 shares of Punjab National
Bank. For this purpose she borrowed Rs.4 crores @ 15% p.a. for 15 days and paid
interest of Rs.2,63,015. She was allotted 4,635 shares. The entire amount of
interest of Rs.2,63,015 was capitalised as cost of shares allotted. Similarly,
the assessee applied for 8,76,000 shares of NTPC Ltd. For this purpose she
borrowed Rs.4.88 crores @ 17% p.a. for 17 days and paid interest of Rs.3,87,317.
She was allotted 73,403 shares. The entire amount of interest of Rs.3,87,317 was
capitalised as cost of shares allotted.

The assessee sold the shares allotted. While computing
capital gains on sale of shares allotted the entire amount of interest
capitalised was regarded as cost of acquisition and claimed as deduction.

The Assessing Officer (AO) disallowed the entire interest of
Rs.6,50,330 (Rs.2,63,015 + Rs.3,87,317).

The CIT(A) allowed the claim of deduction for interest to the
extent of borrowed amount utilised for the purpose of payments of shares
allotted by Punjab National Bank and NTPC. The assessee preferred an appeal to
the Tribunal.

Held :

The Tribunal noted that there was no dispute that the entire
loan was borrowed for the purpose of acquiring the shares of Punjab National
Bank and NTPC and also that immediately after allotment of shares, money
refunded by both the companies was refunded to the financiers. The Tribunal held
that the fact that applied shares were not allotted in full will not deprive the
assessee from claiming the entire interest paid as part of the cost of
acquisition of the shares allotted, as money borrowed has direct nexus with
acquisition of shares. The Tribunal directed the AO to treat the interest paid
by the assessee to both the financiers as part of cost of acquisition of shares
and allow the same as a deduction.

This appeal of the assessee was allowed.


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Provisions of S. 115JB (MAT) are not applicable to foreign companies that do not have physical presence in India, in the form of an office, branch or a permanent establishment (PE).

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New Page 1Part C : Tribunal & AAR International Tax Decisions

22 The Timken Company &

Praxair Pacific Limited

2010 TII 25 & 26 ARA-Intl.

S. 115JB of the Act, Article 5 of India-USA DTAA and

Article 13 of India-Mauritius Treaty

Dated : 23-7-2010

 

Provisions of S. 115JB (MAT) are not applicable to foreign
companies that do not have physical presence in India, in the form of an office,
branch or a permanent establishment (PE).

Facts :

  • As part of its global
    restructuring exercise, Timken, a US company (USCO) proposed to transfer
    shares of in an Indian listed company. The proposed transfer was to be through
    stock exchange, and hence, was expected to qualify for exemption from capital
    gains tax in terms of S. 10(38) of the Act.

  • The issue raised
    before AAR was whether in absence of any presence in India, USCO was liable to
    pay tax under MAT provisions on capital gains arising from transfer of shares.



Ruling of AAR :

On the following grounds, AAR held that MAT provisions did
not apply to foreign companies that had no business presence in India :

  • A foreign company
    that has not established a place of business in India is not required to
    prepare its financial statements in accordance with S. 591 r.w. S. 594 of the
    Companies Act.

  • The context of the
    MAT regime, the Finance Minister’s speech and the administrative circulars
    indicate that the MAT is not designed to be applicable to a foreign company
    which does not have presence in India.

  • The earlier AAR
    ruling holding that MAT is applicable to foreign companies was in the context
    of an entity that was doing business in India and had a PE in India. Such
    foreign company had obligation to comply with the provisions of the Companies
    Act and maintain books of accounts in India and therefore, was liable to MAT.



Note : This ratio was also applied when a foreign transferor
company earned capital gains, which was exempt from tax in terms of the
India-Mauritius Treaty. (Praxair Pacific Limited)

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