S.2(28A) : Interest – Deduction of tax at source – Additional compensation paid to the purchaser of flat on cancellation of booking of flats is not interest – Not liable to deduct tax at source. [S.194A, 201]

Purchaser has made payment while booking the flat, however subsequently dropping out of agreement. Builder has sold the flat to third person at higher rate and refunded the amount paid by the purchaser and part of excess price received. Tribunal held that the excess price was interest and liable to deduct tax at source. On appeal, allowing the appeal the Court held that; Additional compensation paid to the purchaser of flat on cancellation of booking of flats is not interest hence not liable to deduct tax at source. (AY. 2012-13, 2013-14)

Beacon Projects P. Ltd v. CIT (2015) 377 ITR 237/ 234 Taxman 706 (Ker) (HC)

S.4 : Charge of income-tax –Mutuality – Premium from outgoing members – The premium amount received by Society on transfer of four plots was not liable to tax as the said amount was to be utilised for the benefit of members

The assessee-society had given its plots on lease to its members for the purpose of constructing residential units. During the relevant year, the society collected premium, on transfer of some plots from the outgoing members as per the Bye-Laws of the society and claimed such amount as capital receipt. The Assessing Officer held that the assessee was not a co-operative society but an association of persons engaged in the business and accordingly, added premium amount to the income of the assessee.

However, all the three following tests of mutuality laid down since the decision of Privy Council in case of English & Scottish Joint Co-operative Wholesale Society Ltd. which were reiterated, highlighted and refined in the decision in case of Bangalore Club v. CIT [2013] 350 ITR 509 (SC), stands satisfied in instant case:

(1) The identity of the contributors to the fund and the recipients from the fund, (2) The treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate and (3) The impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.

Further, it was found from the records that these funds were to be expended for common amenities or for general benefit of members of society, or to be distributed amongst members in form of dividend or lease rent waiver, it could not be regarded as ‘taxable income’ in hands of assessee. (AY. 1986-87)

CIT v. Prabhukunj Co-op. Housing Society Ltd. (2015) 124 DTR 233/232 Taxman 517 (FB) (Guj.)(HC)

S.9(1)(i) : Income deemed to accrue or arise in India – Business connection – Liaison office of a foreign co. which identifies a manufacturer in India, negotiates the price, helps in choosing raw material to be used, ensures compliance with quality and gets material tested is not a ‘permanent establishment’ – DTAA – India-USA. [Articles 5, 7]

The High Court had to consider the following questions:

(a) Whether the Indian liaison office involves a permanent arrangement for the application under Article 5.1 of the DTAA?

(b) Whether any portion of the income attributable to the liaison office on account of the activity of vendors co-operation of global production management and planning and equitable quality assurance strategy, quality development and is liable to tax?

HELD by the High Court:

(i) Section 9 of the Income-tax Act deals with income deemed to accrue or arise in India. It provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. However, Explanation 1(b) to the said Section carves out an exception. It provides that in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. Therefore, it is clear that when a non-resident purchases goods in India for the purpose of export, no income accrues or arises in India for such non-resident for it to be taxed.

(ii) Under Article 7(1) of the Tax Convention with the Republic of India and the USA, it clear that if a permanent establishment carries on business of sales in India or other business activities of the same or similar kind through that permanent establishment, then only, the profits of the enterprise will be taxed. Therefore, there is no tax liability if purchase is made for the purpose of export. The permanent establishment referred to therein is also defined in Article 5. It provides that for the purposes of this convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It is an inclusive definition of what is included in the term ‘permanent establishment’ which is clearly set out in sub-Article (2). However, sub-Article (3) starts with a non-obstante clause. It makes it clear that the term ‘permanent establishment’ shall be deemed not to include any one or more of the following as set out in sub-Article (3). Clause (d) of sub-Article (3) speaks about the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise. In other words if the permanent establishment is established for the purpose of purchasing goods or merchandise for the purpose of collecting information for the enterprise, it is not a permanent establishment as defined under Article 5(1) read with Article 7. According to the Advance Ruling Authority what sub-Article 3(d) excludes is the place of business solely for the purpose of purchasing goods or of collecting information for the enterprise.

(iii) In the instant case, the liaison office of the petitioner identifies a competent manufacturer, negotiates a competitive price, helps in choosing the material to be used, ensures compliance with the quality of the material, acts as go-between, between the petitioner and the seller or the manufacturer, seller of the goods and even gets the material tested to ensure quality in addition to ensuring compliance with its policies and the relevant laws of India by the suppliers. Therefore, it is of the view that the aforesaid activities carried on by the liaison office, cannot be said to be an activity solely for the purpose of purchasing the goods or for collecting information for the enterprise. We find it difficult to accept this reasoning. If the petitioner has to purchase goods for the purpose of export, an obligation is cast on the petitioner to see that the goods, which are purchased in India for export outside India is acceptable to the customer outside India. To carry on that business effectively, the aforesaid steps are to be taken by the seller i.e., the petitioner. Otherwise, the goods, which are purchased in India may not find a customer outside India and therefore, the authority was not justified in recording a finding that those acts amounts to involvement in all the activities connected with the business except the actual sale of the products outside the country. In our considered information, all those acts are necessary to be performed by the petitioner – assessee before export of goods. Consequently, the reasoning of the authority that for the same reasons, the liaison office in question would qualify to be a permanent establishment in terms of Article 5 of the DTAA is also erroneous. That liaison office is established only for the purpose of carrying on business of purchasing goods for the purpose of export and all that activity also falls within the meaning of the words “collecting information” for the enterprise. In that view of the matter, we are of the view that the impugned order is unsustainable.

Columbia Sportswear Company v. DIT(2015) 235 Taxman 349 (Karn.)(HC)

S.9(1)(vi) : Income deemed to accrue or arise in India – The retrospective amendment to s. 9(1)(vi) so as to supersede the law laid down in Asia Satellite 332 ITR 340 (Del.) and assess transmission fees as “royalty” has no impact on assessees covered by DTAA because a corresponding amendment has not been made to the definition of “royalty” therein-Amendments to domestic law do not affect the DTAA – DTAA –India-Thailand. [Art . 12]a

The Delhi High Court had to consider the following two propositions of law: (i) Whether by a unilateral amendment in the Income-tax Act, an interpretation of the same term in the Double Taxation Avoidance Agreement can be changed? And (ii) Whether by merely terming an amendment as ‘clarificatory’ and making it retrospective in fact renders its retrospectivity valid in law? HELD by the High Court:

(i) This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible.

(ii) It takes little imagination to comprehend the extent and length of negotiations that take place when two nations decide to regulate the reach and application of their legitimate taxing powers (Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) in the context of the Indo-Mauritius Double Tax Avoidance Convention referred).

(iii) The Vienna Convention on the Law of Treaties, 1969 (“VCLT”) is universally accepted as authoritatively laying down the principles governing the law of treaties. Article 39 therein states the general rule regarding the amendment of treaties and provides that a treaty may be amended by agreement between the parties. The rules laid down in Part II of the VCLT apply to such an agreement except insofar as the treaty may otherwise provide. This provision therefore clearly states that an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited.

(iv) We do not however rest our decision on the principles of the VCLT, but root it in the inability of the Parliament to effect amendments to international instruments and directly and logically, the illegality of any Executive action which seeks to apply domestic law amendments to the terms of the treaty, thereby indirectly, but effectively amending the treaty unilaterally. As held in Azadi Bachao Andolan these treaties are creations of a different process subject to negotiations by sovereign nations. The Madras High Court, in Commissioner of Income Tax v. VR. S.RM. Firms Ors [1994] 208 ITR 400 (Mad.) held that “tax treaties are…… considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries”.

(v) At the very outset, it should be understood that it is not as if the DTAAs completely prohibit reliance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3(2) of both DTAAs state that in the course of application of the treaty, any term not defined in the treaty, shall, have the meaning which is imputed to it in the laws in force in that State relating to the taxes which are the subject of the Convention.

(vi) The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e., the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided.

(vii) Though this has been the general rule, much discussion has also taken place on whether an interpretation given to a treaty alters with a transformation in, or amendments in, domestic law of one of the State parties. At any given point, does a reference to the treaty point to the law of the Contracting States at the time the treaty was concluded, or relate to the law of the States as existing at the time of the reference to the treaty? The former is the ‘static’ approach while the latter is called the ‘ambulatory’ approach. One opportunity for a State to ease its obligations under a tax convention comes from the ambulatory reference to domestic law. States seeking to furtively dodge the limitations that such treaties impose, sometimes, resort to amending their domestic laws, all the while under the protection of the theory of ambulatory reference. It thereby allows itself an adjustment to broaden the scope of circumstances under which it is allowed to tax under a treaty. A convenient opportunity sometimes presents itself in the form of ambiguous technical formulations in the concerned treaty. States attempting to clarify or concretise any one of these meanings, (unsurprisingly the one that benefits it) enact domestic legislation which subserves such purpose.

(viii) There are therefore two sets of circumstances. First, where there exists no definition of a word in issue within the DTAA itself, regard is to be had to the laws in force in the jurisdiction of the State called upon to interpret the word. The Bombay High Court seems to accept the ambulatory approach in such a situation, thus allowing for successive amendments into the realm of “laws in force”. We express no opinion in this regard since it is not in issue before this Court. This Court’s finding is in the context of the second situation, where there does exist a definition of a term within the DTAA. When that is the case, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the DTAA and the ultimate taxability of the income under the agreement. That is not to say that the Court may be inconsistent in its interpretation of similar definitions. What that does imply however, is that just because there is a domestic definition similar to the one under the DTAA, amendments to the domestic law, in an attempt to contour, restrict or expand the definition under its statute, cannot extend to the definition under the DTAA. In other words, the domestic law remains static for the purposes of the DTAA.

(ix) Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word “royalty” in Asia Satellite [2011] 332 ITR 340 (Del.), when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. (ITA 473/2012, 474/2012, 500/2012 & 244/2014, dt. 8-2-2016)

DIT v. New Skies Satellite BV (Delhi)(HC) ; www.itatonline.org

S.10(23C) : Educational institution – Approval – Question of application of funds not to be considered at stage of approval

The assessee submitted an application for grant of approval for exemption under section 10(23C)(vi) for the assessment years 1999-2000, 2000-01 and 2001-02. On rejection of the application a writ petition was filed, Allowing the petition the Court held that; Question of application of funds not to be considered at stage of approval. (AYs. 1999-2000, 2000-01, 2001-02)

American School of Bombay Education Trust v. UOI (2015) 377 ITR 645 (Delhi) (HC)

S.10B : Export Oriented undertakings – Deemed Export Drawback, Customer claims, Freight subsidy & interest on fixed deposit receipts (under lien for LC & bank guarantee) are all derived from the undertaking & are eligible for deduction

Allowing the appeal of assessee, the Court held that; Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s. 10B of the Act.”As regards the decision of the ITAT in not accepting the assessee’s plea in regard to ‘customer claims’ ‘freight subsidy’ and ‘interest on fixed deposit receipts’ even while it accepted the assessee’s case as regards ‘deemed export drawback’, the contention of the assessee as regards customer claims was that it had received the claim of ` 28,27,224 from a customer for cancelling the export order. Later on the cancelled order was completed and goods were exported to another customer. The sum received as claim from the customer was non-severable from the income of the business of the undertaking. The Court fails to appreciate as to how the ITAT could have held that this transaction did not arise from the business of the export of goods. Even as regards freight subsidy, the assessee’s contention was that it had received the subsidy in respect of the business carried on and the said subsidy was part of the profit of the business of the undertaking. If the ITAT was prepared to consider the deemed export draw back as eligible for deduction then there was no justification for excluding the freight subsidy. Even as regards the interest on FDR, the Court has been shown a note of the balance sheet of the assessee [which was placed before the AO] which clearly states that “fixed deposit receipts (including accrued interest) valuing ` 15,05,875 are under lien with Bank of India for facilitating the letter of credit and bank guarantee facilities.” the interest earned on such FDR ought to qualify for deduction under Section 10B of the Act. (ITA No. 549 of 2015, dt. 19-11-2015) (AY. 2008-09)

Riviera Home Furnishing v. ACIT (Delhi)(HC); www.itatonline.org

S.11 : Property held for charitable purposes – Management and development programme –Consultant charges are part and parcel of institute of management studies – Surplus funds was applied for attainment of object of institute – Entitled exemption – Allowance of depreciation – No double deduction. [S.32]

Dismissing the appeal of revenue the Court held that letting out halls for marriages, sale and advertisement rights had not been found to be a regular activity undertaken as part of business. The income was generated from giving various halls and properties of the institution on rentals only on Saturdays and Sundays and on public holidays when they were not required for educational activities and could not be said to be a business which was not incidental to attainment of the objects of the Trust. This being merely an incidental activity and income derived from it having been used for the educational institute and not for any particular person and separate books of account having been maintained, this income could not be brought to tax. As regards acquisition of property the deduction was allowed earlier was towards application of funds of the trust for acquiring assets, the depreciation is permissible as deduction considering the use of the assets.

DIT(E) v. Shri Vile Parle Kelavani Mandal (2015) 378 ITR 593 / 232 Taxman 499 (Bom.)(HC)

S.11 : Property held for charitable purposes – Charitable purpose – Maintaining gaushalas and tending to other animals and birds, anonymous donation received would not be taxable. [Ss. 2(15), 115BBC ]

Assessee was a charitable trust engaged in maintaining gaushalas and tending to other animals and birds. Assessee received donations from identified donors and also anonymous donations. Assessing Officer after excluding identified donations, brought to tax anonymous donations. Commissioner(Appeals) after examining objects of assesee-trust and work carried out, concluded that assessee trust was a trust which had been established to fulfil charitable and religious purpose. Tribunal also upheld finding of Commissioner(Appeals). On appeal by revenue, it was contended that trust not being one for religious purposes but only for charitable purposes, anonymous donations were liable to be taxed under section 115BBC. Dismissing the appeal of revenue the Court held that; taking care of animals was to be considered as charitable as well as religious activities, therefore, anonymous donation received would not be taxable. (AY. 2007-08)

DIT v. Bombay Panjrapole Trust (2015) 232 Taxman 821 (Bom.)(HC)

S.11 : Property held for charitable or religious purposes – Accumulation of income-Just because more than one object is mentioned, benefit of accumulation cannot be denied.[Form No. 10]

As long as objects of assessee-trust, are charitable in character and purposes mentioned in Form 10 are for achieving objects of trust, merely because more than one purpose have been specified and details about plan of such expenditure has not been given, same would not be sufficient to deny benefit under section 11(2) to assessee. (AY. 2005-06)

DIT v. Envisions (2015) 232 Taxman 164 (Karn.)(HC)

S.12AA : Procedure for registration – Trusts or institutions – Dissolution clause – Refusal of registration was held to be not justified

Dismissing the appeal of revenue the Court held that; where trust deed specifically provided that if necessary to close trust, then property of trust be handed over to other institution/trust having similar objects by passing resolution by minimum 2/3rd majority of trust and unanimous decision of committee working trustees, registration under section 12AA could not be denied to assessee-trust on ground that trust deed did not have dissolution clause.

DIT v. Vanchhara Tirthadhipati – Chintamani Paraswaprwabhu (2015) 233 Taxman 1 (Guj.)(HC)

S.14A : Disallowance of expenditure – Exempt income – Interest incurred on taxable income has also to be excluded while computing the disallowance to avoid incongruity & in view of Department’s stand before High Court

The ITAT referred to the decision of the Kolkata Bench of the ITAT in ACIT v. Champion Commercial Co. Ltd., (2012) 139 ITD 108, which in turn referred to the decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd v. CIT (2010) 328 ITR 81 (Bom.)(HC) and held that for the purposes of Rule 8D(2)(ii), the amount of interest not attributable to the earning of any particular item of income, i.e., ‘common interest expenses’ that was required to be allocated would have to exclude both expenditures, i.e., interest attributable to tax exempt income as well as that attributable to taxable income. The ITAT observed that notwithstanding the rigid wording of Rule 8D(2), this interpretation was permissible in view of the stand taken by the Revenue before the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. The ITAT, therefore, was of the view that since there was no common interest expenditure in the present case no portion of interest really survives for allocation under Rule 8D(2)(ii). On appeal by the department, High Court dismissed the appeal of revenue and affirmed the order of Tribunal. (ITA No. 802/2015, dt. 17-12-2015) (AY. 2008-09)

Pr.CIT v. Bharti Overseas Pvt. Ltd. (Delhi)(HC); www.itatonline.org

S.22 : Income from house property – Land appurtenant there to – Licence’ the terrace floor as the ‘space’ for mounting a tower/mast and antenna – Assessable as income from house property and not as business income or income from other sources. [S. 28(i), 56]

Assessee-company was owner of a terrace floor. Assessee entered into agreement with a telecom company and gave said floor on licence as space for mounting tower and antenna. Assessee claimed amount of licence fee as ‘Income from house property’. Assessing Officer opined that since property was reflected as ‘commercial asset’, income derived therefrom was to be assessed as business income. Tribunal held that the terrace does not have any appurtenant land, hence the agreement of renting and hiring terrace was in essence an agreement of hiring space and not building and land appurtenant thereto hence, rental income was assessable as income from other sources. On appeal by assessee, allowing the appeal the Court held that; since assessee continued to be owner of terrace floor and such property could not be used for any other purpose except exploitation of its space in such a way for gaining income, impugned licence fee was to be taxed as income from house property. (AY. 2008-09)

Niagara Hotels & Builders (P.) Ltd. v. CIT (2015) 233 Taxman 180 (Delhi)(HC)

S.22 : Income from house property – Business income – Income from letting out godowns is held to be assessable as income from house property and not as business income. [S.28(i)]

Main business of assessee-firm was export of tobacco and for that purpose it had constructed godowns. It let out godowns when they were not in use and earned rental income therefrom. It claimed said income as business income contending that one of objectives in partnership deed was to let out godowns. Assessing Officer assessed the income under the head income from house property. On appeal, the Commissioner (Appeals) held that the income from letting out of godowns should be treated as income from business. On revenue’s appeal, the Tribunal confirmed the order of the Commissioner (Appeals). On appeal to the High Court by the revenue, allowing the appeal the Court held that; since letting out of godowns was not a continuous activity of assessee from year to year and assessee could let out godowns only because those were not in use at relevant time, rent received by assessee would have to be computed as income from property and character of income would not stand altered only because it was received by firm with one of objects of partnership deed to let out their godowns. (AY. 1992-93)

CIT v. Sileman Khan Mahaboob Khan (2015) 377 ITR 613 / 233 Taxman 65 (AP)(HC)

S.22 : Income from house property – Income from business – Real estate developer – Stock in trade-Rental income is held to be assessable as Income from house property. [S.28(i)]

Rental income received from unsold portion of property constructed by assessee, a real estate developer, is assessable as income from house property and not business. Once it is held that income is derived from property, treatment given in books of account as stock-in-trade would not alter character or nature of income. (AY.2000-01)

CIT v. Sane & Doshi Enterprises (2015) 377 ITR 265 / 278 CTR 316 / 232 Taxman 452 (Bom.)(HC)

S.24 : Income from house property – Deductions – Interest paid to partners capital accounts – Held to be allowable. [S.22]

Assessee-firm’s business was to construct flats or commercial units and sell them at profit. Interest was paid to partners on capital contributed by them which was utilised for purpose of construction of property from which assessee earned rental income. Same had been allowed by Tribunal under section 24(b) on ground that such claim was allowed by Commissioner (Appeals) and later approved by Tribunal in earlier year. Dismissing the appeal of revenue, the Court held that since entire interest paid on partners’ capital which was utilised for construction of property from which rental income was earned was allowable. (AY.2000-01)

CIT v. Sane & Doshi Enterprises (2015) 377 ITR 265 / 278 CTR 316 / 232 Taxman 452 (Bom.)(HC)

S. 28(iv) : Business income – Value of any benefit or perquisites – Converted into money or not – Waiver of loan – Assessing as business income was held to be not justified

The assessee-company borrowed funds from IC, an associate concern, from time-to-time at commercial rate of interest. Similarly, the assessee had advanced loan to MBPL, another associate concern.

There was default on the part of MBPL and the assessee waived the loan granted to MBPL together with interest. At the same time, IC waived loan advanced to the assessee together with interest.

The Assessing Officer treated the amount of loan and interest waived by IC as business income under section 28(iv) and made addition accordingly.

On appeal, the Commissioner (Appeals) deleted the additions.

On revenue’s appeal, the Tribunal upheld the order of the Commissioner (Appeals).

On appeal to the High Court; When in earlier years revenue did not accept loan transactions from IC and to MBPL both, as business transactions, it could not apply section 28(iv) by terming such waiver as income of assessee arising from its business. Further if both transactions were loan transactions and one part of it was treated as business income, then second part could not have given a different character and what assessee derived by way of loan having been shown as income and what was amount written off by assessee could be adjusted against each other. (AY. 2005-06)

CIT v. Digiwave Infrastructure & Services Ltd. (2015) 232 Taxman 399 (Bom.)(HC)

S.32 : Depreciation – Wind mills – Cost of wind mill – Disallowance of depreciation on alleged inflation of cost is held to be not justified

The assessee had claimed 100 per cent depreciation on 12 wind mills. Assessing Officer disallowed said claim holding that cost of wind mills were inflated by ` 1 crore per windmill. Tribunal, allowed assessee’s claim. Dismissing the appeal of revenue, the Court held that; the Tribunal had considered statement of comparable cases produced by assessee and concluded that payment made by assessee was certainly not inflated. It was also found that Assessing Officer had merely proceeded on basis of a presumption that cost of each windmill was inflated but it had not been proved by documentary evidence, in view of aforesaid, Tribunal was justified in allowing assessee’s claim. (AYs. 2002-03 to 2006-07)

CIT v. Karma Energy Ltd. (2015) 232 Taxman 496 (Bom.)(HC.)

S.32 : Depreciation – Functional test – Centering/Shuttering material – 100% depreciation is not eligible

Allowing the appeal of revenue the Court held that; shuttering/centering is undoubtedly a plant, but its components which cannot be put to use in the business independently cannot be treated as plant; hence the assessee was not entitled to claim 100 per cent depreciation under section 32(1), proviso, on centering/shuttering material. (AY.1991-92)

CIT v. S. Vijay Kumar (2015) 122 DTR 81 (FB)((AP&T)(HC)

S.32 : Depreciation – Block of assets – Even assets installed in a discontinued business are eligible for depreciation as part of ‘block of assets’ [Ss. 2(11)43(6)]

On appeal by the department to the High Court HELD dismissing the appeal; Once the concept of block of assets was brought into effect from assessment year 1989-90 onwards then the aggregate of written down value of all the assets in the block at the beginning of the previous year along with additions made to the assets in the subject Assessment Year depreciation is allowable. The individual asset loses its identity for purposes of depreciation and the user test is to be satisfied at the time the purchased machinery becomes a part of the block of assets for the first time (ITA No. 2088 of 2013. dt. 17-11-2015) (AY.2005-06)

CIT v. Sonic Biochem Extraction Pvt. Ltd. (Bom.) (HC); www.itatonline.org

S.35 : Scientific research –Assessing Officer cannot disallow the weighted deduction in respect of scientific expenditure pursuant to certificate issued by prescribed authority, i.e., Department of Scientific and Industrial Research (DSIR) : Availability of alternate remedy would be a good ground to refuse the relief under Article 226 of the Constitution of India. [S. 35(2AB), Constitution of India, Article 226 ]

Allowing the petition the Court held that; where assessee claimed deduction under section 35(2AB), pursuant to certificate issued by prescribed authority, i.e., Department of Scientific and Industrial Research (DSIR), approving such claim, Assessing Officer could not have denied weighted deduction under section 35(2AB) in respect of scientific expenditure. Court also held that the Assessing Officer cannot sit in judgment over report submitted by prescribed authority, however, where Assessing Officer does not accept claim of assessee made under section 35(2AB), he should refer matter to Board, which will then refer question to prescribed authority, since issue of jurisdiction of Assessing Officer was under consideration, petition could not have been dismissed on ground of availability of alternate remedy. (AY. 2009-10)

Tejas Networks Ltd. v. Dy. CIT (2015) 233 Taxman 426 (Karn.)(HC)

S.37(1) : Business expenditure – On medical treatment of eyes – Not incurred wholly and exclusively for purpose of profession – Held not deductible

Expenditure incurred by assessee advocate on medical treatment of eyes is for personal wellbeing and the benefit, if any, as a professional is incidental, assessee is not entitled to claim deduction in respect of expenditure incurred by him on foreign tour undertaken by him for the purpose of pre-operative treatment of his eyes. (AY. 1986-87)

Dhimant Hirarla Thakkar v. CIT (2016) 282 CTR 87 / 236 Taxman 181/ ( 2016) 380 ITR 275 (Bom.)(HC)

S.37(1) : Business expenditure –Tournament to promote corporate image – Held to be allowable deduction

Expenditure incurred in organising tournaments to promote corporate image of group companies was an allowable deduction. (AYs. 1998-99, 1999-2000)

CIT v. Williamson Magor & Co. Ltd. (2015) 232 Taxman 533 (Cal.)(HC)

S.37(1) : Business expenditure – Capital or revenue – Contribution to various industries – Revenue in nature

Assessee company was engaged in business of manufacturing and selling petrochemicals. It made certain contribution to various industries which Tribunal held to be revenue in nature. Tribunal had merely followed and applied its earlier orders for prior assessment years in case of this very assessee and on same question. Dismissing the appeal of revenue the Court held that; such factual findings could not be termed perverse and did not give rise to any substantial question of law. (AYs. 2003-04, 2004-05)

CIT v. Indian Petrochemicals Corporation Ltd. (2015) 378 ITR 569/ 233 Taxman 89 (Bom.)(HC)

S.37(1) : Business expenditure –Cost of Employees Stock Option (ESOP) debited to P & L A/c is allowable business expenditure

The question sought to be projected by the Revenue is whether the ITAT erred in deleting the addition of ` 1,28,19,169/- made by the Assessing Officer (‘AO’) by way of disallowance of the expenses debited as cost of Employees Stock Option (‘ESOP’) in profit and loss account? The Court has been shown a copy of the decision dated 19th June, 2012 passed by the Division Bench of Madras High Court in CIT-III Chennai v. PVP Ventures Ltd. (TC(A) No. 1023 of 2005) where a similar question was answered in favour of the assessee by holding that the cost of ESOP could be debited to the profit and loss account of the assessee. This Court has also in its decision dated 4th August, 2015 in ITA No. 2 of 2002 (CIT v. Oswal Agro Mills Ltd.) held that the expenditure incurred in connection with issue of debentures or obtaining loan should be considered as revenue expenditure. In the circumstances, the impugned order of the ITAT answering the question in favour of the assessee is affirmed.(ITA No. 107/2015, dt. 18-8-2015) (AY. 2008-09)

CIT v. Lemon Tree Hotels Ltd. (Delhi)(HC); www.itatonline.org

S.37(1) : Business expenditure – Advertisement – Brand building – Agarbatti – Businessman point of view – AO cannot question and challenge the right of asessee – Disallowance was held to be not justified. [S.40A(2)]

Advertisement expenses incurred by the assessee for brand building of Agarbatti cannot be disallowed. The expenditure that has been incurred is prerogative and right of assessee and the Assessing Officer cannot question and challenge same. (AYs. 2003-04 to 2005-06)

CIT v. Hari Chand Shri Gopal (2015) 231 Taxman 79 (Delhi)(HC)

S.40(a)(ia) : Amounts not deductible – Deduction at source – Payee filing income-tax return and offering sum received for taxation – Disallowance was not justified – Second proviso is declaratory and curative and has retrospective effect from April 1, 2005. [Ss. 194J, 201(1)]

Dismissing the appeal of revenue the Court held that; The payees had filed returns and offered the sums received to tax. No disallowance could be made under section 40(a)(ia). Second proviso is declaratory and curative and has retrospective effect from April 1, 2005. (AYs. 2008-2009, 2009-2010)

CIT v. Ansal Land Mark Township P. Ltd. (2015) 377 ITR 635/ 124 DTR 18/ 234 Taxman 825 (Delhi )(HC)

S.40(a)(i) : Amounts not deductible – Royalty – Purchase of software – Not royalty – Not liable to deduct tax at source. [S. 9(1)(iv), 40(a)(ia), 194J, 195]

Dismissing the appeal of revenue the Court held that ; Payments made for purchase of software as a product is not for use or the right to use the software and is not assessable as “royalty” The amount cannot be disallowed, the assessee is not liable to deduct tax at source. (AY. 2008-09). (ITA No. 890/2015, dt. 19-1-2016)

Pr. CIT v. M Tech India P. Ltd. (Delhi)(HC); www.itatonline.org

S.40A(2) : Expenses or payments not deductible – Excessive or unreasonable – Both the companies are assessed at maximum marginal rate –Disallowance was held to be not justified. [S.37(1)]

Assessing Officer disallowed the estimated rent by invoking the provision of section 40A(2) of the Act. Tribunal deleted the disallowances. On appeal by revenue dismissing the appeal of revenue the Court held that; the assessee company as well as parent company, both were assessed to tax at maximum marginal rate and, therefore, it could not be said that service charge was paid to G at unreasonable rate to evade tax. Since revenue could not point out that assessee evaded payment of tax, invocation of section 40A(2) was not valid.

Pr.CIT v. Gujarat Gas Financial Services Ltd. (2015) 233 Taxman 532 (Guj.)(HC)

S.40A(2) : Expenses or payments not deductible – Excessive or unreasonable – Sale of rice lesser than its purchase price – Addition cannot be made if the parties are not related

Assessee sold rice bran at a price lessor than its purchase price, Lower authorities confirmed the difference as additional income of assessee. On appeal allowing the appeal of assessee the Court held that; The Apex Court in the case of CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 has held that ‘where a trader transfers his goods to another trader at a price less than the market price and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched to ascertain the profit from the transaction. An assessee can so arrange his affairs as to minimise his tax burden. Similarly, the Gujarat High Court in the case of CIT v. Keshavlal Chandulal [1966] 59 ITR 120 has observed that ‘where a person disposes of his goods at a lesser value than their market price, or at a concessional price, there is nothing in the income tax law which compels him to sell at a price which is the price realisable in the market.

The only exception in this rule is, if the goods fall under section 40(A)(2) where there exists a relationship as set out in the said provision between the parties. It is not the case of the department that though the shops are adjoining each other, they are related in any manner. That provision is not invoked. In the light of the aforesaid statement of law, the authorities were not justified in adding the income, taking the difference between the price at which the rice bran is purchased and rice bran is sold. (AY. 2004-05)

A. Khadar Basha v. ACIT (2015) 232 Taxman 434 (Karn.)(HC)

S.40A(3) : Expenses or payments not deductible – Cash payments exceeding prescribed limits – Film artist – Costumes, makeup at different places – Deletion of expenses was held to be justified. [S.260A]

Assessee was a leading film artist and claimed professional expenditure. Assessing Officer disallowed some of expenses claimed by assessee in excess of ` 20,000 in terms of section 40A(3) and other expenses claimed were disallowed for want of evidence. However, Commissioner (Appeals) held that incurring of expenditure by assessee at different places where shooting took place could not be ruled out and there was reasonableness in claim of assessee insofar as expenses on costumes, makeup, wig material, travelling expenses etc. Tribunal confirmed order of Commissioner (Appeals). Dismissing the appeal of revenue the Court held that; since issue involved was a pure question of fact, appeal against order of Tribunal was to be dismissed. (AYs. 2007-08 & 2008-09)

CIT v. R.S. Suriya (2015) 232 Taxman 126 (Mad.)(HC)

S. 40A(3) : Expenses of payments not deductible – Cash payments exceeding prescribed limits –Amendment of aggregation of payments in a single day is applicable w.e.f. 1st April, 2009.

During the year under consideration, the assessee made various purchases of ` 1,38,43,525/- from two parties in respect of which payments were made in cash. The Assessee was required to make payments in cash for the reason that the assessee was new in business and had a small capital base of ` 10 lakh, therefore, distributors were not ready to extend the credit even for a single or two days.

The AO and CIT(A) disallowed the said payment u/s. 40A(3). However, the Tribunal deleted the addition so made.

The Revenue carried the matter to the Delhi High Court and the Hon’ble High Court concurred with the view of the Tribunal on the ground that there are several mitigating factors to show and establish commercial expediency and reasons for making the purchases in cash, which have not been disputed. Further, amendment to section 40A(3) relating to “aggregation” of payments made to a person in a single day is not applicable as the same is effective from 1st April, 2009 i.e. AY. 2009-10 onwards.

CIT v. Hitesh Bansal (2015) 113 DTR 433 (Delhi) (HC)

S.45 : Capital gains – Transfer –Accrual of income – Subsequent to cancellation of agreement of sale of land – Income has not accrued to assessee in real sense – No hypothetical income could be brought to tax. [Ss. 2(47), 139, 145]

Assessee filed its return declaring income on account of sale of land/FSI to its associates/sister concerns. Subsequently, assessee-company filed revised return declaring nil income and claimed that income declared in original return in respect of sale of land/FSI stood withdrawn due to cancellation of sale agreements. Assessing Officer was of view that action of assessee in filing revised return was not bona fide and taxed income from sale of land/FSI. Tribunal allowed the claim of assessee. On appeal by revenue dismissing the appeal the Court held that; it was found that agreements were cancelled, properties reverted to assessee which were duly reflected in balance sheet and assets of assessee. There were revised accounts which were also scrutinised and were found to be in order and meeting accounting principles. Since income had not accrued to assessee in real sense, original return represented wrong statement which was corrected by assessee by filing a revised return, no hypothetical income of assessee could have been brought to tax. (AY. 2007-08)

CIT v. Lok Housing & Constructions Ltd. (2015) 232 Taxman 159 (Bom.)(HC)

S.45 : Capital gains – Business income – Borrowed money – Income from sale of shares – Portfolio management services – Income assessable as capital gains and not as business income. [S.28(i)]

Dismissing the appeal of revenue the Court held that merely because assessee has invested funds in shares through portfolio management service or it has invested borrowed funds in the purchase of shares, it does not mean that the assessee is carrying on business of investment in shares; findings arrived by the Tribunal that the income from the sale of shares by the assessee is assessable as capital gains and not as business income being conformity with the guidelines issued by Circular No. 4 of 2007 dt. 15th June, 2007, no substantial question of law arises. (AY. 2006-07, 2008-09)

CIT v. Kapur Investment (P) Ltd. (2015) 122 DTR 311/ 234 Taxman 149 (Karn.)(HC)

S.50B : Capital gains – Slump sale – In computing the net worth for computing capital gains from a slump sale, depreciation on assets have to be deducted even if not claimed by the assessee. [S.2(11), 2(42C), 43(6)(c), 50]

Allowing the appeal of revenue the Court held that; In computing the net worth for computing capital gains from a slump sale, depreciation on assets have to be deducted even if not claimed by the assessee. (AY. 2001-02). (ITA No. 1003/2011, dt. 6-1-2016)

CIT v. Dharmpal Satyapal (Delhi)(HC); www.itatonline.org

S.54B : Capital gains – Land used for agricultural purposes – Land need not be used continuously – Land purchased in the name of wife was not eligible to deduction.[S.45]

Court held that section does not indicate that land should have been used continuously, since assessee had established that he had been using said land for a period of two years immediately preceding date on which he transferred same exemption was to be allowed, however, purchase of land in the name of wife was held to be not eligible deduction. (AY. 2006-07)

CIT v. Dinesh Verma (2015) 233 Taxman 409 (P&H)(HC)

S.54F : Capital gains – Investment in a residential house – Amount invested – Construction though not completed within three years entitle to exemption. [S.45]

Assessee sold a property on 6-10-2008. She purchased another residential plot on 13-10-2008. On 2-6-2010 she obtained approval of building plan from local authority and commenced construction, which was not completed within 3 years, i.e., on or before 5-10-2011. She claimed exemption under section 54F in respect of long-term capital gain arising from sale of property. Assessing Officer disallowed claim on ground that assessee had not completed construction of house within three years as per section 54F. Dismissing the appeal of revenue the Court held that; once it was established by assessee that she had invested entire net consideration in construction of residential house within stipulated period, it would meet requirement of section 54F and she would be entitled to get benefit of section 54F. (AY. 2009-10)

CIT v. B.S. Shanthakumari (Smt.) (2015) 233 Taxman 347 (Karn.)(HC)

S.68 : Cash credits – Share capital – It is a fallacy to assume that a company which has not commenced business has unaccounted money – Fact that investors have a common address is not relevant – Fact that shares were subsequently sold at reduced rate is not relevant – Addition was deleted

Dismissing the appeal of revenue , the Court held that –

(i) There is a basic fallacy in the submission of the Revenue about the precise role of the Assessee, Five Vision. The broad sweeping allegation made is that “the Assessee being a developer is charging on money which is taken in cash”. This, however, does not apply to the assessee which appears to be involved in the construction of a shopping mall. In fact for the AYs in question, the assessee had not commenced any business. The construction of the mall was not yet complete during the AYs in question. The profit and loss account of the assessee for all the three AYs, which has been placed on record, shows that only revenue received was interest on the deposits with the bank. Assessee is, therefore, right in the contention that the basic presumption of the Revenue as far as the assessee is concerned has no legs to stand. Correspondingly, the further allegation that such ‘on money’ was routed back to the mainstream in the form of capital has also to fail.

(ii) The other submission that the assessee was itself being used as a conduit for routing the ‘on money’ or that the investment in the assessee was also for routing such ‘on money’ has not even prima facie been able to be established by the Revenue. On the one hand there is an attempt to treat the cash credit found in the assessee’s books of accounts to be ‘undisclosed income of the assessee’ by showing the investors to be ‘paper companies’. On the other hand, the attempt is to show that this money in fact belongs to certain other entities whose source has not been explained by the assessee.

(iii) Coming to the core issue concerning the identity, creditworthiness and genuineness of the investor companies, it is seen that as far as the Table I investors were concerned, only 9 were searched and in their cases, the ITAT on a very detailed examination was satisfied that they not only existed, but that the assessee had discharged the primary onus of proving their creditworthiness and genuineness. They had responded to the summons issued to them. Directors of 14 of these companies appeared before the AO and produced their books of account.

(iv) The mere fact that some of the investors have a common address is not a valid basis to doubt their identity or genuineness.

(v) Also, the fact that the shares of the assessee were subsequently sold at a reduced price is indeed not germane to the question of the genuineness of the investment in the share capital of the assessee. The question of avoidance of tax thereby may have to be examined in the hands of the person purchasing the shares. (AY. 2007-08, 2009-10)

CIT v. Five Vision Promoters Pvt. Ltd. (2016) 380 ITR 289 (Delhi)(HC)

S.68 : Cash credits – Share application – If the identity and other details of the share applicants are available, the share application money cannot be treated as undisclosed income in the hands of the Co. The addition, if at all, should be in the hands of the applicants if their creditworthiness cannot be proved

(i) The Revenue has not doubted the identity of the share applicants. The sole basis for the Revenue to doubt their creditworthiness was the low income as reflected in their Income Tax Returns. The entire details of the share applicants were made available to the AO by the assessee. This included their PAN numbers, confirmations, their bank statements, their balance sheets and profit and loss accounts and the certificates of incorporation etc. It was observed by the ITAT that the AO had not undertaken any investigation of the veracity of the above documents submitted to him. It has been rightly commented by the ITAT that without doubting the documents, the AO completed the assessment only on the presumption that low return of income was sufficient to doubt the credit worthiness of the shareholders.

(ii) The Court is of the view that the assessee produced sufficient documentation, discharged its initial onus of showing the genuineness and creditworthiness of the share applicants. It was incumbent to the AO to have undertaken some inquiry and investigation before coming to a conclusion on the issue of creditworthiness. In para 39 of the decision in CIT v. Nova Promoters & Finlease Ltd. 342 ITR 169, the Court has taken note of a situation where the complete particulars of the share applicants are furnished to the AO and the AO fails to conduct an inquiry. The Court has observed that in that event no addition can be made in the hands of the assessee under section 68 of the Act and it will be open to the Revenue to move against the share applicants in accordance with law. (ITA Nos. 71-72 & 84 of 2005, dt. 12-8-2015) (AYs. 2006-07 2007-08, 2008-09)

CIT v. Vrindavan Farms (P) Ltd. (Delhi) (HC); www.itatonline.org

S. 69 : Unexplained investments – Cash received on sale of property shown as income – Buyer of property denied having paid any cash – Deletion of addition was held to be justified. [S.153A]

During search at assessee’s premises it was found that assessee had purchased a property (Anand Niketan property). Assessee explained that his company RFPL had received cash amount of ` 1 crore on account of sale of other property (Golf Link property) and said amount was used by assessee for purchasing Anand Niketan property. Buyer of Golf Link property, however, denied to have paid any cash to RFPL. On that basis Assessing Officer held that cash involved in purchase of Anand Niketan property remained unexplained and made addition accordingly. Appellate authorities deleted addition on ground that RFPL had shown cash receipt of ` 100 lakh on account of sale of a property and had declared long-term capital gain on basis of sale proceeds of ` 255 lakh which had been accepted by Assessing Officer of that company and, hence, it had to be accepted that this much cash was received by that company. On appeal by revenue the Court held that; on given fact-intensive nature of matter, findings recorded by Appellate Authorities were to be upheld.

CIT v. Tilak Raj Anand (2015) 232 Taxman 653 (Delhi)(HC)

S.69B : Amounts of investments not fully disclosed in books of account – Survey – Unaccounted investment – Retraction of statement without giving reasons – Addition was held to be justified. [Ss. 133A, 142, 143]

Dismissing the appeal of revenue the Court held that; where assessee made an admission regarding unaccounted investment during survey and almost after two years, retracted from same on basis that admission was based on coercion and force without giving any reason, same was not acceptable and addition as undisclosed investment was to be upheld.

Navdeep Dhingra v. CIT (2015) 232 Taxman 425 (P&H)(HC)

S.72 : Carry forward and set off of business losses – Depreciable assets – Can be set off against gains arising from sale of depreciable asset – Matter remanded to Tribunal. [Ss. 32, 32(2)(iii)(a), 50]

For the assessment year 1999-2000, the assessee-firm, relying upon the provisions of section 32(2), claimed that the carry forward depreciation loss relating to assessment year 1997-98 was admissible to be set off against profit and gains arising from business in the relevant year which included short-term capital gains arising from sale of business assets. In support of its claim the assessee relied upon the decision of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 and E.D. Sassoon & Co. Ltd. v. CIT [1972] 86 ITR 757.

The Assessing Officer, however, rejected the assessee’s claim and brought to tax the short-term capital gains to tax.

On appeal, the Commissioner (Appeals) and the Tribunal were of the view that the claim of the assessee that unabsorbed depreciation should be allowed to be adjusted against capital gains was incorrect as sections 32(2)(i) and 32(2)(ii) did not get attracted in instant case.

On appeal to High Court:

The core issue in the instant case is whether in terms of section 32(2)(iii), the assessee will be entitled to set off the brought forward depreciation loss against capital gains. That issue, apparently, has not been addressed by the Tribunal in the order in question. All that the Tribunal says in the order is that, though it is abundantly clear that section 32(2)(iii) is operational in the case of the assessee, it only says that unabsorbed depreciation can be carried forward to the successive years. That is not the issue raised in the appeal.

The issue to be decided in the instant case is whether the capital gains arising out of sale of depreciable assets could be set off against the profits and gains of business for the assessment year 1999-2000. That issue, unfortunately, has not been considered by the Tribunal. Furthermore, the decision of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. (supra) and E.D. Sassoon & Co. Ltd.’s case (supra) raised in the grounds of appeal by the assessee has also not been adverted to. The decision of the Supreme Court clearly gives a pointer to the issue as to whether the appellant/assessee is entitled to set off of brought forward depreciation loss as against profits and gains of business arising from sale of depreciable assets for the assessment year 1999-2000.

In this view of the matter, the matter is remanded back to the Tribunal to consider and pass orders on the entire issues raised by the assessee. (AY. 1999-2000)

Southern Travels v. ACIT (2015) 232 Taxman 689 (Mad.)(HC)

S.79 : Carry forward and set off losses – Change in share holdings – Companies in which public are not substantially interested – The transfer of shares of an Indian company by a holding Co. (Yum Asia) to another holding Co. (Yum Singapore) results in change of “beneficial ownership” of shares, – Set off of losses was rightly rejected by the Tribunal.

Dismissing the appeal of assesse the Court held that ;Having examined the facts as well as the concurrent orders of the AO and the ITAT, the Court finds that there was indeed a change of ownership of 100% shares of Yum India from Yum Asia to Yum Singapore, both of which were distinct entities. Although they might be AEs of Yum USA, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of ‘piercing the veil’ at the instance of Yum India does not arise. In the circumstances, it was rightly concluded by the ITAT that in terms of section 79 of the Act, Yum India cannot be permitted to set off the carry forward accumulated business losses of the earlier years.(AY. 2009-10) ( ITA No. 349/2015, dt. 13-1-2016)

Yum Restaurants (India) Pvt. Ltd. v. IOT (Delhi)(HC) ; www.itatonline.org

S.80-IA : Industrial undertakings – Wind mill power generation – Losses incurred by assessee had already been set off against other income of business enterprise, profit earned by it would be eligible for deduction. [S.32 ]

Assessee – was engaged in wind mill power generation and textile exports. It claimed deduction under section 80IA. Tribunal allowed assessee’s claim .On appeal dismissing the appeal of revenue the Court held that since losses incurred by assessee had already been set off against other income of business enterprise, profit earned by it would be eligible for deduction. (AY. 2010-11)

CIT v. Mallow International (2015) 232 Taxman 281 (Mad.)(HC)

S.80-IB : Industrial undertaking – Proprietorship converted into partnership – Partnership firm is entitled to deduction. [S.84 ]

Dismissing the appeal of revenue, the Court held that; when a proprietorship converted in to partnership and transferred the industrial undertaking as a whole along with assets and liabilities is not a case of transfer of plant and machinery to firm or of splitting or reconstruction of business hence the firm is entitled to deduction.( AY. 2005-2006)

CIT v. Advance Valve Global (2015) 377 ITR 207 (All.) (HC)

S.92C : Transfer pricing – CUP method can be applied by comparing a pricing formulae, rather than the pricing quantification in amount. Rule 10AB inserted w.e.f. 1-4-2012 is beneficial in nature and so retrospective w.e.f. 1-4-2002

Dismissing the appeal of revenue the Court held that CUP method can be applied by a comparing a pricing formulae, rather than the pricing quantification in amount. Rule 10AB inserted w.e.f. 1-4-2012 is beneficial in nature and so retrospective w.e.f. 1-4-2002. (AY. 2007-08) (ITA No. 374/2015, dated 10-12-2015)

Pr. CIT v. Global Forwarding India Pvt. Ltd. (Delhi)(HC); www.itatonline.org

S.92C : Transfer pricing –Advertising Marketing and Sales promotion (AMP) Expenditure – Onus is on revenue [S.92B ]

Dismissing the appeal of revenue the Court held that the onus is on the Revenue to demonstrate by tangible material that there is an international transaction involving AMP expenses between the Indian Co. and the AE. In the absence of that first step, the question of determining the ALP of such a transaction does not arise. In the absence of a machinery provision it is hazardous for any TPO to proceed to determine the ALP of such a transaction since Bright Line Test has been negatived as a valid method of determining the existence of an international transaction and thereafter its ALP. (AY. 2008-09) (ITA No. 610/2014, dated 22-12-2015)

CIT v. Whirlpool of India Ltd. (Delhi)(HC); www.itatonline.org

S.92C : Transfer pricing –Adjustment with respect to transfer pricing has to be confined to transactions with Associated Enterprises

An adjustment with respect to transfer pricing has to be confined to transactions with Associated Enterprises and cannot be made with respect to transactions with unrelated third parties. (ITA No. 2201 of 2013. dated 2-12-2015) (AY. 2007-08)

CIT v. Thyssen Krupp ( Bom.)(HC); www.itatonline.org

S. 92C : Transfer pricing –Arm’s length price (‘ALP’) –Advertisement, Marketing and sales promotion (AMP) –Adjustment for Advertisement & Market Promotion (AMP) expenses cannot be made on the basis that there is an assumed “international transaction” with the AE because the advertisement expenditure of the Indian company is “excessive”. [S.92B, 92F]

The Tribunal followed its decision in LG Electronics India Pvt. Ltd. v. ACIT (2013) 22 ITR (Trib.) 1 and held that the Assessing Officer (‘AO’) was entitled to make a transfer pricing adjustment under Chapter X of the Act in respect of the AMP expenditure incurred by MSIL on the ground that such expenditure created brand value and marketing intangibles in respect of the brands/trademarks belonging to MSIL’s Associated Enterprise (‘AE’), Suzuki Motor Corporation, Japan (hereinafter ‘SMC’). HELD by the High Court: Advertisement & Market Promotion (AMP) – Adjustment for Advertisement & Market Promotion (AMP) expenses cannot be made on the basis that there is an assumed “international transaction” with the AE because the advertisement expenditure of the Indian company is “excessive”. Appeals of assessee was allowed by holding that AMP expenses incurred by MSIL cannot be treated as an international transaction under section 92B of the Act. (ITA No.110 of 2014 and 710 of 2015, dt. 11-12-2015. (AY. 2005-06, 2006-07)

Maruti Suzuki India Limited v. CIT (2016) 129 DTR 25 / 282 CTR 1(Delhi) (HC)

S.115JA : Book profit – Interest is chargeable even in case of assessment under section 115JA. [Ss. 234B, 234C]

Interest is chargeable even in case of assessment under section 115JA. (AY. 1997-98)

CIT v. Salgaokar Mining Industries (P.) Ltd (2015) 122 DTR 260 (Bom.)(HC)

S.127 : Power to transfer cases – Assessee should be supplied the information which formed basis of issuance of notice for centralisation of their cases

Assessees were issued show cause notices for centralisation of their cases. They requested to supply material information, which formed basis for issuance of notices. Request of assessees was turned down holding that such material would be supplied to them during course of assessment proceedings. On writ, allowing the petition the Court held that assessees should know gist of enquiry carried out against them and were also to be supplied adverse material gathered against them in order to enable them to represent their cases effectively before Commissioner and assessees were entitled to pre-decisional hearing in order to contest show cause notices.

Virbhadra Singh v. CIT (2015) 233 Taxmann 269 (HP)(HC)

S.132(4) : Search and seizure –Statement on oath – Addition which was made only on the basis of statement recorded after two and half months of search was held to be invalid. [Ss. 132, 158B, 158BC, Constitution of India, Article 20(3), Evidence Act, 1872, S.31]

Dismissing the appeal of revenue the Court held that no incriminating material having during search, block assessment made solely on the basis of statement of assessee recorded under section 132(4) was invalid, more so when such statement was recorded after two and half months of search and was retracted.

CIT v. Naresh Kumar Agarwal (2015) 122 DTR 339 (AP)(HC)

S.142A : Estimate by Valuation Officer – Cost of construction – reference to DVO cannot be made without rejecting the books of account on some legal or justified basis [S.147]

Where books of account in respect of cost of construction are maintained, reference to DVO cannot be made without rejecting said books of account on some legal or justified basis. (AYs. 2004-05, 2005-06, 2007-08, 2009-10)

CIT v. Freedom Board & Paper Mills (2015) 231 Taxmann 719 (P&H)(HC)

S.143(2) : Assessment – Notice – Failure to issue a S. 143(2) notice renders the reassessment order void. S. 292BB saves a case of “non service” of the notice but not a case of “non issue” [s. 292BB]

The failure of the AO, in reassessment proceedings, to issue notice under Section 143(2) of the Act, prior to finalising the reassessment order, cannot be condoned by referring to Section 292BB of the Act. Section 292BB applies in so far as failure of “service” of notice is concerned and not with regard to failure to “issue” notice. The non-issue of the said notice is fatal to the order of reassessment. (ITA No. 519/2015, dt. 14-10-2015) (AY. 2008-09)

Pr.CIT v. Shri Jai Shiv Shankar Traders Pvt. Ltd. (Delhi)(HC); www.itatonline.org

S.143(3) : Assessment – Amalgamation – Non-existent assessee – Successor-company – Null and void – Not curable defects. [S. 292B]

Assessee-company was amalgamated with respondent-company , with effect from 1-4-2004. For relevant assessment year, assessee filed its return on 28-11-2003 and assessment order was passed on 27-3-2006. On appeal CIT(A) gave partial relief to assessee. Asssessee and revenue filed appeal before the Tribunal. The Tribunal allowed the appeal of the respondent company and quashed the assessment order by the Assessing Officer holding that the assessment proceedings against SSS Ltd. (which was non-existent on the date of passing of the assessment order) was not valid proceedings. On appeal by the revenue dismissing the appeal the Court held that Assessment order passed by Assessing Officer on assessee after being intimated about its merger with respondent. company was without jurisdiction and null and void. Provisions of section 292B would not make assessment valid as a defect/omission to incorporate name of successor company in assessment order was not a procedural irregularity but it went to root of matter. (AY. 2003-04)

CIT v. Intel Technology India (P.) Ltd. (2015) 232 Taxmann 279/(2016) 380 ITR 272 (Karn.)(HC)

S.143(3) : Assessment – Estimate of income – Enquiry by excise authorities cannot be sole basis for estimation of income – Method adopted by the Tribunal was held to be justified

Dismissing the appeal of revenue the Court held that the provisions under the two laws, viz., the Central Excise Act and the Income-tax Act, operate in two different fields. Without there being an independent enquiry by the taxing authorities the demand made under the provisions of the Central Excise Act cannot be incorporated as such, especially when the notice of demand had been modified by the adjudicating authority. The method adopted by the Commissioner (Appeals) with regard to taxation under the Income-tax Act, as affirmed by the Tribunal, was the correct method of determining the income based on the unaccounted turnover. (AY 2002-03, 2003-04, 2004-05)

CIT v. Amman Steel and Allied Industries (2015) 377 ITR 568 (Mad.) (HC)

S.143(3) : Assessment – Notice – Limitation – Service of notice beyond one year – Order void ab initio. [S.143(3)]

Notice under section 143(2) served upon assessee beyond period of one year barred by limitation. Assessment was held to be void ab initio. (AY. 1999-2000)

CIT v. Gujarat Foils Ltd. (2015) 377 ITR 324 (Guj.) (HC)

S.144C : Reference to dispute resolution panel – Empowered to examine issues arising out of assessment proceedings even though such issues are not part of subject-matter of variations suggested by Assessing Officer.[S.147 ]

In terms of Explanation to section 144C(8), Dispute Resolution Panel is empowered to examine issues arising out of assessment proceedings even though such issues are not part of subject matter of variations suggested by Assessing Officer. Reassessment was also quashed. AY. 2008-09)

Lahmeyer Holding GMBH v. Dy. DIT (2015) 376 ITR 70/232 Taxman 829 (Delhi)(HC)

S.147 : Reassessment – Assessing Officer has to form his own opinion – Reassessment on the basis of Audit objection was held to be bad in law. [S.148 ]

Allowing the petition the Court held that Reopening of assessment to take remedial action pursuant to audit objections as per Instruction No. 9 of 2006 is not valid if AO disagrees with the objections. Instruction No. 9 cannot override the requirement in s. 147 that AO should form his own belief that income has escaped assessment. (AY. 2004-05)( WP. No. 6729/2011, dt. 14-1-2016)

Sun Pharmaceuticals Industries Ltd. v. DCIT (Delhi) (HC); www.itatonline.org

S.147 : Reassessment – Non-furnishing of reasons for reopening to assessee renders reassessment void. [Ss. 143(1), 148]

The question of non-furnishing the reasons for reopening an already concluded assessment goes to the very root of the matter. After filing of the return in response to the notice issued under Section 148 of the Act or on request of the assessee requesting that the return of income initially filed be treated as a return of income filed in response to such notice, the assessee is entitled to be furnished the reasons for such re-opening, which can also be challenged independently. Since such reasons had not been furnished to the appellant, even though a request for the same had been made, we are of the opinion that proceedings for the reassessment could not have been taken further on this ground alone. (WA No. 218/2015(T-IT), dt. 14-8-2015) (AY. 2006-07)

Kothari Metals v. ITO (Karn.) (HC); www.itatonline.org

S.147 : Reassessment – Department is warned not to harass taxpayers by reopening assessments in a mechanical and casual manner. Pr. CIT directed to issue instructions to AOs to strictly adhere to the law explained in various decisions and make it mandatory for them to ensure that an order for reopening of an assessment clearly records compliance with each of the legal requirements. AOs also directed to strictly comply with the law laid down in GKN Driveshafts (2003) 259 ITR 19 (SC) as regards disposal of objections to reopening assessment [S.148 ]

(i) The Court is of the view that notwithstanding several decisions of the Supreme Court as well as this Court clearly enunciating the legal position under Section 147/148 of the Act, the reopening of assessment in cases like the one on hand gives the impression that reopening of assessment is being done mechanically and casually resulting in unnecessary harassment of the Assessee.

(ii) The Court would have been inclined to impose heavy costs on the Revenue for filing such frivolous appeals but declines to do so since the appeals are being dismissed ex parte. However, the Court directs the Revenue through the Principal Chief Commissioner of Income Tax (Pr CIT) to issue instructions to the AOs to strictly adhere to the law explained in various decisions of the Supreme Court and the High Court in regard to Sections 147/148 of the Act and make it mandatory for them to ensure that an order for reopening of an assessment clearly records the compliance with each of the legal requirements. Secondly, the AOs must be directed to strictly comply with the law explained by the Supreme Court in GKN Driveshafts (India) Ltd v. Income Tax Officer (2003) 259 ITR 19 (SC) as regards the disposal of the objections raised by the assessee to the reopening of the assessment. (ITA 768/2015, dt. 12-10-2015) (AY.2002-03)

Pr. CIT v. Samcor Glass Ltd. (Delhi) (HC) ; www.itatonline.org

S.147 : Reassessment – After expiry of four years – Business income – Capital gains – Order passed within four weeks from date of rejection of assessee’s objections- Reassessment was held to be bad in law. [Ss. 28(i), 45 143(3), 148 ]

Assessee, a member of BSE, filed his return declaring income from sale of shares as capital gains. Assessing Officer completed assessment under section 143(3) accepting assessee’s treatment in respect of income in question . After expiry of four years from end of relevant year, Assessing Officer sought to reopen assessment on ground that assessee was a trader holding shares as stock-in-trade and, thus, income from sale of shares was to be taxed as business income. On Writ allowing the petition the Court held that at time of making assessment, assessee had given complete details giving names of scrips, purchase quantity, sale quantity, period of holding profit earned etc. Therefore in absence of any failure on part of assessee to disclose all material facts necessary for assessment, initiation of reassessment proceedings merely on basis of change of opinion was not sustainable. Court also held that; Assessing Officer passed assessment order within period of four weeks from date of rejection of assessee’s objections to reopening of assessment, order so passed being invalid, same deserved to be set aside. (AY. 2007-08)

Bharat Jayantilal Patel v. UOI (2015) 233 Taxmann 98 (Bom.)(HC)

S.147 : Reassessment – After the expiry of four years – Objections should be disposed by the Assessing Officer by passing speaking order – Disallowance of expenditure on exempt income –There was no failure to disclose all relevant facts – Reassessment was quashed. [Ss.14A, 148]

Allowing the petition, the Court held that Assistant Commissioner without making any reference to assessment and appellate proceedings or specific disallowances filed an affidavit in reply in court and merely copied reasons which had been recorded by her predecessor. Court held that a speaking order was required to be passed dealing with objections and reproduction of reasons and reiterating them again was no compliance with law laid down by court . Further there being nothing on record to suggest that assessee had failed to fully and truly disclose all materials facts necessary for assessment for relevant assessment year, impugned notice seeking to reopen assessment beyond four years was to be quashed and set aside. (AY. 2007-08)

Godrej Industries Ltd. v. Dy. CIT (2015) 232 Taxmann 380 (Bom.)(HC)

S.147 : Reassessment – Within four years – Change of opinion – Order of Commissioner (Appeals) – Independent application of mind is required – Reassessment was held to be bad in law. [S. 148]

The assessee and others were co-operative societies manufacturing sugar out of sugarcane supplied by their members. Their assessments had been completed under section 143(3) accepting returned income. Notices under section 148 were issued to reopen assessment inter alia on the ground that by paying amount to the cane growers in excess of the Statutory Market Price (SMP) declared by the Govt., the assessees were passing/distributing their profits and to that extent there was escapement of income. The assessees filed objections to the notices but the Assessing Officer rejected same. On writ; allowing the petition the Court held that; on basis of order passed by Commissioner (Appeals) in case of some other assessee satisfaction of Assessing Officer and formation of opinion in case of present assessee cannot be sustained; such satisfaction can be said to be a borrowed satisfaction from another officer which in absence of any application of mind and any real finding in case of assessee does not constitute valid reason to believe that income has escaped assessment. The Court held that reassessment on the basis of change of opinion was bad in law. (AY. 2007-08)

Shree Chalthan Vibhag Khand v. Dy. CIT (2015) 376 ITR 419 /233 Taxman 469 / 281 CTR 389 (Guj.)(HC)

S.147 : Reassessment – Within four years – Free trade zone –Setting off losses of other units – Query was raised in the original assessment proceedings – Reassessment notice was held to be bad in law. [S.10A]

Assessing Officer issued reassessment notice on basis that assessee claimed section 10A deduction without setting off losses of other unit – Assessee objected to reassessment order by stating that complete facts relevant to section 10A deduction were before Assessing Officer during course of original assessment – Further a specific query had been raised by Assessing Officer in relation to section 10A deduction, after which Assessing Officer passed order under section 143(3) allowing deduction – Whether thus reopening assessment would be a clear case of revisiting claim which was clearly impermissible.(AY. 2007-08)

Capgemini India (P.) Ltd. v. ACIT (2015) 232 Taxman 149 (Bom.)(HC)

S.147 : Reassessment – Change of opinion – Labour charges – Subsequent assessment year – Reassessment was held to be bad in law. [S. 37(1), 148]

In regular assessment proceedings the Assessing Officer had called upon assessee to give details of labour charges. Assessee made available said details along with quantum of work done by each of labour contractor, TDS amount on labour charges and sample bills. It was only after Assessing Officer was satisfied with claim of labour charges that he accepted claim of assessee in regular proceedings . Later on, Assessing Officer on basis of material obtained during subsequent assessment year which indicated that deduction on account of labour charges had been excessively claimed, re-opened assessment for current year. Dismissing the appeal of the revenue the Court held that reopening of assessment was a mere change of opinion and could not be sustained. (AY. 2004-05)

CIT v. Srusti Diam (2015) 232 Taxmann 127 (Bom.)(HC)

S.147 : Reassessment – Intimation – Bogus purchases – The assessment is reopened on the ground of “bogus purchases”, the reasons must contain an averment of which details on record reflect the bogus purchases. [S.143 (1), 148]

Allowing the petition the Court held that; It is settled legal position as held by a catena of decisions that the substratum for formation of belief that income liable to tax has escaped assessment has to form part of the reasons recorded. In the present case, the substratum for formation of belief, as indicated in the order rejecting the objections as well as the affidavit-in-reply, is the information given by the DGIT (Inv.), Mumbai, which got no relation with the reasons recorded, which are stated to be based upon the material available on record. Under the circumstances, the Assessing Officer, on the basis of the material on record, could not have formed belief that there was any escapement of income chargeable to tax so as to validly assume jurisdiction under section 147 of the Act. As held by the Supreme Court in a catena of decisions, the reasons recorded cannot be supplemented in the affidavit or by the order rejecting the objections. The material, on the basis of which, the belief that income chargeable to tax has escaped assessment has been formed, has to find place in the reasons itself.

(ii) In the aforesaid premises, the formation of belief that income has escaped assessment not being based upon record, it is evident that the substratum for reopening the assessment is not laid in the reasons recorded, but on material extraneous thereto. Under the circumstances, the basic requirement for assumption of jurisdiction under section 147 of the Act for reopening the assessment is not satisfied in the present case. The impugned notice under section 148 of the Act, therefore, cannot be sustained.(CA. No. 12873-75 of 2014, dt. 13-10-2015) (AY. 2009-10 )

Varshaben Sanatbhai Patel v. ITO (2016) 129 DTR 261 (Guj.)(HC); www.itatonline.org

S.147 : Reassessment – Objection – Assessing Officer was bound to decide objections on merits and pass an order, disposing of objections. [S.148]

Assessments were completed under section 143(1) and 143(3). Thereafter notices under section 148 were issued stating to file returns of income within 30 days from service of notices. The assessee raised objections against the reopening of the assessments and the Assessing Officer had disposed of the said objections without dealing anything on merits and solely on the ground that the assessee had not filed returns of income within a period of 30 days from the receipt of the notice under section 148.On writ allowing the petition the Court held that; the Assessing Officer was bound to decide objections on merits and orders, disposing of objections on ground that assessee had not filed returns of income within a period of 30 days from service of notices, were to be quashed and set aside and matter was to be remanded to Assessing Officer to consider, decide and dispose of objections on its own merits. (AY. 2007-08, 2009-10)

Pushpak Bullion (P.) Ltd. v. Dy. CIT (2015)379 ITR 81 / 233 Taxmann 326 (Guj.)(HC)

S.147 : Reassessment – Once reassessment was held to be valid, the Assessing Officer is empowered to make addition even on ground on which reassessment notice might not have been issued. [S. 143(3), 148]

Court held that in view of Explanation 3 to section 147, Assessing Officer is empowered to make addition even on ground on which reassessment notice might not have been issued, therefore, if notice under section 148(2) is found to be valid, then addition can be made on all grounds or issues which may come to notice of Assessing Officer subsequently during course of proceedings under section 147, even though reason for notice for ‘such income’ which may have escaped assessment, may not survive. (AY. 2004-05)

N. Govindaraju v. ITO (2015) 377 ITR 243 /233 Taxmann 376 / 280 CTR 316 (Karn.)(HC)

S.151 : Reassessment – After the expiry of four years – Sanction for issue of notice – Sanction has to be by Joint Commissioner and not by Commissioner – Order passed with approval of Commissioner was held to be bad in law- Not curable defects. [S. 143(1),147, 148, 292B]

Dismissing the appeal of revenue the Court held that where reassessment proceedings were initiated after expiry of four years from end of relevant years, sanction for issuance of notice for reassessment proceedings was to be granted by Joint Commissioner and not by Commissioner. The Court also invoke the principle enunciated by the Privy Council in Nazir Ahmad v. Emperor AIR 1936 PC 253 that if the statute mandates that something be done in a particular manner, it should be in that manner or not at all. The Court also relying on the ratio in CIT v. S.P.L’s Siddhartha Ltd. (2012) 345 ITR 223 (Delhi)(HC) rejected the revenue‘s contention about its application holding that where a jurisdictional infirmity strikes at the root, in validating the Issuance of notice, Section 292B cannot be rescue it .(AY. 2002-03)

CIT v. Soyuz Industrial Resources Ltd. (2015) 232 Taxman 414 (Delhi) (HC)

S.153C : Assessment – Income of any other person – Search and seizure – Intimation–Amalgamation – Notice was issued to transferor company –since such notice had not been issued to transferee-company, entire proceedings were a nullity. [S.143(3)]

Assessee-company amalgamated with other company with effect from 1-4-2008 and this fact was intimated to revenue. While so, revenue issued notice under section 153C to assessee on basis of search conducted in premises of some other parties – Despite assessee’s objection that it ceased to exist on account of its amalgamation, Assessing Officer completed assessment in name of assessee-company – Whether since assessee had amalgamated with transferee-company, notice ought to have been sent to latter, and since such notice had not been issued to transferee-company, entire proceedings were a nullity. (AY. 2003-04 to 2008-09)

CIT v. Micra India (P.) Ltd. (2015) 231 Taxmann 809 (Delhi)(HC)

S.153C : Assessment – Income of any other person – Recording of satisfaction – No satisfaction was recorded before issue of notice – Order was quashed. [S.132]

Assessee was a partnership firm carrying on business of steel fabricators. A search was conducted against partners of assessee-firm under section 132(1). On bases of seized material, Assessing Officer issued notice under section 153C calling upon assessee to file returns for assessment years in question. Assessee filed its return declaring certain taxable income. Assessing Officer completed assessment under section 153C, read with section 143, making various additions to assessee’s income. Tribunal held that no satisfaction had been recorded by the Assessing Officer before issuing of notice under section 153C. Further, none of the papers seized belonged to assessee in course of search proceedings carried out at premises of its partner hence order was quashed. On appeal by revenue, High Court affirmed the order of Tribunal. (AY. 2000-01 to 2006-07)

CIT v. Mechmen 11-C (2015) 233 Taxmann 540 / 280 CTR 198 (MP)(HC)

S.153C : Assessment – Recording of satisfaction – Assessing Officer same – Recording of satisfaction is mandatory – As no satisfaction was recorded order was held to be bad in law. [S. 132,153A]

A search and seizure operation under section 132 was carried out in the group case of TYG and others. During the course of search documents belonging to the assessee had been seized. On that basis the Assessing Officer initiated action against the assessee and consequently framed an assessment under section 153C. On appeal the Tribunal quashed the assessment on the ground that there was no satisfaction recorded by the Assessing Officer having jurisdiction over the searched person despite the fact that the Assessing Officer of the assessee and the Assessing officer of the searched person were the one and the same. On appeal by the revenue dismissing the appeal the Court held that recording of satisfaction is a pre-condition for invoking jurisdiction under section 153C and, therefore, Tribunal had correctly followed principle in quashing assessment framed. (AY. 2009-10)

CIT v. Shettys Pharmaceuticals & Biologicals Ltd. (2015) 232 Taxmann 268 (AP)(HC)

S.158BD : Block assessment –Recording of satisfaction is mandatory – Mere stating that in the course of search of third party certain cash belong to the assessee was found cannot be the ground to initiate proceedings without recording proper satisfaction. [S.158BC ]

Dismissing the appeal of revenue, the Court held that; the copy of the satisfaction recorded by the Assessing Officer, reads that in the course of search and seizure of the house of one MM, some documents related to assessee were found and seized. Therefore, the jurisdiction over the assessee had been assigned by Commissioner and in view of provisions of section 158BD, notice under section 158BC issued. On perusal of the same, it is found that no satisfactory reasons were assigned by the Assessing Officer in order to issue a notice under section 158BD as held by the Tribunal. In addition, it is also seen that the revenue did not show any reasons for non-production of the reasons recorded for the satisfaction of the Assessing Officer to issue notice under section 158BD before the Tribunal when time was granted for one year to the revenue to produce the same. Even in this appeal, no explanation is offered except stating that reasons were recorded. When there is no explanation offered by the revenue for non-production of the document before the Tribunal for more than an year and having held that reasons recorded would not constitute satisfactory reasons, it is to be held that there is no merit in this appeal.

CIT v. SSK Tulajabhavani Kalyan Mantap Kattd Samithi (2015) 232 Taxmann 262 (Karn.)(HC)

S.158BD : Block assessment – Undisclosed income of any other person – Satisfaction – Even if the Assessing Officer is same, recording of satisfaction is mandatory. [S.132A, 158BC ]

Requirement of section 158BD, that Assessing Officer of person searched or against whom an order under section 132A has been passed, should be satisfied that any undisclosed income belongs to a third person, is statutory mandate and a jurisdictional prerequisite before proceedings under section 158BD are initiated and violation of said requisite and mandatory requirement would result in annulment of assessment under section 158BD read with section 158BC. Merely because Assessing Officer of person searched and Assessing Officer of assessee were same, this would not mean that Assessing Officer of person searched should not have recorded satisfaction before notice was issued under section 158BD read with section 158BC. In the instant case, no satisfaction note recorded by the Assessing Officer of the person searched is available. In these circumstances and in view of the decision of the Supreme Court in CIT v. Calcutta Knitwears [2014] 362 ITR 673 (SC) the block assessment proceedings initiated under section 158BD read with section 158BC were bad and contrary to law.

CIT v. Manju Finance Corporation (2015) 231 Taxmann 44 (Delhi)(HC)

S. 158BD : Block assessment –Undisclosed income of any other person – Specific recording of reason is a mandatory requirement

The Assessing Officer and the CIT(A) completed block assessment proceedings u/s. 158BD. On assessee’s appeal, the Tribunal held that the Assessing Officer should record satisfaction. In the instant case, the communications available with the Assessing Officer show that certain facts with regard to question were communicated, but there is no specific recording of reasons for resort of block assessment. On Revenue’s appeal to the High Court, it held that recording of reason is a mandatory requirement as contemplated u/s .158BD and therefore, it didn’t find any error in the Tribunal’s Order.

ACIT v. J. B. Enterprises (2015) 117 DTR 254 (MP)(HC)

S.170 : Succession to business otherwise than on death – Appeal – Merger – Jurisdiction – Subsequent to merger, company was assessed at Gurgaon – Order was passed by the Assessing Officer at Bangalore – Bangalore Tribunal deciding the appeal – Appeal was filed at Punjab and Haryana High Court – No jurisdiction to adjudicate upon Lis over an order passed by Assessing Officer at Bangalore. [S.260A]

For relevant assessment year, original company MIEPL was assessed at Bangalore on27-3-2006. In meantime, it merged with respondent assessee (which was assessed at Gurgaon) with effect from 1-4-2005, which filed appeals against assessment order before Commissioner (Appeals) and Tribunal at Bangalore. Tribunal decided in favour of assessee. Revenue filed appeal before Punjab and Haryana High Court against order of Tribunal. Dismissing the appeal of revenue the Court held that once assessment of MIEPL was at Bangalore, subsequent merger of that company would not give right to assessing authorities who had jurisdiction over successor company and only Assessing Officer of predecessor company would have jurisdiction which was at Bangalore, therefore, Punjab and Haryana High Court had no territorial jurisdiction to adjudicate upon lis over an order passed by Assessing Officer at Bangalore. (AY. 2003-04)

CIT v. Motorola Solutions India (P.) Ltd. (2015) 232 Taxmann 608 (P&H)(HC)

S.172 : Shipping business – Non-residents – Shipping companies assessed u/s. 172 are not subject to deduction at source obligations u/s. 195 [S. 40(a)(ia), 44B,195]

As a Division Bench of the Bombay High Court was unable to agree with the view taken in Commissioner of Income-tax vs. Orient (Goa) Private Limited 325 ITR 554, the Full Bench had to consider the question “Whether, while dealing with the allowability of expenditure under section 40(a)(i) of the Income Tax Act, 1961, the status of a person making the expenditure has to be a non-resident before the provision to section 172 of the Act can be invoked?” HELD by the Full Bench overruling CIT vs. Orient (Goa) Private Limited 325 ITR 554:

(i) A bare perusal of s. 44BB indicates as to how this provision covers the case of an assessee who is a non-resident and engaged in the business of operation of ships. That stipulates a sum equal to 7 % of the aggregate ½ of the amount specified in sub-section (2) of section 44B as deemed to be profits and gains of such business chargeable to tax under the head “Profits and Gains of Business or Profession”. It is the explanation which refers to the demurrage and for the purpose of sub-section (2) of section 44B. It clarifies that the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature shall for the purposes of sub-section (1) deemed to be the profits and gains of the business, namely, shipping business chargeable to tax under that head. The amounts which are paid or payable whether in or out of India to the assessee or to any person on his behalf on account of carriage of passengers, livestock, mail or goods shipped at a port in India and the amount received was deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India shall be deemed to be the profits and gains. On that the tax is payable by virtue of sub-section (1) of section 172. That has to be levied and recovered in terms of the sub-sections of section 172 of the Income Tax Act. Once section 172 falls in Chapter XV titled as Liability in Special Cases – Profits of Non-residents, then section 172 is referable to section 44B. Both provisions open with a non-obstante clause and whereas section 44B enacts special provisions for computing profits and gains of shipping business in case of non-residents section 172 dealing with shipping business of non-residents is enacted for the purpose of levy and recovery of tax in the case of any ship belonging to or chartered by a non-resident operated from India. These sections and particularly section 172 devise a scheme for levy and recovery of tax. The sub-sections of section 44B denote as to how the amounts paid to or payable would include demurrage charges or handling charges or any other amount of similar nature. The sub-sections of section 172 read together and harmoniously would reveal as to how the tax should be levied, computed, assessed and recovered. Therefore, there is no warrant in applying the provisions in chapter XVII for collection and recovery of the tax and its deduction at source vide section 195.

(ii) To our mind, the Division Bench judgment in Commissioner of Income-tax v. Orient (Goa) Pvt. Ltd. seen in this light does not, with greatest respect, take into account the scheme and setting as understood above. There need not be apprehension because there is no escape from the levy and recovery of tax. The tax has to be levied and collected. The ship cannot leave the port or if allowed to leave any port in India, it must either pay or make arrangement to pay the tax. Hence, the apprehension of avoidance or evasion both are taken care of by the legislature. That is how advisedly the legislature cast the obligation to deduct tax at source on the person responsible to make payment to a non-resident in shipping business.

(iii) The resident assessee contended before the Division Bench in Orient (Goa) (supra) as well as the Division Bench which made the referring order that section 172 of the Income-tax Act has a bearing and an important one on the obligation to deduct tax at source. Therefore, it is the recipient’s position and the perspective in which the recipient’s income would be taxed will have to be borne in mind. The non-resident shipping company in respect of its income would be in a position to rely upon section 44B and consequently section 172. However, we do not see how there is an obligation to deduct tax at source on the resident assessee/Indian company before us. While computing the income of the non-resident Indian/foreign company, assistance can be derived by such non-residents from section 44B if they are in shipping business. It would also be in a position to rely upon section 172 but the responsibility of the person making payment to a non-resident in sub-section (1) of section 195 cannot be avoided in the manner set out in other cases. The scheme as above operates only to cases covered by section 172 of the IT Act and none else.(ITA No. 989 of 2015, dt. 5-2-16)(AY.1999-2000)

CIT v. V. S. Dempo & Co Pvt Ltd (FB) (Bom)(HC); www.itatonline.org

S.195 : Deduction at source –Business connection – Foreign company is not chargeable to tax in India – Not liable to deduct tax at source – DTAA-India-USA [S.9(1)(i), 201(1), 201(IA) Art. 5, 7]

Dismissing the appeal of revenue the Court held that ; where recipient of income, a foreign company, is not chargeable to tax in India, then question of deduction of tax at source by payer-assessee would not arise. (AY. 1999-2000, 2000-01)

CIT v. ITC Hotels Ltd. (2015) 233 Taxmann 302 (Karn.)(HC)

S.234C : Interest – Deferment of advance tax – Waiver of interest –Case which was not falling under such notified classes, would not be entitled to waiver of interest. [Ss. 119, 234A, 234B

Assessee filed petition seeking waiver of interest under section 234C on basis of Notification dated 26-6-2006 issued by CBDT under section 119(2)(a) which was dismissed by the Commissioner. On writ dismissing the petition the Court held that Income-tax authorities are authorised to waive off interest under sections 234A, 234B and 234C only for such classes of income and cases for which general or special orders have been issued by CBDT, since assessee’s case was not falling under such notified classes, he would not be entitled to waiver of interest under section 234C. (AY. 1990-91)

Fertilizers & Chemicals Travancore Ltd. v. Dy. CIT (2015) 377 ITR 591 /233 Taxmann 29 (Ker.)(HC)

S.254(1) : Appellate Tribunal –Cross objection – Cross appeal – Where the assessee is aggrieved against any disallowance by the order of the Commissioner (Appeals) which is not under challenge before the Tribunal at the behest of the Revenue, Rule 27 cannot be invoked. [S. 68, ITAT, Rule 27]

The assessee was a partnership firm engaged in the business of manufacturing and sale of knitted cloth. Consequent upon search and seizure, the Assessing Officer (AO) made certain additions after rejecting books of account u/s. 145(3). The major addition of ` 37.30 lakhs was made as cash credit u/s. 68. On appeal, the Commissioner (Appeals) partly allowed the appeal deleting the said addition of ` 37.30 lakhs and rejecting the other additions. Aggrieved by the CIT(A) order, the Revenue filed an appeal before the Tribunal. However, the assessee chose to file an application under Rule 27, to assail that part of order passed by the Commissioner (Appeals) which was decided against it. The Tribunal allowed revenue’s appeal and dismissed the application filed under Rule 27 by the assessee as not maintainable. In respect to Rule 27, the Tribunal held that the assessee is entitled to support the order appealed against and raise defence against the appeal filed by the Revenue on any of the grounds which have been decided against him. However, cannot invoke the said rule to claim any fresh relief which was denied by the Commissioner (Appeals) and which is not part of the ground so raised by the revenue. On an appeal, the High Court held that where the assessee is aggrieved against any disallowance or addition sustained by the Commissioner (Appeals) which is not under challenge at the behest of the revenue, the only remedy available with the assessee is to either file separate appeal or agitate the issue by way of cross objections impugning the disallowance or the addition sustained. Thus, The Tribunal had rightly not allowed the assessee to invoke Rule 27 of the ITAT Rules. (AY. 2005-06)

Self-Knitting Works v. CIT (2014) 227 Taxmann 253 / (2015) 116 DTR 319 (P&H)(HC)

S.254(2A) : Appellate Tribunal –Stay – Tribunal has power to grant stay beyond 365 days. [S.254(1)]

Dismissing the writ petition of revenue; the Court held that as the Third Proviso which restricts the power of the ITAT to grant stay beyond 365 days “even if the delay in disposing of the appeal is not attributable to the assessee” has been struck down in Pepsi Foods Pvt Ltd v. ACIT (2015) 376 ITR 87 (Del.) as being arbitrary, unreasonable and discriminatory. The law laid down in Narang Overseas (P) Ltd. v. ITAT (2007) 295 ITR 22 (Bom.) & CIT v. Ronuk Industries Ltd (2011) 333 ITR 99 (Bom.) that the ITAT has power to grant stay beyond 365 days has to be followed. (AY. 2009-10 to 2012-13)(WP. No. 3437 of 2015, dt. 16-12-2015)

CIT v. Tata Teleservices (Maharashtra) Ltd. (Bom) (HC); www.itatonline.org

S.271(1)(c) : Penalty – Concealment – If the notice is issued without application of mind (by striking out the relevant part in the notice), the penalty proceedings are invalid. [s. 271(1)(b), 271(IB)]

The assessee filed a return of income claiming certain deductions as revenue expenditure disclosing the same under the head ‘financial expenses’ in the return of income filed by him. This return was taken for scrutiny and after adjudication, the Assessing Officer held that the claim made by the assessee as revenue expenditure is capital in nature and allowed the deduction claimed by the assessee. Having held so, separate proceedings were initiated under Section 271(1)(c) of the Act to levy penalty for wilful concealment of the particulars of income and for furnishing inaccurate particulars of such income. In the printed proforma issued by the Assessing Officer under Section 274 read with Section 271 of the Act the Assessing Officer has deleted the paragraph relating to “have concealed the particulars of your income or furnished inaccurate particulars of such income” and has put a right mark on the printed form relating to the para “failure to comply with a notice under sections 22(4)/23(2) of the Indian Income-tax Act, 1922 or under sections 142(1)/143(2) of the Income-tax Act, 1961” which corresponds to Section 271(1)(b) of the Act. The High Court had to consider whether such a notice is proper in law. HELD by the High Court:

(i) It is clear that the notice is issued proposing to levy penalty under Section 271(1)(b) of the Act whereas the order is passed by the Assessing Officer under Section 271(1)(c) of the Act which clearly indicates that there was no application of mind by the Assessing Officer while issuing the notice under Section 274 of the Act. It is imperative from the order under Section 271(1)(c) of the Act that the Assessing Officer noticed that the assessee has declared the revenue expenditure in the financial expenses which was capital in nature. This is based on the verification of details of the return of income filed by the assessee. If so, there was no occasion for the Assessing Officer to come to a conclusion that there was concealment of the income by the assessee or the assessee has filed inaccurate particulars. The very particulars were available in the return of income.

(ii) This clearly indicates that the Assessing Officer had no jurisdiction to pass the penalty order under Section 271(1)(c) of the Act without issuing a proper notice as required under law and moreover, when the particulars are disclosed in the return of income.

(iii) As regards Section 271(1-B) of the Act, it clearly indicates that the assessment order should contain a direction for initiation of proceedings. Merely saying that the penalty proceedings have been initiated would not satisfy the requirement, a direction to initiate proceeding shall be clear and not be ambiguous.

(iv) In the light of the said judgment of the Co-ordinate Bench in CIT vs. Manjunatha Cotton And Ginning Factory 350 ITR 565 (Kar.), we are of the considered view that the Assessing Officer has not applied his mind at the time of issuing notice under Section 274 r/w Section 271(1)(b) of the Act. This view is fortified by the order passed under Section 271(1)(c) of the Act. No direction is coming forth in the assessments order for levying penalty which is mandatory as per Section 271(1B) of the Act. Considering the relevant factors, Appellate Commissioner has rightly allowed the appeal of the assessee setting-aside the orders passed by the Assessing Officer which has been reversed by the ITAT on the ground that the assessee deliberately evaded the payment of tax by declaring the capital expenditure as revenue expenditure in the ‘financial expenses’. In our considered opinion, for the reasons stated above, the order passed by the ITAT is not sustainable. Accordingly, we set aside the order of the ITAT and restore the order passed by the CIT(A) answering the substantial questions of law in favour of the assessee and against the revenue. (ITA No. 240/2010, dt. 25-1-2016) (AY. 2011-12)

Safina Hotels Private Limited v. CIT ( Karn.) (HC) ; www.itatonline.org

S.271(1)(c) : Penalty – Concealment – Claim of assessee was not accepted by Revenue – Levy of penalty was not justified

Dismissing the appeal of revenue the Court held that merely because the assessee made a claim which was not acceptable ipso facto the assessee could not be said to have made a wrong claim by furnishing inaccurate particulars attracting penalty. (AY 2007-08)

Pr. CIT v. G.K. Properties P. Ltd. (2015) 377 ITR 417 (T&AP) (HC)

S.271(1)(c) : Penalty – Concealment – Revised return was filed showing additional income – Penalty could not be levied [S.139(5)]

Dismissing the appeal of revenue the court held that the Tribunal which is the ultimate fact finding authority, after consideration of the evidence had found that there was no concealment of income, further scrutiny by way of reappreciation of evidence would be beyond the scope of the present appeal. The deletion of penalty was justified. (AY. 2005-06)

CIT v. Bhavinkumar M. Dagli (2015) 377 ITR 389 (Guj.) (HC)

S.271(1)(c) : Penalty – Concealment – Non compete fee – Capital or revenue – Based on legal opinion – Deletion of penalty was held to be justified

Dismissing the appeal of revenue the Court held that the assessee had disclosed material particulars in return. Assessee also had obtaining legal opinion that entire receipt of non-compete fees from foreign collaborator a capital receipt and not on account of transfer of any capital asset, therefore basis for taking amount of compensation as business income of assessee debatable and not a case of furnishing inaccurate particulars of income attracting penalty. (AY. 2004-05)

Pr. CIT v. Control and Switchgear Contractors Ltd. (2015) 377 ITR 215 (Delhi) (HC)

S.275 : Penalty – Bar of limitation – Penalty proceedings initiated on issues unrelated to assessment of income (such as for ss. 269SS / 269T & TDS defaults), time limit runs from date of initiation of penalty proceedings and not from date of CIT(A)’s order. [Ss. 269T, 271E, 275(1)(c)]

The AO initiated penalty proceedings as per assessment order passed u/s. 143(3) dated 28-12-2007. The AO passed a penalty order u/s. 271E dated 20-3-2012. The AO held that the time limit for passing of the penalty order had to be reckoned from the date of the passing of the order of the CIT(A) in the quantum appeal. The assessee claimed that the order of the CIT(A) was on a totally different issue and had no bearing on the issue on which penalty u/s. 271E was imposed. The CIT(A) accepted the assessee’s claim and held that the penalty order should have been passed within the financial year itself in which the penalty proceedings were initiated or within six months from the end of the month in which the penalty proceedings were initiated, whichever period expires later, and in the present case the penalty order could have been passed on or before 30-6-2008. He held that the penalty order passed u/s. 271E on 20-3-2012 is barred by limitation and deserves to be quashed on this ground alone. On appeal by the department, the Tribunal dismissed the appeal. On further appeal by the department to the High Court HELD dismissing the appeal:

(i) In terms of section 275(1)(c), there are two distinct periods of limitation for passing a penalty order, and one that expires later will apply. One is the end of the financial year in which the quantum proceedings are completed in the first instance. In the present case, at the level of the AO, the quantum proceedings was completed on 28th December, 2007. Going by this date, the penalty order could not have been passed later than 31st March 2008. The second possible date is expiry of six months from the month in which the penalty proceedings were initiated. With the AO having initiated the penalty proceedings in December 2007, the last date by which the penalty order could have been passed is 30th June 2008. The later of the two dates is 30th June 2008.

(ii) Considering that the subject matter of the quantum proceedings was the non-compliance with Section 269T of the Act, there was no need for the appeal against the said order in the quantum proceedings to be disposed of before the penalty proceedings could be initiated. In other words, the initiation of penalty proceedings did not hinge on the completion of the appellate quantum proceedings. This position has been made explicit in the decision in CIT v. Worldwide Township Projects Limited (2014) 269 CTR 444 in which the Court concurred with the view expressed in Commissioner of Income-tax v. Hissaria Bros. (2007) 291 ITR 244(Raj).(ITA No. 780/2015, dt. 13-10-2015) (AY. 2005-06)

Pr. CIT v. JKD Capital & Finlease Ltd. (2015) 378 ITR 614 (Delhi) (HC)

S.240 : Refunds – Appeal – Revised return was held to be invalid – Tax and interest paid on revised return was liable to be refunded to the assessee. [S. 4, 139(5), 148 Art. 265]

When revised return was held to be invalid; tax and interest paid on revised return was liable to refunded to by assessee. (AY. 1992-93)

K. Nagesh v. ACIT (2015) 376 ITR 473 /232 Taxmann 507 (Karn.)(HC)

S. 254(1) : Appellate Tribunal –Stay of prosecution proceedings – The ITAT has no jurisdiction to grant a stay of prosecution proceedings as such proceedings are not directly & substantially flowing from the orders impugned before it [S. 276C ]

Allowing the appeal of revenue the Court held that proceedings for prosecution are independent of assessment and penalty, and the Tribunal is neither the appellate nor the revisional authority in a case where prosecution is launched, the mere fact that the decision in the appeal may have an impact on the prosecution, in our considered opinion, cannot be used to read into the expressions “pass such orders thereon as it thinks fit” or “any proceedings relating to an appeal”, a power in the Tribunal to direct that prosecution or a show cause notice shall be kept in abeyance. There is another aspect of the case, namely, if such a power, as has been canvassed by the assessee, were available to the Tribunal, prosecution would have to await the final outcome of proceedings up to the Supreme Court. We are unable to discern any legislative intent or power as would confer upon the Tribunal power to stay consideration of a show cause notice proposing to initiate prosecution, by reading into Section 254, the power to stay independent proceedings merely because they may be affected by the decision of a pending appeal. The legislature having conferred power to grant stay in terms, used in Section 254 (1) and the first proviso, we cannot add to or subtract from the words and expressions used in Section 254(1) or by a process of interpretation confer jurisdiction which legislature did not intend to confer. A prosecution being a consequence of infractions by an assessee cannot be said to be act of harassment or mischief so as to confer power upon the Tribunal, to order that prosecution shall be kept in abeyance. (AY. 2008-09 )

Pr. CIT v. ITAT, & Jindal Steel& Power Ltd. (2015) 128 DTR 9/ 281 CTR 521 (P&H) (HC)

S.271(1)(c) : Penalty – Concealment – Amount was disclosed as capital receipt – Assessed as income – Just because explanation was not accepted in quantum proceedings, levy of penalty was held to be not valid. [S.45 ]

Dismissing the appeal of revenue the Court held that the disclosure of amount was made by assessee as a part of notes to its accounts as well as by a letter given along with return of income claiming same as not taxable, would be considered as a complete disclosure of all relevant facts, mere fact that explanation of assessee was not accepted in quantum proceedings would not ipso facto become a reason to levy penalty for concealment on assessee. (AY. 2005-06)

CIT v. S.M. Construction (2015) 233 Taxmann 263 (Bom.)(HC)

S.271(1)(c) : Penalty – Concealment – Stamp valuation – Department valuation was more than the agreement value – Deletion of penalty was held to be justified. [S.50C]

Stamp valuation, department valuation was more than the agreement value, deletion of penalty was held to be justified

CIT v. Fortune Hotels and Estates (P.) Ltd. (2015) 232 Taxmann 481 (Bom.)(HC)