The assessee, a Korea based company, entered into a contract with O.N.G.C. and L&T as consortium partners. The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as “a communication channel” between the Assessee and ONGC in respect of the Project. Pre-engineering, survey, engineering, procurement and fabrication activities which took place abroad, all took place in the year 2006. Commencing from November, 2007, these platforms were then brought outside Mumbai to be installed at the Vasai East Development Project. The Project was to be completed by 26.07.2009. The AO held that the work relating to fabrication and procurement of material was very much a part of the contract for execution of work assigned by ONGC. The work was wholly executed by PE in India and it would be absurd to suggest that PE in India was not associated with the designing or fabrication of materials. Accordingly attributed 25% of gross receipts of the assessee outside India was attributable to the business carried out by the Project Office of the assessee revenue. The DRP and also Appellate Tribunal confirmed the order of the AO. On appeal by the assessee the High Court held that the question as to whether the Project Office opened at Mumbai cannot be said to be a “permanent establishment” within the meaning of Article 5 of the DTAA would be of no consequence. The High Court then held that there was no finding that 25% of the gross revenue of the Assessee outside India was attributable to the business carried out by the Project Office of the Assessee. According to the High Court, neither the AO nor the ITAT made any effort to bring on record any evidence to justify this figure. Accordingly the appeal of the assessee was allowed. On appeal by the revenue the Court held that, Project office in India cannot be construed as fixed place hence cannot be considered as permanent establishment. The condition precedent for applicability of “fixed place” permanent establishments under Article 5(1) of the Double Taxation Avoidance Treaties is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment. The maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5. Also, it is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment (CA No. 12183 of 2016 dt. 24-07-2020 (AY. 2007-08)

DIT (IT) v. Samsung Heavy Industries Co. Ltd. (2020) 117 Taxman 870 (SC) www.itatonline.org

Editorial: Samsung Heavy Industries Co. Ltd. v. DIT (IT) & Anr. (2014) 221 Taxman 315 / 265 CTR 109 / 98 DTR 89 (Uttarakhand)(HC), affirmed.

19. S. 28(ii)(a) : Business income – Compensation – Capital or revenue – Capital gains – Restrictive covenant as to non-competition – Held to be not taxable – Prior to assessment year 2013-14 [S. 2 (47), 4, 28(va)]

    By a memorandum of understanding dt. 13.04.1994, made between the appellant and three group Signature of Shaw Wallace Company Group, consideration of the sum of ₹ 6,00,00,000 (Rupees Six crores only) was paid by Shaw Wallace Company Group to the assessee as an advance against the non-competition fee. As per the understanding the covenant shall remain in full force and effect for a period of 10 years from the date of these presents and this covenant will be absolutely and irrevocably binding on the assessee. The AO held that the deed of covenant was held to be a colourable device to evade tax that is payable under Section 28(ii)(a) of the Act hence taxable as revenue receipt. Order of the AO was affirmed by the CIT(A). On appeal the Appellate Tribunal allowed the appeal of assessee by a majority of 2:1 of the honourable members. On appeal by the revenue the High Court held that ₹ 6.60 crores paid was for as consideration for sale of shares, rather than a payment under Section 28(ii)(a) of the Act accordingly taxable as capital gains. On appeal by the assessee the Court held that, there is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/ restrictive covenant is a capital receipt. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till AY 2003-2004. It is only w.e.f. 1-4-2003 that the said capital receipt is now made taxable u/s. 28(va). It is well settled that a liability cannot be created retrospectively (CA No. 12044 of 2016 dt.
    23-06-2020 (AY. 1995-96)

    Shivraj Gupta v. CIT [2020] 117 taxmann.com 871 (SC) www.itatonline.org

    Editorial : CIT v. Shiv Raj Gupta (2014) 52 taxmann.com 425 / [2015] 372 ITR 337 / 273 CTR 353 (Delhi) (HC) reversed. Followed Guffic Chem (P.) Ltd. v. CIT (2011) (2011) 332 ITR 602 / 239 CTR 225 / 52 DTR 289 / 198 Taxman 78 / 225 Taxation 383 (SC) / 4 SCC 254.

20. S. 37(1) : Business expenditure – Business income – Income from other sources – Interest income – Assessable as business income – Real income theory – Disbursements of grants was held to be core business of appellant expenditure incurred in course of business and for purpose of business is allowable as deduction. A Committee of legal experts presided by a retired Judge can give its imprimatur to the settlement – A vibrant system of Advance Ruling can go a long way in reducing taxation litigation – This is true even of disputes between the taxation department and private persons, who are more than willing to comply with the law of the land but find some ambiguity – A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward. [S. 4, 28(i), 56]

    Dismissing the appeal of the revenue the, court held that to decide whether a particular source is business income, one has to look to the notions of what is the business activity. The activity must have a set purpose. The fact that the assessee does not carry on business activity for profit motive is not material as profit making is not an essential ingredient. The Act requires determination of ‘real income’ on the basis of ordinary commercial principles of accountancy. To determine the ‘real income’, permissible expenses are required to be set off. Every application of income towards business objective of the assessee is a business expenditure and nothing else. Accordingly the disbursements of grants was held to be core business of appellant expenditure incurred in course of business and for purpose of business is allowable as deduction. Court also suggested that an mediation inter se the Government authorities or Government departments is an efficacious remedy. A Committee of legal experts presided by a retired Judge can give its imprimatur to the settlement. A vibrant system of Advance Ruling can go a long way in reducing taxation litigation. This is true even of disputes between the taxation department and private persons, who are more than willing to comply with the law of the land but find some ambiguity. Court suggested that the aim of any properly framed advance ruling system ought to be a dialogue between taxpayers and revenue authorities to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become another stage in the litigation process. Court also recommended the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward. (AY. 1976-77) (CA Nos. 5105-5107 of 2009 dt. 11-9-2020)

    National Co-Operative Development Corporation v. CIT (SC) [2020] 119 taxmann.com 137 (SC) www.itatonline.org

21. S. 40(a)(ia): Amounts not deductible – Deduction at source – Failure to deduct tax at source – Payment exceeding ₹ 20,000 to each truck owners – Contract with a cement factory to transport cement with truck owners is a sub-contractor – Disallowance is not limited only to amount outstanding and this provision equally applies in relation to expenses that had already been incurred and paid by assessee – S. 40(a)(ia) as introduced by Finance (No. 2) Act, 2004 with effect from 1-4-2005 is applicable to and from assessment year 2005-06 – Disallowance is held to be justified. [S. 40A(3), 194C]

    The appellant is a partnership firm, had entered into contract with Aditya Cement Limited for transporting cement to various places in India. As the appellant was not having the transport vehicles of its own, it had engaged the services of other transporters for the purpose. On verifying the record the AO observed that while making payment to the truck operators/owners, the appellant had not deducted tax at source even if the net payment exceeded
    ₹ 20,000/-. The appellant contended, inter alia, that the trucks hired were belonging to different operators/owners who were not the sub-contractors or contractors; that they came from different parts of India and mostly required cash payment for diesel and other running expenses; that the appellant had no liability to deduct tax at source because it had not made payments exceeding ₹ 20,000/- in a single transaction; and that the provisions of Section 40(a)(ia) were not applicable to the appellant. The AO held that the payments to different truck operators/owners were made directly by the appellant firm and not the consignor company; that the appellant firm was responsible for transportation of goods of the company as per the contract for which, the appellant received payment from the company after tax being deducted at source therefrom. The AO also held that the appellant firm paid freight charges to the truck operators/owners from the income so earned; and the remaining amount was shown as commission. AO held that looking to the nature of dealings of the parties where the single payment exceeded the sum of ₹ 20,000 the amount was disallowed by applying the provision of S. 40(a)(ia) of the Act. Order of the AO is affirmed by the CIT(A), Tribunal and also High Court. On appeal affirming the decision of High Court, the Court held that, disallowance u/s. 40(a)(ia), 40A(3) etc. are intended to enforce due compliance of the requirement of other provisions of the Act and to ensure proper collection of tax as also transparency in dealings. The interest of a bonafide assessee who had made the deduction as required and had paid the same to the revenue is safeguarded. No question about prejudice or hardship arises (ii) Payment made for hiring vehicles for the business of transportation of goods attracts TDS u/s. 194C, (iii) Disallowance u/s. 40(a)(ia) is not limited to the amount outstanding (“payable”) but also to expenses that had already been incurred and “paid” by the assessee, (iv) Disallowance u/s. 40(a)(ia) as introduced by the Finance (No. 2) Act, 2004 w.e.f. 01.04.2005 is applicable to AY 2005-2006, (v) Benefit of amendment made in the year 2014 to s. 40(a)(ia) is not available to the facts of the appellant as the appellant has neither deducted the tax at source nor deposited the tax before filing of the return. (CA No. 7865 of 2009 dt. 29-07-2020) (AY. 2005-06)

    Shree Choudhary Transport Company v. ITO (2020) 118 taxmann.com 47 (SC) www.itatonline.org

    Editorial: Affirmed the order in Shree Choudhary Transport Company v. ITO [2009] 225 CTR 125 (Raj.) (HC) (ITA No. 117/JU/2008 dt. 29-08-2008) followed, Palam Gas Service v. CIT (2017) 394 ITR 300 (SC) Distinguished CIT v. Hardarshan Singh [2013] 350 ITR 427 / 216 Taxman 283 / 263 CTR 466 (Delhi) (HC) PIU Ghosh v. Dy. CIT [2016] 386 ITR 322 / 73 taxmann.com 226 / (2017) 295 CTR 340 (Cal.) (HC), CIT v. Calcutta Export Company [2018] 404 ITR 654/ 255 Taxman 293 / 302 CTR 201 (SC)

22. S. 45 : Capital gains – Accrual – Protective assessment – Completion of transfer with vesting of land in the Government essentially correlates with taking over of possession of the land under acquisition by the Government – However, where possession is taken over before arriving of the relevant stage for such taking over, capital gains shall be deemed to have accrued upon arrival of the relevant stage and not before – To be more specific, in such cases, capital gains shall be deemed to have accrued: (a) upon making of the award, in the case of ordinary acquisition referable to Section 16; and (b) after expiration of fifteen days from the publication of the notice mentioned in Section 9 (1), in the case of urgency acquisition under Section 17 [Land Acquisition Act, 1984, S. 4, 6, 16, 17]

    Asset of assessee were taken up by way of notification dated 15-5-1968 and award of compensation was made on 29-9-1970 – But, at time of issuance of initial notification for acquisition, subject land was already in possession of beneficiary college under a lease even after expiry of lease on 31-8-1967 – Assessee contended that transfer, leading to capital gains, took place on very date of preliminary notification (15-5-1968) because, possession of land in question was already with beneficiary College. Revenue contended that transfer reached its completion, resulting in capital gains, only on date of award (29-9-1970). Court held that instant case, assessee continued to carry its status as owner of land in question and that status was not lost only because a part of land remained in possession of College, accordingly the contention that land vested in Government on date of initial notification remains totally baseless and was to be rejected. Further, neither on date of notification i.e.,
    15-5-1968 nor until date of award, Government took over possession of land in question and if at all possession of College was to result in vesting of land in Government, such vesting happened only on date of award i.e., 29-9-1970 and not before, therefore, transfer of capital asset (land in question), for purposes of S. 45 of Act was complete only date of award and not on date of notification for acquisition under section 4 of Act of 1894. Accordingly the AO had rightly assessed tax liability of assessee on long-term capital gains arising on account of acquisition, on basis of amount of compensation allowed in award dated 29-9-1970 as also enhanced amount of compensation accrued finally to assessee; and as regards interest income, had rightly made protective assessment on accrual basis (CA No. 2416 of 2010 dt. 25-08-2020) (AY. 1971-72)

    Rajpal Singh v. CIT (2020) 118 taxmann.com 508 (SC) www.itatonline.org

23. S. 115QA : Tax on distributed income to share holders – Buy back of shares – Remittances to non-residents – Appeal pending before Supreme Court – Department agreeing to treat communication as show-cause notice – Direction to assessee to file reply thereto and further directions as to continuance of interim orders. [S. 2(22)(a), 2(22)(d), 115O, 245Q]

    The assessee filed a writ appeal whereupon the Division Bench observed that the single judge after having found the writ petition not maintainable, ought not to have gone into the merits. As regards the nature of the communication dated March 22, 2018 and maintainability of an appeal challenging it, it observed that order was a final one, and that the further question whether the order under challenge violated the principles of natural justice or requisite procedure contemplated under the Act was a matter for consideration by the appellate authority. On appeal the Court held that, the Department having agreed before the court that the communication dated March 22, 2018 could be treated as a show-cause notice and the Department permitted to conclude the issue within a reasonable time, provided the interim order passed by the single judge of the High Court was continued, and this course having been accepted by the assessee and an appropriate affidavit of undertaking to withdraw the proceedings initiated before the Authority for Advance Rulings having been filed by the assessee, the court in the peculiar facts of the case, directed that the communication dated March 22, 2018 shall be treated as a show-cause notice calling upon the assessee to respond with regard to the aspects adverted to in the communication, that the assessee shall be entitled to put in its reply and place such material, on which it sought to place reliance, within ten days, that the assessee shall thereafter be afforded oral hearing in the matter, and that the matter shall be decided on the merits by the concerned authority within two months, and that pending such consideration, as also till the period to prefer an appeal from the decision on the merits was over, the interim order passed by the single judge of the High Court shall continue to be in operation. The court directed that the amount deposited towards payment of tax and the amounts which stood deposited and invested in the form of fixed deposit receipts shall be subject to the decision to be taken by the authority on the merits or to such directions as may be issued by the appellate authority. The court directed that the merits of the matter shall be gone into independently by the authorities without being influenced, in any way, by any of the observations made by the court. (AY. 2016-17) [Refer Cognizant Technology Solutions India P. Ltd. v. Dy. CIT (LTU) (2019] 416 ITR 462 (Mad.)(HC)]

    Cognizant Technology Solutions India Pvt. Ltd. v. Dy. CIT (Large Taxpayer Unit) (2020) 424 ITR 302 / 187 DTR 369 / 313 CTR 510 (SC)

24. S. 147 : Reassessment – Change of opinion – AO had raised a very issue in the original assessment proceedings and reply was filed – Issue of notice on same issue is change of opinion hence without jurisdiction [S. 148]

    Dismissing the appeal of the revenue the Court held that, the reasons in support of the s. 148 notice is the very issue in respect of which the AO had raised a query during the assessment proceedings and the Petitioner had responded justifying its stand. The non-rejection of the explanation in the Assessment Order amounts to the AO accepting the view of the assessee, thus taking a view/forming an opinion. In these circumstances, the reasons in support of the notice proceed on a mere change of opinion and would be completely without jurisdiction. [SLP(C) No. 7367/2020 dt. 1-06-2020) (AY. 2014 -15)

    ACIT v. Marico Ltd. (2020) 117 taxmann.com 244 (SC) www.itatonline.org

    Editorial : Marico Ltd. v. ACIT (Bom.)(HC) is affirmed (WP No. 1917 of 2019 21-08-2019)

25. S. 260A : Appeal – High Court – High court shall formulate question and may then pronounce judgment either by answering question in affirmative or negative – If High Court wishes to hear appeal on any other substantial question of law not formulated by it, it may, for reasons to be recorded, formulate and hear such questions if it is satisfied that case involves such question. [S. 4, 28(ii)(a), Code of Civil Procedure 1908, S. 100]

    On appeal by the assessee, the Court observed that the substantial question of law that was raised by the High Court did not contain any question as to whether the non-compete fee could be taxed under any provision other than Section 28(ii)(a) of the Act. Without giving an opportunity to the parties followed by reasons for framing any other substantial question of law as to the taxability of such amount as a capital receipt in the hands of the assessee, the High Court answered the substantial question of law, without any recorded reasons and without framing any substantial question of law on whether the said amount could be taxed under any other provision of the Income-tax Act, the High Court went ahead and held that the amount of INR 6.6 crores received by the assessee was received as part of the full value of sale consideration paid for transfer of shares. Court held that high court shall formulate question and may then pronounce judgment either by answering question in affirmative or negative or by stating that case at hand does not involve any such question. If High Court wishes to hear appeal on any other substantial question of law not formulated by it, it may, for reasons to be recorded, formulate and hear such questions if it is satisfied that case involves such question (CA No. 12044 of 2016 dt. 23-06-2020 (AY. 1995-96)

    Shivraj Gupta v. CIT [2020] 117 taxmann.com 871 (SC) www.itatonline.org

    Editorial : CIT v. Shiv Raj Gupta (2014) 52 taxmann.com 425 / [2015] 372 ITR 337 / 273 CTR 353 (Delhi) (HC) reversed. Followed Guffic Chem (P.) Ltd. v. CIT (2011) 332 ITR 602 / 239 CTR 225 / 52 DTR 289 / 198 Taxman 78 / 225 Taxation 383 (SC) / 4 SCC 254.

26. Covid-19 – Extension of limitation period due to Covid-19 Lock down – Service of all notices, summons and exchange of pleadings may be effected by e-mail, FAX, WhatsApp, Telegram, Signal, etc. in addition to service of the same document by e-mail simultaneously on the same date – The Reserve Bank of India may consider whether the validity period of a cheque under the Negotiable Instruments Act should be extended or not [Arbitration and Conciliation Act, 1996 S. 23(4), 29A, Banking Regulation Act, 1949, S. 35A, Commercial Courts Act, 2015, S. 12A Constitution of India, 1949, Art. 141, Negotiable Instruments Act, 1881, S. 46 Limitation Act 1908, S. 5]

    On Suo Moto Writ petition in Re Cognizance for extension of limitation the court observed that service of all notices, summons and exchange of pleadings Service of notices, summons and exchange of pleadings/documents, is a requirement of virtually every legal proceeding. Service of notices, summons and pleadings etc. have not been possible during the period of lockdown because this involves visits to post offices, courier companies or physical delivery of notices, summons and pleadings. Accordingly the Court held that it is appropriate to direct that such services of all the above may be effected by e-mail, FAX, commonly used instant messaging services, such as WhatsApp, Telegram, Signal etc. However, if a party intends to effect service by means of said instant messaging services, the Court directed that in addition thereto, the party must also effect service of the same document/documents by e-mail, simultaneously on the same date. Accordingly the extension of validity of Negotiable Instruments Act, 1881 for implement is allowed. As regards with reference to the prayer, that the period of validity of a cheque be extended, the court held that the said period has not been prescribed by any Statute but it is a period prescribed by the Reserve Bank of India under Section 35-A of the Banking Regulation Act, 1949. Accordingly the Court directed the Reserve Bank of India may in its discretion, alter such period as it thinks fit. (Suo Moto Writ petition (c) No. 3/2020 dt. 19-07-2020)

    In Re Cognizance for extension of limitation v. Ors. (SC) www.itatonline.org