1. Attribution of profit to permanent establishment

The Supreme Court held that the authority was correct in holding that there is no need for attribution of further profits to the permanent establishment of the foreign company where the transaction between the two were to be held to be at arm’s length taking into account all the risk taking functions of the multinational enterprise.

There is a difference between the taxability of the permanent establishment in respect of the income earned by it in India which is in accordance with the Income-tax Act, 1961, and the taxability of the multinational enterprise through its permanent establishment in India under A. 7 of the DTAA.

The transactional net margin method was the appropriate method of quantifying the profits of the foreign company in the case of the service permanent establishment because under the transactional net margin method the total operating profit arising from the transaction was appropriated on the basis of sales, cost assets, etc.

DIT vs. Morgan Stanley [2007] 292 ITR 416 (SC), 210 CTR 419

When the loan is taken by the director in the name of the company and the interest is paid by the directors through the company, the Supreme Court held that the company is required to deduct tax at source.

The Supreme Court held that the material expression is section 194A "at the time of credit of such income to the account of the payee"; therefore whenever interest is credited to the account of the payee the payer has to deduct tax at source.

CIT vs. Century Building [2007] 293 ITR 194(SC)

The Supreme Court following its earlier decision of CIT vs. Lakshmi Machine Works 290 ITR 667, held that just as commission received by the assessee is relatable to exports and yet it cannot form part of "turnover", so also excise duty and sales tax do not emanate from the "turnover".

CIT vs. Catapharma (India) P. Ltd. 2007] 292 ITR 641 (SC), 211 CTR 83

4. Export market & development allowance — S. 35B

When the assessee is engaged in the business of purchase of tea of diverse grades and brands and then blended them by mixing different kinds of tea, it was held not amounting to manufacture as required under section 35B. Therefore the decision of the High Court allowing the deduction was reversed.

CIT vs. Tara Agencies [2007] 292 ITR 444 (SC), 210 CTR 454

5. Lease — Capital on revenue — Capital expenditure — S. 37

The Supreme Court held that where a royalty or rent is payable for the lease it would be revenue expenditure, but where entire amount of the lease is paid either at the time of the lease or instalment, then it would be a capital expenditure.

Enterprising Enterprises vs. CIT [2007] 293 ITR 437 (SC)

6. Manufacture

The word "production" or "produce", when used in juxtaposition with the word "manufacture", takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all by-products, intermediate products and residual products which emerge in the course of manufacture of goods.

CIT vs. Tara Agencies [2007] 292 ITR 444 (SC), 210 CTR 454

7. New industrial undertaking — Deduction – Simultaneous deduction — Ss. 80hh and 80-i

The deductions under section 80HH and section 80-I are independent of each other. Therefore, a new industrial unit can claim deduction under both sections on gross total income independently.

JCIT vs. Madideep Engg & Pkg. India (P) Ltd. [2007] 163 Taxman 337 (SC)

8. Penalty — Appeal — Jurisdiction of High Court — S. 271(1)(c)

Appellant herein carried on business at Lucknow. It was assessed at the said place. The matter, however, ultimately came up before Central Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi. The said Tribunal exercises jurisdiction in respect of cases arising within the territorial limits of the State of Uttar Pradesh, National Capital Territory of Delhi and the State of Maharashtra. Having regard to the situs of the Tribunal, an appeal in terms of section 35G of the Central Excise Act, 1944 was filed before the Delhi High Court. A Division Bench of the said Court relying on an earlier Division Bench judgment in Bombay Snuff Pvt. Ltd. vs. Union of India opined that it had no territorial jurisdiction in the matter.

Held — Jurisdiction not to be decided on the basis of location of Appellate Tribunal but on the basis of the place of assessment. High Court was correct in its view. Appeals dismissed.

Ambica Industries vs. Commissioner of Central Excise (2007) 9 RC 181

9. Penalty — Concealment — S. 271(1)(c)

Appellant is an individual. He is an engineering graduate. Apart from his income by way of salary, he was having shares of profit of a number of firms besides income from proprietorship business. He has also earned income from dividend and interest. The banker of the assessee was the Syndicate Bank. A power of attorney was given by the appellant in its favour. The shares of the companies which the appellant owned were lodged with and in custody of the said Bank. Under his instructions, the Bank used to purchase shares of various companies and kept with it the physical possession thereof. It has also sold the shares of the appellant and delivered the same to the brokers or the parties and also used to pay or receive the sale proceeds and deposit the same in the bank account. The said arrangement continued for a number of years in the past.

Question was whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that penalty under section 271(1)(c) was not exigible in the present case?

The term ‘inaccurate particulars’ is not defined. Furnishing of an assessment of value of the property may not by itself be furnishing of inaccurate particulars. Even if the explanations are taken recourse to, a finding has to be arrived at having regard Clause (a) of Explanation 1 that the Assessing Officer is required to arrive at a finding that the explanation offered by an assessee, in the event, he offers one was false. He must be found to have failed to prove that such explanation is not only not bona fide but all the facts relating to the same and material to the income were not disclosed by him. Thus, apart from his explanation being not bona fide, it should be found as of fact that he has not disclosed all the facts which was material to the computation of his income.

The order imposing penalty is quasi-criminal in nature and, thus, burden lies on the department to establish that the assessee had concealed his income. Since burden of proof in penalty proceedings varies from that in the assessment proceeding, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitute good evidence in the penalty proceeding. In the penalty proceedings, thus, the authorities must consider the matter afresh as the question has to be considered from a different angle.

It is now a well-settled principle of law that the more is the stringent law, more strict construction thereof would be necessary. Even when the burden is required to be discharged by an assessee, it would not be as heavy as the prosecution.

[See P.N. Krishna Lal and Ors. vs. Govt. of Kerala and Anr. 1995 Supp (2) SCC 187]

The omission of the word "deliberate", thus, may not be of much significance.

Section 271(1)(c) remains a penal statute. Rule of strict construction shall apply thereto. Ingredients of imposing penalty remains the same. The purpose of the legislature that it is meant to be deterrent to tax evasion is evidenced by the increase in the quantum of penalty, from 20% under the 1922 Act to 300% in 1985.

‘Concealment of income’ and ‘furnishing of inaccurate particulars’ carry different connotations. Concealment refers to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressio veri or suggestio falsi.

Penalty deleted.

T. Ashok Pai vs. Commissioner of Income-tax (Bangalore) - (2007) 7 SCC 162

10. Recovery – Provisions of Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 shall prevail over the provisions of the I. T. Act — S. 226

The language of section 13 of the Special Courts Act is similar to 32 of the Sick Industrial Companies (Special Provisions/Act, 1985. The Apex Court, following the ratio laid down in Solidaire India Ltd. vs. Fair Growth Financial Services Ltd. (2001) 3 SCC 71 held that the provisions of the Special Court Act, wherever they are applicable, shall prevail over the provisions of the Income-tax Act, 1961.

TRO vs. Custodian Appointed under Special Court Act, 1992 [2007] 163 Taxman 441 (SC)

11. Revision — S. 263

When the Commissioner sought to revise a part of the order of the assessment which was not part of the re-assessment, after four years of original assessment, the Supreme Court held that the doctrine of merger did not apply in such cases and that the period of limitation commences from the date of the original order.

12. Repairs — S. 31(i)

The Supreme Court further held that there may not be any doubt or dispute that once an order of reassessment is reopened, the previous under-assessments will be held to be set aside and the whole proceedings would start afresh, but that would not mean that even when the subject matter of reassessment is distinct and different, the entire proceedings would be deemed to have been reopened.

CIT vs. Alagendran Finance Ltd. (2007) 293 ITR 1 (SC), 211 CTR 69

13. Service tax — Chartered Accountants

14. Tribunal order — Merger — S. 254

The order of the Appellate Tribunal was dismissed in appeal by the High Court. Subsequently a Miscellaneous Application was filed as the Tribunal had not adjudicated the alternate ground of the assessee. The Tribunal recalled the matter for the limited purpose of disposal of the alternate ground. When the relief was granted by the Tribunal, the department went up in appeal. The High Court held that the Tribunal order has merged with the order of the High Court and had attained finality once it was dismissed by the High Court and therefore the Tribunal could not have recalled the order. The Supreme Court reversed the order of the High Court and held that as the recall was not challenged by the department, it has become final and it could not have been interfered by the High Court.

Hindustan Coca Cola Beverage P Ltd. vs. CIT [2007] 293 ITR 226 (SC)

15. Unexplained money — S. 69A

In order to find out whether the assessee is the owner of the money in terms of section 69A, which provides that unexplained money, etc., may be deemed by the assessing officer to be the income of the assessee, the principal of common law jurisprudence in section 110 of the Evidence Act, 1872, can be applied.

When a deposit stands in the name of a third person and that person is related to the assessee, the proper course would be to call upon the person in whose books the deposit appears or the person in whose name the deposit stands to explain such deposit.

CIT vs. K. Chhinnathamban [2007] 292 ITR 682 (SC), 209 CTR (SC) 183

16. VDIS

When the certificate issued to the firm for disclosure under VDIS was declared null and void as the search was conducted on the partners of the firm before the disclosure was made in the hands of firm and this fact was not brought to the notice of the officer. The Supreme Court declined to interfere even though the firm and partners are different persons for the purposes of the Act, holding that keeping in view the purport and object which the scheme seeks to achieve; we are of the opinion that in place of literal interpretation, rule of purposive construction should be applied.

Tanna and Modi vs. CIT [2007] 292 ITR 209 (SC), 210 CTR 273