S. 2(22)(e) : Deemed dividend – Current account – Subsidiary company – In the course of business – Deeming provision is not attracted

When both the assessee company and its subsidiary company maintain current accounts and the subsidiary company advances on behalf of assessee company for the purchase of raw materials resulting into credit lying with the latter company and as these transactions were made during the course of business, the deeming provision u/s. 2(22)(e) is not attracted. (dated 15-10-2014)

CIT v. India Fruits Ltd. (2015) 274 CTR 67/ 228 Taxman 243 (Mag.)/ 114 DTR 109 (AP) (HC)

S. 2(47)(v) : Transfer –Development right – Possession of land was given – Capital gains – Held to be transfer. [S. 45]

Assessee entered into development agreement with builder and developer for transfer of development rights in respect of land. Developer took possession of that land and started development work. Said transaction was to be treated as transfer of right in property covered under section 2(47)(v). (ITA No. 336 of 2012 dated 10-7-2014)

Bertha T. Almeida v. ITO (2015) 53 taxmann.com 522 / 229 Taxman 159 (Bom.)(HC)

S. 4 : Charge of income-tax – Over- head expenses in construction of community centre – Minutes misread – Charges not received – Addition was deleted

Assessee had undertaken construction of project awarded to them by Government. Assessing Officer relied upon minutes of meeting to hold that assessee was entitled to overhead charges of 1.5 per cent not only in respect of cost of construction of community centre but also on cost of construction of residential flats and made addition. However, it was found that assessee never received 1.5 per cent as overhead expenses for construction of residential quarters and said minutes had been misread. Therefore stand of assessee that notes of meeting related to development of community centre complex and not to residential quarters was correct. Additions confirmed by the Tribunal was deleted. (ITA No. 339 of 2014 dated 27-10-2014)(AY. 2002-03)

Housing & Urban Development Corporation Ltd. v. Addl. CIT (2015) 54 taxmann.com 16 / 229 Taxman 157 (Delhi)(HC)

S. 9(1)(vi) : Income deemed to accrue or arise in India – Income deemed to accrue or arise in India – Royalty – Indian agent of foreign company cannot be regarded as “Dependent Agent Permanent Establishment” if agent has no power to conclude contracts. If the agent is remunerated at arm’s length basis, no further profit can be attributed to the foreign company. It is doubtful whether retrospective amendment to s. 9(i)(vi) can apply to the DTAA. However, question is left open – DTAA-India-Mauritius [Articles 5(4), 5(5)]

The assessee is a foreign company incorporated in Mauritius. It had filed its residency certificate and pointed out that its business is of telecasting of TV channels such as B4U Music, MCM etc. During the assessment year under consideration, its revenue from India consisted of collections from time slots given to advertisers from India. The details filed by the assessee revealed that there is a general permission granted by the Reserve Bank of India to act as advertisement collecting agents of the assessee. The permissions were granted to M/s. B4U Multimedia International Limited and M/s. B4U Broadband Limited. In the computation of income filed along with the return, the assessee claimed that as it did not have a permanent establishment in India, it is not liable to tax in India under Article 7 of the DTAA between India and Mauritius. The argument further was that the agents of the assessee have marked the ad-time slots of the channels broadcasted by the assessee for which they have received remuneration on arm’s length basis. Thus, in the light of the Central Board of Direct Taxes Circular No.23 of 1969, the income of the assessee is not taxable in India. The conditions of Circular 23 are fulfilled. Therefore, Explanation (a) to section 9(1)(i) of the IT Act will have no application. The Assessing Officer did not accept the contentions of the assessee. However, the Tribunal noted that paragraph 5 of Article 5 of the DTAA indicates that an enterprise of a contracting State shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business in that State through a broker, general commission agent, or any other agent of independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted exclusively or almost exclusively on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. The Tribunal held that the assessee carries out the entire activities from Mauritius and all the contracts were concluded in Mauritius. The only activity which is carried out in India is incidental or auxiliary/preparatory in nature which is carried out in a routine manner as per the direction of the principal without application of mind and hence B4U is not an dependent agent. Nearly 4.69% of the total income of B4U India is commission/service income received from the assessee company and, therefore, also it cannot be termed as an dependent agent. As far as the alternate contentions are concerned, it was held that the assessee and B4U India were dealing with each other on arm’s length basis. 15% fee is supported by Circular No.742. Thus it was held that no further profits should be taxed in the hands of the assessee. On appeal by the department to the High Court, HELD dismissing the appeal:

(i) As per the agreement between the assessee and B4U, B4U India is not a decision maker nor it has the authority to conclude contracts Further, the Revenue has not brought anything on record to prove that agent has such powers and from the agreement any such conclusion could not have been drawn. Barring this agreement, there is no material or evidence with the Assessing Officer to disprove the claim of the assessee that the agent has no power to conclude the contract. This finding is rendered on a complete reading of the agreement. The Indo-Mauritius DTAA requires that the first enterprise in the first mentioned State has and habitually exercised in that State an authority to conclude contracts in the name of the enterprise unless his activities are limited to the purchase of goods or merchandise for the enterprise is a condition which is not satisfied. Therefore, this is not a case of B4U India being an agent with an independent status.

(ii) The findings of the Supreme Court judgment in Morgan Stanley & Co. that there is no need for attribution of further profits to the permanent establishment of the foreign company where the transaction between the two is at arm’s length but this was only provided that the associate enterprise was remunerated at arm’s length basis taking into account all the risk taking functions of the multinational enterprise. Thus, assuming B4U India is a dependent agent of the assessee in India it has been remunerated at arm’s length price and, therefore, no profits can be attributed to the assessee. The argument that the assessee had not subjected itself to the transfer price regime and cannot derive assistance from this judgment is not correct because the requirement and in relation to computation of income from international transactions having regard to arm’s length price has been put in place in Chapter-X listing special provisions relating to avoidance of tax by substituting sections 92 to 92F by the Finance Act of 2001 with effect from 1st April, 2002. Therefore, such compliance has to be made with effect from assessment years 2002-03. In any event, we find that the Tribunal has rightly dealt with the alternate argument by referring to the Revenue Circular 742. There, 15% is taken to be the basis for the arm’s length price. Nothing contrary to the same having been brought on record by the Revenue. Similarly, the Division Bench judgment of this Court in the case of Set Satellite (Singapore) Pte. Ltd. v. Deputy Director of Income Tax (IT) & Anr. (2008) 307 ITR 265 would conclude this aspect.

(iii) The argument that the transponder charges being a consideration and process as clarified in terms of Explanation (6) to section 9 of the IT Act, the assessee was obliged to deduct tax at source under section 195 and having not deducted the same, there has to be a disallowance under section 40(a)(i) of the IT Act is not required to be answered. It was doubtful whether any payment which is stated to be made to a US based company by the assessee which is a Mauritius based company, can be brought to tax in terms of Indian tax laws. We are of the opinion that any wider question or controversy need not be addressed. We clarify that the arguments based on whether the payments made could be brought within the meaning of the word “process” and within the explanation can be raised and are kept open for being considered in an appropriate case. (ITA No. 1274 of 2013, dated 29-4-2015)(AY. 2001-02, 2004-05, 2005-06)

DIT v. B4U International Holding Limited (Bom.)(HC); www.itatonline.org

S. 9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services – Amount paid by Indian entities as “share of cost” of utilizing automated telecommunications system is not assessable as “fees for technical services” if there is no profit element in it – DTAA-India- Netherlands. [S. 44B, Article 13(4)]

The assessee had three agents working for them viz. Maersk Logistics India Limited (MLIL), Maersk India Private Limited (MIPL) and Safmarine India (Pvt) Limited (SIPL). These agents would book cargo and act as clearing agents for the assessee. In order to help them in this business, the assessee had procured and maintained a global telecommunication facility called MaerskNet which is a vertically integrated communication system. The agents would incur pro rata costs for using the said system and the agents share of the cost was, therefore, recovered from these three agents. According to the assessee, it was merely a system of cost sharing and hence the payments received by the assessee from MIPL, MLIL and SIPL were in the nature of reimbursement of expenses. However, the AO and CIT(A) held that the amounts paid by these three agents to the assessee is consideration/fees for technical services rendered by the assessee and taxable in India under Article 13(4) of the DTAA and assessed tax at 20% under section 115A of the Income-tax Act, 1961. The assessee submitted before the Tribunal that without this system, it was not possible to conduct international shipping business efficiently and in having the system set up, the assessee had incurred costs. A share of this cost would have to be borne by each of the agents which utilise the system and, accordingly, these pro rata costs relatable to each of the agents was billed to the agents and these amounts were thus paid. It was merely a “charging back” to the agent, proportionate costs of the global shipping communications system and did not, in any manner, amount to rendering of any technical services. The Tribunal accepted the contention of the assessee. On appeal by the department to the High Court HELD dismissing the appeal:

(i) There is no finding by the Assessing Officer or the Commissioner that there was any profit element involved in the payments received by the assessee from its Indian agents. On the other hand, having considered the various submissions, we are of the view that no technical services as contemplated by the Act have been rendered in the instant case;

(ii) In Director of Income Tax (International Taxation) v. Safmarine Container Lines NV (2014) 209 ITR 366, this Court had occasion to consider the effect of the Double Taxation Avoidance Agreement between India and Belgium in which the questions involved were whether the income from inland transport of cargo within India was covered by Article 8(2)(b)(ii) of the Tax Treaty between India and Belgium. This Court, while considering the said issue found that the assessee was not liable to tax by virtue of DTAA in that case. Moreover, in the present case, there was no occasion for the Tribunal to come to any different view. In our view, the Tribunal has correctly observed that utilization of the Maersk Net Communication system was an automated software based communication system which did not require the assessee to render any technical services. It was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business. The Maersk Net used by the agents of the assessee entailed certain costs reimbursement to the assessee. It was part of the shipping business and could not be captured under any other provisions of the Income-tax Act except under DTAA;

(iii) In Commissioner of Income-tax v. Siemens Aktiongeselleschaft reported in [2009] 310 ITR 320 (Bom) this Court has held that once there is a treaty between two sovereign nations, though it is open to a sovereign Legislature to amend its laws, a DTAA entered into by the Government, in exercise of the powers conferred by section 90(1) of the Act must be honoured. The provisions of section 9 Income-tax Act were applicable and the provisions of DTAA, if more beneficial than the I.T. Act, the provisions of DTAA would prevail. Thus, in the instant case also, it is not possible for the revenue to unilaterally decide contrary to the provisions of the DTAA.(ITA No. 1306 of 2013, dated 29-4-2015) (AYs. 2001-02 to 2003-04)

DIT v. A. P. Moller Maersk A/S (Bom)(HC); www.itatonline.org

S. 10(23C)(vi) : Exemption – Mandatory object to perform education – Entitle exemption

When the object of the Trust to provide education is fulfilled, rendering other object and earning profit out of the said object does not prevent the trust to claim exemption-matter remanded for reconsideration. (dated 6-1-2015).(AY 2008-09)

Allahabad Young Men’s Christain Aassociation v. CCIT (2015) 371 ITR 23/ 274 CTR 283/ 229 Taxman 279/ 114 DTR 129(All)(HC)

S. 10(23C)(vi) : Exemption – Approving authority should not merely see the objects specified in the instrument/deed, but also the activities of the Trust and how the funds are employed for the purpose of granting approval.[S.12A]

The Trust was registered as a public charitable trust u/s. 12A in 1976 with many objects such as relief of the poor, education, medical relief, providing scholarships, establishing hostels, orphanages, etc. and runs a polytechnic college recognized by the Govt. of Tamil Nadu. On making an application for the renewal of the approval, the Chief CIT rejected the assessee’s application stating that the Trust does not exist solely for the purpose of education.

On appeal to the Court, it held that merely because there are other objectives for the Trust, other than education, that would not disentitle the Trust to exemption under section 10 (23C) (vi) of the Act. Furthermore, while considering the claim for exemption, the substance of the claim would be more relevant than the form. In other words, the authority should not be solely guided by the objects set out in various clauses in the Instrument of Trust (Deed of Trust). Rather, the authority should be guided by the activities of the Trust, as to how the funds are employed, since the exemption sought is under Chapter III of the Act, which deals with incomes which do not form part of the total income. Accordingly, the High Court allowed the writ petition and remanded back the matter to the first respondent for fresh consideration.

Tamil Nadu Kalvi Kapu Arakkattalai v. CCIT (2015) 115 DTR 277 (Mad.)(HC)

S. 10B : Export Oriented Undertakings – Assessee – When the assessee has the required infrastructure in place, the business can be treated as set-up and accordingly the expenses incurred between the date of set-up and the date of commencement can be taken on revenue account

The assessee was in the business of voice activation and local number portability, i.e. BPO services, which were made available to M/s. Omniglobe International, USA – the holding company. The assessee was incorporated on 19-3-2004 and claimed deduction under section 10B, of the Income-tax Act for a period commencing from 1-4-2004 to 31-5-2004, contending that it had obtained approval as a 100% EOU under the STPI scheme and had commenced operations from 1-4-2004. The AO held that the assessee had commenced its operations only from 1-6-2004, i.e. the date on which the assessee entered into the “service agreement” with its parent company and, therefore, the expenditure incurred between 1-4-2004 and 31-5-2004 should be capitalised. The Commissioner (Appeals) and Tribunal upheld the order of the Tribunal.

On an appeal, the Court keeping in view the nature of business activity of the assessee held that training, imparting skills to employees recruited, or testing their performance cannot be treated as a pre-setup expenditure. The moment employees were recruited and enrolled, and infrastructure to use their service was in place, setup was complete. It was indicative of the fact that business operations had been set up. In the BPO industry, training of employees is an important, essential and integral element of the business activities and when the assessee has the infrastructure in place, the business can be treated as set-up. Accordingly, the High Court reversed the order of the lower authorities. Dated 11-8-2014),

Omniglobe Information Tech India Private Limited v. CIT (2015) 115 DTR 265 (Delhi) (HC).

S. 10B : Export Oriented Undertaking – Loss suffered in s. 10A/10B units cannot be set-off against the profits of taxable units. [Ss.2(45), 10A, 70, 71, 72, 80A, 80AB]

The High Court had to consider whether the loss suffered by the assessee in a unit entitled for exemption under sections 10A and 10B of the Income-tax Act, 1961, can be set off against income from any other unit not eligible for such exemption after the amendment by the Finance Act, 2000 w.e.f. 1-4-2001 which converted the said sections from an “exemption” provision into a “deduction” provision. HELD by the High Court:

(i) Parliament was aware of the various restricting and limiting provisions like section 80A and section 80AB which was in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates that the intention of Parliament is to be regarded as an exemption and not a deduction. The Act of Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament, despite being conversant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III;

(ii) There is a difference of opinion between the Karnataka and Bombay High Courts as to whether section 10A or section 10B are in the nature of exempt income or deductions. However, there is agreement in both the opinions as to the manner of computation and that such profits have to be eliminated at the first stage itself, that is, as soon as they are computed, suggesting that it is an exemption provision. It was held that the eligible profits are not to be subjected to the adjustment under section 72 of the Act, and the brought forward loss from the unit eligible for the relief under section 10B cannot be adjusted against the profits from the other three eligible units, which in effect reiterates the position that the loss does not enter the field of taxation just as the profits also do not enter the field. This, with respect, lends support more to the view that section 10A and section 10B are in the nature of exemption provisions, rather than provisions for deduction;

(iii) Even if section 10A/Section 10B are treated as exemption provisions, Section 80A(4) cannot defeat that interpretation. The object of Section 80-A(4) is to ensure that double benefit does not result to an assessee in respect of the same income, once under section 10A or section 10B or under any of the provisions of Chapter VIA and again under any other provision of the Act. Even if section 10A or section 10B is construed as exemption provisions, it is still possible to invoke the sub-section and ensure that the assessee does not obtain a deduction in respect of the exempted income under any other provision of the Act. The only object of the sub-section is to ensure that there is no double benefit arising to the assessee in respect of the same income.

(iv) Consequently, the tax-exempt income of the assessee, eligible under section 10-B cannot be set off against the losses from tax-liable income. (ITA No. 386/2013, dt. 13-3-2015)

CIT v. Kei Industries Ltd. (Delhi)(HC); www.itatonline.org

S. 11 : Property held for charitable purposes – Exempt income – In computing the income of charitable institutions income exempt u/s 10 has to be excluded – The requirement in s. 11 with regard to application of income for charitable purposes does not apply to income exempt u/s. 10 [S.2(45), 10(33), 10(38)]

The High Court had to consider whether an assessee enjoying exemption u/s. 11 could claim that the income exempt u/ss. 10(33) and 10(38) had to be excluded while computing the application of income for charitable or religious purpose. HELD by the High Court:

There is nothing in the language of sections 10 or 11 which says that what is provided by section 10 or dealt with is not to be taken into consideration or omitted from the purview of section 11. If we accept the argument of the Revenue, the same would amount to reading into the provisions something which is expressly not there. In such circumstances, the Tribunal was right in its conclusion that the income which in this case the assessee trust has not included by virtue of section 10, then, that cannot be considered under section 11. (ITA No. 1310 of 2013, dated 1-4-2015)(AY.2007-08)

DIT (E) v. Jasubhai Foundation (Bom.) (HC) ; www.itatonline. org

S. 12A : Registration – Trusts or institutions – Merely because some amendments were made in the trust deed, denial of registration was held to be not justified. [S. 2(15), 11]

Assessee-trust was constituted with an intention to carry out charitable activity of imparting education. Entire objects of trust were clearly set out. Number of classes to be conducted by trust were also mentioned in trust deed 80 persons constituted teaching and non-teaching staff in said institution. Merely because some amendments were made in trust deed, it could not be a ground to deny registration as charitable institution particularly when objects of trust were fulfilled. (ITA No. 786 of 2008 dt. 16-9-2014)

CIT v. Annapoorneswari Trust (2015) 53 taxmann.com 527 / 229 Taxman 202 (Kar.)(HC)

S. 14A: Disallowance of expenditure – Exempt income – In computing the “average value of investment”, only the investments yielding non-taxable income have to be considered and not all investments. [R.8D]

The assessee reported tax exempt income of Rs. 18,26,360. The AO added back Rs. 19,96,242 under section 14A. While doing so, the AO applied Rule 8D by taking into consideration the total quantum of interest other than that invested, under section 14A in terms of Rule 8D, and arrived at the said figure after multiplying it with the result of the average value of investments and over average value of assets derived by him. The CIT(A) went into the record and found that the amount of investment attributable to dividend as on 31-3-2008 was Rs. 3,53,26,800, which constituted less than 1% of the total scheduled funds. He however accepted the basis of calculation applied by the AO and directed a disallowance of .05% of the amount determined to be average investment. The ITAT to which the revenue appealed, restored the AO’s determination holding it to be a true calculation in terms of Rule 8D. On appeal by the assessee HELD by the High Court:

The first condition for application of section 14A was fulfilled as the AO expressed the opinion that a disallowance was warranted. In such eventuality the AO is required by the mandate of Rule 8D to follow Rule 8D(2). Clauses 1, 2 and 3 detail the methodology to be adopted. The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT (Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and thereafter arrive at the exact disallowance of .05% Finding of Tribunal and lower authorities were set aside. Appeal of assessee was allowed. (ITA No. 615/2014, dt. 24-3-2015) (AY. 2008-09)

ACB India Ltd. v. ACIT (Delhi)(HC); www.itatonline. org

S. 28(i) : Business income – Chain management fees – Income from other sources – Service income earned by the assessee for undertaking a number of activities in accordance with the terms of the agreement constitutes an income under the head “Business and Profession” and not under “Income from Other Sources” [S.56]

The main source of the assessee’s income is service income and Supply Chain Management fees. This service income is governed by an agreement entered into by the assessee with M/s. Tricon Restaurant International Inc. In terms of the agreement, the assessee was under an obligation to provide assistance to existing and future licensees in India, Mauritius, Pakistan, Sri Lanka and such other areas upon which the parties may agree from time to time. The assessee offered the service income to tax as business income.

The AO treated this service income as “income from other sources” instead of “business and profession”. The Commissioner (Appeals) and Tribunal reversed the order of the AO.

On an appeal, the High Court held that the earning of service income cannot be classified under any other head but business income since all the essential parameters of classifying the said activity as business, for instance the assessee has been providing such services for the past several years and to date they are also continued, are fulfilled. Furthermore, it is not in dispute that the entire expenditure debited in the P&L account has been accepted by the AO as business expenditure. Now, if expenditure is held to be business expenditure, service income computed on the basis of 110% of such expenditure cannot be anything but business income. Accordingly, the High Court upheld the order of the Tribunal.(dated 30-1-2015)

CIT v. Yum Restaurants (I) Pvt. Ltd. (2015) 115 DTR 129 (Delhi HC)

S. 28(i) : Business income – Cutting of trees of spontaneous growth in tea garden and using wood for own consumption – Not assessable as business income. [S.143(3)]

Business of assessee was growing and producing tea and there was no intention to generate revenue from sale of trees, grown in tea garden. Tribunal concluded that cutting of trees, leaving stump as required by condition imposed by forest department was not for generating income out of trees, but for felling of wood for own consumption. Tribunal re-affirmed view that it was not a case of business income. No question of law, arose for consideration in instant appeal. (T. C. A. No. 728 of 2014 dated 8-9-2014)

CIT v. Periakaramalai Tea & Produce Co. Ltd. (2015) 54 taxmann.com 29 / 229 Taxman 200 (Mad.)(HC)

S. 28(i) : Business income – Income from house property – Commercial activities – Assessable as business income.[S. 22]

Where assessee was in business of taking land, putting up commercial buildings thereon and letting-out such building with all furniture, notwithstanding fact that assessee had constructed building and also provided other facilities and there were two separate rental deeds, for two types of activities, income received by assessee would not fall within heading of ‘Income from House Property’. Income assessable as business income. (ITA No. 8 of 2009 dated 14-10-2014)(AY. 2002-03)

Black Pearl Hotels (P.) Ltd. v. Dy. CIT (2015) 54 taxmann.com 20 / 229 Taxman 155 (Kar.)(HC)

S. 28(i) : Business loss – Loss of goods in transit – Allowable as business loss

Where assessee-company incurred trading loss due to loss of goods in transit in normal course of business and had written off said loss in its books of account, assessee was eligible for deduction of said loss.(ITA Nos. 861 to 863 of 2008 dated 10-10-2014)(AY. 1996-97 to 1998-99)

CIT v. Pyramid Timber Associates (P.) Ltd. (2015) 54 taxmann.com 3 / 229 Taxman 174 (Kar.)(HC)

S. 36(1)(iii) : Interest on borrowed capital – Sufficient capital and reserve – Advance to sister concern on low rate – No disallowance can be made

When there was sufficient capital and reserve and surplus at the assessee’s disposal, advance to sister concern on a low interest or without interest having business connection does not prove that assessee has diverted borrowed funds as interest free loan.(AY.1992-93)

CIT v. Vijay Solvex Ltd. (2015) 274 CTR 384 (Raj)(HC)

S. 36(1)(iii) : Interest on borrowed capital – Shares and debentures for the purpose of business – Interest was held to be allowable. [S.56]

The assessee firm was engaged in the business of advancing loans and earning income from hire purchase financing, besides investment in shares and debentures. It borrowed funds and invested the same in shares and debentures. It treated the interest arising out of such investments as income from business and claimed interest on borrowed capital under section 36(1)(iii).The AO held that the interest income had to be assessed under the head “other sources” and not under the head “business income” and therefore disallowed the interest on borrowed capital under section 36(1)(iii). On appeal the disallowance was deleted by CIT(A) and Tribunal. On appeal by revenue dismissing the appeal the Court held that where borrowed capital was invested in shares and debentures for purpose of business, interest paid thereupon would be allowed as deduction. (T. C. (A) Nos. 2657 of 2006, 2017 & 1018 of 2007 dt. 17-9-2014)(AY. 1992-93 to 1994-95)

CIT v. Shriram Investments (Firm) (2015) 54 taxmann.com 15 / 229 Taxman 179 (Mad.)(HC)

S. 36(1)(vii) : Bad debt – For claiming bad debt it was not
necessary for assessee to close individual account of each of its
debtors in its books

Assessee was a co-operative bank and claimed deduction in respect of bad debt. Assessing Officer denied deduction on ground that assessee was trying to recover amount treated as bad debts. Where assessee had written off bad debt in its books of account and simultaneously reduced corresponding amount from loans and advances to debtors, assessee would be entitled to deduction under section 36(1)(vii); it was not necessary for assessee to close individual account of each of its debtors in its books. (TA No. 549 of 2014 dated 30-6-2014)(AY. 2007-08)

CIT v. Newanagar Co-operative Bank Ltd. (2015) 54 taxmann.com 28 / 229 Taxman 201 (Guj.)(HC)

S. 37(1) : Business expenditure –Subsidiary – New line of business – No nexus with business carried on by assessee – Expenditure was held to be not allowable

The assessee was a public limited company carrying on the business of manufacture and sale of beer and liquor. The assessee-company in furtherance of its business started the business of establishment of resorts by incorporating a subsidiary company. The main purpose of the said subsidiary was to put up resorts at important tourist destinations and since the date of incorporation, expenses like employee cost and other establishment costs were being incurred regularly. However, the subsidiary company had not done any business right from the date of incorporation and was also not intending to do any business or commercial activity as laid down in the main objects of its memorandum of association. The company had become defunct. Therefore, a request was made to strike the name subsidiary company under section 560 of the Companies Act. Such a request had been accepted by the Assistant Registrar of Companies. During the financial year ending on 31-3-2001, the assessee made a claim of Rs. 1.42 crore as bad debts written off, including the amount of Rs. 1.28 crore which was given as a loan to the subsidiary company.

The Assessing Officer held that as during enquiry, the assessee was unable to substantiate the said claim and since such expenditure did not relate to any of the existing activities of the assessee-company, it was not allowable.

The assessee thus gave up and withdrew the said claim under section 36(1)(vii) and put up an alternative claim under section 37 contending that it is an expenditure expended wholly and exclusively for the purpose of the business. The Expenditure was disallowed by the AO which was confirmed by the Tribunal. On appeal, dismissing the appeal of assessee the Court held that, where-assessee company had lent money to its subsidiary, for purpose of setting up a new line of business, it could not be said that all money lent by assessee to subsidiary company was an expenditure laid down and expended wholly and exclusively for purpose of business of assessee. Where such expenditure had no nexus with business carried on by assessee, same was not allowable. (ITA No. 879 of 2007 dated 20-6-2014)(AY. 2001-02)

United Breweries Ltd. v. ACIT (2015) 54 taxmann.com 8 / 229 Taxman 113 (Kar.)(HC)

S. 37(1) : Business expenditure – Debenture issue expenditure –Held to be revenue in nature

Expenses incurred in issue of debentures could be allowed as revenue expenditure. (T. A. No. 314 of 2002 dated 3-12-2014)

ACIT v. VXL India Ltd. (2015) 54 taxmann.com 103/ 229 Taxman 199 (Guj.)(HC)

S.37(1) : Business expenditure – Capital or revenue – Expenditure on an abandoned capital project is revenue in nature & can be claimed as deduction in year of abandoning the project

(i) Expenditure made for construction/acquisition of new facility subsequently abandoned at the work-in-progress stage is allowable as incurred wholly or exclusively for the purpose of assessee’s business. It is revenue expenditure as it does not result in the acquisition of an asset or an advantage of an enduring nature;

(ii) The expenditure has to be claimed in the year in which the decision is taken to abandon the project. There would have been no occasion to claim the deduction if the work-in-progress had completed its course. Because the project was abandoned the work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. It can therefore be safely concluded that the expenditure arose in the relevant year. (ITA No. 265 of 2009, dt. 23-3-2015)(AY. 2002-03)

Binani Cement Ltd. v. CIT (Cal)(HC); www.itatonline.org

S. 44AD : Civil construction – Best judgment assessment – Though gross receipts of assessee were in excess of Rs. 40 lakh – Estimation at 8% was held to be justified. [S.144]

Assessee filed his return declaring income at rate of 8 per cent on gross receipts. Assessing Officer allowed expenses to extent of 75 per cent and computed gross profit at rate of 25 per cent. Tribunal, however, assessed income at rate of 8 per cent on gross receipts. Since Assessing Officer had computed gross profit at rate of 25 per cent without any justification, Tribunal was justified in adopting gross profit rate of 8 per cent as mentioned in section 44AD even though gross receipts of assessee were in excess of Rs. 40 lakh. (ITA No. 416 of 2014 dated 30-7-2014)

CIT v. Lovish Oberoi (2015) 54 taxmann.com 23 / 229 Taxman 197 (Delhi)(HC)

S. 45 : Capital gains – Transfer – Capital gains are levied in the year in which the possession of the asset and all other rights are transferred and not in the year in which the title of the asset gets transferred. [S. 2(47), Transfer of Property Act, 1953 S. 53A]

The assessee entered into an agreement with the builder on 24-6-1999 to develop his land. After obtaining the map, the assessee entered into a supplementary agreement in which the possession of the land and all other rights excluding title were transferred. On 30-4-2005, the project was completed and the assessee handed over the title to the builder.

The AO held that since the title of land was handed over in FY 2005-06, the assessee was liable to pay capital gain in the relevant assessment year only. The CIT(A) upheld the order of the AO. On further appeal, the Tribunal reversed the order of the CIT(A). On the Revenue’s further appeal, the Court held that under the terms and conditions of the agreement dated 24-6-1999, the transfer was effective from that day and not in AY 2006-07 and therefore confirmed the order passed by the Tribunal. (ITA Nos. 467 & 242 of 2010 dated 18-12-2014)

CIT v. Ziauddin Ahmad (2015) 115 DTR 7 /229 Taxman 281 (All)(HC)

S. 45 : Capital gains – Part consideration was received by partners – Partner admitting receipt of consideration of Rs. 65 lakhs the same is assessable in the assessment of firm.[S.48]

Assessee-firm sold joint property and declared sale consideration of Rs. 45 lakhs in sale deed. However, it was found that cheque was issued for Rs. 50 lakhs. Further, prior to sale and subsequent to sale, cheques had been issued to partners of assessees-firm. There was no material on record to show that it was paid back. One of partners admitted receipt of Rs. 65 lakh. Further, market value of said property as on date of sale was Rs. 62.38 lakhs. Sale consideration was to be considered as Rs. 65 lakhs. (ITA Nos. 67 & 68 of 2008 dt. 3-6-2014)(AY. 2001-02)

Sri Saleswara Industries Mahajanahalli v. ITO (2015) 54 taxmann.com 27 / 229 Taxman 195 (Kar.)(HC)

S. 68 : Cash credits – Loans from minors – Gift received from uncle – Addition was held to be justified

Where assessee claimed to have taken loans from his two minor sons and source of loan was stated to be gift received by assessee’s sons from their uncle i.e., brother of assessee, since assessee’s brother categorically stated that he had not given any gifts to anybody, impugned addition made by Assessing Officer in respect of loan amount was to be confirmed. (ITA No. 512 of 2005 dated 7-8-2014)(AY. 2001-02)

CIT v. Virendra Behari Agrawal (2015) 53 taxmann.com 526 / 229 Taxman 193 (All.)(HC)

S. 68 : Cash credits – Transaction of purchase and sale of shares was held to be bogus – Addition was held to be justified

Once transaction of purchase and sale of shares was found to be bogus then sale proceeds had to be added as income of assessee under section 68 as money received on basis of bogus transaction had been credited by assessee in his books of account which remained unexplained. (ITA No. 196 of 2014 dated 16-9-2014)(AY. 2005-06)

Chandan Gupta v. CIT (2015) 54 taxmann.com 10 / 229 Taxman 173 (P&H)(HC)

S. 68 : Cash credits – Share capital – Commission on account entry taken – Addition was confirmed – Assessment proceedings under the Income-tax Act are not a game of hide and seek. If AO does not conduct proper inquiry, the obligation to do so is on the CIT(A) & ITAT [S. 131, 143(3)]

(i) Assessment proceedings under the Income-tax Act are not a game of hide and seek. The inquiry in the wake of a notice under section 148 is not an empty formality. It must be effective and with a sense of purpose. There is an elaborate procedure set out which requires scrupulous adherence and followed up on. In the hierarchy of the authorities, the AO is placed at the bottom rung. The two layers of appeals, before the matter engages the appellate jurisdiction of this court, are authorities vested with the jurisdiction, power and obligation to reach appropriate findings on facts. Noticeably, it is only the appeal to the High Court, under section 260-A, which is restricted to consideration of “substantial question of law”, if any arising. As would be seen from the discussion that follows, the obligation to make proper inquiry and reach finding on facts does not end with the AO. This obligation moves upwards to CIT (Appeals), and also ITAT, should it come to their notice that there has been default in such respect on the part of the AO. In such event, it is they who are duty bound to either themselves properly inquire or cause such inquiry to be completed. If this were not to be done, the power under Section 148 would be rendered prone to abuse.

(ii) The authority to bring to tax unaccounted money by exercising the power given to the AO under section 68 is of great importance. It is expected that the AO would resort to this provision with all requisite circumspection. Since the provision is generally invoked, as has been done in the case at hand, by recourse to the procedure of notice under section 148 upon satisfaction under section 147 that the income (purportedly represented by the unexplained sums found credited in the books of account), within the mischief of section 68, it is inherent that the explanation of the assessee respecting such credit entries would be called for only with circumspection and solely upon some concrete material coming up to support the tentative impression about it being suspect.

(iii) Thus, when the AO sets about seeking explanation for the unaccounted credit entries in the books of account of the assessee in terms of section 68, it is legitimately expected that the exercise would be taken to the logical end, in all fairness taking into account the material submitted by the assessee in support of his assertion that the person making the payment is real, and not non-existent, and that such other person was actually the source of the money forming the subject matter of the transaction as indeed that the transaction is real and genuine, same as it is represented to be. Having embarked upon such exercise, the AO is not expected to short-shrift the inquiry or ignore the material submitted by the assessee.

(iv) The provision of appeal, before the CIT (Appeals) and then before the ITAT, is made more as a check on the abuse of power and authority by the AO. Whilst it is true that it is the obligation of the AO to conduct proper scrutiny of the material, given the fact that the two appellate authorities above are also forums for fact-finding, in the event of AO failing to discharge his functions properly, the obligation to conduct proper inquiry on facts would naturally shift to the door of the said appellate authority.

(v) The AO here may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion. But CIT (Appeals), having noticed want of proper inquiry, could not have closed the chapter simply by allowing the appeal and deleting the additions made. It was also the obligation of the First Appellate Authority, as indeed of ITAT, to have ensured that effective inquiry was carried out, particularly in the face of the allegations of the Revenue that the account statements reveal a uniform pattern of cash deposits of equal amounts in the respective accounts preceding the transactions in question. This necessitated a detailed scrutiny of the material submitted by the assessee in response to the notice under section 148 issued by the AO, as also the material submitted at the stage of appeals, if deemed proper by way of making or causing to be made a “further inquiry” in exercise of the power under section 250(4). This approach not having been adopted, the impugned order of ITAT, and consequently that of CIT (Appeals), cannot be approved or upheld. Appeal of revenue was allowed, however the issue of reassessment was remanded to the CIT(A). (ITA No. 525/2014, dt. 11-3-2015) (AY. 2004-05)

CIT v. Jansampark Advertising & Marketing (P) Ltd. (Delhi) (HC); www.itatonline.org

S. 69 : Unexplained investments – Assignment of right – No documentary evidence was filed – Addition was held to be justified

Assessee an exporter was issued import licence under which it could import goods valued at Rs. 5 lakhs or it could assign same to others. Assessee claimed that aforesaid licence was assigned to UET, a partnership firm on receipt of a premium. However, since assessee failed to file necessary documentation before Chief Controller, Assessing Officer opined that assessee had sold imported goods in open market and earned unaccounted income and, hence, assessment was reopened. Where UET had not imported goods in question under any invoices and had in categorical terms, denied any import whatsoever, order of Tribunal sustaining additions in hands of assessee was justified. (ITA No. 56 of 2012 dated 13-8-2014)(AY. 1982-83)

Dalmia Cement (Bharat) Ltd. v. CIT (2015) 54 taxmann.com 9 / 229 Taxman 170 (Delhi)(HC)

S. 69B : Amounts of investments not fully disclosed in books of account – Addition was held to be justified.[S.158B]

In the search proceedings it was found that assessee-company advanced Rs. 17 lakh to its sister concern but said amount was not shown in balance sheet. Investment account of assessee’s sister concern showed a different amount of Rs. 7.5 lakh. Advancing of Rs. 17 lakh came to light only from bank account of sister concern and material found during search and post search enquiry in block assessment, said advance was to be treated as unexplained investment. (T. A. No. 52 of 2007 dated 5-11-2014)

Herald Publications (P.) Ltd. v. CIT (2015) 274 CTR 102 / 53 taxmann.com 31 / 229 Taxman 103 (Bom.)(HC)

S. 80-IA : Industrial undertakings – Number of workers – Sweeper, peons, manager, clerk do not participate in manufacturing process, they need to be excluded from number of employees to find out eligibility. [S.158BC]

Since sweeper, peons, manager, clerk do not participate in manufacturing process, they need to be excluded from number of employees to find out eligibility in terms of section 80-IA.Denial of deduction was held to be justified. (T. A. No. 52 of 2007 dated 5-11-2014)

Herald Publications (P.) Ltd. v. CIT (2015) 274 CTR 102 / 53 taxmann.com 31 / 229 Taxman 103 (Bom.)(HC)

S. 80-IA : Industrial undertakings – Lease agreement with port authorities – Entitled to deduction even though assets were not transferred to Government – Circular was held to be applicable in respect of initial assessment year 2000-01 – Eligible deduction

Assessee was an inland storage facility provider. As per lease agreement with Port Trust Authorities, Port Trust could repossess entire infrastructure facility and assessee had an obligation to transfer facility on receiving such compensation as may be determined by Authorities. Assessee claimed deduction under section 80-IA opting 2000-01 as initial assessment year. Assessing Officer accepted claim of assessee for assessment year 2000-01. However, he disallowed claim for current years on ground that assessee did not transfer assets to Government as required under section 80-IA(4). However Circular No.793 dated 23-6-2000 which stated that asset had to be transferred was applicable from assessment year 2001-02 onwards. Thereafter, CBDT issued Circular No. 10, dated 16-12-2005, withdrawing condition of transfer of assets to government or local authority. Assessee would be entitled for deduction under section 80-IA for current years also. (T. C. (A) Nos. 888 & 889 of 2013 dated 21-7-2014)

CIT v. Suraj Agro Infrastructure (India) (P.) Ltd. (2015) 54 taxmann.com 26 / 229 Taxman 191 (Mad.)(HC)

S. 80P : Co-operative societies –Once notification is repealed it cannot stand in the eye of law – Notification issued under 1922 Act was repealed, matter was remanded.[Ss.263, 279]

Assessee-co-operative society was engaged in business of supplying fertilizer, crude oil, sugar, oil seeds etc. to members and non-members. Assessee claimed exemption on entire income under Notification No. SRO/992 dated 22-12-1950. As said notification was of Income-tax Act, 1922 which was repealed by Income-tax Act, 1961, income was not entirely exempt and issue was to be decided according to section 80P. Matter remanded. (ITR No. 16 of 2003 dt. 2-12-2014)

CIT v. Shri Gopal Gram Seva Sahakari Mandli Ltd. (2015) 54 taxmann.com 132 / 229 Taxman 166 (Guj.)(HC)

S. 80-IB(9) : Industrial undertaking – Commercial production of natural gas – The Explanation to section 80-IB(9) inserted by Finance (No. 2) Act 2009 w.e.f. 1-4-2000 is ultra vires to Article 14 of the Constitution of India.[S.80-IA, Constitution of India, Art 14]

The Gujarat High Court had to consider the following issues:

(i) Whether the insertion of the Explanation to section 80-IB(9) of the Income-tax Act, 1961 by Finance (No.2) Act, 2009 with retrospective effect from 1-4-2000 explaining the meaning of the term “undertaking” is unconstitutional and ultra vires to Article 14 of the Constitution of India?

(ii) Whether the insertion of sub-clause (iv) in section 80-IB(9) of the Income-tax Act, 1961, by Finance (No.2) Act, 2009 conferring the benefit of the deduction under this section to undertakings engaged in commercial production of natural gas in blocks licensed under VIIIth round of bidding provided such commercial production commenced on or after 1-4-2009 results in denial of the benefit of deduction under 80-IB(9) to undertakings engaged in commercial production of natural gas under contracts entered into prior to NELP VIII on an interpretation thereof that the term “mineral oil” would not include natural gas since the benefit was available only to undertakings engaged in commercial production of “mineral oil” rendered the newly added sub-clause (iv) unconstitutional and ultra vires Article 14 of the Constitution of India?

(iii) Whether the Petitioner has any accrued or vested right?

HELD by the High Court:

In this backdrop, one has to now consider whether the insertion of Explanation by Finance (No.2) Act, 2009 with retrospective application from 1-4-2000 would be valid and sustainable in law. The above analysis would indicate that though the expression “Undertaking” has not been defined under the Act, it has acquired a well defined meaning through consistent judicial decisions commencing from Textile Machinery case. The expression ‘Undertaking’ is used in various provisions of the Act, while conferring the benefits under different schemes. It is clear that commercial production of mineral oil happens from every Development Area/Field consisting of a well or cluster of wells with a Development Plan being approved for every Development Area/Field thereby making every Development Area/Field as an independent economic unit. Every Development Area/Field is thus an “Undertaking”. The Petitioner placed on record the decision of the ITAT rendered in their own case for the Assessment Year 2001-02. The Respondent contended that this matter is under challenge in appeals before the High Court which are pending. This decision, however, has not been stayed. Looking at the whole conspectus, it is clear that the term “Undertaking” has acquired a consistent statutory meaning. It is true that legislature is entitled to depart from this meaning and can define it the way it chooses to do so. While doing so, it has to resort to the process known to and approved by law. The explanation introduced by Finance Act (No.2) of 2009 is a departure from the settled interpretative meaning given by Courts to the expression ‘Undertaking”. Any departure, therefore, has to be through the process of validation which has to be notwithstanding any law or decision. The Explanation is not a non-obstante clause, notwithstanding any law or decision, it proceeds under the presumption that an existing ambiguity is sought to be clarified when, in reality, there is none. In fact, the usage of the expression “single” before the term ‘undertaking’ in the explanation evidences the legal understanding that the undertaking is not synonymous to assessee and an assessee can have more than one undertaking doing the same or distinct business as long as they are independent standalone units. When, clearly there can be separate commercial discoveries for every Development Area/Field which may consists of one well or cluster of wells which makes each Development Area an “Undertaking” and this is as per the Production Sharing Contract (PSC) entered into between the Petitioner and the Central Government, there does not exist any ambiguity under the Act.(SCA. No. 13134 of 2009 and SCA No. 10903 of 2009, dt. 26-3-2015)

Niko Resources Limited v. UOI (Guj.)(HC); www.itatonline.org

S. 92C : Transfer pricing – Shares at premium – Income deemed to accrue or arise in India – In view of order passed in case of Vodafone India Services (P.) Ltd. v. UOI [2014] 50 taxmann.com 300 (Bom.) shortfall in amounts received on issue of shares to non-resident AEs when compared to that receivable on basis of ALP, along with interest on above shortfall could not be brought to tax.[S.9(1)(i)]

The assessee had issued shares to its non-resident Associated Enterprise (AE) of the face value of Rs. 10 at the premium of Rs. 120 each per share.

The Assessing Officer referred the transaction declared in Form 3CEB to the TPO in terms of section 92CA(1) of the Act.

Before the TPO, the assessee contended that the issue of equity shares being on Capital Account does not give rise to any income. However, the TPO negatived the assessee’s contention.

Further the TPO held that the Arm’s Length Price (ALP) of the equity shares had to be Rs. 2,315 per share as against Rs. 130 per share declared by the petitioner. Consequently, a Transfer Pricing Adjustment on account of undervaluation of shares was determined of Rs. 168.05 crores and deemed interest/compensation on non-receipt of the above amount at Rs. 2.79 crores, aggregating to Rs. 170.82 crores. In view of order passed in case of Vodafone India Services (P.) Ltd. v. UOI [2014] 50 taxmann.com 300 (Bom.) shortfall in amounts received on issue of shares to non-resident AEs when compared to that receivable on basis of ALP, along with interest on above shortfall could not be brought to tax. (W. P. No. 1399 of 2014 dated 19-11-2014)

Essar Projects (India) Ltd. v. UOI (2015) 54 taxmann.com 115 / 229 Taxman 162 (Bom.)(HC)

S. 92C : Transfer pricing – Uncontrolled Price method (CUP) – London Interbank Offered Rate (LIBOR) – Euro Interbank Offered Rate (EURIBOR) – Arm’s length interest – Interest received on loan – Transfer pricing determination is not primarily undertaken to re-write the character and nature of the transaction – Arm’s length interest applied by the TPO at 14% p.a. as against 4% interest received by the assessee was deleted by the Tribunal was affirmed – Appeal of revenue was dismissed.[S.92CA]

The assessee advanced a loan to its wholly-owned subsidiary in the USA. The assessee selected the Comparable Uncontrolled Price method (CUP) to benchmark the interest received on the loan and claimed that the interest received at the rate of 4% was comparable with the export packing credit rate obtained from independent banks in India. The TPO held that the arm‘s length interest rate should be taken as 14% p.a. This was reduced to 12.20% by the DRP by adopting the Prime Lending Rate fixed by the Reserve Bank of India. On appeal by the assessee, the Tribunal relied on Siva Industries and Holding, Tech Mahindra, Tata Autocomp Systems etc. and upheld the assessee’s claim. On appeal by the department to the High Court HELD dismissing the appeal:

(i) The reasoning recorded by the TPO suffers from a basic and fundamental fallacy. Transfer pricing determination is not primarily undertaken to re-write the character and nature of the transaction, though this is permissible under two exceptions. Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should have been entered. It is for the assessee to take commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured. It is not uncommon for manufacturers cum exporters to enter into distribution and marketing agreements with third parties or incorporate subsidiaries in different countries for undertaking marketing and distribution of the products.

(ii) Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner;

(iii) The assessee’s act of incorporating a subsidiary in United States was done with the intention to expand and promote exports in the said country and was a legitimate business decision. The transaction of lending of money by the assessee to the subsidiary, should not be seen in isolation, but also for the purpose of maximising returns, propelling growth and expanding market presence. The reasoning of the TPO ignores the said objective facet. Transfer pricing rules treat the domestic AE and the foreign AE as two separate entities and profit centres, and the test applied is whether the compensation paid for the products and services is at arm‘s length, but it does not ignore that the two entities have a business and a commercial relationship. The terms and conditions of the commercial business relationship as agreed and undertaken are not to be rewritten or obliterated. Transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair market price. This is done by computing the arm‘s length price. The purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. The first step in this exercise is to ascertain the international transaction, which in the present case is payment of interest on the money lent. The next step is to ascertain the functions performed under the international transaction by the respective AEs. Thereafter, the comparables have to be selected by undertaking a comparability analysis. The comparability analysis should ensure that the functions performed by the comparables match with the functions being performed by the AE to whom payment is made for the services rendered.

(iv) Rules 10B and 10C of the Income Tax Rules, 1962 indicate factors that ought to be taken into account for selection of the comparables, which necessarily include the contractual terms of the transaction and how the risks, benefits and responsibilities are to be divided. The conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and the size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition, are all material and relevant aspects. If we keep the aforesaid aspects in mind, it would be delusive not to accept and agree that as per the prevalent practice, subsidiary AEs are often incorporated to carry on distribution and marking function. This is not an unusual but common. Once this is accepted, then we cannot accept the reasoning given by the TPO that the transfer pricing adjustment could restructure the transaction to reflect maximum return that a party could have earned and this would be the yardstick or the benchmark for determining the interest payable by the subsidiary AE. This is not what Chapter X of the Act and Rules mandate and stipulate. The aforesaid provisions neither curtail the commercial freedom, nor do they bar or prohibit a legitimate transaction. They permit transfer pricing adjustment so as to bring to tax what would have been paid for the transaction in the same or similar comparable circumstances by an independent third party.

(v) This ratio and rationale, when applied to the facts of the present case, would mean that the transfer pricing determination would decide what an independent distributor and marketer, on the same contractual terms and having the same relationship, would have earned/paid as interest on the loan in question. What an independent party would have paid under the same or identical circumstances would be the arm’s length price or rate of interest. What the assessee would have earned in case he would have entered into or gone ahead with a different transaction, say with a party in India, is not the criteria. What is permitted and made subject matter of the arm‘s length determination is the question of rate of interest and not re-classification or substitution of the transaction.

(vi) The comparison, therefore, has to be with comparables and not with what options or choices which were available to the assessee for earning income or maximizing returns. Importantly, the TPO, DRP and the Assessing Officer have all accepted that the respondent assessee had adopted and applied CUP Method for computing arm‘s length interest payable by the subsidiary AE. To this extent, there is no lis or dispute.

(vii) We express our inability to accept that commercial expediency and related benefits have no connection or relationship with the rate of interest. In terms of Clauses (c) and (d) to Rule 10B(2), contractual relations or terms, and other material facts should be recognized. Having said so, we do accept the force of the alternative argument advanced that this fact could be of marginal significance and effect. It would be for the assessee to show and prove that a transaction separately benchmarked, included consideration for the lower interest rate being paid.

(viii) We do not agree with the finding recorded by the TPO that the comparable test to be applied is to ascertain what interest would have been earned by the assessed by advancing a loan to an unrelated party in India with a similar financial health as the taxpayer‘s subsidiary. The aforesaid reasoning is unacceptable and illogical as the loan to the subsidiary AE in the instant case is not granted in India and is not to be repaid in Indian Rupee. It is not a comparable transaction. The finding of the TPO that for this reason the interest rate should be computed at 14% per annum i.e. the average yield on unrated bonds for Financial Years (FY, for short) 2006-07, has to be rejected.

(ix) The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of interest. (UN Model Double Taxation Convention Between Developed and Developing Countries & OECD Model Convention Commentary, Chapter 10 of the U.N. Transfer Pricing Manual etc. considered)(ITA Nos. 233/2014, dt. 27-3-2015)(AY. 2007-08))

CIT v. Cotton Naturals (I) Pvt. Ltd. (Delhi)(HC); www.itatonline.org

S. 94A : Special measures in respect of transactions with persons located in notified jurisdictional area – Assessee filed writ petition assailing Notification No. 86/2013, dated 1-11-2013 whereby Cyprus had been declared as a notified jurisdictional area on the basis that the Government of Cyprus was not co-operating with Government of India and was not supplying information sought by Indian Government authorities. While exercising writ jurisdiction Court should not proceed to look into as to whether information sought by Indian authorities was ever declined by the Government of Cyprus or if Government of Cyprus is ready and willing to supply information sought by the Indian authorities. Moreover, there being no valid reason to disbelieve satisfaction recorded by Indian authorities, no relief could be granted to the assessee – DTAA-India-Cyprus.[Art 28]

The assessee filed a writ petition assailing the notification dated 1-11-2013, mainly on the basis that “Cyprus” ought not to have been declared as a notified jurisdictional area in view of the international treaty between the Government of India and Government of Cyprus. The assessee contended that the very basis of issuing the impugned notification dated 1-11-2013 i.e. that the Government of Cyprus was not co-operating with the Government of India and, despite several requests, not supplying the information sought by the authorities of the Government of India, on the face of it, was wrong in view of the Press Release made by the Cyprus authorities that they had never denied any information and they had been ready and willing to supply the information sought by the Government of India.

The Court held that while exercising the writ jurisdiction under Article 226 of the Constitution of India, the Court ordinarily should not proceed to look into as to whether information sought by the Indian authorities was ever declined by the Government of Cyprus or if the Government of Cyprus is ready and willing to supply the information sought by the Indian authorities. Moreover, there seems to be no valid reason to disbelieve the satisfaction so recorded by the Indian authorities. Accordingly, the writ filed by the assessee was rejected. (Writ Petition Nos. 2871, 2872, 2873, 2877, 2881 & 2882 of 2014 dtd. 22-1-2015)

Expro Gulf Ltd. v. UOI (2015) 230 Taxman 331 / 115 DTR 17 / 274 CTR 390 (Uttarakhand) HC)

S. 133(6) : Power to call for information – The AO can call for information u/s. 133(6) even if no proceedings are pending

The Assessee challenged the validity of notice u/s. 133(6) calling for information of its depositors against which no proceedings are pending.

The High Court held that by virtue of section 133(6) of the Income-tax Act, 1961, the Department has the power to call for information in relation to such points or matters which would be useful for, or relevant to any proceeding under the Act, from “any person” including a ”Banking Company” or “any Officer” thereon. Further, the amendment made by the Finance Act, 1995 whereby, the words “enquiry or” were inserted before the word “proceeding” in Section 133(6) widened its scope and therefore, even in a case where no proceeding was pending, such information could be called for as part of the enquiry. (WP (C) Nos. 10334, 14827, 14922, 14923, 20629, 21579, 25297, 23801, 23802, 23803 & 26114 of 2014 dtd. 20-12-2014)

Pattambi Service Co-operative Bank Ltd. v. UOI (2015) 115 DTR 289/53 taxmann.com 453 (Ker)(HC)

S. 140A(3) : Penalty – Self assessment tax – Non-payment of admitted tax – Finding that assessee had no intention to evade tax and paid entire tax – Reduction of quantum of penalty to 25% – Held to be justified.

The assessee, declared an income of Rs. 6,23,36,790, on which tax at Rs. 1,26,46,875 was due and payable after reducing the advance tax paid of Rs. 14,60,000. He had not paid the admitted tax under section 140A. In reply to a show cause notice issued under section 140A(3), the assessee took the stand that he paid the admitted tax of Rs. 1,41,06,875 inasmuch as he had paid Rs. 14 lakhs as advance tax and he had paid the balance of Rs. 1,26,46,875 in the month of April, 2011.

Held, the discretion exercised by the Commissioner (Appeals) reducing the penalty to 25% was within the mandate of law and based on good, valid and cogent ground. The imposition of the maximum penalty in all cases is not the legislative mandate. Therefore, the restriction of the penalty to 25% by the appellate authorities was justified in the circumstances. (ITA No. 654 of 2014 dated 22-12-2014)(AY. 2009-2010)

CIT v. Naresh Kumar Jaggi (2015) 370 ITR 401 (Delhi) (HC)

S. 143(3) : Assessment – Extrapolation principle – The AO is entitled to make an estimation based on guesswork – However, the estimate must not be arbitrary and should be based on material.[S.153A]

The ratio of the Hon’ble Supreme Court judgment in the case of Commissioner of Income Tax v. HM Eusafali HM Abdulala (1973) 90 ITR 271 (SC) has been explained in the later judgment of this Court in Commissioner of Income Tax v. Dr. M.K.E. Memon ( ) 248 ITR 310 (Bom.). There also a professional has been dealt with and the Supreme Court’s judgment in HM Eusafali HM Abdulala was followed. However, this Court cautioned as to how for a period of one year the estimation could not be made and it could be, therefore, arbitrary. An arbitrary method cannot be adopted. On facts, there is no arbitrariness. The Tribunal found that the additions have been made in the assessment years 2000-01 and 2001-02, the benefit of set off may be given. So far as assessment year 2000-01 is concerned, the addition is sustained to the extent of Rs. 20,00,000 which was the payment made by the assessee to Shri Doke. So far the addition on account of suppressed profession receipts of Rs. 14,30,225 the Tribunal relied on the admissions and which can be gathered from the maintenance of a parallel record. The modus operandi was admitted. The addition as made by the AO were not confirmed in the absence of direct evidence. In the circumstances, when the Tribunal relied on the decision of the Supreme Court to not uphold the entire addition as made by the Assessing Officer, but sustained it to the extent of 10%, then no substantial question of law arises for determination and consideration. In the matter before this Court in Commissioner of Income Tax v. Dr. M.K.E. Memon 248 ITR 310 (Bom.), the arbitrariness was writ large because there was a block assessment of ten years. The Supreme Court judgment must be read in the backdrop of the facts and that is clear. The finding of fact by this Court is that it is improbable that the rate of fees charged by a professional in 1983 would remain static for the entire block period of ten years. It is in these circumstances the proportionate amount of refund could not have been considered as static for ten years. With the other admitted facts and pertaining to the reduction of migration to Gulf countries on account of Gulf war that this Court found complete arbitrariness in the estimation by the assessee. At the same time, this Court held that it is open for the Assessing Officer to make an estimation and in that process there could be a certain guess work as well. That element cannot be discarded totally. (ITA No. 498 of 2013, dated 16-3-2015) (AY.2002-03)

Prakash K. Kankariya v. JCIT (Bom)(HC); www.itatonline.org

S. 147 : Reassessment – After the end of four years – Export of computer – Reassessment was held to be bad in law. [Ss.80HHE, 143(3), 148]

When there was no failure on the part of the Assessee to fully and truly disclose all the material facts before the Assessing Officer during original scrutiny assessment proceeding u/s. 143(3), the reopening of the completed assessment beyond four years is bad in law. Dated 19-1-2015)(AY. 2003-04)

Donaldson India Filters (P) Ltd. v. Dy. CIT (2015) 371 ITR 87/274 CTR 73/229 Taxman 249 (Delhi)(HC).

S. 147 : Reassessment – Depreciation – Intangible assets – Where the assessee’s claim of depreciation on non-compete fees was accepted by the AO in regular assessment after considering details submitted by the assessee in response to queries raised by the AO, notice issued for reassessment on change of opinion was not sustainable.[Ss.32, 148]

The assessee claimed depreciation on its intangible assets, such as goodwill and non-compete fees as a part of its block of intangible assets claiming depreciation at 25 per cent. The AO called upon the assessee to give detailed working of the claim for depreciation. The AO, satisfied with the assessee’s response, accepted the assessee’s claim on account of depreciation. The notice under section 148 was issued by the AO, seeking to re-open the assessment on the basis that the depreciation claimed on non-compete fees at 25 per cent could not be allowed the same is not mentioned among the intangible assets set out in the Appendix to the Income-tax Rules, 1962.

On a writ by the assessee, the Court observed that the assessee had supplied the necessary details and the AO passed an order under section 143(3) in the regular assessment proceedings allowing the claim for depreciation on non-compete fees. In fact, the order passed in the regular assessment proceedings specifically discussed the assessee’s claim for depreciation and disallows the excess depreciation claimed on buildings at 10 per cent to the extent it is in excess of the prescribed 5 per cent. In view of the above the Court held that the reason recorded in support of the impugned notice seeking to deny depreciation on non-compete fees has been issued on account of a change of opinion and accordingly, allowed the writ filed by the assessee. (Writ Petition No. 2617 of 2007 dated 15-1-2015)

Godrej Agrovet Ltd. v. DCIT (2015) 115 DTR 257 56 taxmann.com 141 (Bom.)(HC)

S. 147 : Reassessment – Change of opinion – Within four years – Set off loss – Long-term capital gains – If the recorded reasons show contradiction and inconsistency it means necessary satisfaction in terms of the statutory provision has not been recorded at all. The Court cannot be called upon to indulge in guess work or speculate as to which reason has enabled the AO to Act. [Ss.32(2), 45, 148]

(i) Though the power to reopen is much wider, but the interpretation that the words “reason to believe” must receive an interpretation which is in consonance with the scheme of the law. There cannot be arbitrary powers to the Assessing Officer to reopen assessment on the basis of mere change of opinion. The Assessing Officer has no power to review. He has only a power to reassess. In the garb of reopening the assessment review cannot take place.

(ii) If the assessee has not made full and true disclosure of income and its particulars in the return or during the assessment proceedings, then, we do not see how these figures have been derived by the Assessing officer. In one breath he says that he has perused the records and which reveals the above position. At the same time, he holds that the petitioner has not made full and true disclosure of income and its particulars in the return or during assessment proceedings. This contradiction and inconsistency in the reasons would indicate that the necessary satisfaction in terms of statutory provision has not been recorded at all. This would be further clear if one refers to the other reason viz. that the income has escaped assessment and also in view of sub-clause (I) of clause (c) of Explanation 2 to section 147 of the Act if income chargeable to tax has been underassessed. Such recording of reasons can never be termed as satisfactory. There is either a satisfaction based on the income escaping assessment by virtue of it being chargeable to tax and, therefore, reassessment and in terms of substantive provision is required. The satisfaction can also be said to be that the case is covered by the deeming fiction and the income chargeable to tax has escaped assessment by virtue of Explanation 2 clauses (a), (b), (ba) and (c) and (d). However, if one refers to the failure on the part of the assessee to make full and true disclosure of income, then, what the Assessing Officer has in mind is the first proviso to section 147. That enables reassessment after expiry of four years from the end of the relevant assessment year if the income chargeable to tax has escaped assessment for such assessment year by reason of failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. In the present case, both are referred viz. the first proviso to section 147 and Explanation 2 thereof. However, this is not a case where action under section 147 is taken after the expiry of four years from the end of the relevant assessment year but it is within four years period. Thus, this proviso cannot be of any assistance. At the same time, the Assessing Officer says that he has reason to believe that income has escaped assessment and also in view of sub-clause (1) of clause (c) of Explanation 2. The Court cannot be called upon to indulge in guess work or speculate as to which reason has enabled the Assessing Officer to act in terms of this section. If more than one reason is assigned as in this case then the Court can sustain the notice only if it is of the opinion that an erroneous reference to a statutory provision has been made but still there is an income chargeable to tax which has escaped assessment and on account of which issuance of notice is justified. Which ground is sufficient to sustain the notice is something which must be indicated in clear terms and should not be a matter of speculation or guess work. (WP. No. 746 of 2015, dated 25-3-2015 )(AY. 2009-10)

Plus Paper Food Pac Ltd. v. ITO (Bom.)(HC); www.itatonline.org

S. 147 : Reassessment – Notice – Non-application of mind – Change of mind – Capital or revenue – Management fee – The notice should not be in a standard format but indicate why reassessment has been resorted to. The term “failure to disclose material facts” has a specific legal connotation – Reassessment was quashed.

The assessee challenged the reassessment notice issued under section 148. Allowing the petition the court held that (i) We have noted, on several occasions, that notices of this nature are issued in a standard format and often the officers merely fill in the blanks or tick mark whatever is applicable. We would highly appreciate if the department draws a notice not in this format, but something by which it would be clear in indicating to the assessee as to why section 147 of the IT Act has been resorted to.

(ii) We are sorry to see such non-application of mind and which is apparent …. In the present case, when the Revenue alleges failure to make full and true disclosure of material facts, then, the term failure has some specific legal connotation. Here, material facts are pertaining to the expenses under the head “management fees”. It is apparent that the words employed are material facts. It is not just facts but material facts. The word “material” in the context means “important, essential, relevant, concerned with the matter, not the form of reasoning” (see Oxford Dictionary Concise Eighth Edition). Just as disclosure of every fact would not suffice but for proceeding under section 147 non disclosure ought to be of a material fact. The assessee disclosed that loss under this head is derived from the acquisition of two centres. If that is known to the Revenue in this case, then, what further facts were expected to be disclosed so as to make the assessment has not been indicated. It is not enough to allege that there is a distortion of facts and as per the convenience of the Assessee. On facts the court held that there was no failure to disclose material facts the AO in the original assessment proceedings has applied his mind and allowed the expenditure as revenue in nature, hence reassessment was held to be invalid. (WP No. 2959 of 2015, dated 26-3-2015) (AY.2007-08)

Tata Business Support Services Ltd. v. DCIT (Bom.)(HC); www.itatonline.org

S. 147 : Reassessment – Notice – Principal condition that income chargeable to tax has escaped assessment was not satisfied-Reassessment was held to be bad in law though original assessment was completed u/s. 143(1) – Revenue cannot take a contrary stand than what was recorded in the recorded reasons.[S. 143(1), 148]

The assessment was completed u/s. 143(1). The AO issued the notice u/s. 148. The assessee challenged the notice by filing the writ petition. Allowing the petition the Court held that; (1). The assessee filed a return of income which could have been subjected to verification and scrutiny and in terms of the applicable law and sections in the Income-tax Act, 1961 itself. However, if this notice has been issued in the present case and on the footing that the income chargeable to tax has escaped assessment during the course of the assessment proceedings, then, we would not go by the stand taken by the Revenue and on affidavit. It is too late now to urge that there was no assessment and therefore no question arises of reopening thereof. In the light of the language of the notice itself, it would not be proper for us and to permit the Revenue to raise such a plea.

(ii) In the present case, the AO does not state that any income chargeable to tax has escaped assessment. All that the Revenue desires is verification of certain details and pertaining to the gift. That is not founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. That belief is not recorded and which alone would enable the Assessing Officer to proceed. Thus, the reasons must be founded on the satisfaction of the AO that income chargeable to tax has escaped assessment. Once that is not to be found, then, we are not in a position to sustain the impugned notice. Reassessment notice was quashed. (WP No. 2314 of 2015, dated 7-4-2015)(AY.2010-11)

Nivi Trading Limited v. UOI (Bom.)(HC); www.itatonline.org

S. 150 : Assessment – Finding of Tribunal – Finding given by Tribunal could not enable Assessing Officer to extend period of limitation – Order barred by limitation.[S.158BC]

Tribunal in block assessment proceeding in assessee’s case held that extent of claim for depreciation made by assessee would not be a subject matter of enquiry in block assessments but in regular assessment. In view of said decision, Assessing Officer sought to re-open assessment for relevant year after a period of nine years. There had been no failure on part of assessee to disclose truly and fully all material facts necessary for assessment. Moreover, no material was found to establish that claim for depreciation made was incorrect. Allowing the petition the Court held that finding given by Tribunal could not enable Assessing Officer to extend period of limitation as provided under section 150 for purpose of issuing notice in respect of assessment year 1993-94.(W. P. No. 3314 of 2004 dt. 11-8-2014)(AY. 1993-94)

EskayK’n’ IT (India) Ltd. v. Dy. CIT (2015) 54 taxmann.com 22 / 229 Taxman 204 (Bom.)(HC)

S. 153 : Assessment – Reassessment – Limitation –Conclusion of Tribunal that the assessment order was passed after the period of limitation – Order of Tribunal was affirmed.[S.143(3)]

No evidence was produced by department to substantiate its claim that assessment order was made and same was dispatched along with notice of demand on or before last day of prescribed time period. However, on basis of available evidence appellate authorities came to conclusion that assessment order was passed after period of limitation. Tribunal was justified in setting aside said assessment order being barred by limitation.(ITA Nos. 289 of 2011, 51, 52, 58, 59 & 72 of 2012 dt. 30-7-2014)(AY. 2006-07)

CIT v. Sincere Construction (2015) 54 taxmann.com 31/229 Taxman 186 (All.)(HC)

S. 154 : Rectification of mistake – Commission – Without allowing expenditure – Application should only be confined to rectify arithmetical errors and mistake apparent from record – Rejection of application was held to be justified. [S.132]

The assessee was subjected to search under section 132 for providing accommodation entries in the form of share loss or share gain by issuing bills for shares without actual sale and purchase by the party mentioned in the bills. The AO and the CIT(A) held that the assessee had earned commission at the rate of 1.5 per cent from the said transactions. On Second Appeal, the Tribunal by their order held that in the light of the material available on record, the provisions of Chapter XIV-B were rightly applied, as it was a case where the assessee had undisclosed income. The Tribunal directed that the commission/brokerage of the assessee should be computed by applying the rate of 0.6 per cent on the total turnover, which was not disputed and accepted as the sum total of all transactions. The AO passed the order giving effect in compliance to the direction of the Tribunal.

The assessee had filed an application under section 154 against the order giving effect to the Tribunals order passed by the AO stating that the gross rate of commission had been computed without allowing expenditure incurred to earn such commission and the figure of turnover should be reduced or excluded. The application was rejected by the AO observing that there was no dispute with regard to the turnover and this was confirmed in the earlier order of the Tribunal. Furthermore, there was no mistake apparent from the record and the issue being debatable was outside the ambit and scope of section 154. The Commissioner (Appeals) and the Tribunal dismissed the appeal of the assessee. The Court held that the Tribunal observed that during the entire appellate proceedings the assessee had not challenged the said turnover and had accepted this as true and correct. What the assessee wants and seeks, by way of rectification, is re-examination of the entire bank accounts and re-computation of the turnover. This will require detailed scrutiny, examination and verification of entries and details. There may be or may not be any error but the said determination would not be confined to arithmetical or adding figures, but explanation and answers would be required. In view of the above the High Court held that the impugned order passed by the Tribunal, rejecting the application under section 154 was correct. (IT A. No. 1 of 2014 dated 22-8-2014)

JRD Stockbrokers Pvt. Ltd. v. CIT(2014) 52 taxmann.com 224 / (2015) 115 DTR 244 (Delhi)(HC)

S. 158BC : Block assessment –Survey – Unaccounted stock was found – Same cannot be subject matter of search and block assessment.[Ss. 132, 133A]

Where before commencement of search through survey, certain unaccounted stock was noticed, same could not be subject matter of a search again and consequently, could not be subject matter of block assessment proceedings. (ITA Nos. 155 of 2008 & 224 of 2007 dated 10-6-2014)(AY. 2001-02)

CIT v. B. Sudheer Baliga (2015) 53 taxmann.com 524/ 229 Taxman 185 (Kar.)(HC)

S.158BD : Block assessment –Limitation – Income of any other person – Within two years as prescribed under the Act – Notice issued after limitation period was held to be bad in law.[S.158BC, 158BE]

The issue of notice u/s. 158BD to any person other than the person searched should be issued within the period of two years as prescribed under the Act to complete the Block Assessment. Hence notice issued u/s. 158BD after the limit prescribed u/s. 158BE is void ab-initio.(dt. 11-11-2014)(AY. 1991-92 to 2001-02)

CIT v. V. D. Muralidharan (2015) 274 CTR 142/53 taxmann.com 140 (Mad.)(HC).

CIT v. K. Venugopal (2015) 274 CTR 142/53 taxmann.com 140 (Mad.)(HC)

CIT v. V. P. Ullas (2015) 274 CTR 142/53 taxmann.com 140 (Mad.)(HC)

S. 194H : Deduction at source – Commission or brokerage – Trade discount – Not liable to deduct tax at source

In the absence of principal-agent relationship as per the Agreement entered into and when there is no primary responsibility of the assessee to deduct tax at source, Sec 194 H is not attracted. The trade discount allowed to the assessee on the sale of recharge vouchers, prepaid cards and starter kits to its distributors does not amount to payment of commission. Thus, no violation of law. (dated 14-8-2014) (AY. 2005- 06 to 2008-09)

Bharti Airtel Ltd. v. CIT (2015) 372 ITR 33/274 CTR 213/228 Taxman 219 (Mag.) (Karn)(HC)

S. 194I : Deduction at source – Rent – Fees for technical services – Transmission & wheeling charges paid by electricity company is neither rent nor fees for technical services – Not liable to deduct tax at source – It will not be permissible for either the revenue or the assessee to take up the issues which were not raised before the Tribunal. [S.9(1)(vii), 194J, 201 201(IA), 260A]

(i) The argument of the revenue that Transmission charges and/or Wheeling charges amounts to “rent” for purposes of TDS u/s. 194-I cannot be accepted. According to the Black’s Law Dictionary, ‘Rent’ is defined as consideration paid for periodical use or occupancy of property. Various types of rent are contemplated such as ceiling rent, crop rent, ground rent, etc. Even taking the widest possible definition of rent, in our view the (Wheeling charges and/or Transmission charges (hereafter referred to “WT charges”), WT charges cannot be considered as rent. It is well settled that the Court may in its discretion construe the legislative provisions so as giving effect to the intended use and applying the test of contextual interpretation. We are of the view that the expression ‘rent’ used in section 194-I does not apply to WT charges or any other part thereof;

(ii) The expression rent would also entail an element of possession. In each of the instances contemplated by the explanation to section 194-I, we see in them an element of possession, be it land, building (including factory building), land appertaining to a building, plant, equipment, furniture or fittings. The person using it has some degree of possessory control, at least momentarily, although it cannot entrust the user title to the subject matter of the charge. Even the mere right to “use” is vested with an element of possessory control over the subject matter. In the present case, WT charges are bereft of such possessory control and hence in our view, completely outside the purview of the Explanation to section 194-I;

(iii) Though in the context of parking charges, the Delhi High Court has taken a view in favour of the revenue in United Airlines 287 ITR 281 (Delhi), the Madras High Court in C.I.T. v. Singapore Airlines (2013) 358 ITR 257 has taken a contrary view. We find ourselves in agreement with the view taken by the Madras High Court inasmuch as, the decision of United Airlines (supra) did not take into account the navigational services, etc. which go along with the landing of an aircraft and payment of charges for parking the aircraft thereof. Right from the moment a flight is permitted to land at a particular airport, a process is set into motion, to guide the aircraft to the runaway, for successful landing and after the aircraft had come to a halt it is led to a parking space allotted to it once again with the navigational help. It is only thereafter that the aircraft is said to be parked till it resumes its flight. An example is the use of a toll road (instead of highway). If use of a toll road could be characterised as use of land, it would be an extreme view if we held that toll to be paid for use of a toll road would be subject to deduction of tax at source only because it could also be characterised as rent for use of land. Such an extreme view will not be justified under any circumstances;

(iv) The Hon’ble Supreme Court has also shown us some direction in this behalf. While interpreting the expression ‘rent’, the applicability of section 194-I must be gathered from whether the WT charge draws its colour from the basic meaning of the expression ‘rent’. It is seen that the meaning of ‘rent’ must be understood in the context in which they are used. In the present set of facts, it is not possible to equate WT charges payable MSETCL with rent;

(v) There is nothing on record to support the revenue’s contention that the WT charges assumes the character of rent. The expression ‘rent’ must be conceptually understood. The concept of rent under the Income-tax Act does not encompass, in our view, the WT charges payable by the assessee especially when the assessee is discharging a public function. The expression of ‘Transmission charges’ and / or “Wheeling charges’ entails distribution of electricity in the area of the Corporation and they cannot be subjected to provisions of section 194-I of the Act. We, however, clarify that this is restricted to the case of the assessee in view of the public function to be undertaken by it, as a result of the restructuring of the Maharashtra State Electricity Board;

(vi) The revenue’s contention that if WT charges are not rent, it would amount to payment of fees for technical services is also not acceptable. The very concept of the charge for transmission of electricity and wheeling of electricity, as the case may be, is subject to the tariff that will be determined by the MERC in public interest. Hence it is incomprehensible that the tariff passes the test as fees for technical services. Once again applying the principles of conceptual interpretation to the tariff to be fixed for WT charges of electricity, it cannot be interpreted to mean fees for the providing technical services. Under the open access system, it is the MSEDCL which will be availing of the said transmission facility. No ‘service’ is being provided by the MSETCL or the STU. No doubt, MSEDCL as transmission licensee is required to provide superintendence, maintenance and repairs to the system. However, no such service is rendered by the MSETCL to MSEDCL. MSETCL is obliged to maintain the system by value of operation of law under the Electricity Act. MSEDCL accesses the STU and distributes electricity passing through the STU. Our views stand fortified by the very fact that the revenue itself is confused and unsure as to the nature of the charge. The focus of the revenue is only the requirement of deduction of tax whether under section 194-I or Section 194-J. This approach is erroneous. The revenue contends that the WT charges could be rent or fees for technical services but in our view it is neither. Appeal of revenue was dismissed. Court also observed that, it will not be permissible for either the revenue or the assessee to take up the issues which were not raised before the Tribunal.(ITA No. 336 of 2013, dated 8-5-2015)

CIT (TDS) v. Maharashtra State Electricity Distribution Co. Ltd. (Bom.)(HC); www.itatonline.org

S. 194-I : Deduction at source – Rent – Use of plant and machinery on monthly basis – Not liable to deduct tax at source

Assessee-company entered into an agreement with a factory to carry on re-rolling work. It paid to said factory an amount of Rs. 200 per ton on manufacturing of steel items. Assessing Officer treated said payment as rent for use of factory premises and disallowed same on account of non-deduction of TDS. From agreement, it was found that assessee made payment for use of plant and machinery on monthly production basis. On facts, assessee was not liable to deduct TDS under section 194-I. (ITA No. 87 of 2005 dated 22-8-2014)(AY. 1998-99)

CIT v. R.H.L. Profiles Ltd. (2015) 53 taxmann.com 529 / 229 Taxman 180 (All.)(HC)

S. 220 : Collection and recovery – Assessee deemed in default Waiver of interest – Assessee paying tax after 27 years of completion of assessment – Waiver application was considered and the assessee was made to pay fixed amount of interest as full and final settlement

Once assessee pays of the total tax demand along with the interest raised by the Department after 27 years of completion of assessment i.e. up to 1990, in October, 2005, as per the notice of demand of 2004. Further, demand cannot be raised by the Department for the period up to 2005. However, the assessee is liable to pay interest for the period of delay while making payment of the demand. The waiver application was considered and the assessee was directed to pay a fixed amount as interest as full and final settlement.(dated 13-11-2014)(AY. 1977-78 to 1998-99)

Christy Arockia Raj v. CIT (2015) 274 CTR 61/229 Taxman 549 (Mad.)(HC)

S. 220 : Collection and recovery – Assessee deemed in default – Interest – Interest has to be calculated from the period after expiry of 30 days as stated under sec. 220(1) of the Act and not from the date on which the return has been filed. [S.156]

The assessee did not file the return of income. Consequently, a search was conducted in the premises of the assessee and then the AO, after making the assessment, raised a demand by issuing notice u/s. 156 of the Act. Under the notice u/s. 156, the demand has to be paid within the time specified u/s. 220 (1) of the Act. Therefore, the contention of the assessee is that the interest on the demand has to be paid from the date commencing after the end of the period (30 days) as stated under sec. 220 of the Act. However, the contention of the Department is that the interest has to be paid from the date on which the return has been filed and therefore, the interest on the demand has to be paid from that date and not from the expiry of the period as stated in sec. 220 (2) of the Act.

On a writ filed by the assessee, the High Court held that the case is squarely covered under the Apex Courts judicial decision in Vikrant Tyres Ltd. v. Income Tax Officer (2001) 247 ITR 821 in which it has been held that interest has to be calculated from the period after expiry of 30 days as stated under sec. 220 (1) of the Act and not from the date on which the return has been filed.(dated 13-11-2014)

Govindachary v. TRO (2015) 115 DTR 122 (Karn.)(HC)

S. 234B : Interest – Advance tax – Non-resident – Since the assessees were non-resident companies entire tax was to be deducted at source on payments made by the payee to it and there was no question of payment of advance tax by the assessees. Therefore, it would not be permissible for the Revenue to charge any interest under section 234B to the assessee. [S. 195, 209]

The assessees, non-resident companies, were manufacturing equipment relating to oil and gas, energy, transportation and aviation for supply to customers in India. After a survey under section 133A at their liaison office, reassessment proceedings were initiated against the assessees. The assessee’s filed nil returns of income and thereafter, a final assessment order was passed wherein the AO held that the services provided by the assessee are taxable in India. The AO further levied interest u/s. 234B of the Act. The CIT(A) deleted the interest under sec. 234B. The Tribunal upheld the order of the CIT(A).

On appeal the Court held that the implication of an absolute obligation upon the payer to deduct tax at source under section 195(1) is that it becomes the responsibility of the payer to determine the amount it ought to deduct from the remittance to be paid to the assessee, If an assessee files nil returns at the stage of assessment, and maintains that it is not liable to tax in India, the payer is obliged to apply to the AO to determine what portion, if any, of its remittance to the assessee is liable to be deducted at source towards tax. The view taken by the Tribunal was correct. The primary liability of deducting tax (for the period concerned, since the law has undergone a change after the Finance Act, 2012) is that of the payer. (ITA Nos. 352 to 391 & 402 of 2014 dated 12-1-2015)

DIT(E) v. GE Packaged Power Inc. (2015) 115 DTR 70 / 275 CTR 20/56 taxmann.com 190 (Delhi)(HC)

S. 254(1) : Appellate Tribunal – Additional evidence – When the AO has asked further time to forward remand report, Tribunal should not have proceeded further without providing a reasonable opportunity. [R. 46A]

When there was a bona fide reason that prevented the Assessing Officer to verify and produce the Remand Report and he asks further time, in the circumstances due to non-consideration of the bona fide reason by the CIT(A) & ITAT, proceeding further with the matter is erroneous.(AYs. 2003-04 to 2009-10)

CIT v. Essence Commodities Ltd. (2015) 274 CTR 416 (MP)(HC)

S.254(1) : Appellate Tribunal – Power to admit additional evidence – Application for admission of additional evidence six years after assessment during penalty proceedings – No credible evidence and no explanation for delay in application – Rejection of application – Justified. [R.29]

Held, dismissing the appeal, that the application for permission to produce additional evidence in the form of certain documents so as to retract the statement was filed under rule 29 of the Income tax (Appellate Tribunal) Rules, 1963, in 2012 after expiry of almost six years and that too during the course of the penalty proceedings at the stage of Second Appeal. The assessee had tried to produce affidavits of certain customers to show that it was their gold which was lying with the assessee. Further, through the additional evidence the stock of diamond jewellery lying with the assessee was sought to be established as belonging to suppliers. Not only these affidavits but also the statement of stock furnished by the suppliers were only a result of an afterthought. Even during the penalty proceedings before the Assessing Officer and the Commissioner (Appeals) there was nothing to show that the jewellery found at the premises of the assessee on October 27, 2006, was accounted money with the assessee. No satisfactory explanation had been furnished to demonstrate why the material sought to be produced now could not be produced earlier. Therefore, the Tribunal was justified in rejecting the application for admission of additional evidence filed by the assessee. (ITA No. 164/14 (O&M) (dated 15-9-2014)(AY. 2007-08)

Jawahar Lal Jain (HUF) v. CIT (2015) 370 ITR 712 (P & H) (HC)

S. 254(1) : Appellate Tribunal – Order – Method of accounting – Lesser gross profit – Tribunal reversed the finding of CIT(A) without giving any reasons – Matter remanded. [S. 145]

Assessing Officer held that the assessee claimed lesser gross profit as compared to its books of account and accordingly, made addition. CIT(A) deleted addition on ground that revenue had not produced any relevant material in support of its claim. Tribunal reversed said findings of CIT(A) without assigning cogent reasons, matter was to be remanded back. (TA No. 122 of 2001 dated 1-12-2014)

Bhaktiprasad Nagori Timber & Plywood (P.) Ltd. v. ACIT (2015) 54 taxmann.com 59 / 229 Taxman 203 (Guj.)(HC)

S. 254(1) : Appellate Tribunal –Delay of 715 days – No reasonable cause – Dismissal was held to be justified. [S. 253]

Whether where assessee filed appeal before Tribunal with a delay of 715 days taking a plea of death of his parents, in view of fact that assessee’s parents died even before passing order of Commissioner (Appeals), Tribunal was justified in dismissing assessee’s appeal being barred by limitation. (ITA No. 96 of 2014 dated 4-7-2014)(AY. 2005-06)

Amolak Singh Kumar & Sons v. CIT (2015) 53 taxmann.com 525 / 229 Taxman 182 (P&H)(HC)

S. 254(1) : Appellate Tribunal – Ex parte order – Set aside after imposing reasonable cost of Rs. 5,000, upon assessee

The Tribunal passed an ex parte order dismissing assessee’s appeal in absence of assessee at the time of hearing.

Thereafter, the assessee preferred Miscellaneous Application to set aside ex parte order and to hear the appeal on merits. However by the impugned order, the Tribunal dismissed the said application.

On writ: allowing the petition the court held that in absence of mala fide intention on part of assessee to remain absent at the hearing of appeal, impugned order passed by Tribunal dismissing assessee’s appeal ex parte was set aside after imposing cost of Rs. 5,000.(S. C. A. No. 7821 of 2014 dated 25-7-2014)

Vision Corporation Ltd. v. Jt. CIT (2015) 53 taxmann.com 521 / 229 Taxman 184 (Guj.)(HC)

S. 263 : Commissioner – Revision of orders prejudicial to revenue – Search and seizure – Once proceedings is initiated under section 153A, Commissioner has no jurisdiction to initiate revision jurisdiction. [S. 132, 153A]

Once the proceeding initiated u/s. 153A by virtue of search u/s. 132, the Assessing Officer gets the jurisdiction to reopen and reassessee the declared and undisclosed incomes and pass the orders accordingly. Hence, the CIT has no jurisdiction to initiate proceeding u/s. 263.(dated 25-7-2014) (AYs. 2005-06 to 2008-09)

Canara Housing Development Company v. Dy.CIT (2014) 49 taxmann.com 98 / (2015) 274 CTR 122 (Karn.)(HC)

S. 263 : Commissioner – Revision of orders prejudicial to revenue – Capital or revenue receipt – Capital gains – Business income – Termination of agency business – Assessing Officer wrongly treating receipt as capital gains and applying section 54EC to grant exemption – Consideration for transfer of goodwill received in nature of compensation – Taxable under head “Profits and gains of business or profession – Revision applying section 28(ii)(c) was held to be valid. [Ss.4, 28(ii)(c), 45, 54 EC]

The assessee was a recipient of certain amount for holding an agency in India for the activities relating to the business of another company and it was only in connection with the termination of the agency, that the assessee received certain payment by transferring such rights covered by the sub-agency to another party. Therefore, section 28(ii)(c) would come into play and the income received by the assessee had to be certainly treated as profits and gains of business. It could not partake of the character of transfer of capital asset, as what was transferred was the sub-agency and goodwill attached. If it was a case of transfer simpliciter of the asset, without reference to the sub-agency, the assessee would be entitled to invoke section 45. But, the impugned agreement would clearly fall within the ambit and scope of section 28(ii)(c). The Assessing Officer had not applied the correct provision of law and the Commissioner was justified in invoking section 263 to revise the erroneous order. In so far as prejudice to the interests of the Revenue was concerned, it was apparent on the face of the record that but for the application of section 28(ii)(c) of the Act, the assessee would be entitled to the benefit of claiming the receipt of the amount as capital gains under section 45 and the consequent exemption. Therefore, the claim of the assessee would certainly be prejudicial to the interests of the Revenue. Revision was held to be valid.(TC. No 1279 of 2007 dated 2-12-2014)(AY. 2001-02)

Chakiat Agencies P. Ltd. v. ACIT (2015) 370 ITR 502 (Mad.) (HC)

S. 263 : Commissioner – Revision of orders prejudicial to revenue – Cash credits – Assessment order showing non-application of mind by Assessing Officer – Assessment order erroneous and prejudicial to the interests of Revenue – Revision was held to be valid.[S.68]

The assessee received Rs. 61 lakhs in the form of loans. The Commissioner noted that whereas on the one hand loans were advanced to the assessee at or about a proximate point in time, gifts in similar amounts had also been advanced. The Commissioner observed that these loans were unquestioningly accepted by the Assessing Officer despite the fact that the identity and capacity of the persons to whom the loans had been given had not been established. Letters which were addressed to the lenders had been returned unserved and the assessee expressed his inability to furnish their current addresses. The Commissioner made a detailed enquiry and summarised the evidence which was gathered in the group of cases pertaining to the family of the assessee during the course of the order in the form of a tabulated statement. The Commissioner observed that the persons who were advancing the gifts or the interest-free loans were individuals with a marginally taxable income, whereas the assessees were persons with a high income and substantial assets. The ultimate conclusion was that the loans or gifts were orchestrated to deposit moneys in family concerns or for investment in property. The Commissioner made a reference to the entries in the bank accounts and noted that balances were built up mostly in the form of cash and were taken out instantaneously by cheques and drafts which was a symptom of a hawala transaction. The Commissioner held that the identity and capacity of as many as 12 lenders were not established and the Assessing Officer was directed to modify his order adding an amount of Rs. 61 lakhs obtained from the loans. The Tribunal set aside the revisional order holding that the Assessing Officer had conducted an enquiry and had taken a possible view in law and was satisfied with the quality of evidence produced by the assessee. On appeal:

Held, allowing the appeal, that the order of the Assessing Officer did not indicate that there had been an application of mind by the Assessing Officer. There was nothing to indicate from the order that the Assessing Officer had brought his mind to bear upon the identity and capacity of the alleged lenders who had furnished loans to the assessee in the amount of Rs. 61 lakhs. This, indeed, was a material circumstance which would have a bearing on the applicability of the provisions of section 68. It could not be deduced merely on the basis of the order-sheets of the Assessing Officer that there was a due and proper application of mind to the fundamental issue which had been raised by the Commissioner while exercising jurisdiction under section 263. Evidently, therefore, the requirement of section 263 has been established and the Commissioner was justified in coming to the conclusion that the order passed by the Assessing Officer without application of mind was both erroneous and prejudicial to the interests of the Revenue. The Tribunal has manifestly acted in excess of its jurisdiction in interfering with the order of the Commissioner. The Assessing Officer was directed to decide issue afresh.(ITA No. 143 of 2014 dated 3-11-2014) (AY. 2003-04)

CIT v. Anand Kumar Jain (2015) 370 ITR 140 (All.)(HC)

S. 263 : Commissioner – Revision of orders prejudicial to revenue – Unaccounted purchases and sales – Addition by Commissioner on basis of statement before excise authorities in context of levy of excise duty on unaccounted production – Excise authority deleting addition and deletion affirmed by Tribunal – Revision was held to be not valid

Held, that the addition was sought to be made by the Income-tax Department on the basis of the statement made by the director before the Central excise authorities in the context of levy of excise duty on unaccounted production. The Central Excise Department had deleted the addition of excise duty levied and this had been upheld by the CESTAT which had held that there was no evidence to show that there was clandestine manufacture and clearance of the ingots. The Income-tax Department had not collected any independent material to arrive at the conclusion that there were unexplained sales or purchases made by the assessee. It was only on the basis of the statement of the director before the excise authorities in which the Tribunal had noticed various contradictions and gaps. In the facts and circumstances, on the basis of the statement made by the director before the excise authorities alone which did not find corroboration from any other material, no addition could have been validly made. Revision was held to be not valid. (ITA Nos. 360, 362, of 2011 167/246.299.300/301 of 2012 dt 21-7-2014)(AY. 2005-06)

CIT v. Arora Alloys Ltd. (2015) 370 ITR 732 (P & H) (HC)

S. 263 : Commissioner – Revision of orders prejudicial to revenue – Recording of satisfaction before issuing notice – Commissioner signing on order-sheet for putting up draft notice under section 263 as well as issuing notice – Sufficient compliance in the matter of calling for, examining records of assessment to consider necessity of issuing notice –Revision was held to be valid

Held, affirming the decision of the single judge, that having put the signature of the Commissioner in approval of the draft notice put up with the file and having issued the show cause notice there was sufficient compliance by the Commissioner. He had complied with the provisions contained in section 263 in the matter of calling for, examining the records of the assessment proceedings to consider the necessity of issuing such show cause notice. The assessee had challenged the issuance of the show-cause notice itself before “making of the order”. It is only upon “making of the order” the assessee might, from the face of it, show whether there was consideration or not. (GA NO 1911/14, APO NO 212/14, WP NO 281/14 dt. 19-8-2014)

Zigma Commodities P. Ltd. v. ITO (2015) 370 ITR 318 (Cal) (HC)

S. 271(1)(c) : Penalty – Concealment – Non-production of bills – Levy of penalty was held to be justified

When the Assessing Officer asking for the Bills for 9 alleged items, non-production Bills for 6 items amounts to furnishing of inaccurate particulars hence, the levy of penalty is justified. (AY. 2003-04)

Clariant Chemicals India Ltd. v. ACIT (2015) 274 CTR 353 (Bom.)(HC)

S. 271(1)(c) : Penalty – Concealment – Cash credits – Merely because additions are made in the quantum proceedings, penalty cannot be imposed mechanically. [S.68]

The assessee is engaged in the business of boring of tube-wells for farmers. The assessee filed its return of income for the AY 1986-87. Pursuant thereto, some additions were made u/s. 68 and accordingly penalty u/s. 271(1)(c) was imposed on the basis that the assessee had failed to disclose its income truly and correctly. Being aggrieved, the assessee filed an appeal to the CIT(A), who dismissed the appeal. The Tribunal also upheld the CIT(A)’s order.

On appeal to the Court, it held that the AO cannot impose penalty in the case of an assessee mechanically, merely on the basis of addition of a certain amount, over and above the amount already declared by the assessee. The AO has to record reasons specifying that there was either concealment of income or supplying of untrue particulars of taxable income for the relevant year which the AO failed to do.

Amrut Tubwell Company v. ACIT (2015) 115 DTR 1 (Guj.)(HC)

S. 271(1)(c) : Penalty – Concealment – Book profit – Assessment under section 115JB on book profits basis – Search by excise authorities revealing concealment of income – Additions to income – Tax liability not changing – Penalty could not be imposed.[S.115JB]

The assessee declared a total income as “nil”, after claiming deduction under section 80-IB of the Income-tax Act, 1961, and depreciation available. The assessee’s book profits under section 115JB worked out to Rs. 3,78,87,230. In the scrutiny assessment, the Assessing Officer found that a search had been carried out at the premises of the dealers of the assessee by the Excise authorities. Statements of the representatives of the dealers were recorded. Statements of the representatives of the assessee were also recorded. On the basis of such materials, the Assessing Officer came to the conclusion that during the previous years relevant to the assessment years 2003-04, 2004-05 and 2005-06 up to July 13, 2005 (i.e., the date of the search), the assessee had received a sum of Rs. 64,95,365 in cash. For the assessment year under consideration, the Assessing Officer apportioned a sum of Rs. 46,78,545 out of the cash receipts. He, accordingly, added this amount to the income of the assessee, both for normal computation as well as for computing book profit under section 115JB. In his order of assessment the Assessing Officer ordered initiation of penalty proceedings. He imposed penalty. This was upheld by the Commissioner (Appeals) but the Tribunal held that even after the additions had been made during the course of the assessment proceedings, the income of the assessee remained “nil” and the assessee was liable to pay tax on the book profits under section 115JB. Hence, the Tribunal deleted the penalty. On appeal to the High Court :

The order in effect was that the addition for the normal computation was sustained but for the purpose of computation of the book profits, it was deleted. When the assessee’s tax liability did not change despite unearthing of concealed income, no penalty could have been levied. The deletion of penalty was justified. (TA.Nos. 140/141 of 2014 dated 23-4-2014)(AY. 2005-06)

CIT v. Citi Tiles Ltd. (2014) 46 taxmann.com 344/ (2015) 370 ITR 127 (Guj.)(HC)

S. 271(1)(c) : Penalty – Concealment – Nature of satisfaction of Assessing Officer – Must be evident from assessment order itself – Nature of satisfaction need not be in writing but factum of satisfaction must be in writing.

The AO imposed the penalty for concealment. Appellate authorities deleted the penalty on the ground that there was no endorsement in the order of assessment to the effect that penalty proceedings of the Act would be initiated. Dismissing the appeal of revenue the Court held that the nature of satisfaction need not be in writing, though the factum of satisfaction must be in writing. (ITA No. 282 of 2003 dt. 11-11-2004 (AY. 1995-96)

CIT v. Lotus Constructions (2015) 370 ITR 475/273 CTR 538/55 taxmann.com 182 (T & AP) (HC)

S. 271(1)(c) : Penalty – Concealment – Furnishing inaccurate particulars – Claim of loss on sale of fixed assets in profit and loss account – Claim incorrect and contrary to principles of primary accountancy – Revised return not filed voluntarily or before issue of notice for penalty – Order of penalty sustainable

The claim of loss on accounts of sale plant and machinery was contrary to the elementary and well-known basic principles of accountancy. The case was not a case of a debatable issue and was a capital loss. Also, the assessee had not filed a revised return voluntarily but after the Assessing Officer confronted the assessee and it was asked to explain how and why the loss on account of sale of fixed assets was claimed in the profit and loss account. The loss, capital in nature and could not have been claimed in the profit and loss account. Therefore, the levy of penalty under section 271(1)(c) was justified. (ITA No.83 of 2012 dated 1-12-2014)(AY. 2006-07)

CIT v. NG Technologies Ltd. (2015) 370 ITR 7 (Delhi) (HC)

S. 271(1)(c) : Penalty – Concealment – Search and seizure – Discrepancy in accounts noted in search proceedings – Surrender of amount – Levy of penalty was held to be valid. [S. 153A]

The assessee was carrying on jewellery business. There was a search under section 132 of the Income-tax Act, 1961, in its premises. Discrepancies were found in its accounts. Notice was issued under section 142(1) for the preceding six years, namely, with effect from the assessment year 2001-02 onwards. Notice under section 153A of the Act was issued requiring the assessee to file the return of income in consequence of the search proceedings. In pursuance thereof, the assessee filed a return of income dated July 31, 2007 disclosing Rs. 1,06,48,173 comprising the amount from regular sources of income amounting to Rs. 48,27,928 and the balance amount of Rs. 58,20,245 attributable to the discrepancies found and after reconciling with the corroborative material facts containing material particulars. Subsequently, a revised return of income was filed declaring an income of Rs. 2,98,41,628 which included the amount of Rs. 48,41,628 from regular sources of income and additionally Rs. 2.50 crores attributable to discrepancies. The assessment was completed under section 143(3) read with section 153A. The assessment order was accepted and the tax was paid. Penalty was levied and this was confirmed by the Commissioner (Appeals). The Tribunal upheld the levy of penalty under section 271(1)(c) rejecting the prayer for admission of additional evidence. On appeal to the High Court : That no error or perversity could be pointed out in the findings recorded by the Assessing Officer, the Commissioner (Appeals) and the Tribunal which might call for interference. The levy of penalty was valid. (ITA NO 164/14 (O&M)dt. 15-9-2014)(AY. 2007-08)

Jawahar Lal Jain (HUF) v. CIT (2015) 370 ITR 712 (P&H) (HC)

S. 271D : Penalty – Loans in cash exceeding prescribed limit –Business exigency – Reasonable explanation – Levy of penalty was not justified. [Ss.269SS, 269T, 271E, 273B)

Held, dismissing the appeals, that the assessee had shown the receipt of cash and repayment thereof due to business exigency and that would amount to reasonable cause. The genuineness of the transaction to meet the immediate necessity was accepted by the Tribunal in the quantum appeal and that would amount to reasonable cause in terms of section 273B. The deletion of penalties under section 271D and section 271E was justified. TC. No. 759/760 of 2014/MP.No. 1 of 2014 dated 29-10-2014 (AY 2006-07)

CIT v. T. Perumal (Indl.)(2015) 370 ITR 313/53 taxmann.com 17 (Mad) (HC)

S. 271D : Penalty – Loan or deposit in cash – Book adjustment of funds by assessee to its sister concern – Not loan or deposit – No identification of loanee or depositor – Penalty could not be imposed. [S. 269SS, 269T, 271D, 271E)

Held, allowing the appeal, that except making reference to the relevant provisions of the Act and the allegation contained in the show cause notices, the Assessing Officer did not indicate the method of payment. It was simply mentioned that everything was done in cash. The very fact that from the same agencies, amounts were said to have been received and repaid, as reflected in the books, disclosed that it was nothing but book adjustment. Making book adjustment of the funds by a firm vis-a-vis its sister concern, could not be said to be violation or contravention of section 269SS and section 269T. Levy of penalty was deleted.(ITTA NO 231/03, dated 12-11-2014)(AY. 1992-93)

Gururaj Mini Roller Flour Mills v. Addl. CIT (2015) 370 ITR 50 (T & AP) (HC)

S. 276C : Offences and prosecution – False verification in return – Conviction and sentence confirmed – Liberty to Department to consider application for compounding offence. [S.277]

The trial court convicted the assessee under sections 276C and 277 of Income-tax Act and sentenced him accordingly. The conviction and sentence of the trial court were confirmed by the appellate court. On a criminal revision petition :

Held, dismissing the petition, (i) that the complaint showed that it was only after getting proper sanction that the complaint had been lodged against the assessee and was taken cognizance of by the trial court.

(ii) That the court left it open to the Department to consider the application of the assessee for compounding the offence if made by the assessee within a period of ninety days. The court gave a further direction that the court’s revision order shall be given effect to by the Income Tax Officer, after a finality was reached in the assessee’s writ petition pending before the court.

(CRC No. 1461/06 dt. 11-4-2014) (AY.1996-97, 1997-98)

B. Gopi v. G. Thiyagarajan, ITO (2015) 370 ITR 353 (Mad) (HC)

S. 292B : Return of income not to be invalid on certain grounds – Assessment – Amalgamation of companies – Effect – Amalgamating company ceases to exist – Order of assessment on amalgamating company – Not valid – Not a procedural irregularity to be cured by section 292B. [Ss. 159, 170, 176]

Section 170(2) of the Income-tax Act, 1961, makes it clear that in the case of amalgamation, the assessment must be made on the successor (i.e., the amalgamated company). Section 176 which contains provisions pertaining to a discontinuation of business, does not apply to a case of amalgamation. The language of section 159 evidently only applies to natural persons and cannot be extended through a legal fiction, to the dissolution of companies. Once it is found that assessment is framed in the name of non-existing entity it does not remain a procedural irregularity of the nature which could be cured by invoking the provisions of section 292B. Participation by the amalgamated company in assessment proceedings would not cure the defect because “there can be no estoppel against law”. Held, dismissing the appeals, that the orders of assessment were invalid. (ITA No. 327 to 330 332 of 2014 C.M. Nos 10527/10528 10641 10690 of 2014 dated 8-7-2014) (AY. 2003-04 to 2008-09)

CIT v. Dimension Apparels P. Ltd.(2014) 52 taxmann.com 356/(2015) 370 ITR 288 (Delhi)(HC)

Wealth-tax Act

S.2(ea)(b): Asset – Agricultural land – Within municipal limit

Though the land situated within the municipal limits but still it is an agricultural land, on which construction is not permissible without the permission of the Municipality Corporation Building Bye-Law and Town and Country Planning Act. Thus, the land does not fall within the ambit of Sec. 2(ea)(b) to carry out construction.

Amin Chand Mehta v. CWT (2015) 274 CTR 150 (HP)(HC)

Research Team