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Category: Tribunal News: Part A-Domestic Taxation

S. 43B – Interest on Custom duty not covered in S. 43B

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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.)



3 Royal Cushion Vinyl Products Ltd. v. ACIT


ITAT ‘F’ Bench, Mumbai

Before Sushma Chowla (JM) and

Abraham P. George (AM)

ITA No. 2824/M/2006

A.Y. 2002-03. Decided on : 31-7-2008

Counsel for assessee/revenue : Mayur Shah/

K. M. Varma

S. 43B of Income-tax Act, 1961 — Interest on Customs duty —
Whether such interest falls within the ambit of provisions of S. 43B — Held, No.

Per Abraham P. George :

Facts :

The assessee was a manufacturer of PVC flooring, leather
cloth, etc. It had imported certain raw materials under advance licence without
the payment of customs duty. This exemption was granted with the condition that
the assessee would export required value of goods. However, for its failure to
export goods, the assessee was made to pay the customs duty of Rs.9.52 crore,
which was waived on goods imported, along with the interest of Rs.3.78 crore. In
its tax audit report, the assessee had shown Rs.13.20 crore as disallowable
u/s.43B. However, in its return of income filed, the assessee had disallowed the
sum of Rs.9.52 crore only i.e., the amount equal to the custom duty. The
interest of Rs.3.78 crore was claimed as not covered u/s.43B. The Assessing
Officer as well as the CIT(A) held that the interest was disallowable u/s.43B.

Held :

The Tribunal referred to the Calcutta High Court decision in
the case of Hindustan Motors Ltd., where it was held that interest payable under
the Customs Act, 1962 was not part and parcel of customs duty payable and hence,
such interest did not attract S. 43B of the Act. According to it, the same High
Court followed the said decision in Orient Beverages Ltd., where it was held
that interest payable on outstanding municipal taxes could not be disallowed
u/s. 43B. Further, it also referred to the Apex Court decision in the case of
Harshad Mehta, where it was held that penalty or interest could not be
considered as tax. In view of the same, and the fact that there were no
decisions of the jurisdictional High Court, though there were decisions which
were against the assessee but of a different High Court, the Tribunal allowed
the appeal and deleted the disallowance of Rs.3.78 crore.

Cases referred to :



1. Hindustan Motors Ltd. v. CIT, 218 ITR 450 (Cal.)

2. CIT v. Orient Beverages Ltd., 247 ITR 230 (Cal.)

3. Harshad Mehta v. Custodian and Others, 231 ITR
871 (SC)



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Whether CIT(A) was justified in refusing to admit additional evidence — Held, No

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New Page 1

Part B — Unreported Decisions


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



2 Anmol Colours India (P) Ltd.
v. ITO


ITAT ‘A’ Bench, Jaipur

Before I. C. Sudhir (JM) and

B. P. Jain (AM)

ITA No. 379/JP/2008

A.Y. : 2002-03. Decided on : 20-6-2008

Counsel for assessee/revenue :

Mahendra Gargieya/P. C. Sharma

Assessing Officer issued notice u/s.143(2) of the Income-tax
Act, 1961 and gave the assessee various opportunities to produce documents in
support of the return filed — None appeared for the assessee — AO proceeded to
make an ex-parte assessment u/s.144 by treating addition to unsecured loans and
share application money during the year as unexplained u/s.68 of the Act —
Before CIT(A), assessee contended that it had given all documents/evidences to
its counsel who failed to appear before the AO — Assessee should not be made to
suffer for no lapse on his part — Assessee filed application under Rule 46A
along with documents/ evidences for admission thereof as additional evidence —
CIT(A) refused to admit additional evidence — Whether CIT(A) was justified in
refusing to admit additional evidence — Held, No.

Per B. P. Jain :

Facts :

The assessee was served notice u/s.143(2) of the Act on
29-10-2003. Thereafter, the assessee was given various opportunities and show
cause for producing the documents in support of the return filed. No one
appeared and the AO proceeded to make an ex-parte assessment u/s.144 of
the Act. The AO treated the addition to the unsecured loans and share
application money during the year as unexplained u/s.68 of the Act and added the
same to the income of the assessee. The AO further denied the claim of the
business loss of Rs.1,77,365 and treated the business income as Nil. Before the
CIT(A), the assessee contended that all the documents/evidences were given to
the counsel of the assessee and that the assessee was totally dependent upon his
counsel for representing the matter before the AO, but he did not care to attend
the proceedings. It was submitted that the assessee should not be made to suffer
for the serious lapse on the part of his counsel. The assessee stated that upon
receipt of the assessment order it came to know for the first time about the
additions made by the AO. The affidavit in this regard was filed before CIT(A).
The assessee contended that the circumstances were beyond the control of the
assessee and therefore, assessee was prevented by sufficient cause from
producing the documents/evidence before the AO. The assessee filed an
application under Rule 46A and produced the necessary evidences, before the
CIT(A), which were, in the opinion of the assessee, required for disposal of the
case. The CIT(A), upon receipt of the application along with documents/evidences
sent the said application along with documents/evidences to the AO. In response
thereto, the AO wrote a letter to the CIT(A) stating that assessee had not
appeared and had not produced any evidence despite various opportunities and now
on the basis of evidence filed before the CIT(A), the said loans and share
application money are verifiable from the books of the assessee. Upon receipt of
the letter from the AO, the CIT(A) held that none of the conditions specified
under Rule 46A are fulfilled and therefore he refused to admit the additional
evidence and confirmed the action of the AO. The assessee preferred an appeal to
the Tribunal.

Held :

The explanation of the assessee appears to be bona fide
and the assessee was prevented by sufficient cause from producing the evidence
which it was called upon to produce before the AO. Therefore, the CIT(A) was not
justified in not admitting the additional evidence under Rule 46A of the
Income-tax Rules, 1962.

When the application under Rule 46A along with documents was
sent to the AO and the AO in his letter to the CIT(A) stated that on the basis
of evidence filed before the CIT(A), the said loans and share application money
are verifiable from the books of the assessee, then the CIT(A) within his power
under sub-rule 4 of Rule 46A could direct the AO to examine the
documents/evidences filed by the assessee to dispose of the appeal.

The powers of the first Appellate Authority are very wide and
co-terminus with those of the AO and what AO can do, he can do and what AO fails
to do, that also he can do [refer Kanpur Coal Syndicate, 53 ITR 225 (SC)]. S.
251 and S. 252 of the Act have also been worded keeping the same spirit, as also
Rule 46A.

S. 250(4) empowers the CIT(A) to make further inquiries on
its own or to direct the AO to make further inquiry and to report to him.

The embargo put on his power under Rule 46A(1) and (2) has
also been loosened by sub-rule 4 which empowers the CIT(A) to direct the
production of any document/examination of witness, to enable him to dispose of
the appeal. Thus, the legislative intent is quite clear and the CIT(A) should
not jump straightway to reject, if the appellant files some evidence before him
under the provisions of Rule 46A(1).

The powers of the CIT(A) as submitted above are also to be
interpreted in the context of the amended law, wherein he is no more empowered
to restore back any matter which was earlier u/s.251(1)(a), necessitating a
compulsory admission of the evidence before him in the interest of justice.

Since all the evidences have to be examined by the AO,
therefore, in the interest of justice, the matter is restored back to the file
of the AO who will examine the evidences filed by the assessee before the CIT(A)
and decide the issue de novo, but by providing adequate opportunity of
being heard to the as-sessee. The assessee may submit further documents or
evidences as required in support of his claim before the AO. The AO is directed
to act accordingly.


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Amount of liability in dispute when fixed by the Court in the concerned assessment year is an ascertained liability even though not provided in the books of account.

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 (2010) 126 ITD 255 (Delhi)

DCIT v. Dune Leasing and
Finance Ltd. (Delhi)

A.Y. : 2001-02. Dated :
26-9-2008

 

12. Amount of liability in
dispute when fixed by the Court in the concerned assessment year is an
ascertained liability even though not provided in the books of account.

S. 115JB — AO cannot reopen
the accounts of company which have been audited and certified by the auditors.

Facts :

The assessee had taken a
loan from P. Ltd. for which there was some dispute pending in the Court. This
dispute came to an end in the assessment year under consideration. Accordingly
the assessee had an interest payable of Rs. 2.10 crore. There was one more item
of interest receivable of Rs. 1.19 crore.

The auditor’s report
mentioned that interest expenditure of Rs. 2.10 crore and interest income of Rs.
1.19 crore for the period 1-4-2000 to 31-3-2001 were not provided in the books
of account. Further it mentioned that P. Ltd. had filed a suit against the
assessee which was pending in the Court. The amount of liability was yet to be
fixed by the Court and so the same cannot be said to be an ascertained
liability.

The assessee however claimed
deduction of interest payable to P. Ltd. in its return of income. Similarly the
interest receivable was also offered to tax.

Considering the statement of
accounts filed and remarks of the auditor, the AO held that the assessee adopted
the policy of not providing for the liability of interest and therefore, the
liability was not allowed.

As regards, the interest
income, the AO, however, taxed the same.

Held I :

(i) The dispute came to an
end in the concerned financial year. The Court directed the assessee to pay
certain interest at the rate of 21% till the date of order of the Court and at
the rate of 10% thereafter. Thus it is not an unascertained liability.

(ii) It is a trite law now
to say that entries in the books of account are not conclusive about
determination of income and that if a liability has now been incurred but not
entered in the books, the same has to be allowed.

(iii) The AO has taxed the
interest income although not provided, but not allowed interest expenses.
Therefore the action was contradictory in nature in this behalf.

Facts :

While computing profits
u/s.115JB, the AO added a sum of Rs. 1.19 crore being interest income not
credited to the profit and loss A/c. However he did not allow any deduction for
interest liability of Rs. 2.10 crore not provided for in the books of account.

Held :

Considering the decision of
the Supreme Court in the case of Apollo Tyres Ltd. v. CIT, (2002) 255 ITR 273,
the Tribunal held that the AO cannot reopen the accounts of company which have
been audited and certified by the auditors. The impugned amount was not entered
in the books. The auditor had made certain remarks in this regard. No objection
was taken by the Registrar. Therefore, the book profit as per the profit & loss
account has to be taken.

Hence no adjustment needs to
be made for interest income not credited and interest liability not provided in
books.

 

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Income-tax Act, 1961 — Section 10A, section 155(11A) — Once the assessee has complied with all formalities and the request of the assessee for extension of time is not rejected, it could be presumed that after reasonable time, the extension of time has be

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46 (2011) TIOL 113 ITAT-Mum.

Mphasis Software & Services (India) Pvt. Ltd. v. ACIT

ITA Nos. 704 & 705/Bang./2010

A.Ys. : 2003-2004 & 2004-2005. Dated : 31-1-2011

 

Income-tax Act, 1961 — Section 10A, section 155(11A)
— Once the assessee has complied with all formalities and the request of the
assessee for extension of time is not rejected, it could be presumed that after
reasonable time, the extension of time has been granted in respect of the amount
realised and brought into India in convertible foreign exchange. Assessee is
entitled to deduction u/s.10A on the amount which was not realised within the
due date of filing of income-tax return but for which an application was made to
the prescribed authorities and the amount was realised before the assessment was
made. Powers conferred upon an AO by section 155(11A) w.e.f. 13-7-2006 do not
refer to any particular assessment year and the AO can w.e.f. this date amend
the assessment for any assessment year, provided the assessee applies within a
period of four years from the end of the previous year in which the export
proceeds are received in India.

Facts:

For A.Y. 2003-2004 (for A.Y. 2004-05 facts were identical and
hence not given here). The assessee-company, engaged in the business of
providing software development and call-centre services, had set up units at
Mumbai and Pune which were registered as Software Technology Park (STP units).
In respect of these units, the assessee was eligible for exemption u/s.10A. For
A.Y. 2003-04, the assessee filed return of income on 25-11-2003 declaring a
total income of Rs.3,89,69,030 after claiming relief u/s.10A amounting to
Rs.8,46,49,114. While computing the claim u/s.10A the assessee had considered
unrealised export revenue of Rs.14,44,50,338 as part of export turnover. Out of
Rs total unrealised export proceeds of Rs.14,44,50,338 an amount of
Rs.6,72,97,027 was realised subsequent to 30th September, 2003 till the
completion of the assessment. The balance unrealised export proceeds of
Rs.7,71,53,311 were not considered by the AO as part of export turnover while
calculating deduction u/s.10A on the ground that the assessee had not been able
to furnish the approval of the competent authority granting extension of time.

Aggrieved the assessee preferred an appeal to the CIT(A) and
contended that in view of the ratio of the Mumbai Bench of the ITAT in the case
of Morgan Stanley Advantage Services (P) Ltd. v. ITO, 30 SOT 1, approval
for extension shall be deemed to have been granted if communication
accepting/rejecting the application was not received after a reasonable time and
in view of the provisions of section 155(11A), the order passed by AO needs to
be rectified by considering the export proceeds realised by the assessee as
export turnover. The CIT(A) did not adjudicate upon the first contention and
rejected the second contention on the ground that the assessment years under
consideration are for a period prior to insertion of section 155(11A).

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the assessee complied with all the
formalities and had applied for extension to competent authority vide letters
dated 2-9-2003 and 5-11-2003. It held that once the assessee has complied with
all formalities and the request of the assessee for extension of time is not
rejected, it could be presumed that after reasonable time, the extension of time
has been granted in respect of the amount realised and brought into India in
convertible foreign exchange. It observed that section 155(11A) was introduced
to enable rectification of assessments. It held that section 15(11A) is a
provision which permits amendment of assessments already completed due to
subsequent developments taking place and power was given to the AO to carry out
such amendments w.e.f. 13-7-2006. The Tribunal held that in the view nature of
things, this date (13-7-2006) cannot refer to any particular assessment year and
the power having been conferred upon the AO from this date, the assessment for
any assessment year can be amended provided the assessee applies within a period
of four years from the end of the previous year in which the export proceeds are
received in India. The Tribunal noted the findings of the Bangalore Bench of the
ITAT in the case of Nous Info-systems (P) Ltd. v. ACIT, (2009 TIOL 14
ITAT-Bang.).

The Tribunal remitted the matter back to the AO to determine
the amount realised in convertible foreign exchange and to grant the benefit of
deduction in respect of the sum so realised and recomputed the deduction u/s.10A
of the Act.

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Income-tax Act, 1961 — Section 244A — Assessee is entitled to interest on delayed payment of interest. Whenever there is a delay in granting refund to the assessee, the Department has to pay compensation by way of interest for the delay in payment of amou

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45 (2011) TIOL 91 ITAT-Mum.

Multiscreen Media Pvt. Ltd. v. ACIT

ITA No. 6602/Mum./2008

A.Y. : 1999-2000. Dated : 19-11-2010

 

Income-tax Act, 1961 — Section 244A — Assessee is entitled to
interest on delayed payment of interest. Whenever there is a delay in granting
refund to the assessee, the Department has to pay compensation by way of
interest for the delay in payment of amount lawfully due to the assessee, which
are withheld wrongly and contrary to law.

Facts:

The Tribunal vide its order dated 4-3-2004 decided the appeal
filed by the assessee and granted certain reliefs to the assessee. The AO on
23-4-2004 passed an order giving effect to the order of the ITAT and determined
the amount of refund due to the assessee at Rs.3,26,48,225 (this included
interest of Rs.18,22,490). A part of the refund due to the assessee was adjusted
against the demand for A.Y. 2001-02 in July 2004 and the balance amount of
Rs.1,34,70,662 was paid to the assessee in August 2004. The assessee vide letter
dated 21-9-2004 moved an application u/s.154 of the Act on the ground that
computation of interest u/s.244A was erroneous and there was a short grant of
interest to the extent of approx Rs.42 lakh. On 26-9-2006, the AO passed an order u/s.154 and determined the balance refund due
to the assessee at Rs.42,15,279 and a further sum of Rs.13,16,576 was determined
as due to the assessee on account of MAT credit brought forward from A.Y.
1998-1999. Of the total amount of Rs.55,31,855 due to the assessee Rs.1,77,531
was adjusted against demand for A.Y. 2001-02 and balance Rs.53,54,324 was
adjusted on 4-12-2006 against demand for A.Y. 2003-04.

The assessee vide letter dated 9-11-2006 requested the AO to
rectify the mistake of short grant of interest on refund and for grant of
further interest on delayed payment of interest of Rs.42,15,279 for the period
from September 2004 to December 2006. The AO vide letter dated 3-1-2007 rejected
the contention of the assessee on the ground that there is no provision in the
Act for granting interest on delayed payment of interest.

Aggrieved the assessee preferred an appeal to the CIT(A) who
held that Sandvik Asia is a case where there was an inordinate delay and the SC
had taken serious exceptions to such delay. The case of Sandvik Asia was an
exceptional case and the ratio of the said decision would apply to such
exceptional cases. He was of the opinion that the case of the assessee did not
fall in the category of the Sandvik Asia case. He dismissed the appeal filed by
the assessee.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted the ratio of the decision of the Apex
Court in the case of Sandvik Asia (280 ITR 643) (SC) and did not find any merit
in the observations of the CIT(A) that the case of Sandvik Asia is an
exceptional case and the said decision would apply only to such exceptional
cases. It held that whenever there is a delay in granting refund to the
assessee, the Department has to pay compensation by way of interest for the
delay in payment of amount lawfully due to the assessee, which is withheld
wrongly and contrary to law. The Tribunal held that the assessee is entitled to
interest u/s.244A on delayed refund of Rs.42,15,279 for the period from
September 2004 to December 2006. It directed the AO to pay interest u/s.244A to
the assessee as per law.

The appeal filed by the assessee on this ground was allowed.

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Income-tax Act, 1961 — In the absence of any contrary material brought by the Revenue Authorities that the assessee has received professional fees more than what has been declared by him, no addition should have been made by the AO on account of non-furni

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44 (2011) TIOL 87 ITAT-Mum.

S. Ganesh v. ACIT

ITA No. 527/Mum./2010

A.Y. : 2006-2007. Dated : 8-12-2010

 

Income-tax Act, 1961 — In the absence of any contrary
material brought by the Revenue Authorities that the assessee has received
professional fees more than what has been declared by him, no addition should
have been made by the AO on account of non-furnishing of partywise details of
professional fees received during the year and non-reconciliation of
professional fees received with AIR information.

Addition on account of unexplained investment cannot be made
in the hands of the assessee, on the basis of AIR information, when the assessee
was only the second owner of the units of mutual funds and the identity of the
first owner was established and they are assessed to income-tax.

Facts:

The Assessing Officer asked the assessee to furnish partywise
details of professional fees received during the year and also to reconcile the
professional fees received by him with AIR information. The assessee in his
reply stated that all professional fees are received by way of cheques and all
such cheques received are deposited in one bank account only; professional
receipts disclosed by the assessee are more than the receipts shown in AIR
information and accordingly, there is no discrepancy. He also expressed his
inability to furnish partywise details of professional fees received during the
year under consideration. The AO added a sum of Rs.47,37,000 to the total income
of the assessee. This sum represented 40 items of receipts which, in the opinion
of the AO, were not disclosed by the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A) who
sustained the addition of Rs.47,37,000 made by the AO on account of
non-reconciliation of professional fees with AIR information. He decided this
ground against the assessee.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the submissions of the assessee were
not controverted by the AO and that the professional income declared by the
assessee far exceeded the professional fees as per AIR information. The Tribunal
held that in the absence of any contrary material brought by the Revenue
Authorities that the assessee has received amount more than the professional
fees than what has been declared by him, no addition should have been made. It
observed that there may be so many reasons such as low deduction of tax,
non-deduction of tax, deduction on account of reimbursement of expenses, etc.,
for which the figure of AIR may not tally with the income declared by the
assessee on account of professional fees from various clients. It also noted
that the categorical statement of the assessee viz. that it was not practically
possible to give detailed party-wise break-up of fees received was accepted in
the past in scrutiny assessment and no addition made. It deleted the addition
made by the AO and sustained by the CIT(A).

The appeal filed by the assessee on this ground was allowed.

Facts II:

The AO asked the assessee to reconcile the source of
investments in mutual funds and reconcile the same with AIR information as well
as co-relate the payments with the assessee’s bank account. The AO held that the
assessee failed to explain the source of investment in units of mutual funds
totalling Rs.4.75 crores. He added this amount to the total income of the
assessee as unexplained investment.

Aggrieved the assessee filed an appeal to the CIT(A) where he
filed additional evidence in the form of further statements got by him from
mutual funds. The AO in the remand report accepted Rs.4 crores as explained and
submitted that the two amounts aggregating to Rs.75 lakh remained unexplained.
The CIT(A) reduced the addition of unexplained investment from Rs.4.75 crores to
Rs.75 lakh.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held II:

In respect of the two amounts of Rs.50 lakh and Rs.25 lakh
regarded as unexplained investment of the assessee, the Tribunal noted that the
investment of Rs.50 lakh was in the name of the father of the assessee as the
first holder and assessee was the second holder. Similarly the investment of
Rs.25 lakh was in the name of the mother of the assessee as the first holder and
the assessee was the second holder. The Tribunal also noted that both these
persons were assessed to tax and the AO had written to the AO having
jurisdiction over these persons to take necessary action at their end. The
Tribunal was of the view that since the identity of these persons is established
and they are assessed to income-tax, therefore, addition, if any, could have
been made in their hands only on account of unexplained investment and not in
the hands of the assessee. The Tribunal set aside the order of the CIT(A) on
this ground and directed the AO to delete the addition of Rs.75 lakh.

The appeal filed by the assessee on this ground was allowed.

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Income-tax Act, 1961 — Section 40(a)(ia), section 194C — The provisions of section 194C are not applicable to a case where the transporters are hired by the vendors of the goods, who directly made supplies to the factory of the assessee and charged the am

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43 (2011) TIOL 38 ITAT-Mum.

Chang Hing Tannery v. DCIT

ITA No. 1921/Kol./2009

A.Y. : 2006-07. Dated : 16-12-2010

 

Income-tax Act, 1961 — Section 40(a)(ia), section 194C — The
provisions of section 194C are not applicable to a case where the transporters
are hired by the vendors of the goods, who directly made supplies to the factory
of the assessee and charged the amount of transportation separately in their
bill to the assessee.

Facts:

The assessee purchased raw material consisting of hide and
chemicals with the understanding that goods will be delivered at the factory of
the assessee by the supplier. Freight charges were to be paid by the assessee in
some cases against bill raised by the supplier of goods along with the value of
goods and in some cases separately on production of bills by the transporters.
There was no agreement between the assessee and the transporters as the
transporters were arranged by the suppliers themselves. The Assessing Officer
(AO) disallowed, u/s.40(a)(ia), a sum of Rs.23,70,881 out of freight charges on
the ground that the assessee failed to deduct TDS u/s.194C.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal found that the submissions of the assessee viz.
that the goods were supplied by the suppliers at the factory of the assessee was
not disputed by the Revenue. The Tribunal held that there could not have been
any agreement either written or oral between the assessee and the transporters
as transporters were arranged by the suppliers themselves to bring the goods at
destination. The Revenue did not bring anything on record to suggest the
contrary. Since there was no contract between the assessee and the transporters,
provisions of section 194C of the Act were held to be not applicable and
consequently the assessee was held to be not liable to deduct tax on such
payments u/s.194C. The addition made by the AO and sustained by the CIT(A) was
deleted.

The appeal filed by the assessee was allowed.

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S. 36(1)(vii) read with S. 263 — Bad debts written off — Assessing Officer allowed it after due verification of all facts and evidence — CIT invoked S. 263. Held : CIT has no power to rectify assessment order u/s.263 when Assessing Officer has duly verifi

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7. (2010) 122 ITD 228 (Ahd.)

Matrix Logistics (P) Ltd. v. CIT

A.Ys. : 1999-2000 & 2000-2001. Dated : 4-1-2008

 

S. 36(1)(vii) read with S. 263 — Bad debts written off —
Assessing Officer allowed it after due verification of all facts and evidence —
CIT invoked S. 263. Held : CIT has no power to rectify assessment order u/s.263
when Assessing Officer has duly verified all facts and evidence.

Facts :

The assessee is a limited company engaged in providing
technical and management services. Other ancillary objects of the assessee
included carrying out financing and investment and trading in shares and
securities.

For the relevant assessment year, the assessee filed return
of income, which was processed u/s.143(1) of the Income-tax Act, 1961 (‘the
Act’). The Assessing Officer later on reopened the assessment u/s.147 of the Act
to verify the claim of bad debts written off in the return. The assessee
furnished all details and evidences to support its claim of bad debts. The bad
debts were in relation to loan advanced to some R during the financial years
1996-97 to 1998-99. Interest earned on this loan was offered to tax. The
Assessing Officer noted the fact that the loan was given in the normal course of
business of financing of the assessee in view of resolution passed by the Board
of Directors on 15-3-1999. After due verification and examination, the Assessing
Officer allowed the bad debts, stating that the conditions of S. 36(i)(vii) read
with S. 36(2) of the Act are fulfilled.

The CIT invoked S. 263 of the Act on the grounds that the
assessee is not engaged in the business of banking and money lending, changes in
the memorandum have been effected in violation of certain provisions of the
Companies Act and that provisions of S. 36(1)(vii) and S. 36(2) of the Act are
not satisfied.

Held :

The Ahmedabad Tribunal held as follows :

(1) The CIT has no jurisdiction to set aside the assessment
order merely to conduct another inquiry and reach the same result. The
Assessing Officer had considered all the facts and had taken a view which is a
possible view.


(2) There is no default committed by the assessee under the
Companies Act. Even if there was any irregularity committed under the
Companies Act, it will not affect the chargeability and computation under the
Income-tax Act.


(3) Since the assessee company had been lending money to
various parties right from its inception, it can be seen that it was carrying
on the business of money lending in its ordinary course though it may not be
the main business of the company. The income earned out of the monies lent was
offered as business income from time to time.


Even the treatment in the books of account were done
accordingly.


Accordingly the revision order passed u/s.263 was quashed.



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S. 54F — Long-term capital gains invested by purchasing a row house — Subsequently, agreement to purchase row house cancelled — Another agreement entered with S company to purchase shares of S company engaged in building — Through this agreement assessee

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New Page 2

6. (2010) 122 ITD 212 (Mum.)

Mukesh G. Desai (HUF) v. ITO

A.Y. : 1996-97. Dated : 24-6-2008

 

S. 54F — Long-term capital gains invested by purchasing a row
house — Subsequently, agreement to purchase row house cancelled — Another
agreement entered with S company to purchase shares of S company engaged in
building — Through this agreement assessee was entitled to block no. 5 of one
Abhijit building — Whether this transaction would qualify for benefit of S. 54F
— Held, Yes.

The assessee HUF sold shares during the period from May 1995
to January 1996 and earned long- term capital gains of Rs.27,01,204. It then
entered into an agreement to purchase a row house with one Mr. H and paid
Rs.30.50 lakhs. The agreement was dated 26-8-1996. However, the above agreement
was cancelled due to a demolition drive by the Thane District Authorities. Mr. H
paid back the money on 15-5-1997 and 7-6-1997.

Subsequently, the assessee entered into an agreement with S
company engaged in construction of a building known as Abhijit. The said
building was under construction. The assessee paid Rs.30.50 lakhs on 28-3-1996
and purchased a ‘Block of Shares’ of S company. Through this, he became entitled
to flat no. 5 of the under-construction building. The assessee got occupancy
certificate on 5-12-1998. The Assessing Officer held that :

(a) the assessee’s investment in the row house is a
purchase of ‘new asset’ within the meaning of S. 54F.

(b) the cancellation of transaction with Mr. H is to be
treated as transfer of ‘new asset’. Since this ‘new asset’ is transferred
before completion of 3 years, the condition of S. 54F(3) is violated. The
Assessing Officer ignored the investment in Abhijit building and denied
exemption u/s.54F.

On appeal the CIT(A) held that :

(a) in view of cancellation of agreement for purchase of
row house, there was neither purchase nor any construction within the
stipulated time limit of S. 54F.

(b) considering January 1996 i.e., the last date on which
capital gains arose, the last date for purchase of new asset is March 1998.

(c) The assessee’s case is that of purchase of
asset and not construction of asset.

(d) The assessee has not utilised the capital gains before
filing of return and has also not deposited in capital gains scheme.

On appeal, the Mumbai Tribunal held from the sequence of
events :

(a) The assessee’s intention to invest the capital gains
was a bona fide one. The Assessing Officer has not brought any mala fide
intention. The assessee cannot buy a defective house i.e., row house just to
qualify for exemption under the Income-tax Act. Therefore the contention of
the lower authorities in treating the row house is misplaced.

(b) As regards, the capital gains scheme, the assessee had
already parted with capital gains by paying for acquisition of row house.
There is no way it would have complied with the condition of depositing in
bank for capital gains scheme.

(c) The assessee purchased certain shares of S company.
This entitled him to block no. 5 of Abhijit building. Hence the transactions
are interlinked. So the purchase of shares in S company is nothing but
investment in residential house.

(d) As regards, the time limitation of two years, a
combined reading of Board Circulars Nos. 471 and 672 show that the assessee’s
case has to be treated as that of ‘construction’.

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S. 28(i) — Letting out of property used to run business centre — Whether rent income or business income.

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New Page 2

5. 122 ITD 93 (Mum)

Harvindarpal Mehta (HUF) v.

DCIT, Mumbai

A.Y. : 2002-03. Dated : 22-5-2008

 

S. 28(i) — Letting out of property used to run business
centre — Whether rent income or business income.

Facts :

The assessee was running two business centres. One of the
properties in which a business centre was functioning was owned by the assesee,
while the other was taken on lease. The spaces in the property were given to
various customers on short-term basis and customers kept on changing from time
to time.
Additionally, other common services/facilities like receptionist, telephone
operator, house-keeping staff, common waiting rooms, etc. were also provided.

The receipts and expenditure incurred in running the business
centres were routed through profit & loss account. The assessee declared income
as business income. The Assessing Officer treated the receipts from business
centre situated in the property owned by the assessee as income from house
property. According to him, the assessee was the owner of the said property and
this property was let out by the assessee. Hence the receipt out of it shall be
treated as income from house property. In the case of business centre situated
in property taken on lease by the assessee, the receipt from the same was
treated as ‘income from other sources’. As far as the service charges are
concerned, the same were treated as ‘income from other sources’.

On appeal to the CIT(A), the CIT(A) confirmed the assessment
order.

Held :

Relying on the decision of the Apex Court in the case of
Shambhu Investment (P.) Ltd. (2003) (263 ITR 143), the Tribunal held that the
fact whether a receipt is a business receipt or a receipt from mere letting out
of property, depends on the facts of the case and intention of the assessee.

Further in the present case, various facilities like
receptionist, telephone operator, common waiting rooms, etc. are also provided.
The ultimate control over the premises is with the assessee. There is
no intention of mere letting out the property and earn the rental income.
Business centres have
peculiar characteristics wherein space is provided for temporary period along
with other business-like facilities.

The intention of the assessee is thus to run the
business centre by exploiting the property and not mere letting out the
property. Hence the receipts are business receipts.

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S. 54F — Assessees sold shares and earned long-term capital gains — The said gains were invested in purchasing land and building — The building was demolished and a new building was constructed — Whether the cost of construction of new building was eligib

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New Page 2

4. (2010) 122 ITD 15 (Bang.)

M. Vijaya Kumar v. ITO

A.Y. : 2004-05. Dated : 25-1-2008

 

S. 54F — Assessees sold shares and earned long-term capital
gains — The said gains were invested in purchasing land and building — The
building was demolished and a new building was constructed — Whether the cost of
construction of new building was eligible u/s.54F — Held, Yes.

The assessees, husband and wife, sold shares and purchased
property, land and building in joint name. They demolished the building and
constructed a new building. They claimed benefit of S. 54F in respect of cost of
construction of house property. The Assessing Officer denied the benefit
thereby, holding that once the capital gains are invested in purchase of house
property, the application of S. 54F ends. The CIT(A) seconded the AO’s opinion.

On appeal, the Bangalore ITAT held in favour of the assessee
relying on the case of Union Co. (Motors) Ltd. and CBDT Circular No. 667, which
clarified that for exemption meant construction of a residential house after
demolishing the existing structure. It held that the existing structure was
demolished so as to make way for the new asset. The intention of the assessee
was to create and stay in a residential property. Hence the cost of construction
of new property is allowed as deduction u/s.54F.

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S. 17(2) – Employer’s contribution towards social security scheme, made under a statutory provision, is not a perquisite —Even in ex-parte cases the CIT(A) is required to decide appeal on merit after considering material on record — For computing tax effe

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New Page 2

3. 2010
TIOL 103 ITAT (Mum.)



ACIT v. Harashima Naoki Tashio

A.Y. : 2004-05. Dated : 8-2-2010

 

S. 17(2) – Employer’s contribution towards social security
scheme, made under a statutory provision, is not a perquisite —Even in ex-parte
cases the CIT(A) is required to decide appeal on merit after considering
material on record — For computing tax effect interest is not to be taken into
account.

Facts :

The assessee, not an ordinary resident in India, worked as a
General Manager with M/s. Mitsui & Co. India Pvt. Ltd. in the period relevant to
the assessment year under consideration. While assessing the total income of the
assessee the Assessing Officer (AO) made an addition of Rs.5,00,629 representing
contribution made by the assessee’s employer in Japan towards social security,
health insurance, etc. The assessee’s contention that the contribution was under
a statutory provision and only a contingent benefit which did not give any
vested right to the assessee, as the assessee may or may not get any benefit
depending upon happening or non-happening of an event which is beyond the
control of the appellant, was not accepted. Aggrieved, the assessee preferred an
appeal to the CIT(A).

The CIT(A) examined the scheme under which the payment was
made and following the decision of the Tribunal in the case of ACIT v. Eric
Matthew Gottesman, 15 SOT 301 (Del.) deleted the addition.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that in the following cases, which are
binding on it, similar contribution to social security made by the employer in
the home country of the foreign national was held to be not taxable as a
perquisite :

1. ACIT v. Eric Matthew Gottesman, (2007) 15 SOT 301
(Del.)

2. ACIT, Circle 47(1) v. Hideki Ishihara in ITA No.
1906/Del./2008 dated 31-12-2008

3. ITO v. Lukas Fole, (2009) 124 TTJ 965 (Pune)

4. Gallotti Raoul v. ACIT, 61 ITD 453 (Bom.)


The objection on behalf of the Revenue that since none
appeared on behalf of the assessee before the CIT(A), the CIT(A) should have
decided the issue against the assessee the Tribunal held that even in ex-parte
cases the CIT(A) is required to decide appeal on merit after considering
material on record.

The Tribunal held that interest for computing tax
effect is not to be taken into account, but since how much interest has been
charged was not available on record, the contention on behalf of the
assessee that the tax effect is less than Rs.2 lakhs was rejected.

The Tribunal dismissed the appeal filed by the
Revenue.

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S. 244A – Interest is payable even on refund arising out of self-assessment tax paid from the date of payment of self-assessment tax.

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New Page 2

2. 2010 TIOL 126 ITAT (Mum.)

ADIT v. GE Asset Mgt. Inc A/c General Electric Pension Trust

A.Ys. : 1999-2000 & 2003-04. Dated : 5-2-2010

S. 244A – Interest is payable even on refund arising out of
self-assessment tax paid from the date of payment of self-assessment tax.

Facts :

Pursuant to the order passed by the Assessing Officer (AO) on 3rd October, 2008 the assessee was entitled to refund of
Rs.1,99,47,368. This refund comprised tax paid on regular assessment and also
part of self-assessment tax paid on 13-2-2006. The AO granted interest on refund
arising on the amount of tax paid on regular assessment, but did not grant
interest on refund arising on amount of tax paid as self-assessment tax. He did
not assign any reason for not granting interest on refund of self-assessment tax
paid on 13-2-2006.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
held that the provisions of S. 244A(1)(b) include all situations of refund other
than those covered by S. 244A(1)(a) i.e., refunds arising out of advance tax or
TDS. He held that interest u/s. 244A(1)(b) is payable even if refund arises on
account of self-assessment tax paid by the assessee. The CIT(A) allowed the
appeal and held that the assessee is entitled to additional interest u/s.244A on
the amount of self-assessment tax paid from the date of payment till the date of
granting
of refund.


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

Held :

The Tribunal noted that while allowing the claim of the
assessee the CIT(A) has followed the decision of the Co-ordinate Bench of the
Tribunal in the case of DCIT v. BSES Ltd., (113 TTJ 227) (Mum).
The Tribunal also noted that the AO had not assigned any reasons for not
granting interest on refund arising on account of payment of self-assessment
tax. The Tribunal dismissed the appeal filed by the Revenue.


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S. 10A/S. 10B – Deduction u/s.10A/10B cannot be denied to software developer exporting software merely on the ground that it hires IT professionals on man-hour basis whenever it has assignments and does not have many employees on payroll.

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New Page 2

1. 2010 TIOL 132 ITAT (Mum.)

ACIT v. Meridian Enterprises Computing
Solutions P. Ltd.

A.Ys. : 2002-03 to 2004-05. Dated : 8-3-2010

 

S. 10A/S. 10B – Deduction u/s.10A/10B cannot be denied to
software developer exporting software merely on the ground that it hires IT
professionals on man-hour basis whenever it has assignments and does not have
many employees on payroll.

Facts :

The assessee company was having an office located in STP and
was carrying on the business of on-site software development. It had claimed
exemption u/s.10A/10B of the Act. There was no dispute about satisfaction of any
of the conditions prescribed for claiming exemption. The Assessing Officer (AO)
observed that the assessee company hired IT professionals on a man-hour basis;
its Managing Director and other directors were old people and their son was the
only employee on the payroll of the assessee; the assessee did not have
infrastructure facilities in India except four walls in STP. He examined the
agreement entered into by the assessee with M/s. Alpharma, its customer, and
noted that the assessee was to get remuneration on an hourly basis and that the
assessee was referred to in the agreement as ‘supplier’. For all these reasons
he came to the conclusion that the assessee was supplying man-power and was not
engaged in software development. He, denied exemption u/s.10A/10B.

Aggrieved the assessee preferred an appeal to the CIT(A) who
examined the matter in detail and observed that the agreement entered into by
the assessee was for provision of information technology consulting services and
procuring of services of individual consultants was incidental to rendering this
service and was not service in itself; the description on the invoice was ‘technical service’; the remittance advice to the
bank corroborated this fact; since the assessee had only one employee, he held
that it would be improper to conclude that the assessee is engaged in supply of
manpower; the overseas company paid the assessee amount based on invoices raised
from time to time. He also held that since it was an on-site assignment, there
was no need to have infrastructure in India to render such services. He also
noted that the assessee was liable for damages in case of non-performance or
lapses of their employee. The fact that by taking the contract from Alpharma the
assessee had put itself to stake of USD 50,000 in terms of warranted encumbrance
which was independent of earnings from the said company was held to be very
vital to decide the issue since if it was a transaction of merely manpower
supply then taking such a risk was unwarranted. The CIT(A) held that thecontract of the assessee with M/s. Alpharma was not for manpower supply. The CIT(A) allowed the appeal.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal did not find any infirmity in the findings of
the CIT(A). It upheld the order of the CIT(A) and dismissed the appeal filed by
the Revenue.

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S. 149(3) of the Income-tax Act, 1961 — Whether the time limit provided u/s.149(3) applies to the asses-see who has voluntarily filed the return of his principal non-resident, and in whose case no order u/s.163 has been passed treating him as the agent of

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New Page 28 2009 TIOL 168 ITAT Mum. (SB)


J. M. Baxi & Co., as agents of Chartering
Singapore Pte Ltd. v. DDIT
ITA No. 2965/M/2006 to ITA No. 2968/M/2006
A.Ys. : 1998-99 to 2002-2003. Dated : 5-3-2009

S. 149(3) of the Income-tax Act, 1961 —
Whether the time limit provided u/s.149(3) applies to the asses-see who has
voluntarily filed the return of his principal non-resident, and in whose case
no order u/s.163 has been passed treating him as the agent of the non-resident
— Held, No.

Facts :

M/s. J. M. Baxi & Co. (‘the assessee’) filed
returns for A.Ys. 1998-99 to 2002-03 as agent of non-resident Singapore
company, M/s. Thaoresen Chartering Singapore Pte Ltd. (TCSPL). In the returns
filed the assessee and its principal claimed that under Article 8 of Double
Tax Avoidance Treaty, the freight collected in India on account of various
vessels owned/ chartered by TCSPL was taxable at a lower rate. The returns
filed were accepted u/s.143(1) of the Act. Subsequently, the AO issued notices
u/s.148 dated 6-1-2005 to the assessee as agent of non-resident.

Since the notices issued u/s.148 in the first
three assessment years i.e., 1998-99, 1999-2000 and 20002001 were
issued after the expiry of period of two years from the end of the relevant
assessment year the same were claimed to be out of time u/s.149(3) on the
ground that the assessee was an agent of a non-resident. On the other hand,
the Revenue contended that the provisions of S. 149(3) do not apply to a
person who is ‘agent’ under general law and that since the assessee has never
been ‘treated as an agent’ u/s.163, the notices issued are not barred by the
limitation prescribed u/s.149(3).

Since the Regular Bench found conflict of
decisions between various authorities, the matter was referred to the Special
Bench.

Held :

S. 160 to S. 166 are machinery and enabling
provisions and give the Department the option to either assess the
non-resident or his agent. A non-resident or his agent cannot claim that he be
assessed under a particular clause of S. 163 and not u/s.160(1)(i) read with
S. 161.

Under provisions of S. 160 to S. 166, there are
agents of two types : (1) agents who admit their liability as agents of
non-resident. Such liability may be expressly admitted or it may be implied
from their act and conduct. Having accepted themselves to be ‘agent’ of the
non-resident, the question of giving opportunity of being heard to such agents
or passing order, treating them as agent of non-resident, would not arise. (2)
There can be agents u/s.160(1)(i) or u/s.163(1), who deny their liability to
be agents of the non-resident assessee. Because of their stand, it becomes
necessary for the AO to allow them an opportunity of being heard and then
adjudicate the matter relating to their liability to be agent in terms of S.
163(2). When an order u/s.163(2) is passed holding such persons to be agent of
the non-resident, such person falls in the category of persons who are treated
as agents u/s.163. Whether a particular person would fall under first category
or second category, would depend upon facts and circumstances of the case.

S. 149(3) applies only in a case where a person
is ‘treated as an agent’ of a non-resident u/s.163 i.e., persons
disputing their liability as agent. It does not apply to persons who have
voluntarily treated themselves as agent of the non-resident.

The SB upon going through the various clauses of
the agreement entered into by the assessee with its principal and upon
consideration of other facts viz. that the assessee had not disputed
its liability to be assessed as an agent of the non-resident; it had signed
income-tax returns and had filed them as agent for and on behalf of the
non-resident, several documents were furnished with the income-tax authorities
including an undertaking that taxes due from the non-resident would be paid by
the asses-see, came to a conclusion that the assessee had treated himself as
the ‘agent’ and that it was not necessary for the authorities in this case to
provide any opportunity of being heard to the assessee as regards its
liability to be treated as an agent under the Act, nor was there any necessity
to pass any order in terms of S. 163(2). The time limit prescribed in S.
149(3) was held to be not applicable. The question referred to the SB was
answered in favour of the Revenue and against the assessee.


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S. 115JB of the Income-tax Act, 1961 — Whether while computing book profits u/s.115JB of the Act, provision for diminution in value of investments can be added back by invoking clause (c) of Explanation below S. 115JB on the ground that it is not an ascer

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New Page 27 2009 TIOL 131 ITAT Bang.


Rajmahal Trade & Investment Pvt. Ltd. v. CIT
ITA No. 68/Bang./2008
A.Y. : 2003-2004. Dated : 8-8-2008

S. 115JB of the Income-tax Act, 1961 —
Whether while computing book profits u/s.115JB of the Act, provision for
diminution in value of investments can be added back by invoking clause (c)
of Explanation below S. 115JB on the ground that it is not an ascertained
liability — Held, No.

Facts :

For the A.Y. 2003-04, the profit & loss account
prepared by the assessee had adjustments in two parts, namely, adjustments
above the line and adjustments below the line. Profit of Rs.1,47,15,215 was
shown as net profit ‘above the line’. The following two adjustments were
made below the line :

Provision for diminution in value of investments Rs. 32,66,947

Provision for taxes Rs. 10,00,000

After the above two adjustments, the profit
transferred to balance sheet was shown at Rs.1,04,42,268. The assessee while
computing book profit added back the provision for taxes and computed the
book profit to be Rs.1,14,42,268.

While assessing the income of the assessee u/s.
143(3) of the Act, the AO while computing the book profits u/s.115JB held
that provision for diminution in the value of investments was not an
ascertained liability and therefore he invoked clause (c) of Explanation
below the Section and added this sum of Rs.32,66,947 to the profit as per
profit & loss account.

On an appeal by the assessee, the CIT(A) held
that in view of the decision of the Apex Court in the case of Apollo Tyres
the AO had no power to re-compute the book profit if the profits of the
assessee have been ascertained in accordance with Part II and Part III of
Schedule VI of the Companies Act, 1956. He agreed with the assessee’s
contention that the provision for diminution in the value of investments did
not represent any unascertained liability and, therefore, cannot be added
back under Explanation

(c) below S. 115JB. He, however, held that the
shares were held as investments and not as stock-in-trade and, therefore,
held that the AO was right in adding back the provision to the book profit.
Accordingly, he confirmed the assessment order on this point.

Aggrieved, the assessee preferred an appeal to
the Tribunal.

Held :

The Tribunal held that in view of the
observations of the Apex Court in the case of Apollo Tyres Ltd. it is not in
order for the AO or the CIT(A) to rescrutinise the assessee’s accounts to
find out whether the provision has been made for diminution in respect of
shares held as stock-in-trade or as investments. Part III of Schedule VI to
the Companies Act only requires a provision to be created for diminution in
the value of assets and no distinction has been made between an asset which
is held as stock-in-trade and assets which are held as investments by the
assessee. In rescrtuinising the accounts of the assessee and questioning
their correctness the CIT(A) has overlooked the observations of the SC in
the case of Apollo Tyres.

Parts II and III of Schedule VI to the
Companies Act do not recognise any distinction between above the line
adjustments and below the line adjustments. Therefore, the assessee itself
has not recognised any such distinction.


The contentions of the assessee were accepted
and the Tribunal directed the AO to reduce the book profit by Rs.32,66,947
being the provision for diminution in the value of investments.

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Section 80IB(10) — Assessment Year 2003-04 — Whether in a case where a project comprising residential housing units and also commercial establishments has been approved by a local authority as a ‘housing project’, deduction under S.80IB(10), as applicable

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New Page 2

  1. 2009-TIOL-218-ITAT-PUNE-SB

Brahma Associates vs. JCIT

A.Y. : 2003-2004. Date of Order : 6.4.2009

 

Section 80IB(10) — Assessment Year 2003-04 — Whether in a
case where a project comprising residential housing units and also commercial
establishments has been approved by a local authority as a ‘housing project’,
deduction under S.80IB(10), as applicable prior to 1.4.2005, is admissible qua
the profits of the entire project i.e., including the profits on sale of
commercial units — Held : Yes.

Whether in a case where such a project is approved by the
local authority as a ‘residential-cum-commercial project’, deduction
u/s.80IB(10), as applicable prior to 1.4.2005, is admissible —Held : Yes, if
the commercial establishments are up to 10% of the built-up area. Whether in a
case where in such a project the area of commercial establishments is more
than 10% of the built-up area, but the profits of residential units can be
ascertained separately and also the size of the plot after excluding the area
utilised for construction of commercial establishment exceeds one acre and all
other conditions are satisfied by considering construction of residential
units as a separate project on a stand-alone basis, deduction u/s. 80IB(10),
as applicable prior to 1.4.2005, is admissible in respect of profits of
residential units — Held : Yes.

Facts :


The assessee was an AOP who constructed a project in Pune,
which project was started on 14th August, 2000 and was completed on 3rd Oct.,
2005. The total area of the plot was 34,209.79 sq. mts. The built-up area of
the residential units was 24,583.31 sq. mts, whereas built-up area of
commercial premises was 7,128.87 mts. The percentage of commercial area to the
total area was 20.83%. The Pune Municipal Corporation had approved the project
as a ‘New/Residential + Commercial’.

The assessee, at the assessment stage, claimed deduction
u/s.80IB(10) in respect of profits attributable to the residential units or
dwelling unit segment of the overall project. The Assessing Officer (AO)
rejected the claim of the assessee on the ground that prior to A.Y. 2005-06 a
project qualified for deduction u/s.80IB(10) only if it was a purely
residential project and did not involve construction of commercial areas at
all. He also noted that the commercial areas constructed in the project of the
assessee were far in excess of the limits prescribed in DC Regulations for
convenience shopping and also the commercial units constructed violated the
norms prescribed in DC Regulations as regards size and the purpose for which
the same could be used.

The Commissioner of Income-tax (Appeals) upheld the order
of the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal. The Division Bench noted that there were divergent views in various
decisions of the Division Benches and therefore, a Larger Bench was
constituted to consider the following questions :

1 Whether deduction u/s. 80IB(10), as applicable prior to
1st April, 2005, is admissible in case of ‘housing project’ comprising
residential housing units and commercial establishments ?

2 In case questions no.1 is answered in the affirmative,
whether considering the facts and circumstances of a particular case, a
propor-tionate deduction should be allowed ?

3 In case the answers to questions no. 1 and 2 are in
affirmative, whether the limit prescribed by clause (d) of S. 80IB(10)
should operate ?


Held :

The Special Bench held the amendment to S.80IB(10)
w.e.f. 1.4.2005 laying down the limit up to which a housing project can
have commercial areas to be prospective and not retrospective. It observed
that the 2005 amendment placed a restriction on commercial user and also shows
that commercial user was permissible even prior to that.

The Bench noted that this Section is aimed at promoting
construction of housing projects so as to address the problem of shortage of
dwelling units and it cannot be said that the object is to encourage house
building activity per se, irrespective of whether these are dwelling or
commercial units.

The Special Bench held that for a period prior to 1.4.2005,

(a) A project involving construction of commercial areas
along with dwelling units would qualify for deduction u/s. 80IB(10) if such
a project was approved by local authority as a ‘housing project’. Such an
approval by the local authority will be conclusive and no further inquiry
needs to be made on the extent of commercial use in such a project. Profits
of such a project, subject to satisfaction of other conditions specified in
S.80IB(10), will qualify for deduction u/s.80IB(10). The entire profits of
the project and not only profits attributable to dwelling units will qualify
for deduction u/s.80IB(10).

(b) Given that under the DC Rules (of Pune) there cannot
be a pure residential project and it is incumbent on the developer to
reserve a part of the plot for shopping, commercial use of area must be
regarded as an integral part of housing project and consequently in case a
project involved construction of dwelling units and commercial areas and the
project was approved by a local authority as ‘residential-cum-commercial
project’, such a project will qualify for deduction u/s.80IB(10) if the
commercial areas are up to 10% of the built-up area. Once such a project is
regarded as housing project qualifying for deduction u/s.80IB(10), subject
to satisfaction of other conditions stated in S.80IB(10), entire profits of
the project will be eligible for deduction and not only the profits
attributable to construction of residential dwelling units.

Section 10B of the Income-tax Act, 1961 — Formula under S. 10B(4) — Whether any expenses on freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or any expenses incurred in f

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New Page 2

  1. 2009-TIOL-187-ITAT-MAD-SB

ITO vs. Sak Soft Ltd.

A.Ys. : 2002-2003 and 2003-04.

Date of Order : 6.3.2009

Section 10B of the Income-tax Act, 1961 — Formula under S.
10B(4) — Whether any expenses on freight, telecommunication charges or
insurance attributable to the delivery of articles or things or computer
software outside India or any expenses incurred in foreign exchange in
providing technical services outside India, which are required to be excluded
from export turnover as defined in Explanation 2(iii) below S. 10B, ought also
to be excluded from the figure of total turnover while applying the formula
prescribed by Ss (4) of S. 10B. — Held : Yes.

 

Facts :

The assessee was a company engaged in export of computer
software. In the return of income filed by the assessee it claimed an
exemption of Rs.3,07,77,341 u/s. 10B of the Act. While computing the amount of
deduction u/s. 10B of the Act the assessee had taken export turnover at
Rs.8,33,64,528 and total turnover at Rs.9,26,23,216. In the course of
assessment proceedings, the Assessing Officer (AO) noticed that assessee had
incurred the following expenses in foreign currency.


Employer’s NIC contribution Rs.2,19,672


Salary at London office Rs.20,92,763


Lodging expenses at London Rs.6,263


Travelling expenditure Rs.5,62,896


Professional charges at London office Rs.25,462


Total Rs.29,07,056


The AO held that in terms of clause (iii) of Explanation 2
below S.10B the above expenditure was to be deducted from export turnover. He,
accordingly, reduced the sum of Rs 29,07,056 from export turnover of
Rs.8,33,64,528. The AO thereafter worked the deduction u/s.10B in accordance
with the formula prescribed by S.10B(4). He, however, did not reduce this sum
of Rs.29,07,056 from total turnover in the denominator.


The assessee’s contention was that there should be parity
between the figures of export turnover and total turnover, and the figure of
Rs.29,07,056 should be excluded from both the export turnover and the total
turnover, which are the numerator and denominator, respectively, in the
formula.


The question before the Special Bench (SB) was whether AO
should have taken the total turnover in the formula to be Rs.8,97,16,160
(Rs.9,26,23,216 minus expenditure of Rs.29,07,056).

Held :



(a) As held by the SC in the case of LMW, there has to be
an element of turnover in the receipt if it has to be included in the total
turnover. That element is missing in the case of freight, telecom charges or
insurance attributable to the delivery of the goods outside India and
expenses incurred in foreign exchange in connection with providing of
technical services outside India. These receipts can only be received by the
assessee as reimbursement of such expenses incurred by him. Mere
reimbursement of expenses cannot have an element of turnover. It is in
recognition of this position that in the definition of ‘export turnover’ in
S. 10B the aforesaid two items have been directed to be excluded.


(b) The definition of export turnover contemplates that
the amount received by the assessee in convertible foreign exchange should
represent ‘consideration’ in respect of the export. This can only refer to
the price of the computer software exported out of India. Any reimbursement
of the two items of expenses mentioned in the definition can under no
circumstances be considered to represent ‘consideration’ for the export of
the computer software or articles or things. Thus, there is evidence
inherent in the definition of ‘export turnover’ itself that it should
represent ‘consideration’ for export of the articles or things or computer
software. It follows that the expression ‘total turnover’ which is not
defined in S.10B should also be interpreted in the same manner. Thus, the
two items of expenses referred to in the definition of ‘export turnover’
cannot form part of the total turnover since the receipts by way of recovery
of such expenses cannot be said to represent consideration for the goods
exported.


(c) Ss 10A, 10B, 80HHC, 80HHE and 80HHF provide for
relief from export profits and in that sense they are of the same genre. It
cannot be disputed that the object of these Sections is to promote exports.
If some of the Sections such as S.80HHE and S.80HHF provide for a formula
for calculating the deduction which is identical with the formula prescribed
by S. 10B, it follows that it would be incongruous to interpret Section 10B
in a manner different from these two Sections merely because there is no
definition of ‘total turnover’ in that Section.


(d) Statutorily parity is maintained between export
turnover and total turnover in S.80HHE and S.80HHF. We do not see why such
parity cannot be maintained between export turnover and total turnover in
S.10B just because ‘total turnover’ has not been defined in that Section.


(e) In clause (iii) of Explanation 2 to S. 10B, the
freight, telecom charges and insurance attributable to the delivery of the
goods outside India and expenses incurred in foreign exchange in providing
technical services outside India have been excluded from export turnover.
Therefore, the same have to be excluded also from the total turnover though
that expression has not been defined in the Section.


(f) While explaining the rationale for introduction of
the definition of ‘total turnover’ with retrospective effect in S.80HHC, the
CBDT has in circular no. 621, dated 19.12.1991 by implication at least,
taken the view that parity should be maintained between both the
expressions.


The appeals filed by the Department were dismissed.


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Section 271(1)(c) of the Income-tax Act, 1961 —Concealment penalty — Whether in a case where an assessee in penalty proceedings successfully explains his position and is not trapped within the parameters of clause (c) of S. 271(1)(c) along with the Explan

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  1. 2009-TIOL-193-ITAT-MUM

ACIT vs. VIP Industries Ltd.

A.Y. : 2000-2001. Date of Order : 20.3.2009

Section 271(1)(c) of the Income-tax Act, 1961 —Concealment
penalty — Whether in a case where an assessee in penalty proceedings
successfully explains his position and is not trapped within the parameters of
clause (c) of S. 271(1)(c) along with the Explanations deeming the concealment
of income, penalty cannot be imposed — Held : Yes. Whether ratio decidendi of
the judgment of Apex Court in Dharmendra Textiles Processors and Ors. is
confined to treating willful concealment as not vital for imposing penalty
u/s. 271(1)(c) and not that in all cases where addition is confirmed, the
penalty shall mechanically follow — Held : Yes.

 

Facts :

The assessee claimed deduction u/s. 35 for scientific
research expenditure @ 100% inter alia towards cost of motor car
purchased during the year. The tax audit report filed by the assessee
categorically mentioned that deduction was claimed on Research & Development
Expenditure including deprecia-tion. The Assessing Officer (AO) added back
this amount and allowed depreciation @ 20% by treating it as car used for
ordinary business purpose not connected with the scientific research and
development activity. This addition was confirmed by the Tribunal.

The AO levied penalty u/s. 271(1)(c).

The CIT(A) allowed the appeal of the assessee and deleted
the penalty levied by the AO.

In an appeal by the Revenue to the Tribunal heavy reliance
was placed on the decision of the Apex Court in the case of Dharmendra
Textiles Processors and Ors. (306 ITR 277).

Held :

The Tribunal after considering the decision of the Apex
Court in Dharmendra Textiles Processors held that :

(a) the mere fact that addition is confirmed cannot
per se lead to the confirmation of penalty because quantum and penalty
proceedings are independent of each other;

(b) Explanation 1 to S. 271(1)(c) is attracted when
either of the following three ingredients is satisfied viz. :

(i) the assessee fails to offer an explanation; or

(ii) he offers an explanation which is found by the
authorities to be false; or

(iii) the person offers an explanation which he is not
able to substantiate and fails to prove that such explanation is bona
fide and that all the facts relating to the same have been disclosed
by him.

(c) the judgment of the Supreme Court in Dharmendra
Textiles Processors which holds that penalty u/s. 271(1)(c) is a civil
liability and that ‘willful concealment’ and ‘mens rea’ are not
essential ingredients for imposing penalty cannot be read to mean that in
all cases where addition is confirmed, penalty shall automatically follow.
In order to attract S. 271(1)(c), there must be concealment — the fact that
the same is willful or unintentional is irrelevant;

(d) where an assessee genuinely claims a deduction after
disclosing necessary facts, there is no ‘concealment’ even if the claim is
rejected. If penalty is imposed under such circumstances also there will
remain no course open to an assessee to raise disputed claims and such
proposition is beyond recognised canons of law.

The Tribunal upon examining the facts found that the
assessee had bona fide made a claim for deduction u/s. 35 in respect of
cost of car purchased for the purpose of R & D activity by disclosing all the
necessary particulars in the audit report. The Tribunal found this to be a
case of genuine difference of opinion between the assessee and the AO. The
Tribunal held that the assessee had not concealed its income and also none of
the ingredients necessary to be satisfied for invoking Explanation 1 was
satisfied. The Tribunal confirmed the action of CIT(A) and dismissed the
appeal of the Revenue.


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Once an assessee is maintaining its accounts as per the mercantile system, any liability which has accrued in a year, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business.

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  1. [2008] 304 ITR (AT) 130 (Pune)

Thermax Babcock & Wilcox Ltd. vs. Addl. CIT

A.Y. : 1997-98 Dated : 02.03.2007

Once an assessee is maintaining its accounts as per the
mercantile system, any liability which has accrued in a year, though to be
discharged at a future date, would be a proper deduction while working out the
profits and gains of business.


There exists a stipulation in the contract agreements
entered into by the assessee with its customers for manufacture of boilers
that liquidated damages would be paid by either party for causing delay in
executing or erecting or commissioning the work. For the relevant A.Y., the
assessee made a provision of Rs.40,73,360 for liquidated damages. The
Assessing Officer held it to be a contingent liability and hence not
allowable. The disallowance was also upheld by the CIT(A).


On Second Appeal, the ITAT held that :


1. The condition for payment of liquidated damages for
delay in work is inbuilt in the contract agreement itself. Therefore, there
exists an undertaking given by the parties to execute the work within
specified time, and if any delay is caused in completing the work within the
specified time, the defaulter has agreed to pay damages on account thereof.
This undertaking is not found to be conditional.

2. This certain act or event of not completing the work
within the stipulated time has imported a definite and absolute liability on
the assessee and merely because of the fact that liability would be
discharged at a future date and there is a difficulty in estimating the
correct amount thereof would not convert this definite and absolute
liability into conditional one.

3. There could be a dispute only with regard to the exact
quantification thereof, but that by itself would not convert the definite
liability into a contingent one. Where no dispute has been raised as to the
assessee’s liability to pay liquidated damages for delay in executing the
contract work, the provision for liability may be claimed in the year to
which the transaction relates, provided it can be fairly ascertained or
estimated on agreed and admitted terms of the contract.

4. From the Notification No. S.O. 69(E), dt. 25th Jan.,
1996, issued by the CBDT under S.145(2), it is clear that the Department has
itself accepted the principle that a provision 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.


Based on the above observations, the ITAT remanded the
matter back to the Assessing Officer to ascertain and determine the accrued
liability pertaining to the relevant A.Y. in light of the terms and condition
of the agreement and accordingly allow the deduction.


Cases relied upon :





1. Calcutta Co. Ltd. vs. CIT, (1959) 37 ITR 1 (SC)


2. Metal Box Company of India Ltd. vs. Their Workmen,
(1969) 73 ITR 53 (SC)


3. Bharat Earth Movers vs. CIT, (2000) 245 ITR 428
(SC).



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Whether Assessing Officer can make a reference to DVO u/s. 142A where he is of the opinion that the figure of investment in property is overstated; Held : No.

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  1. [2008] 304 ITR (AT) 354 (Jodhpur)

Saraswati Devi Gehlot (SMT) vs. ITO

A.Y. : 2002-03 Dated : 31.08.2007

Whether Assessing Officer can make a reference to DVO u/s.
142A where he is of the opinion that the figure of investment in property is
overstated; Held : No.

 

The assessee has shown an investment in shops at Rs.
26,45,100 and the Assessing Officer made reference to the DVO as in his
opinion this figure should be less. Hence, the Assessing Officer made a
reference to the DVO. The valuation given by the DVO Rs.23,33,177 was adopted
as cost of construction by the Assessing Officer, which resulted into a short
term capital gain of Rs. 2,50,823 against loss of Rs. 61,100 declared by the
assessee. This addition was also upheld by the CIT(A).

The Tribunal observed that :

1. Basis of cost of construction of shops shown by the
assessee has not been disputed by the Assessing Officer and no adverse
comment has been made by him in this regard. Thus, the cost of acquisition
declared by the assessee does not warrant any interference.

2. Reference to DVO u/s. 142A can be made for the purpose
of Sec. 69, 69A or 69B. All these Sections refer to a situation where either
the assessee is found to be owner of some valuables not recorded in the
books or the value recorded by him is less than the investment made by him.
However, in the present case, the Assessing Officer was of the view that the
value recorded by the assessee is more than the investment made by him.
Reference to DVO u/s. 142A is not permissible in such situation.

3. Further, reference as contemplated under S.55A is for
ascertaining the fair market value of a capital asset and not for
determining the cost of acquisition or construction.

Thus, the ITAT was of the view that reference to DVO is
void ab initio and the report supplied by the DVO is of no consequence.

Case Referred to :



· Smt. Amiya Bala Paul vs. CIT, (2003) 182 CTR
(SC) 489; (2003) 262 ITR 407 (SC) and also Circular No. 5 of 2005, dt. 15th
July, 2005.



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Payments made by assessee, a co-operative society running sugar mills, to Zone Samitis formed by the cane growers, for spending the same on harvesting, cutting and transporting sugarcane to assessee’s factories on behalf of cane growers, which were debite

[2008] 304 ITR (AT) 1 (Ahmedabad)

    Kamrej Vibhag Sahakari Khand Udyog Mandli Ltd. vs. ITO

    and

    Sayan Vibhag Sahakari Khand Udyog

    Mandli Ltd. vs. ITO

    A.Ys. : 2003-04 & 2004-05 Dated : 30.05.2008

    Payments made by assessee, a co-operative society running sugar mills, to Zone Samitis formed by the cane growers, for spending the same on harvesting, cutting and transporting sugarcane to assessee’s factories on behalf of cane growers, which were debited to cane growers’ advance account and ultimately adjusted against the cost of cane — Whether provisions of Section 194C applicable ? Held : No.

    The assessee is a co-operative society running sugar mills. Farmers, who are members of the assessee society, form committees every season known as Zone Samitis for the purpose of undertaking the collective work of harvesting, cutting and transportation of sugarcane to the factory sites. The assessee made advance payments at a fixed rate to the Samitis for spending the same on harvesting, cutting and transporting sugarcane to its factories which was the liability of the cane growers. The Assessing Officer held that the assessee was liable to deduct tax at source u/s. 194C from these payments and accordingly he raised demands u/s. 201 against the assessee with interest. These orders were also upheld by the CIT(A).

    On second appeal to the ITAT, the Tribunal observed that there were conflicting judgments in case of Shree Chalthan Vibhag Khand Udyog Sahakari Mandli Ltd. vs. ITO, 104 TTJ 654 (AHD) and Shree Mahuva Pradesh Sahakari Khand Udyog Mandli Ltd. Because of these two orders, the President constituted a Special Bench to decide the controversy.

    The Special Bench held as follows :

    1. Section 194C applies when payments are made for carrying out any work including supply of labour for carrying out any such work in pursuance of a contract between the contractor and the persons stated therein. By sub-Section (1) of S.194C a liability to deduct tax at source is cast upon the person responsible for paying any such sum. Here, the responsibility of paying the sum for harvesting, cutting and transporting is of the cane growers. This is clearly established by the fact that the payments, though made in instalments, were debited to the individual accounts of the cane growers, maintained by the assessee and adjusted ultimately against the cost of the cane.

    2. The payments are, no doubt, made to the labour hired for this purpose but these payments were made by the Samiti or by the assessee as alleged by the Revenue, not on its own account; they were for and on behalf of the cane growers.

    3. The assessee was required to pay the fixed price and make the payment to the cane growers for the cost of the cane; The payments, though in instalments, were debited to the cane growers’ advance account and adjusted ultimately as cost of the cane.

    4. The assessee had given and Samitis have taken the amount from the assessee for and on behalf of the cane growers and on their behalf; Samitis have also paid that amount to the labourers on account of the cane growers.

    5. Surplus and deficit is ultimately adjusted in the cane growers’ account through the Samitis who have paid and received that amount from the assessee-company.

    Thus assessee is not liable to deduct tax at source under S.194C from these payments.

    Cases Relied upon :

    · Associated Cement Company Ltd. vs. CIT, (1993) 201 ITR 435 (SC)

    · BDA Ltd. vs. ITO, (2006) 281 ITR 99 (Bom)

    · Balsara Home Products Ltd. vs. ITO, (2005) 94 TTJ (Ahd) 970

    · Birla Cement Works vs. CBDT, (2001) 248 ITR 216 (SC)

    · CIT vs. Dabur India Ltd., (2006) 283 ITR 197 (Del)

Whether fee received from clients in advance by advocate following a cash method is income of the year in which it is received, Held : No. Whether a mistake in one assessment year should be carried over to the assessment proceedings of the next assessment

14. [2008] 304 ITR (AT) 295 (Delhi)

    K. K. Khullar vs. Dy. CIT

    A.Y. : 2002-03 Dated : 18.01.2008

    Whether fee received from clients in advance by advocate following a cash method is income of the year in which it is received, Held : No. Whether a mistake in one assessment year should be carried over to the assessment proceedings of the next assessment year, Held : No i.e., it is not compulsory for the A.O. to carry forward the interpretations and findings of the earlier orders without application of mind.

    The assessee, an Advocate, recovered fees from his clients in advance. The proportionate fees relating to the work performed and the balance of fees is shown as advance received from clients. The Assessing Officer made an addition of the advance fees to the income of the year in which it was received in view of Section 145 of Income-tax Act, 1961, stating that there are only two methods of accounting viz., Cash and Accrual. As per cash system of accounting, the amount of fess received should be liable to tax in the year of receipt itself. Also the CIT(A) was of the opinion that since the assessee was a professional, the method of accounting followed should be in consortium with other professionals i.e., cash basis.

    On further appeal to the Tribunal, it was held as follows :

    1. Income only to the extent of the amount pertaining to services rendered vested in the assessee. The rest of the amount was taken as liability to be vested in subsequent years as and when the services were rendered.

    2. The excess amount would have to be returned in case the service was not performed in subsequent years and therefore, in respect of such amount, no debt came into existence in favour of the assessee.

    3. The levy of Income-tax is a levy on income. The Act takes into account two points of time at which the liability to tax is attracted, namely, the accrual of income and its receipt. However the substance of the matter is ‘Income’.

    4. The findings of the CIT(A) that the assessee was following a hybrid system of accounting on the ground that the whole of the amount received from clients as retainer fees was not declared as income in the year of receipt of the amount was not correct.

    5. A wrong decision rendered by the Assessing Officer in one year or in number of years would not bind the Assessing Officer in the assessment of a subsequent year as there could not be any estoppel against law. The principle of res judicata does not apply to Income-tax proceeding as each assessment year is a separate unit.

    On the above reasoning, the ITAT deleted the addition made by the Assessing Officer.

    Cases Relied upon :

    1. CIT vs. M/s. Shoorji Vallabhdas & Co., [1962] 46 ITR 144(SC)

    2. Radhasoami Satsang vs. CIT, [1992] 193 ITR 321 (SC).

Section 271(1)(c) — When Assessing Officer recalculates total income in accordance with law and such total income is different from that calculated by the assessee, there is no concealment of particulars of income or furnishing of inaccurate particulars o

   (2009) 28 SOT 470 (Mum.)

    Mimosa Investment Co. (P.) Ltd. vs. ITO

    A.Y. : 2004-05. Dated 15.01.2009

    Section 271(1)(c) — When Assessing Officer recalculates total income in accordance with law and such total income is different from that calculated by the assessee, there is no concealment of particulars of income or furnishing of inaccurate particulars of income or deemed concealment in accordance with Explanation 1 to Section 271(1).

    
    For the relevant assessment year, the Assessing Officer made some addition on a pro rata basis in terms of Section 14A. Thereafter, the Assessing Officer levied penalty u/s.271(1)(c) on ground that the assessee had not furnished full particulars for purpose of computation of its income. The CIT(A) confirmed the penalty by observing that the assessee had concealed its income and had furnished inaccurate particulars of its income.

    The Tribunal deleted the penalty. The Tribunal noted as under :

    1. There cannot be a straitjacket formula for detection of defaults of concealment or of furnishing inaccurate particulars of income. Concealment of particulars of income and furnishing of inaccurate particulars of income may at times overlap. It depends upon the facts of each case.

    2. On consideration of facts of the instant case it was not found that the assessee had concealed the particulars of his income or had furnished inaccurate particulars of such income. The assessee had furnished a note along with the return of income stating, “the interest expenditure was not considered as disallowed u/s.14A as the investments had not been made for the purpose of earning dividend income but for business consideration including capital appreciation. However, without prejudice to the above contentions, if any interest was to be considered as being in relation to dividends earned, the disallowance would amount to Rs.41.18 lacs as per the relevant annexure”, which was also enclosed by the assessee.

    3. Hence, the assessee had disclosed all the relevant material facts for the purpose of computation of total income. The assessee had also offered explanation in this regard, which was not found to be false by the Assessing Officer. The explanation of the assessee regarding claim of interest expenditure was bona fide. The assessee had substantiated his explanation.

    4. When the assessee had furnished all the material facts for the purpose of computation of total income, the Assessing Officer was duty-bound to calculate correct total income in accordance with law, which might have been different than the total income calculated by the assessee.

    5. Mere fact that the Assessing Officer while discharging his duty was recalculating the total income in accordance with law and such income was not the same as calculated by the assessee, it could not be held that the assessee had concealed particulars of his income or had furnished inaccurate particulars of such income or there was a deemed concealment in accordance with Explanation 1 to Section 271(1)(c).

    Therefore, penalty u/s.271(1) read with Explanation 1 could not be invoked. The penalty levied by the Assessing Officer was deleted.

Section 194D does not apply to each and every payment made by any person by way of commission or otherwise; it applies to remuneration or reward paid for soliciting or procuring insurance business.

       12. (2009) 28 SOT 453 (Mum.)

        General Insurance Corpn. of India vs. Asst. CIT (TDS)

        A.Ys. : 2004-05 to 2006-07. Dated 13.02.2009

        a. Section 194D does not apply to each and every payment made by any person by way of commission or otherwise; it applies to remuneration or reward paid for soliciting or procuring insurance business.

        b. Since commission paid by assessee to insurance companies was in nature of compensation towards cost of procurement incurred by insurance companies for originally accepting insurance business from agents, provisions of Section 194D would not be attracted.

        The assessee public sector undertaking, engaged in the business of re-insurance, accepted re-insurance contracts from other insurance companies and paid commission on the re-insurance premium earned without deducting tax at source on such commission. The Assessing Officer treated the assessee to be in default for non-deduction of tax u/s.194D. The CIT (A) upheld the order of the Assessing officer.

        The Tribunal held that Section 194D was not attracted on the facts of the instant case. The Tribunal noted as under :

        1. In terms of Section 194D, tax deduction is to be made from income which is in the nature of remuneration or reward (whether it is called commission or otherwise) for soliciting or procuring insurance business. Section 194D does not apply to each and every payment made by any person by way of commission or otherwise; it applies only to remuneration or reward paid for soliciting or procuring insurance business. The language of Section 194D makes it abundantly clear that if the commission or other payments are made by any assessee not by way of remuneration or reward for soliciting or procuring insurance business, then Section 194D would not apply.

        2. In the instant case, the insurance companies did not procure business for the assessee-company nor did the assessee-company pay any commission or other payment for soliciting the business from the insurance companies.

        3. Such commission was allowed by the assessee-company in order to compensate the insurance companies for the brokerage and other costs incurred in procuring the business by the ceding company. Considering the nature of the payment made by the assessee-company to the insurance companies by way of commission, it could be said that the same did not fall within the category of payments by way of remuneration or reward for soliciting or procuring insurance business from the insurance companies.

    2. As held in the case of Gujarat Gas Financial Services Ltd. vs. Asst.CIT (2008) 115 ITD 218 (Ahd.)(SB), deposits cannot be equated with loans or advances. The Special Bench had held that the two expressions ‘loans’ and ‘deposits’ are different and the distinction can be summed up by stating that in the case of loan, the needy person approaches the lender for obtaining the loan therefrom. The loan is clearly lent at the terms stated by the lender. In case of deposits, however, the depositor goes to the depositee for investing his money primarily with the intention of earning interest.

    3. Section 2(22)(e) enacts a deeming fiction whereby the scope and ambit of the word ‘dividend’ has been enlarged to bring within its sweep certain payments made by a company as per the situations enumerated in the said Section.

    4. Such a deeming fiction could not be given a wider meaning than what it purports to be. The provision would necessarily be accorded strict interpretation and the ambit of the fiction would not be pressed beyond its true limits.

    5. The requisite condition for invoking Section 2(22)(e) is that payment must be made by way of loan or advance. Since there is a clear distinction between inter-corporate deposits vis-à-vis loans / advances, the lower authorities were not right in treating the same as deemed dividend u/s.2(22)(e).

Section 2(22)(e) — Inter Corporate Deposits (ICDs) are different from loans or advances and would not come within purview of deemed dividend u/s.2(22)(e).

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New Page 2

  1. (2009) 28 SOT 383 (Mum.)

Bombay Oil Industries Ltd. vs. Dy. CIT

A.Y. : 2001-02. Dated 22.01.2009

Section 2(22)(e) — Inter Corporate Deposits (ICDs) are
different from loans or advances and would not come within purview of deemed
dividend u/s.2(22)(e).

 

During the relevant assessment year, the assessee-company
had taken unsecured loans from three companies by way of ICDs for the purpose
of its business. The Assessing Officer treated these amounts as deemed
dividend u/s.2(22)(e). The CIT(A) upheld the order of the Assessing Officer.

The Tribunal held that ICDs do not come within the purview
of Section 2(22)(e). The Tribunal noted as under :

1. The lower authorities had not controverted the claim
of the assessee that the amounts received from the three companies were
inter-corporate deposits. The Assessing Officer held it against the assessee
only on account that it had failed to explain that the investment was
neither loan nor advance.

2. As held in the case of Gujarat Gas Financial Services
Ltd. vs. Asst.CIT (2008) 115 ITD 218 (Ahd.)(SB), deposits cannot be
equated with loans or advances. The Special Bench had held that the two
expressions ‘loans’ and ‘deposits’ are different and the distinction can be
summed up by stating that in the case of loan, the needy person approaches
the lender for obtaining the loan therefrom. The loan is clearly lent at the
terms stated by the lender. In case of deposits, however, the depositor goes
to the depositee for investing his money primarily with the intention of
earning interest.

3. Section 2(22)(e) enacts a deeming fiction whereby the
scope and ambit of the word ‘dividend’ has been enlarged to bring within its
sweep certain payments made by a company as per the situations enumerated in
the said Section.

4. Such a deeming fiction could not be given a wider
meaning than what it purports to be. The provision would necessarily be
accorded strict interpretation and the ambit of the fiction would not be
pressed beyond its true limits.

5. The requisite condition for invoking Section 2(22)(e)
is that payment must be made by way of loan or advance. Since there is a
clear distinction between inter-corporate deposits vis-à-vis loans /
advances, the lower authorities were not right in treating the same as
deemed dividend u/s.2(22)(e).



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Section 11 read with Section 12A — An Institution or Trust having mixed activities of charity as well as religion cannot be denied exemption u/s.11(1)(a).

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New Page 2

  1. (2009) 28 SOT 148 (Cochin)

Calicut Islamic Cultural Society vs. Asst. CIT

A.Y. : 2003-04. Dated 31.07.2008.

Section 11 read with Section 12A — An Institution or Trust
having mixed activities of charity as well as religion cannot be denied
exemption u/s.11(1)(a).

 

The assessee was an Islamic Society registered under the
Societies Registration Act, 1860 as a charitable society. Its claim for
exemption of income u/s.11 was not allowed by the Assessing Officer on the
ground that the activities of the assessee were partly religious and partly
charitable in nature and, thereby, they were not eligible for claiming
exemption of their income u/s.11(1)(a).

The CIT (A) confirmed the order of the Assessing Officer.

The Tribunal, relying on the decisions in the following
cases, held that the assessee was entitled to exemption u/s.11 :

a. Hiralal Bhagwati vs. CIT, (2000) 246 ITR 188 (Guj.)

b. CIT vs. Surat City Gymkhana, (2008) 170 Taxman
612 (SC)

The Tribunal noted as under :

1. The assessee was not constituted only for the benefit
of the backward community but for the benefit of the entire public.
Moreover, in the institutions run by the assessee, more particu-larly the
educational institutions, members of other communities were also admitted.
They were also giving support to the poor.

2. The entire controversy was thus revolving around the
interpretation of Section 11(1)(a). It was interpreted that as per the words
used in Section 11(1)(a), any institution or trust must perform either
wholly charitable or wholly religious activities.

3. The interpretation given by the Assessing Officer as
well as by the CIT(A) that the purpose should be wholly charitable or wholly
religious was only academic. When the Legislature has categorically defined
the purposes like religious and charitable and if the assessee is engaged as
per their objects in mixed activities, which are partly charitable and
partly religious, it cannot be said that Section 11(1)(a) does not
contemplate such a situation.

4. Once registration is granted to the assessee by the
CIT u/s.12A, the Assessing Officer cannot probe into the objects and the
purpose of the trust or institution — that is within the exclusive domain
and jurisdiction of the Commissioner. What the Assessing Officer can do at
the most is that he can investigate into the matter within the four corners
of Section 13. In the instant case, the Assessing Officer had gone ahead
with investigating and probing the basic objects of the trust by entering
into the shoes of the Commissioner and such exercise was not permissible.

In view of the above, the assessee was allowed the benefits
of Section 11.


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S. 36(1)(vii) of the Income-tax Act — Since debts could not be recovered in spite of best efforts, whether assessee was entitled to deduction u/s.36(1)(vii) — Held, Yes.

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New Page 1

  1. [2009] 116 ITD 321 (Chennai)


Preeti Tex v. Income-tax Officer,

Ward-II(4), Coimbatore

A.Y. : 2003-04. Dated : 18-1-2008

S. 36(1)(vii) of the Income-tax Act — Since debts could not
be recovered in spite of best efforts, whether assessee was entitled to
deduction u/s.36(1)(vii) — Held, Yes.

The assessee-firm had entered into a Cost, Insurance and
Freight (CIF) agreement with a certain Bangladeshi party for selling its
goods. When the goods reached Custom station of Benapole inside Bangladesh,
said party failed to pay for goods after having acknowledged receipt of goods
at Custom station. Therefore, the assessee claimed value of goods from foreign
buyer. Despite making an honest attempt to recover the said amount, the
assessee could not recover the same and, therefore, had written-off said
amount as bad debts in its books of account during the year and claimed
deduction of same u/s.36(1)(vii). The Assessing Officer rejected its claim. On
appeal, the Commissioner (Appeals) found that there was no evidence on the
part of the assessee to show as to what legal steps were taken by it against
the buyer or its bank to recover its money. He, therefore, rejected the
assessee’s claim.

On second appeal : the ITAT held that :

(1) Under a CIF contract, seller is required to insure
the goods; to deliver them to the shipping company; to arrange for
affreightment; and to send the bill of lading and insurance policy together
with invoice and a certificate of origin to a bank.

(2) The documents are usually delivered by the bank
against the payment of price or against the acceptance of the bill.

(3) The property in the goods passes on to the buyer on
the delivery of documents. In the instant case, it was not disputed that the
buyer had got the delivery of documents.

(4) In a CIF contract the buyer has got to accept the
documents and to pay the price, even if the goods are destroyed or lost. In
that case, he has the remedy against the insurer to recover the loss.

(5) The whole documents the assessee relied upon had
clearly proved the completed wholesome CIF contract and the assessee had
taken an honest decision as contemplated on the part of the duty of the
seller. The insurance was perfectly made. All requirements of CIF contract
were satisfied. Therefore, the assessee could not be faulted with
transaction. As per the C&F terms, the goods were sold and the fact that the
goods had reached the Custom station was not at all disputed.

(6) The fact that the goods were lost or destroyed in a
fire at the Custom port in Bangladesh was also not disputed. Under the above
circumstances, the amounts were due under two of the invoices for goods sold
on C&F terms and the goods were exported on C&F terms after fulfilling all
the conditions for entering into C&F contract, the goods were covered by
transit insurance arranged by the buyer.

Under the above facts and circumstances, in spite of honest
efforts made by the assessee, the debts could not be recovered and in view of
the honest decision of the assessee the book debts were written-off for the
previous year relevant to the assessment year under appeal. Therefore, the
claim of the assessee was to be allowed.

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S. 80IA of the Income-tax Act, 1961 — Whether S. 80-IA(2) gives an option to assessee to claim relief u/s.80-IA for any 10 consecutive assessment years out of 15 years beginning from year in which undertaking or enterprise develops or begins to operate an

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New Page 1

  1. [2009] 116 ITD 241 (Chennai)


Mohan Breweries & Distilleries Ltd. v. ACIT
(Chennai)

A.Y. : 2004-05. Dated : 31-10-2007

S. 80IA of the Income-tax Act, 1961 — Whether S. 80-IA(2)
gives an option to assessee to claim relief u/s.80-IA for any 10 consecutive
assessment years out of 15 years beginning from year in which undertaking or
enterprise develops or begins to operate any infrastructure facility, etc.,
and it does not mandate that first year of 10 consecutive assessment years
should be always first year of set-up of enterprise — Held, Yes — Whether
provision of S. 80-IA(5), treating eligible undertaking as a separate sole
source of income, is applicable only when assessee chooses to claim deduction
u/s.80-IA and same cannot be applied to a year prior to the year in which
assessee opted to claim relief u/s.80-IA for first time — Held, Yes.

The assessee-company had started three power projects, two
in the previous year, relevant to the A.Y. 1996-97 and one in the previous
year, relevant to the assessment year 1999-2000. In respect of the profits of
these power units, the assessee claimed deduction u/s.80-IA for the first time
in the A.Y. 2004-05. The Assessing Officer held that while computing the gross
total income of the eligible units, the notional brought forward loss incurred
by those units in earlier years had to be taken into account first and after
that, if any remaining profit was available then the deduction u/s.80-IA had
to be given.

On appeal, the Commissioner (Appeals) upheld the order of
the Assessing Officer. On second appeal, the ITAT held that :

(1) S. 80-IA gives an option to the assessee to claim
relief under this section for any 10 consecutive assessment years out of 15
years beginning from the year in which the undertaking or enterprise
develops or begins to operate any infrastructure facility, etc.

(2) S. 80-IA(2) does not mandate that first year of 10
consecutive assessment years should be always the first year of set-up of
enterprise.

(3) The provision of S. 80-IA(5) is applicable only when
the assessee chooses to claim deduction u/s.80-IA and if it has not chosen
to claim the deduction u/s.80-IA, S. 80-IA(5) cannot be made applicable.

(4) In the instant case, there was a categorical finding
by the Assessing Officer and the Commissioner (Appeals) that the first year
claimed by the assessee was from the A.Y. 2004-05. Hence, the initial
assessment year could not be the year in which the undertaking commenced its
operations but it was the assessment year in which the assessee had chosen
to claim deduction u/s.80-IA. Therefore, there was no question of
setting-off notionally carried forward unabsorbed depreciation or loss of
earlier years against the profits of the units and the assessee was entitled
to claim deduction u/s.80-IA on the current assessment year’s profit.

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Whether if application filed by assessee for additional time for removing the defect in the return u/s.139(9), is not disposed of or no action is taken and if Assessing Officer remains silent then time asked for by assessee would be treated as granted by

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New Page 1

  1. [2009] 116 ITD 207 (Cochin)


Indus Motor Co. Ltd. v. ACIT

A.Y. : 1998-99. Dated : 24-1-2007

Whether if application filed by assessee for additional
time for removing the defect in the return u/s.139(9), is not disposed of or
no action is taken and if Assessing Officer remains silent then time asked for
by assessee would be treated as granted by Assessing Officer — Held, Yes.

The assessee-company filed its return of loss on
30-11-1998, but it could not attach the statutory audit report with it.
Consequently, the Assessing Officer issued letter to the assessee asking it to
rectify said defect. On receipt of the letter, the assessee filed application
requesting for extension of time till 5-3-1999 for filing the audit report as
per the deficiency letter. However, there was no communication from the
Assessing Officer in response to the said application of the assessee.
Subsequently, the assessee filed another return of loss on 5-3-1999 revising
the loss. The Assessing Officer completed the assessment u/s.143(3) but the
said loss was refused to be carried forward and set-off in future on the
ground that the assessee had filed its revised return of loss after the due
date. On appeal, the Commissioner (Appeals) upheld the impugned order.

On second appeal, the ITAT held that :

1. As per the provisions of S. 80, if the return of
income is not filed as provided u/s.139(3) the loss determined shall not be
carried forward and allowed to be set-off under the relevant provisions.

2. S. 139(9) provides that if the return furnished by the
assessee is defective then the AO may intimate the defect to him and give
him an opportunity to rectify the defect within a period of 15 days or
within such further period on an application made by the assessee as the
Assessing Officer in his discretion may allow.

3. In the instant case, the assessee filed an application
requesting for further period to rectify the defect. It had requested the AO
for time up to 5-3-1999 to file the return. It was the duty of the AO to
dispose of the application filed by the assessee, either granting the
additional time or refusing the same. But the AO did not act on the said
application.

4. If the application filed by the assessee for
additional time is not disposed of or no action is taken and if the
Assessing Officer remains silent, then time asked for by the assessee would
be treated as granted by the Assessing Officer.

5. Another aspect to be considered was that if it was not
a valid return, then how the assessment was framed u/s.143(3). The returns
filed by assessee on 30-11-1998 as well as on 5-3-1999 were valid returns
and there was no bar to carry forward determined loss as per S. 80.

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Whether as per S. 26, any income which is chargeable under head ‘Income from house property’ is to be assessed in hands of co-owners if their shares are ascertainable and such income cannot be taxed in hands of AOP — Held, Yes.

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New Page 1

  1. [2009] 116 ITD 155 (Bang.)


ACIT v. S. Prabhakar Kamath

A.Ys. : 1995-96 to 1998-99

Dated : 30-4-2007

Whether as per S. 26, any income which is chargeable under
head ‘Income from house property’ is to be assessed in hands of co-owners if
their shares are ascertainable and such income cannot be taxed in hands of AOP — Held,
Yes.

The assessees, four individuals, purchased a plot of land
and thereafter constructed a commercial complex thereon. Each co-owner had
equal undivided share in the entire property. A part of the said complex was
given on rent. The assessees filed their individual returns separately, in
status of co-owners and showed the rental income under the head ‘House
property’. The Assessing Officer issued a notice u/s.148 to the assessees
stating that there was an AOP in existence and income from the commercial
complex was chargeable to tax in the hands of the AOP. Accordingly, the rental
income had been taxed as business income in the hands of the AOP. On appeal,
the Commissioner (Appeals) held that since share of all members was equal,
rental income should be assessed in the individual hands of the co-owners as
per S. 26.

On Revenue’s appeal, the ITAT observed that :

(1) It was an admitted position that rental income from
the property had been assessed in the hands of the individual co-owners upto
the A.Y. 1994-95.

(2) When the revenue had taken a stand that rental income
upto the A.Y. 1994-95 was assessable in the hands of individual co-owners,
then it could not take a different stand for the subsequent years,
particularly in view of S. 26. As per S. 26, any income which is chargeable
under the head ‘Income from house property’ is to be assessed in the hands
of co-owners if their shares are ascertainable and such income cannot be
taxed in the hands of the AOP.

Hence, rental income in question chargeable under the head
‘Income from house property’ was to be taxed in the individual hands of the
co-owners.

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S. 32 of the Income-tax Act, 1961 — Expression ‘any other business or commercial rights of similar nature’ appearing in clause (ii) of S. 32(1) would include such rights which can be used as a tool to carry on business — Assessee entitled to claim depreci

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New Page 1

  1. [2008] 116 ITD 348 (Mum.) (SMC)


Skyline Caterers (P.) Ltd. v. ITO

A.Y. : 2003-04. Dated : 28-12-2007

S. 32 of the Income-tax Act, 1961 — Expression ‘any other
business or commercial rights of similar nature’ appearing in clause (ii) of
S. 32(1) would include such rights which can be used as a tool to carry on
business — Assessee entitled to claim depreciation on amount paid for
acquisition of all rights under catering contract.

The assessee entered into an agreement with ‘R’ on
16-8-2000 for taking over the catering contract of ‘R’ with HLL against a
consideration of Rs.27 lakhs. Out of the said sum, the assessee paid a sum of
Rs.25 lakhs to ‘R’ as a consideration for acquiring all the rights under the
catering contract between ‘R’ and HLL and balance sum of Rs.2 lakhs was paid
to ‘R’ for not competing with the assessee. The assessee treated the said
amount of Rs.27 lakhs in its balance sheet as goodwill and claimed
depreciation thereon treating the same as commercial rights acquired by it.
The Assessing Officer held that depreciation is admissible only on know-how,
patents, copyrights, trade marks, etc. He further held that the expression
‘similar nature’ in S. 32(1)(ii) would not include goodwill. He, therefore,
disallowed the assessee’s claim for depreciation. On appeal, the Commissioner
(Appeal) upheld the action of the Assessing Officer.

On second appeal, the ITAT held that :

(1) The nomenclature given to the entries in the books of
account is not relevant for ascertaining the real nature of the transaction.
The nature of transaction should be ascertained on the basis of the
agreement between the parties. Therefore, merely because the assessee showed
the said payment on account of goodwill in the books of account, no adverse
inference could be drawn against the assessee.

(2) The payment of Rs.25 lakhs was specifically made for
acquiring all the rights under the catering contract between ‘R’ and HLL and
for acquiring articles and paraphernalia belonging to ‘R’, which were lying
in the canteen. Hence, it could not be said that the payment was either on
account of goodwill or on account of not to compete with the assessee.

(3) The specific intangible assets referred to in S.
32(1)(ii) are followed by the expression ‘any other business of commercial
rights of similar nature’. The specific words in the above section reveal
the similarity in the sense that all the intangible assets specified are
tools of the trade, which facilitate the assessee carrying on the business.
Therefore, the expression ‘any other business or commercial rights of
similar nature’ would include such rights which can be used as a tool to
carry on the business. Since catering business at HLL canteen could be
carried on only with the help of such rights under the contract, the
assessee would be entitled to depreciation.

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S. 80-IB of the Income-tax Act, 1961 — Whether amendment by Finance Act, 2000 in provision of S. 80-IB(10) extending period for completion of eligible projects to 31-3-2003 was made with effect from 1-4-2001 apparently because as per pre-amended provision

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New Page 1

  1. [2008] 116 ITD 253 (Delhi)


Dy. CIT v.


Ansal Properties & Industries Ltd.

A.Y. : 2000-01. Dated : 15-2-2008

S. 80-IB of the Income-tax Act, 1961 — Whether amendment by
Finance Act, 2000 in provision of S. 80-IB(10) extending period for completion
of eligible projects to 31-3-2003 was made with effect from 1-4-2001
apparently because as per pre-amended provisions, such period was prescribed
up to 31-3-2001 and date of 1-4-2001 given as an effective date for said
amendment cannot be read in a manner to say that same was applicable only for
and from A.Y. 2001-02 — Held, Yes.

The assessee-company was engaged in the business of
development of mini-townships, construction of house property, villas,
commercial complexes, etc. For the A.Y. 2000-01, the assessee’s claim for
deduction u/s.80-IB(10) in respect of profits derived from a housing project,
was disallowed by the Assessing Officer on the ground that the assessee had
not produced the completion certificate in respect of the said project as
evidence of completion by 31-3-2003, as required by the Section. On appeal,
the Commissioner (Appeals), relying upon the Occupation certificate submitted
by the assessee as additional evidence, allowed the assessee’s claim for
deduction u/s.80-IB(10).

On 2nd appeal, the revenue raised a new plea that the date
of completion of project as earlier prescri-bed in S. 80-IB(10) as on
31-3-2001 was extended to 31-3-2003 by the Finance Act, 2000 only with effect
from 1-4-2001 and hence the benefit of extended date for completion of project
in order to make it eligible for deduction u/s.80-IB was not available to the
assessee for the assessment year 2000-01.

The ITAT observed that :

(1) As is clearly evident from the Explanatory note to
the Finance Bill, 2000, the purpose of amendments made by the Finance Act,
2000 in the provisions of S. 80-IB(10) was to extend the benefit available
under the said provisions even to the housing projects which would be
completed up to 31-3-2003 as against the period up to 31-3-2001 specified
earlier.

(2) The period of commencement of the said projects in
order to become eligible for benefits of S. 80-IB(10) was also
simultaneously specified as up to 31-3-2001 as against the period earlier
prescribed as on or after 1-10-1998, which clearly means that the intention
of the Legislature was to give the benefit of extended period of completion
to all the projects which had already commenced on or after 1-10-1998.

(3) The interpretation given by the Revenue may also lead
to absurd results in the cases of assessees following two different methods
of accounting to recognise the income derived from the projects eligible for
benefit u/s.80-IB. In a case where the assessee follows a project completion
method, he will be able to avail the benefit of S. 80-IB in respect of
entire profits of the projects completed after 31-3-2001 but before
31-3-2003, whereas the assessee following percentage completion method would
be able to avail the said benefits in respect of profits of the project
completed after 31-3-2001 but before 31-3-2003 only to the extent of profit
declared on percentage completion method in the A.Y. 2001-02 and subsequent
year and lose that benefit on the profits of the very same project declared
on percentage completion method in the A.Ys. 1999-2000 and 2000-01.

(4) It is a well-settled canon of construction that in
construing the provisions of beneficial Legislation, the Court should adopt
the construction, which advances, fulfils and furthers the object of the Act
rather than the one, which would defeat the same and render the benefit
illusory.

Based on the above observations, the ITAT held that the
amendment in the provision of S. 80-IB(10) extending period for completion of
eligible projects was made with effect from 1-4-2001 apparently because as per
pre-amended provision such period was prescribed up to 31-3-2001 and the date
of 1-4-2001 given as an effective date for the said amendment cannot be read
in a manner to say that the same was applicable only for and from A.Y. 2001-02
and the subsequent years. Therefore, the benefits of the amended provisions of
S. 80-IB(10) would be available in A.Y. 2000-01 even to the projects completed
within the extended period, i.e., 31-3-2003.

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S. 292B r.w. S. 80, S. 139(1) and S. 139(3) — Assessee company having filed four returns in respect of its four units correctly disclosing all relevant information without causing any prejudice to Revenue, such mistake or defect stood removed by operation

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New Page 1

  1. (2009) 121 TTJ 289 (Mumbai) (TM)


Nicholas Applegate South East Asia Fund Ltd. v. Asst. DIT
(International Taxation)

ITA No. 3875 (Mum.) of 2005

A.Y. : 2001-02. Dated : 23-1-2009

S. 292B r.w. S. 80, S. 139(1) and S. 139(3) — Assessee
company having filed four returns in respect of its four units correctly
disclosing all relevant information without causing any prejudice to Revenue,
such mistake or defect stood removed by operation of S. 292B and consolidated
revised return filed by assessee will relate back to the date of filing of
original returns entitling the assessee to claim carry forward and set off of
loss as claimed in original returns and consolidated in revised returns.

The assessee is a company incorporated in Mauritius under
the Protected Cells Companies Act having four cells/sub-divisions in India.
For the relevant assessment year, it filed separate returns of income in
respect of each cell in India within the time limit prescribed u/s.139(1)
showing short term capital loss and exempt dividend income. Subsequently, the
assessee realised that a consolidated return for all the four divisions was
required to be filed and, accordingly, it filed a revised return incorporating
the incomes/losses of the four divisions. The Assessing Officer treated the
original four returns as invalid and treated the consolidated revised return
as the original return and, since the same was not filed within the time
prescribed u/s.139(1), disallowed the assessee’s claim for carry-forward of
short term capital loss. The CIT(A) allowed the loss to be carried forward.

Since there was a difference of opinion between Members of
the Tribunal, the matter was referred to the Third Member. The Third Member
also held in favour of the assessee. The Third Member relied on the decisions
in the following cases :

(a) Swaran Kanta v. CIT, (1989) 176 ITR 291 (P&H)

(b) CIT v. K. Saraswathi Ammal, (1984) 39 CTR
(Mad.) 35/(1984) 146 ITR 486 (Mad.)

(c) Shirish Madhukar Dalvi v. ACIT, (2006) 203 CTR
(Bom.) 621/(2006) 287 ITR 242 (Bom.)

The Third Member noted as under :

(1) As per Circular No. 179 dated 30th September 1975 of
CBDT, S. 292B has been made to provide against purely technical objections
without substance coming in the way of the validity of assessment
proceedings. It is clear from the language of S. 292B that its aim is to
prevent any return of income, assessment, notice or other proceedings being
treated as invalid merely by reason of any mistake, defect or omission in
such return of income, assessment, notice, other proceedings which are in
substance and effect in conformity with and according to the intent and
purpose of this Act. Substance over form theory is the underlying philosophy
of S. 292B. If in substance and in effect, the return, notice or assessment
is in conformity with or according to intent and purpose of the Act, the
mistake, defect or omission is to be ignored.

(2) If significance of words ‘substance’ and ‘effect’ is
kept in mind, there is no justification to take the four returns separately
and in not considering them together. All the four returns were filed at the
same time with the same Assessing Officer and signed by the same competent
and authorised person. When the total effect of all the four returns is
taken into account, it is clearly found that the assessee did disclose full
information of total loss in time as was needed by the Revenue to compute
assessee’s income/loss. The Revenue has not pointed out any information
needed but not given in the four returns submitted by the four cells.

(3) There was a mistake in filing four returns instead of
one consolidated return of total loss of the assessee company. However, that
mistake, otherwise rendering the returns invalid, is fully taken care of by
provisions of S. 292B.

(4) Four cells of the assessee, by filing four returns,
in which total loss claimed by the assessee was disclosed, did comply in
substance and in effect with the intent and purpose of the Act. It is
nobody’s case that any prejudice was caused to the Revenue because of the
above defect and mistake.

(5) In such a situation, it is not correct to hold that
returns filed earlier were invalid, ineffective and of no legal consequence.
The revised return would, in such circumstances, relate back to the date of
filing of original return. The said return has to be taken along and
considered with the original four returns which contained complete
information for making an assessment. The technical mistake in the four
returns stood removed on filing of the consolidated return. To ignore date
of four returns is to ignore provisions of S. 292B.

The assessee was, therefore, entitled to carry forward such
losses for setting off the same in the subsequent year in terms of the
provisions of S. 80.

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S. 2(14) r.w. S. 45 : Receipt on sale of immovable property is capital gain, irrespective of imperfect title

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New Page 1

15 (2007) 110 TTJ 460 (Pune)

ITO v. Rina B. Parwani

ITA No.1426 (Pune) of 2004

A.Y. 2001-02. Dated : 31-5-2007

S. 2(14) read with S. 45 of the Income-tax Act, 1961 —
Receipt from sale of immovable property is capital gains, irrespective of
imperfect title.

For the relevant assessment year, the Assessing Officer held
that the receipt from sale of immovable property was to be taxed as mesne profit
to be included under ‘Income from Other Sources’ and also denied exemption
u/s.54F, on the ground that there were vital defects in the assessee’s legal
title to the immovable property and that there were certain Court disputes in
connection with this property and there were decisions against the assessee. The
CIT(A), however, allowed the assessee’s claim for long-term capital gain and
exemption u/s.54F.

The Tribunal, relying on the decision in the case of
Ashoka Marketing Ltd. v. CIT, (1986) 53 CTR 152 (Cal.)/(1987) 164 ITR 664
(Cal.), held that receipt from sale of immovable property, with howsoever
imperfect title, is chargeable as capital gains.

The Tribunal noted as under :

(a) All that the assessee is required to have, in order
that gains on sale of which can be taxed as ‘capital gains’, is a capital
asset and rights to a property, howsoever imperfect, constitute a capital
asset.

(b) There is no dispute that the assessee acquired these
rights in 1980 and the same were duly reflected in her tax returns. There is
also no dispute that these rights were sold in the relevant previous year. The
objections are only to the imperfections in the rights, but then that aspect
of the matter is not really relevant for the present purposes.

(c) As the CIT(A) has rightly observed that in case the
sale proceeds of these rights cannot be taxed as capital gains, it cannot be
taxed at all. The definition of income includes only such capital receipts as
are chargeable to tax u/s.45. In other words, capital receipts, not chargeable
to tax u/s.45, are outside the ambit of ‘income’.

(d) The receipt in question being referable to a capital
asset, i.e., the rights have been acquired by the assessee in
connection with the bungalow, the receipt can only be treated as capital
receipt. A receipt which is neither a capital gain nor a revenue receipt will
be outside the ambit of income chargeable to tax. One can also safely infer
that merely because a receipt is not a capital gain chargeable to tax, it
would not mean that such a receipt is revenue receipt in nature.






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S. 2(ea) — Office premises on leave-and-licence basis used for business are commercial establishments not includible in net wealth

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24 (2007) 112 TTJ 489 (Pune)


Satvinder Singh Kalra v. Dy. CWT

WTA Nos. 34 to 37 (Pune) of 2005

A.Ys. 1999-2000 to 2002-3. Dated : 29-9-2006

S. 2(ea) of the Wealth Tax Act 1957 — Office premises let out
on leave-and-licence basis and used by licensees for their business are in the
nature of commercial establishments and not includible in net wealth.

 

For the relevant assessment years, four office premises owned
by the assessee and let out by him were claimed as specifically exempt from net
wealth u/s.2(ea)(i)(5) as commercial establishments. The Assessing Officer
treated them as ‘assets’ defined u/s.2(ea). The CWT(A) confirmed the Assessing
Officer’s order.

 

The Tribunal held as under :

(a) If the assessee owns more than one property in the
nature of commercial establishments or complexes, the exemption shall be
available to all such properties and cannot be restricted to any one of them.

— Shri Balaganesan Metals v. M. N. Shanmugham Chetty,
(1987) 2 SCC 707, and

— CIT v. Arvind Investments Ltd., (1991) 94 CTR
(Cal.) 263; (1991) 192 ITR 365 (Cal.)

(b) A property would fall within the exceptions under
sub-clause (5) of clause (i) of S. 2(ea), if it is in the nature of commercial
establishment or complex and is also used for the purpose of any business or
trade, whether by the assessee or anybody else.

 


The Tribunal noted as under :

(1) In the main provisions as well as in the exception
clauses, the Legislature has used the words like ‘any building’, ‘any house’,
‘any residential property’, and ‘any property’. Therefore, ‘any house’, or
‘any property’, or ‘any building’ shall include all houses, or some of them or
one of them, as the case may be.

(2) Two of the four let out commercial properties were used
by the licensees for commercial purposes. Therefore, having regard to the
nature of the property as well its use, the property can be classified as
commercial establishment within the meaning of S. 2(ea)(i)(5) and, as such,
value thereof is not includible in the net wealth chargeable to tax under the
WT Act.

(3) The third property was given on rent on
leave-and-licence basis to National Eggs Research Institute for office
purposes. The National Eggs Research Institute has taken the premises for the
purpose of their dispensary-cum-laboratory and not for the purpose of carrying
on any business or trade. Since the property was not in use and occupation for
the purpose of any business, it is not covered by sub-clause (3) of clause (i)
of S. 2(ea). It cannot be said that it is in the nature of a commercial
establishment or complex. Therefore, this property was correctly included by
the Assessing Officer in taxable net wealth.

(4) In respect of the fourth property given on
leave-and-licence basis, it is not clear as to whether the property was given
for the purpose of carrying on business by establishing an office by the
licensee or for the purpose of residence of its any employee. No other
documents are on record to verify as to whether this property in question was
used in a business or trade carried on by the licensee. As to the nature of
the property, there is no dispute that it is in the nature of commercial
property being in the nature of office premises. But the second criteria as to
whether the property is used for the purpose of business or not is not
established from the papers available on record, so as to treat the same as a
commercial establishment within the meaning of sub-clause (5) of clause (i) of
Ss.(ea) of S. 2. This matter was restored to the file of the Assessing Officer
for further enquiry and verification.

 


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Advance tax — Shortfall in payment due to enhancement on reassessment — Interest cannot be charged u/s.234B — Held, Yes

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21 (2008) 299 ITR (AT) 286 (Mum.)


Datamatics Ltd. v. ACIT

ITA No. 6616 (Mum.) 2003

A.Y. 1993-94. Dated : 14-2-2007

Advance tax — Shortfall in payment of advance tax due to
enhancement of tax on reassessment — Interest cannot be charged u/s.234B — Held,
Yes.

 

Facts :

For the A.Y. 1993-94, the total tax payable by the assessee
in accordance with intimation u/s.143(1)(a) of the Income-tax Act, 1961, dated
March 21, 1995, was Rs.8,39,528. The assessee paid TDS at Rs.4,48,873 and
advance tax of Rs.59,00,000. An amount of Rs.68,06,075, including interest of
Rs.13,17,288 u/s. 244A was refunded. There was no interest u/s.234B payable by
the assessee in terms of intimation u/s.143(1)(a). The assessee received a huge
refund as a result of processing of the return u/s.143(1)(a). Subsequently, the
tax component was enhanced as a result of the reassessment done u/s.143(3) read
with S. 147. Interest was levied on the assessee u/s.243B.

 

The Commissioner (Appeals) held that from the date of the
order u/s.143(1)(a), i.e., December 15, 1996, to the date of the order
under appeal interest chargeable was to be worked out in terms of Ss.(3) of S.
234B, based on the shortfall due to enhancement.

 

On appeal to the Tribunal, it was held that the charging of
interest u/s.234B is mandatory when the conditions are fulfilled. The condition
is that the assessee should have defaulted. A reading of S. 234B(3) makes it
clear that where, as a result of an order of reassessment or recomputation
u/s.147 or S. 153A, the amount on which interest was payable U/ss.(1) is
increased, the assessee shall be liable to pay simple interest at the rate of
one percent. The Section further makes it clear that first of all there should
be a default on the part of the assessee in the regular assessment and the
assessee should have been held liable to pay interest u/s.234B. In that case, if
there was reassement or recomputation u/s.147 or u/s.153A, the liability of the
assessee is increased and not otherwise.

 

In the instant case, there was no default on the part of the
assessee in paying the advance tax. For the first time the dispute arose
consequent to the reassessment done u/s.143(3) read with S. 147. Interest could
not be charged u/s.234B.

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If Commissioner does not pass order granting/refusing registration within time limit u/s.12AA, then Commissioner is deemed to have allowed registration, though the Act does not provide as to what could be done if Commissioner does not pass order

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20 (2008) 299 ITR (AT) 161 (Delhi) (SB)


Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari
Parmarth Dham Trust v. CIT

Dated : 31-8-2007

S.12AA : If the Commissioner does not pass any order
granting/refusing registration within the time limit set u/s.12AA, then the
Commissioner is deemed to have allowed the registration, though the Act does not
provide as to what could be done if Commissioner does not pass the order.


Facts :

The assessee, a charitable institution, applied to the
Commissioner for registration u/s.12AA on October 23, 2001. The time limit for
passing the order was to come to an end on April 30, 2002. The Commissioner
initiated enquiries as late by 3rd April 2002 and ultimately refused
registration on 26th May 2003 i.e., after the time limit set u/s.12AA. On
appeal, the ITAT (SB) held that the registration would be deemed to have been
granted since the Commissioner did not pass the order within the time limit set
by-law. While allowing the appeal, the ITAT referred to the following :

The action of Commissioner of not passing any order either
granting or refusing registration would lead to following :

(1) If the application for registration were to abate, the
assessee would be required to apply again for no fault of his.

(2) If the application were to be treated as pending, then
the Commissioner would get extended period of limitation which the Section
does not allow.

(3) If the application were to be deemed to have been
refused, then the assessee must be in a position to file an appeal to the
Tribunal, which it will not be able to do in the absence of a written order.

(4) Therefore, by the process of exclusion, the
Com-missioner must be deemed to have allowed the registration. The rights of
the Department would also be protected in the sense that it would be open to
the Commissioner to cancel the registration by invoking Ss.3 of S. 12AA. If
aggrieved by the cancellation, the assessee would also have a right to appeal
to the Tribunal u/s.253 (1)(c).

 


Cases referred to :




(i) Sambodh Organisation v. CIT, (Delhi Bench)

(ii) Karnataka Golf Association v. DIT, (E) 2005
Bangalore 272 ITR (AT) 123 and a few more.

 


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S. 10B, S. 32(2) & S. 72 : Set off of business loss and unabsorbed depreciation of earlier assessment years allowable against the profits and gains of unit eligible for deduction u/s.10B.

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31 (2008) 114 TTJ 881 (Chennai)


Ford Business Services Center (P) Ltd. v. ACIT

ITA No. 308 (Mad.) of 2005 &

C.O. No. 170 (Mad.) of 2005

A.Y. 2001-02. Dated : 22-6-2007

S. 10B, S. 32(2) and S. 72 of the Income-tax Act, 1961 —
Set-off of business loss and unabsorbed depreciation of earlier assessment years
is allowable against the profits and gains of a unit eligible for deduction
u/s.10B.

 

For the relevant assessment year, the assessee, engaged in
the business of IT-enabled accounting services and software development, claimed
set-off of carried forward business loss and unabsorbed depreciation against the
income of the unit on which deduction u/s.10B was claimed. The Assessing Officer
and the CIT(A) disallowed the claim. The CIT(A) noted that once the profits and
gains of the unit are eligible for S. 10B deduction, it cannot be taken into
consideration for set-off u/s.70 or u/s.71 or for application of S. 72 and,
therefore, loss from other undertaking cannot be set off against this profit.

 

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

(a) The heading of Chapter III of the Income-tax Act,
i.e. ‘Incomes which do not form part of total income’ cannot be conclusive
about the exact purport of any provision contained in the said chapter.

(b) When S. 10B was introduced w.e.f. 1st April 1989, there
was total exclusion of such income from the total income. Subsequently,
however, the total exclusion was removed and deduction was provided for.
Similar is the case for S. 10A, S. 10AA and S. 10BA.

(c) Once deduction u/s.10B has to be allowed, the total
income of the undertaking will enter the computation and then only deduction
will be given to the assessee. If that is the case, then the stand of the
CIT(A) that S. 10B is a secluded provision cannot be accepted. Had it been a
case where total exclusion from income was provided for, then perhaps, the
observation of the CIT(A) that such income cannot be taken into consideration
for set-off u/s.70, u/s.71, or u/s.72 would have been proper.

 


Therefore, the Assessing Officer is directed to consider the
set-off of unabsorbed business losses and depreciation after availing deduction
u/s.10B.

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S. 54EC : Exemption cannot be denied when investment in bonds made in joint names

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30 (2008) 114 TTJ 803 (Del.)


ITO v. Smt. Saraswati Ramanathan

ITA No. 2624 (Del.) of 2007

A.Y. 2004-05. Dated : 19-7-2007

S. 54EC of the Income-tax Act, 1961 — Exemption cannot be
denied when investment in notified bonds is made in joint names of assessee and
her son and not in her own name exclusively.

 

During the relevant assessment year, the assessee invested
her capital gains income in notified bonds and claimed exemption u/s.54EC. The
Assessing Officer denied the exemption on the ground that the investment in the
bonds was in the joint names which is not permitted under the above Section
under which it is the assessee who has to invest the gains in her own name. The
CIT(A), however, held that there is no such requirement in the Section and since
the assessee had invested the sale proceeds of the shares in the REC bonds
without any contribution from her son, the Section was complied with and the
exemption cannot be denied.

 

The Tribunal, relying on the decisions in the following
cases, allowed the exemption :

(a) Jt. CIT v. Smt. Armeda K. Bhaya, (2006) 99 TTJ
(Mum.) 358, (2005) 95 ITD 313 (Mum.)

(b) R. B. Jodha Mal Kuthiala v. CIT, (1971) 82 ITR
570 (SC)

(c) CGT v. N. S. Getti Chettiar, 1972 CTR (SC) 349,
(1971) 82 ITR 599 (SC)

 


The Tribunal observed as under :

(1) If development of infrastructure is the object of S.
54EC, it would hardly matter whether the investment is made in the name of the
assessee exclusively or in the joint names of the assessee and somebody else.
The only condition is that the funds used for the investment must be traceable
to the sale proceeds of the capital asset.

(2) The assessee was 69 years old at the relevant time and
it was only a matter of convenience and to avoid any problem in future that
the son’s name was included.

(3) It is difficult to imagine that it would have been the
intention of the Act to place restrictions on such freedoms given to the
citizens of the country or on their right to take such precautions in the
interests of a secure future. Income tax is only one aspect of life and that
too for a minuscule part of the citizens of this country.

(4) While everyone is given the freedom to make investments
in any name he likes, there is no reason why such freedom should be taken away
in the case of Income-tax assessees, when the substantial ingredients of the
Section are complied with and the sale proceeds of the capital asset are
channelled into the assets in the national interest which is the main and
vital requirement of the Section.

(5) It is a well-settled rule of interpretation in IT law
that a beneficial Section has to be construed liberally, having due regard to
the object which it intends to serve.

(6) The Assessing Officer has interpreted the word
‘invested’ in S. 54EC to mean “invested in the assessee’s name”, an approach
which has no justification as it adds words into the Section and also ignores
the purpose which the Section is intended to serve.


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S. 32 & S. 43(6) : Assessee claiming depreciation for first time on assets purchased and used in earlier year, entitled to claim on the original cost of assets

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29 (2008) 114 TTJ 145 (Ahd.)


National Dairy Development Board v. ACIT

ITA No. 454 (Ahd.) of 2006

A.Y. 2003-04. Dated : 17-8-2007

S. 32 and S. 43(6) of the Income-tax Act, 1961 — Assessee not
being a taxable entity in earlier years, it was entitled to depreciation on the
original cost of the assets without reducing from original cost the notional
depreciation accounted for in the books of assessee.

 

For the relevant assessment year, the assessee claimed
depreciation for the first time on the original cost of certain assets, even
though these assets were purchased and used by it in earlier years.

 

The assessee claimed that as per the provisions of S. 43(6),
the WDV had to be computed by reducing the depreciation actually allowed against
the cost of the assets and that there was no concept of mental calculations of
the depreciation as having been allowed in the tax-free period. Therefore,
depreciation during the current year has to be computed on the original cost of
the assets. The Assessing Officer rejected the contention of the assessee, as in
his view, the principle governing the depreciation allowance is the effective
life of the depreciable assets and the expenditure incurred on its wear and tear
for the period of its consideration and since the assessee had been using the
assets in question for years, such assets must have depreciated greatly by their
use and some of them might have reached the stage of being discarded. Hence, in
order to arrive at the correct income, normal wear and tear of the assets had to
be taken into account. The CIT(A) upheld the AO’s order.

 

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

(a) CIT v. Straw Products Ltd., (1966) 60 ITR 156
(SC)

(b) CIT v. Dharampur Leather Co. Ltd., (1966) 60 ITR
165 (SC)

(c) CIT v. Mahendra Mills, (2000) 159 CTR (SC) 381,
(2000) 243 ITR 56 (SC)

(d) Madev Upendra Sinai v. Union of India & Ors.,
(1975) 98 ITR 209 (SC)

 


The Tribunal observed as under :

(1) S. 32 provides for depreciation on the WDV of the
asset. S. 43(6) defines the WDV to mean, in case of asset acquired in the
previous year, the actual cost to the assessee and in other cases, the actual
cost to the assessee less all depreciation actually allowed to him under the
Act.

(2) The short controversy is whether the “WDV of the asset
is to be taken at the original cost or as reduced by the notional depreciation
accounted for in the books of assessee and deemed to have been allowed in the
earlier years when the assessee was not chargeable to tax”.

(3) The term ‘actually allowed’ means allowed actually
under the Act and not notionally.

(4) In the earlier years the assessee was not liable to tax
and, therefore, the question of allowing any depreciation to the assessee
would not arise. The depreciation of the exempted period cannot be said to
have been allowed to the assessee.

(5) Wherever the legislature has wanted to reduce the WDV
to be ascertained after allowing notional depreciation, it has specifically
provided so, e.g., in S. 10A(6) providing for the deemed allowance of
depreciation for the assessment years ending before 1st of April 2001. S.
10B(6) also provides for similar deemed allowance of depreciation for any of
the relevant assessment years ending before the 1st of April 2001.

(6) As the income of the assessee was exempt until the
earlier year, no notional depreciation can be assumed and, therefore, it would
be entitled to the depreciation on the original cost of the assets.

 


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Section 28(i) — Penalty paid on account of failure to maintain margin money and not recovered from client, was an allowable loss.

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  1. (2009) 27 SOT 469 (Mum.)

ITO vs. VRM Share Broking (P.) Ltd.

A.Y. : 2004-05. Dated 03.11.2008

1. Section 28(i) — Penalty paid on account of failure to
maintain margin money and not recovered from client, was an allowable loss.
2. Section 37(1) of the Income-tax Act, 1961 —Penalty paid to SEBI for ‘excess
utilisation limits’ was an allowable business expense.

 

For the relevant assessment year, the Assessing Officer
disallowed the following amounts claimed by the assessee as expenses :

a. Amount not recovered from client on account of failure
to maintain margin money of 20% of the price of the securities proposed to
be purchased by the client.

b. Amount paid to the NSE for violation of the margins
imposed by SEBI on the share brokers.

Both the disallowances were deleted by the CIT(A).

The Tribunal, following the decision of the Bombay High
Court in the case of CIT vs. Gwalior Rayon Silk Manufacturing (Wvg.)
Co. Ltd. [1999] 237 ITR 23/102 Taxman 433, also held in favour of the
assessee. The Tribunal noted as under :

1. From the perusal of various Notifications issued by
SEBI, it was apparent that they were issued mainly in the context of risk
management rather than as penal provisions for punishing the defaulters or
deeming the transactions as illegal. In view of the same, it was held that
irrespective of whether the margin money was available or not, the loss
could not be held as illegal loss. The benefit of set-off of the same
against the income or allowing the same to be carried forward to the later
years cannot be denied to the assessee.

2. The amount paid was a penalty levied for violation of
the margins imposed by SEBI on the sharebrokers. From the Notification
issued by SEBI, it was found that such margins were imposed in order to
reduce the risk components and, therefore, those were basically risk
management oriented penalties, which were routine in nature. Having regard
to the purpose of the provisions of Section 37(1) which is aimed at
providing deterrence for infraction of laws of the country, the violation in
the instant case was not such that it would attract the provisions of
Section 37(1).



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Whether mesne profits received under consent decree by Apex Court was revenue receipt chargeable to tax or capital receipt not chargeable — Held, Not chargeable

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28 (2008) 111 ITD 1 (Mum.) (SB)

Narang Overseas (P.) Ltd. v. ACIT

ITA No. 4632 (Mum.) 2005

A.Y. 2002-03. Dated : 20-7-2008

Whether the mesne profits received by the assessee under the
consent decree granted by the Apex Court was revenue receipt chargeable to tax
or capital receipt not chargeable to tax — Held, Not chargeable to tax.

 

The assessee-company, promoted by the members of one family,
owned various properties including one building. The said property was given by
the assessee on leave-and-licence basis to another company ‘N’ promoted by the
same family. Under the agreement, the licensee i.e., N, could use and
occupy the premises for carrying on the business of selling fastfood under the
name ‘Croissants’, subject to payment of commission by way of certain percentage
of sale proceeds received by N. Within a period of few months, disputes arose
between the family members in respect of their properties. Thereafter various
family settlements were arrived at, including the settlement that consequent to
the termination of licence created in favour of ‘N’ in respect of property in
question, N shall vacate the said premises on or before 31-3-1992.

 

The members decided to implement the family settlements and
also to have all suits decreed by a consent decree. As a result, the Supreme
Court decreed all the suits. Pursuant to the said order, the licence created by
the assessee in favour of ‘N’ was cancelled and agreed to hand over quiet,
peaceful and vacant possession of the said premises to the assessee on or before
1-1-2002 and also to pay the arrears of commission for occupation of the said
premises along with the interest and further to simultaneously pay damages and
mesne profits for wrongful use and occupation of the said premises from 1-4-1992
till 31-12-2001, at the rate of Rs.10 lakhs per month along with interest.
Accordingly, the assessee received Rs.33,47,01,137 during the A.Y. 2002-03.
However, in return of the relevant assessment year, the assessee did not offer
the said amount as income, on the grounds that the damages/mesne profits
received by it were on capital account and, hence, not liable to tax. The AO,
however held that the amount received by the assessee could not be treated as
mesne profits as the same represented arrears of commission payable by ‘N’ to
the assessee under the licence agreement and that the same were revenue in
nature.

 

On appeal, the Commissioner (Appeals) held that the amount
received by the assessee under the consent decree passed by the Apex Court
represented mesne profits. As regards the nature of the same receipt, he
observed that the judgment of the Madras High Court in CIT v. P. Mariappa
Gounder (1984) 147 ITR 676/17 Taxman 292 was in Revenue’s favour and the
same was affirmed by the Supreme Court in P. Mariappa Gounder v. CIT,
(1998) 232 ITR 2. He, therefore, held that the mesne profits received by the
assessee constituted revenue receipt.

 

On second appeal, the dispute before the Division Bench was
whether the mesne profit received by the assessee pursuant to the consent decree
passed by the Supreme Court constituted revenue receipt assessable to tax. The
revenue contended that the issue stood concluded against the assessee by the
decision of the Special Bench of the Tribunal in Sushil Kumar & Co. v. Jt.
CIT (2004) 88 ITD 35 (Kol.), wherein it was held that the judgment of the
Madras High Court in P. Mariappa Gounder (supra), holding that the mesne
profit received by the assessee was revenue receipt chargeable to tax got merged
in the subsequent judgment of the Supreme Court and consequently the mesne
profit received by the assessee was taxable as revenue receipt.

 

However, the assessee contended that the issue was not
correctly decided by the Special Bench in Sushil Kumar & Co. (supra),
inasmuch as the issue that the taxability of mesne profit was neither raised
before nor considered by the Supreme Court.

 

The assessee further contended that the Madras High Court had
decided two issues — (1) the issue regarding the taxability of the mesne profit,
and (2) the year of assessability; the High Court decided both the issues
against the assessee; however, the issue regarding the taxability of mesne
profit was never raised before nor considered by the Supreme Court, since the
assessee challenged only the issue regarding the year in which the mesne profit
could be taxed; the Apex Court held that the High Court rightly held the same to
be taxable in the A.Y. 1963-64 and, therefore the judgment of the Madras High
Court regarding the issue of taxability of mesne profit did not merge in the
judgment of Supreme Court. In view of assessee’s contentions, the Division Bench
found it difficult to concur with the view expressed by the Special Bench in
Sushil Kumar & Co. (supra). Consequently, it referred the matter to the
Special Bench of three Members.

 

The Special Bench was of the view that the correctness of the
Special Bench’s decision in Sushil Kumar (supra) could be decided only by
a Larger Bench. Accordingly, a Special Bench comprising of five Members was
constituted.

 

S. 37(1) — Software in disk is tangible asset — Ownership, enduring benefit and functional tests to be applied to decide nature of expenditure on software — Whether capital or revenue

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27 (2007) 114 TTJ 476 (Del.) (SB)


Amway India Enterprises v. Dy. CIT

ITA No. 72 (Del.) of 2006

A.Ys. 2001-02 to 2002-03. Dated : 15-2-2008

S. 37(1) of the Income-tax Act 1961 — Computer software in a
disk is a tangible asset — Ownership test, enduring benefit test and functional
test are applied to decide the nature of expenditure on computer software —
whether capital or revenue.

For A.Y. 2001-02, the assessee claimed deduction in respect
of software expenditure incurred for purchase of various types of application
software for use in its business. The Assessing Officer held that the softwares
were part of plant and machinery and gave enduring benefit to the assessee,
since they had long-lasting use of more than three four years. This treatment of
software being capital expenditure was confirmed by the CIT(A), since he found
that the assessee had not upgraded or replaced the software frequently.

 

The Division Bench of the ITAT found that divergent views
were expressed on the issue by the various Division Benches in various cases
and, since this issue was expected to occur regularly in many cases, it felt the
need for a Special Bench to consider this matter.

 

The Special Bench noted as under :

(1) The cardinal rule is that the question whether certain
expenditure is capital or revenue should be decided from the practical or
business view-point and in accordance with sound accountancy principles and
this rule is of special significance in dealing with expenditure on expansion
and development of business.

(2) Three tests generally applied to decide whether an
expenditure is capital or revenue in nature are :


l
Ownership test


l
Test of enduring benefit


l
Functional test


(3) Computer software has not been defined in the Act but
in Note 7 to Appendix 1 to the IT Rules it has been explained to include
computer programme recorded on any disk, tape, perforated media or other
information storage device. Therefore, computer software is goods and a
tangible asset by itself. An assessee purchasing such software, or the licence
to use such software, becomes owner thereof. (Decision of the Supreme Court in
the case of Tata Consultancy Services v. State of Andhra Pradesh, 192
CTR 257/137 STC 620 applied.)

(4) In terms of the enduring benefit test, the duration of
time for which the assessee acquires the right to use the software becomes
relevant. What is material to consider is the nature of the advantage in a
commercial sense and it is only where the advantage is in capital field that
expenditure would be disallowable on the application of this test.

(5) The period of advantage in the context of computer
software should not be viewed from the point of view of different assets or
advantages like tenancy or use of know-how, because software is a business
tool enabling a businessman’s ability to run his business. (Decision of the
Supreme Court in the case of Empire Jute Co. Ltd. v. CIT, 17 CTR
113/124 ITR 1 applied.)

(6) Having regard to the fact that software becomes
obsolete with technological innovation and advancement within a short span of
time, it can be said that where the life of the software is short (say, less
than two years), then it may be treated as revenue expenditure. Any software
having its utility to the assessee for a period beyond two years can be
considered as accrual of benefit of enduring nature.

(7) Once the tests of ownership and enduring benefit are
satisfied, it has to be seen from the point of its utility to the businessman
and to see how important an economic or functional role it plays in the
business. Therefore, the functional test becomes more important because of the
peculiar nature of the software and its possible use in different areas of
business touching either capital or revenue field or its utility to a
businessman which may touch either capital or revenue field.

(8) If the advantage consists merely in facilitating the
assessee’s trading operations or enabling the management and conduct of the
business to be carried on more efficiently or more profitably while leaving
the fixed capital untouched, then the expenditure would be on revenue account
even though the advantage may endure for an indefinite future.

(9) Merely because the software is acquired on a licence,
it cannot be concluded whether it is revenue in nature if on application of
the functional test it is found that the expenditure operates to confer a
benefit in the capital field. Similarly, some software having a very limited
economic life cannot be treated as capital in nature even if it is owned by
the assessee.

 


The matter was remanded to the Assessing Officer for deciding
the issue afresh based on the above criteria.

Gain on exchange fluctuation under EEFC account, interest thereon and FDRs maintained as guarantee for export and DEPB credits eligible for deduction u/s.80HHC

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26 (2007) 112 TTJ 754 (Mum.)


Shah Originals v. ACIT

ITA Nos. 3206 (Mum.) of 2006 and 1254 to 1256 and 4065 (Mum.)
of 2007

A.Ys. 2000-01 to 2004-05. Dated : 25-10-2007

S. 80HHC of the Income-tax Act, 1961 — Gain on foreign
exchange fluctuation under EEFC account, interest on EEFC account, interest on
FDRs maintained as guarantee for export business and DEPB credits are eligible
for deduction u/s.80HHC.

 

For the relevant assessment years, the Assessing Officer
disallowed the assessee’s claim u/s.80HHC in respect of the following incomes :

(a) Gain on foreign exchange rate fluctuation under EEFC
account.

(b) Interest on EEFC account.

(c) Interest on bank FDRs maintained as guarantee for
export business.

(d) Income form DEPB.

The Tribunal allowed the assessee’s claim in respect of all
these incomes. The Tribunal noted as under :

1. In respect of allowability of foreign exchange rate
fluctuation gain, the tribunal relied on the following decisions :

(i) Smt. Sujata Grover v. Dy. CIT, (2002) 74 TTJ 347
(Del.)

(ii) S. S. Industries (ITA No. 2732/Mum./1997, dated 30th
Jan. 2000)

(iii) Mohindra Impex (ITA No. 1492/Del.)

(iv) M. B. Mehta & Co. (ITA No. 4607/Mum./2004 dated 27th
June 2006)

(v) Fountainhead Exports (ITA Nos. 5817 & 5823/Mum./2000)

2. In respect of allowability of interest on EEFC account,
the Tribunal relied on the decision in the case of Fountainhead Exports (supra).

3. In respect of allowability of interest on Bank FDRs
maintained as guarantee for export business, the Tribunal held that since
furnishing of guarantees is closely linked up with the export business, there is
no reason why the interest earned on such FDRs should not be considered as
business income of the assessee.

4. In respect of allowability of DEPB credits, the Tribunal
noted that DEPB credits arise directly out of the export business operations
and, hence, should be considered as business income of the assessee.

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S. 2(29B), S. 2(42A) and S. 48 — When ownership rights transferred partly and later some floors of new building sold with proportionate share in land, sale consideration has to be apportioned between land and superstructure to determine capital gains

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25 (2007) 112 TTJ 593 (Kol)


The Statesman Ltd. v. ACIT

ITA No. 1692 (Kol.) of 2006

A.Y. 2003-04. Dated : 31-1-2007

S. 2(29B), S. 2(42A) and S. 48 of the Income-tax Act, 1961 —
When ownership rights were transferred partly and later some floors of the newly
constructed building were sold along with proportionate undivided share in land,
the sale consideration has to be apportioned between the land and the
superstructure to determine long-term/short-term capital gains.

 

The assessee-company owned and held a plot of land on
perpetual lease. It transferred 56.8% of the land to a developer under a
development agreement, retaining 43.2% ownership. Pursuant to the agreement, the
developer constructed two superstructures on the land and handed over one
building to the assessee-company. The assessee sold 4 floors of this building
during this year. The assessee computed long-term capital gain arising on
transfer of proportionate undivided portion of the land attributable to the 4
floors sold by it. It also computed short-term capital gains arising on transfer
of the built-up superstructure area of the 4 floors sold by it. The Assessing
Officer treated the entire amount as short-term capital gains, ignoring the
bifurcation done by the assessee. This was upheld by the CIT(A).

 

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

(a) ITC Ltd. v. Dy. CIT, (2003) 80 TTJ 15 (Kol.)
(TM)/86 ITD 135

(b) CIT v. Estate of Omprakash Jhunjhunwala, (2002)
172 CTR 325 (Cal.)/254 ITR 152

 


The Tribunal noted as under :

(1) The first objection by the Assessing Officer while
treating the sale of 4 floors as income from short-term capital gains is based
on the observation that the rights of the assessee-company in the land and
building forming part of the property were extinguished as soon as the same
were handed over to the developer for development through construction of new
multistoreyed buildings. As evident from the plain reading of terms of
agreement between the assessee-company and the developer, the fact that
emerges is that the assessee at no point of time has relinquished or
transferred the right of ownership on such land to the extent of 43.2% and the
assessee always held the ownership of 43.2% of the land. Therefore, the first
objection by the Revenue, while denying the computation of capital gain by the
assessee, does not hold any merit.

(2) The second objection by the Revenue basically disputing
apportionment of sales consideration by the assessee-company between the value
of land and superstructure is without any concrete and sound reasoning.

(3) Since the assessee is the owner of the building and
43.2% of the land on which such building had been constructed, the assessee
has rightly apportioned the sale consideration in its books of accounts on the
sale of the 4 floors.

(4) For the purpose of apportionment, the assessee has
rightly taken the market value of land as on 1st April 1981, since the land
was acquired before 1981 and the gain arising on disposal of the land was
long-term capital gain and the gain on disposal of the above 4 floors of the
building has rightly been treated as short-term capital gain.

(5) Even otherwise, when there is some difficulty in
bifurcation/apportionment, the same cannot be a ground for rejecting the claim
of the assessee. The Tribunal relied on decisions in the following cases :

(a) ITC Ltd. v. Dy. CIT, (2003) 80 TTJ (Kol.) (TM)
15; (2003) 86 ITD 135 (Kol.) (TM)

(b) CIT v. Estate of Omprakash Jhunjhunwala, (2002)
172 CTR (Cal.) 325; (2002) 254 ITR 152 (Cal.)

 


The Tribunal also relied on the decisions in the following
cases :

(a) CIT v. Dr. D. L. Ramchandran Rao, (1998) 147 CTR
(Mad.) 314; (1999) 236 ITR 51 (Mad.)

(b) CIT v. Vimal Chand Golecha, (1993) 110 CTR
(Raj.) 216; (1993) 201 ITR 442 (Raj.)

(c) CIT v. C. R. Subramanian, (2000) 159 CTR (Kar.)
218; (2000) 242 ITR 342 (Kar.)

(d) CIT v. Best & Co. (P) Ltd., (1966) 60 ITR 11
(SC)


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S. 50C does not apply where transferred property is not the subject-matter of registration and question of valuation for stamp duty has not arisen

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23 (2007) 112 TTJ 76 (Jd)


Navneet Kumar Thakkar v. ITO

ITA No. 679 (Jd) of 2006

A.Y. 2003-04. Dated : 8-3-2007

S. 50C of the Income-tax Act, 1961 — S. 50C does not apply to
cases in which the transferred property is not the subject-matter of
registration and the question of valuation for stamp duty purposes has not
arisen.

 

For the relevant assessment year, the Assessing Officer
observed that the fair market value of the plot of land sold by the assessee
seemed to be much higher than the sale consideration shown in the sale
agreement. He referred the matter to the Asst. Valuation Officer u/s.55A and
made additions for the differential amount. The CIT(A) accepted the sale value
adopted by the Assessing Officer and confirmed the additions.

 

The Tribunal, applying the decisions in the following cases,
held that unless the property transferred has been registered by sale deed and
for that purpose the value has been assessed and stamp duty has been paid by the
parties, S. 50C cannot come into operation :

(a) CIT v. Amarchand N. Shroff, (1963) 48 ITR 59
(SC)

(b) CIT v. Mother India Refrigeration Industries Pvt.
Ltd., (1985) 48 CTR 176/155 ITR 711 (SC)

 


The Tribunal noted as under :

(1) A legal fiction has been created in S. 50C only in
respect of the cases where the consideration received by the assessee is less
than the value adopted or assessed by the stamp valuation authority of the
State Government for the purpose of payment of stamp duty ‘in respect of such
transfer’.

(2) It is a trite law that the legal fiction cannot be
extended beyond the purpose for which it is enacted. S. 50C embodies the legal
fiction by which the value assessed by the stamp duty authorities is
considered as the full value of consideration for the property transferred. It
does not apply to cases in which the transferred property has not become the
subject-matter of registration and the question of valuation for stamp duty
purposes has not arisen.

(3) What is relevant for the attractability of S. 50C is
that the property which is under transfer from the assessee to another person,
should have been assessed at a higher value for stamp valuation purpose than
that received or accruing to the assessee.

(4) Unless the property transferred has been registered by
a sale deed and for that purpose the value has been assessed and stamp duty
has been paid by the parties, S. 50C cannot come into operation. In such a
situation, the position existing prior to insertion of S. 50C would apply and
the onus would be upon the Revenue to establish that the sale consideration
declared by the assessee was understated. In such cases the decisions in the
cases of K. P. Verghese v. ITO, (1981) 24 CTR 358 (SC)/131 ITR 597 and
CIT v. Shivakami Co. (P.) Ltd., (1986) 52 CTR 108 (SC)/ 159 ITR 71
would come into operation and govern the determination of the full value of
consideration.

(5) As the Assessing Officer has not embarked upon making
enquiries from the purchaser about the actual sale consideration, and has not
brought on record any other material worth the name to show that the sale
consideration declared by the assessee was understated, the addition was
wrongly made and sustained.

 


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(a) S. 37(1) — Expenditure on implementation of new ERP package is revenue expenditure. (b) Only expenditure of capital nature on repairs of leased premises is covered by Explanation 1 to S. 32(1)

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22 (2007) 112 TTJ 94 (Chd.)


Glaxo Smith Kline Consumer Healthcare Ltd. v.
ACIT

ITA Nos. 379 & 534 (Chd.) of 2004 and 309 & 310 (Chd.) of
2005

A.Ys. 1998-99 to 2001-02. Dated : 21-3-2007




(a) S. 37(1) of the Income-tax Act, 1961 —
Expenditure on implementation of new ERP package is revenue expenditure.


(b) S. 30 & S. 32(1) of the Income-tax Act 1961 —
Only expenditure of capital nature incurred on repairs of leased premises is
covered by Explanation 1 to S. 32(1).



Implementation of ERP package :

The Assessing Officer rejected the assessee’s claim for
deduction of expenses incurred on implementation of a new ERP package for
recording of manufacturing and accounting transactions. The Assessing Officer
held that such expenditure was capital in nature, since it would provide the
assessee with enduring benefits. The CIT(A), however, allowed the assessee’s
claim.

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

1. The majority of the expense was relating to salaries,
travelling and other routine business expenses.

2. The expenditure does not result in acquisition of any
asset in the hands of the assessee.

3. An efficient and reliable recording of activities of
accounting, finance, inventory management, processing of purchases, sales,
etc. would enable the assessee to be more efficient and profitable in carrying
out its main business activity of manufacturing. Where the assessee incurs
expenditure to further improve and upgrade its manner of recording of
accounting and other related transactions, it does have an impact on
generation of income, since the assessee acquires improved inputs to take
business decisions.

4. However, it does not add to the capital apparatus of the
assessee. Therefore, the resultant benefits, in the shape of carrying on
business more efficiently and smoothly, cannot be said to be an advantage
accruing in the capital field.

 


Renovation of leased premises :

In respect of expenditure incurred by the assessee on
renovation of office premises taken on lease, the Assessing Officer and the
CIT(A) held that in terms of Explanation 1 appended to S. 32(1) of the Act, any
expenditure incurred towards the renovation/ improvement of leased building is
to be held as capital in nature.

 

The Tribunal, relying on a plethora of cases, held that only
‘capital expenditure’ is covered within the purview of the said Explanation —
each and every expenditure does not fall within the realm of the Explanation.

 

The Tribunal noted as under :

(1) The expenditure envisaged in the Explanation, inter
alia, includes expenditure by way of renovation or expansion or of
improvement to the building, provided of course that the same is to be of
capital nature.

(2) If it is found that the expenditure is revenue
expenditure, then notwithstanding that it is incurred on a leased building,
the same will not fall within the purview of the Explanation 1 to S. 32(1).

 


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S. 43B — The assessee issued Deep Discount Bonds in 2000 — During the relevant assessment year, it claimed deduction of interest accrued on above bonds — AO was of the view that since no interest was paid in the period and eventually, the interest will be

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56 (2010) 126 TTJ (And) 262

Gujarat Toll Road Inv. Co. Ltd. v. ACIT

A.Y. : 2003/04 Dated : 15-05-2009

S. 43B — The assessee issued Deep Discount Bonds in 2000 —
During the relevant assessment year, it claimed deduction of interest accrued on
above bonds — AO was of the view that since no interest was paid in the period
and eventually, the interest will be paid after maturity of the bonds, no
deduction is permissible — Held, the interest would be still allowable in view
of mercantile system of accounting followed by the assesse.

Facts :

The assessee, an infrastructure company, issued Deep Discount
Bonds worth Rs.30 crore in 2000 to Mutual Funds, Public Financial Institutions
and Scheduled Banks. The assessee claimed deduction of Rs.6,08,03,230 in the A.Y.
2003-04 on account of interest paid. However, the AO was of the view that since
the total interest will be paid at the maturity of the Deep Discount Bonds,
deduction was to be allowed only on actual payment. On appeal, the Commissioner
(Appeals) affirmed the view of the AO on a different ground, i.e., since
interest was to be paid on maturity, there was no question of accrual of
interest for the period.

Held :

As per the mercantile system of accounting employed by the
assessee, though the payment was to be made only at the maturity, it was not
wrong to provide for interest in a pro rata manner as the liability has accrued.
This view was seconded by the Circular No. 2 of 2002, dated 16-2-2002 of the
CBDT.

Thus, the interest which had accrued during the period,
though not paid was still allowable to the assessee. Moreover, it was affirmed
that S. 43B(e) was not applicable to payment of interest to Mutual Funds. Also,
in case of Public Financial Institutions, S. 43B(d) is attracted only on payment
of interest to its loans/borrower. In the given case, interest was paid on Deep
Discount Bonds which are like deposits. So, provisions regarding payment of
interest on loans/by a borrower as per S. 43B(d) and S. 43B(e) were not
applicable. Therefore, the disallowance made for interest in respect of Deep
Discount Bonds was to be deleted.


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Income-tax Act, 1961 — S. 10A — Free trade zone — An assessee need not set off unabsorbed depreciation and brought forward losses of non-STPI unit against profit of STPI unit as there is no deduction u/s.10A for non-STPI unit.

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55 (2010) 125 ITD 101 (Bangalore)

Rely Software (P.) Ltd. v. ITO (Bangalore)

A.Y. : 2004-05. Dated : 16-5-2008

Income-tax Act, 1961 — S. 10A — Free trade zone — An assessee
need not set off unabsorbed depreciation and brought forward losses of non-STPI
unit against profit of STPI unit as there is no deduction u/s.10A for non-STPI
unit.

Facts I :

In A.Y. 2004-05, the Assessing Officer on scrutiny of the
assessee’s case was of the view that unabsorbed depreciation and brought forward
losses of non-STPI unit should be adjusted against the profits of STPI unit
before claiming deduction u/s.10A. The aggrieved assessee appealed to the CIT(A),
who upheld the order of the Assessing Officer.

Facts II :

The AO obtained the details of export of incurred in foreign
exchange. The details as given by the assessee included an item ‘allowance paid
to engineers on overseas contract’. The Assessing Officer held that the said
expenditure is for technical services and accordingly excluded the same from
export turnover.

Held I :

The Tribunal relied on the decisions of ACIT v. Yokogawa
India Ltd., (2007) (13 SOT 470) (Bang.) and Huawei Technologies (Ind.) P. Ltd. [ITA
No. 9(B) of 2007, Order dated 8-11-2007] and held that the business loss or
unabsorbed depreciation of non-STPI should not be set off with the STPI unit.
The following observations were also made :

1. The words total income used in S. 10A means total
income as computed under the provisions of the Act. The substituted S. 10A
does not mean that profits as mentioned u/s.10A should not be included in
the total income.

2. The Legislature has used the words ‘profits and gains
as derived by an undertaking’. The assessee may have more than one
undertaking and in that case one has to consider the profits and gains of
that undertaking which qualifies for deduction u/s.10A.

3. S. 10A nowhere mentions that the deduction has to be
restricted to the total income of the assessee as computed as per the
provisions of the Act. The only interpretation which is possible in respect
of S. 10A is that deduction of the unit qualifying for exemption is to be
given to the extent of income computed in respect of that unit as per the
provisions of the Act.


Held II :


1. Payments made to the engineers employed on site are
for the development of software. By such development, the assesse has not
rendered any technical services.

2. The CBDT Circular No. 694, dated 23-11-1994, stated
that computer programs are not physical goods, but are developed as a result
of intellectual analysis of the system. It is often prepared on site with
the software personnel going to the client’s premises.

Hence the expenditure incurred for payments on site
development cannot be excluded from the export turnover by holding it as
technical services.



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S. 43(6), S. 45(1A) and S. 50 — Insurance claim received on damaged tanks and terminals — S. 43(6) does not include the word ‘damage’ — Hence the same should not be reduced from the WDV.

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54 (2010) 124 ITD 493

J. R. Enterprises v. ACIT

A.Y. : 2002-03. Dated : 30-6-2008

S. 43(6), S. 45(1A) and S. 50 — Insurance claim received on
damaged tanks and terminals — S. 43(6) does not include the word ‘damage’ —
Hence the same should not be reduced from the WDV.

Facts :

The assessee’s tanks and terminals were damaged due to an
earthquake during the relevant financial year. The assessee incurred an
expenditure of Rs.3,83,04,364 for repair, reconstruction and refurbishment of
the said tanks and terminals. As against this, the assessee received a total sum
of Rs.1,57,28,124 from the insurance company in two instalments. During the
relevant financial year, the assessee deducted the amount of first instalment
(i.e., Rs.1,25,00,000) received from the insurance company from total
expenditure incurred (i.e., Rs.3,83,04,364). The balance amount was shown as WIP
in the balance sheet. In the next year, the assessee deducted the second
instalment received from the said WIP and included certain other expenses
incurred. The final amount was then capitalised and depreciation u/s.32 was
claimed on the said amount.

The AO pointed out that the provisions of S. 45(1A) r.w. S.
50 should be applied to the assessee’s case. Thus the insurance receipt of
Rs.1,57,28,124 should be deducted from the WDV of the block of plant and
machinery.


Held :


1. S. 50 of the Act deals with transfer of assets or
cessation of existence of the block of assets. In the instant case, there is
neither a transfer, nor has the block ceased to exist. It is a case of
damaged tank and terminals and damage does not involve transfer or cessation
of existence.

2. Further, the words used in S. 45(1A) are ‘profit or
gains’, which imply the excess of the insurance receipts over the
expenditure incurred by the assessee in respect of damaged tanks and
terminals. The total insurance receipts in the present case is much less
than the total expenditure incurred by the assessee. Therefore the
provisions of S. 45(1A) are inapplicable in the present case.

3. S. 43(6)(c)(i)(B) excludes the word ‘damage’.
Therefore the moneys payable in respect of damaged tanks and terminals is
outside the purview of the said Section.

4. There is no provision in the Act to authorise the
Assessing Officer to decrease the WDV involving damaged depreciable assets
as in the case of the assessee. The AO has thus erroneously equated the
insurance receipts in the assessee’s case with ‘moneys payable in respect of
any asset falling in that block which is sold or discarded or demolished or
destroyed’.

5. The AO has erroneously assumed that every insurance
receipt is taxable, ignoring the provisions of the S. 45(1A) which use the
words ‘any profits or gains’ on such insurance receipts.



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S. 10(16) — Scholarship/stipend paid to assessee — Whether can be termed as salary — Held, No. The same is exempt u/s.10(16).

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53 (2010) 124 ITD 480 (Chd.)

Dr. Rahul Tugnait v. ITO

A.Y. : 2005-06. Dated : 30-6-2008


S. 10(16) — Scholarship/stipend paid to assessee — Whether
can be termed as salary — Held, No. The same is exempt u/s.10(16).


Facts :

The assessee completed his MBBS degree and joined a medical
college as a junior resident for post graduation. He received a sum of
Rs.2,65,955 from the college as a scholarship/stipend for higher education. The
assessee claimed the said amount as exempt u/s.10(16) of the Act. The AO
disallowed the claim on the ground that the said amount forms salary income in
the hands of the assessee.


Held :


1. The terms and conditions mentioned in the bond signed
between the assessee and the college clearly use the words ‘scholarship’ and
‘scholarship holder’.

2. The assessee had made an application to the principal
of the medical college. The letter of the Principal clearly states that the
amount is a ‘stipend’ to the post-graduate student.

3. S. 10(16) of the Act speaks about the scholarship
granted to meet the cost of education, therefore, it can be said that even
if it is an income in the hands of recipient, it cannot be taxed, because it
is a scholarship to meet the cost of education.



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Credit for TDS to be allowed even when the income is capitalised and not directly offered to tax.

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52 (2010) 124 ITD 394 (Chennai)

Supreme Renewable Energy Ltd. v. ITO

A.Y. : 2003-04. Dated : 14-8-2008

Credit for TDS to be allowed even when the income is
capitalised and not directly offered to tax.

Facts :

The assessee was a domestic company engaged in the business
of co-generation of power. It had earned interest income of Rs. 51,21,287 on
which tax was deducted at source. The said interest income arose out of a
statutory deposit made by the assessee. The said interest income was deducted
from expenditure incurred for the installation of machinery. The Assessing
Officer, however, did not give credit of tax deducted on this interest income on
the ground that the same was not offered to tax but was capitalised.

Held :

Relying on the decisions of Karnal Co-operative Sugar Mills
Ltd. (243 ITR 2) (SC) and Toyo Engg. India Ltd. v. JCIT, (5 SOT 616), the ITAT
held that :

(1) When deposit is linked with the installation of
machinery, income earned on such deposit is incidental to the installation.
Accordingly, the interest is a capital receipt and would go to reduce the
cost of asset. The assessee had rightly deducted the interest income from
the cost of asset and while doing so it has indirectly offered the income to
tax.

(2) When a particular income is received after deduction
of tax, the TDS has been duly deposited with the bank and the assessee has
received the requisite certificate to this effect, then on production of the
said certificate the assessee becomes entitled to the credit of
TDS even if the income is not directly offered for tax.

(3) The assessee should be rightly allowed the credit of
tax deducted. The Government cannot benefit by taking advantage of legal
technicalities.

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S. 271(1)(c) — Deduction u/s.80HHC — Assessee included miscellaneous income without reducing 90% — Penalty cannot be levied simply because assessee had not reduced 90% of other incomes

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51 (2010) 124 ITD 353 (Delhi)

Model Footwear (P.) Ltd. v. ITO

A.Y. : 1998-99. Dated : 22-5-2009


S. 271(1)(c) — Deduction u/s.80HHC — Assessee included
miscellaneous income without reducing 90% — Penalty cannot be levied simply
because assessee had not reduced 90% of other incomes

S. 271(1)(c) — Last year for claiming deduction u/s.80I was
A.Y. 1996-97 — Inspite of this, assessee claimed deduction u/s.80I — No
explanation offered by assessee in this regard — Explanation I to S. 271(1)(c)
applicable — Penalty to be levied.

Facts :

The assessee claimed deduction u/s.80HHC of Rs. 1,52,63,904.
While doing so, the assessee included interest income, miscellaneous income and
excess provision written back in the profit without reducing 90% thereof. The
AO, by applying the Explanation (baa) to S. 80HHC, excluded 90% of aforesaid
amounts and worked out deduction u/s.80HHC. He also initiated penalty
proceedings u/s.271(1)(c).

The Assessing Officer further noticed that the assessee had
also claimed deduction u/s.80I. The AO noted that the assessee was entitled to
deduction only up to A.Y. 1996-97. The AO thereafter asked the assessee to give
reasons as to why the claim of deduction u/s.80I should not be disallowed. No
reply in this regard was furnished by the assessee. The AO, therefore, held that
the claim of deduction u/s.80I was incorrect. He also initiated penalty
proceedings u/s.271(1)(c).

The CIT(A) confirmed the above additions. Thereafter, the AO
proceeded with penalty proceedings.

The CIT(A) confirmed that penalty u/s.271(1)(c) is leviable
in the assessee’s case.



Held :


(1) The question of excluding interest income and
miscellaneous income is dependent upon the nature of incomes — Whether they
are directly connected to operations of the assessee’s business. Simply
because the assessee had claimed deduction without reducing 90% of aforesaid
incomes, it cannot be said that the assessee has concealed income or has
made incorrect claim. The assessee’s claim was a bona fide one and assessee
has disclosed all material facts. Hence, no penalty u/s.271(1)(c) is to be
levied.

(2) As far as deduction u/s.80I is concerned, penalty
u/s.271(1)(c) has been correctly levied. No reason or explanation was given
by the assessee as to why it made a claim for deduction u/s.80I when it was
known to the assessee that the deduction is available only up to the A.Y.
1996-97.

The Assessing Officer started making enquiry and on enquiry,
the assessee informed the AO that the first year of deduction was A.Y. 1989-90.
Even, thereafter the assessee did not withdraw the claim made u/s.80I.

Hence the Explanation I to S. 271(1)(c) is squarely
applicable to assessee’s case inasmuch as the assessee failed to offer any
explanation.


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S. 40A(9) — Where the contribution made to any fund is a bona fide one, the same should not be hit by the disallowance of S. 40A(9).

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50 (2010) 124 ITD 332 (Cochin)

ACIT v. State Bank of Travancore

A.Y. : 2002-03. Dated : 8-8-2007

 

S. 40A(9) — Where the contribution made to any fund is a bona
fide one, the same should not be hit by the disallowance of S. 40A(9).

Facts :

The assessee had contributed Rs.50 lakhs to Retired Employees
Medical Benefit Scheme. This was pursuant to the Associate Bank Officers’
Association’s (‘union’) demands from the management of the State Bank of India
and its subsidiaries. After negotiations between the management and the union,
it was agreed to formulate a medical scheme for retired officers. As per terms
of agreement between the management and the union, the assessee paid Rs.50 lakhs
as its contribution towards formulation of the scheme.

On perusal of the tax audit report, the AO disallowed the
said contribution on the ground that the said contribution is subject to the
provisions of S. 40A(9). The CIT(A) held in favour of the assessee.

Held :

The Tribunal held in favour of the assessee on the following
grounds :

(1) The basic intention for inserting Ss.(9) to S. 40A was
to discourage the practice of creating camouflage trust funds, etc. ostensibly
for the welfare of employees and transferring huge funds to such trust as
contribution.

(2) In the given case, there was an agreement signed by the
management and the union and contribution made by the assessee was in
pursuance to this agreement. Hence, it was a contractual obligation of the
assessee and the contribution was a bona fide one. Further, in the case of
assessee the fund is not in the control of the assessee.

The assessee would not be hit by the provisions of S. 40A(9).

51 (2010) 124 ITD 353 (Delhi)

Model Footwear (P.) Ltd. v. ITO

A.Y. : 1998-99. Dated : 22-5-2009

 

S. 271(1)(c) — Deduction u/s.80HHC — Assessee included
miscellaneous income without reducing 90% — Penalty cannot be levied simply
because assessee had not reduced 90% of other incomes

S. 271(1)(c) — Last year for claiming deduction u/s.80I was
A.Y. 1996-97 — Inspite of this, assessee claimed deduction u/s.80I — No
explanation offered by assessee in this regard — Explanation I to S. 271(1)(c)
applicable — Penalty to be levied.

Facts :

The assessee claimed deduction u/s.80HHC of Rs. 1,52,63,904.
While doing so, the assessee included interest income, miscellaneous income and
excess provision written back in the profit without reducing 90% thereof. The
AO, by applying the Explanation (baa) to S. 80HHC, excluded 90% of aforesaid
amounts and worked out deduction u/s.80HHC. He also initiated penalty
proceedings u/s.271(1)(c).

The Assessing Officer further noticed that the assessee had
also claimed deduction u/s.80I. The AO noted that the assessee was entitled to
deduction only up to A.Y. 1996-97. The AO thereafter asked the assessee to give
reasons as to why the claim of deduction u/s.80I should not be disallowed. No
reply in this regard was furnished by the assessee. The AO, therefore, held that
the claim of deduction u/s.80I was incorrect. He also initiated penalty
proceedings u/s.271(1)(c).

The CIT(A) confirmed the above additions. Thereafter, the AO
proceeded with penalty proceedings.

The CIT(A) confirmed that penalty u/s.271(1)(c) is leviable
in the assessee’s case.


Held :

(1) The question of excluding interest income and
miscellaneous income is dependent upon the nature of incomes — Whether they
are directly connected to operations of the assessee’s business. Simply
because the assessee had claimed deduction without reducing 90% of aforesaid
incomes, it cannot be said that the assessee has concealed income or has made
incorrect claim. The assessee’s claim was a bona fide one and assessee has
disclosed all material facts. Hence, no penalty u/s.271(1)(c) is to be levied.

(2) As far as deduction u/s.80I is concerned, penalty
u/s.271(1)(c) has been correctly levied. No reason or explanation was given by
the assessee as to why it made a claim for deduction u/s.80I when it was known
to the assessee that the deduction is available only up to the A.Y. 1996-97.

The Assessing Officer started making enquiry and on enquiry,
the assessee informed the AO that the first year of deduction was A.Y. 1989-90.
Even, thereafter the assessee did not withdraw the claim made u/s.80I.

Hence the Explanation I to S. 271(1)(c) is squarely applicable to assessee’s
case inasmuch as the assessee failed to offer any explanation.

S. 10B — For claiming deduction the assessee need not own the plant and machinery by itself.

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49 (2010) 124 ITD 249 (Delhi)

ITO v. Techdrive (India) (P.) Ltd.

A.Y. : 2002-03. Dated : 27-6-2008

S. 10B — For claiming deduction the assessee need not own the
plant and machinery by itself.

Facts :

The assessee is a private limited company. In its return of
income it claimed a deduction u/s.10B of the Income-tax Act, 1961 (‘the Act’) in
respect of export of computer software. During the scrutiny assessment, the AO
found that the assessee did not have any plant and machinery to develop any
computer software on its own. The computer software developing was done in the
premises of Seacom, the subsidiary of the assessee for which the assessee paid
‘software development charges’. According to the AO, one of the basic conditions
for claiming deduction u/s.10B is that the assessee company should have its own
infrastructure. He denied deduction u/s.10B of the Act.

The CIT(A) held that the assessee was entitled to exemption
u/s.10B.

Held :

On appeal, the ITAT allowed deduction u/s.10B on the
following grounds :

(1) Relying on various judgments, the ITAT held that it is
not required that the assessee company should itself own plant and machinery.
Even if the assessee gets the articles manufactured from some other person but
under the control and supervision of the assessee, it must be taken as if the
assessee is the manufacturer.

(2) Further the development of computer software is a very
specialised field which requires specialised education, skills, etc. It is not
a mechanical job and more than machines, it is human skills that count.

(3) Further, Circular 694, dated 23-11-1994 also supports
the assessee’s case. The Circular accepts that computer programmes are not
physical goods but are developed through a process of intellectual analysis.
It also recognizes that in some cases it is possible for the assessee to
produce software at the client’s premises. In such case, the software
personnel sent by the assessee would obviously use the client’s equipment
only.

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S. 32 r.w. S. 147, S. 133A — Depreciation cannot be denied on asset forming part of block of assets is not used

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50 (2008) 22 SOT 249 (Mum.)

Unitex Products Ltd. v. ITO

ITA Nos. 153 and 154 (Mum.) of 2003

A.Ys. 1996-97 & 1997-98. Dated : 25-1-2008

S. 32 r.w. S. 147 and S. 133A of the Income-tax Act, 1961 —
Once an asset was part of block of assets and depreciation was granted on that
block, it cannot be denied in subsequent year on the ground that one of the
assets was not used by the assessee in that year.

 

The Assessing Officer completed the assessments of the
assessee for the relevant years u/s.143(3). Subsequently, a survey u/s.133A was
carried out at the business premises of the assessee. On the basis of the
statement recorded of the estate manager (R), the Assessing Officer reopened the
assessment for A.Ys. 1996-97 and 1997-98 and disallowed the assessee’s claim for
depreciation and maintenance expenses of one building as R had stated that the
building was under structural renovation during the period and was vacated by
the assessee. The CIT(A) confirmed the Assessing Officer’s action.

 

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

(a) Apart from R’s Statement, the Department had not
brought anything on record for negating the claim of the assessee with regard
to depreciation.

(b) Contrary to the facts possessed by the Assessing
Officer, the assessee had demonstrated that the building, though was under
renovation, yet was not totally abandoned; it had been using this building for
business purposes and it had incurred electricity expenses, telephone expenses
and made sales and purchases from this building. The assessee had also pointed
out that all correspondence was being made in that building only. The demand
notice was also served on these premises. It was also pointed out that
registered office address was also of this building.

(c) If one weighed the material produced by the assessee
vis-à-vis the solitary statement of R elicited by the authority during the
course of survey, then scale would tilt in favour of the assessee, because the
statement was recorded U/ss.(3)(iii) of S. 133A without administering the oath
to R. This was information which required corroboration for deciding an issue
against the assessee. The Assessing Officer had not brought any corroborative
piece of evidence in support of this information.

(d) It was also submitted by the assessee that the building
was part of its block of assets. The Tribunal in Packwell Printers v. ACIT,
(1996) 58 ITD 340 (Jab.) has considered a similar issue. This order of the
Tribunal was subsequently followed in Natco Exports v. Dy. CIT, (2003)
86 ITD 445 (Hyd.), etc. According to these decisions, once the asset is part
of block of assets and depreciation is granted on that block, it cannot be
denied in the subsequent year on the ground that one of the assets was not
used by the assessee in some of the years. The user of the assets has to apply
upon the block as a whole instead of an individual asset. The Revenue could
not cite any other decision contrary to the said decisions of the Tribunal.

 


Therefore, the assessee was entitled to depreciation and other expenses in
respect of the building.

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(a) S. 23 — Notional interest on interest- free deposit cannot be considered for determining annual letting value. (b) Standard rent under Rent Control Act, can be taken as ALV; in absence of standard rent, municipal rateable value to be taken — If muni

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49 (2008) 22 SOT 245 (Mum.)

Delite Enterprises (P.) Ltd. v.
ITO

ITA Nos. 433, 2983-4887 and 5708 (Mum.) of 2005

A.Ys. 2001-02 & 2002-03. Dated : 26-2-2008

S. 23 of the Income-tax Act,.1961-




(a) Notional interest on interest-free deposit cannot
be considered for determining the Annual Letting Value (ALV)


(b) When Rent Control Act applies, only standard rent
can be taken as ALV; in the absence of standard rent, municipal rateable value
is to be taken and where municipal rateable value is less than actual rent,
then actual rent shall be the fair market value.


 


During the relevant assessment year, the assessee had let out
a property in New Delhi for an annual rent of Rs.0.60 lacs and took security
deposit of Rs.370.60 lacs. The assessee computed the annual letting value of the
said property u/s.23(1)(b) by taking the rent received at Rs.60,000 and offered
the same to tax in its return of income. It submitted before the Assessing
Officer that the Municipal Rateable Value (MRV) of the said property as per
Delhi Municipal Authority was Rs.22,230 only and, therefore, the higher of the
two had to be taken into consideration while computing the annual letting value
u/s.23(1)(b). The Assessing Officer held that there was an interest-free
security deposit of Rs.370.60 lacs and the interest had to be considered while
arriving at the fair market value of the property. He further held that S.
23(1)(b) was not applicable to the facts of the case and only S. 23(1)(a) had to
be considered. Further, the Assessing Officer relied upon some property
newspaper and computed the annual rent at Rs.14.40 lacs. The CIT(A) upheld the
order.

 

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

1. Interest on security deposit :



The Assessing Officer cannot consider notional interest on
deposit while arriving at the fair market value u/s.23(1)(b) of the Act. The
judgment of the jurisdictional High Court in case of J. K. Investors (Bombay)
Ltd. (2001) 248 ITR 723/112 Taxman 107 has been approved by the Supreme Court.

 


2. Determination of ALV


(a) A reading of the order of the Tribunal in ITO v.
Makrupa Chemicals (P.) Ltd., (2007) 108 ITD 95 (Mum.) shows that the
standard rent is the upper limit. The property in question was situated in
Delhi and was indisputably covered under the Rent Control Act. Hence, the
standard rent had to be arrived at. Further, fair market value should be based
on the facts and circumstances of the case.

(b) The Assessing Officer had not made any attempt
whatsoever to decide the standard rent and, under these circumstances, the
municipal rateable value assumed significance. As the actual rent received was
more than municipal rateable value, the actual rent received should be taken
as municipal rateable value. In any event, as the Rent Control Act applied to
the property in question, only standard rent could be taken as the annual
letting value. In the absence of standard rent, municipal rateable value was
to be taken. As municipal rateable value was less than the actual rent, the
actual rent would be the fair market value of property. Therefore, the
assessee had rightly computed annual letting value of the said property
u/s.23(1)(b) by taking into consideration actual rent received.

 

 

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S. 28(iv) — Gifts received by social reformer and philosopher from followers could not be taxed u/s.28(iv).

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48 (2008) 22 SOT 197 (Mum.)

Nirmala P. Athavale v. ITO

ITA No. 1084 (Mum.) of 2005

A.Y. 2001-02. Dated : 29-2-2008

S. 28(iv) of the Income-tax Act, 1961 — Gifts received by a
social reformer and philosopher from followers in recognition of personal
qualities and noble thoughts could not be taxed u/s.28(iv).

 

The assessee, husband of the appellant, a well known social
reformer and philosopher and having lakhs of followers spread all over the
world, had established a movement called ‘Swadhyaya’ for the upliftment of the
masses. The assessee had devoted his whole life to the cause of this movement
and had never charged any fee or remuneration from his followers or the persons
who attended his lectures at any point of time. During the relevant previous
year, the assessee had received voluntary gifts of certain sum on his 80th
birthday from his admirers and well-wishers in recognition of his personal
qualities and noble thoughts and claimed the same to be exempt from taxation.
The Assessing Officer held that conducting spiritual discourses amounted to a
vocation and, hence, the provisions of S. 28(iv) were squarely applicable to the
instant case. The Assessing Officer, therefore, treated the amount of gifts
received by the assessee as his income from profession and brought the same to
tax. The CIT(A) confirmed the action of the Assessing Officer.

 

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

(a) The work done by the assessee was a mass movement or
campaign and not a vocation. Even if it was treated as vocation, then having
regard to the fact that the assessee had never charged any fee or remuneration
for his imparting of knowledge and practising of values based on ‘Shrimad
Bhagawat Gita’ and also the fact that the assessee did not have any vested
right to receive any kind of payment for these activities from his
disciples/followers, the gift made by the followers, without being under any
contractual or legal or customary obligations to do so, could not be treated
as a consideration arising out of carrying on of vocation.

(b) In Helios Food Improvers (P.) Ltd. v. Dy. CIT,
(2007) 14 SOT 546 (Mum.) the Tribunal has held that the provisions of S.
28(iv) can be applied in a number of situations, but the bottomline or crucial
fact would always be circumvention of income by taking or receiving income in
other forms. Since, in the instant case, there was no intention of
circumvention of income on the part of the assessee or receiving income in
other forms, provisions of S. 28(iv) could not be applied.

(c) Further, the term ‘perquisite’ as per dictionary
meaning means ‘privilege or benefit given in addition to one’s salary or
regular wages’, which means that it is an additional benefit and not a
complete substitution of one’s income. The assessee had never charged any
consideration from his followers or persons who attended his lectures. Hence,
it could not be termed as ‘benefit’ or ‘perquisite’ within the meaning of S.
28(iv).


 

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S. 271(1)(c) — Deduction u/s.80HHC — Assessee included miscellaneous income without reducing 90% — Penalty cannot be levied simply because assessee had not reduced 90% of other incomes.

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48 (2010) 124 ITD 353 (Delhi)

Model Footwear (P.) Ltd. v. ITO

A.Y. 1998-99. Dated : 22-5-2009

 

S. 271(1)(c) — Deduction u/s.80HHC — Assessee included
miscellaneous income without reducing 90% — Penalty cannot be levied simply
because assessee had not reduced 90% of other incomes.

The assessee claimed deduction u/s.80HHC of Rs. 1,52,63,904.
While doing so, the assessee included interest income, miscellaneous income and
excess provision written back in the profit without reducing 90% thereof. The
AO, by applying the Explanation (baa) to S. 80HHC, excluded 90% of aforesaid
amounts and worked out deduction u/s.80HHC. He also initiated penalty
proceedings u/s.271(1)(c).

The CIT(A) confirmed the above additions. Thereafter, the AO
proceeded with penalty proceedings.

The CIT(A) confirmed that penalty u/s.271(1)(c) is leviable
in the assessee’s case.

Held :

The question of excluding interest income and miscellaneous
income is dependent upon the nature of incomes — whether they are directly
connected to operations of the assessee’s business. Simply because the assessee
had claimed deduction without reducing 90% of aforesaid incomes, it cannot be
said that the assessee has concealed income or has made incorrect claim. The
assessee’s claim was a bona fide one and the assessee has disclosed all material
facts. Hence, no penalty u/s.271(1)(c) is to be levied.

Note : The above issue was the main issue involved in the case.
The other issues being minor issues have not been reported.

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S. 271(1)(c) — The constitution of Special Bench itself suggests that there was some force in the claim of the assessee — If there is a debatable issue and action of the assessee is bona fide being based on adoption of one of the possible views, the penal

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Part
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47 (2010) 39 DTR (Del.) (Trib.) 202

Pradeep Agencies Joint Venture v. ITO

A.Ys. : 2003-04 & 2004-05. Dated : 31-3-2010

 

S. 271(1)(c) — The constitution of Special Bench itself
suggests that there was some force in the claim of the assessee — If there is a
debatable issue and action of the assessee is bona fide being based on adoption
of one of the possible views, the penalty is not leviable.

Facts :

The assessee was an AOP and during the relevant assessment
years it filed return of income at nil and it was claimed that it had
distributed the profit amongst its members as per their respective shares which
are determined and defined in the joint venture agreement and all of them have
shown their share as income u/s.67A and, therefore, S. 167B(2) was not
applicable. The assessee supported its claim by relying on the decision of the
Supreme Court in the case of CIT v. Murlidhar Jhawar & Purna Ginning & Pressing
Factory, 60 ITR 95 and also by Board’s Circular No. 75/19/191/62-ITJ, dated 24th
August, 1966.

The contention of the assessee was not accepted by the AO and
income was taxed in the hands of the AOP at maximum marginal rate as per S.
167B(2). The matter went up to the Tribunal and Special Bench was constituted.
The Special Bench held that the assessment made on the AOP is valid as reliance
could not be placed on the Circular as the same had lost its validity in the
light of the decision of the Supreme Court in the case of ITO v. Ch. Atchaiah,
218 ITR 239 and also there was amendment in the provisions of the Act by virtue
of which the AO had lost option to the assessee either AOP or its members under
the provisions of the Income-tax Act, 1961 as compared to the provisions of the
1922 Act.

The penalty was levied on the ground that the assessee has
not come clean on the issue of taxing the income received by AOP u/s.167B(2) and
tried to mislead the Department.

Held :

It has to be kept in mind that quantum proceedings are
different and distinct from the penalty proceedings. In penalty proceedings,
mere confirmation of addition in quantum proceedings cannot be said to be
conclusive factor to hold that penalty is leviable. According to the facts of
the present case, right from the beginning it has been the case of the assessee
that its claim of filing substantial income in the hands of the members of the
AOP was supported by the decision of the Supreme Court, which was even
interpreted by the CBDT in its Circular to be applicable to the provisions of
the Income-tax Act, 1961. It is also the case of the assessee that even if the
legal position had been settled by the decision of the Supreme Court in the case
of Ch. Atchaiah (supra), then also the Circular being a benevolent one could not
be refused to be applied by the Department unless the same is withdrawn. The
constitution of the Special Bench itself suggests that there was some force in
the claim of the assessee or at least the view taken by the assessee could not
be said to be totally devoid of merit. The reference of issue to the Special
Bench is indicative of the fact that there was a lot of debate on the issue
whether the benevolent Circular will prevail even after the decision of the
Supreme Court in the case of Ch. Atchaiah (supra). Thus, it is certainly a case
where two views of the matter were possible. Where there is a debatable issue
and action of the assessee is bona fide being based on adoption of one of the
possible views, the penalty is not leviable even if in the quantum proceedings
it was not finally accepted by the Tribunal.

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S. 80-IA — The eligibility for the claim of deduction u/s.80-IA by applying the restraints of S. 80-IA(3) cannot be considered for every year of the claim of deduction u/s.80-IA, but can be considered only in the year of formation of the business.

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Part
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46 (2010) 39 DTR (Del.) (Trib.) 17

Tata Communications Internet Services Ltd. v.
ITO

A.Y. : 2006-07. Dated : 26-2-2010

 

S. 80-IA — The eligibility for the claim of deduction
u/s.80-IA by applying the restraints of S. 80-IA(3) cannot be considered for
every year of the claim of deduction u/s.80-IA, but can be considered only in
the year of formation of the business.

Facts :

The company was in the business of providing fax mail
services. The company started two new services being Internet services and
Internet telephony services as per the licence issued from the Department of
Telecommunication (DOT). The assessee claimed that as per the provisions of
S. 80-IA(4), the assessee was entitled to the deduction right from the A.Y.
2001-02 as the first invoice was made on 17th October, 2000. The assessee did
not claim deduction u/s.80-IA(4) for the A.Ys. 2001-02, 2002-03 and 2003-04 and
the first year of claim u/s.80-IA(4) was for A.Y. 2004-05 and for the
A.Ys. 2004-05 and 2005-06 the assessee had been granted the deduction where the
assessment orders were passed u/s.143(3) of the Act.

The AO denied the deduction u/s.80-IA(4) for A.Y. 2006-07 on
the ground that this was a new business in which the assessee had used the plant
and machinery previously used in its business of fax mail services.

Held :

The bar as provided in S. 80-IA(3) is to be considered only
for the first year of claim of deduction
u/s.80-IA. Once the assessee has been shown to have used new plant and machinery
which was not previously used for any purpose and it is established that the
undertaking is not formed by splitting up or reconstruction of a business
already in existence the assessee becomes entitled to the deduction u/s.80-IA.
In the subsequent years, the assessee may acquire fresh machinery and plant
whether new or previously used for any purpose. As the deduction is available on
the income of the undertaking and the bar provided u/s.80-IA(3) is in relation
to the formation of undertaking, once the formation is complete the development
of undertaking cannot be put under restraints of S. 80-IA(3) of the Act. The
eligibility for the claim of deduction u/s.80-IA by applying the restraints of
S. 80-IA(3) cannot be considered for every year of the claim of deduction
u/s.80-IA, but can be considered only in the year of formation of the
undertaking.

Even otherwise in the present case, the clause (ii) of S.
80-IA(4) having been inserted in S. 80-IA(3) w.e.f. 1st April, 2005 and the
business of the assessee has been formed and commenced much before 1st April,
2005, the restrictions placed by S. 80-IA(3) to the provisions of S.
80-IA(4)(ii) would not bar that assessee for continuing with its claim of
deduction u/s.80-IA.

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Income-tax Act, 1961 — S. 70(1), S. 80IA(5). An assessee running two separate undertakings can set off depreciation of the undertaking whose income is eligible for deduction u/s.80IA against business income of the other undertaking whose income is not eli

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Part
A: Reported Decisions

45 2010 TIOL 338 ITAT (Bang.)

Swarnagiri Wire Insulations Pvt. Ltd. v. ITO

A.Y. : 2006-07. Dated : 21-5-2010

Income-tax Act, 1961 — S. 70(1), S. 80IA(5). An assessee
running two separate undertakings can set off depreciation of the undertaking
whose income is eligible for deduction u/s.80IA against business income of the
other undertaking whose income is not eligible for deduction u/s.80IA.

Facts :

The assessee had two undertakings — one carrying on the
business of manufacturing of super-enameled copper winding wires and the other
carrying on the business of generation of power through windmills. The profits
of the undertaking generating power through windmills qualified for deduction
u/s.80IA, whereas the profits of the other business of manufacturing
super-enameled copper winding wires did not qualify for deduction u/s.80IA.
During the year under consideration, the assessee filed a revised computation of
income, claimed business income of Rs.60,00,829 from which it deducted
Rs.73,20,339 being loss/depreciation of undertaking generating power. The
Assessing Officer (AO) held that since the profits of the undertaking generating
power through windmill qualify for deduction u/s.80IA the loss/depreciation of
this undertaking cannot be set off against the income of the undertaking whose
profits do not qualify for deduction u/s.80IA. He, accordingly, denied the
set-off claimed by the assessee, but allowed it to carry forward the
loss/depreciation of undertaking generating power to the subsequent assessment
year.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

(1) For the purpose of determining the quantum of deduction
as referred in Ss.(1) to S. 80IA in respect of an eligible business, the
computation will have to be done as if such eligible business was the only
source of income to the assessee in all the relevant years of claim commencing
from the initial assessment year.

(2) S. 80IA is a beneficial Section permitting certain
deductions in respect of certain income under Chapter VIA of the Act. A
provision granting incentive for promotion of economic growth and development in
taxing statutes should be liberally construed and restriction placed on it by
way of exception, should be construed in a reasonable and purposive manner so as
to advance the objects of the provision. It is a generally accepted principle
that the deeming provision of a particular Section cannot be breathed into
another Section. Therefore, the deeming provision contained in S. 80IA(5) cannot
override the S. 70(1) of the Act. The CIT(A)’s observation on this regard that
the specific provision of S. 80IA(5) have overriding effect is not acceptable.

(3) The assessee was entitled, as per provisions of the Act,
to claim depreciation on windmill at Rs.78,72,094 and had generated income from
windmill power generation business of Rs.5,51,755. Thus, the loss on account of
business eligible for deduction u/s.80IA was Rs.73,20,339. Since there was a
loss for the previous year, the question of deduction u/s.80IA did not arise.
The Tribunal held that as per S. 70(1), the assessee is eligible to set off this
loss of Rs.73,20,339 from another source under the same head of income. However,
during the subsequent assessment year, this loss has to be notionally carried
forward under the same source and set off before claiming deduction u/s. 80IA of
the Act.

The Tribunal directed the AO to set off the loss of the
assessee on windmill operations from the other source under the same head of
income. The appeal of the assessee was allowed.

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Income-tax Act, 1961 — S. 147, S. 148, S. 263. When CIT has after considering the explanations offered by the assessee dropped the proposed proceedings u/s.263, the AO has no locus standi to issue notice u/s.148 on the same set of facts.

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New Page 2

Part
A: Reported Decisions

44 2010 TIOL 350 ITAT (Bang.)

Asea Brown Boveri Ltd. v.
ACIT

A.Y. : 1988-89. Dated : 13-5-2010

 

Income-tax Act, 1961 — S. 147, S. 148, S. 263. When CIT has
after considering the explanations offered by the assessee dropped the proposed
proceedings u/s.263, the AO has no locus standi to issue notice u/s.148 on the
same set of facts.

Facts :

The total income of the assessee was originally assessed
u/s.143(3) of the Act. The CIT proposed a revision u/s.263, but later on dropped
the same accepting the explanations offered by the assessee-company. The reasons
which prompted the CIT to issue notice u/s.263 were regarding technical know-how
fees, cash assistance and duty draw-back, consideration of doubtful debts for
the deduction u/s.32AB and matter regarding deduction u/s.80I. The reasons
recorded by the Assessing Officer (AO) for issuing notice u/s.148 and the
reasons reflected in the notice u/s.148 were nothing else but the very same
issues considered by the CIT for the purpose of S. 263 proceedings. The AO
having issued notice u/s.148 completed the assessment u/s.143(3) r.w. S. 147 of
the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A)
challenging the validity of reassessment proceedings and contending that the
reassessment is bad in law and void ab initio. The CIT(A) upheld the order
passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it contended that when the CIT has dropped the proposed proceedings
u/s.263 on arriving at the satisfaction of the explanations offered by the
assessee-company, the AO has no locus standi to issue notice u/s.148 on the same
set of issues and thereafter to frame an assessment u/s147.

Held :

The Tribunal noted that in A.Y. 1987-88 on similar facts and
circumstances, a similar issue had arisen in the case of the assessee and the
Tribunal had in that case found that the Madras High Court has in the case of
CIT v. Ramachandra Hatcheries, (305 ITR 117) (Mad.) considered the same legal
issue i.e., whether S. 147 action is permissible in a case where proceedings
u/s.263 had already been dropped. The Madras High Court has in the said case
held that the AO has no jurisdiction to reopen an assessment u/s.147 so as to
circumvent the order of the CIT passed u/s.263, which had become final unless
and until the order was set aside by any process known to law.

The Tribunal also noted that when a Co-ordinate Bench has
already passed an order on an issue it has to follow the said order of the
Co-ordinate Bench unless the facts are different or new questions of law have
been raised or new materials have been placed. If the facts and circumstances
are the same and the law considered the same and the materials placed before the
Tribunal are also the same, the Tribunal has to follow the earlier decision of
the Co-ordinate Bench as that is the mandate of rule of judicial precedence and
that of judicial discipline. If the Tribunal does not follow the earlier
decision of the Co-ordinate Bench without valid reasons, it would be an
onslaught of the Rule of Law. Not to follow the order of the Co-ordinate Bench
would be ridiculed as a pompous show of self-righteousness. That is why the
Supreme Court has in the case of Union of India v. Raghubir Singh, (178 ITR 548)
(SC) has held that the Tribunal has to follow its own decision and should not
differ from its earlier view simply because a contrary view is possible.

The Tribunal following the order for A.Y. 1987-88 held the
reopening of assessment made by AO to be bad in law and set aside the order
passed by the AO u/s.143(3) r.w. S. 147 of the Act.

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Income-tax Act, 1961 — S. 32(2) — Effect of substitution of S. 32(2) w.e.f. A.Y. 2002-03 is that unabsorbed depreciation of the earlier period is allowable under the new provision, but has to be dealt with in accordance with the old provision and is subje

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New Page 2

Part
A: Reported Decisions

43 2010 TIOL 340 ITAT Mum.-SB

DCIT v. Times Guaranty Limited

A.Ys. : 2003-04 & 2004-05. Dated : 30-6-2010

 

Income-tax Act, 1961 — S. 32(2) — Effect of substitution of
S. 32(2) w.e.f. A.Y. 2002-03 is that unabsorbed depreciation of the earlier
period is allowable under the new provision, but has to be dealt with in
accordance with the old provision and is subject to the limitation of being
eligible for set-off only against business income and for 8 years. Unabsorbed
depreciation relating to A.Ys. 1997-98 to 2001-02 cannot be set off against
non-business income of A.Y. 2003-04.

Facts :

During the assessment years under consideration the assessee
continued to derive income from the business of merchant banking activity. For
the assessment years under consideration the assessee claimed to set off
unabsorbed depreciation determined in A.Y. 1997-98 and A.Y. 1998-99 against
income under the head ‘Income from Other Sources’. The assessing officer did not
allow the claim.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
relying on the decision of the Supreme Court in the case of CIT v. Virmani
Industries Private Limited, (216 ITR 607) held that unabsorbed depreciation was
available to an assessee perpetually for set-off against the gross total income.

Aggrieved, the Department preferred an appeal to the
Tribunal. The President constituted a Special Bench to consider the following
question :

“On the facts and circumstances of the case, whether the
unabsorbed depreciation relating to A.Ys. 1997-98 to 1999-2000 is to be dealt
with in accordance with the provisions of
S. 32(2) as applicable for A.Ys. 1997-98 to 1999-2000 as claimed by the
Revenue or the same has to be dealt with in accordance with the provisions as
applicable to A.Ys. 2003-04 and 2004-05 as claimed by the assessee.”

Held :

(1) The amendment to S. 32(2), by the Finance Act, 2001
w.e.f. 1-4-2002 is a substantive amendment. Amendment to a substantive provision
is normally prospective unless expressly stated otherwise or it appears so by
necessary implication. The substantive provision contained in S. 32(2) as
substituted by the Finance Act, 2001 w.e.f. 1-4-2002 is prospectively applicable
to A.Y. 2002-03 onwards.

(2) S. 32(2) is a deeming provision. A deeming provision
cannot be extended beyond the purpose for which it is intended. By a legal
fiction, the amount of depreciation allowance u/s.32(1) which is not fully
absorbed against income for that year is deemed to be the part of depreciation
allowance for the succeeding year(s).

(3) S. 32(1) deals with depreciation allowance for the
current year and S. 32(2) uses the present tense to refer to allowance to which
effect ‘cannot be’ and ‘has not been’ given. This indicates that S. 32(2) speaks
of depreciation allowance u/s.32(1) for the current year starting from A.Y.
2002-03. Brought forward unabsorbed depreciation of earlier years cannot be
included within the scope of S. 32(2). If the intention of the Legislature had
been to allow such b/fd unabsorbed depreciation of earlier years at par with
current depreciation for the year u/s.32(1), u/s.32(2) would have used past or
past perfect tense and not the present tense. Further, the unabsorbed
depreciation for the period from A.Y. 1997-98 to A.Y. 1999-2000 has been
referred to as ‘unabsorbed depreciation allowance’ and given a special name and
cannot fall within S. 32(1) in A.Y. 2002-03.

(4) The effect of the amendment to S. 32(2) is that
unabsorbed depreciation of the earlier period is allowable under the new
provision, but has to be dealt with in accordance with the restrictions
contained in the old provision and is subject to the limitation of being
eligible for set-off only against business income. It can be carried forward
after a period of eight years.

(5) The legal position of current and brought forward
unadjusted/unabsorbed depreciation allowance in the three periods is summarised
as under :

A. In the first period (i.e., up to A.Y. 1996-97)

(i) Current depreciation, that is the amount of allowance
for the year u/s.32(1), can be set off against income under any head within
the same year.

(ii) Amount of such current depreciation which cannot be so
set off within the same year as per (i) above shall be deemed as depreciation
u/s.32(1), that is depreciation for the current year in the following year(s)
to be set off against income under any head, like current depreciation.

B. In the second period (i.e., A.Y. 1997-98 to 2001-02)

(i) Brought forward unadjusted depreciation allowance for
and up to A.Y. 1996-97 (hereinafter called the ‘First unadjusted depreciation
allowance’), which could not be set off up to A.Y. 1996-97, shall be carried
forward for set-off against income under any head for a maximum period of
eight A.Ys. starting from A.Y. 1997-98.

(ii) Current depreciation for the year u/s.32(1) (for each
year separately starting from A.Y. 1997-98 up to A.Y. 2001-02) can be set off
firstly against business income and then against income under any other head.

(iii) Amount of current depreciation for A.Ys. 1997-98 to
2001-02 which cannot be so set off as per (ii). above, hereinafter called the
‘Second unabsorbed depreciation allowance’ shall be carried forward for a
maximum of eight assessment years from the A.Y. immediately succeeding the
A.Y. for which it was first computed, to be set off only against the income
under head ‘Profit and gains of business or profession’.

C.    In the third period (i.e., A.Y. 2002-03 onwards)

(i)    ‘First unadjusted depreciation allowance’ can be set off up to A.Y. 2004-05, that is, the remaining period out of the maximum period of eight A.Ys. [as per (Bi) above] against income under any head.
(ii)    ‘Second unabsorbed depreciation allowance’ can be set off only against the income under the head ‘Profit and gains of business or profession’ within the period of eight A.Ys. succeeding the

A.Y. for which it was first computed.
(iii)    Current depreciation for the year u/s. 32(1), for each year separately, starting from A.Y.
2002-03 can be set off against income under any head. Amount of depreciation allowance not so set off (hereinafter called the ‘Third unadjusted depreciation allowance’) shall be carried forward to the following year.
(iv)    The ‘Third unadjusted depreciation allowance’ shall be deemed as depreciation u/s.32(1), that is depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation, in perpetuity.
(6)    The argument that the Department having taken a stand in Jai Ushin Ltd. [ITA No. 3412/ (Delhi)/2006] cannot argue to the contrary is not acceptable. Such limitation if placed on the Revenue will also have to apply to the assessee. Further, as a Special Bench is constituted to resolve conflict of opinion amongst different Benches, it will be too harsh to stop the assessee or the Revenue from arguing the case in the way they like.

(7)    The principle that if two interpretations are possible, then the view in favour of the assessee should be adopted cannot be applied in a loose manner so as to debar a superior authority from examining the legal validity of conflicting views expressed by lower authorities. This rule is applicable where the provision in question is such which is capable of two equally convincing interpretations and not otherwise.

S. 158BC and S. 158BD — Search warrant having been issued in the name of assessee’s husband, proceedings u/s.158BC cannot be initiated against the assessee

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  1. (2009) 120 TTJ 320 (Mum.)


Smt. Nasreen Yusuf Dhanani v.
ACIT

IT(SS)A No. 203 (Mum.) of 2002

Block Period : 1-4-1986 to 18-12-1996

Dated : 5-10-2007

 

The Assessing Officer passed the block assessment order in
the assessee’s case making huge additions of unclosed income. The assessee’s
plea that since there was no search warrant in the name of the assessee, the
Assessing Officer should drop the block assessment proceedings initiated in
her name was not considered.


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


(a) Jt. CIT v. Latika V. Waman, (2005) 1 SOT 535
(Mum.)

(b) Dhiraj Suri v. Addl. CIT, (2006) 99 TTJ 525
(Del.)/(2006) 98 ITD 187 (Del.)

The Tribunal noted as under :

(1) Chapter XIV-B is a special procedure for making
assessment of search cases. These provisions of block assessment come into
picture only as a result of search action carried out u/s.132. On reading
the provisions of S. 132(1), it is clear that the section is person-specific
and not premises-specific as argued by the Departmental Representative. The
primary target for conducting a search action is the person who is in
possession of any unclosed income and the search party can enter and search
any building, place, vessel, vehicle or aircraft where the undisclosed
assets or incriminating documents are likely to be found in relation to such
person.

(2) It is an undisputed fact that there is no search
warrant issued in the name of the assessee. In respect of the Panchnama
issued in respect of the bank lockers, it is seen that the Panchnama is in
the names of husband and the assessee for the simple reason that the bank
lockers were in joint names of husband and wife, the name of husband being
first in all the lockers.

(3) As per S. 158BB(1) r.w. S. 132(1), the position is
clear that in order to assess undisclosed income of any person in accordance
with Chapter XIV-B, a search is a prerequisite for the initiation of block
assessment proceedings. Since there is no search warrant issued in the name
of the assessee, the block assessment proceedings u/s. 158BC cannot be
sustained.

(4) If in the course of search of husband, any material
incriminating his wife had been found then the proper course for the
Assessing Officer would have been to issue a notice u/s.158BD. When specific
procedures are prescribed for persons who are searched and for persons in
respect of whom incriminating material is found, the AO cannot bypass the
prescribed procedures and issue notice u/s.158BC on a person who was not
subjected to search.


(5) In the case of the assessee, it was intimated to the
Assessing Officer (AO) vide letter dated 15th December 1997 that there is no
search warrant in her name and, hence, the block assessment pro-ceedings
initiated u/s.158BC need to be drop-ped and, even then, the AO has proceeded
to make assessment u/s.158BC. The entire proceedings undertaken by the AO were
bad in law and hence, the assessment is quashed.



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University established and adopted by Assembly of State and with the character of a body corporate as per the relevant Act, will fall within the definition of person in section 2(31)(vii).

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42 (2010) 127 ITD 164 (Delhi)

O. P. Jindal Global University v. CIT, Rohtak

Dated : 28-5-2010

Section 2(31) read with section 12AA :

 

1. University established and adopted by Assembly of State
and with the character of a body corporate as per the relevant Act, will fall
within the definition of person in
section 2(31)(vii).

2. University charging high fees from the students and not
meant for the benefit of people at large, however satisfying the conditions of
section 2(15) of imparting education i.e., systematic instruction, schooling
or training given to the youth to prepare them for works of life is eligible
for registration as a charitable institution u/s.12AA.

Facts:

The assessee was a university incorporated under the Haryana
Universities Act, 2006. As per the relevant Section of the Haryana Universities
Act, the assessee shall be a body corporate and shall have perpetual succession
and common seal. It shall have the power to sue and to be sued in its name.
However, it is not registered u/s.25 of the Companies Act and also not
registered under the Cooperative Societies Act. The assessee had applied for
registration u/s.12AA of the Act as a charitable institution.

The Ld. D.R. argued that, based on the facts, the university
was not a separate entity and was just an activity carried on by the sponsoring
body and therefore would not constitute a person u/s.2(31)(vii).

Held:

It was held by the Tribunal that the university established
and adopted by Assembly of State and with the character of a body corporate as
per the relevant Act, though not registered u/s.25 of the Companies Act or
though not registered under the Co-operative Societies Act, will fall within the
definition of person in section 2(31)(vii) i.e., an artificial juridical person.

Facts:

The next question after being satisfied that the
assessee-university is person u/s.2(31)(vii) is whether it qualifies for
registration as a charitable institution u/s.12AA.

The Ld. A.R. argued that the assessee-university was engaged
in imparting education in the field of law and administration. Objects of the
assessee-university were primarily aimed at awarding diplomas and degrees
granting fellowships and scholarships.

The definition of charitable purpose which existed at the
relevant point of time was in an inclusive manner to include education as one of
the many activities. The Ld. A.R. also relied on the decision of the Supreme
Court in the case of Sole Trustee Loka Shikshana Trust, which restricted the
meaning of education to impart instruction, schooling and training to prepare
the youth for the works of life.

The Commissioner argued that the assessee university was
charging higher fees and was not meant for the benefit of people at large.

Held:

The University satisfied the condition of imparting education
and should be thus granted registration u/s.12AA. If the purpose is education,
the requirement will be fully satisfied even if an activity for profit is
carried on in the course of actual carrying out the primary purpose.



Note : The other issues, being minor ones, have been ignored
while reporting the above decision.


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Section 4 — Compensation awarded for loss of income earning apparatus is in the nature of capital receipt. However interest awarded on delay in receipt of compensation is revenue in nature and is to be treated as income.

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41 (2010) 127 ITD 153 (Mum.)

Spaco Carburettors (I) (P.) Ltd. v. Addl. CIT,

Range 5(3) Mum.

A.Y. : 2003-2004. Dated : 16-3-2009

 

Section 4 — Compensation awarded for loss of income earning
apparatus is in the nature of capital receipt. However interest awarded on delay
in receipt of compensation is revenue in nature and is to be treated as income.

Facts:

1. The assessee-company was engaged in the business of
manufacturing different types of carburettors. It entered in a Technical
Collaboration Agreement (TCA) with a Japanese company. As per the relevant
clause of the TCA, the assessee was entitled to use any improvement made in
technology of carburettors by the Japanese company. The Japanese company
developed a new product, in respect of which they refused to give any advice
to the assessee company.

2. Subsequently the matter was referred to the
International Court of Arbitration and the said Court awarded compensation and
interest in favour of the assessee-company.

3. The assessee-company claimed the same as capital receipt
and therefore not taxable. However the Assessing Officer treated the same as
revenue and charged to tax.

4. On appeal, the CIT(A) held that the compensation was in
the nature of capital receipt, hence out of the purview of tax. However
interest received on the compensation is revenue in nature and therefore
chargeable to tax.

5. The Ld. AR of the assessee submitted before the Tribunal
that the compensation awarded was in respect of the extinction of a source of
income and profit-earning apparatus and was not awarded for breach of a
contract of revenue nature. Hence it was capital in nature. Similarly interest
on compensation received by the assessee-company was attached to the
compensation awarded by the Court, hence it partakes the character of the
compensation.

6. Whereas Ld. DR argued that compensation was awarded for
non-existing income i.e., for future loss which is nothing but revenue in
nature.

Held:

1. The Tribunal upheld the decision of the CIT(A) in
respect of the compensation awarded to the assessee-company and treated the
same as capital receipt.

2. In respect of interest, the Tribunal held that it is a
well-settled principle that interest always bears the character of revenue
unless it is awarded as profit. Since interest received is for the loss to the
assessee for delay in receipt of compensation which the assessee was entitled
to receive in the year in which the breach occurred, it was of revenue nature
and consequently the Tribunal upheld the decision of the CIT(A) in respect of
interest on compensation.

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(a) S. 69 — Investments not recorded in books of account are covered. 695 (b) S. 28(iv) — Condition that chargeable income should arise from business — Purchase of investment, at lower value not covered

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 Part A — Reported Decisions



47 (2008) 22 SOT 174 (Mum.)

Rupee Finance & Management (P.) Ltd. v.
ACIT

ITA Nos. 3264 (Mum.) of 2006 and

2300 & 2881 (Mum.) of 2007

A.Ys. 2002-03 and 2003-04. Dated 05.02.2007




(a) S. 69 of the Income-tax Act, 1961 — U/s.69, only
such investments are covered, which are not recorded in books of account.


(b) S. 28(iv) of the Income-tax Act, 1961 — The
condition for invoking S. 28(iv) is that the chargeable income should arise
from the business/profession — Purchase, by way of an investment, at a lower
value is not covered.


 


Pursuant to an MOU between the assessee-company and the group
of promoters, shares of two group companies were transferred to the assessee at
cost. The Assessing Officer, applying S. 69, made an addition on account of the
difference between the market value and purchase price of the shares. The CIT(A)
held that the benefits derived by the assessee were clearly chargeable to tax
u/s.28(iv) and, accordingly, upheld the addition.

 

The Tribunal held that addition u/s.69 was not sustainable
and there was no income u/s.28(iv). The Tribunal noted as under :

1. S. 69 :


(a) It was not disputed that the investments purchased were
recorded in the books of account.

(b) U/s.69, only such value of the investments may be
deemed to be the income of the assessee for the financial year, if they are
not recorded in the books of account. Thus, S. 69 was not applicable to the
instant case.

(c) The first Appellate Authority possibly realising this
difficulty had chosen to invoke S. 28(iv) and not to give a decisive finding
as to whether S. 69 was applicable or not.

(d) There was no allegation or evidence from the Revenue
that the apparent consideration was not the real consideration. The only
grouse of the Revenue authorities was that the assessee-company had purchased
the shares at a price which was much lesser that the market price.

(e) On these facts, therefore, no addition would be
sustained u/s.69.

 

2. S. 28(iv) :


(a) The condition for invoking S. 28(iv) is that the
chargeable income of the assessee should arise from the business or in the
exercise of profession. There must be a nexus between the business of the
assessee and the benefit the assessee derived.

(b) In the instant case the assessee purchased certain
shares at a certain price and was required to hold these shares for a period
of three years. It was not in dispute that this was an investment made by the
assessee. Hence, irrespective of the fact as to whether these investments were
made in pursuance of the MOU or not, such investments could not be said to be
a benefit arising out of the business of the assessee.

(c) The effect of this Section has been explained by the
CBDT, from which it is clear that when an assessee purchases goods or assets
at a price lower than the market price, under whatever circumstances, the same
cannot be brought to tax u/s.28(iv).

(d) Only if the seller had incurred an expense or a
liability or had provided a facility to the purchaser, then the value in cash
of such expenses or benefit or perquisite shall be treated as income. In the
instant case, the seller had not incurred any expenses or liability, nor had
provided a facility. It sold its shares at a reduced price.

(e) Therefore, the purchase of shares at a particular price
which was below the market price as an investment was not income by any
stretch of imagination. It could not also be deemed as income u/s.28(iv), as
it was neither benefit or perquisite that had arisen to the assessee from the
business or in the exercise of a profession.


 

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S. 40 (a)(i), read with S. 195, of the Income-tax Act, 1961 – In view of Board’s Circular No. 786, dated 7-2-2000, no income had accrued or arisen in India either u/s.5(2) or u/s.9 in respect of selling commission, brokerage and other related charges paid

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  1. [2009] 116 ITD 328 (Gauhati)


Jt. CIT v. George Williamson (Assam) Ltd.

A.Y. : 1995-96. Dated : 31-8-2007

S. 40 (a)(i), read with S. 195, of the Income-tax Act, 1961
– In view of Board’s Circular No. 786, dated 7-2-2000, no income had accrued
or arisen in India either u/s.5(2) or u/s.9 in respect of selling commission,
brokerage and other related charges paid to non-resident agents in respect of
sale of tea outside India and, therefore, no tax was deductible u/s.195.
Hence, disallowance made by Assessing Officer was liable to be deleted.

During the relevant assessment year, the Assessing Officer
disallowed the expenditure on selling commission, brokerage and other expenses
in relation to overseas sales paid to non-residents without tax deduction
u/s.195. On appeal, the Commissioner (Appeals) deleted the additions so made.

On revenue’s appeal : the ITAT held that :

1) S. 195 casts an obligation on an assessee to deduct
tax from the payments made to non-residents which are chargeable to tax
under the Act.

2) In Circular No. 786, dated 7-2-2000, the Board has
explained the applicability of S. 195, read with S. 40(a)(i), in relation to
commission paid to foreign agents. As per the said Circular, in respect of
commission and brokerage paid to foreign agents on export sales, no income had
accrued or arisen in India either u/s.5(2) or u/s.9 and no tax was, therefore,
deductible u/s.195. Consequently, expenditure on commission and related
charges payable to non-resident agents could not be disallowed u/s.40(a)(i) on
the ground that tax had not been deducted.

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Section 48 — Actual value of sale consideration cannot be substituted by fair market value without any evidence.

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40 (2010) 127 ITD 127 (Delhi)

Moral Trading & Investment Ltd. v. DCIT

A.Y.: 2006-2007. Dated: 30-4-2010

Section 48 — Actual value of sale consideration cannot be
substituted by fair market value without any evidence.

Facts:

The assessee acquired 8,91,181 shares of Hotel HQR in 2002
for a consideration of Rs.12.82 crore (i.e., for Rs.143. 85 per share).
Subsequently, a further subscription of shares was made by the assessee in 2004
and 2005 for Rs.10 per share. All the shares were then transferred to Shri R. P.
Mittal (a majority shareholder in the assessee company) at the rate of Rs.20 per
share. The AO held that transfer of shares was a colourable device to mitigate
tax. He further worked out fair market value of the shares at Rs.185.68 per
share. Capital gains was worked out on the basis of this amount as sale
consideration.

Held:

The hotel was not functional and was under repairs since
quite a long time. As per the valuation done by authorised valuer, the value per
share was coming to Rs.3.19. The Department has not brought any evidence to
rebut the valuation by the authorised valuer. Further, for the shares acquired
in 2004 and 2005 at Rs.10 per share, the assessee had earned profit. Hence, sale
of shares by the assessee to its majority shareholder is not a colourable device
to avoid tax. Hence, the actual value of sale consideration cannot be
substituted by some presumed fair market value.

Note : The other issues, being minor ones, have been ignored
while reporting the above decision.

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Medical reimbursement does not constitute fringe benefit as defined in section 115WB

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39 (2011) 49 DTR (Mum.) (Trib) 202

Godrej Properties Ltd. v. Additional CIT

A.Y. : 2006-2007. Dated : 3-12-2010

Medical reimbursement does not constitute fringe benefit as defined in
section 115WB.

Facts :

The assessee-company filed its return of fringe benefit
declaring the value of fringe benefit at Rs. 14,48,890. The Assessing Officer,
however, assessed the value of fringe benefit by holding that salary paid to
employee in form of medical reimbursement was liable to Fringe Benefit Tax
(FBT). The CIT(A) held the same to be a perquisite liable to FBT on the ground
that in the given case the amounts of expenditure reimbursed to the employee
were not part of salary package and were in the nature of reimbursement.

Held:

The proviso clause (v) of section 17(2) treats expenditure
actually incurred by the employee on medical treatment for himself or his family
and which is paid by the employer in excess of Rs.15,000 as perquisite taxable
as salary. Thus, reimbursement of medical expense is not taxable as perquisite
if amount does not exceed Rs.15,000 per annum. section 115WB(3) explicitly
excludes perquisites in respect of which tax is paid or payable by the employee.
In the Memorandum explaining the Provisions to the Finance bill it was stated
that perquisites directly attributed to the employees will continue to be taxed
in their hands in accordance with provisions of section 17(2). Also, the Budget
Speech (Paragraph 160 — 194 Taxman 1) categorically stated that ‘At present
where the benefits are fully attributable to the employee, they are taxed in the
hands of the employee; that position will continue’.

From the above, it was held that where benefits which are
fully attributable to employee and are taxed in their hands, would be continued
to be taxed u/s.17(2). Only in case where the benefits are enjoyed collectively
by employees and cannot be attributed individually shall be taxed in employers
hands.

In the case on hand, only where bills have been produced by
the employee to the employer it was a case of reimbursement and to the extent of
the benefit given in section 17(2) proviso (v) the employee need not pay tax.
This is not a case where the attribution of personal benefits directly to an
employee poses problem or a case where it is not feasible to tax the benefit in
question in the hands of the employee. It is only a case where a benefit above a
certain specified amount only is liable to be taxed in the hands of employee.
Such case does not constitute fringe benefit as defined in section 115WB of the
Act.

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Exemption u/s.10B — Expenses incurred on on-site development of computer software outside India cannot be excluded from the export turnover for computing deduction u/s.10B — Export proceeds retained abroad in accordance with RBI guidelines is to be includ

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38 (2011) 49 DTR (Chennai) (SB) (Trib.) 1

Zylog Systems Ltd. v. ITO

A.Y.: 2003-2004. Dated: 2-11-2010

 

Exemption u/s.10B — Expenses incurred on on-site development
of computer software outside India cannot be excluded from the export turnover
for computing deduction u/s.10B — Export proceeds retained abroad in accordance
with RBI guidelines is to be included while computing deduction u/s.10B.

Facts:

The assessee was a company engaged in the business of
development of software both by way of on-site development and offshore
development and it has a branch in the USA. It being 100% EOU, had claimed
deduction u/s.10B in respect of the exports of software made. During the
assessment proceedings, the AO had observed that the assessee had total export
turnover of Rs.28.61 crores and out of this amount, the assessee had utilised
the export proceeds to the tune of Rs.15.14 crores in the USA for the purpose of
carrying on export activities. The AO was of the view that since the said amount
had not been received in convertible foreign exchange in India within the
prescribed time u/s.10B(3), the said amount utilised in the USA cannot be
treated as a part of export turnover for computing deduction u/s.10B.

Further, the assessee had incurred expenses of Rs.3.33 crores
in foreign currency on account of payroll, etc., which were claimed to have been
incurred in connection with staff of the foreign branch in foreign country. The
AO also excluded Rs.3.33 crores incurred by the assessee outside India in
foreign exchange considering it as expenses in providing technical services,
while computing deduction u/s.10B. The AO placed reliance on the definition of
‘export turnover’ given in
Explanation 2(iii) to section 10B which excludes expenses incurred in foreign
exchange in providing technical services outside India from export turnover.

The first Appellate Authority allowed the asses-see’s appeal
in respect of inclusion of Rs.15.14 crores in export turnover for computing
deduction u/s.10B, whereas he rejected the claim of the assessee in respect of
inclusion of Rs.3.33 crores incurred by the assessee outside India in providing
technical services.

Held:

The Department had not brought anything on record to show
during the hearing, that the assessee-company was involved in rendering any
managerial consultancy services at foreign country. Also it was not brought on
record that the company was involved in providing the technical services to
other personnel or any outside agency. All the services rendered by the company
were to its staff located at New Jersy for the fulfilment of objects, namely,
development of software. A person cannot provide services to self. Whatever
expenditure has been incurred on foreign soil in a sum of Rs.3.33 crores was
incurred in connection with development of software by the employees of the
assessee-company at foreign branch and nothing has been incurred on managerial
or technical services rendered to outsider in foreign soil and therefore, the
same cannot be excluded from the export turnover.

Regarding the export proceeds of Rs.15.14 crores retained
abroad, the decision of the Supreme Court in the case of J. B. Boda & Co. (P)
Ltd. 223 ITR 271 would apply to this case also, even though the said
decision was on section 80-O wherein it was held that “two-way traffic of
receiving foreign exchange here and sending it back is a ritual which is
unnecessary”.

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Section 41(1) of the Income-tax Act, 1961 — Deferred sales tax liability being difference between payment of net present value and future liability credited by assessee to capital reserve account in its books of account would be a capital receipt and cann

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37 (2010) 42 SOT 457 (Mum.) (SB)

Sulzer India Ltd. v. Jt. CIT

ITA Nos. 2944 & 2871 (Mum.) of 2007 &

1317 (Pn.) of 2007

A.Ys.: 2003-2004 & 2004-05. Dated: 10-11-2010

 

Section 41(1) of the Income-tax Act, 1961 — Deferred sales
tax liability being difference between payment of net present value and future
liability credited by assessee to capital reserve account in its books of
account would be a capital receipt and cannot be termed as remission/cessation
of liability and, consequently, no benefit would arise to assessee in terms of
section 41(1)(a).

The assessee obtained incentive by way of sales tax deferral
scheme under the package scheme of incentive 1983 (the 1983 scheme) and the
package scheme of incentive 1988 (the 1988 scheme) notified by the Government of
Maharashtra. The aggregate deferral amount under 1983 and 1988 schemes was
Rs.752.01 lakh. The total amount of sales tax collected by the assessee for 7
years from 1-11-1989 to 31-10-1996 was to be paid after 12 years in 6 annual
instalments. However, by an amendment to the Bombay Sales Tax Act in 2002, if
the Net Present Value (NPV) of deferred tax as prescribed was paid, then the
deferred tax was deemed, in public interest, to have been fully paid. The
assessee, following the aforesaid amendment, made repayment of Rs.337.13 lakh on
30-12-2002 as per NPV of the deferred tax as prescribed under Circular No. 39T
of 2002 of Trade Circular dated 12-12-2002. The assessee claimed Rs.414.87 lakh,
being the difference between the deferred sales tax Rs.752.01 lakh and its net
present value amounting to Rs.337.13 lakh, as capital receipt and credited it in
the books of account of the assessee to the capital reserve account. However,
the Assessing Officer, keeping in view that the assessee had obtained the
benefit of payment of whole amount of Rs.752.01 lakh as deduction u/s.43B (in
view of CBDT’s Circular No. 496, dated 25-9-1987) brought the difference of
Rs.414.87 lakh to tax u/s.41(1). The CIT(A) upheld the addition made by the
Assessing Officer.

The Special Bench deleted the addition. The Special Bench
noted as under :


    (1) The aggregate deferral amount under 1983 and 1988 schemes of Rs.752.01 lakh was to be paid by the assessee after 12 years in six equal annual instalments.

    (2) As per the amendment of 2002 to the Bombay Sales Tax Act, 1959, the assessee was allowed to prematurely pay the entire amount of the deferred sales tax at the Net Present Value (NPV) as prescribed and, on making such payment, the deferred tax shall be deemed to have been fully paid.

    (3) The amount paid by the assessee was determined and prescribed by SICOM (which was the implementing agency of the State Government.).

    (4) The amount paid by the assessee represented the NPV of the future sum and there had been no remission or cessation of liability by the State Government.

    (5) Had the State Government accepted a lesser amount after 12 years or reduced the number or amount of the annual instalments, then it could have been a case of remission or cessation.

    (6) Therefore, such payment of net present value of a future liability could not be classified as remission or cessation of the liability so as to attract the provisions of section 41(1)(a) since no benefit arose to the assessee in terms of section 41(1)(a).

Section 234B of the Income-tax Act, 1961 — Once assessee’s bank account was put under attachment, the amount therein is to be considered to be lying with the Department which would indicate constructive payment of advance tax and, therefore, interest u/s.

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36 (2010) 134 TTJ 457 (Del.)

S. M. Wahi v. Asst. DIT

(International Taxation)

ITA No. 2779 (Delhi) of 2008

A.Y.: 2007-2008. Dated: 30-4-2009

 

Section 234B of the Income-tax Act, 1961 — Once assessee’s
bank account was put under attachment, the amount therein is to be considered to
be lying with the Department which would indicate constructive payment of
advance tax and, therefore, interest u/s.234B is not chargeable.

For the relevant assessment year, the Assessing Officer
charged interest u/s.234B. The assessee submitted that a sum of Rs.4 crores was
received by the assessee on 3rd January 2007. His bank account was attached on
12th January 2007. The amount was lying with the Department. In such
circumstances, the assessee cannot make the payment of advance tax and interest
u/s.234B cannot be imposed upon him. He relied upon the judgment of the Delhi
High Court in the case of CIT v. K K Marketing, (2005) 196 CTR (Del.)
611/(2005) 278 ITR 596 (Del). The CIT(A) held that charging of interest u/s.234B
is mandatory. The Assessing Officer has no discretion to charge or not to charge
the interest. He further observed that the assessee did not apply to the
Assessing Officer for permitting him to limited operation of bank account for
payment of advance tax.

The Tribunal, following the Delhi High Court’s decision in
the above-referred case, held that in the present case, for all practical
purposes the amount of Rs.4 crores was considered to be lying with the
Department which would indicate constructive payment of advance tax. Therefore,
interest u/s.234B cannot be imposed.

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Section 271(1)(c) of the Income-tax Act, 1961 — Penalty u/s.271(1)(c) would arise only when return of income is scrutinised by the Assessing Officer and he finds some more items of income or additional income over and above what is declared in return.

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35 (2010) 42 SOT 48 (Ahd.)

Dy. CIT v. Dr. Satish B. Gupta

ITA No. 1482 (Ahd.) of 2010

A.Y.: 2006-2007. Dated: 6-8-2010

 

Section 271(1)(c) of the Income-tax Act, 1961 — Penalty
u/s.271(1)(c) would arise only when return of income is scrutinised by the
Assessing Officer and he finds some more items of income or additional income
over and above what is declared in return.

A survey u/s.133A was carried out at the premises of the
assessee who was a practising doctor. During the course of the search he
declared unaccounted income of Rs.32.84 lakh. Thereafter, he filed a return of
income declaring income of Rs.37.57 lakh wherein, apparently, the assessee
disclosed unaccounted income of Rs.32.84 lakh which was declared by him during
the course of survey. The assessment was finally completed on an income of
Rs.38.12 lakh after making minor additions. The Assessing Officer also levied
penalty u/s.271(1)(c) in respect of the sum of Rs.32.84 lakh declared during the
course of survey. On appeal, the CIT(A) set aside the penalty order.

The Tribunal, following the decision of the Allahabad High
Court in the case of Smt. Govinda Devi v. CIT, (2008) 304 ITR 340/173
Taxman 370, upheld the CIT(A)’s order deleting the penalty. The Tribunal noted
as under:


    (1) As per clause (c) of the Explanation 4 to section 271(1)(c), tax sought to be evaded means the difference between tax on the total income assessed and tax that would have been chargeable on such total income reduced by the amount added.

    (2) Since, in the instant case, the Assessing Officer had not made any addition to the returned income, the question of working out any tax sought to be evaded would not arise.

    (3) In general, where a case does not fall within clause (a) or clause (b) of Explanation 4 to section 271(1)(c) there cannot be any ‘tax sought to be evaded’ if there is no addition to the returned income.

    (4) The assessee would be liable for an action u/s.271(1)(c) in respect of such items only which are discovered by the Assessing Officer on the scrutiny of return of income or after carrying out an investigation and discovering some more items of income not found declared or mentioned in the return of income. Prior to the filing of return of income there is no concept of concealment or furnishing inaccurate particulars of income.

    (5) ‘Proceedings’ as used in section 271(1)(c) are statutory proceedings initiated against the assessee either by the issuance of a statutory notice or after filing of return of income. Survey u/s.133A or a search u/s.132 or issuance of a notice u/s.133(6), for example, are only means of collecting evidence against the assessee and are not equivalent to statutory proceedings. Another criterion for finding out whether a particular action is a statutory proceeding or not is to see whether it can be brought to a legal conclusion against the assessee by determining his right to liability.

    (6) Merely carrying out a survey u/s.133A does not create any liability against the assessee which is created only through assessment proceedings or through penalty proceedings. Therefore, the Revenue was not correct in its submission that the survey was a ‘proceeding’ and the Assessing Officer having discovered concealment during survey, the assessee would be liable for penalty u/s.271(1)(c).

    (7) The act of concealment or furnishing of inaccurate particulars should be viewed by the Assessing Officer as done with respect to return of income. The omission or commission or contumacious conduct has to be viewed from the return of income and if certain thing has not been disclosed or has not been furnished therein, only then it can be said that the assessee has concealed the particulars of his income or furnished inaccurate particulars of his income. Prior to this the assessee cannot be said to have done any contumacious conduct on which penalty could be levied.

    (8) Merely because certain receipts were not recorded in the books of account or receipts were not issued to the patients, but income therefrom was finally declared in the return of income, there would be no contumacious conduct. For not maintaining books of account or not issuing receipts to the patients for the amount received by the assessee, at best, the books can be rejected by invoking provisions of section 145(3) and income can be estimated in accordance with section 144. Where, however, the Assessing Officer had accepted the income declared in the return of income, then the assessee could not be charged for any contumacious conduct.

When neither any deduction is claimed nor any charge is made to the profit and loss account of any tax or duty, there is no question of disallowing the amount u/s 43B.

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60 [2009] 121 ITD 461 (Chennai) (TM)

Dynavision Ltd. vs ACIT, Central Circle – II (1), Chennai

A. Ys.: 1990-91 to 1992-93. Date of order: 26.05.2009

 

When neither any deduction is claimed nor any charge is made
to the profit and loss account of any tax or duty, there is no question of
disallowing the amount u/s 43B.

Facts:


The assessee showed gross receipts of Rs. 46.10 crore in its
profit and loss account. Against this, the
assessee claimed deduction of Rs. 31.30 crore towards raw material consumed. Out
of the total amount of customs duty of Rs. 15.82 crore, Rs. 4.59 crores
represented the provision made for customs duty in respect of goods lying in a
bonded warehouse. This amount was provided to the raw material purchases
account. Since the imported goods were not released from the bonded warehouse,
they were shown as closing stock in hand and the customs duty payable was
included in this closing stock. The AO made addition on the basis that the
customs duty was not paid but was charged to profit and loss account. On appeal
to Tribunal, the Accountant Member upheld the order of AO while the Judicial
Member held otherwise. Hence, the matter was referred to Third Member.


Held:


The Third Member upheld the order of the Judicial Member. It
was held that section 43B can be invoked only when the assessee claims any tax
or duty. There was no dispute regarding accrual of liability. Even the assessee
accepted that the liability to pay customs duty had accrued. However, the fact
that the element of customs duty was made a part of closing stock had to be
considered. Since the customs duty was included in closing stock, it could not
be said that the assessee claimed the deduction of customs duty. Hence,
provisions of section. 43B could not be invoked and no disallowance u/s 43B was
warranted.

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Payments for hiring of trucks does not come within the purview of “works contract”—Hence, provisions of section 194C are not applicable.

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59 (2010) 122 ITD 35 (Asr.)

DCIT, Hoshiarpur Range, Hoshiarpur vs Satish Aggarwal & Co.

A. Y.: 2005-06. Date of order: 28.11. 2008

 

Payments for hiring of trucks does not come within the
purview of “works contract”—Hence, provisions of section 194C are not
applicable.

Facts:

The assessee made payments worth Rs. 17,40,000/- towards
hiring charges of trucks. No tax was
deducted on the said payments. The AO disallowed the expenditure u/s 40(a)(ia)
of the Income-tax Act, 1961 on the ground that the tax was deductible u/s 194C,
as the payments were having the character of “work” as defined in Explanation
III to s. 194C. The contention of the assessee was that there was no contract
between the appellant and the truck owners for carrying goods or passengers;
hence tax was not deductible u/s 194C and no disallowance was warranted.

Held:

Following the decision of Poompuhar Shipping Corpn. Ltd., the
Tribunal held that there was no contract between the assessee and the owners of
the trucks for carrying out any work. The assessee simply hired the trucks and
they were utilised in his business of civil construction. For carrying out any
work, manpower is the sine qua non, and without manpower, it cannot be said that
work has been carried out. Merely providing trucks without any manpower cannot
be termed as carrying out work by the truck owners, for which payment was made
by the assessee. Section 194I was also not attracted as its provisions became
applicable on payments made for the use of capital assets with effect from
1.6.2007. Hence, entering into a contract for carrying out work is not
equivalent to contract for hiring trucks. Consequently, there was no need to
deduct tax u/s 194C, and disallowance
u/s 40(a)(ia) was deleted.

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Block of assets, s. 32, 38(2) — Under the scheme of block of assets, (i) Depreciation cannot be disallowed on the ground that some of the assets contained in the block have not been used for the purpose of the business; (ii) the user of an individual asse

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58 2010 TIOL 78 ITAT MUM

Swati Synthetics Ltd. vs ITO

A.Y.: 2001-02. Date of order: 17.12.2009


 



Block of assets, s. 32, 38(2) — Under the scheme of block of
assets, (i) Depreciation cannot be disallowed on the ground that some of the
assets contained in the block have not been used for the purpose of the
business; (ii) the user of an individual asset for the purpose of business needs
to be examined only in the first year when the asset is purchased; (iii)
existence of individual assets in the block itself amounts to use for the
purpose of business. However, proportionate disallowance of depreciation can be
made if an individual asset contained in the block has been used for purposes
other than business.



Facts:

The assessee was carrying on two businesses with one division
at Dombivli and the other in Surat. Though the Surat division had closed down,
the assessee continued to claim depreciation on its assets. The Assessing
Officer (AO) disallowed the proportionate amount of depreciation attributable to
the assets of the Surat division, on the ground that the assets of the Surat
division were not used for the purpose of business. 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 discussed in detail the meaning of the term
`depreciation’, considered various statutory provisions which have been amended
consequent to the insertion of the concept of block of assets and also Circular
No. 469, dated 23rd September, 1986 issued by CBDT. It also considered various
judicial pronouncements, examined the principle of commercial expediency and
also examined in detail how the scheme of depreciation on block of assets works,
and held as follows:

(i) Depreciation allowance u/s 32 is a statutory allowance
not confined expressly to diminution in value of the asset by reason of wear
and tear;

(ii) Main objective of introducing the block of assets
concept was only to reduce time and effort spent in detailed record
maintenance;

(iii) If the asset has neither been used for business nor
for non-business purposes, but remained in block of assets, the provisions of
S. 38(2) are not applicable;

(iv) The ratio of the decision of the SB of the Chandigarh
Tribunal in the case of Gulati Saree Centre vs ACIT 71 ITD 73 (Chd)(SB) does
not apply to the present case, since in the case before the SB, the cars owned
by the assessee firm were being used for personal purposes by the partners,
whereas in the present case, assets remained in block of assets and were not
used for non-business purposes like personal use, etc.;

(v) The condition/requirement `used for the purpose of
business’, as provided in s. 32(1) for the concept of depreciation on block of
assets can be summarized as: (a) Use of individual asset for the purpose of
business can be examined only in the first year when the asset is purchased;
(b) In subsequent years, use of block of assets is to be examined. Existence
of individual assets in the block of asset itself amounts to use for the
purpose of business;

(vi) The judgment of the Bombay High Court in the case of
Dineshkumar Gulabchand Agarwal vs CIT & Anr 267 ITR 768 (Bom) is not
applicable to the facts of the present case, since the issue in the case under
consideration is whether under the facts and circumstances of the case, the
assessee is entitled to depreciation on the assets of the closed unit. The
decision of the Bombay High Court has been distinguished by the ITAT in the
case of G R Shipping Ltd (ITA No. 822/Mum/05 order, dated
17.7.2008)(2008-TIOL-729-ITAT-Mum) by observing that in that case, the asset
in question was not at all put to use.


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Section 10A — Section 10A grants a deduction and not an exemption, and section 80AB is not applicable to s. 10A—Deduction u/s 10A is to be allowed while computing income under the head `Profits and gains of business or profession’ and not under `Gross tot

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57 2010 TIOL 69 ITAT MAD SB

Scientific Atlanta India Technology Pvt. Ltd. vs ACIT

A.Y.: 2003-04 & 2004-05. Date of order: 05.02.2010

Section 10A — Section 10A grants a deduction and not an
exemption, and section 80AB is not applicable to s. 10A—Deduction u/s 10A is to
be allowed while computing income under the head `Profits and gains of business
or profession’ and not under `Gross total income’. Deduction u/s 10A is to be
computed without setting off the losses of non-eligible units against profits of
an eligible unit.

Facts :

During the previous year which was relevant to A.Y. 2003-04,
the assessee had two units: one in Chennai and one in Delhi. The unit in Chennai
was engaged in development of software and its profits were eligible for
deduction u/s 10A. The unit in Delhi was engaged in the business of trading.
During the year under consideration, the unit in Delhi had suffered a loss and
the unit in Chennai had earned profits. The assessee claimed deduction u/s 10A
in respect of its entire profits from the unit in Chennai, without setting off
the loss suffered by the unit in Delhi.

The Assessing Officer (AO) did not accept the computation of
the assessee on the ground that after the amendment of s. 10A, w.e.f. 1.4.2001,
a deduction was to be allowed from the “total income”, and consequently, the
loss suffered by the Delhi unit had to be taken into account.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.
A special bench was constituted to dispose of the appeal as well as to
adjudicate upon the following question of law:

“Should the business losses of a non eligible unit, whose
income is not eligible for deduction under section 10A of the Act, have to be
set off against the profits of the undertaking eligible for deduction under
section 10A, for the purposes of determining the allowable deduction under
section 10A of the Act?”

Held:



(i) Even though s. 10A falls under Chapter III, it has been
mentioned in the section itself that what is to be given is only a deduction
and not exemption. A deduction in respect of profits eligible under s. 10A is
required to be made at the stage of computing the income under the head
“Profits and gains of business and profession” and not from the gross total
income;

(ii) Section 80AB applies to deductions mentioned in
Chapter VI-A. Section 10A does not fall in Chapter VI-A, and hence, s. 80AB
cannot be applied to s. 10A;

(iii) It can be noticed from the language of s. 10A (1)
that a deduction of such profits and gains that are derived by “an”
undertaking, qualify u/s 10A for deduction from the total income. In case the
assessee has more than one undertaking, one has to consider the profits and
gains of that “particular undertaking” which qualifies for deduction u/s 10A.
Again,
s. 10A (4) uses the words “profits and gains of the business of the
undertaking” and not total profits of the business of the assessee. The
distinction between the “undertaking” and the “assessee” is well-known and has
also been noted by the CBDT in Circular F. No. 15/563, dated 13.12.1963. The
deduction u/s 10A attaches to the undertaking and not to the assessee;

(iv) The losses of a unit which is not eligible for
deduction u/s 10A cannot be set off against the profits of the unit which is
eligible for deduction u/s 10A. The loss of the non-eligible unit can be set
off against other incomes or may be carried forward;

(v) If there is more than one undertaking which is eligible
for deduction u/s 10A, and if some of the units have profit and other units
have loss, it would be an entirely different case from the present one. The
decision rendered in this case would not be applicable to such cases.

The Special Bench decided the appeal in favour of the
assessee.

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Section 54EC and Circular No. 142/9/2006 TPL, dated 30.6.2006 — Non-availability of bonds qualifying for deduction u/s 54EC is a reasonable cause for not purchasing the bonds within the time specified in s. 54EC—Since the assessee purchased the bonds as s

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56 2010 TIOL 60 ITAT (Mum)

Cello Plast vs DCIT

A. Y.: 2006-07. Date of order: 19.01.2010

 

Section 54EC and Circular No. 142/9/2006 TPL, dated 30.6.2006
— Non-availability of bonds qualifying for deduction u/s 54EC is a reasonable
cause for not purchasing the bonds within the time specified in s. 54EC—Since
the assessee purchased the bonds as soon as the same were available, it was
eligible to claim deduction u/s 54EC.

Facts:

During the year, the assessee sold its factory building which
formed a part of its block of assets. The capital gain of Rs. 49,36,293 arising
from the sale of the factory building was claimed to be deductible u/s 54EC. The
bonds qualifying for deduction u/s 54EC were not available and as a result of
various representations, the CBDT had extended the time period for subscribing
the bonds upto 31.12.2006, vide its Circular No. 142/9/2006 TPL, dated
30.6.2006. Before filing the return of income, the assessee had deposited Rs. 50
lakh through a fixed deposit with the State Bank of India and had in a letter
intimated to the banker that the fixed deposit would be encashed as soon as the
bonds were available. Along with the return of income, the assessee had appended
a note explaining the factual position and stating that it will subscribe to the
bonds as soon as the same were available. The bonds were available on 22.1.2007
and the assessee applied for them on 27.1.2007, whereupon the bonds were
allotted to him on 31.1.2007.

The Assessing Officer held that since the capital asset
transferred formed a part of the block of assets,
s. 50 deems the gain arising on transfer thereof to be a short-term capital gain
arising from the transfer of a short term capital asset. He also held that
though the circular extended the time period up to 31.12.2006, the bonds had
been purchased on 31.1.2007 which was beyond the due date specified. He,
therefore, disallowed the claim of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A),
who held that following the ratio of the decision of the Bombay High Court in
the case of Ace Builders P. Ltd. 281 ITR 210 (Bom), the assessee was entitled to
deduction u/s 54EC, subject to satisfaction of conditions stated therein. Since
the bonds were not subscribed to by the due date extended by the CBDT circular,
the assessee was held not to be entitled to deduction u/s 54EC.

Held :

On the basis of facts, the Tribunal held that it was an
impossible task for the assessee to comply with the time period laid down u/s
54EC. The delay in purchase due to non-availability of the bonds was held to be
a reasonable cause, and the assessee was held to be entitled to exemption u/s
54EC. The Tribunal also noted that in the case of Ram Agarwal 81 ITD 163, on
similar facts, it had been held by the Tribunal that the assessee was entitled
to claim deduction u/s 54EC. The Tribunal allowed the appeal of the assessee.

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Section 254 of the Income-tax Act, 1961 — If an order passed by the Tribunal is not in conformity with the judgment of the Supreme Court or that of the jurisdictional High Court rendered prior to or subsequent to the impugned order, the same constitutes a

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New Page 1

55 (2009) 34 SOT 541 (Mum.)(TM)

Kailashnath Malhotra vs Jt.CIT

Block period 01.04.1987 to 15.12.1997. Date of order:
12.10.2009.

 

Section 254 of the Income-tax Act, 1961 — If an order passed
by the Tribunal is not in conformity with the judgment of the Supreme Court or
that of the jurisdictional High Court rendered prior to or subsequent to the
impugned order, the same constitutes a mistake as apparent from records and
capable of rectification u/s 254(2).

Certain additions made by the Assessing Officer were
confirmed by the Tribunal. One miscellaneous application filed by the assessee
u/s 254(2), seeking rectification of the Tribunal’s order was dismissed by the
Tribunal. The assessee once again moved another miscellaneous application u/s
254(2) seeking rectification of the Tribunal’s order.

Facts:

The Judicial Member of the Tribunal, in light of the judgment
of the Supreme Court rendered in the case of P.R.Metrani vs CIT [2006] 287 ITR
209 / 157 Taxman 325, recalled the order of the Tribunal on merits. However, the
Accountant Member did not agree with the Judicial Member and dismissed the
miscellaneous application on the ground that successive miscellaneous
applications were not permissible and, further, the judgment of the Supreme
Court in the case of P.R.Metrani (supra) was not applicable. In view of the
difference of opinion between the members of the Tribunal, the matter was
referred to the Third Member.

Held:


The Third Member held as follows:

1. It is evident that the scope of sub-section (2) is
restricted to rectifying any mistake in the order which is apparent from
records and does not extend to reviewing of the earlier order.

2. It is well-settled that the scope of proceedings u/s
254(2) is confined to rectifying any mistake which is apparent on the very
face of it. If the point needs to be proved on the strength of different
facets of reasoning, the same would become debatable. Once a particular point
falls in the realm of “debatable issue”, it automatically goes out of the
domain of sub-section (2) of section 254.

3. If two views are possible on a particular point and the
Tribunal has preferred one view over the other, no rectification application
lies for impressing upon the Tribunal to choose the other possible view in
preference over the one already adopted by it.

4. If, however, the order passed by the Tribunal is not in
conformity with the judgment of the Supreme Court or that of the
jurisdictional High Court, rendered prior to or subsequent to the impugned
order, the same constitutes a mistake apparent from records and capable of
rectification u/s 254(2).

5. Similarly, it will be an error apparent from records, if
the order is not in conformity with the retrospective amendment carried out to
the statutory provision covering the period and point in dispute, subject to
the fulfilment of other conditions prescribed in the Act such as limitation
period, etc.

 


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Section 40(b) — Since section 40(b) uses the term “authorise” and not “quantify”, salary to partners cannot be disallowed merely because amount of salary is not quantified in partnership deed.

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54 (2009) 34 SOT 495 (Pune)

Asst.CIT vs Suman Construction

A.Ys.:1999-2000 and 2000-01.

Date of order: 31.12.2008.

 

Section 40(b) — Since section 40(b) uses the term “authorise”
and not “quantify”, salary to partners cannot be disallowed merely because
amount of salary is not quantified in partnership deed.

Section 119 — CBDT has no jurisdiction to substitute the term
“authorise” occurring in section 40(b) by the term “quantify” in its Circular
No.739, dated 25.03.1996.

Facts:

The salary paid to partners by the assessee firm for A.Ys.
1999-2000 and 2000-2001 was disallowed by the Assessing Officer on the ground
that in the partnership deed filed along with the return of income for
A.Y.1998-99, neither the salary payable to the partners was quantified nor the
manner in which such quantification had to be done was prescribed. By referring
to the CBDT Circular No.739, dated 25.03.1996 [1996] 131 CTR (St.) 53, the
Assessing Officer was of the view that since there was no specified
quantification, the assessee was not entitled to deduction u/s.40(b) in respect
of the salary.

The CIT(A) held that the assessee was entitled to claim the
deduction for remuneration paid to the partners since the payment of salary to
the four partners was authorised by the partnership deed.

Held:

The Tribunal, upholding the CIT(A)’s order, noted as follows:

1. On reading this section it becomes clear that it does
not make it mandatory to quantify the amount of salary in one of the clauses
of the partnership deed, mainly because of the reason that the monetary limit
or ceiling is otherwise prescribed in the statute itself. The statute has used
the term “authorise” and not the term “quantify”.

 

2. In respect of the CBDT Circular No.739
(supra) relied upon by the Assessing Officer, the Tribunal clarified that the
CBDT cannot issue a circular u/s 119 which tantamounts to detracting from the
provisions of the Act. While interpreting the clause of a statute, there is no
scope for importing into the statute some other words which are not there or
to exclude words which are there.

 

3. It was also not a case that the impugned taxing
provisions were ambiguous and, therefore, capable of more than one
interpretation. Since there was no ambiguity, there was no question of a
beneficial interpretation to either side. Therefore, the words contained in
the provision must be given a natural meaning as commonly understood in the
legal parlance.

 


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S. 271B : If income of a partner, excluding the income from the firm, less than Rs.10 lacs, not liable to audit u/s.44AB — Penalty deleted.

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1) Hitesh D. Gajaria v. ACIT


ITAT ‘K’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and

P. Madhavi Devi (JM)

ITA No. 992/Mum./2007

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

Counsel for assessee/revenue : Deepak Shah/

Manvendra Goyal

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

Per P. Madhavi Devi :

Facts :

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

Held :

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

Case referred to :


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

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Section 40(a)(i), read with section 2(28A) — Discounting charges paid, cannot be treated as interest in terms of section 2(28A) and, therefore, such amount is not liable for TDS u/s.195.– Also, the same cannot be disallowed u/s 40(a)(i).

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53 (2009) 34 SOT 424 (Delhi)

Asst. CIT vs Cargill Global
Trading (I) (P.) Ltd.

A.Y.: 2004-05. Date of order: 09.10.2009

 

Section 40(a)(i), read with section 2(28A) — Discounting
charges paid, cannot be treated as interest in terms of section 2(28A) and,
therefore, such amount is not liable for TDS u/s.195.– Also, the same cannot be
disallowed u/s 40(a)(i).

Facts:

The assessee company discounted its export sales bills with a
company in Singapore. The discounting charges were disallowed by the Assessing
Officer u/s 40(a)(i) on the ground that the assessee did not deduct tax at
source u/s 195 on the discounting charges which were in the nature of interest
in terms of section 2(28A). The CIT(A) held that the discounting charges paid by
the assessee were not interest, as neither any money was borrowed nor any debt
was incurred. Therefore, no tax was required to be deducted at source from such
payments. He, accordingly, deleted the disallowance.

Held:

The Tribunal, upholding the CIT(A)’s order, noted as
hereunder:

1. As per section 2(28A), interest means sum payable in
respect of any money borrowed or debt incurred. In the instant case, there was
no debt incurred or money borrowed. In fact, it was a case where the assessee
had merely discounted sale consideration receivable on sale of goods.

2. The word `interest’ defined u/s 2(28A) does not include
the discounting charges on discounting of bill of exchange.

3. Though Circular No.65 was issued in relation to
deduction of tax u/s 194A, yet in respect of payment to a resident, the same
would be relevant even for the purpose of considering whether the discount
should be treated as interest or not. The CBDT had opined that where the
supplier of goods makes over the usance bill / hundi to his bank which
discounts the same and credits the net amount to the supplier’s account
straightaway, without waiting for realisation of the bill on due date, the net
payment made by the bank to the supplier is in the nature of price paid for
the bill. Such payment cannot technically be held as including any interest
and, therefore, no tax need be deducted at source from such payment by the
bank.

4. Hence, the assessee was not under obligation to deduct
tax at source u/s 195. Accordingly, the same amount could not be disallowed by
invoking section 40(a)(i).

 


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S. 271(1)(c) — Deduction claimed on the basis of advise of the tax consultant supported by tax audit report — Penalty cannot be levied on the disallowance of the same.

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39 (2010) 38 DTR (Mumbai) (Trib.) 101
Yogesh R. Desai v. ACIT
A.Y. : 2003-04. Dated : 1-2-2010

 

S. 271(1)(c) — Deduction claimed on the basis of advise of
the tax consultant supported by tax audit report — Penalty cannot be levied on
the disallowance of the same.

Facts :

Deduction u/s.80-O was claimed by the assessee which could
not be justified during the assessment proceedings. Finally, the assessee
accepted before the AO that the deduction was claimed erroneously and
inadvertently, as guided by his tax consultant.

Upon disallowance of the same, the penalty u/s. 271(1)(c) was
levied by the AO which was confirmed by the CIT(A).

Held :

It is settled law that penalty u/s.271(1)(c) is a civil
liability and the Revenue is not required to prove willful concealment as held
by the Supreme Court in the case of UOI v. Dharamendra Textile Processors &
Ors., 306 ITR 277. However, each and every addition made in the assessment
cannot automatically lead to levy of penalty for concealment of income.

Even if some deduction or benefit is claimed by the assessee
wrongly but bona fidely and no mala fide can be attributed, the penalty would
not be levied. The claim of deduction u/s.80-O was claimed on the basis of
advise of the tax consultant supported by tax audit report. Therefore there is
no concealment or furnishing of inaccurate particulars on the part of the
assessee and hence the penalty was deleted.

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S. 115JA(3), CBDT Circular No. 763, dated 18-2-1998 — Credit for MAT can be carried forward for a total of six years and not ‘five assessment years’ mentioned in sub-para 2 of para 45.4 of CBDT Circular No.763 — Statutory provisions prevail over a Circula

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  1. 2009 TIOL 404 ITAT (Mad.)


ITO v.
Data Software Research Company (International) Pvt. Ltd.

ITA No. 1602/Mds./2008

A.Y. : 2003-2004. Dated : 16-4-2009

 

Facts :

While assessing the total income of the assessee, a private
limited company, u/s.143(3) the AO had allowed credit for Rs.14,69,706 being
MAT paid in A.Y. 1997-98. Subsequently, the AO issued notice proposing to
withdraw MAT credit of Rs.14,69,706 by passing an order u/s.154. In response
to the show-cause notice the assessee contended that u/s.115JAA(3) MAT credit
can be set off for a period of 5 years immediately succeeding the assessment
year in which the credit became available. The AO did not accept this
contention and passed an order u/s.154 of the Act withdrawing tax credit of
A.Y. 1997-98 on the ground that u/s.115JAA the tax credit of A.Y. 1997-98 was
available for set-off only up to A.Y. 2002-03 and after that it cannot be set
off.


The CIT(A) allowed the assessee’s appeal.


Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal held that there is no ambiguity in the
language of S. 115JAA(3). The carry forward is available for a total of six
(1+5) years. The Tribunal observed that the confusion has arisen because of
the language used in CBDT Circular No. 763, dated 18-2-1998. The Tribunal held
that the period of ‘five assessment years’ mentioned in sub-paragraph (2) of
paragraph 45.3 of the said Circular contradicts what is stated in Ss.(3) of S.
115JAA. The Tribunal stated that it is trite law that statutory provisions
prevail over a Circular in case of a contradiction between the two. The
Tribunal stated that this position has been reiterated by the Apex Court in
CCE v. Ratan Melting & Wire Industries Ltd., 220 CTR 98 (SC). The Tribunal
upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue.


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S. 2(42A), S. 48, S. 49(1)(e), Explanation III to S. 48 — Where assessee transferred the shares held by it to its 100% subsidiary which shares were retransferred by the subsidiary to the assessee and thereafter were sold by the assessee, the assessee was

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  1. 2009 TIOL 383 ITAT (Mum.)


ACIT v.
Kotak Mahindra Bank Ltd.

ITA No. 2672/Mum./2006

A.Y. : 2000-01. Dated : 2-2-2009

 

Facts :

The assessee company had purchased 2,06,000 equity shares
of M/s. Trumac Engineering Company Ltd. on 7-11-1994. In the financial year
1995-96, the entire lot of 2,06,000 shares were transferred by the assessee to
its 100% wholly-owned subsidiary, M/s. Hamko Financial Services Ltd., (‘the
subsidiary’). In the financial year 1998-99, the subsidiary transferred back
the said shares to the assessee. During the financial year 1999-2000, the
assessee sold 1,56,000 shares out of the said 2,06,000 shares for a
consideration of Rs.70,20,000. The assessee in its return of income for A.Y.
2000-01 claimed loss on sale of these shares at Rs.14,55,72,296 by adopting
the indexation from 1994-95 i.e., the initial date of acquisition by
the assessee. The AO while passing order u/s.143(3) r.w.s. 147 of the Act held
that the assessee was entitled to indexation from the date the shares were
retransferred by the subsidiary to the assessee i.e., financial year
1998-99. Accordingly, the AO computed the indexed cost of acquisition of
shares sold by the assessee to be Rs.11,25,96,594 as against Rs.15,25,92,296
computed by the assessee.


The CIT(A) relying on the decision of the Mumbai Bench of
the Tribunal in the case of DCIT v. Meera Khera in ITA No. 5258/M/1998
of A.Y. 1995-96 and the decision of the Chandigarh Bench of the Tribunal in
the case of Mrs. Pushpa Sofat v. ITO, 81 ITD 1 (Chd.) upheld the
contention of the assessee.


Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal after referring to S. 48, S. 49(1)(e),
Explanation to S. 2(42A) and second proviso to S. 48 held that on a conjoint
reading of these provisions it is evident that in calculating long-term
capital gain on sale of shares of Trumac Engineering Company Ltd., the indexed
cost has to be calculated with reference to the cost, holding period and
indexation factor of the first owner i.e., from 1994-95. It held that
the cost has to be indexed from the date the shares were originally acquired
by the assessee company. It stated that the transfer from the assessee to its
subsidiary and retransfer from the said company has got to be ignored, as
provided in the above provisions of the Act. The Tribunal held that there was
no mistake in the capital gain disclosed by the assessee. Accordingly, it held
that the AO was not justified in denying the benefit of indexation from the
initial date of acquisition. It, accordingly, dismissed the appeal of the
Revenue.


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S. 139A, S. 272B — Penalty u/s.272B cannot be levied on the deductor for not quoting PAN of deductee in the quarterly statements filed in Form No. 26Q.

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  1. 2009 TIOL 370 ITAT (Bang.)


D. V. Steel Corporation v.
ITO (TDS)

ITA No. 907/Bang/2008

A.Y. : 2007-08. Date of Order : 27-2-2009

 

Facts :

The assessee firm filed quarterly statement in Form No. 26Q
for the 4th quarter of financial year 2006-07 without quoting therein PAN of
the deductees. The Assessing Officer was of the view that not quoting PAN of
deductees was contrary to the provisions of S. 139A(5B) of the Act. The AO
issued notice to the assessee asking it to show cause why penalty u/s.272B(1)
should not be levied for not quoting the PAN of the deductees in the
statement. The assessee submitted non-availability of the same to be the
reason for non-furnishing of PAN in the quarterly statement. The AO did not
find this to be a reasonable cause. He levied a penalty of Rs.10,000.


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


Aggrieved, the assessee preferred an appeal to the Tribunal
where it was contended that not quoting the PAN was for a reasonable cause
since the asses-see was being asked to do something which was im-possible; it
had no statutory right or power to compel the deductee to furnish the PAN; not
quoting PAN was for no fault on the part of the assessee.

Held :

The Tribunal noted that there is no mechanism at the end of
the assessee to compel the deductee to give its PAN. The Tribunal was of the
view that the facts of the present case are identical to those before the
Ahmedabad Bench of Tribunal in the case of Financial Co-operative Bank Ltd.
where it has been held that since the rules and the provisions of the Act did
not cast an obligation on the manager of a bank to ensure that Form No. 60
filed by the customer was duly filled in, the failure to comply with the
provisions of S. 139A was on the part of the customer of the bank and not on
the part of the bank. The Tribunal following the reasoning of the said
decision of the Ahmedabad Bench directed the AO to delete the penalty.


          The
appeal filed by the assessee was allowed.

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S. 201(1A) — When no tax is payable by payee, no interest can be charged from payer

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47 (2008) 304 ITR (AT) 338 (Jodhpur)

ITO v. Emrald Construction Co. P. Ltd.

ITA No. 357 and 370/Jdpr./2002

A.Y. : 1996-97. Dated : 31-8-2007

S. 201(1A) — In case no tax is payable by the payee, no
interest u/s.201(1A) can be charged from the payer.

 

The assessee-company had made payment to three companies in
the nature of interest and contractor’s payment, but without TDS on the same.
The Assessing Officer levied interest u/s.201(1A) till the date of assessment
order. Before the CIT(A), the assessee contested that no tax was payable qua
contract or interest payments (incomes) or qua any other incomes of the
recipients, so the question of loss to the Revenue does not arise. Hence, no
interest was leviable u/s.201(1A). The CIT(A) upheld the levy of interest, but
restricted it till the date of assessment order of the recipients. On cross
appeals by the assessee and the Revenue, the ITAT held that

1. The interest to be charged u/s.201(1A) is not a penalty,
but a compensation of revenue loss for the delay in the payments of tax. The
rigours of S. 201 are flexible and not rigid as would not admit any sort of
explanation with regard to non-deduction at source.

2. The charging of interest u/s.201(1A) is definitely
mandatory, but this ‘mandatory’ nature has to take colour from the main charge
of the deduction of tax at source u/s.201. So to say, when the ‘tax’ which was
to be deducted u/s.201 was not payable at all, it would be unjust to conclude
that, in all eventualities, come what may, interest u/s.201(1A) is to be
charged from the deductor.

3. It is certain that the interest is chargeable from the
date on which the tax is due for deduction. The starting point has been
envisaged in the Act but not the end point. The ‘benchmark’ of the end point
is to be decided after taking into consideration various factors. The question
of charging interest up to framing of assessment orders in the hands of the
recipients would not arise, because ‘no tax dues’ are found against them and
as such there was no loss of revenue. Interest cannot be charged for the sake
of charging of interest only, it has to be charged in accordance with a
provision.

4. The interest is chargeable on the amount of tax to be
deducted. In case the chargeable tax at source increases or decreases, the
interest amount varies accordingly. But, in a case where the tax was not
payable at all, then in that case no interest can be charged. The word
‘compensatory’ clearly suggests this conclusion.

 


Cases relied upon :



(i) Vikrant Tyres Ltd. v. ITO, (1993) 202 ITR 454
(Kar.)

(ii) CIT v. Rishikesh Apartments Co-operative Housing
Society Ltd., (2002) 253 ITR 310 (Guj.)

(iii) Bennet Coleman & Co. Ltd. v. Mrs. V. P. Damle,
(1986) 157 ITR 812 (Bom.)

(iv) Karimtharuvi Tea Estate Ltd. v. State of Kerala, (1966) 60 ITR
262 (SC)

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S. 115JA — AO has no power to scrutinise accounts except as per Explanation — No addition can be made due to reduction in value of inventory and obsolescence loss.

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46 (2008) 304 ITR (AT) 123 (Ahmedabad)

Deepak Nitrate v. Dy. CIT

ITA No. 1646 and 1748/Ahd./2004

A.Y. : 1998-99. Dated : 9-4-2007

S. 115JA — Assessing officer has no power to scrutinise the
accounts except as provided in Explanation to S. 115JA and hence no addition can
be made by him on account of reduction in value of inventory and obsolescence
loss for computation of book profit in terms of S. 115JA of the Act.

 

According to the Assessing Officer the two amounts viz.
(i) provision made for obsolescence loss, and (ii) reduction due to change in
method of inventory valuation should be added back in computation of the book
profits as per S. 115JA. He therefore added the said amounts to the income of
the assessee invoking the provisions of S. 154. The CIT(A) upheld the addition
no. (i) and deleted the addition no. (ii).

 

On cross appeals by the assessee and Revenue, the Tribunal
observed as under :

(1) Diminution in value of asset is not a provision for any
liability and consequently it would not be a case of reserve.

(2) As per the relevant provisions of the Companies Act, an
amount set apart to become a provision has to be either (i) provision for
depreciation, renewals, or diminution in value of asset, or (ii) provision for
any known liability of which the amount cannot be determined with substantial
accuracy. However, the Income-tax Act has included only one part of this
definition for increasing the net profit to determine the book profits and
that is provision for meeting liability other than ascertained liability.
Hence provision for diminution in the value of asset cannot be added back
u/s.115JA.

(3) The change in method of valuation of inventory was
adopted by the assessee being more scientific and was consistently followed.
Even otherwise, it would be a diminution in value of inventories and since
these items had not been found to be wrong by any authorities under the
Companies Act, the Assessing Officer did not have the jurisdiction under the
provisions of the Act to add back such items for calculating book profits.

 


Case relied upon :



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



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I. By holding shares, assessee entitled to exercise rights of owner of flat — Whether entitled to depreciation — Held, Yes. II. Forfeiture of application money on non-payment of call money on issue of debentures —Held, Capital receipt

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45 (2008) 304 ITR (AT) 167 (Mumbai)

Deepak Fertilizers and Petrochemicals Corporation Ltd.
v. DCIT

A.Ys. : 1997-98 to 2001-2002. Dated : 21-9-2007



I. By virtue of holding the shares, assessee entitled
to exercise the rights of owner in respect of a flat — Whether entitled to
depreciation on flats — Held, Yes.



S. 32 — The assessee purchased the shares of YIL on the
basis of which it got an exclusive right to use and occupy certain flats and
claimed depreciation on the same which was disallowed by the Assessing
Officer, but the same was allowed by the CIT(A) relying on the provisions of
S. 2(47)(vi), S. 27(iii), S. 269UA(d)(ii) and also relevant Supreme Court
judgments.

 

The Tribunal observed as under :

1. The articles of association of a company engaged in
the business of real estate may provide that a shareholder of particular
shares would be entitled to exercise the rights of owner in respect of
properties owned by the company. Such mode of transfer is duly recognised by
the Legislature in provisions of S. 2(47)(vi), S. 27(iii), and S.
269UA(d)(ii)


2. The meaning of the term ‘owner’ for the purpose of S.
32 although not defined in the Income-tax Act, a reference to Supreme
Court’s decision in various cases can be construed so as to include a person
who can exercise the rights of the owner not on behalf of the owner but in
his own right. The term ‘owned’ as occurring in S. 32(1) should be assigned
a wider meaning. The provisions of this Section are for the benefit of the
assessee and the intention of the Legislature should be interpreted
accordingly.


 


The Tribunal accordingly allowed the assessee’s claim :

 

Cases relied upon :



(a) CIT v. Podar Cement P. Ltd., (1997) 226 ITR
625 (SC)

(b) Mysore Minerals Ltd. v. CIT, (1999) 239 ITR
775 (SC)

(c) R. B. Jodha Mal Kuthiala (1971) 82 ITR 570 (SC)

 

II. Forfeiture of application money on non-payment of
call money on issue of debentures —Held, Capital receipt.

The assessee issued partly convertible debentures and
received application money. On non-payment of call money, certain amount was
forfeited by the assessee. The assessee claimed it to be capital receipt not
liable to tax, which was rejected by the Assessing Officer. The CIT(A) deleted
the addition made by the Assessing Officer.

 

On Revenue’s appeal, the ITAT held that :

1. The decision of the Supreme Court in the case of T. V.
Sundaram Iyengar & Sons Ltd., 222 ITR 344 relied upon by the assessee, is
not relevant because the amount received is not a trading receipt of the
assessee.

2. Since the amount received was in respect of debentures
issued, it is a capital receipt not chargeable to rax.

 


Cases relied upon :



(1) CIT v. Mahindra & Mahindra Ltd., (2003) 261
ITR 501 (Bom.)

(2) Prism Cement v. Joint CIT, (2006) 285 ITR (AT)
43 (Mumbai)

 




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Set-up date of business is question of fact and depends upon circumstances involved.

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44 302 ITR (AT) 1 Pune


Styler India Pvt. Ltd. v. JCIT 2008

SS ITA 1961 S. 28, S. 37

A.Y. : 1998-99. Dated : 8-4-2008

When business can be said to be set up is a question of fact
and would depend upon the circumstances involved in a particular case.

The assessee-company was set up as a 100% sub-sidiary of S of
Austria with the aim to make available technical expertise to the Indian
industry in three main areas — technical design and con-sultancy services,
systems supplier with respect to vehicle components and parts, sourcing of
vehicle components and parts from India for the global market.

 

The assessee filed a return for the A.Y. 1998-99 showing a
receipt of Rs.3,91,780 as interest on fixed deposit with the banks and claiming
expenses of Rs.49,27,336 as administrative and selling expenses as against the
receipt. The Assessing Officer was of the opinion that expenses of Rs.17,92,600
were capital in nature and that exhibition and launch expenses of Rs.15,65,239
should be disallowed as preliminary expenses.

 

The assessee explained that repairs, improvement and
innovation expenses were incurred for carrying on the business which was done by
obtaining long lease and in regards to exhibition and launch expense of
Rs.15,65,239, these were incurred after the company was formed on September 15,
1997.

 

For substantiating its claim, the assessee stated that it had
attended an exhibition in January 1998 at Expo ’98 at Delhi and it had taken a
stall and participated in the exhibition to promote the business interest of the
company and to increase its visibility in the eyes of Indian automotive
industry. The Assessing Officer held that interest income was liable to be
assessed under the head ‘Other Sources’ and expenses claimed amounting to
Rs.49,27,336 were not admissible and were to be disallowed.

 

The Commissioner (Appeals) held that there was no sufficient
proof to hold that the business had commenced, that all expenses were incurred
by the assessee before setting up of the business and
were not permissible. He upheld assessment of interest income under the head
‘Other Sources’ and did not allow any expenses against the above receipt.

 

On appeal to the Appellate Tribunal :

 

Held :



1. That there were details of various activities handled by
the Managing Director during his stay in India and the corporate offices he
visited to carry on discussion with different persons. Even the names of the
persons he met were given. The assessee had also furnished the detailed
qualification of the general manager, marketing, who had met various
prospective clients and given a summary of various activities carried on by
the employee. The assessee had placed on record correspondence exchanged with
various manufacturers of automobiles.

2. The expenditure clearly showed that the assessee had a
building on which rent of Rs.3,10,400 was incurred. It further carried on an
advertisement related to the business it had set up and other miscellaneous
expenses connected with the consultative services the assessee intended to
provide.

3. The assessee participated and took a stall in ‘Auto
Fair’ held in Delhi with the objective of advancing the assessee’s business of
consultancy. The assessee had a place of business; it had qualified people who
could give advice on automobile industry. There was material to show that the
assessee contacted various clients who entered into agreement with the
assessee in the subsequent years and paid fees for consultation to the
assessee.

4. Merely because actual receipts were not shown, it could
not be said that the assessee did not set up its business. When the assessee
was ready to offer advice on matters and problems indicated in the
correspondence with the clients, it was im-material that no fees for the
consultancy were received in the year under consideration. The assessee had an
office from which advice could be given in the automobile industry. All the
correspondence was addressed to a particular address in Pune. The assessee had
machinery to render advice in the technical field. On the above facts, it
could not be held that the assessee did not set up business in the relevant
period.

 


Cases referred to :



(i) CIT v. Sarabhai Management Corporation Ltd.,
(1991) 192 ITR 151 (SC) (para 84)

(ii) Neil Automation Technology Ltd. v. Deputy CIT,
(2002) 120 Taxman 205 (Mum.) (Tribunal) (paras 4,18, 31, 57, 59, 62)

(iii) Western India Vegetable Products Ltd. v. CIT,
(1954) 26 ITR 151 (Bom.) (paras 4, 10, 13, 17, 29, 35, 52, 59, 60, 61, 75, 77,
81, 85, 92) and many more.

 


S. 10B, as amended w.e.f. 1-4-2001 — Deduction to be computed w.r.t. profits of EOU unit after reducing losses of non-EOU units — Held, No

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43 2009 TIOL 53 ITAT Bang.

DCIT v. M/s Medreich Ltd.

ITA No. 632/Bang./2008

A.Y. : 2004-2005. Dated : 21-11-2008

Whether in view of the provisions of S. 10B, as amended
w.e.f. 1-4-2001, the deduction u/s.10B is to be computed with reference to
profits of EOU unit after reducing the losses of non-EOU units — Held, No.

 

Facts :

The assessee company, a 100% EOU, was engaged in the business
of manufacture of pharmaceutical products. The assessee company claimed
exemption u/s.10B of the Act in respect of export profits in the EOU Unit and
also the domestic profits thereon. The assessee had not claimed set-off of
business losses incurred in other units but carried them forward. The AO while
assessing the total income first set off the loss of non-EOU unit against the
entire profit of the EOU unit (domestic as well as export) and then allowed
deduction u/s.10B on the residue. As a result, the carried forward benefit
claimed by the assessee was not allowed. Aggrieved, the assessee preferred an
appeal to the CIT(A) who allowed the claim of the assessee by relying on the
decision of the Bangalore Tribunal in the case of M/s. Webspectrum Software Pvt.
Ltd. in which the Tribunal held that the deduction u/s.10A is to be allowed
without setting off brought forward and current year loss of non-10A unit.
Aggrieved, the Revenue preferred an appeal to the Tribunal.


 

Held :

The Tribunal did not find any infirmity in the order of the
CIT(A). It dismissed the appeal of the Revenue.


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S. 10A — Assessee owned two STP units — Whether deduction to be computed w.r.t. profits of one unit without setting off loss of other unit — Held, Yes. Whether deduction to be allowed w.r.t. profits and gains derived — Held, Yes. Whether order of CIT u/s.

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42 2009 TIOL 41 ITAT Bang.


Tata Consultancy Service Ltd. v. ACIT

ITA No. 590/Bang./2008

A.Y. : 2003-2004. Dated : 14-11-2008

S. 10A of the Income-tax Act, 1961 — A.Y. 2003-04 — Assessee
owned two STP units — During the assessment year STP Unit 1 earned profit and
STP Unit 2 suffered loss — Assessee computed deduction u/s.10A in respect of STP
Unit 1 with reference to its profits and without setting off the loss suffered
by STP Unit 2 — AO accepted the manner of computation adopted by the assessee —
CIT invoked S. 263 and directed AO to compute deduction u/s.10A in respect of
Unit 1 on the profits of Unit 1 after setting off loss of Unit 2 — Whether
deduction u/s.10A is to be computed with reference to profits of an undertaking
without setting off loss incurred by another eligible undertaking — Held, Yes.
Whether deduction u/s.10A is to be allowed with reference to profits and gains
derived by an undertaking — Held, Yes. Whether order of CIT u/s.263 needs to be
set aside — Held, Yes.

Facts :

The assessee company owned two STP units for export of
software. During the A.Y. 2003-04, STP Unit 1 earned profit, whereas STP Unit 2
suffered a loss. The assessee in its return of income claimed deduction u/s.10A
of the Act in respect of Unit 1. This deduction was computed with reference to
profits of Unit 1 without setting off the loss of STP Unit 2. No deduction
u/s.10A was claimed in respect of STP Unit 2.

 

The Assessing Officer (AO) while assessing the total income
of the assessee, accepted the manner of computation of deduction u/s.10A.

 

The CIT was of the opinion that deduction allowed u/s.10A in
respect of STP Unit 1 without setting off the loss of STP Unit 2 against income
of STP Unit 1 was not in accordance with law and that the order is prejudicial
to the interest of the Revenue. He accordingly directed the AO to modify the
order and allow deduction u/s.10A after setting off the loss from STP Unit 2
against the profit of STP Unit 1.

 

Aggrieved with the order of CIT u/s.263, the assessee
preferred an appeal to the Tribunal.

 

Held :

The Tribunal after considering various judicial precedents
and also the provisions of S. 10A(1), 10A(4), notes on clauses while introducing
amendment to S. 10A(4) by Finance Bill, 2001 held as under :

(1) In S. 10A(1), the word ‘an’ has been used before the
undertaking. Deduction is to be allowed on such profit and gains as are
derived from the undertaking. Hence, to apply the provisions of S. 10A, one
has to consider the profit and gains as derived by an undertaking. It does not
refer to profits and gains as are derived by the assessee. The assessee may be
having more than one undertaking.

(2) Deduction u/s.10A is to be computed on the basis of
profits and gains derived by an undertaking. In the instant case, STP Unit 2
was having a loss and therefore, its loss cannot be set off while ascertaining
the deduction u/s.10A for STP Unit 1.

(3) When the AO has taken one of the possible views, then
the order of the AO cannot be termed as erroneous and the CIT was having no
power to cancel that order u/s.263 of the Act.

 


The Tribunal cancelled the order passed by the CIT u/s.263 of
the Act. The assessee’s appeal was allowed.

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S. 143(2), S. 158BC, S. 292BB — For period prior to 1-4-2008 where notice not issued, whether block assessment order without jurisdiction — Held, Yes. Whether S. 292BB applicable to A.Y. 2008-09 and subsequent years — Held, Yes

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41 2009 TIOL 38 ITAT Del. SB

Kuber Tobacco Products (P) Ltd. v. DCIT

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

A.Ys. : 1-4-1988 to 25-1-1999. Dated : 14-1-2009

Income-tax Act, 1961 — S. 143(2), S. 158BC, S. 292BB — For a
period prior to 1-4-2008 where a notice u/s.143(2) of the Act is not issued, the
block assessment proceedings and consequential block assessment order can be
said to be without jurisdiction — Held, Yes. Whether S. 292BB is applicable to
A.Y. 2008-09 and subsequent years — Held, Yes.

 

Facts :

Search action u/s.132 of the Act was carried out in
the case of the assessee on 21-1-1999. The assessment order dated 29-1-2001
passed u/s.158BC of the Act was silent on the issue of notice u/s.143(2).
Neither before the Assessing Officer, nor before the CIT(A) did the assessee
contend that the assessment framed without issuance of notice u/s.143(2) was
invalid. The assessee in an additional ground before the Tribunal contended that
in the absence of issuance of mandatory legal notice u/s.143(2) of the Act the
block assessment proceedings and consequential block assessment order be held to
be without jurisdiction.

 

The Revenue raised a plea that in view of insertion of S.
292BB which is inserted by Finance Act, 2008 w.e.f. 1-4-2008, 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 and the assessee is barred from
taking this plea.

 

In these circumstances, the question referred to the Special
Bench was whether the assessee who has participated in 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 :

The Special Bench of the Tribunal held as follows :

(1) The scope of S. 292BB is that where any assessee has
appeared in any proceedings or has co-operated in any inquiry relating to
assessment or reassessment, then the consequences ensued will be that it will
be deemed that any notice under any provisions of the Act, which is required
to be served on an assessee has been duly served on him and it will further be
deemed to be served in time and in accordance with the provisions of the Act.
The assessee is debarred from taking the defence or raise any objection in any
proceedings or inquiry that the notice was :


(a) Not served upon him;


(b) Not served upon him in time; and


(c) Served upon him in any improper manner.

 


(2) The assessee has a right of being served with the
notice in case proceedings are taken against him and in case of invalid notice
the whole proceedings taken pursuant to that notice would be void ab initio
(subject to provisions of S. 292B) and will have no legal consequences. To
overcome some of the situations, S. 292BB has been brought on the statute as
explained in the Memorandum explaining the provisions as well as notes on
clauses.


(3) Applicability of S. 292BB is not strictly restricted to
issue of notice u/s.143(2), but it is in respect of other notices relating to
any provisions of the Act, which include notice to initiate re-assessment
proceedings and other proceedings also.


(4) Where the statute u/s.292BB deems service of notice, it
will always include issue of notice as service cannot be effected without
issuance thereof.


(5) Where procedural statute creates a new disability or
obligation and imposes new duties in respect of transactions already
accomplished, then the statute cannot be construed to have retrospective
effect. S. 292BB cannot be construed to have retrospective operation and it
has to be applied prospectively.


(6) S. 292BB is applicable to A.Y. 2008-09 and subsequent
years. The assessee is precluded from taking such objection for and from A.Y.
2008-09. Prior to 1-4-2008 i.e., up to 31-3-2008, as per S. 292BB, the
assessee is not precluded from taking any objection regarding invalidity of
assessment/reassessment on the ground of improper/invalid issuance/service of
a notice.



 



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Whether while computing book profit u/s. 115JB, lower of unabsorbed loss or depreciation as per profit and loss account of amalgamated company can be set off against profits of amalgamating company — Held, Yes.

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40 2009 TIOL 26 ITAT Bang.


VST Tillers & Tractors Ltd.
v. CIT

ITA No. 588/Bang./2008

A.Y. : 2003-2004. Dated : 21-11-2008

S. 115JB of the Income-tax Act, 1961 — A.Y. 2003-04 — Whether
while computing book profit u/s. 115JB of the Act lower of unabsorbed loss or
depreciation as per profit and loss account of the amalgamated company can be
set off against profits of an amalgamating company — Held, Yes.

 

Facts :

During the year ended 31-3-2003, V.S.T. Precision Components
Ltd. (‘VPCL’), a company which was subsidiary of the assessee company was
amalgamated with the assessee company. The amalgamation, approved by the
Karnataka High Court by its order dated 18th July 2003, was to be effective from
1-4-2002. The terms of amalgamation, as mentioned in paragraph 11 of the order
of the Court, inter alia stated that accumulated loss and depreciation of
VPCL shall be deemed to be the loss and depreciation of the assessee company as
provided u/s.72 of the Act.

 

The assessee returned an income of Rs. Nil after setting off
business loss and unabsorbed depreciation of VPCL. The assessee computed book
profit u/s.115JB by reducing from profit as per its profit & loss account the
brought forward loss as per profit & loss account of VPCL.

 

The book profit computed by the assessee was accepted by the
AO in the assessment u/s.143(3).

 

Subsequently, the CIT was of the opinion that since the
unabsorbed loss was not as per the books of account of the assessee company but
of VPCL, the same cannot be permitted to be reduced from the book profit for
purposes of S. 115JB. He, accordingly, directed the AO to modify the assessment
order by re-computing the tax liability u/s.115JB.

 

Aggrieved, the assessee preferred an appeal to the Tribunal.

 

Held :

The Tribunal noted that the effective date of amalgamation
was 1-4-2002. The Tribunal held that in view of the statutory provisions of S.
72A(1) and also the order of the High Court sanctioning the scheme, the
unabsorbed business loss and also unabsorbed depreciation of VPCL were deemed to
be loss and depreciation of the assessee company. U/s.115JB(2) lower of
unabsorbed loss or unabsorbed depreciation is to be set off against the book
profit. Since the unabsorbed loss of VPCL was lower than unabsorbed
depreciation, the assessee had rightly set off the unabsorbed loss against book
profit. The Tribunal held that the CIT was not correct in directing the AO to
compute book profit without setting off the unabsorbed loss of VPCL. The
Tribunal set aside the order of the CIT passed u/s.263 of the Act.

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Whether grant of excessive credit of TDS amounts to escapement of income — Held, No. Whether it can be construed as grant of excessive relief under sub-clause (iii) of Explanation 2(e) to S. 147 — Held, No

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39 2009 TIOL 01 ITAT Hyd.

GMR Projects Pvt. Ltd. v. ACIT

ITA No. 1014/Hyd./2007

A.Y. : 2000-2001. Dated : 26-9-2008

S. 147 of the Income-tax Act, 1961 — A.Y. 2000-01 — Whether
grant of excessive credit of TDS amounts to escapement of income — Held, No.
Whether grant of excessive credit of TDS can be construed as grant of excessive
relief under sub-clause (iii) of clause (c) of Explanation 2 to S. 147 of the
Act — Held, No.

 

Facts :

For A.Y. 2000-01 the assessee company filed its return of
income declaring total income of Rs.11,20,190. During the year under
consideration the assessee had in its profit & loss account admitted receipts of
Rs.3,33,87,112, but had claimed credit for TDS, amounting to Rs.56,30,970, in
respect of entire gross receipts of Rs.25,70,53,996. The Assessing Officer
completed the assessment u/s.143(3) of the Act assessing the total income to be
the same as returned income and granted credit of TDS amounting to Rs.56,27,970.


 


Subsequently, the AO initiated reassessment proceedings since
he was of the view that as per provisions of S. 199 of the Act credit should be
restricted to the extent of income admitted during the year. In the order passed
u/s.143(3) r.w. S. 147 of the Act, the AO restricted credit of TDS to
Rs.7,34,516.


 


In an appeal to the CIT(A) the assessee challenged the
reopening of assessment on the ground that grant of excessive credit of TDS
cannot be construed as escapement of income. The CIT(A) upheld the reopening and
held that grant of excess credit of TDS is a case of income being subjected to
excessive relief.


 



Aggrieved, the assessee preferred an appeal to the Tribunal,
wherein it challenged the reopening of the assessment.

 

Held :

The Tribunal noted that the words ‘income’ and ‘tax’ have
different connotations and are separately defined in the Act. The tax on income
is on the basis of charge prescribed in Chapter II of the Act. It further
observed that what needs to be assessed under the Act is the income earned by
the assessee. Chapter XIV of the Act prescribes the procedure for assessment.
Once the income is earned, returned and assessed, the collection and recovery of
tax start simultaneously at each stage as prescribed in Chapter XVII of the Act.
The Tribunal observed that as per the scheme of the Act, each stage is a
distinct stage, and each stage culminates into the next. In the present case,
the Tribunal noted that it was dealing with assessment stage.

 

The Tribunal observed that S. 147 is contained in Chapter XIV
of the Act and deals with income which has escaped assessment. It stated that
when one says that income has escaped assessment, it only means that such income
has escaped the tax net though it was taxable. According to the Tribunal,
granting of excess credit cannot be equated with income escaping assessment. By
granting excess credit everything revolves around correct collection and
recovery of tax. Nowhere income is in picture and if income is not in picture,
where is the question of its escapement ? The Tribunal held that the AO assumed
the jurisdiction wrongly when no income had escaped assessment.

 

As regards the provision of clause (c)(iii) of Explanation 2
to S. 147 of the Act, the Tribunal noted that the issue is squarely covered in
favour of the assessee by the decision of the Bombay High Court in the case of
Bombay Gas Co. Ltd.

 

The Tribunal quashed the order of reassessment.


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(a) Ss.(2) and (3) of S. 14A are procedural in nature and, hence, retrospective. (b) All direct and indirect expenses are disallowable u/s.14A, which have relation with income not chargeable to tax. (c) S. 14A applicable to dividend earned by assessee

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38 (2008) 26 SOT 603 (Mum.) (SB)

ITO v. Daga Capital Management (P.) Ltd.

ITA Nos. 8057 (Mum.) of 2003 and 183, 1372 and 2048 (Mum.)
of 2005

A.Ys. : 2001-02 and 2002-03. Dated : 20-10-2008

S. 14A of the Income-tax Act, 1961 :



(a) Expenses falling under any head or Section which
are otherwise deductible as business expenditure or under other respective
heads, would call for disallowance to the extent to which those expenses
have been incurred in relation to income exempt from tax.


(b) Ss.(2) and (3) of S. 14A are procedural in nature
and, hence, retrospective.


(c) For purpose of S. 14A what is relevant is to work
out expenditure in relation to exempt income and not to examine whether
expenditure incurred by assessee has resulted into exempt income or taxable
income.


(d) All direct and indirect expenses are disallowable
u/s.14A, which have any relation with income not chargeable to tax under the
Act.


(e) S. 14A would be applicable where shares are held
as stock-in-trade.


(f) Provisions of S. 14A would be applicable with
respect to dividend income earned by assessee engaged in business of dealing
in shares and securities on shares held as stock-in-trade when earning of
such dividend income was incidental to trading in shares.


 


The assessee-company was engaged in the business of dealing
in shares. For the relevant assessment year, the assessee had exempt dividend
income and, therefore, the Assessing Officer disallowed certain expenses in
terms of S. 14A. The CIT(A) upheld the disallowance.

 

The Special Bench also held in favour of the Revenue on all
the matters. The Special Bench observed as under :


1. S. 14A has an overriding effect over all other
Sections allowing deductions :

(a) The residence of this Section in the first
sub-chapter, viz., ‘Heads of income’, clearly demonstrates that it
has been made applicable to all the heads of income. If the intention of the
Legislature had been to restrict its application to the expenditure under
heads other than ‘business income’, then it would have been placed under the
relevant sub-chapter instead of the first sub-chapter, which, in turn,
refers to all the heads of income. Therefore, the expenses deductible under
the head ‘Business income’ are not immune from S. 14A.

(b) S. 14A is a special provision which deals with
disallowances of expenditure incurred by the assessee in relation to income
which does not form part of the total income under the Act. The expenses
falling under any head or Section which are otherwise deductible as business
expenditure or under other respective heads, would call for disallowance, in
view of the specific provision of S. 14A, to the extent to which those have
been incurred in relation to the income exempt from tax.

 

2. Ss.(2) and (3) of S. 14A are retrospective :

(a) In case of substantive provisions, the general rule
is that a provision is normally prospective in nature, unless it is given
retrospective operation expressly or can be so inferred by necessary
implication.

(b) However, in respect of
clarificatory/explanatory/procedural provisions, the date of insertion loses
its significance.

(c) S. 14A was inserted with a view to clarify the
intention of making disallowance in respect of ‘expenditure incurred by the
assessee in relation to income which does not form part of the total income
under this Act’. This Section declared the intention of the Act ‘since
inception’.

(d) When Ss.(1) itself is clarificatory and then
resultantly retrospective, it is beyond comprehension as to how Ss.(2) and
(3), providing the mechanism to do what is provided for in Ss.(1), can be
construed as substantive and, hence, prospective.

(e) A proviso has also been inserted in S. 14A for
reducing its rigor, which stipulates that no reassessment u/s.147 or
rectification u/s.154 shall be carried out by the Assessing Officer so as to
give effect to the newly inserted provision. That has been done so as not to
disturb the proceedings which have already attained finality in the period
prior to this insertion. However, assessments which are pending at any
stage, either before the Assessing Officer or the CIT(A) or the Tribunal or
the Higher Courts, would be governed by the mandate of that Section as it is
retroactive. From the above discussion, it is clear that Ss.(2) and (3) are
procedural in nature and, hence, retrospective.

 

3. Expenditure in relation to exempt income :

(a) The language of Ss.(1) of S. 14A clearly provides
that no deduction shall be allowed ‘in respect of expenditure incurred by
the assessee in relation to income which does not form part of the tot

(a) S. 48 — Option to avail benefit of indexation or not is with assessee. (b) S. 70 — Capital gain computed with indexation can be set off against capital gain computed without indexation.

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37 (2008) 26 SOT 380 (Mum.)

Mohanlal N. Shah HUF v. ACIT

ITA No. 789 (Mum.) of 2004

A.Y. : 2002-03. Dated : 24-9-2008



(a) S. 48 of the Income-tax Act, 1961 — Option to avail
or not to avail benefit of indexation is with the assessee.


(b) S. 70 of the Income-tax Act, 1961 — Capital loss
computed with indexation can be set off against capital gain computed without
indexation.




During the relevant assessment year, the assessee had sold
shares and units of mutual funds. In respect of shares sold, the assessee did
not claim benefit of indexation, but in respect of units sold of one mutual fund
the assessee opted for indexation. The resultant loss from the units was set off
against the gain from shares.

The Assessing Officer held that though the benefit of
indexation is a privilege allowed to the assessee as S. 48, the same could not
be availed of on a pick-and-choose basis; and that the option to offer capital
gain at the rate of 20% with indexation and at the rate of 10% without
indexation lies with the assessee as S. 112, but before that S. 70 comes into
appraisal and for setting off of any income under the same head it is but
natural that capital gain is to be calculated on the same footing. Therefore, he
disallowed the method adopted by the assessee. The CIT(A) also held against the
assessee.

The Tribunal, following the decision in the case of
Devinder Prakash Kalra v. ACIT, (2006) 151 Taxman 17 (Delhi), held in favour
of the assessee. The Tribunal noted as under :

(1) The computation of income from capital gains is
governed by S. 48. A plain reading of the said provision reveals that a
capital gain from each asset which is transferred has to be computed.
Indexation is allowable while computing the ‘capital gain’ from the transfer
of each long-term capital asset.


(2) As provided in S. 48, option is with the assessee to or
not to avail of benefit of indexation for computation of capital gains on
transfer of each of long-term capital assets.


(3) It is only after computing the capital gains as per S.
48, can it be aggregated by setting off the loss u/s.70 and it is then that
the rate of tax as provided u/s.112 is to be applied.


(4) The Delhi Bench of the Tribunal in the case of
Devinder Prakash Kalra v. ACIT, (2006) 151 Taxman 17 (Mag.), has held that
S. 112 is not only a beneficial provision, but is also mandatory provision and
if several transactions have taken place by way of sale of shares, the
assessee can avail of the benefit of indexation in a few transactions and
avail of 10% tax rate in the remaining transactions.



 


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