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Category: Tribunal News: Part A-Domestic Taxation

Section 12A of the Income-tax Act, 1961 — Registration under charitable institutions — Trust formed for propagating the knowledge of Vedas cannot be said to be benefiting only a particular community — Registration cannot be denied on this ground.

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29. 2011) 131 ITD 370 (Cochin) Kasyapa Veda Research Foundation v. CIT A.Y.: 2008-09. Dated: 28-4-2011

Section 12A of the Income-tax Act, 1961 — Registration under charitable institutions — Trust formed for propagating the knowledge of Vedas cannot be said to be benefiting only a particular community — Registration cannot be denied on this ground.


Facts:

The assessee-trust filed an application u/s.12A of the Income-tax Act, 1961 seeking registration as a charitable trust. It was formed for preaching and propagating the knowledge of Vedas. The Commissioner of Income-tax was of the opinion that the trust was not benefiting the public at large and was confined to only the Hindu community. He thus cancelled registration u/s.12A of the Income-tax Act. He further passed an order declaring the trust as religious trust.

Held:

There is a very thin line of difference so as to identify whether the nature of activity is a charitable one or a religious one. The assessee-trust was formed to propagate and spread the knowledge of Vedas and Vedanta amongst the public so that they can change their living habits and take the necessary steps for the betterment of humanity. This would not only help the common public to improve their current status but also would enhance their ability to think about the humanity as a whole. The overall appeal of Vedas and its contents are universal and a representation of religious scriptures. The whole purpose of imparting education in Vedas is to promote the behavioural patterns of the people. Also as mentioned in the Trust deed, the other activities are pure charitable in nature. Thus, the assessee-trust was thus allowed a status of charitable trust.

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Section 11 of the Income-tax Act — Accumulation @ 15% should be calculated on the gross income and before deducting other expenses.

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28. (2011) 131 ITD 335 (Luck.) Krishi Utpadan Mandi Samiti v. DCIT A.Y.: 2006-07. Dated: 7-6-2010

Section 11 of the Income-tax Act — Accumulation 15% should be calculated on the gross income and before deducting other expenses.


Facts:

The assessee-trust has earned total receipts of Rs. 1.32 crore as per their books of accounts. As per the provisions of section 11 of the Act, it accumulated 15% of the receipts and claimed as an exemption. However, the AO computed exemption @ 15% after deducting administrative expenses.

Held:

According to section 11(a) of the Act, income derived from the property held by the trust and applied for religious or charitable purposes will be exempt. Where any income is accumulated, exemption to the extent of fifteen percentage of the said income will be available. The assessee-trust calculated the exemption on the basis of gross income received from the property. As per the AO and the CIT(A) the exemption should be calculated after deducting the expenses incurred for charitable purposes. Relying on the decision of CIT v. Programme for Community Organisation, (248 ITR 1) (SC) it was held that the exemption of 15% must be taken on the gross income and not on net income as determined for income tax purposes.

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Section 22 r.w.s 28(1) — Principle of res judicata though not applicable to income tax proceedings, principle of consistency applicable and in absence of any change of circumstances or non-consideration of material facts or statutory provisions, Department cannot change the stand taken in earlier years.

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27. (2011) 131 ITD 171 (Luck.)ACIT v. Harbilas Cold Storage and Food ProductsA.Y.: 2006-07. Dated: 12-11-2010

Section 22 r.w.s 28(1) — Principle of  res judicata though not applicable to income tax proceedings, principle of consistency is applicable and in absence of any change of circumstances or non-consideration of material facts or statutory provisions, Department cannot change the stand taken in earlier years.


Facts:

(1) The assessee was engaged in carrying on business of running cold storage till 1989. Thereafter, the assessee made some alterations and additions in cold storage building and rented out certain portions for use as warehouse and office.

(2) The rent income was offered by the assessee as income under the head income from house property and the same was accepted by the Department in all earlier assessment years. Further, there was no change in facts in the year under consideration as compared to earlier years.

(3) However for the assessment year under consideration, the AO treated the income as profits and gains from business and profession on the ground that the assessee was not just letting property, but also providing various facilities.

(4) On appeal filed by the assessee, the CIT(A) held that the income is chargeable under the head income from house property only, thus allowing the appeal filed by the assessee.

 (5) Against the order of the CIT(A), the Department filed appeal before the Tribunal.

Held:

 (1) Though principle of res judicata is not applicable in tax proceedings, the principle of consistency is applicable as held by the Supreme Court in the case of Radhasoami Satsang (100 CTR 267) and the Jurisdictional High Court in case of Goel Builders (supra).

(2) Where an issue is decided either in one manner or other and the same has not been challenged by either of the parties, it would not be appropriate to change the position in subsequent years.

(3) The Department has got the right to depart from its earlier practice only on change of circumstances or non-consideration of material facts or statutory provisions.

(4) In the present case, no new facts have been brought on record by the AO so as to justify departure from the earlier stand taken by the Department.

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

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Sections 194I, 199 — Tax is not deductible at source on payment received as an obligation and not as an income — If the amount is paid by the payer to the payee, not directly but indirectly, through the medium of some other person, then such other person receives the amount as an obligation and not as income — Payment received as an obligation is not taxable as income and credit for TDS was allowable u/s.199 in the year in which the amount was received by such other person after deduction of ta<

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(2012) 21 taxmann.com 131 (Mumbai-Trib)
arvind Murjani Brands (P.) Ltd. v. ITO
A.Y.: 2007-08. Dated: 2-5-2012

Sections 194i, 199 — Tax is not deductible at source on payment received as an obligation and not as an income — if the amount is paid by the payer to the payee, not directly but indirectly, through the medium of some other person, then such other person receives the amount as an obligation and not as income — Payment received as an obligation is not taxable as income and credit for TDS was allowable u/s.199 in the year in which the amount was received by such other person after deduction of tax at source.

Facts:

 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.

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Section 40(a)(i) r.w.s 195 — Whether no tax is deductible u/s.195 on the commission payable to a non-resident for services rendered outside India — Held, Yes.

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(2011) 131 ITD 271 (Hyd.)
CIT v. Divi’s Laboratories Ltd.
A.Ys.: 2001-02 to 2004-05. Dated: 25-3-2011

Section 40(a)(i) r.w.s 195 — Whether no tax is deductible u/s.195 on the commission payable to a non-resident for services rendered outside india — Held, Yes.

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


Facts:

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.

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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.

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(2011) 131 ITD 58 (Jp.)
Rajiv Arora v. CIT-iii
A.Y.: 2007-08. Dated: 9-7-2010

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.


Facts:

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.

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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.

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(2011) 130 ITD 157 (Luck.)
aCiT v. U.P. Cricket association
Dated: 24-9-2010

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.


Facts:

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.

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

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(2012) 69 DTR (Mum.) (Trib.) 161
aBN amro Securities india (P) Ltd. v. ITO
A.Y.: 2003-04. Dated: 26-8-2011

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


Facts:

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.

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

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(2012) 69 DTR (Mum.) (Trib.) 19
aCiT v. Vijay S. Shirodkar
A.Y.: 2007-08. Dated: 30-8-2011

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


Facts:

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).

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(2012) 65 DTR (Ahd.) (Trib.) 342 ITO v. Parag Mahasukhlal Shah A.Y.: 2005-06. Dated: 30-6-2011

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Interest for delayed payment of purchase price to principal — Since such interest is compensatory in nature and not related to any deposit or loan or borrowings, no TDS required to be deducted u/s.194A and hence no disallowance u/s.40(a)(ia).

Facts:
The assessee had claimed interest expenses of Rs.12.47 lakh. Out of the total interest claimed, an amount of Rs.7.83 lakh was towards interest of FAG Bearing (India) Ltd. On the said amount of interest no tax was deducted at source. The assessee, having dealership of FAG Bearing (India) Ltd. as per terms of payment was allowed interest-free credit period for 60 days. In case of overdue payment the cost of purchase includes with a liability to pay a compensatory sum which was termed as interest. As per the assessee since it was not in the nature of interest in strict terms, hence there was no liability to deduct the tax at source. The AO denied such claim and stated that as per section 2(28A) interest means interest payable in any manner in respect of any money borrowed or debited. Hence as per the AO, for such payment section 194A was applicable and hence he disallowed such interest u/s.40(a)(ia). The learned CIT(A) upheld the claim of the assessee. The Department went into further appeal.

Held:
Section 2(28A) has defined the term ‘interest’, but the definition appears to be wide to cover interest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligations. But it is also worth noting that the said definition is not wide enough to include other payments. There ought to be a distinction between the payments not connected with any debt, and a payment having connection with the borrowings. A payment having no nexus with a deposit, loan or borrowing is out of the ambit of the definition of interest as per section 2(28A). A decision of Respected National Consumer Disputes Redressal Commission was relied upon, where in the case of Ghaziabad Development Authority v. Dr. N. K. Gupta, (2002) 258 ITR 337 (NCDRC), it was held that if the nature of payment is to compensate an allottee, then the provisions of section 194A not to be applied as far as the question of deduction of TDS on interest is concerned.

Reliance was also placed on the decision of the Gujarat High Court in the case of Nirma Industries Ltd. (2006) 283 ITR 402, wherein the interest received from trade debtors was allowed as deduction u/s.80HH and 80-I, the source being trade activity. The Courts in their judgments have considered the immediate source of interest received. If the immediate source is a loan, deposit, etc., then the payment is in the nature of ‘interest’, but if the immediate source of payment is trade activity, then the nature of receipt is not ‘interest payment’, but in the nature of payment of compensation. Hence, interest for delayed payment of purchase price to principal was held as beyond the ambit of section 194A and hence not liable to TDS.

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(2011) 130 ITD 11/19 taxmann.com 138 (Cochin) Prasad Mathew v. DCIT A.Y.: 2005-06. Dated: 30-7-2010

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Section 2(14) — Definition of Capital Asset.

Facts:
The assessee received certain amount from the sale of rubber and coconut trees standing on his land. The assessee explained that the trees had been sold along with the roots and hence there was no scope to re-grow the trees and as such they were a capital asset and, thus, sale proceeds thereof would represent a capital receipt. The Assessing Officer rejected the assessee’s claim and brought the above amount to tax under the head income from other sources. The Commissioner (Appeals) upheld the order of the Assessing Officer. On second appeal it was held that

Held:
The trees which stood cut and sold were from a spontaneous growth and were neither nurtured, nor cultivated by the assessee. Also they were in no manner used by the assessee for any activity. The controversy between the assessee and the Revenue was with respect to whether the trees were sold along with the roots or not and whether the receipts from sale of these trees was of capital nature. It was held that the trees whether sold with roots or without the roots was an immaterial question given the fact that the trees stood uprooted. The material question would be the purpose for which the trees were cut and sold. If the trees were cut and sold by the assessee for planting fresh ones the sale proceeds would stand to be assessed under income from other sources. Further trees rooted to the land, by definition, are a part of the land. Thus, what stood sold and transferred by the assessee was a part of land itself and thus would be categorised as capital asset and the receipt from their sale would be assessed as capital receipt and eligible to capital gains tax under the act.

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(2012) 65 DTR (Mum.) (Trib.) 39 DCIT v. Eversmile Construction Co. (P) Ltd. A.Y.: 2001-02. Dated: 30-8-2011

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Assessment u/s.153A — Total income for each assessment year has to be done afresh without any reference to what was done in the original assessment and hence assessee is entitled to seek any relief on any addition made in the original assessment.

Facts:
In the original assessment u/s.143(3), the AO disallowed interest of Rs.58.86 lakh. The assessee-company did not agitate the disallowance of interest before the Appellate Authority. While filing return in response to notice u/s.153A, the assessee voluntarily disallowed the interest disallowance made in the original assessment, subject to reservation of right for contesting the allowability of entire interest during the course of assessment proceedings. When the matter came before the CIT(A), the assessee put forth details to support the deduction of interest. The learned CIT(A) forwarded the same to the AO and as per the remand report, the learned CIT(A) directed the AO to disallow interest of Rs.10.81 lakhs and ordered deletion of the remaining disallowance.

The viewpoint of the Department was that the assessee was not entitled to seek relief on any matters which had attained finality in the original assessment, as section 153A does not permit assessment at income lower than the one finally assessed in the original assessment.

Held:
U/s.153A the AO is required to make assessment afresh and compute ‘total income’ in respect of each of relevant six assessment years. As there is no specific restriction on jurisdiction of the AO in not including any new income to such fresh total income pursuant to search which was not added during the original assessment, in the like manner, there is no restriction on the assessee to claim any deduction which was not allowed in the original assessment. As it is a fresh exercise of framing assessment or reassessment, the assessee can argue about merits of the case qua addition made in the original assessment.

The judgment of the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd., (198 ITR 297) was distinguished since in that case the Apex Court was considering provisions of section 147. Conditions for taking action u/s.147 vis-à-vis u/s.153A are different.

Also provisions of search assessment u/s.153A, etc. have been inserted by the Finance Act 2003 w.e.f. 1st June 2003. These provisions are successor of special procedure for assessment of search cases under Chapter XIV-B starting with section 158B. Whereas Chapter XIV-B required assessment of ‘undisclosed income’ as a result of search, which has been defined in section 158(b), section 153A dealing with assessment in case of search w.e.f. 1st June 2003 requires the AO to determine ‘total income’ and not ‘undisclosed income’.

Regarding the view that the income in assessment u/s.153A should not be reduced than original assessment, it needs to be noted that total income is not reduced simply on basis of making claim. The AO is fully empowered to consider the question of deductibility. Hence, assessment u/s.153A needs to be done afresh without any reference to the original assessment.

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(2012) 75 DTR (Mum)(SB)193 Kotak Mahindra Capital Co. Ltd. vs. ACIT A.Y.: 2003-04 Dated: 10-8-2012

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Section 74(1) – Amendment with effect from A.Y. 2003-04 restricting set off of long-term capital loss only against long-term capital gain applies only in respect of losses for the A.Y. 2003-04 & onwards and not to losses of prior assessment years.

Facts:
The assessee filed its return of income wherein the brought forward long-term capital loss of A.Y. 2001- 02 was set off against the short-term capital gain arising during the present assessment year (i.e. A.Y. 2003-04). According to the Assessing Officer, the assessee was entitled to set off the brought forward long-term capital loss only against long-term capital gain and not against short-term capital gain by virtue of the provisions of section 74(1) as amended w.e.f. 1st April, 2003. He held that since the said provisions were amended w.e.f. 1st April, 2003, they were applicable to the year under consideration i.e. A.Y. 2003-04. The action of the Assessing Officer in disallowing the assessee’s claim for such set off was upheld by the learned CIT(A).

Held:
In the case of Komaf Financial Services Ltd. vs. ITO [132 TTJ (Mumbai) 359], the Mumbai Bench had taken a view that amended provisions of section 74(1) will apply to the losses under the head capital gains for any assessment year and not only to the losses relating to the A.Y. 2003-04 onwards. A contrary view, however, was taken by another Division Bench at Mumbai in the case of Geetanjali Trading Ltd. vs. ITO [ITA No. 5428/Mum/2007], wherein it was held that the amended provisions of section 74(1) will apply only in respect of losses for A.Y. 2003-04 and onwards. Therefore, the Special Bench was constituted to decide this question of law.

In the provisions of section 74(1) as substituted w.e.f. 1st April, 2003 present tense has been used, which refers to the long-term capital loss of the current year. The said provisions thus are applicable to the long-term capital loss of A.Y. 2003-04 onwards and not to the long-term capital loss relating to the period prior to A.Y. 2003-04. Therefore, the provisions of section 74(1) as substituted w.e.f. 1st April, 2003 are not applicable to the long-term capital loss relating to the period prior to A.Y. 2003- 04 and set off of such loss is therefore governed by the provisions of section 74(1) as stood prior to the amendment made by the Finance Act, 2002 w.e.f. 1st April, 2003.

The right accrued to the assessee by virtue of section 74(1) as it stood prior to the amendment made w.e.f 1st April, 2003 thus has not been taken away either expressly by the provisions of section 74(1) as amended w.e.f. 1st April, 2003 or even by implication. The golden rule of construction is that, in the absence of anything in the enactment to show that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the Act was passed. The right accrued to the assessee by virtue of section 74(1) as it stood prior to the amendment made w.e.f. 1st April, 2003 to set off brought forward long-term capital loss relating to the period prior to A.Y. 2003-04 against short-term capital gain of subsequent year/s has not been taken away by the provisions of section 74(1) substituted w.e.f. 1st April, 2003. The provisions of section 74 which deal with carry forward and set off of losses under the head “Capital gains” as amended by Finance Act, 2002, will apply only to the unabsorbed capital loss for the A.Y. 2003-04 and onwards and will not apply to the unabsorbed capital losses relating to the assessment years prior to the A.Y. 2003-04.

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(2011) 130 ITD 296 (Pune) Maharashtra Rajya Sahakari Sangh Maryadit v. ITO, Ward 1(2), Pune A.Y.: 2003-04. Dated: 30-4-2011

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Section 10(23C)(iiiab) — Where the Government legislates law to provide for compulsory contribution by the member societies to an ‘education fund’ which was set apart to be the source of finance for educational institution engaged in the co-operative movement in India, which constitutes indirect financing by the Government, are entitled for exemption u/s.10(23C)(iiiab) of the Act.

Facts:
The assessee was a co-operative society registered under the Maharashtra State Co-operative Societies Act, 1960. By virtue of section 68 of the Maharashtra Co-operative Societies Act, every other membersociety was to mandatorily contribute annually towards the education fund of the assessee as per the sums prescribed in the Notification issued by the State Government. The assessee filed his return of income for A.Y. 2003-04 claiming exemption u/s.10(23C)(iiiab) of the Act. The Assessing Officer, while assessing the total income rejected the assessee’s claim holding that it failed to fulfil conditions prescribed u/s.10(23C) (iiiab) with regard to expression ‘financed by the Government’.

On appeal, it was submitted that such supply of finance indirectly by way of mandatory contributions by member co-operative societies met requirement of expression ‘financed by the Government’ used in section 10(23C)(iiiab). The CIT(A) however rejected the claim of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
Before the Tribunal, the assessee relied on the following case laws:

(1) Small Business Corpn., In re (2008) 173 Taxman 452 (AAR — New Delhi)

(2) Dy. DIT (Exemptions) v. Indian Institute of Management, (2009) 120 ITD 351 (Bang.)

The Tribunal noted that in the provisions of section 10(23C)(iiiab), the Legislature has not used the words such as ‘directly or indirectly’ anywhere, meaning thereby the indirect financing by the Government is also a possibility not ruled out by the Legislature.

Further, the decision of the Department to reject the benefits of tax exemption u/s.10(23C)(iiiab) to the institution merely in view of the absence of inflow of the finance directly from the funds of the Government and ignoring the alternate financing mechanisms provided by the Government by legislative enactment, tantamount to narrow interpretation of the expression in the said clause.

In such circumstances and considering the peculiarity of the co-operative movement, governmental role in financing such educational institution rightly should stop with the role as a facilitator by providing requisite legislation for enabling the member societies to contribute to the assessee and contribute mandatorily. Therefore, it is the case of indirect financing of the educational institution of the co-operative movement by the Government and it is evolved in order to promote participation of the members and respect the financial independence of the movement in general and institution in particular.

In the light of the above discussion, the Tribunal set aside the impugned order of the CIT(A) and allowed the claim by the assessee of being entitled to exemption u/s.10(23C)(iiiab) of the Act.

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(2012) 146 TTJ 543 (Mumbai) Pranit Shipping & Services Ltd. v. Asst.CIT ITA No.5962 (Mum.) of 2009 A.Y.2005-06. Dated 25.01.2012.

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Sections 36(1)(iii), 40(a)(ia) and 194A of the Income Tax Act 1961 – Assessee having neither credited the interest in the books of account under any account nor paid such interest in the year, but claimed deduction on the basis of mercantile system of accounting straightaway in the computation of income without routing it through books of account, mandate of section 194A is not attracted and, consequently, the provisions of section 40(a)(ia) are not attracted.

Facts
For the relevant assessment year, the Assessing Officer disallowed u/s 40(a)(ia) Rs. 336.49 lacs towards accrued interest payable by the assessee-company to Sahara India Financial Corporation Ltd. (SIFC) for which no entry was passed in the books of account.Deduction was claimed directly in the Computation of Total Income. The CIT (A) confirmed the disallowance.

For earlier A.Y.2003-04, the assessee claimed deduction for similar interest payable on term loan to SIFC to the tune of Rs. 2.51 crore which was allowed by the Assessing Officer in the assessment framed u/s 143(3). Subsequently, the learned CIT, taking recourse of the provisions of section 263, held that the amount of interest was not deductible. ”

Held:
The Tribunal held that the provisions of section 40(a) (ia) are not attracted in the assessee’s case. The Tribunal noted as under:

In the mercantile system of accounting, deduction is allowed on accrual of liability. It is not material whether the amount is paid or not, or whether or not it is recorded in the books of account. Therefore, the deduction of interest payable to SIFC cannot be denied.

On a conjoint reading of sub section (1) with Explanation to section 194A, it is amply borne out that the event for deduction of tax at source arises when the amount of interest is credited to the account of the payee or when it is paid, whichever is earlier.

Even if the amount is not credited to the account of payee but shown under the head `Interest payable 20 account’ or `suspense account’, etc. it shall still be deemed as credit to the account of payee.

Thus, the essential requirement is that the amount must be credited in the books of account either in the account of payee or interest payable account or any other account by whatever name called such as suspense account. Once an amount is credited in the books of account, the liability to deduct tax at source arises if the payment of such interest is made after the date of crediting.

Since the assessee has not credited the amount of such interest in its books of account and, further, such interest has not been paid in this year, the mandate of section 194A cannot be attracted. This provision comes into play only when either the amount is credited in the books of account or interest is paid, whichever is earlier.

Once there is no liability to deduct tax at source u/s 194A, the provisions of section 40(a)(ia) cannot be attracted.

Probably, this lacuna was not noticed by the legislature while enacting the relevant provisions, which has been exploited by the assessee as a measure of tax planning. In this year the deduction has to be allowed. It will be open to the Assessing Officer to consider the later development of actual payment or non-payment of interest to SIFC and deal with it as per law in such later years.

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(2011) 132 ITD 34 (Allahabad) Asst. CIT v. A.H.Wheelers & Co. (P) Ltd. A.Y. 2004-05 Dated. 18-05-2011

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Section 271(1)(c) – Penalty cannot be levied in respect of wrong figures claimed by the assessee by mistake.

FACTS:
The assessee, who was engaged in the business of trading of books and periodicals, declared certain loss in its return of income for the relevant assessment year which was filed by a tax consultant on the basis of audit report u/s 44AB. The said loss included brought forward losses of earlier years. The Assessing officer, on going through past records, noticed that the assessee had wrongly claimed the brought forward loss in excess of the actual amount.

The assessee rectified the discrepancy before the completion of assessment. However, the Assessing Officer held that the assessee had furnished inaccurate particulars of income and imposed a penalty u/s 271(1) (c).

The CIT(A) deleted the penalty. On revenue’s appeal to the Tribunal, it was held:

HELD:
The details of brought forward losses are within the knowledge of the Assessing Officer in the form of return of income of earlier years filed by the assessee.

The mistake by the assessee was bonafide as it was based on the advice of the Tax Consultant.

It is the duty of the Assessing Officer to apply the relevant provisions of the Act for the purpose of determining the taxable income of the assessee and the consequential tax liability, even if the assessee failed to provide accurate figures relating to set-off of loss of earlier years already determined by the department.

Further, the mistake was inadvertent and was rectified before finalisation of assessment.

Merely because the assessee claimed the wrong amount of set-off, the Assessing Officer cannot reject the claim and consequentially levy the penalty considering wrong claim as concealment of income.

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(2011) 131 ITD 471 (Mum.) Chika Overseas (P) Ltd. v. ITO A.Y. 2000-01 Dated: 25-02-2010

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Section 147 – During the original assessment, facts placed before AO and detailed explanation given – AO discussed issue and then allowed deduction u/s 80HHC – hence there was application of mind by AO – matter carried to Tribunal – during pendency of appeal, AO initiated proceedings u/s 147 – while issue was subject matter of appeal, initiation of reassessment proceedings was bad in law – As AO applied his mind earlier, subsequent belief can only be considered as change of opinion on same set of facts-reopening not sustained.

Facts:
The assessee company was engaged in business of export of leather goods and textile dyes. It had filed return of income declaring total income at NIL after availing at a deduction u/s 80HHC. Assessment u/s 143(3) was completed and the Ld. AO had adjusted the trading losses against the profits of business and had then arrived at deduction u/s 80HHC. On certain other issues relating to section 80HHC, the matter was carried to the Tribunal.

While the appeal was still pending before the Tribunal, the AO had initiated reassessment proceedings u/s 147. The reason for reopening given by the AO was that his predecessor had allowed the losses in trading of goods to be set off against profit on incentives and hence erred in allowing excess deduction u/s 80HHC.

Held:
As the issue was subject matter of appeal during the pendency of appeal, issuance of notice of reassessment is bad in law.

During the original assessment, all the facts were placed before the AO and detailed explanation was given to the AO. The ld. AO had also considered certain judicial decisions while allowing set off of losses. This indicates that the AO had applied his mind at the time of original assessment. Hence, subsequent belief of AO can only be considered as change of opinion on same set of facts. Thus, reopening cannot be sustained.

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(2011) 131 ITD 396 (Mum.) Capgemini Business Services (India) Ltd. v. DCIT (ITAT, Mumbai) A.Y. 2006-07 Dated: 26-11-2010

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Section 246A – where the credit of foreign taxes
paid is not given by the assessing officer, appeal against the same to
the CIT(A) is maintainable.

Facts:
The assessee
filed IT return of income electronically, claiming tax credit u/s 90 and
91 to the extent of Rs. 8,38,764. While passing the assessment order
and determining the tax liability, the AO ignored this tax credit and
determined the amount to be refunded to the assessee. Aggrieved by this,
the assessee filed an appeal to the CIT(A). The CIT(A) did not accept
the appeal on the ground that section 246A did not permit such issues
within its ambit. He observed that the provisions of cl. (B) of s/s (1)
of section 246A refer to “tax” only for calculation of tax on total
income and not beyond that. According to him, the definition of “tax” in
section 2(43) refers to only income chargeable under the provisions of
this Act and hence, the question of tax is to be restricted only to tax
on total income. As the assessee was not challenging the calculation of
tax on total income, the CIT(A) held the appeal was not maintainable.

Held:
On
going through the mandate of clause (a) of section 246(1), it is clear
that an assessee has the right to appeal to the CIT(A) against inter
alia, “any order of assessment under s/s (3) of section1 43”, income
assessed, or to the amount of tax determined etc.

When we see
the expression “amount of tax determined” in juxtaposition to any “order
u/s 143(3)”, it becomes approved that the reference in the provision is
to the determination of the final amount of tax, which is distinct from
income assessed or the amount of loss computed or the status under
which the assessee is assessed.

Considering the judgment of
Hon’ble Supreme Court in M.Chockalingam & M. Meyyappan v. CIT (48
ITR 34) (SC) it appears that the same expression, viz., “amount of tax
determined” as employed in section 246(1) (a), encompasses not only the
determination of the amount of tax on the total income but also any
other act of omission 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 under section 90/91 has the effect
of reducing the refund or enhancing the amount of tax payable, such an
issue is squarely covered within the ambit of section246(1)(a).

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127 ITD 211 (Mum.) DDIT (IT) v. Stork Engineers & Contractors B. V. A.Y.: 1999-2000. Dated: 16-6-2009

Section 37(1) — Expenditure incurred from the date
of receiving contract till the grant of approval by RBI cannot be termed
as prior period expense — Such expense incurred is allowable as expense
incurred after the commencement of business.

Section 37(1) —
Percentage completion method – the figure of opening work-in-progress
cannot be termed as ‘prior period expense’ — Opening work in progress
needs to be taken into consideration to ascertain correct profits.

Facts:
The
assessee-company was incorporated in the Netherlands. It was awarded a
contract by the Indian Oil Corporation for Engineering Procurement and
Construction (EPC) on 24-2-1998. The approval for the setting up of the
project office in India was granted by the RBI in on 16-6-1998, but the
actual work of basic engineering had already commenced during the year
ending March 1998. During the intervening period i.e., 1-4-1998 to
16-6-1998, the assessee had incurred expenditure for the purpose of
execution of its project.

The return of income was filed
claiming a loss of Rs.3.24 crore. The assessee had further mentioned in
the notes to accounts of the Audit Report that expenses of
Rs.1,76,20,000 debited to profit and loss account were the ones incurred
by the head office before setting up project office in India. The
Assessing Officer noted that the expenditure was incurred before setting
up project in India and should be thus disallowed as prior-period
expenses.

Held:
1. The expenditure was incurred after
1-4-1998 i.e., during the year itself. Hence, it is wrong to call it as
prior-period expenditure.

2. Relying on the decision of CIT v.
Franco Tosi Ingenerate, (241 ITR 268) (Mad.), the ITAT noted that the
assessee was awarded contract on 24-2-1998. Any expense incurred after
this date relates to period after commencement of business. Hence, the
expenses would be allowable.

Facts:
The assessee was
following percentage completion method. It had an opening work in
progress of Rs.78,88,526. The assessee submitted that various expenses
were incurred during financial year 1997-98 for the purpose of bidding
for the aforesaid contract. The above-mentioned amount also included
various expenses incurred for basic engineering during the period ending
31-3-1998. The AO observed that the assessee had not filed any return
of income for the A.Y. 1998-99. It was therefore disallowed on the
ground that they were prior-period expenses.

Held:
1.
It is wrong to disallow the first year’s brought forward expenditure in
the second year by branding it as ‘prior-period expenditure’. The
profit cannot be finally determined unless the entire expense is
considered.

2. If the figure of the opening work-in-progress is
not taken into consideration, then the resultant figure of the profit
will be fully distorted. If the income and expenditure of the current
year is only considered, then there will arise difficulty in computing
the ultimate profit on completion of the project.

3. As regards
the requirement of filing return of income, it gets activated only when
there is any income chargeable to tax. As per AS-7, no profit is to be
recognised unless the work has reached a reasonable extent. As the
assessee had completed a very small percentage of the total work in the
preceding year, which is far below the prescribed percentage, there was
no requirement for it to offer any income for taxation in that year.

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(2010) 127 ITD 160 (Chennai) (TM) Hemal Knitting Industries v. ACIT A.Y.: 2001-02. Dated: 30-8-2010

Section 253 r.w.s. 147 — When the disposal of a particular ground is not on merit, the matter cannot be said to have achieved finality — Issue of jurisdiction goes to the very root of proceedings and can be agitated any time.

Facts:
The original assessment was completed on 30-3- 2004, determining the total income at Rs.9,16,870 after allowing deduction u/s.80HHC. Gross bank interest was treated as income from other sources. The assessee filed an appeal against the same to the CIT(A) who dismissed the assessee’s appeal vide order dated 3-12-2004.

The assessee then appealed to the Tribunal. The matter was remanded back to the file of AO. Pursuant to this, the Assessing Officer passed the second assessment order.

In the course of second round, it was contended before the AO that the time limit for issue of notice u/s.143(2) was available to the AO during the first round and thus the AO could not resort to reopening u/s.147. The AO held that the issue of reassessment was raised in the first appeal and the same was rejected by the CIT(A) by observing that no material was brought on record. Further the AO observed that the present assessment was only to give effect to the Tribunal’s order and so the question as to the validity was out of the purview.

There was a difference of opinion between the members. The Accountant Member was of the opinion that the question of jurisdiction goes to the root of the matter and can be raised at any point of time. The Judicial Member was of the view that the assessee did not challenge the validity of reassessment before the CIT(A) or Tribunal. The issue of jurisdiction had thus obtained finality.

On reference to the third Member, the following was held:

Held:
1. The CIT(A) order rejecting the assessee’s ground on reassessment has not discussed any argument on merits of the matter. The assessee can, at best be said to be not to have pressed the ground. But the disposal was never on merit.

2. This issue was never raised before the Tribunal in the first round of litigation. Hence, the Tribunal did not have any opportunity to decide on this matter. Finality cannot be conferred to such an order in a manner that in the second round doors of justice are closed. In the opinion of the third Member, the matter had not reached any finality. The jurisdiction to the authorities cannot be conferred by acceptance or negligence of the parties to the dispute. To shut doors at the threshold on the grounds of technicalities is not within the spirit of the Apex Court’s decision in the case of Improvement Trust.

3. The action of the Assessing Officer in reassessing u/s.147 when time limit for issue of notice u/s.143(2) was available is impermissible in the light of the decision of CIT v. Qatalys Software Technologies Ltd., (308 ITR 249) (Mad).

4. The matter had not reached finality and therefore it was open to the assessee to take up the issue in the second round of litigation.

(2010) 127 ITD 133 (Chennai) (TM) V. Narayanan v. Dy./ACIT A.Ys.: 1987-88 & 1990-91. Dated: 27-8-2009

Section 263 r.w.s. 143 and 153 of the Income-tax
Act — AO cannot be directed by CIT to re-do the assessment when no valid
notice was issued within the given time limit.

Facts:
The
assessee was a managing director of Ponds (India) Limited (‘PIL’). M/s.
Chesebrough Ponds Inc, USA (CPI) had a controlling interest in PIL.
Later on, after coming into force of regulations under FERA the CPI’s
holding was reduced to 40%. Thereafter PIL was sold to Unilever Ltd. The
assessee continued to be the MD of PIL and when the shares were diluted
CPI started representative office in India in 1988. The assessee was to
look after the interest of CPI’s representative office for which
necessary facilities were to be provided to him.

CPI provided a
Mercedes car and an amount of USD 1 lakh to the assessee. Since the
customs authorities did not allow import of car in the name of the
assessee, the car was imported in the name of CPI.

The return
was processed u/s.143(1) of the Act on 27- 1-1989 accepting the
assessee’s claim for exemption of USD 1 lakh and the value of Mercedes
Benz car amounting to Rs.8,10,104. The CIT later on initiated
proceedings u/s.263 and passed an order on 22-3- 1991 directing the AO
to re-do the assessment. The CIT further found that the assessee held
power of attorney for the CPI authorising him to do several acts on its
behalf and that he had the status of head of its representative office.
So, CIT held that the value of car and USD 1 lakh should be taxed
u/s.17(iii). The assessee contended that there was no employeremployee
relationship, nor had he offered any services to CPI, USA and he was
full-time employee of M/s. Ponds India Ltd. He had received it as a gift
from CPI for which gift tax was paid by CPI.

Held:
The
Tribunal held that section 143(1) permits only certain arithmetical
adjustments while making the assessment and that the taxability of the
amount received from the US company (i.e., CPI) and the value of Benz
car cannot fall in the category of those adjustments. The CIT can invoke
the provisions of section 263 only when there is a failure on the part
of AO to make an enquiry u/s.143(2). Section 263 cannot be invoked when
only an intimation u/s.143(1) was sent to the assessee.

At the
most a fresh assessment should be made u/s.143(3) and if this is so, the
AO can make the assessment under this provision only if valid notice
u/s.143(2) had been issued to the assessee on or before 31-3-1990.
However, since that date had elapsed when the CIT passed the order (on
22-3- 1991) it is not possible to either issue such a notice or make an
assessment u/s.143(3). The position would have been different if the AO
in the first place completed the assessment u/s.143(3) after issuing
notice u/s.143(2). In that case the AO can be directed by the CIT to
make fresh assessment. The order of the CIT can be primarily challenged
on the ground that his direction to the AO to re-do the assessment would
result in an assessment being made after the period of limitation and
thus would be contrary to law. Section 153(2A) (as the sub-section stood
at that time) of the Act states that fresh assessment order may be
passed at any time before the expiry of two years from the end of the
financial year in which order u/s.263 is passed. Since the order u/s.263
was passed on 22-3-1991 the AO could pass the fresh assessment order on
or before 31-3-1993. But this sub-section cannot be applied to this
case as section 153(2A) does not confer jurisdiction upon the AO, which
does not exist in him prior to passing of the order of section 263.

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(2011) 50 DTR (Mumbai) (Trib.) 158 Yatish Trading Co. (P) Ltd. v. ACIT A.Y.: 2004-05. Dated: 10-11-2010

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Facts:
The assessee-company was engaged in the business of trading in shares and securities as well as in investment in shares and securities. During the relevant previous year the total income credited by the assessee to the P & L A/c was Rs.39.03 crores which included dividend income of Rs.2.99 crores. The assessee also debited an amount of Rs.10.68 crores which includes administrative expenses, interest and financial charges, etc.

The Assessing Officer disallowed the proportionate interest and financial charges u/s.14A. Upon further appeal, the CIT(A) directed to recompute the disallowance u/s.14A keeping in view the principles laid down in Rule 8D.

Held:
Since the assessment year under consideration is A.Y. 2004-05, the provisions of Rule 8D cannot be applied.

When the real purpose and intent to use the borrowed funds were for trading activity and if incidentally it resulted some dividend income on the shares purchased for trading, then the same would not change the purpose, nature or character of the expenditure. Thus, when the said expenditure incurred for trading activity, then the same cannot be said to have been incurred for earning the dividend income. As per the basic principle of taxation only the net income i.e., gross income minus expenditure incurred is taxed. Accordingly, the expenditure which was incurred for earning the taxable business income has to be allowed against the taxable income and the question of apportionment of the said expenditure does not arise. The expression ‘in relation to’ used in section 14A means dominant and immediate connection or nexus. Thus, in order to disallow the expenditure u/s.14A there must be a live nexus between the expenditure incurred and the income not forming part of the total income. Disallowance cannot be made on the basis of presumption and estimation of the AO. No notional expenditure can be apportioned for the purpose of earning income unless there is an actual expenditure ‘in relation to’ earning the income not forming the part of the total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then as such no disallowance can be made u/s.14A merely because some tax-exempt income is received incidentally. In case of dealer in shares and securities the primary object and intention for acquisition of the shares is to earn profit on trading of shares. The income on sale and purchase of shares of a dealer is chargeable to tax. Therefore, if the said activity of purchase and sale also incidentally yields some dividend income on the shares held by him as stock-in-trade, such dividend income is not intended at the time of purchase of such shares and accordingly there is no live connection between the expenditure incurred and dividend income.

As held by the jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, section 14A is implicit within it a notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible business which receives taxable and non-taxable income. However, the principle of apportionment is applicable only in the cases where it is not possible to determine the actual expenditure incurred ‘in relation to’ the income not forming part of the total income. But when it is possible to determine the actual expenditure ‘in relation to’ the exempt income or no expenditure has been incurred ‘in relation to’ the exempt income, then the principle of apportionment embedded in section 14A has no application.

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[2012] 23 taxmann.com 226 (Mum) DCIT v Ranjit Vithaldas ITA No. 7443/Mum/2002 Assessment Year: 1998-99. Date of Order: 22.06.2012

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Section 54 – Exemption u/s 54 would be available in respect of long term capital gain arising on sale of two flats, in two different years, invested in one residential house. Capital gain arising on sale of more than one residential house can be invested in one residential house. One of the requirements for claiming exemption u/s 54 is that the income of the residential house which has been sold, should be chargeable to tax under the head `Income from House Property’ and not that income should have actually been so charged.

Facts:
The assessee alongwith his three brothers had purchased two residential houses situated in two separate buildings viz. R and V. The assessee had 25% share in each of these two flats. Flat in R was sold on 4.10.1996 for Rs. 1,77,00,000 and flat in V was sold on 8.10.1997 for Rs. 3,30,00,000. The assessee had invested the capital gain arising on sale of two flats in construction of a residential house by purchasing a plot on 25.4.1996 at Bangalore from M/s Adarsh Builders and vide another agreement, had engaged the same builder for construction of a house on the said land. The assessee computed his share of capital gain and therefrom claimed exemption u/s 54 in respect of amount spent on construction of a new residential house and the balance was offered for tax. In response to the AO’s contention that exemption u/s 54 can be claimed only with reference to capital gain arising on transfer of one residential house, the assessee submitted that both R and V need to be regarded as one residential house on the ground that they were proximately located and in the earlier years in wealth-tax returns they were regarded as one residential house and this contention was accepted.

The AO noted that in AY 1997-98 the assessee had claimed exemption in respect of capital gain arising on sale of flat R meaning thereby that it was treated as its SOP and therefore the annual value of flat V was chargeable to tax but the assessee had not included its annual value in returned income and the AO concluded that the only reason it could be excluded was that the flat was used for the purposes of the business by the assessee. The AO concluded that the flat V was used for the purposes of the business and also that in AY 1997-98 capital gain arising on sale of flat R was claimed to be exempt with reference to new house constructed. He therefore, denied claim for exemption u/s 54.

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

Aggrieved the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the two flats sold were located in two different buildings on two different roads and were acquired in two different years. There was no common approach road to the buildings. Hence, it held that the two flats sold could not be regarded as one residential house as was held by CIT(A).

The Tribunal held that there is no restriction placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if assessee sells more than one residential houses in the same year and capital gain is invested in a new residential house, the claim for exemption cannot be denied if other conditions of section 54 are fulfilled. It noted that the Mumbai Bench of ITAT in the case of Rajesh Keshav Pillai has held that exemption u/s 54 will be available in respect of transfer of any number of long term capital assets being residential houses if other conditions are fulfilled. The only restriction is that the capital gain arising from sale of one residential house must be invested in one residential house and not in two residential houses.

There is an inbuilt restriction that capital gain arising from sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential houses cannot be invested in one residential house. Therefore, even if two flats are sold in two different years, and capital gain of both the flats is invested in one residential house, exemption u/s 54 will be available in case of sale of each flat provided the time limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.

As regards the finding of the AO that flat V was used for the purposes of the business, the Tribunal noted that this conclusion was based only on the finding that the asssessee had not returned any income in respect of this flat under the head `Income from House Property’. The Tribunal held that only on the ground that the assessee had not shown any income from the property, it cannot be concluded that the flat had been used for the purposes of business when there is no material to support the said conclusion. It held that the only requirement of section 54 is that the income should be chargeable to tax under the head `Income from House Property’ and it is not necessary that income should have been actually charged.

The appeal filed by the revenue was partly allowed.

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(2011) 135 TTJ 663 (Mumbai) ACIT v. Delite Enterprises (P.) Ltd. ITA No. 4813 (Mumbai) of 2006 A.Y.: 2003-2004. Dated: 20-10-2010

Section 14A r.w.s 36(1)(iii), section 10(2A) and section 28(v) — Since there was direct/one-toone nexus between the funds borrowed on which interest was paid and the funds invested in the firm on which interest was received, such interest had to be deducted u/s.36(1)(iii) against the interest income assessable as business income u/s.28(v) and no disallowance of interest expenditure is called for u/s.14A.
Facts: For the relevant assessment year, the assessee earned interest of Rs.2.34 crores on capital invested in a partnership firm (SE) and also share of profit from the firm [exempt u/s.10 (2A)]. The assessee paid interest of Rs.1.82 crores on funds borrowed from R. Ltd. for investing in the partnership firm. The AO assessed the interest income under the head ‘Income from Other Sources’ as against ‘Business Income’ shown by the assessee. Further, he did not allow any deduction for the interest paid by the assessee.
The CIT(A) held in favour of the assessee on both counts. In further appeal, the Revenue also invoked the provisions of section 14A for proportionate disallowance of interest on borrowed funds invested in the partnership firm. The Departmental representative stated that the assessee company not only earned interest income of Rs.2.34 crores from the partnership firm in the shape of interest, but also received the share in the profits of the firm to the tune of Rs.8.54 crores, which is exempt u/s.10(2A) and, therefore, the proportionate interest on the amount borrowed and invested in the firm to the extent it related to the share in the profits of the firm, should have been disallowed u/s.14A. In other words, the contention was that the interest paid amounting to Rs.1.82 crores should be bifurcated into two parts, that is, as relatable to the earning of the share in the profits of the firm and earning of interest income in the capacity of partner in the partnership firm and, thereafter, the part as is relatable to share in the profits of the firm should be disallowed by invoking the provisions of section 14A.
Held: The Tribunal upheld the assessee’s claim on both issues. The Tribunal noted as under:
1. From the facts it is clearly noticed that the assessee borrowed funds from R. Ltd. and the same funds were invested in SE. One-toone nexus between the borrowed funds as invested in partnership firm was proved by the assessee.
2. Interest income from the firm always has a direct and immediate relation with the capital contribution. Interest is allowed on the capital contributed by a partner in firm irrespective of the profit-sharing ratio. If some funds are borrowed and invested in the firm as capital, it is only the relation between the interest paid on such borrowed funds and interest earned from the firm that exists.
3. The interest paid by the assessee at Rs.1.82 crore has direct and sole relation with the interest income of Rs.2.34 crores. When the interest income of Rs.2.34 crores is taxable u/s.28(v) as business income, it cannot be bifurcated into two parts viz., towards interest received and share of profit from firm.
4. Even though an amount is deductible under the regular provisions of the Act, including section 36(1)(iii), disallowance can be made u/s.14A if the expenditure is in relation to exempt income. Thus, it becomes obvious that the provisions of section 14A have an overriding effect. In such a situation the applicability of section14A on the otherwise deductible interest expenditure of Rs.1.82 crores u/s.36(1) (iii) has to be examined. The question is whether any part of interest expenditure of Rs.1.82 crores can be correlated to the share of the assessee in the profits of the firm, which is otherwise exempt u/s.10(2A). [Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT & Anr., (2010) 234 CTR (Bom.) 1, (2010) 43 DTR (Bom.) 177].
5. No part of interest expenditure, which is sought to be disallowed u/s.14A, relates to share in profits of partnership firm which is otherwise exempt u/s.10(2A).
6. As there is direct nexus between the funds borrowed on which interest is paid and the funds invested in the firm on which interest is received, such interest has to be deducted u/s.36(1)(iii) against the interest income in entirely. Therefore, no disallowance of interest expenditure is called for u/s.14A, as it does not relate to any exempt income.

(2011) 135 TTJ 419 (Mumbai) Digital Electronics Ltd. v. Addl. CIT ITA No. 1658 (Mum.) of 2009 A.Y.: 2005-2006. Dated: 20-10-2010

Section 72 — Income earned by the assessee in the
relevant year on sale of factory building, plant and machinery, although
not taxable as profits and gains of business or profession, is an
income in the nature of income of business though assessed as capital
gains u/s.50 and, therefore, assessee is entitled to set-off of brought
forward business losses against the said capital gains.

Facts:
For
the relevant assessment year, the assessee set off brought forward
business loss against shortterm capital gains arising on sale of factory
building and plant and  machinery assessable u/s.50. The AO declined to
accept the assessee’s claim. The CIT(A) upheld the stand of the AO.

Held:
The
Tribunal, relying on the decision of the Supreme Court in the case of
CIT v. Cocanada Radhaswami Bank Ltd., (1965) 57 ITR 306 (SC), upheld the
assessee’s claim. The Tribunal noted as under:

1. Section 72
provides that where, for any assessment year, the net result of the
computation under the head ‘Profits and gains of business or profession’
is a loss to the assessee, not being a loss sustained in a speculation
business, and such loss cannot be or is not wholly set off against
income under any head of income in accordance with the provisions of
section 71, so much of the loss as has not been so set off is to be
carried forward to the following assessment year and is allowable for
being set off ‘against the profits, if any, of that business or
profession carried on by him and assessable for that assessment year’.

2.
Therefore, for setting off the income, while the loss to be carried
forward has to be under the head ‘Profits and gains of business or
profession,’ the gains against which such loss can be set off, has to be
profits of ‘any business or profession carried on by him and assessable
in that assessment year’.

3. In other words, there is no
requirement of the gains being taxable under the head ‘Profits and gains
of business or profession’ and thus, as long as gains are ‘of any
business or profession carried on by the assessee and assessable to tax
for that assessment year’ the same can be set off against loss under the
head profits and gains of business or profession carried forward from
earlier years. The income earned in the relevant year, although not
taxable as ‘profits and gains from business or profession’, was an
income in the nature of income of business nevertheless.

4. The
assessee was, therefore, justified in claiming the set-off of business
losses against the income of capital gains assessable u/s.50.

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[2012] 23 taxmann.com 93 (Del) ACIT v Result Services (P) Ltd. ITA No. 2846/Del/2011 Assessment Year: 2008-09. Date of Order: 28.06.2012

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Section 194I – Reimbursement by the assessee to its holding company of amount of rent for a portion of premises being used by the assessee company, which premises were taken on lease by the holding company from the landlord and the lease deed provided for use of part of the premises by the subsidiary company, do not qualify for TDS u/s 194I since there was no lessor and lessee relationship between the holding company and the assessee.

Facts:
M, a holding company of the assessee, had taken certain premises on lease/leave and license basis. The lease/leave and license agreements was for the premises to be used by M, its subsidiaries, affiliates, group entities and associates. However, the obligation to pay rent was of the lessee i.e. M. The amount of rent paid by M under these agreements was paid after deduction of TDS u/s 194I.

Part of the premises taken on lease/leave and license were used by the assessee. The assessee reimbursed to M certain amounts towards such user. However, these amounts were paid without deduction of TDS u/s 194I. The Assessing Officer (AO) while assessing the total income of the assessee, disallowed a sum of Rs. 56,23,456 paid by the assessee to M u/s 40(a) (ia) on the ground that tax was not deducted at source u/s 194I.

Aggrieved, the assessee filed an appeal to the CIT(A) who deleted the addition made by the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the assessee was paying rent to the holding company as reimbursement since many years. This position was accepted by the department all through and it was never disputed even when the provisions of section 194I were introduced on the statute w.e.f. 1.6.1994. It also noted that even after amendment to section 40(a) (ia) w.e.f. 1.4.2006, this position was not disputed. It noted that there is no material change in the facts and law during the year under consideration. It also noted that the lease deed provided for use of the premises by the subsidiary companies. Tax was deducted at source from the actual payments made by the holding company to the lessor and holding company had not debited the whole of rent to its P& L account but had only debited rent pertaining to the part of the premises occupied by it. Considering these facts, the Tribunal held that there was no lessor and lessee relationship between the holding company and the assessee which could attract the provisions of section 194I. The Tribunal upheld the order of CIT(A).

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(2011) 135 TTJ 357 (Mumbai) Bhumiraj Constructions v. Addl. CIT ITA No. 3751 (Mum.) of 2009 A.Y.: 2006-2007. Dated: 12-4-2010

Section 249(4) — If appeal is filed without payment of tax on returned income, but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and taken up for hearing.

Facts:
Against the appeal filed by the assessee, the CIT(A) noted that self-assessment tax on the income returned by the assessee was not paid. Ten days’ time was given by the CIT(A) to the assessee to make the payment. The assessee expressed its inability to pay the tax. The CIT(A) passed the order u/s.249(4) dismissing the appeal as not maintainable. Against this, the assessee filed further appeal.

Held:
The Tribunal noted as under: 1. It is sine qua non that the assessee must have made the payment of tax on the income returned. If no payment of tax on the income returned is made at all and the appeal is filed, it cannot be admitted.

2. If, however, the appeal is filed without the payment of such tax, but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and taken up for hearing.

3. The objective behind section 249(4) is to ensure the payment of tax on income returned before the admission of appeal. If such payment is made after filing of the appeal but before it is taken up for disposal validates the defective appeal, then there is no reason as to why the doors of justice be closed on a poor assessee who could manage to make the payment of tax at a later date.

4. The stipulation as to the payment of such tax before the filing of first appeal is only directory and not mandatory. Although the payment of such tax is mandatory, the requirement of paying such tax before filing appeal is only directory.

5. The distinction between a mandatory provision and a directory provision is that if the non-compliance with the requirement of law exposes the assessee to the penal provisions, then it is mandatory, but if no penal consequences follow on non-fulfilment of the requirement, then usually it is a directory provision.

6. It is a trite law that omission to comply with a mandatory requirement renders the action void, whereas omission to do the directory requirement makes it only defective or irregular. On the removal of such defect, the irregularity stands removed and the status of validity is attached.

7. When the defect in the appeal, being the nonpayment of such tax, is removed, the earlier defective appeal becomes valid. Once we call an appeal as valid, it is implicit that it is not time-barred. It implies that on the removal of defect the validity is attached to the appeal from the date when it was originally filed and not when the defect is removed.

8. In the instant case, it is found that the assessee paid the tax due on income returned, although after the disposal of the appeal by the CIT(A). On such payment, the defect in the appeal due to non-compliance of a directory requirement of paying such tax before filing of the appeal stood removed. Therefore, this appeal should have been revived by the first Appellate Authority. Under such circumstances the impugned order is set aside and the matter restored to the file of the CIT(A) for disposal of the appeal on merits.

Sections 50C of the Income Tax Act, 1961 – Section 50C cannot be invoked on receipt of refund of booking advance paid earlier to a builder.

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3. (2012) 147 TTJ 94 (Ahd)
ITO V. Yasin Moosa Godil
ITA No.2519 (Ahd.) of 2009
A.Y.2006-07. Dated 13.04.2012

Sections 50C of the Income Tax Act, 1961 – Section 50C cannot be invoked on receipt of refund of booking advance paid earlier to a builder.

The assessee had booked a flat with a builder and paid advance of Rs.16.12 lakh for the same from time to time. Since the entire amount was not paid by the assessee, the builder had neither handed over the possession of the flat to the assessee nor had he executed any registered sale deed in favour of the assessee. During the relevant assessment year, the assessee requested the builder to cancel the booking and return the advance paid of Rs. 16.12 lakh. The builder, the new buyer and the assessee entered into a tripartite registered sale agreement for transfer of the said flat, wherein the appellant (addressed as the vendor in the sale agreement) was to transfer all his rights, title and interest in the said flat to the buyer, the builder (addressed as the confirming party in the sale agreement) was to give possession of the said flat to the buyer and was also to allot the said flat to the buyer, which was originally agreed to be allotted to the assessee and the new buyer (addressed as the purchaser in the sale agreement) was to acquire only the rights in the said flat from the appellant and the possession and the allotment thereof from the builder. Accordingly, during the year under consideration, the assessee received back from the buyer the booking amount paid by him to the builder.

The Assessing Officer held that the flat was registered for value of Rs.57.57 lakh as against Rs.16.12 lakh refund received by the assessee. He, therefore, treated the difference of Rs.41.45 lakh as unexplained income u/s.50C. The CIT(A) deleted the addition made by the Assessing Officer.

The Tribunal, relying on the decision in the case of Dy.CIT V. Tejinder Singh (2012) 147 TTJ 87 (Kol)/ (2012) 72 DTR (Kol) (Trib) 160 held in favour of the assessee. The Tribunal noted as under:

Prior to the execution of the tripartite agreement, the assessee had neither paid full consideration of the flat nor had he acquired the possession of the flat from the builder.

 From the agreement, it was evident that it is the builder who is transferring the capital asset i.e. the flat to the new buyer by handing over the possession of the flat as also the legal ownership thereof to the new buyer and the appellant only received back the advance paid by him to the builder by relinquishing his booking right in respect of the said flat.

From the reading of section 50C, it is evident that it is a deeming provision and it covers only to land or building or both. Section 50C can come into play only in a situation where the consideration received or accruing as a result of the transfer by an appellant of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of State Government for the purpose of payment of stamp duty in respect of such transfer. It is a settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section.

Therefore, it is essential that for application of section 50C the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both”, then section 50C will not apply.

From the facts of the case, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with the capital asset and therefore section 50C cannot be invoked.

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S/s 56(2)(v) – Gift of India Millennium Deposit Certificate (IMD) received by an assessee is not taxable u/s. 56(2)(v) since the same is not money.

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2. 2012-TIOL-528-ITAT-MUM
ACIT v Anuj Jitendra Mehta
ITA No. 6399/Mum/2010
Assessment Year: 2006-07.  
Date of Order: 05.09.2012

S/s 56(2)(v) – Gift of India Millennium Deposit Certificate (IMD) received by an assessee is not taxable u/s. 56(2)(v) since the same is not money.


Facts:

On 25.9.2005, the assessee received, from a nonresident Indian, a gift in the form of IMD of face value of INR94,000. On 5.10.2005, the assessee prematurely encashed these IMDs and received maturity amount of INR139,452 equivalent to Rs. 98,56,827. While assessing the total income of the assessee, the AO stated that the assessee utilised the unaccounted income of the group company to obtain a non-genuine gift. He also held that the IMDs were equivalent to sum of money and attracted provisions of section 56(2) (v). He added the amount received by the assessee u/s.. 56(2)(v) on the ground that the status of IMDs with the facility of premature encashment available was on par with the legal status of a bank fixed deposit. Aggrieved, the assessee filed an appeal to the CIT(A) who held that the gift was a genuine gift and following the ratio of the decision of ITAT in the case of Shri Anuj Agarwal (130 TTJ 49)(Mum) held that the gift of IMDs is gift in kind and outside the purview of section 56(2)(v) of the Act. He deleted the addition made by the AO. Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

 The Tribunal noted that the facts of the present case before it were identical to the facts before the Tribunal in the case of Haresh N. Mehta (ITA No. 6804/M/2010, AY 2006-07, order dated 31.1.2012). In the case of Haresh N. Mehta, the Tribunal relying on the decision of co-ordinate Bench in the case of ACIT v Anuj Agarwal, 130 TTJ 49(Mum) and also the decision of ITAT Vizag Bench in Sri Sarad Kumar Babulal Jain v ITO (ITA No. 29/Viz/2011) order dated 11.8.2011 dismissed the appeal of the department by confirming the order of CIT(A). Following the decision of the

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(2012) 73 DTR (Mum)(Trib) 265 Kotak Securities Ltd. v DCIT A.Y.: 2004-05 Dated: 3-2-2012

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TDS u/s. 194H – Commission paid to bank for issuing bank guarantee is not liable for TDS u/s. 194H

Facts:
The assessee was a company engaged in stock broking business and was a member of the BSE and NSE. During the course of business carried on by the assessee, it furnished bank guarantees, mainly in lieu of margin deposits, to various agencies, such as BSE and NSE. In consideration for issuance of such bank guarantees, banks charged the fees which was termed as bank guarantee commission. He further noted that the assessee has taken bank guarantees from various banks and these bank guarantees protect the stock exchanges from any default by the assessee and acts as security for due performance and fulfilment of obligations by the assessee. The bank guarantee commission paid by the assessee for these bank guarantees, according to the AO, was liable for deduction at source u/s. 194H. The assessee’s failure to deduct the tax source was, accordingly. visited with demands raised u/s. 201(1) r.w.s. 194H, to make good the shortfall in TDS and u/s. 201 (1A) r/w s. 194H, to compensate interest for delay in realizing the TDS revenues. Aggrieved by the stand so taken by the AO, assessee carried the matter in appeal before the CIT(A) but without any success.

Held:
Even when an expression is statutorily defined u/s. 2, it still has to meet the test of contextual relevance as section 2 itself starts with the words “In this Act, unless context otherwise requires…”, and, therefore, contextual meaning assumes significance. Every definition in the IT Act must depend on the context in which the expression is set out, and the context in which expression ‘commission’ appears in section 194H, i.e. along with the expression ‘brokerage’, significantly restricts its connotations. The common parlance meaning of the expression ‘commission’ thus does not extend to a payment which is in the nature of fees for a product or service; it must remain restricted to a payment in the nature of reward for effecting sales or business transactions etc.

The inclusive definition of the expression ‘commission or brokerage’ in Explanation to section 194H is quite in harmony with this approach. Therefore, what the inclusive definition really contains is nothing but normal meaning of the expression ‘commission or brokerage’. An inclusive definition does not necessarily always extend the meaning of an expression. When inclusive definition contains ordinary normal connotations of an expression, even an inclusive definition has to be treated as exhaustive. That is the situation in this case as well. Even as definition of expression ‘commission or brokerage’, in Explanation to section 194H, is stated to be exclusive, it does not really mean anything other than what has been specifically stated in the said definition.

Principal agent relationship is a sine qua non for invoking the provisions of section 194H. In the present case there is no principal agent relationship between the bank issuing the bank guarantee and the assessee. When bank issues the bank guarantee, on behalf of the assessee, all it does is to accept the commitment of making payment of a specified amount to, on demand, the beneficiary, and it is in consideration of this commitment, the bank charges a fees which is customarily termed as ‘bank guarantee commission’. While it is termed as ‘guarantee commission’, it is not in the nature of ‘commission’ as it is understood in common business parlance and in the context of the section 194H. This transaction is not a transaction between principal and agent so as to attract the tax deduction requirements u/s. 194H.

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2012-TIOL-559-ITAT-DEL ITO v Indian Printing Packaging & Allied Machinery Manufacturers Association ITA No. 2934/Del/2012 Assessment Year: 2003-04. Date of Order: 31-08-2012

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S/s. 194I, 197, 201, 201(1A)–When certificate u/s. 197 has been issued and is valid till 31st March of the financial year, demand u/s. 201/201(1A) cannot be sustained for deduction of tax at a lower rate during the period before the issue of certificate.

Facts:
The assessee had on 01-04-2002 made a payment of advance rent to NESCO Ltd. after deduction of TDS @ 2% instead of 20% as provided u/s. 194I. NESCO Ltd. had on 1.4.2002 applied for issuance of certificate u/s 197 authorising the assessee to deduct TDS @ 2%. The certificate u/s. 197 authorising the payee to deduct TDS @ 2% u/s. 194I was granted on 23-04- 2002. This certificate was valid upto 31-03-2003. The tax so deducted by the assessee was deposited by the assessee to the Government Account on 06-05-2002.

The Assessing Officer levied tax u/s. 201(1) on the assessee for deducting tax u/s. 194I @ 2% instead of 20% on the ground that at the time of deduction of tax (i.e. at the time of payment of advance rent) the assessee did not have certificate u/s. 197. He also levied interest u/s. 201(1A).

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the assessee’s appeal and quashed the demand raised by the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the application for certificate u/s. 197 was made before the payment was made by the assessee. It also noted that the certificate was to remain in force till 31-03-2003 unless cancelled earlier. The Tribunal agreed with the finding of CIT(A) that such a breach, if at all, was only a venial breach or default. It held that such default could have been ascribed to the assessee only if no tax had been deducted in accordance with the provisions of section 201(1). Assessee can be deemed to be an assessee in default only in the case of non-payment of tax within the prescribed time. In the present case, tax having been deducted @ 2% and having been deposited before the prescribed date, by no stretch of imagination can the assessee be deemed to be an assessee in default. The Tribunal decided the issue in favour of the assessee.

The appeal filed by the revenue was dismissed.

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2012-TIOL-530-ITAT-MUM DCIT v BOB Cards Ltd. Assessment Year: 2007-08. Date of Order: 18-09-2012

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Section 37 – Amount of TDS borne by the assessee, as part of its liability under an agreement entered into by the assessee, is allowable as a deduction.

Facts:
The assessee company, engaged in the business of credit card operations and financing payments, had in its return of income claimed under the head Operating Expenses a sum of Rs. 21,61,004 towards non-reimbursible TDS for Master Card and Visa Card. This amount represented TDS which was to be borne by the assessee under the agreements entered into by the assessee with Visa and Master International. The Assessing Officer (AO) disallowed these payments on the ground that they are not incurred wholly and exclusively for business purposes.

Aggrieved, the assessee filed an appeal to the CIT(A) who allowed the appeal by relying on the decision of the Madras High Court in the case of Standard Polygraph Machines P. Ltd. (243 ITR 788) wherein it has been held that amount paid by the assessee for discharging a liability undertaken in terms of an agreement entered into between the assessee and its collaborator, forms part of consideration for agreement relating to knowhow and hence is allowable.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal held that the payment made as a result of a contractual liability is an allowable expenditure. It held that the CIT(A) was correct in placing reliance on the decision in the case of Standard Polygraph Machines P. Ltd. It also noted that the issue has been decided in favor of the assessee by `I’ Bench of ITAT vide order dated 20-06-2012 (AY 2003-04, 2004-05 and 2005-06); ITA Nos. 4882, 2475, 6527/Mum/2010). Following the decision of the co-ordinate bench, the Tribunal decided the grounds in favour of the assessee.

The appeal filed by the revenue was dismissed.

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[2012] 23 taxmann.com 347 (Mum) Ashok C. Pratap v Addl CIT ITA No. 4615/Mum/2011 Assessment Year: 2007-08. Date of Order: 18.07.2012

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Section 56(2)(vi) – Amount received by a Trusteecum- Beneficiary of a discretionary trust, on dissolution of a trust, is not chargeable to tax u/s 56(2)(vi).

Facts:
The mother of the assessee was settlor of a private discretionary trust, created vide trust deed dated 19th January, 1978, wherein the assessee and his wife were the trustees and the two daughters of the assessee (viz. grand daughters of the settlor) were the beneficiaries. By letter dated 15th January, 2001, the assessee and his wife were added as beneficiaries to the said trust. On 30th March, 2001, two daughters of the assessee, both being major, signed the document of release whereby they relinquished their right, title, interest, share and benefits in and from the property and assets of the said trust including accumulated income. On 27th February, 2007, the said trust was dissolved and the assets were equally distributed amongst the two beneficiaries viz. the assessee and his wife. The assessee received Rs. 1,36,00,595. This sum of Rs. 1,36,00,595 was not included by the assessee in his returned income.

While assessing the total income of the assessee for AY 2007-08, the AO noticed that the trust was never registered u/s 12AA of the Act. He held that if the assessee claims to be a trustee, then his status will always be of a trustee and if he claims to be one of the beneficiaries, then he has no right to dissolve the trust. Accordingly, he held that, applying the provisions of section 77(b) of the Indian Trust Act, he included the said sum of Rs. 1,36,00,595 in the total income u/s 56(2)(vi).

Aggrieved the assessee preferred an appeal to CIT(A) who upheld the addition on the ground that the trust is not a relative of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that it is an un controverted fact that the trust had borne tax at maximum marginal rate on its income and also that the assessee had received the amount in the capacity of beneficiary. It held that amount received being in pursuance of dissolution of the trust cannot be termed to be an amount received by the beneficiaries “without consideration”. The addition made by the AO and upheld by CIT(A) was deleted.

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(2012) 72 DTR (Mum)(Trib) 175 Sandvik Asia Ltd. v. JCIT A.Y.: 1994-95 Dated: 29-11-2011

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Section 40(a)(i) – No disallowance of incremental amount due to foreign exchange rate fluctuation on account of non-deduction of TDS u/s 195 if the TDS is already deducted earlier at the time of credit.

Facts:
The assessee had entered into a research and know-how agreement with A.B. Sandvik Coromant, Sweden during AY 1991-92 in terms of which the assessee was liable to pay Swiss Kroner 38,58,000. In the assessment order for AY 1991-92, the AO held that since the duration of the agreement was five years, the appellant was entitled to deduction of 1/5th of the amount payable under the agreement (Swiss Kroner 7,71,600) in each assessment year for five years. However, the assessee had deducted TDS also and remitted the same to the exchequer, on the entire amount of fees payable as the assessee had credited the entire amount in the account books. Accordingly, in the year under consideration, assessee claimed deduction of Rs. 42,89,872 as fourth instalment of fee in its return of income. While remitting the instalment during the year, it suffered foreign exchange fluctuation loss of Rs. 8,82,234 which was comprised in its claim of Rs. 42,85,872. The CIT (A) noticed that deduction of earlier instalments have been allowed on actual payment basis and, hence, directed that even in this year deduction for exchange loss should be allowed. However, he directed the AO to check whether remittances are actually made subject to appropriate deduction of tax at source as per section 40(a)(i) of the Act.

Thereafter, AO passed an order denying the claim of deduction of foreign exchange fluctuation loss amounting to Rs. 8,82,234 on the ground that TDS was deducted in the initial year only with respect to the amount (Rs. 34,07,638) corresponding to Sw. Kr 7,71,600 (i.e. 1/5 of the amount payable) and not on the additional sum of Rs. 8,82,234 (foreign exchange loss) and was to be disallowed u/s 40(a)(i) of the Act. The CIT(A) upheld the disallowance.

Held:
Section 195(1) of the Act requires TDS either “at the time of credit” or “at the time of payment” of an income, whichever is earlier. When the assessee credited the income payable to the foreign concern as research and technical know-how in the earlier year, the provision so made on the basis of the exchange rate then existing was subjected to TDS u/s 195(1). Notably, section 195(1) of the Act prescribes TDS on a sum payable to non-resident either at time of credit or at the time of payment, whichever is earlier. Quite clearly, section 195(1) does not envisage TDS at both instances, i.e. at the time of credit as well as at the time of payment thereof.

Also, as per agreement, the assessee is to make a total payment of Swiss Kroner 38,58,000 and out of which, it was required to remit Swiss Kroner 7,71,600 during the year under consideration. In this year, the cost of remitting the amount to foreign concern has increased due to foreign exchange fluctuation and there is no additional amount payable to foreign concern. The transaction remained of Swiss Kroner 38,58,000 and the same having been subjected to TDS earlier at the time of credit, it would not again call for deduction of tax at source per section 195(1) of the Act.

Alternatively, out of the total claim of Rs. 42,89,872 as fourth instalment of research and know-how fee in this year, tax has been deducted in relation to a sum of Rs. 34,07,638 and, therefore, it is merely a case involving short deduction of tax at source and not a case for failure to deduct tax at source. In decisions of Chandabhoy & Jassobhoy [ITA No. 20/Mum/2010] and S.K. Tekriwal [ITA No. 1135/ Kol/2010], which have been rendered in the context of section 40(a)(ia) of the Act, it has been held that the disallowance envisaged in section40(a)(ia) can be invoked only in the event of non-deduction of tax, but not in cases involving short deduction of tax at source. The ratio of the decisions is squarely applicable in the present case also, inasmuch as the provisions of section 40(a)(ia) of the Act are akin to those of section 40(a)(i). On this count also, the sum of Rs. 8,82,234 cannot be disallowed u/s 40(a)(i).

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(2012) 72 DTR (Mum)(Trib) 167 ITO v. Yasin Moosa Godil A.Y.: 2006-07 Dated: 13-04-2012

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Section 50C does not apply to transfer of booking right in a flat.

Facts:
During the course of assessment proceedings the AO noticed that in the preceding assessment year, the assessee had booked a flat with a builder which was under construction. Out of the agreed aggregate consideration of Rs. 16,12,000, an amount of Rs.1,00,000 was kept outstanding, since the builder had failed to give the possession of the flat in time and also failed to allot the promised parking place. As the entire amount was not paid by the assessee, the builder had neither handed over the possession of the flat to the assessee nor had executed any registered sale deed in favour of the assessee. In the current assessment year, the assessee requested the builder to cancel the booking of the flat and return the booking amount as paid by him towards the said flat. Upon such request, a tri-party registered sale agreement for transfer of said flat was executed between the assessee, the builder and the new buyer wherein the assessee was to transfer all his rights, title and interest in the said flat to the buyer and the builder was to give the possession of the said flat to the buyer and was also to allot the said flat to the buyer which was originally to be allotted to the assessee. Accordingly, during the year under consideration, the appellant received back the booking amount paid by him to the builder from the buyer.

During the course of assessment proceedings, the AO observed that the Jt. Sub-Registrar’s Office had considered the value of the said flat at Rs.57,57,255 for registration of flat as against the total value of Rs.16,12,000. Accordingly, on the basis of information received from the Jt. Registrar’s Office, the AO treated the difference amount of Rs.41,45,255 (i.e. Rs. 57,57,255 – Rs. 16,12,000) as the unexplained income of the appellant and made addition thereof to the total income of the assessee.

The CIT(A) deleted the addition on the ground that such addition can only be made u/s 50C and in the present case provisions of section 50C do not apply since what is transferred is only booking rights in the flat.

Held:
It is an undisputed fact that prior to the execution of the tripartite agreement the assessee had neither paid full consideration of the flat nor had the assessee acquired the possession of the flat from builder. From the agreement it is evident that it is the builder who is transferring the capital asset i.e. the flat to the new buyer, by handing over the possession of the flat as also the legal ownership thereof to the new buyer and the assessee only received back the booking advance paid by him to the builder, by relinquishing his booking right on the said flat.

It is settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and one cannot go beyond the explicit mandate of the section. It is essential that for application of section 50C, the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both” then section 50C will not apply. From the facts of the case narrated above, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with land or building and therefore section 50C cannot be invoked.

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S. 43(5)(d), Rules 6DDA and 6DDB, Notification dated 22.5.2009 recognizing MCX as a recognized stock exchange – Transactions in commodity derivatives carried out on MCX are not speculative transactions w.e.f. 1.4.2006 though MCX has been notified, vide notification dated 22.5.2009, as a recognised stock exchange prospectively.

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1. [2012] 25 taxmann.com 252 (Mum)
ACIT v Arnav Akshay Mehta
ITA No. 2742/Mum/2011
Assessment Year: 2007-08.  
Date of Order: 12.09.2012

Section 43(5)(d), Rules 6DDA and 6DDB, Notification dated 22.5.2009 recognising MCX as a recognised stock exchange – Transactions in commodity derivatives carried out on MCX are not speculative transactions w.e.f. 1.4.2006 though MCX has been notified, vide notification dated 22.5.2009, as a recognised stock exchange prospectively.


Facts:

During the previous year relevant to the assessment year 2007-08, the assessee suffered a loss of Rs. 77,63,237 in trading in commodity derivatives on MCX. The assessee regarded this loss as a non-speculative business loss which was set off against short term capital gains and income from other sources.

While assessing the total income of the assessee for AY 2007-08, the AO noticed that w.e.f. AY 2006- 07, section 43(5)(d) provides that transactions in derivatives will not be regarded as speculative transactions if they have been carried out on a notified stock exchange. He also noted that MCX has been notified as a recognised stock exchange vide notification dated 22.5.2009 prospectively. He, accordingly, held the loss in trading in commodity derivatives to be speculative and denied the set off of the same against short term capital gains and income from other sources as was claimed by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the assessee’s appeal. Aggrieved, the Revenue preferred an appeal to the Tribunal. C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi Chartered Accountants Tribunal news

Held:

The Tribunal noted that the AO has treated the loss under consideration to be speculation loss mainly on the ground that the Notification No. 46 of 2009 issued by CBDT on 22.5.2009, recognising MCX as a recognised stock exchange for the purpose of section 43(5) only from the said date has a prospective effect and therefore, derivative trading in commodity through MCX prior to the said date will amount to speculation business. The Tribunal also noted that The Finance Act, 2005 has w.e.f. 1.4.2006 inserted clause (d) in the proviso to section 43(5) as a result of which w.e.f. 1.4.2006 trading in derivative carried out through the recognised Stock Exchange is treated as non-speculative transaction. For this purpose, Rules 6DDA and 6DDB provide that notification of recognised stock exchange will be done by the Central Government (CBDT).

The Tribunal held that a combined reading of 43(5) (d) and rules 6DDA and 6DDB and Explanation (ii) to section 43(5) indicates that the rules prescribed are only procedural in nature and they prescribe the method as to how to apply for necessary recognition and consequent notification. When a rule or provision does not affect or empower any right or create an obligation but merely relates to procedural mechanism, then it is deemed to be retrospective and will apply to all the proceedings, pending or to be initiated, unless such an inference is likely to lead to an absurdity. It also held that just because the procedural mechanism has taken a long time to notify a stock exchange as recognised stock exchange, it will not lead to an inference that the same would be applicable from the date the stock exchange is notified to be a recognised stock exchange. It observed that the notification does not empower any right or create an obligation, but only recognises what is already provided in the statute. It held that the transactions carried out through MCX Stock Exchange after 1.4.2006 would be eligible for being treated as non-speculative within clause (d) of proviso to section 43(5).

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(2011) TIOL 196 ITAT-Mum. Essem Capital Markets Ltd. v. ITO ITA No. 6814/Mum./2006 and 5349/Mum./2007 A.Ys.: 2003-2004 and 2004-2005 Dated: 25-2-2011

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Section 80IB(10) — Deduction u/s.80IB(10) cannot
be denied on the ground that the assessee is not the owner of the
property which he undertakes to develop, nor can it be denied on the
ground that the development agreement is not registered — Merely because
the commencement certificate was obtained prior to 1-10-1998, it does
not mean that the assessee has commenced the development and
construction of the project unless the assessee has taken some effective
steps on the site.

Facts:
The assessee entered
into a development agreement with M/s. Jay Jay Construction Co. on
12-10-1998. This development agreement, which was not registered, was in
respect of development right to construct a building ‘C’ on a plot of
land on which two buildings were already constructed (not by the
assessee). For the assessment years under consideration, the assessee
claimed deduction u/s.80IB(10) of the Act in respect of profits derived
from developing and building a housing project viz. ‘Building C’, which
claim was not accepted by the Assessing Officer (AO) on the ground that
the commencement certificate issued by the local authority was not in
the name of the assessee; development agreement was not registered;
commencement certificate was obtained prior to 1-10-1998 and building
‘C’ is not a separate project.

Aggrieved the assessee preferred
an appeal to the CIT(A) who confirmed the order of the AO and also had
an additional objection viz. that the condition regarding the area of
the plot is not fulfilled.

Aggrieved the assessee preferred an appeal to the Tribunal. 

Held:
The
Tribunal noted that subsequent to the two buildings being constructed
on the said plot, the plan of building ‘C,’ in respect of which the
assessee acquired the development right, was approved by the local
authority. The original plan was approved in 1995, but final approval
was given to the modified plan 10-9-1998 and permission for construction
of the building was finally given on 9-10-1998. The Tribunal also noted
that in the original approved plan/layout building ‘C’ was not shown.
Having observed that the commencement certificate (CC) was in the name
of the original owner since the title of the property was not in the
name of the assessee, the Tribunal held that:

(a) merely because
the commencement certificate is issued in the name of the original
landowner, the assessee cannot be deprived of deduction u/s.80IB(10) as
nowhere it is a mandate of the said provision that the assessee must be
the owner of the property which he undertakes to develop;

(b)
merely because the agreement is not registered, the assessee cannot be
deprived of the deduction u/s.80IB(10) as the assessee has developed
building ‘C’;

(c) merely because the CC was obtained prior to
1-10-1998, that does not mean that the assessee has commenced the
development and commencement of the building ‘C’;

(d) CC was
granted for the first time on 24-2-1995 and hence, building ‘C’ was not
part of the original project. It observed that on the said plot the
owner had constructed building ‘A’ consisting of 95 flats and tenements
and also building ‘B’. Just because the plot of land remained the same,
it cannot be construed that building ‘C’ is a part of the original
housing project;

As regards the objection of the CIT(A) on the
area of plot of land on which the project was constructed, the Tribunal
on facts found that there was no clearcut finding by the AO and CIT(A)
hence it restored the issue to the file of the AO to verify whether the
area of the plot on which the building ‘C’ is constructed is one acre or
not.

The appeal filed by the assessee was allowed.

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(2011) 132 ITD 236 (Mum.) ITO v Galaxy Saws (P) Ltd. AY 2005-06 Date of Order: 11-03-2011

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Section 115JB: For the purpose of section 115JB, Book profit has to be computed on the basis of net profit as disclosed in Profit & Loss account prepared as per the provisions of part II and part III of schedule VI of the companies Act.

When the accounts are prepared in conformity with the provisions of companies Act and revaluation of assets had been made as per AS-10, no addition could be made to the net profit on account of revaluation reserves directly taken to balance sheet while computing book profit.

Facts:
Assessee during the year sold its premises for Rs.96 lakh. The value of the premises in the books before revaluation was Rs. 3.29 lakh. Before sale, assessee revalued the premises at Rs. 97.44 lakh through a registered valuer and credited Rs.94.14 lakh to revaluation reserve to the balance sheet. Subsequently, assessee debited loss of Rs.1.44 lakh to Profit and loss account.

However, AO rejected the claim of the assessee on the premise that the assessee had adopted the above devise to avoid tax by revaluing property in the year of transfer and added Rs. 92.70 lakh to book profit.

Aggrieved by the order of AO, the assessee filed an appeal before CIT(A) that book profits had been computed on the basis of provisions of Companies Act and revaluation is done as per AS-10. Hence, AO did not have any power to make changes on such accounts. CIT(A) upheld the claim of the assessee and deleted the adjustment made by the AO, aggrieved by which the revenue filed appeal before Tribunal.

Held:
As per explanation 1 to section 115JB(2), amount carried to any reserve has to be added to the net profit, if the amount had been debited to the profit and loss account.

In the instant case, revaluation reserve was directly taken to balance sheet and not routed through profit and loss account. Therefore, the amount could not be added to book profit.

Revaluation of premises was done in conformity with AS-10 and also certified by a registered valuer. The above revaluation was also accepted by the department. Hence, argument of the dept. that it was colourable devise to avoid tax is rejected.

No addition could be made to net profit on account of revaluation reserve directly taken to balance sheet for computing book profit.

Hence, the appeal of the revenue is dismissed.

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(2011) 132 ITD 122 (Mum.) Amartara Plastics (P) ltd. v ACIT Assessment Year: 2005-06 Date of order: 19-01-2011

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Section 26B – Revision – Erroneous and prejudicial order-Computation of book profit u/s. 115JB – When the AO passed the assessment order; clause (i) to Expln.1 to section 115JB was not on the statute book – Order u/s. 263 cannot be passed on an issue that is debatable and hence cannot hold that the order passed by the AO is erroneous.

Facts:
The Assessee was a private limited company that had filed a return for A.Y. 2005-06 on 31st Oct, 2005 declaring Total Income as ‘Nil’. The said return was selected for scrutiny and assessment was completed u/s. 143(3) of the Act. The AO determined the Total Income of the assessee under normal provisions as ‘Nil’ and book profit u/s. 115JB as (–) Rs.26,71,922. This Loss included a provision for bad & doubtful debts of Rs.35, 95,508 allowed by the AO. Subsequently, the learned CIT exercised his revisionary powers u/s. 263 of the Act, holding the order passed by the AO as erroneous and prejudicial to revenue. He set aside the order of the AO with a direction to recompute the book profits after adding back provision for doubtful debts.

Held:
The revisionary power u/s. 263 can be exercised only if the CIT considers any order to be erroneous in so far as it is prejudicial to the interest of the revenue. The order passed by the AO allowing the provision for bad and doubtful debts was not erroneous and was in agreement with past Supreme Court judgments that provisions for bad and doubtful debts did not constitute a liability. Further, the clause (i) to explanation 1 to section 115JB was not on statute when the AO passed the order u/s. 143(3) as well as when the learned CIT exercised his power u/s. 263. Hence, the learned CIT did not have any ground to invoke his power u/s. 263 to enhance, modify, cancel or direct a fresh assessment.

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(2011) 132 ITD 98 ACIT v Rolta India Ltd (Mum) (TM) A.Y 1998-99 Date of Order: 04-06-2010

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Section 148 – Reopening of assessment is void ab intio when initiated merely on the fact that the issue was not specifically dealt with in the assessment order.

Facts:
The assessee company had developed a computer software technology internally, which was capitalised in the books of account and claimed as revenue expenditure in the return of income. The assessing officer during the assessment proceedings, had raised a specific query on allowability of expenditure on computer software. The assessee wrote a letter for the same to the AO giving justification and the relevant facts. There was no specific reference to this issue in the assessment order.

Subsequently, the AO was in receipt of the audit report from the revenue audit party, stating that he had completely overlooked the above mentioned facts and legal position in the given case. The AO then issued notice u/s. 148 based on the above finding.

The assessee then challenged the initiation of the proceedings u/s. 147/148 on the basis of reasons recorded by the AO.

Held:
Merely because the issue on which the notice was issued was not specifically dealt with in the assessment order does not give the AO jurisdiction to reopen the assessment, unless there is tangible material before him to come to the conclusion that there is escapement of income.

When no specific reference to the issue was made in the order, it is presumed that the AO had formed an opinion about the allowability of software expenses as revenue expenditure while completing the assessment u/s. 143(3).

The issue was squarely covered by the judgement of the Supreme Court in CIT v Kelvinator of India Ltd. whereby it was held that mere change of opinion by the AO cannot be taken as the “reason to believe” u/s. 147 to reopen the assessment.

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51 DTR (Bang.) (Trib.) 173 Hewlett Packard India Sales (P) Ltd. v. CIT A.Y.: 2006-07. Dated: 16-8-2010

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Rent paid for parking slots cannot be treated as car running expenses for the purpose of levy of FBT.

Facts:
The assessee had paid Rs.1.25 crores as rent for parking slots. These slots were used for parking cars of employees of the assessee. The FBT assessment was completed without considering this rent as fringe benefit. The CIT u/s.263 set aside the assessment relying upon the CBDT Circular No. 8 of 2005, dated 29th August, 2005.

Held:
In the present case, even though the rent pertaining to the car parking slots was mentioned distinctly and separately in the lease deed, the assessee was paying the sum as part of the overall rent paid to the landlord. The essential facilities attached to a rented building have to be treated as part of the building itself and therefore the rent or licence fee paid for such facilities should be treated as forming part of rent.

Further, the head of expenditure relied on by the CIT to hold the assessee liable for FBT in respect of rent relating to car parking area is ‘running, maintenance and repair expenses of cars’. The running expenses of a motor car usually include fuel oil and other incidental expenses. It may include the driver’s wages as well. It may even include the taxes. But it is very difficult to argue that car parking expenses are in the nature of running expenses. It is not possible to treat parking slot expenses as analogous to repair and maintenance. Hence, they cannot be included within the fringe benefits.

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51 DTR (Mumbai) (Trib.) 283 DCIT v. Ushdev International Ltd. A.Y.: 2002-03. Dated: 9-10-2010

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Penalty u/s.271(1)(c) — If tax liability is determined u/s.115JB, penalty cannot be levied with reference to the additions made under normal provisions of the Act.

Facts:
The Assessing Officer had made two additions to the returned income under normal provisions of the Act which were upheld by the Tribunal. However the addition made to book profits on account of diminution in the value of investments for the purpose of computation u/s.115JB was deleted by the Tribunal. While passing the consequential order the tax payable was determined u/s.115JB since tax payable under normal provisions of the Act was nil.

The AO imposed penalty u/s.271(1)(c) in respect of disallowances made under normal provisions of the Act.

Held:
The additions which constitute the foundation for imposition of penalty u/s.271(1)(c), were made while computing income under the regular provisions of the Act. However, tax u/s.115JB was determined by making an addition on account of diminution in the value of investment, which finally stands deleted by the Tribunal. Thus the basis of assessment under the regular provisions of the Act is no more relevant because of the AO finally computed income u/s.115JB pursuant to the order passed by the Tribunal. Thus the additions which were made in the original assessment as per the regular provisions of the Act, have become academic inasmuch as they have not entered the final computation of total income made by the AO. Neither the total income has increased with such additions, nor has the loss scaled down.

The assessment under regular provisions of the Act, in which such additions were made, has been substituted with that u/s. 115JB, and in the latter case, such additions were either not made or finally deleted by the Tribunal. As such there cannot be any question of imposing or confirming the penalty u/s.271(1)(c) qua these additions.

The argument of the Revenue that penalty should be sustained since the assessee was granted credit in respect of tax paid on deemed income u/s.115JAA was not accepted as the tax credit was not available for tax paid u/s.115JB till A.Y. 2005-06.

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127 ITD 257 (Mum.) Torrential Investments (P.) Ltd. v. ITO, Ward-2(3)(3), Mumbai A.Y.: 1996-97. Dated: 11-8-2009

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Section 234C — Proviso to section 234C(1) as amended by Finance Act (No. 2), 1996 is retrospective in nature, since it was proposed to remove hardship faced by the assessee as the entire tax on capital gains had to be paid at short notice or even before the sale proceeds were received.

Facts:
The assessee had income from long-term capital gains of Rs.25,47,670 during the year which accrued to the assessee in the months of May, 1995 and July, 1995. The assessee paid advance tax instalments as per section 234C (as amended by Finance Act, 1996). However, the Assessing Officer charged interest u/s. 234C from the first instalment consequently holding that the amendment u/s. 234C is prospective.

Held:
(1) The amendment (by the Finance Act, 1996) was enacted to remove the hardship to the assessee as the entire tax had to be paid at short notice as per the original provision even before the sale proceeds were received.

(2) The amendment to proviso to section 234C is clarificatory in nature and has to be applied retrospectively.

(3) The assessee had paid taxes as a part of the instalments due after the date of sale of the asset and hence, was not in default as stipulated u/s. 234C. Thus, no interest was chargeable from it u/s. 234C.

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(2010) 127 ITD 217 (Agra.) (SB) S. K. Jain v. CIT A.Y.: 2000-01. Dated: 13-4-2010

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Section 263 — Once a particular matter has been decided and considered in the appeal, and only because a particular issue or point relating to that matter has not been considered does not render the matter as unconsidered and hence does not give power to CIT to invoke section 263.

Facts:
The assessee had explained the source of investment made of Rs.4,50,000 as cash received from his mother under a will which was found to be genuine by the AO to the extent of Rs.4,00,000 and Rs.50,000 was added. However on appeal, the CIT(A) deleted the addition and the Revenue went for further appeal.

However during the pendency of the appeal, the CIT invoked the provisions of section 263 for revision of order stating the reasons that the AO had failed to examine whether the will had been probated or not, whether bequest of cash and jewellery was as per Hindu Succession Act.

The contention of the assessee was that since the matter has already been considered in the appeal, then the order of the AO got merged with the order of the CIT(A) and the CIT has no right to invoke the provisions of section 263 as per explanation (c) to section 263(1).

Held:
Once a particular matter of appeal has been considered and decided in the appeal, only because a particular point relating to the same remains unconsidered by the CIT(A), does not render the matter as unconsidered. Therefore the order of the AO merged with that of the CIT A and the CIT loses his right to invoke the provisions of section 263 as per the explanation (c) to section 263.

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136 TTJ 263 (Mumbai) (TM) ACIT v. Dharti Estate ITA Nos. 2808 (Mum.) of 2002 and 5056 (Mum.) of 2003. A.Ys.: 1998-99 and 1999-2000 Dated: 29-10-2010

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Section 145 of the Income-tax Act, 1961 — Assessee following percentage completion method consistently which was accepted in earlier and subsequent years — valuation of closing WIP at historical cost was correct particularly when the categorical findings of the CIT(A) highlighting that the assessee has not deviated from the guidelines issued by the ICAI under AS-7 was not challenged by the Revenue.

The assessee, a partnership firm, was engaged in the business of construction. For the relevant assessment years, the assessee valued its closing WIP at historical cost as per its past policy. Such historical cost was the average rate realised for all the years including current year. The Assessing Officer valued the WIP at the current year’s rate of realisation and made addition to the profit. The CIT(A) held that the Assessing Officer was not justified in making the additions.

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

The Third Member, holding in favour of the assessee, noted as under:

(1) It is not in dispute that the assessee has followed percentage completion method consistently since inception and has been declaring income/loss from year to year and the same was accepted in earlier years.

(2) Despite the AO’s stand for the A.Ys. 1998-99 and 1999-2000, with regard to correctness of the method of accounting followed by the assessee, in the year 2000-01, when the assessee declared profit of more than Rs.5 crores on completion of the project, the AO appears to have accepted the same method to accept the income declared therein, which in itself is an indication that the method of accounting followed by the assessee is an approved method of accounting.

(3) Categorical finding of the learned CIT(A) to highlight that assessee has not deviated from guidelines issued by the ICAI (under AS-7), was not challenged before the Tribunal by learned Departmental Representative by producing any evidence thereof. The learned CIT(A) has discussed the issue elaborately and met each point of dispute raised by the Assessing Officer to highlight that there is no merit in the conclusion reached by the Assessing Officer.

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(2011) TIOL 209 ITAT-Mum. ACIT v. American School of Bombay Education Trust ITA No. 136 to 138/Mum./2010 A.Ys.: 2000-01 to 2002-03. Dated: 4-2-2011

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Sections 194C, 201(1), 201(1A), 271C — Penalty u/s.271C cannot be levied if the order u/s.201(1) is barred by limitation.

Facts:
The assessee was running a school popularly known as ‘American School of Bombay’. In the course of survey u/s.133A of the Act, conducted on 24-1-2006 it was found that the assessee had failed to deduct tax at source from the salaries paid to expatriate teachers by South Asia International Educations Services (SAIESF) outside India. The Assessing Officer, upon issuing show-cause notice and considering the explanations offered by the assessee, in an order passed an order u/s.201(1) and 201(1A) held the assessee to be in default for not deducting tax at source u/s.194C. He also levied interest u/s.201(1A) and initiated penalty proceedings, after obtaining approval from the Add. CIT(TDS), by issuing notice to the assessee. Not being satisfied with the explanation offered by the assessee, the AO levied penalty u/s.271C of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who noted that the Tribunal has quashed the order passed by the DCIT(TDS) u/s.201(1) and 201(1A) on the ground that initiation of proceedings was beyond a period of six years and hence was barred by limitation. He deleted the penalty levied u/s.271C.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that in the case of the assessee for the A.Y. 1997-98 to 1999-2000, the Tribunal has held that — a bare perusal of section 271C(1) indicates that penalty u/s.271C can be imposed only when there is a failure on the part of the assessee to deduct or pay the whole or any part of tax and, then, the quantum of penalty is equal to the amount of tax which such person failed to deduct or pay. From here, it emerges that there must be some sum which such person failed to deduct or pay. Such amount constitutes the basis for imposition of penalty u/s.271C. In other words, the liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s 271C. If the very order passed u/s.201(1) creating liability has been set aside on account of limitation and there is no possibility of any fresh order being likely to be passed u/s.201(1), there remains no question of the assessee being deemed to be an assessee in default in respect of such tax. The natural corollary which, therefore, follows is that if the order u/s.201(1) ceases to be operative, it will have the effect of the assessee not being in default. Once the assessee is not in default for failure to deduct or pay tax at source, naturally, there cannot be any question of imposing penalty u/s.271C for the reason that the very basis of such penalty is the amount of tax which such person failed to deduct or pay as per law and when there is no such amount in existence, the possibility of imposing penalty will automatically be ruled out.

The Tribunal noted that the effect of the Tribunal’s order quashing the order passed u/s.201(1) and 201(1A) on account of limitation is that the assessee is not deemed to be in default in respect of any failure to deduct or pay tax at source. It held that in such circumstances the question of penalty u/s.271C cannot arise.

The appeal filed by the Revenue was dismissed.

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(2011) TIOL 197 ITAT-Mum. Bharat Bijlee Ltd. v. Addl. CIT ITA No. 6410/Mum./2008 A.Y.: 2005-06. Dated: 11-3-2011

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Sections 2(42C), 45, 48 and 50B — As per section 2(42C) of the Act, only a transfer as a result of sale can be construed as a slump sale transfer of an undertaking by way of ‘exchange’ will not qualify as a slump sale — When an undertaking is transferred as a going concern it is not possible to conceptualise the cost of acquisition of such a going concern as well as date of acquisition thereof — If the cost of acquisition and/or date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of section 45 for levy and computation of capital gains.

Facts:
During the previous year relevant to the assessment year under consideration, the assessee, pursuant to a Court-approved scheme of arrangement u/s.391 r.w.s 394 of the Companies Act, 1956, transferred its Lift Field Operations Undertaking (‘the undertaking’), as a going concern, to Tiger Elevators Pvt. Ltd. As consideration for transfer the assessee was entitled to receive preference shares and bonds. The price for transfer was a lump sum consideration without assigning any value to any of the individual items. In the return of income filed the assessee did not return any capital gains on the ground that since the cost of undertaking is not ascertainable the machinery for computing capital gains fails. It was also pointed out that the transfer was an exchange and not a sale and therefore did not fall within the purview of the definition of slump sale u/s.2(42C) of the Act.

The Assessing Officer (AO) held the transaction of transfer of the undertaking to be a transaction of slump sale, taxable as per provisions of section 50B of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal having considered the definition of ‘slump sale’ u/s.2(42C) of the Act, held that it is only a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise than as a result of sale will not qualify as a slump sale. On perusal of the clauses of the scheme the Tribunal noted that the scheme of arrangement did not mention monetary consideration for the transfer. The parties were ad idem that the scheme of arrangement was that the assessee was to transfer the undertaking and take bonds/preference shares as consideration. Thus, it was held to be a case of exchange and not sale and consequently the provisions of section 2(42C) were held to be not applicable. Therefore, the provisions of section 50B were also held to be not applicable to the facts and circumstances of the assessee’s case.

Since individual items of capital assets were not being transferred and aggregate of individual assets in the form of an undertaking was a capital asset which was transferred, the transfer being one of going concern, it was held that it is not possible to ascertain the profit or gain from transfer of undertaking, since cost of acquisition and the cost of improvement of the undertaking cannot be ascertained and consequently, computation provisions cannot be applied and the charge of capital gain fails.

This ground of appeal filed by the assessee was allowed.

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[2014] 151 ITD 642 (Mum) ITO vs. Gope M. Rochlani AY 2008-09 Order dated – 24th May, 2013

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Explanation 5A to section 271(1)(c), read with
section 139. In absence of any limitation or restriction relating to
words ‘due date’ as given in clause (b) of Explanation 5A to section
271(1)(c), it cannot be read as ‘due date’ as provided in section 139(1)
alone, rather it can also mean date of filing of return of income u/s.
139(4). Therefore, where pursuant to search proceedings, assessee files
his return before expiry of due date u/s. 139(4) surrendering certain
additional income, he is entitled to claim benefit of clause (b) of
Explanation 5A to section 271(1)(c).

FACTS
The
assessee firm was carrying out business of housing development. A search
and seizure action u/s. 132(1) was carried out in case of assessee on
16th October 2008. In course of said proceedings, one of partners of
firm made statement u/s.132(4) declaring certain undisclosed income and
subsequently, the return was filed by the assessee declaring the amount
surrendered as income.

In the assessment order passed u/s.143(3)
read with section 153A, the assessment was completed on the same income
on which return of income was filed. The Assessing Officer also
initiated a penalty proceedings u/s. 271(1)(c).

The assessee,
before the Assessing Officer, submitted that this additional income was
offered voluntarily which was on estimate basis and the same has been
accepted in the assessment order as such, therefore, provisions of
section 271(1)(c) is not applicable. The Assessing Officer rejecting
assessee’s explanation levied penalty u/s. 271(1)(c).

In
appellate proceedings before Commissioner (Appeals), the assessee also
submitted that in view of clause (b) of Explanation 5A to section
271(1)(c) penalty could not be levied as the assessee filed return of
income on the due date which could also be inferred as return of income
filed u/s.139(4).

The Commissioner (Appeals) did not accept the
assessee’s explanation on Explanation 5A to section 271(1)(c), but
deleted the penalty on the ground that the income which was offered was
only on estimate basis, therefore, additional income offered by the
assessee could neither be held to be concealed income or furnishing of
inaccurate particulars of income.

On appeal by Revenue

HELD
There
is a saving clause in the Explanation 5A to section 271(1)(c) wherein
penalty cannot be held to be leviable u/s. 271(1)(c); according to which
if the assessee is found to be the owner of any asset/income and the
assessee claims that such assets/income represents his income for any
previous year which has ended before the date of search and the due date
for filing the return of income for such previous year has not expired
then the penalty u/s. 271(1)(c) shall not be levied.

The due
date for filing of the return of income u/s. 139(1) for assessment year
2008-09 was 30-9-2008, whereas the assessee has filed the return of
income on 31-10- 2008 i.e., after one month from the date of filing of
the return of income as provided in section 139(1). However the due date
for filing of the return of income u/s. 139(4) for the assessment year
2008-09 was 31-3-2010 and thus, the return of income filed by the
assessee in this case was u/s. 139(4).

The issue however is
whether the return of income filed u/s. 139(4) can be held to be the
‘due date’ for filing the return of income for such previous year as
mentioned in clause (b) of Explanation 5A to section 271(1)(c).

For
the purpose of the instant case, one has to see whether or not the
assessee has shown the income in the return of income filed on the ‘due
date’. Provisions of section 139(1) provides for various types of
assessees to file return of income before the due date and such due date
has been provided in the Explanation 2, which varies from year-to-year.
Whereas, provisions of section 139(4) provide for extension of period
of ‘due date’ in the circumstances mentioned therein and it enlarges the
time-limit provided in section 139(1). The operating line of
sub-section (4) of section 139 provides that ‘any person who has not
furnished the return within the time allowed’, here the time allowed
means u/s. 139(1), then in such a case, the time-limit has been
extended. Wherever the legislature has specified the ‘due date’ or has
specified the date for any compliance, the same has been categorically
specified in the Act.

In the aforesaid Explanation 5A, the
legislature has not specified the due date as provided in section 139(1)
but has merely envisaged the words ‘due date’. This ‘due date’ can be
very well-inferred as due date of the filing of return of income filed
u/s. 139, which includes section 139(4). Where the legislature has
provided the consequences of filing of the return of income u/s. 139(4),
then the same has also been specifically provided.

Once the
legislature has not specified the ‘due date’ as provided in section
139(1) in Explanation 5A, then by implication, it has to be taken as the
date extended u/s. 139(4). In view of the above, it is held that the
assessee gets the benefit /immunity under clause (b) of Explanation to
section 271(1)(c) because the assessee has filed its return of income
within the ‘due date’ and, therefore, the penalty levied by the
Assessing Officer cannot be sustained on this ground.

Thus, even
though the conclusion of the Commissioner (Appeals), is not affirmed,
yet penalty is deleted in view of the interpretation of Explanation 5A
to section 271(1)(c).

In the result, revenue’s appeal is treated as dismissed.

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[2013] 145 ITD 491(Mumbai- Trib.) Capital International Emerging Markets Fund vs. DDIT(IT) A.Y. 2007-08 Order dated- 10-07-2013

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i. Capital Loss from share swapping is allowed.

Facts:
Assessee-company, a Foreign Institutional Investor, was engaged in business of share trading.

The assessee received shares in ratio of 1 : 16 shares held by it in a company. This resulted in long term capital loss. AO disallowed the assessee’s claim of long term capital loss, on swap transaction. When the matter was referred to DRP, it was held that no sound reason was furnished by the assessee to explain as to why it entered in an exchange transaction that resulted in huge loss, that no prudent businessman would enter in to such a transaction, that swap ratio of shares transacted was not done by the competent authority i.e. a merchant banker.

Held:
Swapping of shares was approved by an agency of Govt. of India i.e. FIPB and it had approved the ratio of shares to be swapped. In these circumstances to challenge the prudence of the transaction was not proper. Even if the transaction was not approved by the Sovereign and it was carried out by the assessee in normal course of its business, the Ld AO/DRP could not question the prudence of the transaction. Genuiuness of a transaction can be definitely a subject of scrutiny by revenue authorities, but to decide the prudence of a transaction is prerogative of the assessee. A decision as to whether to do / not to do business or to carry out/not to carry out a certain transaction is to be taken by a businessman. If it is proved that a transaction had taken place, then resultant profit or loss has to be assessed as per the tax statutes. Therefore by casting doubt about the prudence of the transaction, members of the DRP had stepped in to an exclusive discretionary zone of a businessman and it is not permissible.

ii. Set off of short term capital loss subject to STT allowed against short term capital gain not subjected to STT

Facts:
Assessee has claimed set off of short-term capital loss subjected to Securities Transaction Tax(STT) against the short-term capital gains that was not subjected to STT. The AO held that as both the transactions were subject to different rates of tax, the set off of loss is not correct. He held that in order to set off the short term capital loss, there should be short term capital loss and short term capital gain on computation made u/s. 48 to 55. The assessee was entitled to have the amount of such short term capital loss set off against the short term capital gain, if any, as arrived under a similar computation made for the assessment year under consideration.

Held:
The phrase “under similar computation made” refers to computation of income, the provisions for which are contained u/ss. 45 to 55A of the Act. The matter of computation of income was a subject which came anterior to the application of rate of tax which are contained in section 110 to 115BBC. Therefore, merely because the two sets of transactions are liable for different rate of tax, it cannot be said that income from these transactions does not arise from similar computation made as computation in both the cases has to be made in similar manner under the same provisions. The Tribunal therefore, held that short term capital loss arising from STT paid transactions can be set off against short term capital gain arising from non SIT transactions.

Note: Readers may also read following decisions of Mumbai Tribunal:

• DWS India Equity Fund [IT Appeal No. 5055 (Mum.) of 2010]

• First State Investments (Hong Kong) Ltd. vs. ADIT [2009] 33 SOT 26 (Mum)

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[2015] 152 ITD 533 (Jaipur) Asst. DIT (International taxation) vs. Sumit Gupta. A.Y. 2006-07 Order dated- 28th August 2014.

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Section 9, read with section 195 and Article 7 of DTAA between India and USA

Income cannot be said to have deemed to accrue or arise in India when the assessee pays commission to non-resident for the services rendered outside India and the non-resident does not have a permanent establishment in India. Consequently, section 195 is not attracted and so the assessee is not liable to deduct TDS from the said payment.

FACTS
The assessee exported granite to USA and paid commission on export sales made to a US company but it did not deduct tax u/s. 195.

The Assessing Officer held that the sales commission was the income of the payee which accrued or arose in India on the ground that such remittances were covered under the expression fee for technical services’ as defined u/s. 9(1)(vii)(b). He thus held that the assessee was liable deduct tax u/s. 195 and he was in default u/s. 201(1) for tax and interest.

On Appeal, CIT (Appeals) held that commission does not fall under managerial, technical or consultation services and therefore, no income could be deemed to have accrued or arisen to the non-resident so as to attract provisions of withholding tax u/s. 195.

On Appeal-

HELD THAT
The order of CIT(A) was to be upheld as the non-resident recipients of commission rendered services outside India and claimed it as business income and had no permanent establishment in India. Thus, provisions of section 9 and section 195 were not attracted.

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S. 80IB : DEPB receipt eligible for relief

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New Page 1

Part B — Unreported Decisions




19 Flora Exports v. ACIT


ITAT ‘E’ Bench, New Delhi

Before P. M. Jagtap (AM) and

George Mathan (JM)

ITA Nos. 4522 /Del./2004

A.Y. : 2001-02. Decided on : 31-1-2008

Counsel on assessee/revenue : Ved Jain/

Amit M. Govli

S. 80IB of the Income-tax Act, 1961 — Profits and gains from
industrial undertaking — Profits of the undertaking included DEPB — Whether DEPB
receipt eligible for relief — Held, Yes.

Per George Mathan :

Facts :

The issue in dispute in this appeal was against the action of
the CIT(A) in confirming the order of the Assessing Officer to the extent that
the amount of DEPB received by the assessee who was a supporting manufacturer,
was held to be not forming part of the business profits derived from the
manufacturing activity for the purpose of computing deduction u/s.80IB of the
Act.

The Revenue supported the orders of the lower authorities by
relying on the decision of the Delhi High Court in the case of Ritesh Industries
Ltd. where it was held that duty draw back was not income derived from an
industrial undertaking and not entitled to special deduction u/s.80I of the Act.

Held :

The Tribunal referred to the Supreme Court decision in the
case of Baby Marine Exports, where it was held that the premium paid by the
export house or the trading house to a supporting manufacturer on FOB was an
integral part of the turnover of the supporting manufacturer and was includible
in the profits of the business and was eligible for deduction u/s.80HHC.
Further, it noted that the Delhi Tribunal in the case of Maharashtra Seamless
Ltd., applying the ratio of the decision of the Supreme Court in the case of
Baby Marine Exports had taken a view that once such receipts were taken as part
of the turnover and formed part of the eligible profits, then the assessee would
be entitled to the deduction u/s.80IB on such DEPB receipts also. Accordingly,
the assessee’s appeal was allowed.

Cases referred to :



(1) Baby Marine Exports 290 ITR 323 (SC)

(2) Maharashtra Seamless Ltd. (ITA No. 1107/Del./2003 dated
30-11-2006 and MA No. 250/Del./2007 dated 20-12-2007)


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S. 37(1), S. 28, S. 36(1)(vii) : Access fee for usage of software is not capital expenditure; Claims for bad debts and alternatively, as business loss, of dues receivable against sales value of shares of clients allowed.

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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.)


18 Angel Capital & Debt Market Ltd. v. ACIT


ITAT ‘I’ Bench, Mumbai

Before R. K. Gupta (JM) and

Abraham P. George (AM)

ITA No. 7075 /Mum./2005

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

Counsel for assessee/revenue : Rajiv Khandelwal/

Bharat Bhushan

(1) S. 37(1) of the Income-tax Act, 1961 — Capital or
revenue expenditure — Payment of access fee for the usage of software —
Whether allowable as revenue expenditure — Held, Yes.


(2) S. 28 and S. 36(1)(vii) of the Income-tax Act,
1961 — Assessee, a sharebroker — Dues against the sales value of shares of the
clients sold written off and claimed as bad debts and alternatively, as
business loss — Whether the claim of the assessee allowable — Held, Yes.



Per Abraham P. George :

Facts :

The assessee was a sharebroker and had effectively taken two
grounds in appeal before the Tribunal, the facts whereof were as under :

(1) During the year the assessee had paid the sum of
Rs.11.62 lacs as charges for client access licence of a software viz.,
Derivatives front-office software product for NSE. The amount paid was claimed
as business expenditure. However, the Assessing Officer as well as the CIT(A)
rejected the claim of the assessee and treated the same as capital
expenditure.

(2) The non-recoverable dues of Rs.10.25 lacs from its
clients, which were written off by the assessee in its books of accounts were
claimed as bad debts u/s.36(1)(vii). According to the AO, out of the total sum
receivable from the clients, that part which was not brokerage i.e.,
the value of the shares, was not covered u/s.36(2). Hence, the assessee’s
claim was rejected. The alternative claim of the assessee to allow the claim
u/s.28, by treating the same as business loss was not considered by the AO.

Before the Tribunal the actions of the lower authorities were
justified by the Revenue on the ground that the payment was made for acquisition
of system software and not application software.

Held :

(1) The Tribunal noted that the amount paid by the assessee
was for access to certain software used by sharebrokers for accessing NSE and
controlling its trading functions. By this, according to the Tribunal, the
assessee did not get any enduring benefit. This was so because the assessee was
required to pay the amount periodically in order to have its continuous access.
It was also noted by the Tribunal that the ownership to the software was not
transferred to the assessee. According to the Tribunal, though the software did
help the assessee to be competitive in its line of business and for the
efficient conduct of its day-to-day business, that alone would not be sufficient
to hold the payment as capital expenditure. Further, relying on the test laid
down by the Special Bench in the case of Amway India Enterprises, the Tribunal
allowed the appeal of the assessee.

(2) Relying on the decision of the Special Bench Tribunal in
the case of Oman International Bank SAOG, the Tribunal held that the assessee
having written off the non-recoverable dues, had satisfied the stipulation as
per S. 36(1)(vii). According to it, based on the decision of the Mumbai Tribunal
in the case of B. D. Shroff, the assessee was entitled to succeed even under the
alternative ground viz., by way of trading loss u/s.28.

Cases referred to :




(1) Amway India Enterprises & Others v. Dy. CIT, 21
SOT 1 (Del) (SB);

(2) Dy. CIT v. Oman International Bank, SAOG 100 ITD
257 (SB);

(3) CIT v. B. D. Shroff, (ITA No. 4475 / Mum. /
2000)



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CBDT Circular No. 14, dated 11-4-1955 — In the case of an assessee following mercantile system of accounting interest expenditure which has accrued during the previous year is allowable as deduction even if it was not debited to P&L Account and also not c

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New Page 2

  1. 2009 TIOL 664 ITAT (Del.)


ACIT v. Technofab Engg. Ltd.

ITA No. 4698/Del./2005 & 2666/Del./2006

A.Ys. : 2002-03 and 2003-04

Dated : 30-7-2009

CBDT Circular No. 14, dated 11-4-1955 — In the case of an
assessee following mercantile system of accounting interest expenditure which
has accrued during the previous year is allowable as deduction even if it was
not debited to P&L Account and also not claimed in the return of income but
was claimed by filing a letter, before the assessment, making the claim.

Facts :

The assessee was following mercantile system of accounting,
which was accepted by the Assessing Officer. The assessee had not debited some
interest in its books of accounts and consequently the same was not even
claimed as deduction while computing the total income. The assessee did not
revise its return of income but filed a letter, before completion of
assessment, making a claim that deduction for interest accrued during the
previous year be allowed in accordance with the method of accounting regularly
followed by it. The AO did not accept the claim made by the assessee.

The CIT(A) directed the AO to allow liability of interest
although the same was not debited to the books of account and the said claim
was not made by filing a revised return.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held :

The CBDT has issued circulars, which are binding on the
Department, to the effect that the assessee should be properly guided in
relation to the claims. The CBDT has emphasized upon the AOs to assess the
correct income to tax. If the assessee is following a particular method of
accounting and he has omitted to claim the deduction or exemption, to which he
is otherwise entitled, the Board has emphasized that the AO should guide the
assessee so that the correct income is assessed as per the provisions of the
Act. In Circular No. 14 dated 11-4-1955 CBDT has emphasized that the
Department should not take advantage of the assessee’s ignorance to collect
more tax out of him than the liability due from him. This Circular is very
much binding on the Department. In the light of the said Circular and also in
view of the findings of the CIT(A) that the claim made by the assessee was a
perfectly legal claim supported by the method of accounting which the AO has
accepted from year to year, the Tribunal upheld the order of CIT(A).

The appeal filed by the Revenue was dismissed.

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S. 80IA(4), Explanation to S. 80IA(13), S. 255(3) and S. 255(4) — There is a material difference in the circumstances where a reference is made to a Special bench u/s.255(3) and a Third Member or Larger Bench u/s.255(4) — A Third Member/Larger Bench is co

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New Page 2

  1. 2009 TIOL 692 ITAT Mum-LB


B. T. Patil & Sons v. ACIT

ITA Nos. 1408 & 1409/Pn/2003

A.Ys. : 2000-01 and 2001-02

Dated : 26-10-2009

S. 80IA(4), Explanation to S. 80IA(13), S. 255(3) and S.
255(4) — There is a material difference in the circumstances where a reference
is made to a Special bench u/s.255(3) and a Third Member or Larger Bench
u/s.255(4) — A Third Member/Larger Bench is constituted only when there are
differing orders — A Bench constituted u/s.255(4) has to apply the law as
amended with retrospective effect even though such law was not available at
the time of passing of the separate orders by the dissenting Members — S.
80IA(4) (even prior to amendment) applies to a ‘developer’ and not to a
‘contractor’ —Deduction u/s.80IA(4) is allowable only to a person directly
engaged in developing, maintaining and operating the facility — There should
be a complete development of the facility and not just a part of it.

Facts :

The assessee was a civil contractor engaged in construction
of various projects of Governments and local authorities. It claimed deduction
u/s.80IA on the ground that it had undertaken ‘infrastructure projects’. The
Assessing Officer (AO) did not allow the deduction on the ground that the
assessee did not do any business in infrastructure facility but had merely
constructed the properties belonging to the Government/statutory bodies for a
fixed consideration. He also held that the other conditions of S. 80IA(4) were
not satisfied.

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

Aggrieved, the assessee preferred an appeal to the
Tribunal. The JM upheld the claim on the ground that the assessee is a
developer. The AM dissented after taking note of Explanation to S. 80IA then
proposed to be inserted by Finance Bill, 2007 w.e.f. 1-4-2000, rejected the
claim. The President, acting as Third Member, noted that as the AM had decided
on the basis of a point not raised by the parties during the hearing, a
solitary TM decision on the issue may create complications and so the issue
was referred to a Larger Bench.

Before the Larger Bench, apart from the issue under
consideration, two more questions arose (i) whether the reference was made
u/s.255(4) or u/s.255(3) since scope and limitations in both the situations
are different; and (ii) whether the Bench constituted u/s.255(4) has to apply
the law as amended with retrospective effect even though such law was not
available at the time of passing of the separate orders by the dissenting
Members.

Held :

(i) There is a material difference in the circumstances
where a reference is made to a Special Bench u/s.255(3) and a Third Member or
a Larger Bench u/s.255(4). Ss.(4) is a special provision dealing only with a
particular situation in which the members who earlier heard the case differ on
a point or points, as against the language of the relevant part of Ss.(3)
which refers to constituting a Special Bench consisting of three or more
members couched in a general manner. Special Bench u/s.255(3) is always
constituted in the absence of differing opinion expressed by the Members in
that particular case through their separate orders.

(ii) In the present case, the Members had passed differing
orders. Consequently, the reference was u/s.255(4). A Third Member/Larger
Bench is constituted only when there are differing orders.

(iii) Proceedings u/s.255(4) are confined to the point or
points on which Members of the Division Bench differ. One or more of the other
Members appointed under Ss.(4) are supposed to confine himself/themselves only
to the facts of the case before the Bench. Since the Bench has to confine
itself to the facts of the case, interveners are normally not allowed.

(iv) The rule that interveners are not allowed in
proceedings u/s.255(4) is subject to the exception where pure and substantial
question of law is involved in proceedings u/s.255(4). Interveners are allowed
provided their arguments are confined to the substantial legal question posed
before the Bench u/s.255(4).

(v) Proceedings qua the point of difference continue before
the Bench constituted u/s.255(4) and are deemed to continue till passing of
order under this sub-section. A bench constituted u/s.255(4) has to apply the
law as amended with retrospective effect even though such law was not
available at the time of passing of the separate orders by the dissenting
members. The order of the TM/Bench is final and conclusive on the point in
difference and the failure to apply the applicable law will render the order
of the TM/Bench absurd and erroneous.

(vi) On merits, S. 80IA(4) [even prior to insertion of
Explanation below S. 80IA(13)] applies to a ‘developer’ and not to a
‘contractor’. ‘Developer’ is a person who conceives the project which he may
execute himself or assign some parts of it to others. On the contrary
Contractor is the one who is assigned a particular job to be accomplished on
behalf of the developer. His duty is to translate such design into reality.
There may, in certain circumstances, be overlapping in the work of developer
and contractor, but the line of demarcation between the two is thick and
unbreachable. The role of a developer is much larger than that of contractor.
In certain circumstances a developer may also do the work of a contractor but
a mere contractor per se can never be called as a developer. The assessee in
this case was held to be a contractor. Moreover, it did not even own the
facility.

S. 45, S. 47, Explanation (iii) to S. 48 — In respect of a capital asset received as a gift, indexed cost of acquisition needs to be computed by applying cost inflation index of the year in which the previous owner had first held the asset.

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New Page 2

  1. 2009 TIOL 698 ITAT Mum.-SB


DCIT v. Manjula J. Shah

ITA No. 7315/Mum./2007

Date of Order : 16-10-2009

S. 45, S. 47, Explanation (iii) to S. 48 — In respect of a
capital asset received as a gift, indexed cost of acquisition needs to be
computed by applying cost inflation index of the year in which the previous
owner had first held the asset.

Facts :

The assessee transferred a capital asset which was received
by her as a gift on 1-2-2003. The previous owner had acquired the capital
asset on 29-1-2003. While computing long term capital gain, the assessee
computed indexed cost of acquisition by applying cost inflation index of the
year in which the previous owner first held the asset. The AO was of the view
that the provisions of Explanation (iii) to S. 48 which define the term
‘indexed cost of acquisition’ are very clear and as per those provisions the
assessee is entitled to indexation from the year in which the asset was first
held by the assessee and not by the previous owner.

Aggrieved, the assessee preferred an appeal to CIT(A) which
was allowed.

Aggrieved by the order of CIT(A), Revenue preferred an
appeal to the Tribunal. Since there were divergent decisions of Division
Benches on this issue, a Special Bench was constituted to consider the issue.

Held :

A literal reading of Explanation (iii) to S. 48 suggests
that one has to go by the year in which the asset was held by the assessee.
The scheme of the Act as reflected in the definition of ‘short term capital
asset’ in Explanation 1(b) to S. 2(42A) provides that the period for which the
asset was held by the previous owner also has to be taken into account. Also,
the cost of acquisition of the previous owner is regarded as cost of
acquisition of the assessee. It is not logical that the cost of acquisition
and the period of holding is determined with reference to the previous owner
and the indexation factor is determined with reference to the date of
acquisition by the assessee. Therefore, literal interpretation of Explanation
(iii) to S. 48 is inconsistent with the scheme of the Act. Also, literal
interpretation will lead to absurdity and unjust results and will defeat the
purpose of the concept of ‘indexed cost of acquisition’. In accordance with
the principles of purposive interpretation of statutes, Explanation (iii) to
S. 48 has to be read to mean that the indexed cost of acquisition has to be
computed by taking into account the period for which the asset was held by the
previous owner.

The appeal filed by the Revenue was dismissed.

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S. 115JB — For purpose of computing book profits u/s.115JB, although provisions made by an assessee are not allowable as deduction, yet certain provisions which are capable of estimation with a reasonable certainty without quantification are allowable, as

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  1. (2009) 30 SOT 495 (Mum.)


Dresser Valve India (P.) Ltd. v. ACIT

ITA No. 6464 (Mum.) of 2007

A.Y. : 2003-04. Dated : 24-4-2009

S. 115JB — For purpose of computing book profits u/s.115JB,
although provisions made by an assessee are not allowable as deduction, yet
certain provisions which are capable of estimation with a reasonable certainty
without quantification are allowable, as they are ascertainable.

For the relevant assessment year, the assessee-company
added back the amount of provision for gratuity while computing its total
income but did not do the same while computing book profits in terms of S.
115JB. The Assessing Officer, having found that the assessee had failed to
follow AS-15 and the actuarial method referred to therein with regard to
gratuity for determining actual liability, added back the provision for
gratuity to the book profits u/s.115JB. On appeal, the CIT(A) upheld the
action of the Assessing Officer.

The Tribunal, following the decisions in Dy. CIT v. Oman
International Bank SAOG, (2006) 100 ITD 285 Delhi (SB) and Bharat Earth
Movers v. CIT, (2000) 245 ITR 428/112 Taxman 61 (SC), set aside the order
of the CIT(A). The Tribunal noted as under :

(a) The provisions of S. 115JB are a code by themselves
and determination of the book profits has to be done only as per the
provisions of S. 115JB, which unambiguously provide for exclusion of
provision of ascertained liabilities for the purpose of ‘book profits’.

(b) Although the provisions are not allowable as
deduction, yet certain provisions which are capable of estimation with a
reasonable certainty without quantification are allowable, as they are
ascertainable. On finding that the actual quantification is not a legal
necessity in matters of ascertainment of the gratuity, the provision of
gratuity in the assessee’s case was capable of being estimated with a
reasonable certainty and, therefore, it was not a contingent or
unascertained liability. It was an ascertained liability and the same was
outside the scope of the provisions of clause (c) of Explanation 1 to S.
115JB, warranting no addition to the ‘book profits’.

(c) The Supreme Court has held in the case of Bharat
Earth Movers (supra) as under :

“Business liability arising in the accounting year — the
deduction should be allowed although the liability may have to be quantified
and discharged at a future date. What should be certain is the incurring of
the liability. It should also be capable of being estimated with reasonable
certainty without actual quantification. Till these requirements are
satisfied, the liability is not a contingent one. The liability is in
presenti though it will be discharged at a future date. It does not make any
difference if the date on which the liability has to be discharged it is not
certain.”

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S. 28, S. 41 — Waiver of amount of loan taken for acquiring capital asset is not taxable under the Act.

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  1. 2009 TIOL 707 ITAT Mum.


Cipla Investments Ltd. v. ITO

ITA No. 1996/Mum./2008

A.Y. : 2003-04. Dated : 28-8-2009

S. 28, S. 41 — Waiver of amount of loan taken for acquiring
capital asset is not taxable under the Act.

Facts :

The assessee had in 1998 received a sum of Rs.82,91,076
from its holding company towards share application money which was
subsequently transferred to unsecured loans. The amount was utilised for
investment in shares of other concerns. The shares so purchased with borrowed
funds were held as capital assets and income arising on transfer of shares was
offered for tax under the head ‘Income from Capital Gains’. In view of the
losses incurred by the assessee, the holding company had written off the
amount as unrecoverable whereas the assessee company had not written back the
said amount as cessation of liability. The AO taxed the sum of Rs.82,91,076
u/s.41(1) of the Act.

On appeal by the assessee CIT(A), the CIT(A) held that the
provisions of S. 41(1) are not attracted but he held that the assessee’s
business activity comprised investment in shares and securities and
advancement of loan to various parties on interest. He also held that the
amount was obtained in the course of business and by virtue of waiver of the
amount by the holding company the assessee had gained in the course of the
business and therefore the sum waived was held to be taxable u/s.28 of the
Act.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

(i) The CIT(A) was correct in holding that the provisions
of S. 41(1) do not apply.

(ii) In view of the assessee’s contention that it has not
done any trading activity nor shown any income as business income on
investments made the findings of the CIT(A) that the amount was received in
the course of its business are against his findings given while considering
the addition u/s.41(1).

(iii) The assessee’s business activity may comprise
investment in shares and securities, but as far as computation of income is
concerned the profit and loss in those transactions are said to be under the
head ‘Capital Gains’ but not ‘Business Income’, hence, the gain earned by the
assessee in the course of business in investment and advance of loans is in
the capital field but cannot be on the revenue field.

(iv) Remission of a debt by the holding company which was
not claimed and allowed as a deduction in any manner in any earlier previous
year could not be brought to tax either u/s. 41(1) or u/s.28(iv). There is no
benefit or perquisite arising to the assessee in this regard.

(v) The decision of the Bombay High Court in the case of
Solid Containers Ltd. v. Dy. CIT, (308 ITR 417) does not apply to the
facts of the case. The facts of the present case are similar to the decision
of the Bombay High Court in the case of Mahindra & Mahindra Ltd. v. CIT,
(261 ITR 501). The loans availed for acquiring the capital assets i.e.,
shares, when waived cannot be treated as assessable income by invoking the
provisions of S. 28.

(vi) Since the original receipt was undoubtedly capital in
nature its waiver does not have the quality of changing the same into a
revenue receipt.

(vii) On facts, the provisions of S. 28 do not apply and
the amount is not taxable.


 


The assessee’s appeal was allowed.


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S. 14A r.w. S. 143(3) and S. 147 — Proviso to S. 14A inserted by Finance Act, 2002 w.e.f. 11-5-2001 does not confer any jurisdiction on Assessing Officer to make reassessment u/s.147 for any assessment year beginning on or before 1-4-2001.

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  1. (2009) 30 SOT 461 (Mum.)


Jt. CIT v. Bombay Dyeing Mfg. Co. Ltd.

ITA Nos. 1632 and 2208 (Mum.) of 2006

A.Y. : 1998-99. Dated : 16-4-2009.

S. 14A r.w. S. 143(3) and S. 147 — Proviso to S. 14A
inserted by Finance Act, 2002 w.e.f. 11-5-2001 does not confer any
jurisdiction on Assessing Officer to make reassessment u/s.147 for any
assessment year beginning on or before 1-4-2001.

For the relevant A.Y. 1998-99, the Assessing Officer issued
notice u/s.148 on 21-4-2004, with a view to reopen the concluded assessment
and disallowed certain expenses, which the assessee had claimed as deduction,
on account of exempted income u/s.14A. On appeal, the CIT(A) upheld the order
of the Assessing Officer.

The Tribunal held that the disallowance made was contrary
to the proviso to S. 14A, as the same was not permissible under reassessment
proceedings u/s.147 in respect of the assessment year beginning on or before
1-4-2001.

The Tribunal noted as under :

1. A bare perusal of the proviso to S. 14A clearly
demonstrates the legislative intent in placing absolute embargo on the
jurisdiction of the Assessing Officer to re-assess the case u/s.147. Having
regard to the express legislative intent, as enshrined by the Parliament,
vide the Finance Act 2002, w.e.f. 11-5-2001, the Assessing Officer ceases to
have any jurisdiction to re-assess any case u/s.147. In such a statutorily
explicit and undisputed position, the question of reopening of the case or
initiation of the re-assessment proceedings u/s.147 r.w. S. 148, is
inconceivable and incomprehensible. Thus, in the absence of existence of
statutory jurisdiction, in terms of proviso to S. 14A with the Assessing
Officer, to make reassessment u/s.47 the very discussion on the validity or
otherwise of assumption of such jurisdiction, by way of issuance of the said
notice u/s.148, is irrelevant and an exercise in futility.

2. The CBDT issued Circular No. 11 of 2001, dated
23-7-2001, and placed restrictions on reopening of completed assessments, on
account of provisions of S. 14A. The said circular clearly demonstrates the
legislative intent in interpreting the newly inserted proviso to S. 14A.

3. The Circulars issued by the CBDT are binding on the
Assessing Officer, even where the same are not in consonance with the
meaning of the provisions, if they are benevolent and issued to mitigate the
hardship of the assessee. It is pertinent to add that the Assessing Officer
had ignored the said Circular of the Board and judicial mandate of the Apex
Court as contained in the various decisions and initiated reassessment
proceedings, in the instant case, despite there being express exclusion of
such jurisdiction of the Assessing Officer by the proviso to S. 14A.

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S. 234B r.w. S. 195 and S. 209 — No interest can be levied where advance tax is not paid in respect of income on which tax is not deducted at source by payers who were obliged to deduct the same.

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  1. (2009) 30 SOT 248 (Delhi)


Turner Broadcasting System Asia Pacific, Inc., America
v.
Asst. DIT

ITA Nos. 724, 728 and 733 (Delhi) of 2008

A.Ys. : 2001-02 & 2004-05

Dated : 13-3-2009

S. 234B r.w. S. 195 and S. 209 — No interest can be levied
where advance tax is not paid in respect of income on which tax is not
deducted at source by payers who were obliged to deduct the same.

During the relevant assessment years, various parties
advertising their products paid consideration to the Indian agent of the
assessee, who, in turn, remitted such amounts to the assessee. Neither the
advertiser nor the agent deducted tax at source before payment or repatriation
of money, respectively, as provided u/s.195. The AO levied interest upon the
assessee u/s.234B for non-payment of advance tax. The CIT(A) upheld the levy
of interest.

The Tribunal, applying the decisions in the following
cases, deleted the interest levied u/s.234B :

(a) CIT v. Madras Fertilizers Ltd., (1984) 49 ITR
703 (Mad.)

(b) CIT v. Ranoli Investment (P) Ltd., (1999) 235
ITR 433 (Guj.)

(c) CIT v. Sedco Forex International Drilling Co.
Ltd., (2003) 264 ITR 320/(2004) 134 Taxman 109 (Uttaranchal)

The Tribunal noted as under :

1. Since the assessee was a non-resident person, the
amounts paid to their agent in India by the Indian advertisers were liable
for tax deduction u/s.195. The tax had not been so deducted and,
consequently, not paid to the credit of the Government.

2. As provided in S. 209, while computing the amount of
advance tax, the tax deductible at source was to be reduced from the total
tax liability.

3. In the assessee’s case the advance tax payable was Nil
after considering the amount of tax deductible at source u/s.195. It was not
the assessee’s fault, if no tax was deducted by the payers.

4. Since no advance tax was payable as per calculations
in terms of S. 209 and S. 195, there would be no liability to pay interest
u/s.234B. The charge of interest will follow only if there is a default of
non-payment of advance tax. In the absence of default, interest cannot be
charged.



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S. 41(1) — Limitation of time is not a determining factor in matters relating to remission or cessation of liabilities.

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  1. (2009) 30 SOT 31 (Mum.)


DSA Engineers (Bombay) v. ITO

ITA No. 5354 (Mum.) of 2007

A.Y. : 2003-04. Dated : 12-3-2009

S. 41(1) — Limitation of time is not a determining factor
in matters relating to remission or cessation of liabilities.

For the relevant assessment year, in respect of certain
creditors appearing in the Balance Sheet of the assessee, the AO found that
there was neither a pending litigation in existence nor any correspondence
from the parties demanding for clearing the liabilities and held that the
assessee had not proved that it was yet to make the payment of the said
outstanding balances to the creditors, that it had the intention to make the
said payment, and that the liability had not ceased. He, accordingly, invoked
the provisions of S. 41(1) and deemed the liabilities of the creditors as the
profits and gains of business or profession and treated them as the income of
the year. The CIT(A) upheld the order of the AO.

The Tribunal set aside the orders of the lower authorities.
The Tribunal noted as under :

2. From the rival positions of both parties as well as
the provisions of S. 41(1) and the legal propositions of various judicial
fora, the following issues have emerged :



  •  the
    issue of limitation of period of three years



  •  the
    issue of discharge of onus when the assessee had not unilaterally written
    them off



  •  the
    issue of unilateral write-off for the assessments of the post-amendment
    period, i.e., after 1-4-1997.


3. Regarding the issue of limitation of three years, it
was noticed that there is no such limitation provided in S. 41(1) or in its
Explanation 1. In the case of Dy. CIT v. Himalaya Refrigeration & Air
Conditioning Co. (P.) Ltd., (2003) 91 TTJ (Delhi) 296, the Tribunal held
that in the absence of any evidence of cessation of liabilities, mere fact
that the liabilities were outstanding for more than three years and were
time barred, was not sufficient ground for addition u/s.41(1). The
limitation of time is not a determining factor in the matters relating to
remission or cessation of liabilities.

4. Regarding the issue of discharging of onus, it was
held that when the assessee continues to reflect or record the liabilities
as still payable to the creditors and decides not to write them off
unilaterally, the Assessing Officer has higher levels of responsibility and,
hence, he has to establish with evidence that the said book entries are
wrong or not bona fide and, thus, the Assessing Officer is under the
obligation to discharge the onus in this regard. The onus is on the revenue
to prove that the liabilities have ceased finally and there is no
possibility of their revival.

5. Regarding the issue of unilateral write off for the
assessments of the post amendment period, i.e. 1-4-1997, it was
noticed that Explanation 1 was brought into statute by the Finance (No. 2)
Act, 1996 with effect from 1-4-1997. Mere unilateral transfer entry in the
accounts does not confer any benefit to the assessee and, therefore, the
revenue cannot invoke S. 41(1). The assessee’s case, being one where the
alleged liabilities were not unilaterally written off, the requirements of
the Explanation were not met and, therefore, it could not be considered as
the case of obtaining of the benefit during the year under consideration.

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(a) S. 68 — Since no new amount credited in accounts of creditors during year, addition could not be made u/s.68. (b) S. 41(1) — Brought forward balances of creditors could not be added to assessee’s income.

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New Page 2

19 (2008) 24 SOT 393 (Delhi)

Shri Vardhman Overseas Ltd. v. ACIT

ITA No. 440 (Delhi) of 2006

A.Y. : 2002-03. Dated : 11-7-2008



(a) S. 68 of the Income-tax Act, 1961 — Since no new
amount had been credited in accounts of creditors during year under
consideration, addition could not be made u/s.68.


(b) S. 41(1) of the Income-tax Act, 1961 — Brought
forward balances of creditors could not be added to assessee’s income, as
question of genuineness could be examined only in the year in which they were
credited to the account.


 



During the relevant assessment year, the Assessing Officer
asked the assessee-company to prove the genuineness of certain sundry creditors.
The assessee could not file confirmations from the said creditors except one.
The Assessing Officer, thus, treated the credit balances appearing in the
assessee’s books of account as unexplained credits u/s.68. On appeal, the CIT(A)
confirmed the additions u/s.41(1).


 


The Tribunal deleted the additions made u/s.68 and u/s.41(1).
The Tribunal followed the decisions in the cases of :

(a) CIT v. Sugauli Sugar Works (P.) Ltd., (1999) 236
ITR 518; 102 Taxman 713 (SC)

(b) Chief CIT v. Kesaria Tea Co. Ltd., (2002) 254
ITR 434/122 Taxman 91 (SC)

 



The Tribunal noted as under :


(a) No new amount had been credited by the assessee in
their accounts during the year under consideration. Therefore, applicability
of S. 68 was ruled out and addition could not be made under this Section.

(b) The balances were brought forward balances. If the same
were added on account of their non-genuineness, then also those amounts could
not be added to the income of the assessee for the year under consideration,
as the question of genuineness thereof could be examined only in the year in
which they were credited to the account.

(c) The amount could also not be considered to be the
income of the assessee on the ground of expiry of limitation, as according to
well-settled law explained by the Supreme Court in the case of CIT v.
Sugauli Sugar Works (P.) Ltd., (1999) 236 ITR 518; 102 Taxman 713 in the
absence of creditor, it is not possible for the Department to come to the
conclusion that the debt is barred and has become un-enforceable as there may
be some circumstances which may enable the creditor to come with a proceeding
for enforcement of the debt even after expiry of the normal period of
limitation, as provided in the Limitation Act, 1963.



(d) It had not been shown by the CIT(A) that the assessee
had acquired any benefit from these liabilities which were still outstanding
in the balance sheet of the assessee and it had also not been shown that these
liabilities had ceased finally without the possibility of revival. Thus, the
onus had wrongly been shifted by the Revenue on the assessee. The assessee had
shown these liabilities outstanding in its balance sheet. Therefore, there was
no occasion to treat the said amounts as taxable u/s.41(1) and if the
Department intended to assess the same by applying the provisions of S. 41(1),
then the onus was on the Revenue to show that the liabilities which were
appearing in the balance sheet had ceased finally and there was no possibility
of their revival.

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S. 48 r.w. S. 45 and S. 55 — Right to construct additional floors acquired without incurring any cost and had no inherent quality of being available on expenditure of money — Such right is outside scope of S. 45.

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New Page 2

18 (2008) 24 SOT 366 (Mum.)

Maheshwar Prakash-2 CHS Ltd. v. ITO

ITA No. 34 (Mum.) of 2008

A.Y. : 2003-04. Dated : 15-5-2008

S. 48, read with S. 45 and S. 55 of the Income-tax Act, 1961
— Right to construct additional floors under Development Control Regulations,
1991, acquired by assessee without incurring any cost and, moreover, such right
had no inherent quality of being available on expenditure of money — Such right
is outside the scope of S. 45.

 


The assessee, a co-operative housing society established in
the year 1962, owned a building in Santacruz, Mumbai. This building had been
constructed after utilising the entire FSI available to it and, therefore, no
right was available for any further construction on this plot of land. However,
the Bombay Municipal Corporation (BMC) relaxed the development regulations in
the year 1991 and on that account additional Transferable Development Right
(TDR) of FSI was allowed under the newly enacted Development Control
Regulations, 1991 (DCR). Thus, the assessee became entitled to construct
additional space of 15,000 sq.ft. In view of the availability of such right, the
assessee entered into an agreement with two developers on 25-11-2002 for
construction of additional floors on the existing structure of the society’s
building and development of the said property against a consideration of Rs.42
lacs. Under this agreement, TDR was to be arranged by the developers at their
own cost. For the relevant A.Y. 2003-04, the assessee did not admit of any
capital gain tax liability on the aforesaid amount of Rs.42 lacs. The Assessing
Officer held that as per the amended provisions of S. 55(2) applicable to the
year under consideration, the cost of acquisition was to be taken as NIL and,
since the assessee had surrendered its right to the developers against the
consideration, the income had accrued to it in the year under consideration. The
Assessing Officer, therefore, assessed the entire sum of Rs.42 lacs in the hands
of the assessee as long-term capital gain, holding that the right to construct
was embedded in the land which was held by the assessee for more than three
years.

 

The CIT(A) upheld the order of the Assessing Officer and also
held that the instant issue was akin to the issue of bonus shares, which are
issued only to the persons who own the original shares. He also held that the
decision of the Supreme Court in the case of B. C. Shrinivasa Shetty (1981) 128
ITR 294/5 Taxman, relied on by the assessee was not applicable in the instant
case.

 

The Tribunal set aside the orders of the lower authorities
and held that the sum of Rs.42 lacs received by the assessee was not chargeable
to tax u/s.45. Relying on the decision of the Mumbai Bench of the Tribunal in
the case of Jethalal D. Mehta v. Dy. CIT, (2005) 2 SOT 422, the Tribunal
noted as under :

(a) Clause (aa) and Clause (ab) of S. 55(2) deal with the
case of shares or securities and, therefore, the same are not relevant for
disposal of the instant appeal.

(b) The perusal of S. 55(2)(a) reveals that the cost of
acquisition is to be taken at NIL in those cases where the capital asset
transferred is either goodwill of business or a trademark or a brand name
associated with business or a right to manufacture, produce or process any
article or thing or right to carry on any business, tenancy rights, stage
carrier permits or loom hours. In the instant case, the assessee was not
carrying on any business and the right to construct additional floors was not
covered by any of the assets mentioned in the aforesaid Ss.(2) of S. 55.
Therefore, the amended provisions of S. 55(2) did not apply to the instant
case and the lower authorities were not justified in taking the cost of
acquisition of the capital asset being a right to construct the additional
floors at NIL.

(c) Further, the contention of the Revenue that right to
construct the additional floors was embedded in the land and, therefore, the
instant case was akin to the issue of bonus shares and, consequently, it could
not be said that there was no cost of acquisition in respect of such right,
was not acceptable for two reasons, firstly, because it was not the case of AO
or the CIT(A) that the cost of acquisition was taken by them as NIL as per the
amended provisions; secondly, because the theory of spreading over the cost of
original shares over the original shares and bonus shares was based on the
fact that bonus shares were issued to the detriment of the original shares. In
the instant case, the right to construct attached to the land on the date of
purchase of land had already been exhausted by construction of flats prior to
1991 as per the FSI available according to law as was in force. Therefore,
there was no further right to construct any flat on that land. It was because
of DCR, 1991 that additional right had accrued to the assessee, which was
distinct and separate from the original right. Therefore, it could not be said
that such right was embedded in the land. Even assuming, for the sake of
argument, that such right was embedded in the land, there was no detriment to
the cost of land by granting such right on the assessee-society. On the
contrary, price of the land had increased because of the additional right made
available to the assessee-society.

d) Ignoring the events involving the surrendered row house and on examination of the facts regarding the flat in Abhijit building, the assessee’s investment of capital gain in the purchase of block of shares of company, which, in turn, got him entitled to a flat in the Abhijit building, was within the period of three years. After all, the purchases of block of shares of company’S’ and procuring the entitlement to a flat were composite transactions which were interlinked. Therefore, the investment in block of shares of the company’S’ was the investment of capital gain in the flat.

e) On the issue of how the assessee’s case was a case of construction, the assessee’s reliance on Circular Nos. 471 and 672 was relevant. The combined reading of Circular Nos. 471 and 672 shows that investment as in the assessee’s case was to be treated as a case of construction for the purpose of 5. 54F. The assessee’s investment of Rs.30.50 lacs in the construction of the house in Abhijit building fell within three years of the first sale of the shares.

f) Therefore, the investment of the long-term capital gain in the flat in Abhijit building was a case of construction and applicable time limitation was three years and not two years as held in the impugned order by the CIT(A).

S. 54F — Investment in flat in building under construction was a case of ‘construction’ and time limit of 3 years (and not 2 years) applicable

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New Page 2

17 (2008) 24 SOT 312 (Mum.)


Mukesh G. Desai HUF v. ITO

ITA No. 2077 (Mum.) of 2007

A.Y. : 1996-97. Dated : 24-6-2008

S. 54F of the Income-tax Act, 1961 — On facts, investment of
long-term capital gain in a flat in a building under construction was a case of
‘construction’ and time limit of three years (and not two years) was applicable
— Exemption u/s.54F was available.

 

The assessee invested a sum of Rs.30.50 lacs with a builder
for purchase of a row house. Subsequently, the assessee having come to know that
there was a drive by District Authorities for demolition of row houses,
cancelled the aforesaid agreement dated 26-8-1996 and received back whole amount
from the builder. Subsequently, the assessee entered into an agreement with a
company ‘S’, which was engaged in construction of a building known as Abhijit,
and paid a sum of Rs.30.50 lacs to ‘S’ for purchasing ‘block of shares’ of
company ‘S’ and got them transferred to his name. On this basis, the assessee
became entitled to allotment of a flat in the under-construction building,
Abhijit. The said building was constructed and the assessee got occupancy
certificate from the Municipal Corporation of Greater Mumbai (MCGM). The
assessee’s claim for exemption u/s.54F was denied by the Assessing Officer, on
the ground that the investment in the row house was an investment for purchase
of a ‘new asset’ as per Ss.(1) of the S. 54F and that cancellation of the above
transaction amounted to transfer of new asset during the lock-in period of 3
years, violating the condition of Ss.(3) of S. 54F. He, therefore, ignored the
investment in flat in Abhijit building and, thus, denied the exemption u/s.54F.

 

The CIT(A) held that the assessee’s case is the case of
purchase of new asset and not the construction of new asset and, accordingly,
the applicable time limit is of two years and not three years, hence the
exemption is not available. Further, the CIT(A) also observed that the assessee
has not utilised long-term capital gains for the purchase or construction of new
asset before filing the return of income u/s.139 and also failed to deposit the
same as per the scheme specified in Ss.(4) of S. 54F and, therefore, the
exemption should be denied on this ground also.

 

The Tribunal held that the assessee was entitled to exemption
u/s.54F. The Tribunal relied on the decisions in the following cases :

(a) CIT v. T. N. Aravinda Reddy, (1979) 120 ITR 46/
2 Taxman 541

(b) Jagan Nath Singh Lodha v. ITO, (2004) 85 TTJ 173
(Jodh.)(Para 6)

(c) Asst. CIT v. Smt. Sunder Kaur Sujan Singh Gadh,
(2005) 3 SOT 206 (Mum.)(Para 6)

(d) Mrs. Seetha Subramanian v. Asst. CIT, (1996) 56
TTJ 417 (Mad.)

The Tribunal noted as under :

(a) The sequence of events in the instant case revealed
that the assessee’s intention to invest the capital gains in the residential
house to avail of the exemption u/s.54 was beyond any doubt. The Assessing
Officer had not established that the agreement with the first builder and the
agreement for cancellation were bogus. Therefore, the cancellation of the
agreement by the assessee would fall within the ambit of the doctrine of
caveat emptor (i.e., buyers beware) and surrender of row house was
legally justified. The assessee was not expected to proceed to buy a defective
residential house (new asset), which was prone to demolition by the Municipal
Authorities, in order to qualify for exemption for exemption u/s.54F.
Therefore, the decision of the lower authorities in treating the row house as
a new asset was misplaced.

(b) Ss.(3) of S. 54F stipulates that the ‘new asset’
purchased or constructed must not be transferred within the lock-in period of
3 years from the date of such purchase or construction of ‘new asset’. The
Assessing Officer denied the claim of exemption u/s.54F for the reason of
violation of the said condition, considering the row house as a ‘new asset’.
The assessee did not actually purchase a ‘new asset’ and, therefore, the
refund received by the assessee from ‘D’ in respect of the surrender of the
row house was not relatable to any transfer of the new asset. Resultantly, the
violation of the said condition in Ss.(3) of S. 54F did not arise.

(c) Ss.(4) of S. 54F provides for depositing the unutilised
capital gains in the bank as per the prescribed Capital Gain Scheme and manner
of taxing such gains if not utilised before the due date for furnishing the
return of income u/s.139. Since the assessee had already parted with the
capital gain before the due date for filing the return in connection with the
‘row house’ acquisition, there was no way in which the assessee would have
complied with the condition of depositing it in the bank as per Ss.(4) of S.
54F. There was no violation of the condition of Ss.(4) of S. 54F by the
assessee.

(d) Ignoring the events involving the surrendered row house
and on examination of the facts regarding the flat in Abhijit building, the
assessee’s investment of capital gain in the purchase of block of shares of
company ‘S’, which, in turn, got him entitled to a flat in the Abhijit
building, was within the period of three years. After all, the purchases of
block of shares of company ‘S’ and procuring the entitlement to a flat were
composite transactions which were interlinked. Therefore, the investment in
block of shares of the company ‘S’ was the investment of capital gain in the
flat.

S. 45 r.w. S. 28(i) — Where stock-in-trade is converted into investment and later sold on profit, formula favourable to assessee to be accepted

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16 (2008) 24 SOT 288 (Mum.)

ACIT v. Bright Star Investment (P.) Ltd.

ITA Nos. 6374 & 9543 (Mum.) of 2004

A.Ys. : 2000-01 and 2001-02. Dated : 2-7-2008

S. 45 r.w. S. 28(i) of the Income-tax Act, 1961 — In absence
of specific provision in S. 45(2) to deal with a situation where stock-in-trade
is converted into investment and later on investment is sold for profit, formula
which is favourable to an assessee should be accepted.

 


The assessee had converted some shares from stock-in-trade to
investment as on 1-4-1998 at its book value. Thereafter, the assessee sold some
of the shares out of the above shares and offered profit earned as long-term
capital gain. The Assessing Officer opined that in view of the provisions laid
down u/s.45(2), the income of the assessee would be computed separately as
business income till the date of conversion of the shares from the stock to
investment and, thereafter, as long-term capital gain. The AO, therefore, took
the highest market rate of the said shares on the date of conversion and
computed the business income, being the difference in the value at which the
said shares were converted into investment and the market value of the said
shares on the date of conversion, i.e., 1-4-1998 and, further computed
the long-term capital gain at Rs.457.62 lacs being the difference between the
market value and the actual sale value of the shares.

The CIT(A) held that the action of the Assessing Officer to
segregate the long-term capital gain as shown by the assessee in the return of
income into business income and capital gain was totally arbitrary and
unjustified.

The Tribunal held in favour of the assessee. The Tribunal
relied on the decisions in the following cases :

(a) Sir Kikabhai Premchand v. CIT, (1953) 24 ITR 506
(SC)

(b) CIT v. Dhanuka & Sons, (1980) 124 ITR 24; (1979)
1 Taxman 417 (Cal.)

The Tribunal noted as under :


(a) The provisions of S. 45(2) deal with the issue of
capital gain where the investment is converted into stock-in-trade.


(b) While incorporating Ss.(2) to S. 45, the Legislature
has not visualised the situation in other way round, where the stock-in-trade
is to be converted into investment and later on the investment is sold on
profit. In the absence of a specific provision to deal with this type of
situation, a rational formula should be worked out to determine the profits
and gains on transfer of the asset.


(c) In the absence of a specific provision to deal with the
present situation, two formulas can be evolved to work out the profits and
gains on transfer of the assets.


(d) One formula which had been adopted by the Assessing
Officer, i.e., difference between the book value of the shares and the
market value of the shares on the date of conversion should be taken as a
business income and the difference between the sale price of the shares, and
the market value of the shares on the date of conversion, be taken as a
capital gain.


(e) The other formula which was adopted by the assessee,
i.e., the difference between the sale price
of the shares and the cost of acquisition of shares, which was the book value
on the date of conversion with indexation from the date of conversion, should
be computed as a capital gain.


(f) In the absence of a specific provision, out of these
two formulae, the formula which was favourable to the assessee should be
accepted.



levitra

S. 2(22)(e) — Payment made by a co. out of its share premium a/c. cannot be taxed as deemed dividend.

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15 (2008) 24 SOT 42 (Delhi)

Dy. CIT v. MAIPO India Ltd.

ITA No. 2266 (Delhi) of 2005

A.Y. : 1996-97. Dated : 7-3-2008

S. 2(22)(e) of the Income-tax Act, 1961 r.w. S. 78 of the
Companies Act, 1956 — Payment made by a company out of its Share Premium a/c.
cannot be taxed in hands of receiver as deemed dividend.


During the A.Y. 1996-97, an amount of Rs.25.43 lacs was
advanced to the assessee-company by another company ‘G’ Ltd., in which the
assessee held 40% of shares. The amount was advanced in the nature of loans and
advances. Towards the end of the year, the assessee repaid Rs.14.31 lacs and the
AO included the balance amount of Rs.11.12 lacs as deemed dividend in the hands
of the assessee u/s. 2(22)(e). The case of the assessee was that entire reserve
and surplus amount appearing in the books of ‘G’ Ltd. consisted of share premium
which was a capital receipt and could not have been distributed as dividend. The
AO, however, treated the amount as deemed dividend u/s.2(22)(e). The CIT(A)
accepted the assessee’s contention.

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


(a) S. 78(2) of the Companies Act, 1956 states the five
purposes for which the Share Premium a/c. may be used. The Share Premium a/c.
cannot be used otherwise than for the specified purposes.


(b) When there is a statutory bar on the Share Premium a/c.
being used for distribution of dividend, the deeming provisions of S. 2(22)(e)
cannot apply.


(c) Not only is there a prohibition on the distribution of
the Share Premium a/c. as dividend under the 1956 Act, but the same is obliged
to be treated as a part of the share capital of the company and this is made
clear in S. 78(1) of the 1956 Act, which says that any payment out of the
Share Premium a/c., except for purposes authorised by Ss.(2), will be treated
as reduction of share capital attracting the provisions of the 1956 Act in
relation thereto.


(d) This provision of the 1956 Act takes care of the
argument of the Revenue that S. 2(22)(e) does not use the expression ‘whether
capitalised or not’. These words can have application only where the profits
are capable of being capitalised. They are not applicable where the receipt in
question forms part of the share capital of the company under the provisions
of the 1956 Act.



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Mere inclusion of land in industrial zone could not convert agricultural land into NA land, given no infrastructure development, and use for non-agricultural purposes not established — Gain arising on sale of land by assessee exempted from tax

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14 (2008) 114 ITD 428 (Pune)

Haresh V. Milani v. JCIT

A.Y. :1995-96. Dated : 7-9-2006

Whether the mere inclusion of land in industrial zone could
convert agricultural land into non-agricultural land, given that there had been
no infrastructure development on the same, and the fact that it had been used
for non-agricultural purposes had also not been established — Held, No.
Therefore, whether the gain arising on sale of such agricultural land by the
assessee was exempted from tax — Held, Yes.

Facts :

The assessee sold certain agricultural land in the relevant
A.Y., and thus claimed exemption of the long-term capital gains arising
therefrom. The AO accepted the assessee’s claim in the assessment completed
u/s.143(3). Subsequently, the Commissioner noted the fact that the land was
located in industrial zone, the fact which the AO had failed to take note of,
and therefore, under powers assigned to him u/s.263, he set aside the order and
directed the AO to reconsider the exemption granted to the assessee from the
capital gains tax.

Accordingly, the AO after issue of notice u/s.143(2) and
after considering the assessee’s submission, concluded that the land was not
used for agricultural purposes, and hence was not an agricultural land, and the
exemption allowed earlier was withdrawn. On appeal, the Commissioner (Appeals)
upheld the AO’s decision.

On second appeal before the Tribunal, it was observed as
under :

1. The question as to whether a land is agricultural
or not is a question of fact to be answered having regard to the facts and
circumstances of each case. In the instant case, the said land had been
classified in the Revenue records as agricultural land. The assessee had not
given any evidence of incurring any expenditure on agricultural operations on
the said land, as also he had not established that any agricultural produce in
the nature of rice, jowar, etc. was produced from the land.

2. On the other hand, the Revenue has also not produced any
evidence to show that the land was used for other than agricultural purposes.
No permission for non-agricultural use had been obtained by the assessee, and
no evidence of such use was brought on record.

3. Merely the fact that the land in question was brought in
an industrial zone could not be a determining factor by itself to say that the
land was converted into use for agricultural purposes.

4. Further, the profit motive of the assessee in selling
the land, without anything more than itself, could never be decisive to say
that the assessee had used the land for non-agricultural purposes. Therefore,
the land in question sold by the assessee was an agricultural land in nature
at the relevant point of time when the land was sold, and any gain arising
from such sale was exempted from tax.

 


Cases referred to :



(i) CIT v. Raja Benoy Kumar Sahas Roy, (1957) 32 ITR
566 (SC)

(ii) ACIT v. Tarachand Jain, (1980) 123 ITR 567
(Patna)

(iii) CWT v. Officer-in-charge (Court of Wards) Paigah,
(1976) 105 ITR 133 (SC)



levitra

Where assessee had advanced amounts to sister concerns as prevented by regulations from prepaying its ECBs, interest income assessable under head ‘business income’ — Post-amendment to S. 10B, assessee entitled to deduction of interest income, and expenses

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13 114 ITD 387 (Bang.) (2008)

ACIT v. Motorola India Electronics (P.) Ltd.

A.Ys. : 1997-98, 1998-99, 2001-02. Dated : 28-11-2006

Whether in view of the fact that the assessee had advanced
certain amounts to its sister concerns from the monies available to it, because
it had been prevented by Government regulations from prepaying its External
Commercial Borrowings, interest income on the same could be considered to have
close nexus with the business of the assessee, and would be assessable under the
head ‘business income’ — Yes. Post-amendment to S. 10B, as entire profits
derived from business of an undertaking are to be considered for calculation of
eligible deduction, whether the assessee would be entitled to deduction of such
interest income, and expenses incurred in relation to such income were allowable
— Yes.

 

Facts :

The assessee-company earned certain interest income from
deposits lying in the EEFC account and from advancing of intercorporate loans
out of the funds of the undertaking. The assessee had certain External
Commercial Borrowings (ECB’s) obtained in the earlier years, which could be
repaid only in accordance with the repayment schedule, and thus it could repay
only a small portion of its outstanding loans, even though it had the liquidity
to pay more. The assessee took a business decision to place these funds with
various sister concerns as inter- corporate deposits. The assessee claimed that
both these types of interest income were a part of ‘income from business’.

 

Further, from A.Y. 2001-02, S. 10B has been substituted and
as per the new provisions, the interest income so derived would be entitled to
deduction u/s.10B.

According to the AO, only those profits derived from an
eligible undertaking from export of article or thing were entitled for deduction
for A.Y. 2001-02. On appeal, the CIT(A) upheld the order of the AO. On second
appeal, the Tribunal held that :

1. The interest income arose on deposits in the EEFC
account from export profits. The Government had stipulated the maximum amount
that could be held as deposits in the EEFC account, and as per the relevant
regulations, the assessee had also been prevented from pre-paying the External
Commercial Borrowings. Therefore, the assessee advanced the monies to its
sister concerns. The interest income on the same could be considered as having
close nexus with the business activity of the assessee and was assessable
under ‘business income’.

2. For the A.Ys 1997-98 and 1998-99, the assessee was not
eligible for grant of relief on interest income while computing deduction
u/s.10A and 10B. From A.Y 2001-02, S. 10B was substituted. Earlier, it was an
exemption Section, and income from these undertakings did not form part of
total income. However from that particular year, even though the Section
appears in Chapter 3, a deduction from business income from the undertaking is
to be granted by applying the substituted provision. For the A.Y in
discussion, the AO was directed to recompute the deduction u/s.10A and
u/s.10B, such that entire profits derived from the business of the undertaking
would be taken into consideration.

3. Regarding the allowability of expenditure relatable to
the interest income, as it had already been held that interest income was
assessable as business income, all related expenditures had to be allowed in
computing the interest income.

Cases referred to :



(i) CIT v. Tirupati Woollen Mills Ltd., (1992) 193
ITR 252 (Cal.)

(ii) CIT v. Tamil Nadu Dairy Development Corporation
Ltd., (1995) 216 ITR 535 (Mad.)

(iii) Synopsys India (P.) Ltd v. ITO, Appeal No.
1100 (Bangalore) of 2003

(iv) K. S. Subbiah Pillai & Co., (India) (P.) Ltd v.
CIT, (2003) 260 ITR 304 (Mad.) distinguished.


levitra

S. 36(1)(vii) r/w S. 36(2) — Money-lending activity of non-banking finance business — Where assessee provided funds to sister entity, and amount became irrecoverable, allowable as bad debts — Where assessee gave certain amount to entity for allotment of

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12 114 ITD 202 (Delhi)

Tulip Star Hotels Ltd. v. ACIT

A.Ys. : 1998-99, 1999-2000 and 2003-04

Dated : 1-6-2007

S. 36(1)(vii) r/w S. 36(2) — Money-lending activity is a part
of non-banking finance business — Providing funds to entities where assessee was
a promoter was a part of fund-based activities carried on by the company —
Whether where assessee had provided funds to one such assessee, and the said
amount had become irrecoverable, the same could be claimed as bad debts — Also,
where the assessee had given certain amount to an entity for allotment of
preference shares — The entity refused to allot the same, and further the said
amount advanced by the assessee to this entity also became irrecoverable — Held,
the same could be claimed as bad debts.

 

Facts :

The assessee, a non-banking finance company, was incorporated
in the year 1987, and was mainly engaged in providing fund- and non-fund-based
financial services. In the relevant assessment years,
the assessee had paid certain amount to some villagers as advance for purchase
of land for business of development activities. Further, the assessee had also
advanced money to two companies, ‘F’ and ‘P’. The assessee had promoted ‘F’ and
had deposited certain amount with a bank and stood guarantor for money given to
‘F’ by the bank. On the guarantee money, the assessee earned interest from bank
as well as from ‘F’ and offered the same for taxation. Business of ‘F’ was
abandoned and despite all efforts, the assessee was not able to recover the
amount from ‘F’ and claimed the same as bad debts u/s.36(1)(vii). Further, the
assessee had given certain amount to ‘P’ for allotment of preference shares, but
‘P’ refused to allot the same. The assessee, therefore, asked ‘P’ to refund the
amount with interest and on P’s failure, claimed the said amount as bad debts.

 

The assessee’s claim was disallowed on the ground that it was
not carrying on any money-lending business.

 

On appeal before the Tribunal, the Tribunal held the
following :

1. The contention of the lower authorities that the
assessee was not carrying on any money-lending business was incorrect. This
was because; carrying on money-lending activities was a part of doing
non-banking financial business. Huge amounts earned as interest were offered
for taxation, and the same had been taxed in the earlier years as well as the
year under consideration. The objects clause of the assessee-company clearly
stated that the object of the assessee was to run non-banking business and
advance money as intercorporate deposits.

2. The Delhi Bench of the Tribunal has held that there is
no qualification in S. 36(2) that the business of money lending should be
understood only in traditional sense.

3. Further, the guarantee stood by the assessee has to be
taken as an activity of money lending. The assessee has earned interest on the
guarantee amount from the bank as well as from ‘F’. As the business of ‘F’
company was abandoned, whatever amount was recoverable from it by the assessee
was treated as bad debts by the assessee. All the conditions of S. 36(1)(vii)
r/w S. 36(2) being satisfied in this case, amount recoverable from ‘F’ was
allowable as bad debts.

4. With regard to the amount advanced to ‘P’, for allotment
of preference shares, the Tribunal observed that since ‘P’ had refused to
allot the shares, the assessee had asked it to refund the amount. ‘P’ in turn
had instructed its debtor M to pay the said amount to the assessee on its
behalf. The assessee had shown this amount as intercorporate deposit with M,
and interest had also been shown. Therefore, it cannot be said that the said
amount had the character of share application money, as it was in the nature
of intercorporate deposit, on which the assessee was to receive interest. The
conditions of S. 36(2) were satisfied in this case, and the amount recoverable
from ‘P’ was allowable as bad debts u/s.36(1)(vii).

 


Case referred to :

DCIT v. SREI International Finance Ltd., 10 SOT 722
(2006) (Delhi) (para 11)


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S. 264 and S. 246A — Appeal against assessment made consequent to order passed u/s.264 is maintainable u/s.246A, but only to the extent of issues which have not attained finality in order passed u/s.264.

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38 Dr. A. Naresh Babu v.
ITO
(2010) 124 ITD 28 (Hyd.)
A.Ys. : 1996-97 to 2003-04. Dated : 5-9-2008


 


S. 264 and S. 246A — Appeal against assessment made
consequent to order passed u/s.264 is maintainable u/s.246A, but only to the
extent of issues which have not attained finality in order passed u/s.264.


Facts :

The assessee’s case was scrutinised and the Assessing Officer
passed the assessment order. The assessee filed an appeal before the CIT(A).
Later on the appeal filed before the CIT(A) was withdrawn. Thereafter the
assessee filed petition before the CIT seeking revision u/s.264. The CIT set
aside the assessments and restored the matter with certain directions on various
issues to the Assessing Officer to re-do the assessments afresh. The Assessing
Officer completed the assessment afresh.

Being aggrieved by the additions made by the Assessing
Officer in the fresh assessment, the assessee preferred appeal before the
CIT(A). The CIT(A) held that the assessments made in consequence to the order
passed by the CIT, particularly when the assessee’s case has been decided
u/s.264 on merits, cannot be subject matter of appeal before the CIT(A).

Held :

Appeal from fresh order passed by the Assessing Officer to
give effect to the revisional order passed u/s.264 is maintainable, but only
such issues can be taken in appeal which have not attained the finality in the
order passed u/s.264 of the Act.

levitra

S. 43 (5) — Loss suffered in F&O transactions could not be considered as speculation loss.

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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.)


6 R. B. K. Securities Ltd.
v. ITO


ITAT ‘B’ Bench Mumbai

Before G. C. Gupta (JM) and

A. L. Gehlot (AM)

ITA No. 2465/Mum./2006

A.Y. 2003-04. Decided on : 21-7-2008

Counsel for assessee/revenue : Prakash K. Jotwani/ Niraj
Bansal

S. 43(5) of the Income-tax Act, 1961 — Speculation loss —
Whether the loss suffered in F&O transactions could be considered as speculation
loss — Held, No.

Per G. C. Gupta :

Issue :

Whether the losses suffered in F&O transactions could be
considered as speculation loss.

Held :

Relying on the Mumbai Tribunal decision in the case of SSKI
Investors Services Pvt. Ltd., it was held that dealings in derivatives was a
separate kind of transaction which did not involve any purchase & sale of shares
and therefore loss on account of derivative trading cannot be treated as
speculative loss. Further, the Tribunal also referred to the Bangalore Tribunal
decision in the case of C. Bharath Kumar, where the constructive or implied
delivery was held to be as good as actual delivery. Based on the same, the
Tribunal held that the loss claimed by the assessee on F&O transaction was a
business loss and not speculation loss as contended by the Revenue.

Cases referred to :



1. DCIT v. SSKI Investors Services Pvt. Ltd., (2008)
113 TTJ (Mumbai) 511,

2. C. Bharath Kumar v. DCIT, (2005) 4 SOT 593 (Bang.)

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S. 12A(a) — Once CIT is satisfied about objects of the trust and genuineness of activities, he is required to grant registration w.e.f. date of creation

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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.)




5 The Indus Entrepreneur
v. The CIT-II


ITAT ‘B’ Bench, Jaipur

Before I. C. Sudhir (JM) and

B. P. Jain (AM)

ITA No. 32/JP/2008

A.Y. : 2003-04. Decided on : 20-6-2008

Counsel for assessee/revenue : Mahendra Gargieya/

J. L. Basumatari

Assessee society was registered under Rajasthan Societies
Registration Act on 1-9-2005 — Assessee applied to CIT for registration
u/s.12A(a) of Income-tax Act, 1961 — CIT vide his order dated 7-11-2007 granted
registration w.e.f. 1-4-2007 — Whether once CIT is satisfied about objects of
the trust and genuineness of activities, he is required to grant registration
w.e.f. 1-9-2005 — Held, Yes.

Per B. P. Jain :

Facts :

The assessee is a Society registered under Rajasthan
Societies Registration Act on 1-9-2005. The assessee applied for registration on
10-4-2007 before the CIT. The CIT granted registration u/s.12A(a) of the Act
vide its order dated 7-11-2007 w.e.f. 1-4-2007. The assessee made application to
make the said registration effective from 1-9-2005.

Held :

At the outset, the Tribunal noted that the CIT has committed
an error by observing that the application has been made on 10-4-2007, whereas
the same was made on 2-8-2006. A reminder letter dated 10-4-2007 was made to the
CIT, which was wrongly taken as the date of application. Having noted this
error, the Tribunal held as under :

As per the Act, the assessee is required to make the
application in Form 10A before 1-1-1973 or before the expiry of the period of
one year from the date of creation of the trust. In the instant case, the Trust
was created on 1-9-2005 and the assessee has submitted the application on
2-8-2006, which is in time. The CIT is required to grant registration w.e.f.
1-9-2005, if he is satisfied about the objects of the trust and genuineness of
the activities. In the present case, the learned CIT is satisfied about the
objects and genuineness of the activities of the trust and so he has granted
registration, though from a wrong date on a wrong interpretation of the facts of
the case.

The learned CIT is required to pass an order for granting or
refusing the registration u/s.12AA(1)(b) of the Act before 6 months from the end
of the month in which the application is received. The language of the provision
makes it mandatory for the learned CIT either to grant or refuse the
registration within the stipulated period, failing which the assessee is
entitled to assume that its application has been accepted and the registration
granted.

Accordingly, the learned CIT was directed to grant
registration w.e.f. 1-9-2005.


Editor’s note : S. 12AA has been amended w.e.f. 1-6-2007,
whereby the exemption is now available from the financial year in which the
application is made.

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S. 145 — In terms of MOU the assessee liable to refund of earnest money received with interest on cancellation of MOU — During previous year assessee cancels MOU and refunds amounts received under MOU with interest — Whether interest paid for period of ea

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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.)







22 Urban Improvement Co. (P) Ltd. v.


Income-tax Officer, Ward 18(2)

ITAT ‘D’ Bench, Delhi

Before C. L. Sethi (JM) and K. D. Ranjan (AM)

ITA No. 3246/D/2006

A.Y. : 2003-04. Decided on : 5-9-2008

Counsel for assessee/revenue : Rano Jain/

Nikhil Choudhary

S. 145 of the Income-tax Act, 1961 — In terms of MOU the
assessee was liable to refund of the earnest money received by it along with
interest, on cancellation of the MOU in the events mentioned in the MOU — During
the previous year the assessee cancelled the MOU and refunded the amounts
received under MOU along with interest — Whether interest paid for the period
covering earlier years could be disallowed on the ground that it was prior
period expense — Held, No.

 

Per C. L. Sethi :

Facts :

The assessee-company is engaged in the business of developing
land. It debited to its profit & loss account a sum of Rs.15,66,172 towards
interest on earnest money. On 13th June 1997, the assessee had entered into a
memorandum of understanding (‘MOU’) with certain educational societies for
construction of school buildings and had accepted certain amounts as earnest
monies. The MOU provided that in the event that the permission for construction
from the concerned authority was not received, the assessee shall refund the
entire amount with interest. During the previous year relevant to the assessment
year under consideration, the Board of Directors of the assessee company passed
a resolution to refund the said earnest money together with interest. Since the
amount of interest paid pertained to the period from the date of receipt of the
amounts of earnest deposit, the Assessing Officer disallowed the sum of
Rs.15,66,172 as prior period expenses. The AO justified his action by making a
reference to the Madras High Court decision in the case of K. Sankaranarayana
Iyer & Sons. On an appeal, the CIT(A) upheld the action of the AO. The CIT(A)
observed that merely by passing a resolution by the Board of Directors of the
company, the assessee cannot create a liability in the year under consideration
when it was maintaining the books of account on mercantile system. Aggrieved by
the order of the CIT(A), the assessee preferred an appeal to the Tribunal.

 

Held :

The Tribunal held that the liability to pay interest had
accrued in the year under consideration when the resolution was passed and not
prior to that. The liability under consideration was a contractual liability and
was crystallised and ascertained only when the decision to refund the earnest
money along with interest was taken. Accordingly, the Tribunal set aside the
order of the authorities below and held that the assessee’s claim of deduction
of interest amounting to Rs.15,66,172 had actually accrued or crystallised or
ascertained in the present year under consideration and was therefore allowable
as a deduction.

 

Case referred to :


K. Sankaranarayana Iyer & Sons v. CIT, 110 ITR 571
(Mad.).

levitra

When the assessee converted his immovable property into stock-in-trade and entered into development agreement, the said transaction cannot be said to be a sale of immovable property.

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 part A: reported decisions

 

6 (2010) 42 DTR (Chennai
ITAT) 127

R. Gopinath (HUF) v. ACIT

A.Ys. : 2004-05 & 2005-06.
Dated : 24-7-2009

 

When the assessee converted
his immovable property into stock-in-trade and entered into development
agreement, the said transaction cannot be said to be a sale of immovable
property.

Facts :

The assessee converted his
land from capital asset to stock-in-trade and thereafter entered into a
development agreement dated 1-9-2003 along with a supplementary development
agreement dated 23-12-2003 with a developer, whereby the assessee provided his
land measuring 44,090 sq.ft. to the developer and in return the developer was to
give the assessee a built-up area of 25,285 sq.ft.

The assessee offered capital
gains accrued on conversion of land to stock-in-trade proportionate to the
built-up area sold in different years.

The Assessing Officer was of
the view that the long-term capital gain on transfer of land was assessable in
the year in which the assessee handed over the possession of the land to the
developer itself, pursuant to the agreement.

Held :

S. 53A of the Transfer of
Property Act does not provide the conditions for transfer, but it provides
protection to the transferee of any immovable property by a written contract.

S. 53A of the Transfer of
Property Act is borrowed only with respect to the transfer of capital asset as
provided u/s.2(47) of the Income-tax Act, 1961 and the same is not applicable in
other cases which do not fall u/s.2(47).

The sale/transfer of
stock-in-trade cannot be equated with transfer of capital asset u/s.2(47). The
decisions relied upon by the learned Departmental representative as well as the
lower authorities are with respect to the transfer of capital asset u/s.2(47)
and not in respect to stock-in-trade.

The assessee handed over the
possession of the property for construction of residential apartments by the
developer. The assessee did not receive any consideration for handing over the
possession of the property to the developer, but to get the built-up area of
25,130 sq.ft.

In the absence of the
transfer of the title of the property and any consideration at the time of
development agreement, the handing over of the possession was merely a temporary
measure for carrying out the construction work by the developer and the
exclusive possession of the property in legal sense remains with the assessee.

The nature of the transaction between the
parties by way of development agreement cannot be said to be a sale of immovable
property which is stock-in-trade.

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Income-tax Act, 1961 — S. 45 — The gain arising on transfer of FSI/TDR is chargeable to tax under the head ‘capital gain’ and not under the head ‘Other Sources’ — However, as there is no cost of acquisition of the asset transferred, there will be no liabi

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 part A: reported decisions


5 (2010) TIOL 512 ITAT-Mum.

ITO v. Shri Ram Kumar
Malhotra

ITA No. 4843/Mum./2009

A.Y. : 2006-07. Dated :
14-5-2010

Income-tax Act, 1961 — S. 45
— The gain arising on transfer of FSI/TDR is chargeable to tax under the head
‘capital gain’ and not under the head ‘Other Sources’ — However, as there is no
cost of acquisition of the asset transferred, there will be no liability to
capital gains.

Facts :

The assessee, in the year
1977, acquired the property under the registered lease and became co-owner of
the property and was holding 5t shares of the society. The assessee entered into
a development agreement with M/s. P. R. Investsment for the development of the
said property (bungalow) to construct 7-storied building as per approved plans.
The assessee retained proportionate FSI in the said plot for his own residential
accommodation to be constructed by the developer for a consideration of
Rs.21,00,000. The balance FSI was to be utilised by the developer for
construction of the building. The developer was authorised to use the TDR as per
applicable law. Thus, the assessee gave development rights to the developer for
construction of the property. The assessee regarded income arising from transfer
of development rights to be chargeable to tax as capital gains.

The Assessing Officer taxed
the proceeds as Income from other sources on the ground that the assessee had
not extinguished his right, title and interest in the property in any manner and
continued to hold leasehold rights in the property jointly with Shri Anil Kumar
Malhotra. The arrangement under the development agreement, according to the AO,
was to enable the developer to bring in marketable TDR on the plot and construct
and develop the same and sell the constructed area to outside people of his
choice who will have no right, title and interest in the plot of land.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who directed the AO to tax the gain arising on
transfer of FSI/TDR as capital gain and to make necessary calculation of sale
consideration and cost of acquisition and/or improvement and also allow
exemption u/s.54 and u/s.54EC to the extent of investments made, after due
verification.

Aggrieved, the Revenue
preferred an appeal to the Tribunal.

Held :

The Tribunal following the
ratio of the decisions of the Tribunal in the case of New Shailaja Co-operative
Housing Society Ltd. v. ITO, (2009 TIOL 58 ITAT-Mum.), ITO v. Lotia Court Co-op.
Hsg. Soc. Ltd., (2008 TIOL 404 ITAT-Mum.), Jethalal D. Mehta v. Dy. CIT, (2 SOT
422) (Mum.) and Maheshwar Prakash 2 CHS v. ITO, 20 DTR 269 (Mum.) held that the
CIT(A) was right in holding that the gain arising on transfer of FSI/TDR is
chargeable to tax under the head ‘capital gain’ and not under the head ‘other
sources’. However, as there is no cost of acquisition of the asset transferred,
there will be no liability to capital gains.

 

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Income-tax Act, 1961 — S. 32 — Router and switches when used along with a computer and when their functions are integrated with a ‘computer’ would be included in the block of ‘computer’ entitled to depreciation at the rate of 60%.

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 part A: reported decisions

 

4 (2010) TIOL 473 ITAT-SB-Mum.

DCIT v. Datacraft India Ltd.

ITA No. 7462 & 754
/Mum./2007

A.Ys. : 2003-04 and 2002-03.
Dated : 9-7-2010

 

Income-tax Act, 1961 — S. 32
— Router and switches when used along with a computer and when their functions
are integrated with a ‘computer’ would be included in the block of ‘computer’
entitled to depreciation at the rate of 60%.

Facts :

The assessee-company was
engaged in data communication, design, development, purchase and sale of
networking products, etc. The assessee claimed depreciation amounting to
Rs.3,27,67,150 at the rate of 60% under the head ‘Computers’. The assessee had
included routers and switches in the block of computers. The Assessing Officer
(AO) held that routers and switches were entitled to depreciation at the general
rate of 25% as applicable to plant and not as claimed by the assessee at 60%.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who held that the routers and switches fall
under the block of ‘computers’. He allowed the assessee’s appeal.

Aggrieved the Revenue
preferred an appeal to the Tribunal. The President referred the following
question to the Special Bench (SB) for its consideration :

“Whether routers and
switches can be classified as computer entitled to depreciation at 60% or have
to be classified as general plant and machine entitled to depreciation only at
25%.”

Held :

The SB noted that the term
‘computers’ is not defined in the Act. Even the General Clauses Act does not
define the term ‘computers’. The term ‘computer systems’ has been defined in S.
36(1)(xi) but considering the fact that the object of S. 36(1)(xi) is quite
distinct from that of S. 32 the SB was of the opinion that the definition of the
term ‘computer system’ given in the Explanation to S. 36(1)(xi) cannot be
applied as such (for giving meaning to ‘computer’) in the context of S. 32.
Considering the scheme of the Information Technology Act, 2000 and also the
objects of the said Act, the SB noted that the rationale behind the Information
Technology Act, 2000 is quite distinct from that of the Income-tax Act and since
both these acts are not pari materia the definition of ‘computer’ as given in
the Information Technology Act, 2000 cannot be applied in the context of S. 32
of the Act. Considering the general parlance meaning of the term ‘computer’ and
also that of ‘routers’ and ‘switches’ the SB held that router and switches can
be classified as computer hardware when they are used along with a computer and
when their functions are integrated with a ‘computer’. It held that when a
device is used as part of the computer in its functions, then it would be termed
as a computer to be included in the block of ‘computer’ entitled to depreciation
at the rate of 60%.

The appeal filed by the
Revenue was dismissed.

 

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Income-tax Act, 1961 — Principle of mutuality — Principle of mutuality is applicable to the assessee even though it is an incorporated company —Interest earned by the mutual association from banks, bonds, etc. on surplus funds is not liable to tax.

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 part A: reported decisions


 

3 (2010) TIOL 481 ITAT-Mum.

ITO v. Hill Properties Ltd.

ITA No. 6223/Mum./2009 and

ITA No. 6249/Mum./2009

A.Y. : 2005-06. Dated :
16-7-2010

Income-tax Act, 1961 —
Principle of mutuality — Principle of mutuality is applicable to the assessee
even though it is an incorporated company —Interest earned by the mutual
association
from banks, bonds, etc. on surplus funds is not liable to tax.

Facts :

The assessee-company
constructed a building, flats in which were allotted to shareholders. The
assessee in its return of income claimed the amounts collected towards share
transfer fees : Rs.62,20,000; nominee occupancy charges and repairs :
Rs.3,00,000; security deposits (non-refundable) : Rs.5,85,000 and interest and
dividend: Rs.11,95,577 to be not chargeable to tax on the ground of mutuality.
The assessee received nominee occupancy charges in respect of flats which were
given on rent by the members. Non-refundable security deposits were received by
the assessee from shareholders who carried out repairs to their flats. The
Assessing Officer (AO) in an order passed u/s.147 of the Act taxed all these
amounts on the ground that the principle of mutuality applies only to
co-operative bodies and as regards transfer fees he held that since the transfer
fees were received from incoming members, in view of the ratio of the Special
Bench decision of the ITAT in the case of Walkeshwar Triveni CHS Ltd. the same
are taxable. Aggrieved the assessee preferred an appeal to the CIT(A).

The CIT(A) held that the
principle of mutuality applies. He held that the share transfer fees, nominee
occupancy charges and security deposits (non-refundable) to be not chargeable to
tax. He, however, held that interest and dividend is chargeable to tax since in
case of interest and dividend contributors to the common fund are non-members of
the
assessee-company, who are not entitled to participate in the surplus.

Aggrieved the assessee and
the Department preferred an appeal to the Tribunal.

Held :

The Tribunal noted that in
earlier years, in the as-sessee’s own case, the Tribunal has accepted that the
principle of mutuality is applicable even in the case of an assessee being a
company. The Tribunal following the orders of the Tribunal in the as-sessee’s
own case and the ruling of the Supreme Court in the case of Bankipur Club Ltd.
(226 ITR 97) (SC) confirmed the decision of the CIT(A) that principle of
mutuality is applicable to the assessee even though it is an incorporated
company.

The Tribunal following the
judgment of the Bombay High Court in the case of Sind Co-operative Housing
Society Ltd., held the share transfer fees to be not chargeable to tax because
of the principle of mutuality.

The Tribunal having noted
that non-refundable security deposits were received by the assessee from its
members who wanted to carry out some repairs in their flats and the identity of
the contributors and the participants in the surplus was preserved, held the
same to be not chargeable to tax.

Non-occupancy charges were
held to be not liable to tax by following the decision of the Bombay High Court
in the case of Mittal Court Premises Co-operative Society Ltd. (2009 TIOL 548 HC
Mum.-IT).

Interest earned from banks
on surplus funds was held to be not liable to tax by following the order of the
Tribunal in the assessee’s own case for A.Y. 2004-05 and also the order of the
Tribunal in the case of Bombay Gymkhana Ltd. (ITA No. 7624/Mum./2007 dated
20-4-2009).

The appeal filed by the
assessee was allowed and the appeal of the Department was dismissed.

 

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S. 254(1) of the Income-tax Act, 1961 — Principle of consistency qua judicial forums is not unexceptionable; if the subsequent Bench finds it difficult to follow the earlier view due to any convincing reason, the earlier view cannot be thrust upon it; whe

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 2 (2010) 129 TTJ 521 (Mum.)
(SB)


The Maharashtra State Coop.
Bank Ltd. v.
ACIT

A.Y. : 2000-01. Dated :
22-1-2010

(a) S. 254(1) of the
Income-tax Act, 1961 — Principle of consistency qua judicial forums is not
unexceptionable; if the subsequent Bench finds it difficult to follow the
earlier view due to any convincing reason, the earlier view cannot be thrust
upon it; when a matter is referred to the Larger Bench, the appeal needs to be
decided on merits rather than following the earlier view taken by the Tribunal
in assessee’s own case.

(b) S. 80P(2)(a)(i) of the
Income-tax Act, 1961 — Interest u/s.244A received by assessee, a co-operative
bank, on refund of income-tax paid by it in relation to the banking business
carried on by it is covered within the expression ‘profits and gains of
business’ occurring in S. 80P(2)(a) and the assessee is entitled to deduction
u/s.80P(2)(a)(i).

S. 254(1) :

The principle of consistency
qua the judicial forums is not unexceptionable. It is true that ordinarily the
order passed by the earlier Bench on the same point should be respected and
followed. But if the subsequent Bench finds it difficult to follow the earlier
view due to any convincing reason, such as change in the factual or legal
position or non-raising or non-consideration of an important argument by the
earlier Bench having bearing on the issue, then the earlier view cannot be
thrust upon it. So when a matter is referred to the Larger Bench, the view
earlier taken by the Division Bench ceases to be binding on the Special Bench
though it retains the persuasive value. In view of the above-discussed legal
position, the action of the Division Bench in referring the matter for
consideration by a Special Bench is perfectly in order since it found itself
unable to agree with the earlier view taken by another Division Bench of the
Tribunal in the assessee’s own case. Therefore, there is no infirmity in the
action of the Division Bench in making reference for the constitution of the
Special Bench when it found it difficult to accept the earlier view taken in the
assessee’s own case. Under these circumstances the exception to the application
of principle of consistency gets attracted and the appeal needs to be decided on
merits rather than following the earlier view taken by the Tribunal in its own
case.

The Tribunal relied on the
decisions in the following cases :

(a) Union of India &
Anr. v. Paras Laminates (P) Ltd., (1990) 87 CTR (SC) 180/(1990) 49 ELT 322
(SC)

(b) Dy. CIT v. Reliance
Industries Ltd., (2004) 82 TTJ (Mumbai) (SB) 765/(2004) 88 ITD 273
(Mumbai) (SB)

S. 80P(2)(a)(i) :

The Assessing Officer,
during the reassessment proceedings, opined that the interest received by the
assessee on income tax refund was on account of non-banking activity. The CIT(A)
also accepted the Assessing Officer’s order.

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

(a) ITO (ITA No.
4252/Mumbai/2000) and Punjab State Co-op. Bank v. Dy. CIT, (2000) 113
Taxman 128 (CHD) (Mag.)

(b) Cambay Electric
Supply Industrial Co. Ltd. v. CIT, 1978 CTR (SC) 50/(1978) 113 ITR 84 (SC)

The Special Bench noted as
under :

(1) The assessee was
carrying on banking business over the years and tax was collected by the
Revenue in relation to such banking business. Thus, there is a nexus between
the payment of income-tax, its refund and interest on such refund with the
business of banking. But for the carrying on of the banking business, the
assessee would not have paid the income-tax which was refunded to it. Since
income-tax was paid in relation to the banking business, the interest on
income-tax refund will be considered as ‘gain’ (not ‘profit’) of banking
business covered within the expression ‘profits and gains’ of banking
business. Therefore, interest on refund of income-tax would be covered within
the expression ‘profits and gains of business’, notwithstanding the
fact that it falls under the head ‘income from other sources’.

(2) The direct nexus of
interest on income-tax refund is with the payment of income-tax but when the
relation between income-tax and the income on which it was paid is traced, it
comes to light that the same was for the business of banking. Thus, there
exists a commercial and casual connection between the interest on income-tax
refund and the banking business.

(3) Therefore, the
assessee is entitled to deduction u/s.80P(2)(a)(i) on the amount of interest
received u/s.244A on the refund of tax.

 

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Penalty proceedings being separate and independent, the assessee can show that finding recorded in the quantum proceedings is not reliable and sufficient to impose penalty.

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 part A: reported decisions


1 (2010) 125 ITD 313 (Ahd.)
(TM)

Dhirajlal Maganlal Shah v.
ITO

A.Y. : 2001-02. Dated :
25-9-2009

 

Penalty proceedings being
separate and independent, the assessee can show that finding recorded in the
quantum proceedings is not reliable and sufficient to impose penalty.

Facts :

During the scrutiny
assessment the Assessing Officer found that the assessee had paid a sum of
Rs.4,68,305 to some SJT as transport charges. The Assessing Officer held that
the payment was not a genuine one and disallowed the same. On appeal, the CIT(A)
confirmed the disallowance and so did the Tribunal. The Assessing Officer
initiated the penalty proceedings.

In reply to the show-cause
notice, the assessee contended that he had produced all the evidences, including
copies of account payee cheques, in respect of the impugned payment. He further
contended that the Assessing Officer was not able to appreciate the facts of the
case and merely levied penalty only on the basis that the bills produced were
unsigned. On appeal, the CIT(A) confirmed the levy of penalty.

On further appeal to the
Tribunal, the Members differed. The Accountant Member held that there was no
evidence that the payment was made through account payee cheque. He further
observed that the findings of the ITAT in quantum appeal that the assessee has
not discharged the onus has become final. Further, relying on the decision of
Dharmendra Textiles 306 ITR 227 (SC) and other decisions, he upheld the levy of
penalty.

The Judicial Member on the
other hand, observed that the assessee had furnished all the evidences and
details. The bank statement also confirmed the payment made to SJT. He concluded
that the explanations offered by the assessee was not false.

On matter being referred to
the third Member, the following was observed and held :

Held :

It is a settled law that
finding recorded in assessment proceedings is not conclusive, although it is
entitled to great weight. The penalty proceedings being separate and independent
proceedings, the assessee can always show that the finding recorded in the
quantum proceedings is not reliable and sufficient to impose penalty. The
assessee had produced all the evidences along with the bank statements. The
payment was made through account payee cheque. In this background there is no
justification to term the explanation of the assessee as false and levy penalty.

 

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S. 80IB(10) — Land purchased in 1996 — Revised plan approved, commencement certificate issued, and use of land for non-agricultural purposes permitted after 1-10-1998 — Whether AO justified in denying deduction u/s.80IB(10) on ground that commencement of

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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.)


1 ITO, 14(3)(3) v.


Shri Vimalchand M. Dhoka

ITAT ‘A’ Bench, Mumbai

Before K. C. Singhal (JM) and V. K. Gupta (AM)

ITA No. 5520/Mum./2005

A.Y. : 2002-03. Decided on : 19-5-2008

Counsel for revenue/assessee : Sanjay Agarwal/

Vimal Punmiya


S. 80IB(10) of the Income-tax Act, 1961 — In respect of
Lonavala Project of the assessee for which deduction was claimed u/s.80IB(10),
land was purchased in 1996 — Wall was constructed — WIP of this project on
31-3-1998 was stated to be Rs.10,17,615 — Original plan expired after validity
period of one year — Revised plan was approved and commencement certificate
issued on 30-9-2000 — User of land for non-agricultural purposes was permitted
on 28-6-2001 — Whether AO justified in denying deduction u/s.80IB(10) on the
ground that the condition u/s.80IB(10)(a) viz. commencement of the
construction after 1-10-1998 was not satisfied — Held, No.


Per V. K. Gupta :

Facts :

The assessee was engaged in the business of textiles and
construction. In A.Y. 2002-03, in respect of construction business, the assessee
claimed deduction u/s.80IB(10) at Rs.62,21,131 in respect of his projects at
Virar and Lonavala. In respect of Lonavala project, land was purchased in 1996
for Rs.5.50 lakhs and work-in-progress as on 31-3-1998 was shown at
Rs.10,17,615. The AO disallowed the claim for deduction u/s.80IB(10) of
Rs.3,32,369 in respect of Lonavala project, on the ground that the project had
commenced prior to 1st October 1998, since land for Lonavala project was
purchased in 1996 and as on 31st March 1998, certain expenses were shown as
work-in-progress and also a wall was constructed. According to the AO, the
project did not satisfy the condition stated in S. 80IB(10)(a). Before the CIT(A)
the assessee contended that :

(a) no construction work actually took place before 1st
October 1998;

(b) the wall was constructed merely to prevent the entry of
trespassers;

(c) the plan, originally submitted, expired after the
validity period of one year, hence revised plan was submitted, which was
approved by the concerned statutory authorities and, thereafter construction
work started after 1-10-1998;

(d) the land was an agricultural land and conversion of
land use was permitted only on 28-6-2001;

(e) the expenses shown in the balance sheet were of
administrative nature and not of construction activity. The CIT(A) found force
in the arguments of the assessee that the expenses incurred on architect fees,
landscape and elevation on filling the plot are the expenses which were
necessary for submitting the plan for the project and that incurring of these
expenses cannot be taken as commencement of the project. The fact that
permission for conversion of land from agricultural use to non-agricultural
use was issued on 28-6-2001 and also the commencement certificates were issued
by the relevant authority only on 30-9-2000 also weighed with the CIT(A). The
CIT(A) also stated that before getting the order for conversion and
commencement certificate, the construction activity cannot be started. He,
therefore, agreed with the assessee and directed the AO to grant deduction to
the assessee as claimed by it. The Revenue preferred an appeal to the
Tribunal.


Held :

The expenses incurred for change of land use and other
administrative/other land development expenses incurred prior to statutory
approvals, which approvals have been received after 1st October 1998 cannot
result into commencement of the project before 1st October 1998. The Tribunal
observed that the CIT(A) has examined the issue in detail and found itself to be
in agreement with the findings of the learned CIT(A), hence the Tribunal
confirmed the order passed by CIT(A). Accordingly, appeal filed by the Revenue
was dismissed.

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On facts, payments made to Singapore company for certain services were, neither FTS nor royalty. As it did not have PE in India they were not taxable as business profits.

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Bharati Axa General
Insurance Co. Ltd.

(2010) 326 ITR 477 (AAR)

Article 12 of
India-Singapore DTAA;

S. 195 of Income-tax Act

Dated : 6-8-2010

6. On facts, payments made
to Singapore company for certain services were, neither FTS nor royalty. As it
did not have PE in India they were not taxable as business profits.

Facts :

The applicant was an Indian
company (‘IndCo’) engaged in general insurance business. IndCo entered into
agreement with a Singaporean company (‘SingCo’) for receiving assistance such as
business support, marketing information technology support services and strategy
support, etc. Although services were to be provided on continuous basis, no
employee of SingCo was to visit India for providing the services. SingCo did not
have any business establishment in India. SingCo was to be paid a fee equivalent
to the actual cost incurred by it and a markup of 5% thereon.

The applicant sought ruling
of AAR on the following questions :

(i) Whether the payments
for providing services were FTS in terms of Article 12 of India-Singapore DTAA
?

(ii) Whether payments for
providing access to hardware and software hosted in Singapore, and related
support services, were ‘royalty’ in terms of Article 12 of India-Singapore
DTAA ?

(iii) As SingCo did not
have PE in India in terms of Article 5 of India-Singapore DTAA, whether its
receipts were chargeable to tax in India ?

Held :

The AAR concluded as follows
:

(i) Neither clause (a) nor
clause (c) of Article 12(4) of India-Singapore DTAA, which defines FTS, was
attracted. Although some service could be categorised as technical services,
for treating them as FTS, the DTAA required these to be ‘made available’.
Relying on the clarification of ‘make available’ in MOU to India-USA DTAA and
AAR’s ruling in Intertek Testing Services India P Ltd, In re (2008) 307 ITR
418 (AAR) and in Ernst & Young P Ltd, In re (2010) 323 ITR 184 (AAR), the
services fell short of the requirement of ‘make available’. Hence, the
payments for those services were not FTS under Article 12(4) of
India-Singapore DTAA.

(ii) Provision of access
to hardware and software did not result in ‘use of’, or ‘right to use’,
copyright of literary/scientific work. Hence, payments for those services were
not ‘royalty’ under Article 12(3) of India-Singapore DTAA.

(iii) On facts, as SingCo did not have PE
in India, its receipts cannot be taxed as ‘business profits’ under DTAA.

levitra

On facts, Indian branch of American company carrying on research and development activity in India was a PE. Consequently, profit attributable to it was to be computed following arm’s-length principle.

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Pioneer Overseas Corporation
v. DDIT

(2010) 131 TTJ (Del.) 409

Article 5, 7 of India-USA
DTAA

S. 9(1)(i) of Income-tax Act

A.Ys. : 1997-98 & 1999-2000
to 2001-02

Dated : 24-12-2009

5. On facts, Indian branch
of American company carrying on research and development activity in India was a
PE. Consequently, profit attributable to it was to be computed following
arm’s-length principle.

Facts :

The assessee was an American
company. The assessee had a branch in India for carrying out the following two
distinct activities :


(i) Conducting agri-genetic
research, the results of which to be made available to Indian companies; and

(ii) Production of
parent seeds and its sales to joint venture company under an arrangement.


The assessee also had a
joint venture company in India. The branch developed and produced hybrid breeder
seeds which were used for producing and multiplying parent seeds. The branch
sold the parent seeds to the joint venture company.

The data collected by the
assessee while developing breeder seeds formed part of the reach pool of the
head office. This data was used by the head office and other branches of the
assessee globally.

Held :

The Tribunal held as follows
:


(i) Both the activities
of the branch were interwoven, inter-related, co-ordinated, interlinked and
interdependent. Thus, the activities of Indian branch directly or indirectly
contributed to the income of the head office. Consequently, the Indian
branch was not covered under the exclusion in Article 5(3)(e) of India-USA
DTAA. Therefore, the branch constituted PE in India of the assessee.

(ii) The income of the
PE to the extent of its contribution would be taxable in India. In the light
of Article 7(1) and (2) of India-USA DTAA, the PE should be treated as
separate profit centre and profit attributable to it should be computed on
an arm’s-length principle.



 

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Capital gains arising from sale of movable property of a PE are chargeable to tax u/s.9(1)(i) of Income-tax Act as well as under Article 13(2) of India-Mauritius DTAA. Mere deferral of either receipt of sale consideration or even the sale transaction itse

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Cartier Shipping Co. Ltd. v.
DDIT

(2010) 131 TTJ (Mum.) 129

Article 13 of
India-Mauritius DTAA

S. 9(1)(i) of Income-tax Act

A.Y. : 1998-99. Dated :
7-6-2010

 

4. Capital gains arising
from sale of movable property of a PE are chargeable to tax u/s.9(1)(i) of
Income-tax Act as well as under Article 13(2) of India-Mauritius DTAA. Mere
deferral of either receipt of sale consideration or even the sale transaction
itself would have no bearing on the taxability of the transaction.

Facts :

The assessee was a Cypriot
company, which was registered in Mauritius. The Mauritius tax authority had
issued a tax residency certificate to the assessee, based on which the assessee
claimed benefits under India-Mauritius DTAA.

The assesse owned a rig used
for offshore oil exploration, which it had chartered to an Indian company. While
computing its income, the assessee had claimed depreciation on the rig.

On 24th April 1997, the
assessee executed agreement to sell the rig. The assessee issued sale bill dated
19th September 1997 and finally delivered the rig to the buyer on 6th October
1997. The agreement was executed outside India and the rig was also delivered
outside India.

The assessee intimated to
the Tax Authority that its charter agreement was terminated on 3rd October 1997
and it had moved its rig from Indian waters to international waters and it would
continue doing business in international waters.

However, the fact of sale of
rig was not disclosed by the assessee to the Tax Authority. Upon the Tax
Authority reopening the assessment u/s.147 of Income-tax Act for charging to tax
the capital gains arising from the sale, the assessee challenged the reopening.

Apart from the issue of
reopening, the Tribunal also considered the issue : the assessee being a
non-resident; the operations of PE having come to an end; sale having been
effected outside Indian territory (beyond 200 nautical miles), whether the
capital gain arising from the sale was chargeable to tax in India ?

Held :

On the issue of
chargeability of capital gains arising from sale of assets of a PE, the Tribunal
held as follows :

(i) The rig was owned by
the assessee. It was used for business of the assesee in India. The assessee
had claimed depreciation thereon. Therefore, gains on sale of rig were also
deemed to have accrued or arisen in India u/s.9(1)(i) of the Income-tax Act.

(ii) In terms of Article
13(2) of India-Mauritius DTAA, gains from alienation of movable property of PE
are taxable in the country in which PE is situated. Hence, gains on the sale
of rig were taxable in India in terms of Article 13(2).

(iii) Mere deferral of
either receipt of sale consideration or even the sale transaction itself would
have no bearing on the taxability of the transaction. Further, on facts, the
contract was terminated as a result of the sale and not otherwise as claimed
by the assessee.

 

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Payment by PE to head office towards reimburse-ment of technical expenses, being not on account of any specific technical services which were ‘made available’, it was not covered under Article 13. Also, on facts, the payment was not attributable to PE.

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 ADIT v. Bureau Veritas

(2010) 131 TTJ (Mum.) 29

Article 7, 13 of
India-France DTAA

A.Y. : 2002-03. Dated :
29-10-2009

 

3. Payment by PE to head
office towards reimburse-ment of technical expenses, being not on account of any
specific technical services which were ‘made available’, it was not covered
under Article 13. Also, on facts, the payment was not attributable to PE.

Facts :

The assessee was a French
company. The assessee had a PE in India. The PE had, broadly, two kinds of
activities — marine services and certification services. Marine services
included inspection, testing and survey of ships. The certification services
included ISO certification and occupational, heath and safety certification.

The PE had made provision in
respect of technical fees payable to the head office. The assessee had claimed
that the amount provided was towards reimbursement of actual expenses incurred
by the head office. The Tax Authority contended that the amount represented FTS
earned by head office from PE and since tax was not deducted by PE at the time
of credit of the amount, it should be disallowed u/s.40(a)(i) of the Income-tax
Act and added back to the income.

Held :

The Tribunal held as follows
:


(i) Having regard to the
Protocol to India-France DTAA, the scope of FTS is restricted to payments
which ‘made available’ technical knowledge, experience, etc. As the amount
represented allocation of technical and administrative expenses, it was not
for any specific technical services, which were ‘made available’. Hence, it
would not be covered under Article 13 of India-France DTAA.

(ii) The amount was also
not income ‘attributable to PE’. It was also not taxable under any other
provision of India-France DTAA.



 

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S. 115JB of the Income-tax Act, 1961 — Liability to pay income tax based on book profit — Whether banking company liable to pay tax u/s.115JB — Held, No.

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Krung Thai Bank PCL v. Joint
Director of Income Tax — International Taxation

ITAT ‘G’ Bench, Mumbai

Before Pramod Kumar (AM) and

Asha Vijayraghavan (JM)

ITA No. 3390/Mum./2009

A.Y. : 2004-05. Decided on :
30-9-2010

Counsel for assessee/revenue
:

Gajendra Golchha/A. K. Nayak

 

6. S. 115JB of the
Income-tax Act, 1961 — Liability to pay income tax based on book profit —
Whether banking company liable to pay tax u/s.115JB —

Held, No.

Per Pramod Kumar :

Facts :

The assessee was a foreign
bank operating in India through a branch office. During the year under appeal,
it had shown a profit of Rs.78,32,594 as per profit and loss account. After
making necessary adjustments as per normal provisions of the Act, including the
setting off of brought forward loss of A.Y. 2003-04, the assessee had returned
nil income. The original assessment u/s.143(3) was completed on 19th September
2006, without making any adjustments to the income returned by the assessee.
According to the AO, the income of the assessee had escaped assessment as it had
not computed book profit u/s.115JB. Accordingly, the notice u/s.147 was issued.
The assessee objected to the reassessment proceedings on the ground that the
provisions of S. 115JB were not applicable to the assessee. However, the CIT(A)
upheld the action of the AO.

Before the Tribunal the
Revenue contended that there was no specific exclusion clause for the banking
companies, and in the absence thereof, it was not open to infer the same. It
further added that the submission of the assessee was clearly contrary to the
legislative intent and plain wordings of the statute.

Held :

The Tribunal agreed with the
contention of the assessee that the provisions of S. 115JB were not applicable
to the case of the assessee. According to it, the provisions of S. 115JB can
only come into play when the assessee was required to prepare its profit and
loss account in accordance with the provisions of Part II and III of Schedule VI
to the Companies Act. In the case of the assessee being a banking company,
however, the provisions of Schedule VI are not applicable in view of the
exemption given under proviso to S. 211(2) of the Companies Act. The final
accounts of the banking companies are required to be prepared in accordance with
the provisions of the Banking Regulation Act. Further, relying on the Mumbai
Tribunal decision in the case of Maharashtra State Electricity Board v. JCIT,
(82 ITD 422), it held that the provisions of S. 115JB do not apply to the
assessee, and, therefore, the Assessing Officer was in error in concluding that
income had escaped assessment in the hands of the assessee.

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S. 45. According to Circular No. 9, the legal ownership in flats vests in individual members and not in the co-operative society – Flat owners have proportionate interest in the land and building – Amount received for permitting developer to construct add

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 Auro Ville Co-op. Hsg. Soc.
Ltd. v. ACIT


ITAT ‘H’ Bench, Mumbai

Before Pramod Kumar (AM) and

Smt. Asha Vijayaraghavan (JM)

ITA No. 570/Mum./2008

A.Y. : 2004-05. Decided on :
31-3-2010

Counsel for assessee/revenue
: Tarun Ghia/

S. K. Pahwa

 

5. S. 45. According to
Circular No. 9, the legal ownership in flats vests in individual members and not
in the co-operative society – Flat owners have proportionate interest in the
land and building – Amount received for permitting developer to construct
additional area – Held not income of the society.

Per Asha Vijayaraghavan :

Facts :

Vide development agreement
dated 15-2-2004 entered into between the assessee society, its members and the
developer, the assessee society allowed the developer to construct an additional
area aggregating to 30,000 sq.ft for a consideration of Rs. 10.41 crores. Of
this sum of Rs. 10.41 crores an amount of Rs. 15 lakhs was retained by the
assessee and the balance amount was distributed amongst its members in
proportion to area of the flat. The assessee in its revised return of income
declared amount received from developers as ‘Income from Other Sources’.

The Assessing Officer (AO)
was of the view that the assessee was the rightful owner of the land and the
legal ownership vested with it. Since the assessee was held to be the legal
owner, the capital gain was assessed as income of the assessee. The AO
considered the consideration of Rs. 10.26 crores received by flat owners to be
income of the assessee.

Aggrieved the assessee
preferred an appeal to the Commissioner of Income-tax (Appeals) who upheld the
assessment done by the AO.

Aggrieved the assessee
preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the
assessee, co-operative housing society, was registered under the Maharashtra
Co-operative Societies Act, 1960 as a Tenant Co-partnership Hsg. Society under
Rule 10(1) Clause 5(b). It also noted that the flat owner members have
transferred their individual entitlement/right to TDR/FSI in favour of the
developers and were entitled to receive directly from the developers aggregate
compensation of Rs. 10.26 crores. All the individual flat owners offered for
taxation their share of compensation, in their respective return of income. The
Tribunal held as under :

“According to CBDT Circular
No. 9, dated 25-3-1969, the legal ownership in flats is vested in individual
members and not in the co-operative society. Further, the flat owners have
proportionate interest in the land and building. The society is only ostensible
owner and in reality and truth, the flat owners own the land and building for
which they have paid full consideration and amount received from the developer
by the flat owner in their individual capacity is the income of the individual
flat owner. The flat owners have relinquished their interest in the property.
The society has no right or control over such income of the individual owners.”

The Tribunal observed that
the benefit of additional TDR was derived and enjoyed by the members of the
assessee-society and no income has accrued to the society. Following the
decision of the Mumbai Bench of ITAT in the case of Jethalal D. Mehta v. DCIT,
which held that such rights do not have any cost of acquisition, the Tribunal
held that there is no merit in computing any capital gains on the sale of the
said TDR in the hands of the assessee society.

The appeal filed by the
assessee was allowed.

 

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S. 154 read with S. 115JA of the Income-tax Act, 1961 — Rectification of mistake apparent from record — Provision for doubtful debts debited to Profit and Loss account — Book profit as per S. 115JA assessed without making any adjustment qua the said provi

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ACIT (OSD) v. GTL Limited

ITAT ‘G’ Bench, Mumbai

Before P. Madhavi Devi (JM)
and

Rajendra Singh (AM)

M.A. No. 746/Mum./2009

(Arising out of ITA No.
4019/mm/2007)

A.Y. : 1998-99. Decided on :
10-3-2010

Counsel for revenue/assessee
:

Mohd. Usman/K. Shivram and
Paras S. Savla

 

4. S. 154 read with S. 115JA
of the Income-tax Act, 1961 — Rectification of mistake apparent from record —
Provision for doubtful debts debited to Profit and Loss account — Book profit as
per S. 115JA assessed without making any adjustment qua the said provisions per
Tribunal order — By retrospective amendment such provision made liable for
inclusion in book profit — Whether AO justified in claiming that there was
mistake apparent from record and accordingly, rectifying the order — Held, No.

Per P. Madhavi Devi :

Facts :

The assessee had filed a
return of income for the A.Y. 1998-99 declaring the total income at Rs.11.62
crore u/s.115JA of the Act. The AO assessed the total income at Rs.34.63 crore.
Later on, it was noticed by the AO that the provision of doubtful debts of
Rs.18.99 lacs was not added back to the profit & loss account while computing
income u/s.115JA of the Act. Therefore, the AO passed an order u/s.154 of the
Act on 30-12-2004 adding back the provision for doubtful debts u/s.115JA of the
Act. On appeal the CIT(A) allowed the same relying upon the decision of the
Bombay High Court in the case of CIT v. Echjay Forgins (P) Ltd., (251 ITR 15).
The Tribunal vide order dated 17-3-2009 confirmed the order of the CIT(A).

Thereafter, by the Finance
Act, 2009 clause (g) was inserted in Explanation to S. 115JA(2) of the Act w.e.f.
A.Y. 1998-99 providing that provisions for doubtful debts and advances are
disallowable while calculating book profit u/s.115JA of the Act. Relying on the
decision of the Karnataka High Court reported in the case of M. Srinivasalu v.
UOI, (239 ITR 282), the Revenue contended that an order which is not in
accordance with the retrospective law can be rectified u/s.154 of the Act.

Held :

The Tribunal noted that in
respect of the year under appeal the Tribunal had already decided the case in
favour of the assessee by its order dated 17th March, 2009, whereas the
retrospective amendment of the provisions received the assent of the President
of India on 19-8-2009 i.e., after the order of the Tribunal was passed. Further
relying on the Bombay High Court decision in the case of Sudha S. Mehta, it held
that the assessment proceedings got concluded before the Tribunal under the then
existing law and, therefore, there was no mistake apparent from record in the
order of the Tribunal. Accordingly, the Revenue’s miscellaneous application was
dismissed.

 

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S 40(a)(ia). Provisions of S. 40(a)(ia) are not applicable to expenditure which has accrued prior to 10-9-2004 when the Finance Act, (No. 2) 2004 got the presidential approval — Amendment to S. 40(a)(ia) by the Finance Act, 2010 which extends the time lim

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Golden Stables Lifestyle
Centre Pvt. Ltd. v. CIT

ITAT ‘G’ Bench, Mumbai

Before Pramod Kumar (AM) and

Smt. Asha Vijayaraghavan (JM)

ITA No. 5145/Mum./2009

A.Y. : 2005-06. Decided on :
30-9-2010

Counsel for assessee/revenue
: Anil Sathe/

Abani Kanta Nayar

 

3. S 40(a)(ia). Provisions
of S. 40(a)(ia) are not applicable to expenditure which has accrued prior to
10-9-2004 when the Finance Act, (No. 2) 2004 got the presidential approval —
Amendment to S. 40(a)(ia) by the Finance Act, 2010 which extends the time limit
for all TDS payable throughout the year has been introduced as a curative
measure and therefore would apply to earlier years also.

Per Asha Vijayaraghavan :

Facts :

The Assessing Officer (AO)
disallowed amounts aggregating to `29,52,389 u/s.40(a)(ia) on the ground that
assessee had deposited TDS late in the Government Account. Aggrieved the
assessee preferred an appeal to the CIT(A).

The CIT(A) rejected the
contention made on behalf of the assessee that S. 40(a)(ia) as amended with
retrospective effect by the Finance Act, 2008 and Explanatory Notes to the
Finance Bill, 2004 issued by the CBDT vide Circular No. 5/2005, dated 15-7-2005
were brought in to existence after the end of the financial year 2004-05. He
also rejected the contention that the assessee had complied with the very
intention of introduction of S. 40(a)(ia) i.e., compliance of TDS provisions in
case of residents and curbing bogus payments.

Aggrieved the assessee
preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the
CBDT has in its Circular No. 1 of 2009, dated 27-3-2009 clarified the amendment
made to S. 40(a)(ia) by the Finance Act, 2008 with retrospective effect from
1-4-2005 was to mitigate hardship caused by the above provisions of S. 40(a)(ia)
while maintaining TDS discipline. The Tribunal also noted that there has been a
further amendment to this Section by the Finance Act, 2010 whereby time limit
for payment of TDS deducted/deductible during the year has been extended till
the due date of filing return of income. The Tribunal observed that this is
similar to provisions of S. 43B. The Supreme Court has in the case of CIT v.
Alom Extrusions Ltd., (319 ITR 306) held the amendment to S. 43B to be
retrospective in operation. The amendment made by the Finance Act, 2008 to the
provisions of S. 40(a)(ia) being with retrospective effect shows that it was
curative in nature and was brought in to ameliorate the hardship caused on
account of nominal delay in payment of TDS. Applying the ratio of the decision
of the Apex Court, the Tribunal held the amendment brought in by Finance Act,
2010 to be curative in nature and therefore applicable to all earlier years
also. The Tribunal directed the AO not to disallow the expenditure (i) which has
accrued prior to 10-9-2004 when the Finance Act (No. 2) 2004 got the
presidential approval, up to which date the provisions of S. 40(a)(ia) will not
be applicable and (ii) expenditure in respect of which TDS has been paid by the
assessee before the due date of filing of the return.

The ground of appeal filed
by the assessee was allowed.

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Reassessment — Non-supply of reasons recorded by AO — AO having failed to follow the procedure laid down by the Apex Court, the matter is restored back to the AO with a direction to follow the procedure laid down by the Apex Court.

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(2010) 42 DTR (Kol.) (TM) (Trib.)
42

Bhabesh Chandra Panja v. ITO

A.Y. : 2004-05. Dated :
5-3-2010

 

15. Reassessment —
Non-supply of reasons recorded by AO — AO having failed to follow the procedure
laid down by the Apex Court, the matter is restored back to the AO with a
direction to follow the procedure laid down by the Apex Court.

Facts :

The AO has issued notice
u/s.147, in response to which, the assessee informed by way of letter that the
return already filed may be treated as return in response to notice u/s.148. He
also requested for providing the reasons for reopening of the assessment.
However, the reasons for reopening of assessment were not supplied to the
assessee. During continuation of assessment proceedings, again the assessee
pointed out that the reason recorded for reopening of assessment has not been
intimated to him which may be provided at the earliest. However, the AO, without
supplying the copy of the reasons recorded, completed the assessment
u/s.143(3)/147 of the Income-tax Act. In response to which, the assessee filed
the appeal before the learned CIT(A), in which ground was taken against the
validity of reopening of assessment u/s.147. However, the learned CIT(A) upheld
the validity of reopening of assessment. Against which, the assessee filed the
appeal before the Tribunal.

The learned Judicial Member,
following the decision of Apex Court in the case of GKN Driveshafts (India) Ltd.
v. ITO, set aside the matter and restored the same back to the file of the AO
with a direction to follow the procedure as laid down by the Apex Court.
However, the learned Accountant Member differed with the learned Judicial Member
as he was of the opinion that on the facts of the assessee’s case, the decision
of the Apex Court was not applicable for the following reasons :

(i) In the case of GKN
Driveshafts (India) Ltd., the assessee did not furnish a return of income,
while in the case of the assessee, not only the return of income is furnished,
but also the assessment was completed.

(ii) Before the CIT(A),
the assessee did not take the ground that the assessment was wrongly made as
the AO did not supply the reasons recorded for reopening the assessment.

(iii) In the case of GKN
Driveshafts (India) Ltd., the notices u/s.148 and u/s.143(2) were challenged
in a writ.

Upon such difference of
opinion between the Members, the matter was referred to the Third Member.

Held :

The Apex Court has laid down
a general procedure which is to be followed by the assessee as well as the AO in
each and every case wherever notice u/s.148 is issued. The view of the learned
Accountant Member as well as the Departmental Representative that the above
decision of the Apex Court would be applicable only when the assessee files the
writ petition challenging the notice u/s.148, before the High Court or Supreme
Court is not acceptable.

As per the procedure laid
down by the Apex Court, filing of return by the assessee is a necessary
condition for getting the copy of reasons recorded. Therefore, the argument that
since the assessee has filed the return of income, the above decision of the
Apex Court would not be applicable, is not acceptable.

The assessee has challenged the reopening of
assessment u/s.147 before CIT(A). Once the assessee challenges the validity of
reopening an assessment, he may advance several arguments to support his
contention that assessment is not validly reopened. Non-supplying of the reasons
recorded is one of such arguments.

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Tribunal has power to direct the Assessing Officer to consider the allowance of the expenditure under altogether different Section.

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(2010) 42 DTR (Chennai) (TM)
(Trib) 449

ACIT v. Amarnath Reddy

A.Ys. : 2002-03 to 2004-05.
Dated : 15-4-2010

 

14. Tribunal has power to
direct the Assessing Officer to consider the allowance of the expenditure under
altogether different Section.

Facts :

The facts in brief leading
to the controversy were that unaccounted commission earned by the assessee was
unearthed during the search. In his return of income, the assessee claimed
expenditure incurred to earn the said income which the AO disallowed u/s.69C of
the Act. The CIT(A) deleted this disallowance by observing that S. 69C along
with the proviso thereto cannot be made applicable to the facts of the case for
the reason that the expenditure stands explained insofar as the same was
incurred from the unaccounted commission earned by the assessee. Both the
Members who heard the matter have also concurred with the view of the CIT(A)
that S. 69C is not applicable. However, in the course of hearing before the
Tribunal, the learned Departmental Representative raised a fresh plea to the
effect that the AO should have invoked the provisions of S. 37(1) and requested
the Bench to remit the matter to the file of the AO to consider the allowability
or otherwise of the expenditure u/s. 37(1) of the Act. The learned Accountant
Member rejected the request of the learned Departmental Representative by
observing that the jurisdiction of the Tribunal is restricted to the
subject-matter of the appeal and the fresh plea taken by the learned
Departmental Representative being out of the subject-matter, it cannot be
accepted. In arriving at the conclusion that it is out of the subject-matter of
the appeal, the learned Accountant Member tried to draw distinction between the
words ‘aggrieved’ and ‘objects’ appearing in S. 253(1) and S. 253(2)
respectively. On the other hand, the learned Judicial Member held that the
Tribunal has the jurisdiction to entertain a fresh plea on the subject-matter

of the appeal and has the power to pass necessary direction for ascertainment of
relevant facts
and deciding the issue by applying correct
provisions of law.

Held :

The use of different words
in the two sub-sections i.e., ‘aggrieved’ and ‘objects’ appearing in S. 253(1)
and S. 253(2), respectively, has no bearing on the scope of the appeal to be
filed by the assessee and the Department. Relying upon the decision of
Hukumchand Mills Ltd. v. CIT, 63 ITR 232 (SC), it was held that there is no
reason as to why the plea of the learned Departmental Representative cannot be
accepted. In the present case, of course, the Department is the appellant unlike
in the case of Hukumchand Mills (supra). But, it makes no difference. The
Department is aggrieved by the deletion of disallowance of expenditure which
disallowance was made under one particular provision. The subject-matter of the
appeal was whether the expenditure claimed by the assessee was allowable or not.
If it was not disallowable under one particular provision, but is disallowable
under any other provision, the subject-matter, viz., the allowability of
expenditure remains the same. It is not precluded from considering a point which
arises out of the appeal merely because such point had not been raised or urged
by either party at the earlier stage of the proceedings. The matter was remanded
to the AO for considering the claim of the assessee for claiming deduction of
unaccounted expenditure u/s.37(1) of the Act.

 

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S. 234B — Amounts paid in foreign countries under DTAA would be treated as advance tax and not self-assessment tax even for the period before Explanation 1 to S. 234B was introduced.

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(2010) 126 ITD 275 (Hyd.)

DCIT v. Satyam Computer
Services

A.Ys. 1998-99 & 2005-2006

Dated : 25-4-2008

 

13.
S. 234B — Amounts paid in foreign countries under DTAA would be treated as
advance tax and not self-assessment tax even for the period before Explanation 1
to S. 234B was introduced.

 

Facts :

For the relevant assessment
years, the assessee paid certain sums as tax in the USA. The same were claimed
as advance tax in India for availing credit under DTAA. The AO treated the same
as advance tax in the order passed u/s.143(3). Subsequently, as the AO was of
the opinion that the tax paid in the USA should be treated as self-assessment
tax, he issued notices u/s.154 and order u/s.154 was passed considering the
amounts as self-assessment tax. The demand payable and interest amounts were
thus modified. The AO was of the view that the DTAA nowhere mentions that the
tax so paid should be treated as advance tax.

Held :


(i) The assessee has not
delayed in making payment of tax even though made in the USA. When there is no
default in paying tax, no interest u/s.234B is chargeable.

(ii) Explanation 1 to S.
234B introduced by the Finance Act, 2006 w.e.f. 1-4-2007 covers relief of tax
allowed u/s.90 on account of tax paid in country outside India.



(iii) Relying on decision of the Supreme
Court in the case of Dilip N. Shroff v. JCIT, (2007) 291 ITR 519, the Tribunal
observed that the object of Explanation is to explain the meaning and clarify
any vagueness of main enactment. It cannot, in any way, interfere with or
change the enactment or take away a
statutory right.


Hence the said Explanation
is applicable to assessee and the tax paid in the USA has to be treated as
advance tax.

 

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Provisions of S. 45(5) relating to compulsory acquisition do not apply to compulsory requisition of land and building, and the compensation received is also not taxable as rent, as there was no element of income.

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8. (2010) 122 ITD 457 (Chennai)

DCIT, Business Circle X, Chennai v. Udhava Das
Fomra

A.Y. : 2001-02. Dated : 27-3-2009

 

Provisions of S. 45(5) relating to compulsory acquisition do
not apply to compulsory requisition of land and building, and the compensation
received is also not taxable as rent, as there was no element of income.

Facts :

The assessees were the co-owners of land and building. The
State Government exercising powers u/s. 3(1) of the West Bengal (Requisition and
Acquisition) Act, 1948 requisitioned the said land and building on 23-4-1976.
The said property was later on acquired by the Government by issuing
Notification on 7-4-1990. Compensation was paid for requisition of property from
23-4-1976 to 7-4-1990. The assessee filed appeal for enhanced compensation which
was allowed on 20-4-2000. As the jurisdictional High Court by its order held
that interim compensation could not be taxed till the High Court reached
finality on the issue of enhanced compensation, the assessment proceedings for
A.Y. 2000-01 were reopened. The Assessing Officer taxed the entire compensation
u/s.45(5)(a) and S. 45(5)(b). The CIT(A) directed to delete requisition
compensation as the same amounted to capital receipt. The Department filed
appeal against the order of the CIT(A).

Held :

The Tribunal held that requisition of land was not a transfer
within the meaning of the West Bengal (Requisition and Acquisition) Act, 1948 as
it was only taking of possession of the land by the State and owners of the land
were only deprived from use and enjoyment of the land. The compensation was
received for the period from 23-4-1976 to 7-4-1990 for requisition of land. The
provisions of S. 45(5) could not be attracted as there was no transfer of
capital asset. Moreover, the compensation was also not an income of the
owner/assessee, because it was neither a rent nor a receipt in lieu of loss of
income or transfer of any right by the
assessee. Therefore, the compensation received for requisition could not be
taxed as an income of the assessee.

In view of the above, it was held that the said compensation
did not have any element of income, and hence, was not liable to tax either
under the head ‘capital gains’ or under other heads.

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Whether assessee who participated in block assessment is precluded from taking objection that notice u/s.143(2) was not served or not served in time in view of provisions of S. 292BB w.e.f. 1-4-2008 and if so, since when he can be precluded — Held, S. 292

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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.)

23 Kuber Tobacco Products Pvt. Ltd.
v. DCIT


ITAT Delhi Bench ‘Special’

Before Vimal Gandhi (President),

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

IT(SS) A No. 261/Del./2001

A.Y. : 1-4-1988 to 25-1-1999. Decided on : 14-1-2009

Counsel for assessee/revenue : Raj Kumar Gupta, Saurav
Rahatgi/Durga Charan Dash

S. 143(2) read with S. 292 BB of the Income-tax Act, 1961 —
Whether the assessee who has participated in the block assessment proceedings is
precluded from taking any objection that notice u/s.143(2) was not served upon
him or was not served upon him in time in view of the provisions of S. 292BB
inserted by the Finance Act, 2008 w.e.f. 1-4-2008 and if so, since when he can
be said to be so precluded — Held that S. 292BB is applicable to the A.Y.
2008-09 and subsequent assessment years.

Per I. P. Bansal :

Facts :

The issue before the Bench was regarding the validity of the
assessment made u/s.158BC in the absence of issuance of a notice u/s.143(2) of
the Act.

According to the Revenue in view of insertion of S. 292BB,
which is inserted by the Finance Act, 2008 w.e.f. 1st April, 2008, the assessee
cannot take the plea that assessment should be held invalid merely for the
reason that no notice u/s.143(2) was issued. Further, relying on the Madras High
Court decision in the case of Areva T & D India Ltd., it was contended that the
non-issuance/service of notice cannot render the assessment/re-assessment
invalid, but at best it can be a case of irregularity which can be removed. It
was also submitted that presumption against retrospective construction has no
application to enactment, which affects only the procedure, and the practice of
the Courts as held by the Rajasthan High Court in the case of Man Bahadur Singh.

 

Held :


The Tribunal referred to two of the Supreme Court decisions
viz., the case of H. V. Thakur and the case of Maharaj Chintamani Saran
Nath Shahdeo to examine the present issue. According to it,
‘First and foremost rule of
construction of interpretation is that in the absence of anything in the
enactment to show that it is to have retrospective operation, the said enactment
cannot be construed to have retrospective operation and when amendment relates
to a procedural provision resulting into creating a new disability or obligation
and which imposes new duty in respect of transactions already completed, then,
the said procedural provision also cannot be applied retrospectively. Similar is
the position where a statute which not only changes the procedure, but also
creates new rights and liabilities which shall be construed to be prospective in
operation, unless otherwise provided either expressly or by necessary
implication.”


 

Applying the above principle, it noted that S. 292BB has been
made effective by the Legislature from 1st April 2008 and there is nothing in
the enactment to show that S. 292BB has retrospective operation. If it is so,
according to Rule of Interpretation described above, S. 292BB cannot be
construed retrospectively. Further, it noted that if the principles laid down by
the Supreme Court in the above two cases were applied, it would mean that every
litigant has a vested right in substantive law, but no litigant has such right
in procedural law. It further added that though the provisions in question
related to procedural law, since the said procedural statute created a new
disability or obligation, and imposed new duties in respect of transactions
already accomplished, the statute cannot be construed to have retrospective
effect. Therefore, it was held that S. 292BB cannot be construed to have
retrospective operation and it has to be applied prospectively.

 

Cases referred to :



1. H. V. Thakur v. State of Maharashtra, AIR 1994 SC
2623

2. Maharaj Chintamani Saran Nath Shahdeo v. State of
Bihar, AIR 1999 SC 3609

3. Areva T & D India Ltd. v. ACIT, 294 ITR 233
(Mad.)

 


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Income-tax Act, 1961 — S. 143(1)(a), S. 147. Even when the original assessment is u/s.143(1) and even when reassessment proceedings are initiated within a period of four years, it is still necessary that there should be reasons to believe that income had

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Part B :
Unreported Decisions


15 Pirojsha Godrej Foundation v.

ADIT (Exemptions)

ITAT ‘C’ Bench, Mumbai

Before D. K. Agarwal (JM) and

Pramod Kumar (AM)

ITA No. 1976/Mum./2008

A.Y. : 2001-02. Decided on : 31-5-2010

Counsel for assessee/revenue : P. J. Pardiwala/K. K. Mahajan

Income-tax Act, 1961 — S. 143(1)(a), S. 147. Even when the
original assessment is u/s.143(1) and even when reassessment proceedings are
initiated within a period of four years, it is still necessary that there should
be reasons to believe that income had escaped assessment and such reasons are
subject to judicial scrutiny.

Per Pramod Kumar :

Facts :

The assessee was a charitable trust, registered u/s.12A of
the Act, notified, for the relevant period, u/s.10(23C)(iv) of the Act. The
assessee in its return of income filed on 29th October, 2001 declared exemption
u/s.10(23C) and declared nil taxable income. This return was processed u/s.
143(1)(a). On 26th May, 2004, the assessee was served a notice u/s.148 and
income of the assessee was proposed to be reassessed. The Assessing Officer (AO)
had, in the reasons recorded, stated that since the assessee has not invested a
sum of Rs.1.02 crores in accordance with the provisions of S. 11(5), the said
sum of Rs.1.02 crores is chargeable to tax and has escaped assessment.

Aggrieved the assessee preferred an appeal to the CIT(A) and
challenged the validity of the jurisdiction assumed u/s.147 of the Act on the
ground that the AO had resorted to reassessment proceedings without having a
valid reason to believe that the income had escaped assessment. The CIT(A)
upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :


(1) The
recorded reasons that the violation of S. 11(5) r.w. S. 13(1)(d) by the assessee
leads to the amount of Rs.1.02 crores to be included in the assessee’s total
income are clearly contrary to the legal position which is that while the
assessee may lose exemption u/s.10(23)(c) for not adhering to the conditions of
S. 11(5), this does not result in the said amount being chargeable to tax in the
hands of the assessee. The Tribunal held that the reasons for reopening of
assessment have been recorded without application of mind and without
considering the applicable legal position, as expected of an AO while exercising
his powers u/s.147.

(2) The Tribunal after examining the reasons recorded in the
light of the observations of the Bombay High Court in the case of Hindustan
Lever Ltd. (268 ITR 332) and of the Supreme Court in the case of Kelvinator of
India Ltd. (320 ITR 561) concluded that there was no material before the AO that
any income, leave aside the income of Rs.1.02 crores has escaped assessment. The
Tribunal observed that no reasonable person, with basic understanding of the
scheme of income-tax law, can come to the conclusion that the AO has arrived at.
It held that there was no cause and effect relationship between what the AO has
noticed in the attachments to the income-tax return and the conclusion he has
arrived at.

(3) Even when the original assessment is u/s. 143(1) and even
when reassessment proceedings are initiated within a period of four years, it is
still necessary that there should be reasons to believe that income had escaped
assessment and such reasons are subject to judicial scrutiny. No doubt that at
the stage of reassessment proceedings, it is not necessary to establish that
there has been an escapement of income, but essentially there have to be valid
reasons to believe that the income has escaped assessment and these reasons, on
a stand-alone basis, must be considered appropriate for arriving at the
conclusion arrived at by the Officer recording the reasons.

The Tribunal held the very initiation of the reassessment
proceedings, on the facts of this case and on the basis of the reasons recorded
by the AO to be bad in law and quashed the reassessment proceedings. The
Tribunal allowed the appeal filed by the assessee.

Cases referred :

(1) CIT v. Kelvinator of India Ltd., (320 ITR 561) (SC)

(2) Prashant S. Joshi v. ITO, (Writ Petition No. 2287 of
2009, judgment dated 22-2-2010)

(3) Hindustan Lever Ltd. v. R. B. Wadkar, (268 ITR 332) (Bom.)

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Project completion method of accounting — AO cannot adopt two methods of accounting in one project to determine income of assessee — In case of an assessee following project completion method, profit arising on sale of TDR, which was received as considera

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  1. ITO v. Chembur Trading Corporation




ITAT ‘C’ Bench, Mumbai

Before Sunil Kumar Yadav (JM) and

D. Karunakara Rao (AM)

ITA No. 2593/Mum./2006

A.Y. : 2000-01. Decided on : 21-1-2009

Counsel for revenue/assessee : Yeshwant U. Chavan/J. P.
Bairagra

Per Sunil Kumar Yadav :

Facts :

The assessee was in the business of construction of
buildings and was regularly following project completion method which method
was accepted by the Revenue. The assessee started project of construction of a
building known as ‘Kailash Towers’ (KT) on a plot of land at Anik Village,
Chembur of which the assessee was the owner. Till 31-3-1994, the assessee
received Rs.32,31,159 as advances for sale of flats in KT. The assessee had
incurred expenditure of Rs.87,35,285 (which included cost of land and also
cost of work done on this project).

While the project was on, the entire plot of land
admeasuring 44544.25 sq.mts. was required by the Government of Maharashtra for
construction of Eastern Express Freeway and also for construction of tenements
for rehabilitation of slum dwellers. An agreement was executed between the
assessee, the Slum Rehabilitation Authority (SRA) and the Government of
Maharashtra through PWD which agreement detailed modalities as to how the land
was to be acquired and in what manner TDR was to be granted to the assessee.
The agreement was a composite agreement for construction of Eastern Express
Freeway to be carried out by the Government of Maharashtra after acquiring
land from the assessee and also for rehabilitation of the slum dwellers living
in 7500 hutments on the freeway land required for the purpose of Eastern
Express Freeway. 1474 tenements and 92 shops were to be constructed by the
assessee. The assessee was entitled to receive land TDR for handing over land
to the Government and Construction TDR for constructing tenements and shops on
land belonging to it. The grant of TDR was to be in phases. The assessee was
not entitled to any monetary consideration.

During the previous year relevant to the assessment year
under consideration the assessee sold certain TDR and the sale consideration
was reflected on the liability side of the balance sheet. Sale consideration
of TDR was regarded by the assessee as a receipt of the project to be taxed in
the year of completion of the project.

The AO dissected the entire project into two schemes (1)
Transfer of land for construction of Eastern Express Freeway by the Government
of Maharashtra and the Road TDR granted to the assessee in lieu thereof; (2)
Transfer of land and construction of tenements and shops by the assessee
itself and the grant of TDR in lieu thereof. The AO, accordingly, applied
different methods of accounting to both the projects. In respect of road TDR
he taxed the assessee yearwise in the year in which TDR was sold and in
respect of the project for transfer of land and construction of tenements and
shops he accepted project completion method. In A.Y. 2000-01 the AO made an
addition of Rs.1,88,86,810.

The CIT(A) held that Road TDR was directly related to the
said project and sale proceeds against this TDR were to be recognised as a
revenue receipt in the year in which the project was completed.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that the agreement was a composite
agreement for handing over land for Expressway and also for construction of
tenements and shops by the assessee on land belonging to it. The Tribunal also
noted that the entire land was acquired in phases and also consideration in
the form of TDR was received in phases. Consideration was received in kind.
The funds received on sale of TDR were utilised for construction of tenements
and shops. The Tribunal held that it was clearly one project and not two
projects as they have been treated by the AO. The Tribunal held that the AO
cannot adopt two methods of accounting in one project to determine the income
of the assessee. It observed that in case of construction activity there are
two recognised methods of accounting viz. (1) Project Completion Method
and (2) Percentage Completion Method. The Tribunal stated that the assessee
has a right or a privilege to adopt any one of the methods of accounting for
determining its profit. In the present case, the assessee had been following
the project completion method to determine the profits of a project for last
so many years, but, during the year under consideration the AO had dissected
the project in two segments and for one segment he applied project completion
method and for the remaining segment, he determined the profit on sale of TDR.
The method of accounting adopted by the AO was held to be neither prevalent
nor recognised by the ICAI or under any law. The Tribunal held that the
assessee had rightly computed its profit on the basis of the project
completion method. Accordingly, it upheld the order of CIT(A) and dismissed
the appeal filed by the Revenue.

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S. 145 — Accounting Standard 7 issued by ICAI — In case of an assessee following mercantile system and ‘percentage completion method’ deduction is allowable of ‘foreseeable losses’ on incomplete projects in respect of which a major part of work was not co

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  1. Jacobs Engineering India Pvt. Ltd. v. ACIT




ITAT ‘J’ Bench, Mumbai

Before N. V. Vasudevan (JM) and

Mehar Singh (AM)

ITA No. 335/Mum./2007 & 336/Mum./2007

A.Ys. : 2002-03 & 2003-04. Decided on : 26-5-2009

Counsel for assessee/revenue : Sunil Lala & Aliasger
Rampurwala/Ajay

Per Mehar Singh :

Facts :

The assessee was engaged in the business of executing works
contracts and was following the mercantile system of accounting and the
‘percentage completion method’. During the previous year relevant to the A.Y.
2002-03 the assessee had debited to P & L and had claimed a deduction of
Rs.18,73,568 being provision for future losses. The AO while assessing the
total income of the assessee held that this sum did not represent actual loss;
under mercantile system of accounting it is only an existing liability which
is deductible and not a liability which will come into existence upon
occurrence of certain events; the decision of the Apex Court in Tuticorin
Alkali Chemical & Fertilisers Ltd. does not contemplate deduction of such an
amount. He, accordingly, disallowed Rs.18,73,568 claimed by the assessee as
provision for foreseeable losses.

The CIT(A) observed that since the work completed during
the year under consideration was not a major part of the contract such a
provision was not allowable as according to him it cannot be established that
such a loss had been fully anticipated. He held that since several parameters
were accounted for only on estimate it was not plausible to anticipate the
result. The CIT(A) confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal considered Para 13.1 of Accounting Standard 7
(AS-7) which mandates that a foreseeable loss on the entire contract should be
provided for in the financial statements, irrespective of the amount of work
done and the method of accounting followed. The argument on behalf of the
Revenue that AS-7 has not been notified by the Central Government as an
accounting standard for the purposes of S. 145(2) did not find favour with the
Tribunal. The Tribunal held that in principle, anticipated losses on
incomplete projects are allowable as deduction subject to their being
calculated as per AS-7. However, for the purposes of calculation and
quantification of the said loss in terms of AS-7 it restored the matter to the
file of the AO.

Cases referred :



(1) Tuticorin Alakali Chemcial & Fertilisers Ltd. v.
CIT, (227 ITR 172) (SC)

(2) ITA No. 9701/Bom./1991, dated 10-8-2001

(3) DCIT v. OTIS Elevator Co. India Ltd., (284 ITR
173) (AT) (Mum.)

(4) Aarts Module v. ITO, (ITA No. 9302/Bom./1992)

(5) Mkb (Asia) (P) Ltd. v. CIT, (294 ITR 655) (Gau.)

(6) Metal Box Co. of India Ltd. v. Their Workmen,
(73 ITR 53) (SC)

(7) Gopal Purohit v. DCIT, (20 DTR 99)

(8) CIT v. India Discount Co. Ltd., (75 ITR 191)
(SC)

(9) Kedarnath Jute Mfg. Co. Ltd. v. CIT, (82 ITR
363) (SC)

(10) Sinclair Murray And Co. P Ltd. v. CIT, (97
ITR 615) (SC)

(11) Mazagoan Dock Ltd. v. JCIT, (2009) (29 SOT
356) (Mum.)

(12) Arawali Construction Co. Pvt. Ltd. (124 Taxman 146)
(Raj.)

(13) CIT v. Elecon Engineering Co. Ltd., (1987)
(SC)

(14) Amway India Enterprises v. DCIT, (2008) (111
ITD 112) (Del.) (SB)

(15) Vithal Health Care Pvt. Ltd. v. ITO, (ITA No.
1754/M/04) (AY 01-02)

(16) CIT v. Shirke Construction Equipments Ltd.,
(246 ITR 429) (Bom.)

(17) M/s. Cambay Electric Supply & Industrial Co. Ltd.
v. CIT, (113 ITR 84) (SC)

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S. 37(1) — Treatment of deferred revenue expenditure — Expenditure on brand promotion and brand building classified in the books of account as deferred revenue expenditure — Allowable as revenue expenditure.

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  1. ACIT v. Raj Oil Mills Ltd.




ITAT ‘A’ Bench, Mumbai

Before D. Manmohan (VP) and

Rajendra Singh (AM)

ITA No. 5781/M/2007

A.Y. : 2003-04. Decided on : 27-5-2009

Counsel for revenue/assessee : Sanjay Agarwal/ Sanjay R.
Parikh

Per Rajendra Singh :

Facts :

The assessee was engaged in the business of manufacturing
and trading of edible and hair oils, cosmetics and hygiene products. For the
relevant year the assessee had incurred total expenditure of Rs.1.53 crore on
brand promotion and brand building. Out of the same, a sum of Rs.33.15 lacs
had been debited to the profit and loss account and the balance amount of
Rs.1.20 crore had been treated as deferred revenue expenditure in the books of
account. In the return of income the assessee had claimed the entire amount of
Rs.1.53 crore as revenue expenditure. According to the AO the accounting
treatment given by the assessee clearly showed that the assessee was to derive
benefits from the said expenditure for a number of years. He therefore
disallowed the amount of Rs.1.20 crore shown by the assessee as a deferred
expenditure and added to the total income. On appeal, the CIT(A) allowed the
appeal of the assessee.

Held :

The Tribunal noted that the Assessing Officer had
disallowed the claim mainly on the basis of the accounting treatment given by
the assessee in the books of accounts. According to it, the advertisement
expenditure was basically incurred for promoting the sale of the products.
While incurring such expenses the assessee may derive some enduring benefits
but as held by the Supreme Court in Empire Jute Co.’s case, test of enduring
benefit was not conclusive in understanding the true nature of expenditure. A
particular expenditure can be considered as capital expenditure only if there
was some advantage in the capital field i.e., when the assessee had
acquired any new assets or any new source of income. In case the expenditure
had been incurred only for conducting the business more efficiently and more
profitably, there being no advantage in the capital field, such expenses had
to be treated as revenue expenditure as held by the Supreme Court in the above
case. In the case of the assessee, by incurring expenditure on advertisement,
it had not acquired any new asset or any new source of income. The expenditure
had been incurred only for better profitability by promoting the sales. Such
expenditure, according to the Tribunal had to be treated as revenue
expenditure, irrespective of the accounting treatment given in the books as
the accounting treatment is not conclusive in understanding the true nature of
expenditure.

Case referred to :

Empire Jute Company (124 ITR 1) (SC).



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S. 145A — Valuation of inventory — Assessee following exclusive method of accounting for modvat valued its inventory excluding modvat credit — AO valued closing stock inclusive of modvat credit, but refused to similarly value opening stock — AO not justif

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  1. ACIT v. Tokyo Plast International Ltd.




ITAT ‘A’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 3290/Mum./2007

A.Y. : 2003-2004. Decided on : 26-5-2009

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

Ishwer Rathi

Per P. Madhavi Devi :

Facts :

The assessee was following exclusive method of accounting
for modvat i.e., it did not include un-utilised modvat in the value of
the closing stock. According to the AO, the assessee had not valued the
closing stock as per the S. 145A insofar as the duties relatable to the stock
were not included in the value of the closing stock. He therefore made an
addition of Rs.5.10 lacs to the value of the closing stock and also to the
total income of the assessee. The assessee’s contention to give similar
treatment in the value of the opening stock was rejected by the AO. On appeal,
the CIT(A) agreed with the assessee and allowed the appeal.

Held :

The Tribunal relying on the decisions of the Delhi High
Court in the case of Mahavir Aluminium Ltd. and of the Bombay High Court in
the case of CIT v. Mahalaxmi Glass, upheld the order of the CIT(A) and
dismissed the appeal filed by the Revenue.

Case referred to :



1. Mahavir Aluminium Ltd. in 297 ITR 77 (Del.)




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S. 220(2) — Liability to pay interest by assessee — AO not justified in charging interest for the intervening period when the CIT(A) allowed the appeal in favour of the assessee to the period when the Tribunal allowed the appeal in favour of the revenue

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  1. ACIT v. The Southern Paradise and Stud
    Developers Pvt. Ltd.




ITAT E-1 Bench, Mumbai

Before A. L. Gehlot (AM) and

P. Madhavi Devi (JM)

ITA Nos. 2135 and 2136/Mum./2008

A.Ys. 1995-96 and 1996-97. Decided on : 27-5-2009

Counsel for revenue/assessee : Ajay/Arvind Dalal

Per P. Madhavi Devi :

Facts :

According to the Revenue the CIT(A) had erred in deleting
the interest charged u/s.220(2) for the intervening period when the CIT(A)
allowed the appeal in favour of the assessee to the period when the Tribunal
allowed the appeal in favour of the Revenue. It relied on the decisions of the
Madras High Court in the case of Super Spinning Mills Ltd. and of the
Karnataka High Court in the case of Vikrant Tyres Ltd. and the Board Circular.

Held :

The Tribunal agreed with the assessee that the issue was
covered by the decision of the Supreme Court in the case of Vikrant Tyres Ltd.
The provisions of S. 220 only revives the old demand notice which had never
been satisfied by the assessee and which notice got quashed during some stage
of the appellate proceedings. In the case of the assessee, no such demand was
pending. Accordingly, the appeal filed by the Revenue was dismissed.

Cases referred to :



(1) Vikrant Tyres Ltd., 247 ITR 821 (SC);

(2) Super Spinning Mills Ltd. v. CIT, 244 ITR 814
(Mad.);

(3) Vikrant Tyres Ltd., 202 ITR 456 (Kar.);

(4) Board Circular No. 334, dated 3-1-1982.



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S. 2(14) and S. 45 : Amount received by a member of the housing society from a developer who constructed additional floors in a building owned by the housing society not liable to capital gains tax

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Part B — Unreported Decisions


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20 Deepak S. Shah v. ITO


ITAT ‘D’ Bench, Mumbai

Before R. K. Gupta (JM) and

A. L. Gehlot (AM)

ITA No. 1483/Mumbai/2001

A.Y. : 1995-96. Decided on : 16-6-2008

Counsel for assessee/revenue : Arvind Sonde/

Virendra Ojha

S. 2(14) and S. 45 of the Income-tax Act, 1961 — Capital
Gains — Amount received by a member of the housing society from a developer
holding TDR, who constructed additional floors in a building owned by the
housing society — Whether Assessing Officer justified in levying capital gain
tax from a member of the housing society — Held, No.

Per A. L. Gehlot

Facts :

The assessee derived income from salaries, dividend, etc. He
was a member of the housing society (‘the Society’). There was an estate
developer (‘the Developer’) who was in possession of TDR, and was looking out
for properties, whereon it could utilise the TDR. In March, 1995, the Society
and the Developer entered into an agreement whereunder the Society gave
permission to the Developer to utilise its TDR in raising the superstructure on
the existing building of the Society. In consideration thereof the members of
the Society, including the assessee, received the aggregate sum of Rs.1.21
crores from the Developer, wherein the share of the assessee was Rs.5.8 lacs.

According to the assessee, the said sum of Rs.5.8 lacs
received by him from the Developer was not taxable. However, according to the
Assessing Officer, the Society through its members had transferred the
development rights to the Developer for the aggregate consideration of Rs.1.21
crore and the same was taxable in the hands of the members of the Society.

On appeal before the CIT(A), he opined that the assessee and
the other members had drafted an agreement with the Developer to make believe
that the compensation receivable was for the hardship caused to the members on
account of construction activity. However, in effect and in reality it was the
benefit that each member was given corresponding to the valuable right that he
possessed in the land and building of the Society. Accordingly he held that the
assessee and other members of the Society had transferred a capital asset within
the meaning of S. 45 and therefore, capital gain was chargeable thereon. In
arriving at the conclusion, the CIT(A) also relied on the Supreme Court decision
in the case of A. R. Krishnamurthy and another.

Before the Tribunal the Revenue relied on the orders of the
lower authorities and also on the decision of the Gauhati Tribunal in the case
of Md. Nasser Ahmed.

Held :

The Tribunal noted that neither the Society nor the members
owned or possessed any TDR. The TDRs were owned and possessed by the Developer
and in terms of the regulations framed by the Municipal Corporation, it was
permissible for the building to utilise the said TDR in or with respect to the
prescribed area, including the land and building owned by the Society. The
members of the Society had consented to suffer the hardships and in terms of the
regulations of the Society or otherwise or in law the members did not have any
say in the matter once the Society decided to give its consent. According to the
Tribunal, the members of the Society had paid for purchase of the flat, which
conferred very limited rights and ‘right to grant permission for additional
construction’ as such did not form part of any rights; but it arose on account
of the volition or voluntary desire of a person. Such permission could not be
obtained by enforcing any rights or obligation arising from the agreement to
purchase the flat and/or the regulations of the Society. Accordingly, the
voluntary consent given by the members cannot constitute or form part of the
bundle of rights which were owned or possessed by the member in or with respect
to the tenure of the flats granted to the member by the Society. The area
occupied by the members was only a ‘measure’ in quantitative terms inasmuch as
the extent of hardship which may be faced cannot be quantified; When an
additional construction was made, the location of the flat, as such, was of no
significance or importance, since everyone suffered the hardship and the extent
could not be determined through any ‘measurer’. It further observed that the
members had not transferred any rights in or with respect to the flat or
suffered any deficiency or limitation in or with respect to the rights in the
flat; in fact they had added the risk of adding load to the building.
Accordingly, it held that the cost of flat cannot be any measure for the purpose
of finding out the cost of the alleged ‘capital asset’ and the alleged
‘transfer’ of such asset.

According to the Tribunal, the decisions relied on by the
CIT(A) as well as the Revenue in its submission, both were distinguishable on
the facts. It further observed that the assessee was neither holding any capital
asset, nor was there any transfer of capital asset. Accordingly it held that S.
45 of the Act was not attracted and the assessee was not liable to capital gain
tax u/s.45 of the Act.

Cases referred to :



(1) A. R. Krishnamurthy and Another v. CIT, 176 ITR
417 (S.C.)

(2) ITO v. Md. Nasser Ahmed, 2 SOT 389 (Gauhati)


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S. 14A – Where surplus earned is more than the investment made, no disallowance u/s.14A could be made

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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.)



4 Faze Three Exports Ltd. v. Addl. CIT


ITAT ‘I’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and V. D. Rao (JM)

ITA Nos. 7701 and 4677/Mum./2004 and 2005

A.Ys. : 2001-02 and 2002-03. Decided on : 28-7-2008

Counsel for assessee/revenue : Jitendra Jain/Bharat Bhushan

S. 14A of the Income-tax Act, 1961 — Disallowance of expenses
in relation to exempt income — Assessee, an exporter, had made investments in
shares of different companies, including group companies — Assessee able to show
earnings more than the amount of investment made — Whether Assessing Officer
justified in disallowing interest — Held, No.

Per J. Sudhakar Reddy :

Facts :

The assessee was in the business of exports of goods. As the
assessee had investments in equity shares, in addition to Rs.4.52 crore invested
in preference shares of a group company in the year under appeal, the Assessing
Officer disallowed part of the interest cost u/s.14A of the of the Act.

On appeal the CIT(A) held that interest paid on term loan,
discounting charges and other bank charges as well as interest on vehicles’ loan
cannot be disallowed, as the same can be held to have been utilised for specific
purposes. However, with reference to interest paid on packing credit, the CIT(A)
was of the view that the same could be subjected to S. 14A, and he accordingly,
restricted the disallowance to Rs.4.57 lacs.

Before the Tribunal the Revenue justified the orders of the
authorities below and contended that certain interest expenditure could
definitely be attributable to the investments made by the assessee. It further
relied on the Delhi High Court decision in the case of Motor General Finance
Ltd.

Held :

According to the Tribunal, the CIT(A) had erroneously
concluded that the packing credit was available for all the activities of the
assessee and that since the assessee was having only one bank account, it should
be presumed that the investment had also gone out of packing credit loan and the
same was required to be apportioned. The Tribunal noted that as per the terms of
the packing credit facility, the fund is released only against export orders.
According to the Tribunal, the presumption of the CIT(A) that the assessee would
have violated the stipulation laid down by the bank was unwarranted, especially
when there was no evidence in that regard. Further, it was noted that the
assessee was able to demonstrate that its earning during each of the years was
much more than the investment made in the particular year. It had own fund of
Rs.48.44 crore as against the borrowed fund of Rs.6.3 crore, while the
investment in equity was Rs.4.52 crore. Based on the above and also relying on
the Supreme Court decision in the case of Munjal Sales Corpn., the Tribunal
allowed the appeal of the assessee.

Cases referred to :



1. Munjal Sales Corpn. v. CIT, 298 ITR 298 (SC)

2. CIT v. Motor General Finance Ltd., 254 ITR 449
(Del.)



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