Direct Taxes

Questions & Answers

14th National Tax Convention — 2007 at New Delhi Questions on Income Tax

Q.1 The assessee owns a newly established 100% export oriented undertakings u/s 10B. It exported computer software. It also exported information and software for maintenance of software. The Assessing Officer has allowed deduction in respect of export of software. However, he has not allowed the deduction in respect of the amount received for maintenance of software. Whether the view of the AO is justified.?

Ans. Under sub-section (1) of section 10B, (substituted by Finance Act 2000 w.e.f. 1-4-2001), a 100% export oriented undertaking is entitled to a deduction of

– such profits and gains as are derived by such undertakings from the export of —
– articles or
– things or
– computer software

Clause (i) of Explanation 2 to section 10B defines the expression “computer software” to mean –

a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or

b) any customized electronic data or any product or service of similar nature, as may be notified by the Board

which is transmitted or exported from India to any place outside India by any means.

The CBDT vide notification No. S.O. 890(E), dated 26-9-2000 has specified the following information technology enabled products or services for the purpose of Explanation 2(i)(b) and 80HHE

1. Back-office operations;

2. Call centres

3. Content development or animation

4. Data processing

5. Engineering and design

6. Geographic information system services

7. Human resources services

8. Insurance claim processing

9. Legal databases

10. Medical transcription

11. Payroll

12. Remote maintenance

13. Revenue accounting

14. Support centre, and

15. Web-Site services

Further Explanation 3 to section 10B lays down that “for the removal of doubts, it is hereby declared that the profits and gains derived from on-site development of computer software (including services) for development of software, outside India shall be deemed to be the profits and gains derived from the export of computer software outside India”.

From the above Explanation and Notification dated 26-9-2000, it is clear that the amount received on account of export of “maintenance software” will form part of profits and gains derived from export of computer software or information technology enabled services. Export of maintenance software is part of “computer software”. It is specifically included in a similar export incentive provision in the Notification dated 26-9-2000 in item (xii) – “Remote maintenance”.

The AO was, therefore, not justified in denying the deduction in respect of the amount received for maintenance of software.

Q.2 There was a search and seizure action on an assessee. He had filed the return of income earlier. The assessee filed an application before the Settlement Commission of income showing higher income. Since the assessee did not co-operate, the application was dismissed after admission. Can the AO levy penalty in respect of amount disclosed in the settlement application if the assessee accepts the same as his undisclosed income.

Ans. We presume that settlement application was dismissed and sent back u/s 245HA as it existed before its omission by the Finance Act 2002 w.e.f. 1-6-2002. While sub-section (2) of said section 245HA permitted the AO to use all material and other information in the course of proceedings before him, the question of levy of penalty for concealment of income will essentially depend upon the nature of material produced before the Commission. A mere confession will not entitle the AO to levy penalty in view of the several judgements of the Supreme Court notably the following:-

1. Sir Shadi Lal Sugar & General Mills Ltd v. CIT (1987) 168 ITR 725

2. CIT vs. Suresh Chand Mittal 251 ITR 9 (SC)

3. Dilip & Shroff vs. Jt. CIT (2007) 291 ITR 519

4. T. Ashok Pai vs. CIT (2007) 210 CTR (SC) 259

Q.3 Assessee is a partnership firm, having immovable properties, stock-in-trade etc. Market values of properties are 10 times more than their book value. Two partners retire from the firm by taking only the credit balance in their account and capital balance. A company is introduced as partner, which brings only the required capital. Whether there is any tax liability on the firm, in respect of the partners who have retired or in the hands of incoming partner?

Ans. On the retirement of a partner when he only takes back his capital and that also in cash, there would be no transfer of capital asset. Besides it is not a case of dissolution of the firm. The preponderance of judicial opinion is that retirement is different from dissolution and no transfer of capital assets takes place. Reliance may be placed on the decision of the Hon’ble Supreme Court in CIT vs. Mohan Bhai Pama Bhai (1987) 165 ITR 166 (SC).

As regard capital gains in the hands of incoming partner, sub-section (3) of section 45 specifically excludes company from the purview of capital gains tax provisions and so no capital gains tax would be leviable on the incoming partner.

Q.4 Assessee is a company, carrying on the business of a share broker. He agreed to buy shares on behalf of a client. However, the client refused to take the delivery. The assessee sold the shares and suffered a loss. Whether the loss is allowable as bad debt or as business loss. Can the Department treat the said loss as speculation loss?

Ans. The assessee company being share broker, has to buy and sell shares on behalf of its clients. In the event of client refusing to take delivery of shares and the shares being its stock-in-trade, any profit or loss arising from sale of such shares shall be chargeable to tax as profit and gains in the hands of assessee company. If the assessee company suffers loss in the transaction, the loss shall be allowable as business loss as held by the Madras High Court in CIT vs. Shri Ganesh Stores (2004) 266 ITR 595 and Allahabad High Court in the case of Motor and General Sales Pvt Ltd. vs. CIT (1997) 226 ITR 137.

Q.5 Assessee has filed his return of income. In the return, he filed the valuation report as on 1-4-1971 for the purpose of determining the fair market value. The Assessing Officer disallowed certain expenses relating to the computation of capital gain. The assessee filed an appeal before the CIT (A). In appeal proceedings, the assessee realised that he should have claimed the fairmarket value as on 1-4-1981. Accordingly, he furnished the valuation report as on 1-4-1981. The assessee did not make an application under rule 46A for admission of additional evidence. The CIT(A) dismissed his appeal. Now the matter is pending before Tribunal. The assessee raised the ground that he should be allowed the deduction of fair market value as on 1-4-1981. If Tribunal allows the claim, the income assessed will be less than the returned income. As the assessee did not file the revised return, can the Tribunal allow the claim of the assessee considering the Supreme Court’s decision in Goetze (India) Ltd. vs. CIT (2006) 284 ITR 323 (SC)

Ans. The facts of the case before the Supreme Court were different from those of the above querist. In that case, the return for A.Y. 1995-96 was filed on 13-11-1995 and on 12-1-1998 the assessee sought to claim deduction by way of letter before AO. The Hon’ble Supreme Court held that the claim of deduction cannot be made without filing a revised return. The Supreme Court, however, made it clear that the decision was restricted to the powers of assessing authority to entertain a claim for deduction otherwise than by a revised return and did not impinge on the power of the Appellate Tribunal u/s. 254 of the I.T. Act.