Category: Tribunal News: Part A-Domestic Taxation

The Tribunal, following the Special Bench decision of ITAT Chennai in the case of Scientific Atlanta India Technology (P.) Ltd. v. ACIT, (2010) 129 TTJ 223 (Chennai) (SB)/(2010) 37 DTR 46 (Chennai) (SB)/(2010) 2 ITR 66 (Trib.) (Chennai) (SB), held as under:

(1) The business loss of non-eligible unit(s) cannot be set off against the profits of undertaking(s) eligible for deduction u/s.10A.

(2) Any other income, including the losses arising to the assessee from other concerns, shall be computed as per the regular provisions of the Act, and, consequently, carried forward under and in terms of the regular provisions of the Act.

(3) That the unabsorbed claim u/s.10A, i.e., the income after deduction, having arisen from an eligible unit, cannot be carried forward in the like manner as a business loss or unabsorbed depreciation and would, therefore, be subject to tax.

(4) Deductions u/s.10A and u/s.10B, and also those u/s.80HH, u/s.80HHA, u/s.80-I, u/s.80-IA, etc. are unit-specific in contradiction to being assessee-specific.

(5) There is nothing in the section that suggests aggregation of profits from two or more undertakings so that the profit derived from each is to be considered separately i.e., as if it were the only income of the assessee, for the purpose of computation of deduction thereunder.

(6) In other words, the qualifying amount and, consequently, the deduction in its respect are to be worked out on a stand-alone basis, independently for each eligible unit.

(7) Loss of any other unit is not to be set off while computing deduction u/s.10A.

(8) Income that remains after the deduction u/s. 10A or the unabsorbed claim u/s.10A would stand to be taxed as such i.e., shall not be set off against any other loss or be carried forward.

During the search and seizure operations at the premises of SGL Ltd. and its director A, certain incriminating documents were found. Investigations revealed that SGL Ltd. had received large amount in the form of share capital from sister concerns through bogus shareholders and from agricultural income. Since assessee-trusts also made investment in SGL Ltd., the Assessing Officer framed block assessment u/s.158BD r.w.s 158BC. So-called satisfaction in the order sheet dated 4th September 2003 was recorded before the commencement of block assessment proceedings of the persons searched on 5th September 2003.

The assessees challenged the block assessment orders u/s.158BD before the learned CIT(A). The learned CIT(A) accepted the contention of the assessee and quashed the proceedings u/s.158BD because such notices were issued without any basis. The CIT(A) held that there is no satisfaction recorded objectively and that the same is without application of mind and, accordingly, annulled the block assessment orders u/s.158BD.

There was a difference of opinion between the members of the Tribunal. The Third Member, relying on the decisions in the following cases, upheld the CIT(A)’s order in favour of the assessee:

(a) Manish Maheshwari v. ACIT & Anr., (2007) 208 CTR 97 (SC)/(2007) 289 ITR 341 (SC)

(b) Manoj Aggarwal v. Dy. CIT, (2008) 117 TTJ 145 (Del.) (SB)/(2008) 11 DTR 1 (Del.) (SB) (Trib.)/ (2008) 113 ITD 377 (Del.) (SB).

The Tribunal noted as under:

(1) The so-called satisfaction in the order sheet dated 4th September 2003 has been recorded before the commencement of the block assessment proceedings of the persons searched on 5th September 2003. This satisfaction is not in accordance with the provisions of section 158BD. The satisfaction recorded u/s.158BD on 4th September 2003 i.e., before the initiation of block assessment proceedings of the person searched does not satisfy the requirement of law. The observation that the Assessing Officer has taken simultaneous action in the case of persons searched and in the cases of these assessee-trusts is factually incorrect, because in the cases of assessee-trusts the satisfaction was recorded on 4th September 2003, whereas the block assessment proceedings of the person searched were started subsequently on 5th September 2003.

(2) Similarly, the observation of the AM that it is immaterial whether the satisfaction was recorded in the file of the persons searched or in the case of assessee-trusts is legally incorrect and is not according to the provision of law. Similarly, the reason given by the AM that the Assessing Officer in the case of assessee-trusts and the persons searched is the same and, hence, it is immaterial whether the reasons recorded were in the file of the persons searched or in the case of assesseetrusts is incorrect and is contrary to law.

(3) Satisfaction should be recorded by the Assessing Officer of person searched as per the provisions of section 158BD. It is well-settled law that satisfaction recorded has to be objective/ judicious satisfaction and the order sheet dated 4th September 2003, in the cases of the present assessees, does not fulfil this condition, because the block assessment proceedings of the persons searched were started by issuing notice u/s.158BC on 5th September 2003 and hearing of the case of the persons searched was started on 13th October 2003.

(4) Hence, in no case, the Assessing Officer of the persons searched can examine the seized record on 4th September 2003 and ask the assessees’ explanation in respect of seized record of the persons searched.

(5) The so-called satisfaction recorded on 4th September 2003 by the Assessing Officer is based on assumption and presumption and is not based on seized record and is not a judicious satisfaction and, hence, the order sheet dated 4th September 2003 does not fulfil the requirement of section 158BD.

The Tribunal, relying on the decision of the ITAT Pune in the case of Serum Institute of India Ltd. v. Dy. CIT, (2007) 12 TTJ (Pune) 174/111 ITD 259 (Pune), upheld the assessee’s claim.

The Tribunal noted as under:

(1) It is evident that the compensation was awarded to the assessee ‘against loss of reputation and goodwill’. It was not on account of the failure on the part of UBS to supply the quantity ordered or some loss caused to the assessee in a particular trading transaction.

(2) It was on account of injury caused to the reputation of the assessee, albeit such injury was caused due to some business transaction.

(3) Had the amount been awarded to make good the loss caused due to excess or short supply of the material or some other trading deficiency, it would certainly have been regarded as a revenue receipt.

(4) Since the nexus of the compensation is with reputation and goodwill and not with the trading operations, it cannot be held to be a revenue receipt.

(5) The main criterion to judge as to whether the compensation is capital or revenue is to ascertain the purpose for which such compensation is awarded. If the compensation is to recoup the loss suffered by the assessee in its business activity, then it will be a revenue receipt. If, however, the purpose is unrelated to the trading activity of the assessee, it will be in the nature of a capital receipt.

Facts:
The assessee was a super-specialty hospital dealing with cardiac and cardio vascular diseases. It had taken insurance policies on life of its key personnel — Chief Surgeon, Chairman and Managing Director, the premium on which was claimed as deduction.

The Assessing Officer disallowed the deduction on grounds that the benefit of policy was assigned to key personnel and therefore was not incurred wholly for business purpose.

On appeal, the learned CIT(A) held that since the surgeon had the requisite skill and knowledge of the field, therefore he was responsible for the turnover of the company and accordingly only the premium paid on his policy is deductible and that on the policy of the Chairman and the Managing Director is not.

Held:
(1) The assessee’s activity cannot be said to be solely depending on the surgeon. Though, he may be responsible for the turnover of the company, he may not be responsible for the profits of the company, due to lack of competence necessary for a businessman.

(2) Further, since the business is carried on with the ultimate motive of earning profits, it cannot be said that profits could not be taken as guiding factor to analyse the business.

(3) It was also not argued that the salaries paid to these persons were not allowable.

(4) Further, on their resignation in the subsequent year, the profits of the assessee reduced substantially.

(5) All the above factors led to the conclusion that the Chairman and the Managing Director were key personnel and accordingly the premium paid on their policy is allowed.

Facts:
The assessee derives income from sale of motor parts, tractor parts, tyres, etc. The assessee had shown GP at 10.84% which was less than previous year GP of 14.17%. To support the reduction in GP, the assessee submitted regular books of accounts which were audited. As no quantitative details of  purchases, sales, closing stock, etc. were maintained, the book results were rejected by the AO applying provisions of section 145. The AO thereafter added an estimated amount of Rs.50,000 to total income.

Held:
The assessee had maintained inventory of opening and closing stock and vouchers for purchases and sales which were also audited. Mere non-maintenance of stock register cannot mean that the books of accounts maintained are false. Also, low GP may justify an enquiry but cannot justify an addition to the profit shown. In the present case, the AO had not shown any mistake in books of accounts. Furthermore, rate of GP in a particular year depends on many factors and the same need not be constant from year to year. Therefore addition to income is not justified.

Facts:
The assessee received gift from two parties vide cheques. To prove the gifts are genuine, the assessee submitted affidavits of donors. However, the assessee’s claim was rejected as the AO was also not satisfied with the relationship between donor and donee. Further the AO observed that the assessee did not produce donors for verification and also did not prove financial capacity. The CIT(A), however, upheld the contention of the assessee.

On Revenue’s appeal, there was a difference of opinion between the members, and the matter was referred to the Third Member.

Held II:
The gifts received by the assessee were to be considered genuine as the gift was made through cheque and also disclosed in the books of accounts of the donees. Also the donees have admitted the gift given in their respective affidavits and hence there was no reason in disbelieving the genuineness of the gift.

Facts:
The assessee, a partnership firm, engaged in business of running a marine training institute, filed its return of income declaring the total income of Rs.1,86,466. During the previous year relevant to the assessment year under consideration the assessee sold a building, on which depreciation was claimed in earlier years, for a consideration of Rs.49,43,525. Since the amount of consideration was the same as its WDV, the assessee did not offer short-term capital gains on sale of the building. The value of this building as per stamp valuation authorities was Rs.76,49,000. The Assessing Officer (AO) was of the view that one of the office building i.e., office No. 101 having a WDV of Rs.13,14,425 was not sold by the assessee during the year under consideration. The Assessing Officer (AO) held that in view of the provisions of section 50 r.w.s 50C, the value of the building adopted by the stamp valuation authorities needs to be taken as full value of consideration. He, accordingly, made an addition of Rs.20,44,900, being the difference between value of the office sold (excluding office No. 101) as per stamp valuation authorities (Rs.56,74,000) and the WDV of the said office (Rs.36,29,100), to the total income of the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A), where it contended that the provisions of section 50C cannot be invoked in the case of an assessee wherein section 50 is applicable. It contended that it is not permissible to impose a supposition on a supposition of law. The CIT(A) held that the deeming provisions of section 50C could not apply to depreciable assets. He also held that the block of assets had ceased to exist. He deleted the addition made by the AO.

Aggrieved the Revenue preferred an appeal to the Tribunal.

The President, ITAT constituted a Special Bench to consider the following question:

“On a proper interpretation of sections 48, 50 and 50C of the Income-tax Act, 1961, was the Assessing Officer right in law in applying section 50C to capital assets covered by section 50 (depreciable assets) and in computing the capital gains on the sale of depreciable assets by adopting the stamp duty valuation?”

Held:
(1) There are two deeming fictions created in section 50 and section 50C. The first deeming fiction modifies the term ‘cost of acquisition’ used in section 48 for the purpose of computing the capital gains arising from transfer of depreciable assets, whereas the deeming fiction created in section 50C modifies the term ‘full value of the consideration received or accruing as a result of transfer of the capital asset’ used in section 48 for the purpose of computing the capital gains arising from the transfer of capital asset being land or building or both.

(2) The deeming fiction created in section 50C operates in a specific field which is different from the field in which section 50 is applicable. It is not a case where a supposition has been sought to be imposed on other supposition of law. Going by the legislative intentions to create the said fictions, the same operate in different fields.

(3) The harmonious interpretation of the relevant provisions makes it clear that there is no exclusion of applicability of one fiction in a case where other fiction is applicable.

(4) The assessee’s alternate argument that as the AO had held that the block of asset had not ceased to exist in the year and was in existence, section 50C could not apply as held in Roger Pereira Communications 34 SOT 64 was not acceptable, since the assessee itself had considered the entire block of buildings as having been sold/transferred during the year and the same was upheld by the CIT(A). The assessee is not entitled to take a stand with regard to facts, inconsistent with the stand that he had taken before the Revenue Authorities to obtain a decision in his favour. He cannot be heard to say that the stand on facts so taken by him is not correct just to raise a new legal plea.

The question referred to the Special Bench was answered in the affirmative i.e., in favour of the Revenue and against the assessee. The appeal filed by the Revenue was allowed.

Facts:
One Mrs. Mani Cawas Bamji (the deceased) was a childless widow who died in Mumbai on 6-1-2001. She possessed considerable movable properties in the form of shares, debentures and fixed deposits and immovable property known as Avasia House in her sole name at Nepean Sea Road, Mumbai. During her lifetime, she had allegedly executed a will dated 2-5- 1997. The only legal heirs entitled to her property in the event of her intestacy were the assessee, being the son of a pre-deceased sister of the deceased, and Mr. Dinshaw Jamshedji Mistry, being brother of the deceased. Under her will dated 2-5-1997, the deceased had bequeathed all her properties to her brother Mr. Dinshaw Jamshedji Mistry (DJM), who was also appointed as one of the executors in the will. There were three executors to the will but the other two (other than Mr. Dinshaw Mistry) renounced their executorship. DJM filed a petition before the Bombay High Court for grant of probate of the last will of the deceased. The assessee, as a legal heir of the deceased, received a citation from the Bombay High Court in the petition for grant of probate in respect of the last will of the deceased. The assessee filed a caveat against the grant of probate in respect of the last will of the deceased. In the affidavit filed in support of the caveat the assessee set out reasons as to why the alleged will was not valid. On such objection, the petition for grant of probate was converted into a testamentary suit. The Bombay High Court restrained DJM from dealing with the properties of the deceased. On 28-9-2002, DJM died leaving behind his will dated 29-10-2001 appointing Mr. Rajesh K. Bhavsar (RKB) as the sole executor and legatee. RKB got himself impeded as plaintiff in place of DJM in the testamentary suit for grant of probate of the last will of the deceased.

RKB and the assessee entered into a compromise agreement dated 22-11-2002, whereby the assessee agreed to receive a sum of Rs.5,08,80,000 in consideration for agreeing to the Court granting probate in respect of the last will of the deceased. This sum of Rs.5,08,80,000 was later reduced by Rs.30,00,000 and the sum of Rs.4,78,80,000 was received by the assessee in the following manner:

F.Y. 2003-04 : Rs.1,04,77,032 by various cheques
F.Y. 2005-06 : Rs.3,73,95,335 by various cheques
F.Y. 2006-07 : Rs.7,633 by cash

RKB and the assessee had on 12-12-2002 signed consent terms which consent terms were identical to the agreement dated 22-11-2002. The Court recorded the consent terms and modified the earlier order restraining DJM from alienating any part of the estate of deceased and permitted RKB to alienate some of the properties to enable him to raise funds to discharge the obligation to pay the assessee. The assessee on receipt of the agreed sum was to withdraw his caveat to enable issue of letters of administration with the Will annexed in respect of the estate of the deceased.

The assessee did not offer these amounts for taxation in the A.Y. 2006-07. The AO taxed on substantive basis the sum of Rs.3,73,95,335 (in the year of receipt) and the sum of Rs.1,04,77,032 (received in previous year relevant to A.Y. 2004-05 on a protective basis).

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted section 56(2)(v) has been introduced w.e.f. 1-9-2004. Thus, prior to 1-9-2004, receipts of any sum of money would not be income u/s.56(2)(v). A sum of Rs.1,04,77,032 was received between 3-4-2003 to 14-10-2003. Therefore, these receipts could not be taxed as income u/s.56(2)(v). As regards the sum of Rs.3,73,95,334, the Tribunal held that the sum in question was received by the assessee in consideration of giving up his rights to contest the will of late Mrs. Mani Cawas Bamji. The consideration referred to in the provisions of section 56(2)(v) of the Act have to be understood as per the definition of consideration as given in the Indian Contract Act, 1872 in section 2(d). The assessee has abstained from contesting the will and this constitutes the consideration for payment by RKB to the assessee. Thus, the amount received by the assessee is not without any consideration. Therefore the provisions of section 56(2)(v) were not applicable. The additions made by the AO were directed to be deleted.

The appeal filed by the assessee was allowed.

Facts:
The
assessee company, engaged in the business of providing IT-enabled
services and BPO services, e-filed its return of income declaring total
income of Rs.98,90,146 and claiming therein a refund of Rs.22,76,152.
The Assessing Officer in an order passed u/s.143(3) assessed the total
income to be Rs.98,90,146. While calculating the amount of tax payable
by the assessee/refund due to it, the AO in form ITNS 150A granted
credit for TDS and advance tax as claimed by the assessee, but did not
grant credit of Rs.8,38,764 claimed by the assessee u/s.90 and u/s.91 of
the Act.

Aggrieved, the assessee preferred an appeal to the
CIT(A) who held that the appeal was not maintainable since he was of the
view that section 246A did not permit such issues within its ambit.
Referring to the provisions of section 246A(1) (a), he held that the
reference to ‘tax’ is only for calculation of tax on total income and
not beyond that. He also made a reference to the definition of ‘tax’
u/s.2(43) and held that since the assessee was not challenging the
calculation of tax on total income, the grounds raised were several
steps beyond this calculation. He held that the issue of granting of
credit for advance tax or TDS could not be agitated in an appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the AO had in form ITNS 150A not granted credit of
withholding tax of Rs.8,38,764 u/s.90/91 and also that he had left the
column 18 of ITNS-150A, which specifically provides for DIT relief
u/s.90/91, blank. Upon going through the provisions of section
246A(1)(a) of the Act, the Tribunal observed that the assessee’s case
can be considered only under the second part of section 246A(1)(a) viz.
‘to the amount of tax determined’ and not under the remaining parts as
non-granting of benefit in respect of withholding tax u/s.90 /91 can
neither be considered as ‘the income assessed’, nor ‘the loss computed’,
nor ‘the status under which he is assessed’. Having so observed the
Tribunal proceeded to examine whether non-granting of refund in respect
of withholding tax u/s.90/91 can be considered under the expression
‘amount of tax determined’ and held:

(1) From the ratio
decidendi of the decisions of SC, in the case of Auto and Metal
Engineers and Others v. Union of India and Others, 229 ITR 399 (SC) and
Kalyankumar Ray v. CIT, 191 ITR 634 (SC), it is discernible that the
‘determination of tax’ refers to finding out the amount finally payable
by the assessee for which notice of demand is issued.

(2) The
expression ‘amount of tax determined’ in section 246A(1)(a) also refers
to the determination fo the sum finally payable by the assessee. Not
only the calculation of tax on the total income but also the adjustment
of taxes paid by or on behalf of the assessee is also covered within the
determination of sum payable by the assessee u/s.156 of the Act.

(3)
The expression ‘amount of tax determined’ as employed in section
246A(1)(a) encompasses not only the determination of the amount of tax
on the total income but also any other thing which has the effect of
reducing or enhancing the total amount payable by the assessee. As the
question of not allowing relief in respect of withholding tax u/s.90/91,
has the direct effect of reducing the refund or enhancing the amount of
tax payable, such an issue is squarely covered within the ambit of
section 246A(1)(a).

(4) Accepting the view-point of the CIT(A)
that the appeal is not maintainable in respect of non-allowing of relief
for tax withheld u/s.90/ 91 would amount to violating the language of
section 246A, which has otherwise given the right to the assessee to
appeal broadly against on any aspect of the ‘amount of tax determined’.

(5)
The CIT(A) was not justified in dismissing the appeal of the assessee
as not maintainable on the aspect of not allowing of credit by the AO of
tax withheld on behalf of the assessee u/s.90 and 91. The AO was
directed to modify ITNS 150A and grant the consequential refund due,
which has not been allowed.

The appeal filed by the assessee was allowed.

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

(1) The assessee is a broker as well as an investor. It has maintained the investment portfolio separately, income from which was liable to be taxed as capital gains, since the intention in respect of this was to hold the investment as investment only and was shown as such in the books of account and income therefrom was shown and treated as capital gains in the successive assessments.

(2) The schedule of investments was duly appended in the balance sheet.

(3) The assessee has also maintained separate D-mat accounts for investment and for trading. Therefore, the assessee has distinctly maintained investment account and trading account.

(4) The assessee was holding certain stock for the purpose of doing business of buying and selling and at the same time it was holding other shares as its capital for the purpose of dividend income.

Therefore, the CIT(A) has rightly held that the income is to be treated as capital gains and not as business income.

For the relevant assessment year, certain additions were made by the Assessing Officer against which the assessee filed an appeal. The CIT(A) considered the issue in great detail and passed an elaborate order in favour of the assessee. Aggrieved by this, the Department preferred an appeal before the Tribunal. The Tribunal passed a short order since it was in agreement with the CIT(A)’s order.

The Department filed a miscellaneous application on the ground that the Tribunal was not justified in passing a short order without elaborating on the issues and, thus, it gives rise to a ‘mistake apparent from record’ since it has to be presumed that the Tribunal has not applied its mind on the contentions and issues raised by the Department. In this regard, the applicant has taken a support from para 11 of the guidelines issued by the then President of the Tribunal.

Rejecting the miscellaneous application, the Tribunal observed as under:

(1) Internal guidelines issued by the then President were only to prod the Members to give detailed reasons, as far as practicable, implying thereby that whenever an order of the lower forum is based on two reasons out of which an Appellate Authority agrees only with one reason which would ultimately have an effect of upholding the order of the lower authority, it is the duty of the Tribunal to give detailed reasons to satisfy as to the basis for coming to such conclusion. In a given case, where the appellant raises some additional issues and relies upon some additional case laws which were not considered by the lower authority, even though they are not applicable to the facts of the instant case, the Tribunal may have to give its reasons rejecting such arguments while upholding the order of the CIT (A).

(2) However, when the facts and circumstances are not disputed before the Tribunal and no additional arguments were advanced by the learned Departmental Representative and, in addition to that, when the Tribunal is fully agreeing with the reasons given by the learned CIT(A), as rightly observed by the Apex Court in the case of K. Y. Pilliah & Sons (1967) 63 ITR 411 (SC), it may not be necessary to repeat the reasons given by the first Appellate Authority and an order passed by the Tribunal under such circumstances cannot be said to be illegal.

(3) In para 3 of the order of the Tribunal this Bench has specifically observed that it was in agreement with the reasons given by the CIT (A). Thus, mere non-production of the reasons and the conclusions of the CIT(A) in the body of the order of the Tribunal do not give rise either to a mistake of law or fact, nor can it be considered as an irregular order.

Facts:
The appellants had entered into a ‘Marketing agreement’ with its joint venture to sell, distribute, market, advertise and promote the products of joint venture. The appellants had a belief that the services rendered by them during the period 1-7-2003 to 8-7-2004 were of a commission agent and were fully exempt under Notification No. 13/2003-S.T., dated 20-6-2003. Therefore, they did not pay any Service tax on the services rendered by them. However, the said Notification was withdrawn w.e.f. 9-7-2004 and as a consequence of which the appellants got themselves registered with the Service Tax Department in August 2004.

The Revenue contended that the services provided by the appellants were taxable under business auxiliary service and benefit of exemption Notification cannot be availed as the appellants were not the commission agents. Commission agent meant a person who causes sale or purchase of goods on behalf of another person for a consideration. The commission agents usually charge a fixed percentage of sale price, but the appellants were not charging a fixed percentage. Additionally, the scope of activities undertaken by the appellants is far beyond the activities of commission agent and fall within the purview of definition of business auxiliary service.

The extended period of limitation was invoked. However, the appellants contended that the limitation of five years cannot be invoked as the intention of the appellants was bona fide since they had immediately registered themselves when the relevant exemption Notification was withdrawn.

Held:
The services were to be taxable under business auxiliary service. However, due to reasonable cause for failure to pay Service tax, the penalties levied on the appellants were set aside. Further, the matter was remanded for quantification of demand within the period of limitation.

Facts:
The assessee sold a property, being a flat, for consideration of Rs.1.68 crore. The assessee acquired the property at Rs.46.38 lakh on 27- 12-1990. However, he got the possession of the property only on 6-1-1992 and that too after paying the tenant Rs. 18,00,000 to vacate the same.

The Assessing Officer was of the view that since the assessee got possession only on 6-1-1992, it could be said that the assessee held the property from that date in view of section 48. The AO, accordingly, calculated the indexed cost of acquisition and capital gains. AO also disallowed the payment made to the tenant for vacating the property which was claimed by the assessee as indexed cost of improvement.

On appeal, the CIT(A) upheld the assessment order.

Held:
(1) Assets which are referred under the capital gains include not only the property which is tangible, but also intangible rights whose physical possession cannot be taken. The word ‘held’ used in the Explanation (iii) to section 48 does not mean physical ownership or physical possession of the property, but it refers to ownership rights only.

(2) The ownership has been passed by virtue of the agreement. Possession of property was delayed only due to the adverse possession of a tenant which subsequently got vacated and so, the assessee was deemed to be holding the property with effect from the agreement date. Accordingly claim of indexation from 27-12-1990 was correct.

(3) Further the assessee was entitled to consider the amount paid to the tenant as cost of improvement.

(2) The assessee had filed NIL return, claiming exemption u/s.11.

(3) The Assessing Officer denied the benefits u/s. 11 and u/s.12 on two grounds, namely:

(a) Hospital charges were on higher side and were comparable to hospitals run on commercial basis, and

(b) The alleged subsidised treatment was only given to doctors, relatives/friends of the doctors and employees of the hospital.

(4) On appeal, the assessee proved the facts to the satisfaction of the CIT(A) that its charges were in line with those hospitals who were claiming benefits of sections 11 and 12 and also that the patients have come from farflung areas and that the second ground was altogether baseless. Consequently the CIT(A) set aside the order passed by the AO. Thereupon the Revenue went into second appeal.

Held:

(1) Profitability is not the sole criterion to assess the charitable nature of a society. Charitable activity can also result in profits and that does not conclude that the activity carried on was not charitable in nature.

(2) Further, profits accruing to the society were utilised for charitable purpose only, which was also affirmed by the AO.

(3) Thus, the appeal of the Revenue was dismissed.

Section 54F — exemption u/s.54F can be claimed in respect of deemed long-term capital gain u/s.54F(3) arising on transfer of new house if net consideration thereof is again invested in purchase of a residential house within a period of two years.

On 5-5-2005 the assessee sold land held by him as long-term capital asset, for a consideration of Rs.81 lakh. On 1-10-2005, the assessee invested Rs.75 lakh in purchase of new house property at Alwarpet. In A.Y. 2006-07, the assessee claimed Rs.73,94,157 to be exempt u/s.54F of the Act, which was allowed. On 13-11-2006, the assessee sold the house purchased at Alwarpet for a consideration of Rs.50 lakh and purchased another residential house at Spur Tank Road on 15-11-2006 for Rs.70,80,620. The Assessing Officer (AO) while assessing the total income for A.Y. 2007-08 held that the long-term capital gain of Rs.73,94,157 claimed to be exempt u/s.54F in A.Y. 2006-07 was to be withdrawn in A.Y. 2007-08. According to the AO, the assessee suffered a capital loss of Rs.25 lakh on sale of house property situated at Alwarpet and therefore, allowing set-off of such loss, he brought to tax the balance amount of Rs.48,94,157. Aggrieved the assessee preferred an appeal to the CIT(A) who allowed the appeal. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

The Tribunal after considering the provisions of section 54F(3) of the Act held that the AO was justified in treating Rs.73,94,157 as long-term capital

Section 54 —  exemption u/s.54 can be claimed when under a development agreement an assessee exchanges his old flat for a new flat. Such acquisition amounts to construction of new flat and therefore time period of 3 years is available for such acquisition.

Vide development agreement dated 8-7-2005 the assessee surrendered his flat of carpet area 866 sq.ft. to the builder and in lieu thereof was allotted new flat of carpet area 1040 sq.ft. and also given cash compensation of Rs.11,25,800. The cash compensation was invested by the assessee in REC bonds and was claimed to be exempt u/s.54EC. Since the assessee had acquired new flat in lieu of the old flat, capital gain arising on account of the transfer of the old flat was claimed to be exempt u/s.54 of the Act. The assessee submitted that the capital gain computed at Rs.55,91,866 was less than the value of the new flat and, therefore, the same was exempt u/s.54 of the Act.

The AO held that the assessee had neither purchased, nor constructed the new flat and therefore was not eligible to claim exemption u/s.54. He denied the claim u/s.54. He computed sale consideration of old flat to be Rs.86,96,760 comprising Rs.75,64,960 being market value of the new flat and Rs.11,25,800 being cash compensation. After deducting indexed cost of acquisition from the sale consideration, he computed the long-term capital gains to be Rs.55,91,866.

Aggrieved the assessee preferred an appeal to the CIT(A) who confirmed the disallowance u/s.54. Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal held that acquisition of a new flat under a development agreement in exchange of the old flat amounts to construction of new flat. This view was also taken in the case of ITO v. Abbas Ali Shiras, (5 SOT 422). The Tribunal held that the provisions of section 54 are applicable and the assessee is entitled to exemption if the new flat had been constructed within a period of 3 years from the date of transfer. Since cash compensation was part of consideration for the transfer of old flat and the assessee had invested money in REC bonds, the exemption u/s.54EC will be available. Since the longterm capital gain computed by the AO including cash compensation as part of sale consideration was much below the cost of new flat and therefore, the cash component was also held to be exempt u/s.54. The Tribunal noted that to substantiate the completion of new flat within 3 years the assessee had filed a copy of letter dated 30-5-2007 of the builder in which it was mentioned that the builder had applied for occupation certificate and possession was given on 14-6-2007. This letter was not available with lower authorities. The exact date of taking possession of the flat was also not clear. The Tribunal directed the AO to verify these facts.

The Tribunal held that the assessee is entitled to exemption u/s.54, subject to verification of the date of taking possession by the assessee. The Tribunal decided this ground of appeal in favour of the assessee.

 M/s. Guys & Gals, franchisees of the assessee, desired to take premises on rent. Since the landlords were not willing to let out their premises to M/s. Guys & Gals, the sister concern of the assessee took the premises on rent from the landlords, Sibals.

M/s. Guys & Gals paid to the assessee the amount of rent after deduction of tax at source u/s.194I. The assessee paid the gross amount of rent to its sister concern. The sister concern of the assessee paid the amount of rent to the landlords after deduction of tax at source. Thus, there was TDS on two occasions — first at the time of payment by Guys & Gals to the assessee and second at the time of payment by the sister concern of the assessee to the landlord.

Since the amount received by the assessee from Guys & Gals was for onward payment to its sister concern, it did not reflect any rental income in its accounts. However, the assessee claimed credit for TDS by Guys & Gals.

While assessing the total income of the assessee the Assessing Officer (AO) denied credit of TDS amounting to Rs.8,77,881 on the ground that the corresponding income has not been offered for tax. The AO, however, after considering the explanation of the assessee did not include the amount of rent as income of the assessee.

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

Held:

The Tribunal considered the provisions of TDS contained in Chapter VII of the Act and held that the common thread running through these provisions is the chargeability of the amount as income. If the amount received by the payee is not in the nature of any income or does not contain some element of income, there cannot be any question of deduction of tax at source. In order to attract the provisions for withholding of tax, the amount must be received by the recipient in the nature of income and not as an obligation. When the amount of income is directly paid by the payer to the payee, such amount is liable for deduction of tax at source if it is of the nature as specified in the relevant provisions concerning with deduction of tax at source. If however the amount is paid by the payer to the payee not directly but indirectly, that is, through the medium of some other person, then such other person receives the amount as an obligation and not as income in his hands. Neither the amount received by such middleman can be considered as income in his hands, nor can there be any requirement under law fastening some sort of tax liability on him towards such transaction. The said middleman does not earn any income from the payer, nor incurs any expenditure by mediating in the transaction between the payer and receiver of income.

Section 199 only deals with allowing of the credit for tax deducted at source and not with the disallowing of such credit. It does not encompass within its purview the question for determination as to whether the credit for tax deducted at source should at all be allowed or disallowed. This enabling 298 (2012) 44-A BCAJ provision cannot be employed to disable the allowing of credit for tax deducted at source from the payment made to the assessee in the nature of income. The amount of tax deducted at source has to be necessarily allowed credit somewhere. It cannot be a case that the amount of such tax deducted and paid to the exchequer is not to be refunded, if the tax due on the amount of income received is either lower than the amount of tax deducted or there does not exist any liability to tax in respect of amount received.

The amount of tax deducted at source needs to be adjusted against some tax liability of the payee and in case there is no such liability, it has to be refunded to the payee because of the very mandate of section 199 as per which such amount is ‘treated as payment of tax on behalf of the person from whose income the deduction was made’ that is the payee.

As the amount on which tax was deducted at source is not at all chargeable to tax, then the command of section 199 will have to be harmoniously and pragmatically read as providing for allowing credit for the tax deducted at source in the year of receipt of the amount, on which such tax was deducted at source.

Since the assessee received the amount after deduction of tax at source from Guys & Gals and such amount was admittedly not chargeable to tax in its hands, the Tribunal held that the credit for tax deducted at source should be allowed in the instant year.

Therefore such payments made to overseas agents without deducting of TDS are not liable to be disallowed u/s.40(a)(i) — Held, Yes.

The assessee had paid commission to foreign agents for services rendered outside India. The Assessing Officer disallowed the same u/s.40(a)(i) on the ground that the tax was not deducted at source. The assessee contended that the payment was made through appropriate banking channels as per the RBI guidelines and regulations and hence was not liable to TDS. On assessee’s appeal with the CIT(A), the Commissioner allowed certain relief to the assessee. On the Department’s appeal, it was held:

Held:

Section 195 clearly states that the obligation to deduct tax is only on the income taxable in India. On the basis of section 9, the income is liable to be taxed only when it arises, accrues by virtue of its control or management being situated in India. In this case the overseas agents of Indian exporters operate in their own countries and therefore the income received by them is not liable to be taxed in India and hence do not attract TDS provisions. Also the Assessing Officer had not been able to prove the specific instruction of payee to receive the same payment in India. Hence he had erred in disallowing such agency fees u/s.40(a)(i) and thus the CIT(A)’s order ought to be upheld.

Section 263 — Without examining detailed records submitted by assessee and in absence of finding of any factual mistake or any legal error or any instance which could have shown as to how the order of  ao was erroneous and prejudicial to interest of revenue, the proceedings initiated by Commissioner u/s.263 were not justified.

The assessee was an individual deriving income from manufacturing and export of gems and jewellery. Order of assessment was passed by the Assessing Officer (‘AO’) u/s.143(3). Taking into consideration the past history of the assessee, the deduction u/s.10B was allowed. Thereafter, the successor AO sent a proposal u/s.263 to the Additional Commissioner. Notice u/s.263(1) was thus issued to the assessee. The assessee filed detailed replies to notice. The Commissioner, in exercise of his power u/s.263, set aside the assessment order passed by the AO mainly on ground that while completing assessment, the AO had not raised any queries and details, which were suo moto filed by assessee, were not examined by the AO and no investigation was made. Accordingly, order of the AO was held erroneous and prejudicial to interest of the Revenue and hence was set aside. The assessee appealed before the Tribunal.

Held:

While completing the assessment, the AO though he had not discussed the issue in detail but had clearly mentioned that the case was discussed and various details filed by the assessee were test-checked and were found correct. Taking into consideration the past history, deduction u/s.10B was also allowed. It is not necessary that the AO should write a lengthy order discussing all the details but the necessity is that he should have applied his mind. In reply to the notice issued by the Commissioner, the assessee explained each and every query through detailed reply. However, the Commissioner didn’t comment as to how these explanations and details were not acceptable. The Commissioner set aside the order of the AO to make de novo assessment. The approach of the Commissioner was not legally well-founded. The order of the Commissioner could not be sustained as it could not point out as to how the order of the AO was erroneous and prejudicial to interest of the Revenue or it could not point out any specific defect in the details filed before the AO and again before the Commissioner or how any addition can be sustained. Without pointing out any defect, mere setting aside the order of the AO, just to make fresh investigation in a manner suggested by the Commissioner is not permissible under law. Resultantly, the appeal of the assessee was allowed. The error envisaged by section 263 is not one which depends on possibility or guesswork, but it should be actually an error either of fact or law. The phrase ‘prejudicial to interests of Revenue’ has to be read in conjunction with an erroneous order passed by the AO.

Section 11 r.w.s 12A — Whether the accumulated funds along with all the assets and liabilities transferred to a new institution or section 25 company formed shall be taxable as deemed income u/s.11(3)(d). Held, No.

The assessee a sports association working for the promotion of sports was granted a registration u/s.12A. In the year 2005, the assessee passed a resolution to create a new company u/s.25 of the Companies Act, 1956 and to thus dissolve the existing society by transferring all the assets and liabilities. As on the date of transfer the society had accumulated funds of Rs.5.48 crore which were also transferred. These funds were deemed to be the income u/s.11(3)(d). The CIT(A) held that the funds transferred by the assessee were not covered by section 11(3A) because the new company had invested the accumulated balance in accordance with the provisions. The Department preferred a second appeal.

Held:

The scope of transfer has been extended to by section 11(3A) to not only societies but also to institutions. The new company being a charitable institution registered u/s.12A had taken over the functions of the society as also the assets and liabilities as per its Memorandum of Association. The Revenue had also not placed any material to prove it otherwise, hence the order of the CIT(A) was restored.

Loss on account of valuation of interest rate swap as on the balance sheet date is deductible.

Interest rate swap is a financial contract between two parties exchanging a stream of interest payments for a notional principal amount, on multiple occasions, during the contract period. These contracts generally involve exchange of fixed rate of interest, with floating rate of interest, and vice versa. On each payment date, the interest is notionally paid on the agreed fixed or floating rate by one party to the other, by settling for the difference payments. The assessee had three ongoing interest rate swap contracts, for a notional principal amount of Rs.185 crore, under which the assessee was to pay a fixed rate of interest and receive the floating rate of interest. The assessee claimed a deduction of Rs.10,10,92,000 on account of unrealised loss on the basis of valuation of interest rate swap. This valuation, was arrived at by working out future extrapolation of the yield curve, considering past history of available rates and current market rate. This provision was made in accordance with the guidelines issued by the RBI, and the method of valuation consistently followed all along. The AO disallowed this loss considering it as unascertained liability and it was confirmed by the CIT(A).

Held:

It is important to bear in mind the fact that whatever is claimed as a loss at this stage, is eventually reduced from the overall loss or added to overall profit taken into account, for tax purposes, in the subsequent year in which the settlement date falls. It is not really, therefore, the question as to whether the deduction is to be allowed or not, but only the assessment year in which deduction is to be allowed. Viewed in the long-term perspective, thus, it is wholly tax neutral, but for the timing of deduction. One of the mandatory Accounting Standards, notified vide Notification No. 9949, dated 25th Jan., 1996, provides that “provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information”. There is no enabling provision which permits the AO to tinker with the profits computed in accordance with the method of accounting so employed u/s.145 and as long as the mandatory accounting standards are duly followed. It is not even the AO’s case that the mandatory accounting standards have not been followed.

Loss having been incurred is a reality, its recoupment or aggravation is contingent. It is contingent upon future happenings i.e., whether or not loss the assessee will be able to recoup the losses till settlement date, and such recoupment or aggravation of loss will fall in period beyond the end of the relevant previous year. Viewed thus, and bearing in mind the fact that the real issue in this appeal is not the deductibility but only the timing of the deduction, the loss computed vis-à-vis the variation as on the end of the relevant previous year, the loss is deductible in the relevant previous year.

exemption u/s.54eC — Granted even in respect of bonds purchased in wife’s name where repayment was to be received by the assessee.

Against the long-term capital gain on surrender of tenancy rights the assessee claimed exemption u/s.54EC on the ground that he invested a total sum of Rs.46 lakh in REC bonds. There were two certificates of REC bonds of Rs.23 lakh each. In the first certificate the assessee was mentioned as the main holder of the bonds, whereas wife and daughter of the assessee were shown as the joint holders. In respect of other certificate, Smt. Sabita Shirodkar, wife of the assessee, was the main holder of the certificate and the assessee along with his son were only the nominees of the first beneficial owner.

The AO allowed exemption in respect of first certificate of Rs.23 lakh in the light of the decision of the Tribunal, Mumbai Bench in the case of Dr. (Mrs.) Sudha S. Trivedi v. ITO, 27 DTR (Mum.) (Trib.) 271 though wife and daughter were co-holders. But he disallowed the exemption in respect of another certificate of Rs.23 lakh since the assessee was not the main-holder.

Held:

In respect of the assessee’s investment in REC Bonds the CIT(A) observed that the primary requirement for claiming deduction u/s.54EC of the Act was fulfilled in the instant case by virtue of the fact that the funds invested emanated from the sum received from the transfer of long-term capital asset and that it was invested within a specified time. In his opinion payment of the maturity proceeds to any one of the bond holders is not a material factor for deciding the ownership of the bonds. In the statement of facts before the CIT(A) the assessee stated that though rules were framed for ease of operation and not for determining ownership and/or succession rights, the fact remains that the assessee’s wife had instructed REC to remit the maturity proceeds directly to the account of the assessee and REC had agreed to the change readily without asking for any documentation for the reason that they are not concerned with the question as to who among the joint applicants are the true owners of the bonds. It was stated that the REC had confirmed the change vide their letter dated 27th July, 2009.

Having regard to the factual matrix, the CIT(A) observed that the payment of the maturity deposit to any one of the bond-holders is not a material factor so long as investment was made out of the sale proceeds and the assessee’s name also figures as one of the investors, more particularly when REC changed the name of recipient in its records. Thus, the CIT(A) held that the assessee had invested in REC Bonds.

ITAT primarily relied upon the decision of Dr. (Mrs.) Sudha S. Trivedi v. ITO, 27 DTR (Mum.) (Trib.) 271 and confirmed the above findings of CIT(A).