DIRECT TAXES

Tribunals

Aarti Sathe, Deepak R. Shah, Haresh P. Shah, Paras S. Savla,
Prem Chandra Tripathi, Rahul Hakani & Renu Choudhari

341. S. 2(13) : Adventure in nature of trade – Investment in agricultural land

A person makes investment in agricultural land within limits of town panchayats, and agricultural income was shown and declared year after year. Permission was sought to develop lands. No further action was taken for over 12 years till date of sale, and entire land is sold after its value appreciated, it would not become adventure in the nature of trade.

ITO vs. Chandar HUF (2011) 47 SOT 17 (Chennai).

342. S. 2 (14) : Capital asset – Agricultural land – Payment of compensation of certain immovable property. (S. 194LA)

Definition of "agricultural land" as given in section 2(14) cannot be imported for purpose of payment of compensation on acquisition of certain immovable property as per section 194LA. (A.Y. 2005-06).

ITO TDS vs. Special Land Acquisition Officer (2011) 46 SOT 458 (Mum).

343. S. 2 (14) : Capital assets – Capital gains – Town Panchayat

A Town Panchayat is notified for urban agglomeration, but it is not a municipality. Agricultural lands falling within said town panchayat would not fall within municipality, and hence is not a capital asset as per the definition under section 2(14) (iii). (A.Y. 2006-07)

ITO vs. Chander–HUF ( 2011) 47 SOT 17 (Chennai).

344. S. 2(22)(e) : Deemed dividend – Loan to a concern in which share holder is a partner – Security deposit

Partners of the assessee firm and not the assessee firm being a share holder of the company AG Ltd. Amount received by the assessee firm from the company as security deposit cannot be regarded as deemed dividend. Even otherwise, the amount received from AG Ltd being security deposits under an agreement between the parties coupled with certain obligations, it cannot be regarded to be payment by the company by way of advance or loan and hence, it can not be assessed
to tax under section 2(22)(e). (Asst. Year 2006-07).

Dy. CIT vs. Atul Engineering Udyog (2011) 57 DTR 433 (Agra).

345. S. 2(31)(v) : Person – Association of persons – Individual – Assessment – HUF – Capital gains. (S. 4, 45)

After the death of sole male member of the family, the only person left in the family was the widow of the deceased and three daughters were already married. The property of the deceased would devolve on the window and three married daughters in equal shares, since the property of the deceased was sold without dividing the same among the assessee and her three married daughters, the capital gains on the sale of the property would be assessable in the hands of the BOI consisting of the assessee and her three married daughters (Asst. Year 2005-06).

ITO vs. Shanti Dubey (2011) 139 TTJ 502/58 DTR 422 (Jab).

346. S. 2(47) : Transfer – Capital gains –Possession of property (S.45.)

Assessee was given possession of property as per sale agreement dated 3-4-1999 and assessee also made part payment of the consideration, assets would be deemed to be transferred to assessee on 3-4-1999 and since land was sold on 4-4-2003/2-5-2003 , it would be a long term capital asset and would be long term capital gains.

Hasmukhbhai vs. Asst CIT (2011) 46 SOT 419 (Ahd).

347. S. 4 : Income – Capital or revenue – Amount received from firm by widow of the partner is a capital receipt

Payment towards recognition of valued services rendered by partner during life time and a sort of relief to distressed family, and that too as per terms of partnership deed, could not be said to have a revenue character in assessee’s hands. Amount received by assessee, after death of her husband from firm, in which he was a partner, would be a capital receipt. (A.Y. 2005-06).

Dy CIT vs. Lakshmi M. Aiyar (Mrs) (2011) 131 ITD 436 (Mum).

348. S. 4 : Income – Interest awarded by High Court – Capital receipt – Income wrongly offered for tax – Powers of Commissioner (Appeals).(S. 139, 251)

Interest awarded by High Court is a capital receipt and not taxable.

Though the amount erroneously offered to tax in the return, the assessee is entitled to raise plea before Appellate Authorities against the assessment. The Assessing Officer cannot assess an amount which is not taxable under the law, though shown by the assessee in the return.
(A.Y. 2005-06)

Sushil Kumar Das vs. ITO (2011) 11 ITR (Trib) 17 (Kolkata).

349. S. 5 : Income – Accrual – Dividend recovered – Right to receive income

Assessee a non banking finance company, it sold shares which it held as investment. Transfer of names of transferee was not recorded in register of members of company whose shares were transferred by assessee, therefore dividend declared by companies on those shares was paid to assessee. The assessee has shown the said dividend as under the heading "Excess dividend received refundable". Assessing Officer treated the same as income of the assessee. The Tribunal held that when there is right to receive income can be said to have been accrued and without legally enforceable right there can be no accrual of income. (A.Y. 2006-07).

Dy CIT vs. Tata Investment Corporation Ltd. (2011) 46 SOT 359 (Mum).

350. S. 5 : Income-Accrual – Fixed deposits in banks – Interest

Assessee society held fixed deposits in banks for a term exceeding more than one year. It had not shown any interest income from said FDs during previous year on ground that income from FDs would be offered to tax on its receipt from bank on maturity on basis of certificate of TDS issued by bank. Assessing Officer added interest at 10% on estimate basis. The Tribunal held that the assessee was not liable to declare interest income accrued but not due to it in relevant assessment year in view of fact that said sum was not acknowledged by bank or by assessee itself. (A.Y. 2007-08).

Puri District Co-op. Milk Producers’ Union Ltd vs. ITO (2011) 132 ITD 127 (Cuttack).

351. S. 5 : Income – Accrual of Income- Earnest money – Sale of land

Earnest money received for transfer of land. Transaction not taking place in year.

Earnest money received not to be treated as income in year under consideration. (Asst. Year 2004-05).

Dy. CIT vs. Shiv Sai Developers (2011) 10 ITR 80 (Mumbai).

352. S. 9(i) : Income deemed to accrue or arise in India – Business connection – Activities of liaison office in India. [S. 5(2)(b)]

Since the Indian Office of the non-resident assessee–company practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers, it cannot be argued that no income accrues or arised in India from the commission, however as the CIT(A) has overstated the role of the Indian Offices in the overall conduct of business, instead of allocation of commission at 30 per cent commission income is allocated to the Indian operations at 50 per cent. (Asst Years 1999-2000 to 2005-06).

Linmark International (Hong Kong) Ltd. vs. Dy CIT (2011) 57 DTR 340 (Delhi).

353. S. 9(i) : Income deemed to accrue or arise in India – Non-resident, with "business connection", taxed only in respect of business operations carried out in India – canvassing agent – not ‘business connection’, fair fee extinguishes non-residents liability to tax

(i) The expression ‘business connection’ does not cover mere canvassing for business by an agent in India. It postulates a real and intimate relation between business activity carried on outside India and business activity within India, the relation between the two contributing to the earning of income by the non-resident in his business activity. The business operations carried out outside India and inside India must have such a relationship as to contribute to business operations as a whole.

(ii) The scope of deeming fiction u/s 9(1)(i) which prima facie appears to be an extension of the classical source rule of taxation is in fact confined to the simpliciter taxability of an income earned in a tax jurisdiction because ‘while the main provision of the deeming fiction seems to be taking a rather aggressive view of the source rule, the Explanations to the deeming fiction considerably narrow down the scope of the same’ and to that extent there is overlapping of s. 9(1)(i) and s. 5(2)(b). Further, while s. 9(1)(i) provides that an income with ‘business connection’ in India is chargeable to tax no matter in which part of the world it accrues or arises, the income which can be subjected to tax in India can never exceed the income attributable to operations carried out in India – by the non-resident or by the agent. This is made clear by clause (a) of Explanation 1 to s. 9(1)(i) and Explanation 3. The result is that if the agent ("the business connection") has been compensated with fair remuneration, there cannot be further income of the non- resident which can be brought to tax u/s 9(1)(i) r.w.s. 5(2)(b).

354. S. 9(1)(i) : Income deemed to accrue or arise in India – Foreign agent – Commission – Business connection – Permanent establishment. (Ss. 4(1), 40(a)(ia), 195)

Where a foreign agent of an Indian exporter operates in his own country and his commission is directly remitted to him. Such commission is not received by him or in his behalf in India, then such agent is not liable to income tax in India on commission received by him. As there was no right to receive income earned in India nor there was any business connection between assessee and foreign agent (ETUK), therefore when income was not chargeable to tax in India under section 4(1), there was no question of invoking provisions of section 195 hence no disallowance can be made under section 40 (a) (ia). (A.Y. 2007-08).

Dy CIT vs. Eon Technology (P) Ltd ( 2011) 46 SOT 323 ( Delhi) (Trib).

355. S. 9(1)(i) : Income deemed to accrue or arise in India – Principles on "splitting of turnkey contracts" – Offshore supply – DTAA-India-Korea. (Articles 5. (1), 5(2)

The assessee, a Korean company, entered (together with L&T) into a contract dated 28-2-2006 with ONGC for the "surveys, design, engineering, procurement, installation", etc of a project on turnkey basis. On 24-5-2006, the assessee opened a Project Office which constituted a ‘Permanent Establishment’. The assessee claimed, relying on Ishikawajima-Harima 288 ITR 408 (SC) & Hyundai Heavy Industries 291 ITR 482 (SC) that the revenue from "offshore supply" and "offshore services" was not assessable to tax in India as no part of it was attributable to the PE. The AO & DRP rejected the claim on the basis that (i) the assessee had actively participated in pre-bid meetings and the project office was in existence even at the stage of the "kick-off" meeting, on appeal
by the assessee to the Tribunal, The Tribunal held

(i) The contract was not divisible into one part for the fabrication of platform and the other for installation & commissioning. Its terms showed that it was a composite contract from surveys of pre-engineering to start-up and commissioning of the entire facilities;

(ii) The opening of the Project Office was a condition precedent before the commencement of the activity of the contractor. The scope of the Project Office was not restricted either by the assessee or by the RBI. Also, the resolutions of the assessee showed that the Project Office was opened for co-ordination and execution of project. It was clear that all the activities to be carried out in respect of the contract were to be routed through the Project Office;

(iii) Hyundai Heavy Industries 291 ITR 482 (SC) is not applicable because there (a) the project office was to work only as a liaison office and was not authorized to carry on any business activity and (b) the contract was divisible into two parts and so the argument that the PE does not come into existence till the fabrication work is done was accepted;

(iv) The argument that if an "installation PE" is to come into existence under Article 5(3), one cannot have regard to the PE under Articles 5(1) & 5(2) is not acceptable. The Project Office constituted a PE under Article 5(1) and an "Installation PE" was not necessary;

(v) The onus is on the assessee to show that office did not play a role in the project. On the other hand, the contract proceeds on the basis that the PO played a vital role in the execution of the project;

(vi) The attribution to India of profit from off-shore supply has to be based on material and dwork one based on the extent of
activity done by the PO (matter remanded).

Samsung Heavy Industries Co. Ltd. vs ADCIT (Delhi). www.itatonline.org.

356. S. 9(1) (vi) : Income deemed to accrue or arise in India – Royalty – Income from licence of software not assessable as "royalty". Gracemac not followed; motorola still good law – DTAA – India-Israeli

The assessee, an Israeli company, entered into an agreement with Reliance Infocomm for supply and licence of software for RIL’s wireless network in India. The assessee received ` 3 crores which it claimed to be "business profits" and not taxable for want of a permanent establishment (PE) in India. The AO took the view that the said sum was assessable as "royalty". This was reversed by the CIT(A) following Motorola Inc 96 TTJ 1 (Del.) (SB). In appeal before the Tribunal, the department argued that in view of Gracemac Corp 42 SOT 550 (Del), the use of software was assessable as "royalty". The Tribunal dismissing the appeal held that, (i) Under Article 12(3) of the India-Israel DTAA, royalty is defined inter alia to mean payments for the "use of" a "copyright" or a "process". There is a distinction between "use of copyright" and "use of a copyrighted article". In order to constitute "use of a copyright", the transferee must enjoy four rights viz: (i) the right to make copies of the software for distribution to the public, (ii) The right to prepare derivative computer programmes based upon the copyrighted programme, (iii) the right to make a public performance of the computer programme and (iv) The right to publicly display the computer programme. If these rights are not enjoyed, there is no "use of a copyright". The consideration is also not for "use of a process" because what the customer is paying for is not for the "process" but for the "results" achieved by use of the software. It will be a hyper technical approach totally divorced from ground business realities to hold that the use of software is use of a "process". (Motorola Inc 96 TTJ 1 (Del.) (SB) and Asia Sat 332 ITR 340 (Del.) followed. Gracemac Corp 42 SOT 550 (Del.) not followed);

(ii) It is well settled that a DTAA prevails over the Act where it is more favourable to the assessee. The view taken in Gracemac, relying on Gramophone Co AIR 1984 SC 667, that the Act overrides the treaty provisions where there is irreconcilable conflict is not acceptable because (a) it is obiter dicta, (b) contrary to Azadi Bachao Andolan 263 ITR 706 (SC) and (c) Gramophone Co not applicable to I. T. Act as it dealt with law in which specific enabling clause for treaty override did not exist. (Ram Jethmalani vs. UOI also considered).

ADIT vs. TII Team Telecom International Pvt. Ltd. (2011) 60 DTR 177 (Mum). www.itatonline.org.

357. S. 9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services – Non-resident – Deduction of Tax at Source. (S. 195)

Fees for technical services (FTS) paid to non resident company for assistance in relation to proposed expansion of taxpayer’s business outside India is not taxable under Income tax Act. Having regard to specific source rule exception applicable to FTS taxation, FTS paid by resident for earning income from a source outside India is not taxable in India. The provision is wide enough to even cover any future source of income.

ITO vs. Bajaj Hindustan, ITA No. 63/Mum/2009, Dt. 3-8-2011, A.Y. 2007-08, BCAJ September 2011, p. 27, Vol. 43-A, Part 6.

358. S. 9(1)(vii) : Income deemed to accrue or arise in India – Deduction of tax at source – Payment to non- resident – Training its personnel – Fees for technical service – Income deemed to accrue or arise in India. [Ss, 40 (a))(i), 195]

Assessee company during relevant assessment year made payment to non resident party for training its personnel or customers to explain proposed buyers salient features of products imported by assessee in India and to impart training to customers to use equipment. The payment made could not be said to be fees for technical services and not liable for deduction of tax at source. (Asst Year 2007-08).

Asst CIT vs. PCI Ltd. (2011) 46 SOT 183 (Delhi).

359. S. 9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services – DTAA – India-USA. (Article 12)

Assessee running business of Hotel making payments to US based interior Landscaping consultants M. Work done by M is basically inspection of hotel, reviewing of the facilities, comparing the same with M’s standards and suggesting improvements/change wherever required to M standard, which did not amount to technical services and therefore no tax was deductible at source. Similarly, fees paid to UK company A was also for work of design, documentation and did not fall under article 13 of Indo–UK DTAA , likewise, fees paid to Thailand company BD, for rendering services of landscape architectural consultancy was not assessable in India. (A.Y. 2003-04 to 2005-06).

Asst CIT vs. Viceroy Hotels Ltd. (2011) 60 DTR 1 (Hyd).

360. S. 10(2) : Exemption – Gift received by Family Member

Gift received by a member of HUF out of the income of the family is exempt under section 10(2).

Vineetkumar Raghavjibhai Bhalodia vs. ITO (2011) 140 TTJ 58 (Rajkot).

361. S. 10(23FB) : Exempt incomes –Venture Capital fund – Income from other sources

It was held that exemption claimed with respect of any income from any VCF prior to 1-4-2008 was exempt as the amendment to s. 10(23FB), which restricted to the exemption to income from investment by VCF, is with effect from
1-4-2008 and is prospective.

ITO vs. Kshitij Capital Fund (2011) 131 ITD 290 (Mumbai).

362. S. 10A : Exempt incomes – Free Trade Zone – Adjustment of loss against taxable profit of other unit – Export turnover

From Assessment Year 2001-02 section 10A is no longer an exemption provision and it allows only deduction from total income, loss from 10A unit has to be adjusted against taxable profit of other unit after deduction under section 10A has been allowed in respect of eligible units. Assessee had incurred data line cost being telecommunication charges in respect of its unit and same was included in export turnover for purpose of deduction under section 10A. Assessing Officer excluded the data line cost from export turnover. Since expenses incurred on development of software in India could not be considered as expenses attributable to delivery of computer software outside India, such expenses could not be excluded from export turn over. (Asst Year 2006-07).

Capgemini India ( P) Ltd vs. Addl. CIT (2011) 46 SOT 195 (Mumbai).

363. S. 10B : Exempt incomes – Deduction – Export of computer software – Back office operation – Computation – Transaction with related concerns. (S. 80-IA(10)

Activities of software programming carried on by the assessee company to render quality and testing assurance services to foreign clients and transmitting the same through internet are in the nature of back office operations covered by CBDT Notification No. 890 (E) dt. 26th September, 2000 issued for the purpose of Explanation 2 to section 10B and therefore, assessee company registered as a 100 per cent EOU with STPI is entitled to deduction under section 10B. The assessee company had raised the bills for the services rendered by it in consonance with the terms of agreement settled between it and its clients from time to time and STPI having certified that such services, it cannot be said that profits shown by the assessee are on the higher side and therefore, profits of the assessee company could not be reworked by applying the provisions of section 80-IA(10) for the purpose of allowing exemption under section 10B. (Asst Years 2005-06 to 2007-08).

Bebo Techlogies (P) Ltd vs. JCIT (2011) 57 DTR 402 (Chd).

364. S. 10B : Exempt incomes – Deduction – Splitting up or reconstruction of existing business – Lease of undertaking

Assessee company claimed the deduction under section 10B on the basis of the lease arrangement between the assessee company and the predecessor, the tribunal held that such claim of benefit under section 10B for the balance unexpired period was not allowable because the claim was not based on the establishment of new industrial undertaking. (Asst. Years 2006-07 & 2007-08).

Synergies Casting Ltd vs. Dy CIT (2011) 57 DTR 503 (Hyd).

365. S. 11 : Exempt Incomes – Charitable or Religious Trust – Property held under Trust

The assessee a charitable trust during the relevant assessment year had earned only loss and not received any donation. The donation of ` 1.36 lakhs had been paid to other charitable institutions out of its earlier accumulated income to the extent permissible in those years. Thus the payment or donation to other charitable institutions could not result in the same becoming income of the assessee. The decision of the Delhi High Court in DIT (Exemption) vs. Bagri foundation (2010) 192 Taxman 309 (Delhi) has been followed in this case. (A.Y. 2007-08)

D. D. Foundation Trust Society vs. ITO (2011) 46 SOT 10 (URO) (Delhi).

366. S. 12A : Exempt incomes – Charitable purpose – Stock exchange – benefit to individual stock broker or members or employees – No exemption granted u/s. 11

When a stock exchange carries out any activity for sole benefit of its members or ex members or employees or ex employees or their dependents and not for benefit of general public which is distinguished from class or community consisting of its members, ex members, employees or ex employees or their dependents and connections, it would not be entitled for exemption under section 11. Members of exchange being integral part of constitution of exchange who are interested persons as per provisions of section 13(1)(c), they are precluded from taking any undue advantages from assessee exchange. Assessee being registered under section 12A, benefit of assessee–exchange would be for public at large and not benefit of individual stock brokers or members of governing body of stock exchange. Since the assessee incurred expenditure for benefit of its members and subsidiary company only, provisions of section 13(1)(C) read with sections 13(2)(b) and 13(3)(cc) was applicable to fact of case and consequently, assessee was not entitled for exemption under section 11. (Asst Years 2001-02 to 2006-07).

Hyderabad Stock Exchange Ltd vs. Asst Director of Income Tax (2011) 46 SOT 1 (Hyd).

367. S. 12A : Charitable Trust – Commercial Activities

Registration under section 12A was rightly refused to the trust where the trust has carried out commercial activity and did not apply the income to fulfil the object of the trust.

Society for the Small & Medium Exporters vs. Director of IT (Exemptions) (2011) 139 TTJ 218 (Delhi.).

368. S. 12A : Exemption – Charitable purpose – Charitable or religious –Registration – Propagation of Vedas

Assessee trust formed for propagation of Vedas was entitled to registration under section 12A, in status of religious and charitable trust. (A.Y. 2008-09).

Kasyapa Veda Research Foundation vs. CIT (2011) 131 ITD 370 (Cochin) (Trib).

369. S. 12A : Exemption – Charitable purpose – Deduction – Donation – Requirement of Form No. 10A. (S. 80G)

In instant case trust had been registered as a charitable institution under section 12A vide order dated 27-11-1975. Subsequently, in view of the order dated 17-3-1994 of the Charity Officer under section 50A (1) of the BPT Act, objects of the Trust were amended. The Case of the revenue was that objects of trust could not be amended without the approval of the High Court. It was also argued that the changes in the objects of trust was not intimated to the department as provided in the Form No 10A. The assessee contended that the when the change in the object clause approved by the Charity Commissioner under section 50A(1) approval of High Court is not required. Requirement of intimation of changes to department was provided only in Form No. 10A, which was not a statutory requirement and in this case the assessee had intimated the said change to department later on. Even the amended objects remained charitable and had not caused any detriment to original objects. The Tribunal held that the assessee trust continued to be eligible for registration under section 12A and thus, impugned order of DIT(E) rejecting renewal of approval under section 80G could not be sustained.

Mehta Jivraj Makandas & Parekh Govindji Kalyani Modh Vanik Vidyarthi Public Trust vs. Director of Income–tax ( 2011) 131 ITD 462 (Mum).

370. S. 12A : Exempt incomes – Charitable Trust – Registration of Trust (S. 80G)

Application for renewal of exemption certificate rejected for the reason that changes made in object clause of trust without following the required procedure, hence the trust became invalid. The Tribunal observed that only one addition was made in the object clause, and even that remained charitable and did not cause any detriment to original object. There was no statutory requirement of intimating the changes except the one mentioned in the Form 10A, and even there was no time limit. Held that revenue was not justified in refusing to renew exemption certificate.

Mehta Jivraj Makandas & Parekh Govindaji Kalyanji Modh Vanik Vidyarthi Public Trust vs. DIT(E), ITA No. 2212/Mum/2010, dt. 11-3-2011, ‘G’ Bench, Mumbai ITAT, BCAJ p. 32, Vol. 43-A, Part 1, April 2011.

371. S. 14A : Business expenditure –Exempted income – Investment –Dividend income

For the applicability of section 14A there must be (i) income which is taxable under the Act, for the relevant assessment year and (2) there should also be income which does not form part of total income under the Act during relevant assessment year. If either one is absent, then section 14A has no applicability. (A.Y. 2006-07).

Siva Industries & Holdings Ltd vs. Asst CIT (2011) 59 DTR 182 (Chennai).

372. S. 14A : Business Expenditure – Exempted Income – No nexus between investment in tax-free securities and borrowed funds. – No disallowance to be made – Disallowance under section 14A cannot exceed exempt income

In A.Y. 2007-08, the assessee received dividend in respect of investment in shares made in earlier years. No investments were made during the year. It was claimed that the investment in the earlier years was made out of reserves & surplus and that there was no expenditure incurred during the year to earn the dividend. The AO held that as in the earlier years, the assessee had borrowed funds, s. 14A applied. It was held that if there is no nexus between borrowed funds and investments made in purchase of shares, disallowance u/s 14A is not warranted. (A.Y. 2007-08).

ACIT vs. Punjab State Co-op & Mktg (Chandigarh)(www.itatonline.org)

373. S. 14A : Business Expenditure – Rule 8D to be applied only after showing how assessee’s method is incorrect

It is a pre-requisite that before invoking Rule 8D, the AO must record his satisfaction on how the assessee’s calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax-free income. Without discharging the onus, the AO is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptions

DCIT vs. Jindal Photo Limited (Delhi) (www.itatonline.org)

374. S. 17(2)(iiia) : Perquisites – Employees Stock Option – Equity warrant certificates

Warrant issued in February 1999 and assessee exercising option in April 1999.

Perquisites arise and taxable in financial year 1999-2000 relevant to assessment year 2000-01. Date of exercise of option is date of acquisition of shares and not date of certificate. (A.Y. 2000-01).

Dy CIT vs. Vijay Gopal Jindal (2011) 11 ITR 451 (Delhi).

375. S. 22 : Income from House property – Business income – Business of construction and development of residential – Commercial unit.
[(S. 28 (i)]

In case where assessee who is engaged in constructions and development of residential/commercial units and where there was no material on record to show that leasing of residential/commercial units was one of the principal objects of the company and that lease rent received by it was from exploitation of property by way of complex activities, the rent income derived as owner of property will be assessed as ‘Income from House Property’.

Roma Builders (P) Ltd vs. JCIT (2011) 131 ITD 91 (Mumbai).

376. S. 22 : Income from house property – Annual value – Second property – Rent control Act

Assessee having two self occupied properties. In case of the second property, relevant provisions of the Rent Control Act were applicable. The Assessing Officer is bound to determine the standard rent of the premises in accordance with provisions of Act. However, where the standard rent has not been determined by the rent control authority, the Assessing Officer is duty bound to do the excise himself and determine the standard rent as per the provisions of the relevant Rent Control Act.

Jayantibhai Meghibhai vs. Addl CIT (ACAJ Vol 35 Part 5. August 2011 P. 320) (Ahd).

377. S. 24 : Income from house property – Deduction – Interest on Loans raised for repayment of original loan – Maintenance charges – Lift- Lighting – Sweeping Charges. (Ss. 22, 23)

Loan raised for repayment of original loan taken to purchase house property partakes the character of original loan and therefore interest paid on such subsequent loan is deductible under section 24 from the rental income of property. Charges paid to the society for the facilities of generator, lift, lighting, etc. were deductible from the gross rent received by the assessee. (Asst. Year 2004-05).

CIT vs. Sunil Kumar Agarwal (2011) 139 TTJ 49 (Luck) (UO).

378. S. 26 : Income from house property – Co-owner – Assessment

Quantification of annual value of co-owned property in course of assessment of AOP consisting of co-owners is not a condition precedent for taxability of individual share of such income in hands of co-owners. (A.Y. 2002-03).

Sujeer Properties (AOP) vs. ITO ( 2011) 131 ITD 377 (Mum).

379. S. 28(i) : Business income – Capital or revenue – Appreciation in foreign currency value – Share application money

Amount received in foreign currency towards shares application money kept in foreign branch of the bank. Subsequently share application money had to be refunded by the assessee. After refunding share application money surplus of about ` 1 crore on account of appreciation in value of foreign currency remained in the account. Such amount cannot be taxed as revenue receipt.

ACIT vs. Shalimar Synthetic Pvt. Ltd., ITA No. 464/Ind./2006, Dt. 29-03-2011, A.Y. 2000-01, BCAJ July 2011, p. 35, Vol. 43-A, Part 4.

380. S. 32 : Depreciation – Computer peripherals – Printers – Scanners – servers – UPS

Computer peripherals such as printers scanners, servers, UPS, etc., form integral part of computer system on which higher depreciation of 60% is allowable. (Asst Year 2005-06).

ITO vs. Omni Globe Information Technologies India (P) Ltd (2011) 131 ITD 280 (Delhi).

381. S. 32 : Depreciation – Trust – Cost of asset allowed as Application of income

Claim of depreciation by assessee trust in respect of assets, cost of which had been claimed as an application of income towards its objects, would amount to double deduction which is prohibited by law. (Asst Year 2006-07).

Dy. Director of Income Tax (Exemption) vs. Adi Sankara Trust (2011) 46 SOT 230 (Coch).

382. S. 32 : Depreciation – Computer Peripherals – Integral Parts

Computer peripherals like printers, scanners, servers, UPS, etc., form integral part of computer system on which higher depreciation of 60% is allowable. [A. Y. 2005-06]

ITO vs. Omni Globe Information Technologies India (P) Ltd. (2011) 131 ITD 280

383. S. 32 : Depreciation – Rate – Printers – UPS

Printers and UPS fall within the class of computer peripherals and therefore, eligible for depreciation at the rate of 60%.

Haworth (India) (P) Ltd. vs. Dy. CIT (2011) 140 TTJ 446 (Delhi.).

384. S. 32(1)(ii) : Depreciation – Non compete fee

Non-compete fee is not in the nature of knowhow, patents copy right, trade marks, licences or franchises within the meaning of section 32(1)(ii), depreciation is not allowable.

Sharp Business Systems (India) Ltd vs. Dy CIT (2011) 59 DTR 385 (Delhi).

385. S. 36(1)(ii) : Bonus or Commission –Commission-in-lieu of Dividend

Directors owning entire capital were paid commission for their hard work not allowed as it was paid in lieu of profit or dividend as it was revealed that the profit earned was due to improved market conditions and not because of any extra services rendered for improving the performance of the company.

Dalal Broacha Stock Broking (P.) Ltd vs. Addl. CIT 131 ITD 36 (Mum.) (SB)

386. S. 36 (1)(vii) : Business Expenditure – Bad debts – Export. (S. 80 HHC)

Assessee’s claim, as an exporter, for allowability of bad debts was rejected on the grounds that the assessee was allowed deduction u/s 80HHC as also that it had not obtained RBI’s permission for write-off. Held that lower authorities were not justified and deduction for bad debts was allowable.

Tricon Enterprises Ltd. vs. ITO, ITA No.6143/Mum./2009, Dt. 31-5-2011, A.Y. 2006-07, BCAJ July 2011, p. 35, Vol. 43-A, Part 4.

387. S. 36(i)(xi) : Business Expenditure –Y2K Expenditure – Eligible

The assessee company was engaged in the business of manufacture, trading and marketing of cameras, films, photo chemicals and other imaging products. It had a computer network system consisting of several computers, servers, etc. in operation. The total system as a whole was not Y2K complaint. To make the entire computer system Y2K complaint, some of the devices had to be replaced and some were upgraded wherever it was possible. The Department had not disputed these facts, however deduction under 36(i)(xi) was still disallowed by the A.O. and the CIT(A). There was no material brought on record or even disputed by the revenue regarding the necessity to replace some of the devices of computer system. Further there was no evidence to show that there was any acquisition of a new computer system. Taking into consideration the intention behind provisions as explained in the Board circular and the facts of the assessee’s case, it was held that the claim of the assessee deserved to be accepted. It was therefore held by the Tribunal that the expenditure as claimed by the assessee as deductible under section 36(i) (xi) should be allowed as a deduction. (A.Y. 2001-02)

Kodak India Limited vs. ACIT (2011) 46 SOT 162 (Mum.) (URO)

388. S. 37(1) : Business Expenditure –Broken period interest

Broken period interest has to be allowed if the securities were held as current assets.

Jt. CIT vs. Dena Bank (2011) 139 TTJ 81 (Mum.)

389. S. 37 (1) : Business expenditure – Capital or revenue – Convertible debentures

Expenditure in connection with issue of 4 per cent fully convertible debentures which were later converted into equity shares of the assessee company was of revenue nature. (A.Y. 2005-06).

Havells India Ltd vs. Addl CIT (2011) 59 DTR 118 / 140 TTJ 283 / 47 sot 61 (Delhi).

390. S. 37(1) : Business expenditure – Capital or revenue – Expenditure on software

Expenses incurred by the assessee for obtaining license to use software are to be treated as revenue expenditure. (A.Ys. 2003-04, 2004-05 & 2006-07)

ST Microelectronics (P) Ltd vs. CIT (2011) 61 DTR 1 (Delhi).

391. S. 37(1) : Business expenditure – Capital or revenue expenditure – Pre operative expenses – Expansion of existing business

Where there is complete interlacing and intermixing of the funds of the assessee, in all its units, besides there being a common management assessee is justified in claiming pre –operative expenses incurred for new project as deductible as revenue expenditure. (A.Y. 2005-06).

Havells India Ltd vs. Addl CIT (2011) 59 DTR 118 / 140 TTJ 283 / 47 SOT 61 (Delhi).

392. S. 37(1) : Business expenditure – Capital or revenue- Non – compete fees – Deferred revenue expenditure

Expenditure incurred by the assessee to ward off the competition for a period of seven years during which any company could have set up its products and reputation in the market, expenditure cannot be allowed as revenue expenditure. As non–compete fee is held to be capital expenditure, claim for treating it as revenue expenditure entitled to deduction for seven years is also not allowable. (A.Y. 2001-02).

Sharp Business Systems (India) Ltd vs. Dy CIT (2011) 59 DTR 385 (Delhi).

393. S. 37(1) : Business Expenditure –Compounding Fee – Motor Vehicle Act – Penalty – Overdimensional Consignments

The assessee was engaged in transporting cargo of overdimensional consignments where front side and rear dimension of consignment as well as weight of consignment exceeded limits allowed under permit granted by RTO and limits laid down under Motor Vehicle Act, 1988 and Rules made thereunder. During the course of assessment proceedings A.O. noticed that assessee paid compounding fees aggregating to ` 73,45,953/- to RTO on various trips during year for transportation of over dimensional consignments in its trailers. A.O. disallowed assessee’s claim in respect of said payment holding that it was in the nature of penalty and thus not allowable under section 37(1). It was held that in view of the fact that the assessee had made about 230 trips by paying compounding fees as per Motor Vehicle Act, it could not be stated that assessee’s payment of compounding fees was in violation of law. It was an expenditure incurred wholly and exclusively for business purpose and hence allowable under section 37(1) of the Act. (A.Y. 2006-07)

Dy. CIT vs. Bharat Gandhi (2011) 46 SOT 258 (Mum.)

394. S. 37(1) : Business Expenditure –Entrance to a Club Membership –Not allowed for not furnishing the evidence

The assessee company contended that the club membership was taken for development of business. A.O. & C.I.T. (A) disallowed the claim of the assessee-company and held it to be a capital expenditure in the absence of any evidence filed by the assessee to prove that the membership was taken for the benefit of the assessee company. In the facts of the present case the ITAT held that as the assessee-company had not furnished any evidence in support of the same, the expenditure was disallowed. (A.Y. 2004-05).

New India Exemptions (P) Ltd vs. ACIT (2011) 46 SOT 14 (Mum) (URO).

395. S. 37(1) : Business expenditure – Expenditure on foreign education of director being son of the major shareholder

Where the assessee company was not able to substantiate that sending of the director for training abroad was for the benefit of the business of the assessee, the expenses incurred for foreign training were not allowable in the hands of assessee company.

Vishesh Entertainment Ltd vs. ACIT (2011) 60 DTR 284 (Mum).

396. S. 37(1) : Business Expenditure – Expenditure to procure raw Material

Expenditure incurred for the purpose of procuring the raw material in thermal power station is allowable expenditure.

ACIT vs. Chettinad Cement Corporation Ltd. (2011) 140 TTJ 100 (Chennai).

397. S. 37 (1) : Business expenditure – Royalty paid to foreign associated enterprise

Royalty paid to foreign associated enterprise under foreign technology collaboration agreement is allowable as revenue expenditure. ( A.Y. 2005-06).

Cabot India Ltd. vs. Dy CIT (2011) 46 SOT 402 (Mum).

398. S. 37(1) : Business Expenditure – Payment of Compensation

Payment made by the assessee to close family members for getting vacant and peaceful possession of premises was held capital expenditure as there was no dispute going on between the parties to show that the payment was necessary for taking peaceful possession. (A. Y. 2003-04)

ITO vs. Pritam Juice (2011) 138 TTJ 294 (Mum)

399. S. 37(1) : Business expenditure –Secret Commission for providing contract

Secret commission paid by the assessee to directors of the company giving construction contract to the assessee cannot be allowed as expenditure in view of Explanation 1 to section 37(1). (Asst Years 1983-84 & 1984-85).

J.K. Panthaki & Co vs. ITO ( 2011) 57 DTR 233/ 139 TTJ 337 (Bang).

400. S. 37(1) : Business expenditure – Secret Commission for providing contract

Secret commission paid by the assessee to directors of the company giving construction contract to the assessee cannot be allowed as expenditure in view of Explanation 1 to section 37(1). (Asst Years 1983-84 & 1984-85).

J.K. Panthaki & Co. vs. ITO (2011) 57 DTR 233/139 TTJ 337 (Bang).

401. S. 40A (3) : Amounts not deductible – Block Assessment – Profit estimated. (S. 158BB)

Provisions of section 40A (3) cannot be invoked in block assessment with respect to the purchases found as per seized material and unrecorded in the regular books of account, especially, when the profit from the unrecorded transactions has been estimated and declared.

Kirti Foods Ltd vs. Asst CIT (2011) 60 DTR 96 (Pune).

402. S. 40A(3) : Business disallowance – Rejection of books of account. (S.145)

Assessing Officer having rejected the books of account and applied the net profit rate for the purpose of computing income, no disallowance could be made under section 40A(3) (A.Y. 2002-03).

ITO vs. Sadhwani Brothers (2011) 58 DTR 368 (JP).

403. S. 40A (9) : Amounts not deductible – Corporation – State Act – Contribution – For statutory corps as their Service Regulations have "force of law"

The assessee, a corporation set up under a State Act, made a contribution of ` 16.77 lakhs, in its capacity as employer and as per the service regulations, to the "MSW Karmachari Welfare Fund". The AO & CIT(A) took the view that the payment, being to a "fund", was hit by s. 40A(9) and not allowable as a deduction. In the appeal to the Tribunal, the assessee claimed that its service regulations had the "force of law" and s. 40A (9) did not apply.

The Tribunal allowing the appeal held that, S. 40A(9) provides that no deduction shall be allowed in respect of "any sum paid by the assessee as an employer … as contribution to any fund … except where such sum is so paid … as required by or under any other law for the time being in force". In the case of statutory corporations, the regulations providing for the terms and conditions of employment and conditions of service have the force of law. Consequently, the service regulations framed by the assessee by which it agreed to make payment to the Fund carried statutory force and fell within the expression "as required by or under any other law" for purposes of s. 40A(9). (U.P. Warehousing Corporation 1980 3 SCC 459 followed)

Maharashtra State Warehousing Corporation vs. ACIT ( Pune). www.itatonline,org.

404. S. 40(a)(ia) : Amounts not deductible – Payable to a contractor or sub- contractor – Adjustment of Refund – Deduction of tax at source

Irrespective of fact that an assessee is entitled to claim refund of excess tax paid or get adjusted against tax liability under provisions of Act, assessee cannot withhold TDS deducted from payment made to a contractor so as to adjust same against excess taxes paid earlier and if an assessee does so then provisions of section 40(a)(ia) are attracted in respect of payment so made. (Asst Year 2005-06).

HCC Pati Joint Venture vs. Asst CIT (2011) 46 SOT 263 (Mumbai).

405. S. 40(a)(ia) : Amounts not deductible – Payments to Indian Agents of foreign shipping lines – Deduction of tax at source- (S. 194C)

Transportation of goods by railways does not fall within the ambit of "work" within the meaning of section 194C and therefore, there was no obligation on the assessee to deduct tax at source under section 194C from the payments made to Indian agents of foreign shipping lines for inland haulage of goods by railways and accordingly, no disallowance can be made under section 40(a)(ia) (Asst Year 2006-07).

Airtech (P) Ltd. vs. Dy. CIT (2011) 57 DTR 169 (DelhI).

406. S. 40(a)(i) : Amounts not deductible – Deduction of tax at source – Non- resident – A Fee for "user of name" and "accreditation" not taxable as "royalty". (S.195)

The assessee, engaged in manufacture of tooth paste, etc. paid ` 11,71,826 as "accreditation panel fees" to British Dental Health Foundation UK without deduction of tax at source. The AO disallowed the sum u/s 40(a)(i) on the ground that the sum was taxable as "royalty" and tax had not been deducted at source u/s 195(1). The CIT(A) deleted the disallowance. Before the Tribunal, the department argued that since the assessee derived valuable advantage from the accreditation by BDHF and used the same as a marketing tool, the amount constituted "royalty". HELD dismissing the appeal:

(i) The obligation to deduct tax u/s 195(1) arises only if the payment is chargeable to tax in the hands of non-resident recipient. If the recipient of the income is not chargeable to tax, the vicarious liability on the payer is ineffectual. As the AO had not established how the recipient was liable to pay tax, he was in error in disallowing u/s 40(a)(i). 

(ii) On merits, though the accreditation fees permitted the assessee the use of name of British Dental Health Foundation, it did not constitute "royalty" under Article 13 of the India-UK DTAA because it did not allow the accredited product to use, or have a right to use, a trademark, nor any information concerning industrial, commercial or scientific experience so as to fall within the definition of the term. The purpose of the accreditation by a reputed body was to give certain comfort level to the end users of the product and to constitute the USP of the product. The term "royalty" cannot be construed as per its normal connotations in business parlance but has to be construed as per the definition in Article 13. The amount constituted "business profits" and as the recipient did not have a PE in India, it was not taxable in India.

ACIT vs. Anchor Health and Beauty Care Pvt. Ltd. (Mum). www.itatonline.org.

407. S. 40(a)(i) : Amounts not deductible – Fees for technical services –Deduction of tax at source – Non resident. (Ss. 9(1)(vii)(b), 195)

In order to fall within the exception of section 9 (1)(vii)(b), the technical services for which, the fees have been paid, ought to have been utilized by resident in a business outside India or for the purpose of making or earning any income from any source outside India. Assessee having established that the testing and certification services provided by it by CSA were utilized only for export activity, section 9(1)(vii)(b) being not attracted, section 40(a)(i) could not be invoked. (A.Y. 2005-06).

Havells India Ltd vs. Addl. CIT (2011) 59 DTR 118 140 TTj 28 3 / 47 SOT 61 (Delhi).

408. S. 40(a)(ia) : Amounts not deductible – Business expenditure – Tax deduction at source – Non allotment of TAN

Disallowance of expenditure on account of non-deduction of TDS. Non deduction was on account of non-allotment of TAN. The disallowance was not justified.

Inder Prasad Mathura Lal vs. ITO, ITA No. 1068/JP/2010, Dt. 27-5-2011, A.Y. 2005-06, BCAJ September 2011, p. 21, Vol. 43-A, Part 6.

409. S. 40(a)(ia) : Amounts not deductible – Deduction of tax at source – Deposited before due date of filing of return – Amendment by FA 2010 is not retrospective

The Finance Act, 2010 amended s. 40(a)(ia) w.r.e.f 1.4.2010 to provide that no disallowance would be made if the TDS was deposited on or before the due date for filing the return. The assessee claimed that the said amendment was "remedial and curative in nature" and applicable from AY 2005-06. The Special Bench, held that, the amendment to s. 40(a)(ia) by the FA, 2010 was made retrospectively applicable only from AY 2010-11 and not earlier. It is nowhere stated that the amendment is curative or declaratory in nature nor is such an intention discernible. A provision giving relief cannot be regarded as retrospective only because the original provision caused hardship to the assessee. S. 40(a)(i) caused "intended difficulty" with the object of discouraging non-compliance with the TDS provisions. A partial relaxation in its rigour, inserted with prospective effect, cannot be treated as "retrospective".

Bharati Shipyard ltd. vs. DCIT. (www.itatonline.org.) / 132 ITD 253 (Mum) (SB)

410. S. 40(a)(ia) : Amounts not deductible – Deduction of tax at source – Retrospective Amendment

Where the assessee acted bona fide in conformity with the provision of Act and the legal position in not deducting tax at source, retrospective amendment could not make him liable and therefore no disallowance under s. 40(a)(ia) was called for.

Sterling Abraive Ltd vs. ACIT (2011) 57 DTR 361 (Mum).

411. S. 40(a)(ia) : Amounts not deductible – Fees for technical services –Deduction of tax at source – Non resident – DTAA-India-UK (S. 9(1) (vii)(b), 195, Art s 13 &15 )

By amendment in the Finance Act ,2007 ,the legislature inserted the Explanation with retrospective effect from 1 st June ,1976 to section 9(2) and it was impossible for the assessee to deduct tax in the financial year 2003-04 1st April, 2003 to 31 st March 2004, when the obligation to deduct TDS was not on the assessee during that period disallowance was not sustainable. Assessee acted bona fide in conformity with the provisions of Act. (A.Y. 2004-05).

Sterling Abbraive Ltd vs. Asst CIT (2011) 140 TTJ 68 (Ahd).

412. S. 40(a)(ia) : Expenses or payments not deductible – Commission – Non-resident – Agent – Service rendered outside India. (Ss. 9(1)(i), 195)

Commission paid to non-resident agent for services rendered outside India not being chargeable to tax in India could not be disallowed under section 40(a)(ia). (A.Ys. 2001-02 to 2004-05).

Dy CIT vs. Devi’ s Laboratories Ltd (2011) 60 DTR 210 ( Hyd) (Trib)/140 TTJ 746.

413. S. 40(a)(ia) : Expenses or payments not deductible – Interest – Form No. 15G

Depositors having submitted Form No. 15G to the assessee well in time, interest paid to them without deduction of tax at source cannot be disallowed under section 40(a)(ia) simply because the said forms could not be submitted to the AO within the time stipulated in the Act, once the same were available to the AO while framing the assessment. (A.Y. 2006-07).

Shyam Sunder Kailash Chand vs. ITO (2011) 60 DTR 270 (Jaipur).

414. S. 40(a)(ia) : Amounts not deductible – Payable to a contractor or sub- contractor – Adjustment of Refund – Deduction of tax at source

Irrespective of fact that an assessee is entitled to claim refund of excess tax paid or get adjusted against tax liability under provisions of Act, assessee cannot withhold TDS deducted from payment made to a contractor so as to adjust same against excess taxes paid earlier and if an assessee does so then provisions of section 40(a) (ia) are attracted in respect of payment so made. (Asst Year 2005-06).

HCC Pati Joint Venture vs. Asst CIT (2011) 46 SOT 263 (Mumbai).

415. S. 40(a)(ia) : Amounts not deductible- Payments to Indian Agents of foreign shipping lines – Deduction of tax at source – (S. 194C.)

Transportation of goods by railways does not fall with in the ambit of "work" within the meaning of section 194C and therefore, there was no obligation on the assessee to deduct tax at source under section 194C from the payments made to Indian agents of foreign shipping lines for inland haulage of goods by railways and accordingly, no disallowance can be made under section 40 (a) (ia) (Asst year 2006-07).

Airtech (P) Ltd. vs. Dy CIT (2011) 57 DTR 169 (DelhI)

416. S. 40(a)(ia): Amounts not deductible – Payment to contractors – Section is applicable in respect of amount paid and payable

Assessee contended that the section 40(a)(ia) is not applicable in case where sum has been paid as the section refers the "sums payable". The Tribunal held that section is applicable in respect of amount paid also hence the assessee failed to deduct the tax under section 194C, disallowance was justified. (Asst Year 2007-08).

Dy CIT vs. Ashika Stock Broking Ltd. (2011) 139 TTJ 192 (Kol).

Editorial – Contrary View was taken by Jaipur Bench in Jaipur Vidyut Vitran Nigam Ltd vs. Dy CIT (2009) 123 TTJ 88 8 (JP).

417. S. 40(a)(ia) : Amounts not deductible – Interest payment additional cost – Tax deduction at source. (S. 194A)

When the amount of interest paid has been considered to be part of the purchase price and not interest under section 194A, such payment cannot be disallowed under section 40a(ia). (Asst Year 2005-06) .

Parag Manshuklal shah vs. ITO - ITA no 2075 /Ahd/ 2008 CO No. 120/Ahd /2008 Bench A dt. 30-6-2011. ACAJ Vol 35 –Part 3. June 2011 P. 166

418. S. 41(1) : Profits Chargeable to tax – Income – Remission or cessation of trading liability – Outstanding Credit

For treating amount of outstanding credit as taxable under section 41(1), there has to be a positive act on part of creditor in current year which would provide benefit to assessee by way of remission; merely because certain amount is outstanding for number of years will not be a case for holding that there is a cessation or remission. The Tribunal dismissed the appeal of revenue. (Asst Year 2007-08).

ITO vs. Bhavesh Prints (P) Ltd. (2011) 46 SOT 268 (Ahd).

419. S. 41(1) : Profits chargeable to tax – Income – Liabilities outstanding more than three years

Outstanding liabilities of the assessee cannot be said to have ceased to exist merely because the relevant accounts have become non-operational or period of three years have expired and, therefore such liabilities cannot be charged to tax by invoking the provisions of section 41(1), more so when the assessee has not written back such liabilities in its profit and loss account. (A.Ys .2003-05 to 2007-08).

Dy CIT vs. Hotel Excelsior Ltd. (2011) 60 DTR 450/141 TTJ 448 (Delhi).

420. S. 41(1) : Profits chargeable to tax –Income – Capital or revenue receipt – Waiver loan. [Ss. 2(24), 28(iv)]

Principal amount of loan, which is taken for the purpose of business or trading activity, on its waiver by the creditor, would constitute income chargeable to tax; however, if the loan is utilized for the purpose of acquiring any capital asset, the same, on its waiver, would not constitute income chargeable to tax either under s. 41(1) or s. 28(iv) or s. 2(24). (A. Y. 2006-07)

Dy. CIT vs. Logitronics (P) Ltd.(2011) 53 DTR73 (Del).

421. S. 41 (1) : Profits Chargeable to tax – Income – Remission or cessation of trading liability – Outstanding Credit

For treating amount of outstanding credit as taxable under section 41(1), there has to be a positive act on part of creditor in current year which would provide benefit to assessee by way of remission; merely because certain amount is outstanding for number of years will not be a case for holding that there is a cessation or remission. The Tribunal dismissed the appeal of revenue. (Asst Year 2007-08).

ITO vs. Bhavesh Prints (P) Ltd. (2011) 46 SOT 268 (Ahd).

422. S. 43(5) : Speculative Transaction – Derivatives

Derivative transactions carried out from 1-4-2005 to 25-1-2006 through stock exchanges , which were recognised by notification issued by CBDT on 25-1-2006, would be eligible for being treated as non speculative transactions within the meaning of clause (d) of proviso to section 43 (5). (Asst Year 2006-07).

Asst CIT vs. Hiren Jaswantrai Shah (2011) 46 SOT 276 (Ahd.).

423. S. 43(5) : Speculative transaction – Derivatives – Foreign institutional investors (S. 115AD)

Transactions in derivatives, both index based and individual share based, are to be considered as speculative transactions within the meaning of section 43(5) and they cannot be treated as normal business or non speculative transactions. Section 43(5) has no application to FIIs in respect of securities as defined in Explanation to section 115AD, income from sale of securities to be considered as short-term or long-term gains. (Asst Year 2004-05).

LG Asian Plus Ltd vs. Asst. CIT (2011) 46 SOT 159 (Mum).

424. S. 43(5) : Speculative Transaction- Derivatives

Derivative transactions carried out from 1-4-2005 to 25-1-2006 through stock exchanges , which were recognised by notification issued by CBDT on 25-1-2006, would be eligible for being treated as non speculative transactions within the meaning of clause (d) of proviso to section 43 (5). (Asst Year 2006-07).

Asst CIT vs. Hiren Jaswantrai Shah (2011) 46 SOT 276 (Ahd).

425. S. 43(5) : Speculative transaction- Derivatives – Foreign institutional investors (S. 115AD)

Transactions in derivatives, both index based and individual share based, are to be considered as speculative transactions within the meaning of section 43(5) and they can not be treated as normal business or non speculative transactions. Section 43(5) has no application to FIIs in respect of securities as defined in Explanation to section 115AD, income from sale of securities to be considered as short term or long-term gains. (Asst Year 2004-05).

LG Asian Plus Ltd vs. Asst CIT (2011) 46 SOT 159 (Mum)

426. S. 43B : Business disallowance – Actual payment – Bonus to employees – Before due date of filing of return

Bonus payment made before due date of filing of return no disallowance can be made. (A.Y. 2005-06).

G.D. Metsteel (P) Ltd vs. Asst CIT (2011) 47 SOT 62 (Mum.).

427. S. 45 : Capital gains – Business income – Shares – Even gains on shares held for 30 days & less is STCG & not business profits. [S. 28 (i)]

To decide whether a capital gain is short-term or long-term, it was held that holding period is one of the criteria. The principles that have to be applied are (a) the intention of the assessee at the time of purchase, (b) whether borrowed funds were used, (c) the frequency of purchase and sales, (d) the treatment in the books, etc. No single criteria is conclusive and an overall view has to be taken (Associated Industrial Development 82 ITR 586 (SC) and Holck Larsen 160 ITR 67 (SC) followed).

Hitesh Satishchandra Doshi vs. JCIT (2011) 58 DTR 258/ 140 TTJ 32/ 46 SOT 336/140 TTJ 32 (Mumbai).

428. S. 45 : Capital gains – Transfer – Part performance of contract

Assessee company purchased a piece of agricultural land on 20-11-1999. It entered into an agreement for sale of said land with "K" on 5-9-2002 and similarly executed a power of attorney in favour of "M", a representative of "K" .authorising him to cultivate said land and to sell agricultural produce grown on it. The said power of attorney was registered before sub-registrar on 21-11-2002 . Sale consideration had been paid to assessee through cheque prior to 5-9-2002. Assessee claimed that transfer of land got completed on 21-11-2002 and therefore, capital gains arising on sale of land was to be assessed as long term capital gains. However the assessing officer took date of execution of power of attorney and agreement to sell; i.e., 5-9-2002, to be date of transfer and assessed capital gains as short term capital gains. The Tribunal held that, once a document is registered, its effective from date, when it was executed, therefore, power of attorney, event though registered on 21-11-2002, could be effective with the effect from 5-9-2002 and as such, it could be held that possession of land had been given on 5-9-2002 when the power of attorney was executed, therefore, all ingredients as are required to be complied with for applicability of section 53A of 1882 Act were satisfied in instant case on 5-9-2002 and accordingly it was to be held that transfer of land had duly taken place on 5-9-2002, itself and, therefore order of Assessing Officer assessing the same as short term capital gain was upheld.(Asst Year 2003-04).

V. Ram Chandra Construction (P) Ltd. vs. Asst CIT (2011) 131 ITD 71 (Agra) (TM).

429. S. 45 : Capital gains – Amount paid to bank by purchaser on behalf of assessee

Where the assessee had transferred plant and machinery, stores, spares, licences, etc. along with certain specified liabilities under an agreement for a consideration and the purchaser had undertaken to pay a sum due by the assessee to a bank, such payment to the bank is only application of income and not charge on income and hence not deductible from total consideration.

Shree Changdeo Sugar Mills Ltd vs. JCIT. (2011) 58 DTR340 (Mum.).

430. S. 45 : Capital gains – Amount received by the assessee on retirement from firm after revaluation of assets

Where the retiring partner received lump sum payment in consideration of his assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners and partners capital accounts had been artificially increased by revaluing assets just to ensure that the retiring partner is paid consideration standing to the credit of his capital account, there was a transfer of interest of the retiring partner over the assets of the firm giving rise to capital gains.

Sudhakar M. Shetty vs. Asst. CIT (2011) 58 DTR 289 (Mum.).

431. S. 45 : Capital Gains – PMS Fees not deductible against capital gains –Despite dissenting orders, reference to Special Bench not necessary

Whether an earlier order should be followed or a reference to the Special Bench be made depends on whether the Bench is satisfied or not about the correctness of the earlier order and not on the view point of the aggrieved party. It is only when a subsequent Bench finds itself unable to endorse the earlier view that it may make reference for the constitution of the Special Bench. The aggrieved party cannot compel the later Bench to either take a contrary view or make a reference for the constitution of the Special Bench.

Homi K. Bhabha vs. ITO (Mum). (www.itatonline.org)

432. S. 45 : Capital loss – Loss on pro rata reduction of share capital is "Notional". In absence of consideration, capital gains provisions do not apply

The assessee invested ` 24.84 crores in equity shares of Times Guarantee Ltd. Pursuant to a scheme of reduction u/s 100 of the Companies Act, the face value of Times Guarantee shares was first reduced to ` 5 from ` 10 and thereafter two equity shares of ` 5 each were consolidated into one equity share of ` 10. The result was that the assessee’s investment was reduced to ` 12.42 crores. The assessee, claimed that the reduction in face value was a "transfer" and that it had suffered a long-term capital loss of ` 22.21 crores after indexation. The AO disallowed the claim on the ground that (i) there was no "transfer" and (ii) there was no "consideration" and the machinery provisions of s. 48 cannot apply. The issue was referred to the Special Bench. Held by the majority

(i) First the face value of each share was reduced from ` 10 to ` 5 and then two shares of ` 5 each were consolidated into one share of ` 10 each. If the argument is that earlier shares were replaced or substituted by new shares, then there is no "transfer" but it is merely a case of substitution of one kind of share with another kind of share

(ii) Assuming that a reduction of shares in the manner done by the assessee amounts to a "transfer", Ss. 45 is not attracted because there is no "consideration" received by the assessee for the transfer. Unless and until a particular transaction leads to "computation" of capital gains or loss as contemplated by Ss. 45 & 48, it cannot attract capital gain tax. On facts, the assessee had not received any consideration for reduction of share capital. While the number of shares held by the assessee has reduced to 50%, nothing had moved from the side of the company to the assessee.

(iii) Further, by the reduction, the assessee’s rights had not been extinguished because it continued to hold the same percentage in the holding of Times Guarantee as it did before the reduction. There was no change in the intrinsic value of his shares and even his rights vis-à-vis other share holders as well as vis-à-vis company remained the same. The concept of capital gains has to be understood as in the commercial world and there was no loss that can be said to have actually accrued to the share holder as a result of reduction in the share capital. Also, there would be no change even in the cost of acquisition of shares by virtue of s. 55(v).

Minority view is that,

(i) On the point of "transfer", a reduction of share capital u/s 100 of the Companies Act can take place either by paying excess capital to the shareholders or by cancelling lost capital. While the first method amounts to a "transfer" the other method (adopted by the assessee) results in an "extinguishment of rights" in the shares which is also a "transfer". Consequently, a reduction of capital by cancellation of shares results in a "transfer";

(ii) On the point that a capital loss cannot be computed if there is no consideration, while it is true that the failure of the computation provisions results in a failure of the charging provisions, there is a distinction between a case where the computation provision is incapable of ascertainment and a case where it is ascertained as zero or Nil. In the present case, the consideration received by the assessee was Nil. It was not a case where the consideration was incapable of ascertainment;

(iii) On the point that there is no "loss", the argument that as with the reduction of capital, there is a corresponding increase in the net worth per share and the assessee’s interest in TGL remains unaffected on an overall basis is not acceptable because after the reduction, the assessee is left with lesser number of shares. The fact that the book value has increased has no effect. An increase or decrease in the market value of shares is of no consequence if the shares are held as investment;

(iv) the apprehension that the assessee would derive a double advantage by claiming the loss now and the entire cost at the time of sale is unfounded because (a) the assessee’s books shows the investments at the reduced amount and (b) u/s. 55(2)(iv)(v), the cost of acquisition of the remaining consolidated shares will be the reduced amount.

Bennett, Coleman & Co. Ltd. vs. ACIT (Mum)(Special Bench) www.itatonline.org.

433. S. 45 : Capital gains – Business income – Shares – Even gains on shares held for 30 days & less is STCG & not business profits. [S. 28 (i)]

To decide whether a capital gain is short-term or long-term, it was held that holding period is one of the criteria. The principles that have to be applied are (a) the intention of the assessee at the time of purchase, (b) whether borrowed funds were used, (c) the frequency of purchase and sales, (d) the treatment in the books; etc. No single criteria is conclusive and an overall view has to be taken (Associated Industrial Development 82 ITR 586 (SC) & Holck Larsen 160 ITR 67 (SC) followed);

Hitesh Satishchandra Doshi vs. JCIT (2011) 58 DTR 258/ 140 TTJ 32/ 46 SOT 336/140 TTJ 32 (Mumbai).

434. S. 45 : Capital gains – Transfer – Part performance of contract

Assessee company purchased a piece of agricultural land on 20-11-1999. It entered in to an agreement for sale of said land with "K" on 5-9-2002 and similarly executed a power of attorney in favour of "M" a, representative of "K". authorising him to cultivate said land and to sell agricultural produce grown on it. The said power of attorney was registered before sub–registrar on 21-11-2002. Sale consideration had been paid to assessee through cheque prior to 5-9-2002. Assessee claimed that transfer of land got completed on 21-11-2002 and therefore, capital gains arising on sale of land was to be assessed as long term capital gains. However the assessing officer took date of execution of power of attorney and agreement to sell; i.e., 5-9-2002, to be date of transfer and assessed capital gains as short-term capital gains. The Tribunal held that, once a document is registered, its effective from date, when it was executed, therefore, power of attorney, eventthough registered on 21-11-2002, could be effective with the effect from 5-9-2002 and as such, it could be held that possession of land had been given on 5-9-2002 when the power of attorney was executed, therefore, all ingredients as are required to be complied with for applicability of section 53A of 1882 Act were satisfied in instant case on 5-9-2002 and accordingly it was to be held that transfer of land had duly taken place on 5-9-2002, itself and, therefore order of assessing Officer assessing the same as short term capital gain was upheld.(Asst Year 2003-04).

V. Ram Chandra Construction (P) Ltd. vs. Asst. CIT (2011) 131 ITD 71 ( Agra) (TM)

435. S. 48 : Capital gains – Computation – Fair market value

Provision contained in section 48 regarding computation of capital gains contemplates ascertainment of full value of consideration received or accruing as a result of transfer capital asset, said provision does not contain words to effect "fair market value", etc. Where there was no evidence on record that transferees were related to directors of assessee company and that assessee had received amount more than stated consideration, income was to be computed by Assessing Officer on basis of consideration actually received. (Asst Year 2006-07).

Dy CIT vs. Jindal Equipment Leasing & Consultancy Services Ltd. (2011) 131 ITD 263 ( Delhi).

436. S. 48 : Capital gains – Computation – Indexation – Preference shares

Once shares are specifically covered by indexation of costs, and unless there is a specific exclusion clause for "preference shares", it cannot be open to Assessing Officer to decline indexation benefits to preference shares. (A.Y. 2005-06).

G. D. Metsteel (P) Ltd. vs. Asst CIT (2011) 47 SOT 62 (Mum) (Trib).

437. S. 48 : Capital gains – Fees paid for Portfolio Management services – Cost of acquisition – Diversion of income

Fees paid by assessee for PMS was not inextricably linked with particular instance of purchase and sale of shares and securities and sale of shares and securities so as to treat the same as expenditure incurred wholly and exclusively in connection with cost of acquisition, improvement, of shares and securities so as to be eligible for deduction in computing capital gains under section 48. Payment of fees by assessee for PMS did not amount to diversion of income by an overriding title. (A.Y. 2004-05)

Devendra Motilal Kothari vs. Dy CIT (2011) 132 ITD 173 (Mum).

438. S. 48 : Capital gains – Computation – Fair market value

Provision contained in section 48 regarding computation of capital gains contemplates ascertainment of full value of consideration received or accruing as a result of transfer capital asset, said provision does not contain words to effect "fair market value" etc., Where there was no evidence on record that transferees were related to directors of assessee company and that assessee had received amount more than stated consideration, income was to be computed by Assessing Officer on basis of consideration actually received. (Asst Year 2006-07).

Dy CIT vs. Jindal Equipment Leasing & Consultancy Services Ltd (2011) 131 ITD 263 (Delhi).

439. S. 50 : Capita gains – Capita loss – Depreciable assets – Set off of brought forward long term capital loss. (S. 74)

Prescriptions of section 50 are to be extended only up to the stage of computation of capital gains and therefore, capital gain resulting from transfer of depreciable assets which were held for a period of more than three years would retain the character of long term capital gain for all other provisions and consequently qualify for set off against brought forward loss from long term capital assets. (Asst year 2005-06).

Manali Investments vs. Asst CIT (2011) 139 TTJ 411 (Mumbai).

440. S. 50C : Capital gains – Consideration – Lease Rights

‘Land or building’ is distinct from any right in land or building.

As s. 50C applies only to a capital asset, being land or building or both, it cannot be made applicable to lease rights in a land.

Atul G. Puranik vs. ITO (2011) 58 DTR 208 (Mum.).

441. S. 50C : Capital gains – Development rights – Transfer – Valuation – Transfer of Property Act, S. 53A. (S. 2 (47)(v), 45)

Provisions of section 50C were applicable to transfer of development rights in the property. Once the assessee handed over the possession of the property to the developer against payment then the property deemed to have been transferred as per deeming provisions of section 2(47)(v). Not making changes in municipality records is not relevant. Valuation officer has valued much less than the stamp authority, hence there the valuation has to be accepted.

Arif Akhatar Hussain vs. ITO (2011) 59 DTR 307 (Mum).

442. S. 50C : Capital gains – Stamp valuation – Power of Assessing Officer

Once document is with stamp authority, value adopted by stamp duty authority is to be considered as value of asset for purpose of clause (b) of section 50C. Assessing Officer cannot substitute value which the stamp authority ought to have adopted for purpose of stamp duty. (A.Y. 2004-05).

Hasmukhbhai vs. Asst CIT (2011) 46 SOT 419 (Ahd).

443. S. 50C : Capital gains – Computation – valuation by stamp valuation authority vis-à-vis DVO

AO cannot disregard the value determined by the DVO under s. 50C(2) r.w.s. 16A of WT Act, and proceed to compute long term capital gain in accordance with the value determined by stamp valuation authority. (A. Y. 2005-06)

Bharti Jayesh Sanghani (Smt) vs. ITO. (2011) 55 DTR 212 (Mum)

444. S. 50C : Capital gains- special provision for full value consideration – May – Valuation by stamp authority

If stamp valuation adopted by stamp authority is disputed before Assessing Officer, then Assessing Officer is bound to refer matter to DVO for determining fair market value of property. The term "may" used in sub section (2) of section 50C is to be read as "shall". (Asst Year 2004-05).

Manjula Singhal vs. ITO ( 2011) 46 SOT 149 (Jodh).

445. S.50C : Capital gains – special provision for full value consideration – Value adopted by AO

The assessee pointed out strong reasons that sale consideration is less than value determined for stamp duty, such cases have to be referred to DVO and in such cases sale consideration which has been deemed to be value adopted for stamp duty purposes as per main provisions, would be value adopted by DVO. As such the matter when once referred to the DVO, the valuation given by the DVO had to be adopted as deemed consideration (A.Y. 2006-07)

Nandita Khosla (Mrs) v.s I.T. O. (2011) 46 SOT 90 (Mumbai).

446. S. 50C : Capital gains – Stamp valuation – Reference to valuation.

Assessing Officer can refer for valuation of capital assets to valuation officer under section 50C if he finds that consideration received is less than value adopted by stamp valuation authority for purpose of stamp duty. (Asst Year 2006-07).

ITO vs. Chandrakant R. Patel (2011) 13 ITD 1 (Ahd)

447. S. 50C : Capital gains – Computation – valuation by stamp valuation authority vis-à-vis DVO

AO cannot disregard the value determined by the DVO under s. 50C(2) r.w.s 16A of WT Act, and proceed to compute long term capital gain in accordance with the value determined by stamp valuation authority. (A. Y. 2005-06)

Bharti Jayesh Sanghani (Smt) vs. ITO. (2011) 55 DTR212 (Mum).

448. S. 50C : Capital gains – special provision for full value consideration – May – Valuation by stamp authority

If stamp valuation adopted by stamp authority is disputed before Assessing Officer, then Assessing Officer is bound to refer matter to DVO for determining fair market value of property. The term "may" used in sub-section (2) of section 50C is to be read as "shall". (Asst year 2004-05).

Manjula Singhal vs. ITO (2011) 46 SOT 149 (Jodh).

449. S. 50C : Capital gains – Stamp valuation – Reference to valuation

Assessing Officer can refer for valuation of capital assets to valuation officer under section 50C if he finds that consideration received is less than value adopted by stamp valuation authority for purpose of stamp duty. (Asst year 2006-07).

ITO vs. Chandrakant R. Patel (2011) 13 ITD 1 (Ahd).

450. S. 54 : Capital gains – Exemption – Sale of two or more houses and investment

There is no restriction placed anywhere in the S. 54 that exemption is available only in relation to sale of one residential house; however, exemption on sale of more than one house property will be available in relation to each set of sale and corresponding investment in the residential house.

Rajesh Keshav Pillai vs. ITO (2011) 60 DTR 412 (Mum).

451. S. 54EC : Capital Gains – Exemption – Date of payment – considered date of delivery/investment

The Tribunal held that since the assessee had delivered the cheque to NABARD by 9-2-2006, the date of payment would be the date of delivery of the cheque. The date when the cheque was encashed by NABARD cannot be said to be the date of investment.

Kumar Amrutlal Doshi vs. DCIT, ITA No. 1523/Mum/2010, dt. 9-2-2011, A.Y. 2006-07, `G’ Bench, Mumbai ITAT, BCAJ p. 31, Vol. 43-A, Part 1, April 2011.

452. S. 55(2)(b) : Capital gains – Cost of acquisition (S.2 (22B), 50C)

Cost of acquisition of the property u/s 55(2)(b)(i) will be its fair market value as on 1-4-1981 as determined by the registered valuer and not the circle rate.

Pyare Mohan Mathur HUF vs. ITO, ITA No. 471/Agra/2009, dt. 21-4-2011, A.Y. 2005-06, Agra ITAT, BCAJ p. 28, Vol. 43-A, Part 3, June 2011.

453. S. 55A : Capital gains – Reference to valuation Officer – Fair market value – (S.48)

Section 55A, is meant only to ascertain fair market value of a capital asset but not meant to determine full value of consideration received as result of transfer and therefore it has its own limitation for its operation. Since section 48 do not prescribe determination of capital gain on fair market value it is out of ambit of reference prescribed under section 55A. (Asst Year 2006-07).

ITO vs. Chandrakant R. Patel (2011) 131 ITD 1 (Ahd).

454. S. 68: Cash Credits – Confirmation –Satisfaction of AO – to be based on proper appreciation of materials and surrounding circumstances available on record

Assessee had filed confirmation and copy of bank statement as well as cash book. It could be said that assessee had proved genuineness of loan and no addition could be made under section 68 of the Income-tax Act. Opinion of Assessing Officer for not accepting explanation offered by assessee under section 68 as not satisfactory. It must be based on proper appreciation of material and other surrounding circumstances available on record and Assessing Officer cannot reject each and every explanation of assessee. (Asst Year 2000-01)

Umesh Electricals vs. Asst CIT (2011) 131 ITD 127 (Agra) (TM).

455. S. 68 : Cash Credits – Share Application money

Assessee company having filed letters of the share applicant companies written to the Asstt. CIT confirming that they had applied for shares in the assessee company giving details of drafts, copies of acknowledgment of returns, certificates of incorporation and balance sheets of the said companies wherein investment made in the assessee company is shown, it has discharged the onus which lay upon it under section 68 establishing the identity and credit worthiness of each share holder. The Tribunal held that addition cannot be made under section 68. (Asst Year 2005-06).

Dy CIT vs. Dolphine Marbles (P) Ltd. (2011) 57 DTR 58 (Jab) (TM).

456. S. 69A : Unexplained money – Gift – Onus on assessee to prove – Occasion

When assessee received the gift onus is on him not only to establish identity of person making gift but also his capacity to make such gift and he is also required to demonstrate, what kind of relationship or what kind of love and affection donor has for assessee and to explain circumstances in which gift were made. (A.Y. 2001-02).

Sushil Kumar Mohanani vs. ITO (2011) 131 ITD 237 (Jab) (TM).

457. S. 69A : Unexplained money – Sale proceeds of shares

Where the shares sold by the assessee were received by the assessee in her demat account on July 3, 2003 transferred from another client and were not those shares stated to be purchased by the assessee on June 17, 2002. The credit in demat account of the assessee on July 3, 2003 remaining unexplained and hence addition was justified. (A.Y. 2004-05).

Kusum Lata (Smt) vs. Asst CIT (2011) 10 ITR 737 (Trib) (Delhi).

458. S. 71 : Losses – Set off from one head against income from another – Capital loss – Capital gains

Assessee sold certain shares of Company "A" and claimed capital loss. Assessing Officer disallowed loss holding that assessee sold shares so as to claim set off this loss against capital gains arising on sale of land. Tribunal held that since shares were duly transferred and recorded in books of account and further, assessee also explained the circumstances in which he sold shares, capital loss on sale of shares cannot be disallowed. (A.Y. 2004-05).

Hasmukhbhai M. Patel vs. Asst CIT (2011) 46 SOT 419 (Ahd).

459. S. 80HHC : Deduction – Export – Interest on Loan given to employees – Business income

Interest earned on loans given to employees is to be treated as part of business income for the purpose of computation of deduction under section 80HHC.

Kirloskar Ebara Pumps vs. Dy. CIT (2011) 138 TTJ 211 (Pune).

460. S. 80-IA : Deduction – Industrial undertaking – Generation and supply of power – Deemed generation of power

Assessee entered into agreement for supply of power. Agreement providing that if power not required, compensation charges to be paid. Amount received for deemed generation of power is entitled to deduction under section 80-IA as the compensation has direct nexus with the business of generation of power. (A.Y. 2004-05).

Magnum Power Generation Ltd vs. Dy CIT (2011) 11 ITR 493 (Delhi).

461. S. 80-IA : Deduction – Profits and gains derived from industrial undertaking – Initial year – Substantial expansion – Take over of existing units. (80-IB)

Conditions as laid down for claiming deduction under section 80-IA/80-IB are to be complied within the initial year and not in all the assessment years in which the assessee is eligible for deduction. Once the assessee has complied with the conditions as laid down in sections 80-IA/80-IB in the initial year, expansion or extension of the existing unit by acquiring assets of another units in a subsequent year does not disentitle the assessee to claim deduction under sections 80-IA/80-IB in respect of increased profit due to such expansion or extension of industrial undertaking. (A.Ys. 2004-05 & 2005-06).

Aqua Plumbing (P) Ltd vs Asst CIT (2011) 59 DTR 22 / 46 SOT 366 (Agra).

462. S. 80-IA(4) : Deductions –Infrastructure development –Industrial undertakings – Deduction available even to contractor who merely develops but does not operate & maintain the infrastructure facility

Relying on the judgement of the Larger Bench in B. T. Patil & Sons 126 TTJ 577 (Mum), the assessee’s claim for deduction u/s 80-IA(4) was denied by the Tribunal on the ground that the assessee was only a contractor and had not complied with all the conditions specified in sub-clauses (a), (b) & (c) of clause (i) of s. 80-IA(4). The order was recalled pursuant to the assessee’s MA claiming that the judgement of the Bombay High Court in ABG Heavy Industries Ltd 322 ITR 323 covered the issue in its favour. HELD deciding the issue afresh:

The contractor who merely develops but does not operate or maintain the infrastructure facility is eligible for deduction u/s. 80-IA(4). Harmonious reading of s. 80-IA(4) led to the conclusion that the deduction was available to an assessee who (i) develops or (ii) operates and maintains or (iii) develops, operates and maintains the infrastructure facility. The 2001 amendment made it clear that the three conditions of development, operation and maintenance were not intended to be cumulative in nature. A developer who is only developing the infrastructure facility cannot be expected to fulfil the condition in sub-clause (c) which is an impossibility and requiring it to be fulfilled will be an absurdity. (B.T. Patil & Sons Belgaum vs. ACIT 126 TTJ 577 (Mum) impliedly held not good law).

Laxmi Civil Engineering Pvt. Ltd. vs. ACIT (Pune). www.itatonline.org.

463. S. 80-IA(4)(iii) : Deductions – Income from developing, operating or maintaining industrial park

Assessee having constructed multistoried buildings for the purpose of developing infrastructure facilities as approved by the Ministry of Industry and Commerce and leased out to five /four floors to some tenants who are carrying on their diverse operations as functionally independent units, each floor could be taken as independent unit, and deduction under section 80IA(4)(iii) could not be denied on the ground that all the floors of the same building occupied by same tenant cannot be construed as one unit and that it was not operating five units in asst year 2007-08 and four units in the next year as stipulated in the approval granted by the said Ministry. Once the projects are approved and notifications are made by the appropriate authorities the approval and notification run back to the date of commencement of the activities and therefore, deduction under section 80-IA(4)(iii) cannot be declined on the ground that the assessee has started functioning even before the formal order of approval and notification. (Asst Years 2007-08 & 2008-09).

Primal Projects (P) Ltd vs. Dy CIT (2011) 139 TTJ 233 (Bang)/56 DTR 291

464. S. 80-IB(10) : Deduction – Housing project – Commercial area 8.8%

Commercial area of the residential plus commercial project did not exceed 8.8% of total area, further, deduction is eligible to housing project approved by the local authority as such or as "residential plus commercial project" having residential as well as commercial units to the extent permitted under the DC Rules .Assessee is entitled to deduction under section 80-IB(10). ( A.Y. 2004-05).

Bhumiraj Homes Ltd vs. Dy. CIT (2011) 60 DTR 65 (Mum).

465. S. 80-IB(10) : Deduction – Housing project – Completion of entire project

For claiming deduction under section 80-IB, it is not necessary for assessee to compute entire project and even on partial completion of project, assessee would be eligible for deduction under section 80-IB. (A.Y. 2005-06).

Nagarjuna Homes vs. ITO (2011) 46 SOT 287 (Hyd).

466. S. 80-IB(10) : Deduction – Housing project – Sale of pair of flats in the name of family members exceeding 1000 square feet – Amendment with effect from 1-4-2010 is prospective in nature

Under pre-amended section as long as a residential unit has less than specified area, is as per duly approved plans and is capable of being used for residential purposes on stand alone basis, deduction under section 80-IB (10), cannot be declined in respect of same merely because end user, by buying more than one such unit in name of family members has merged those residential units into a larger residential unit of a size which is in excess of specified size. Amendment, made to section 80-IB(10) with effect from 1-4-2010, is prospective in nature.(A.Y. 2004-05).

Emgeen Holdings (P) Ltd vs. Dy CIT (2011) 47 SOT 98 (Mum).

467. S. 80-IB(10) : Deduction – Housing projects – Ownership of Land

When the assessee has taken possession of land after the payment of full consideration and developed it, the assessee has fulfilled all the conditions laid down in section 80-IB(10), therefore entitled to deduction under section 80-IB.

ACIT vs. C. Rajini (Smt) (2011) 140 TTJ 218 (Chennai).

468. S. 80-IB(10) : Deduction – Pro-rata basis – Housing project – Residential buildings – Area exceeding 1,500 square feet

Whether deduction should be allowed in the case of flats having build up area not exceeding 1500 sq ft, even though some of the flats were exceeding 1500 sq ft. On reference to third member, the third member held that in view of order passed by Calcutta High Court in CIT vs. Bengal Ambuja Housing Development Ltd (IT Appeal no 458 of 2006 dated 5-1-2007), assessee was entitled to deduction under section 80-IB (10) in respect of flats having built up area not exceeding 1500 square feet and not entitled for deduction in respect of those flats having their built up area exceeding 1500 square feet. The third member also held that in view of CIT vs. Brahma Associates (2011) 197 Taxman 459 (Bom) (High Court), finding of Vice president on the issue of fixing limit of 10 per cent cap does not hold good. (A.Ys. 2005-06 & 2006-07).

Sanghvi & Doshi Enterprise vs. ITO ( 2011) 131 ITD 151 (Chennai) (TM).

469. S. 80-IB : Deduction – Manufacture – Production – Water purification system – Outsourcing – Twenty or more workers

Assessee himself is making the final product i.e., water purification system, it cannot be said that he is not engaged in manufacture merely because, some material is readily purchased from the market and some raw material is got manufactured by outsourcing, assessee having employed twenty or more workers during the major part of the year, there is substantial compliance of the condition of employment of minimum number of workers and, therefore assessee is entitled for deduction under section 80-IB, more so when similar deduction has been allowed in the preceding years. (A.Y. 2001-02).

P.L. Patel vs. ITO (2011) 60 DTR 53 (Mum).

470. S.80-IB : Deduction – Profits and gains from Industrial undertakings other than infrastructure development undertakings – Job work charges – Apportionment of receipts

Assessee – HUF was engaged in manufacturing of moulds for ball pens and, supplying same to ball pen manufacturing concerns. It also provided services to buyers by way of repair and maintenance of moulds sold to them and charged job work charges, which included receipt on account of sale of spare parts and repair and maintenance charges. The Tribunal held that income earned by assessee could not be from repairs and maintenance charges could not be equated at par with income from manufacturing and hence not eligible deduction in terms of section 80-IB. Since in the absence of record of assessee it was not possible to decide how much was for repairs and how much was for job charges it was estimated at 50% of receipt as job work charges on which the assessee would be entitled deduction under section 80-IB and balance 50% as receipt on account of repair and maintenance charges on which the assessee would not be entitled to get deduction under section 80-IB. (A.Y. 2005-06).

Dy CIT vs. Rajesh kr. Drolia (2011) 132 ITD 23 (Kolkata) (SB).

471. S. 80IA(4)(iii) : Deductions – Income from developing, operating or maintaining industrial park

Assessee having constructed multistoried buildings for the purpose of developing infrastructure facilities as approved by the Ministry of Industry and Commerce and leased out to five/four floors to some tenants who are carrying on their diverse operations as functionally independent units, each floor could be taken as independent unit, and deduction under section 80-IA(4)(iii) could not be denied on the ground that all the floors of the same building occupied by same tenant cannot be construed as one unit and that it was not operating five units in asst. year 2007-08 and four units in the next year as stipulated in the approval granted by the said Ministry. Once the projects are approved and notifications are made by the appropriate authorities the approval and notification run back to the date of commencement of the activities and therefore, deduction under section 80-IA(4)(iii) cannot be declined on the ground that the assessee has started functioning even before the formal order of approval and notification. (Asst Years 2007-08 & 2008-09).

Primal Projects (P) Ltd vs. Dy CIT (2011) 139 TTJ 233 (Bang) / 56 DTR 291

472. S. 92A : Avoidance of Tax – Transfer Pricing – Associated Enterprises – De facto control of an unrelated party – unrelated parties also considered "associated enterprises"

If one enterprise controls the decision making of the other or if the decision making of two or more enterprises are controlled by same person, these enterprises are required to be treated as ‘associated enterprises’. Though the expression used in the statute is ‘participation in control or management or capital’, essentially all these three ingredients refer to de facto control on decision making. 

The argument, based on Quark Systems 38 SOT 307 (SB), that exceptionally high and low profit making comparables are required to be excluded from the list of TNMM comparables is not acceptable. Merely because an assessee has made high profit or high loss is not sufficient ground for exclusion if there is no lack of functional comparability. While there is some merit in excluding comparables at the top end of the range and at the bottom end of the range as done in the US Transfer Pricing Regulations, this cannot be adopted as a practice in the absence of any provisions to this effect in the Indian TP regulations. (Benefit of +/- 5% adjustment as directed in UE Trade Corporation 44 SOT 457 to be given);

The adjustment made by the TPO with regard to the advertisement expenditure incurred by the assessee was without jurisdiction because the AO had not made any reference on this issue to the TPO. As the reference to the TPO is transaction specific and not enterprise specific, the TPO Officer has no power to go into a matter which has not been referred to him by the AO. Even the CBDT Instructions are clear on this (3i Infotech Ltd 136 TTJ 641 followed) (A.Y. 2006-07).

Diageo India Pvt. Ltd vs. ACIT (2011) 47 SOT 252 (Mum).

473. S. 92C : Avoidance of tax – Transfer Pricing – Arm’s length price – Selection of comparables

Exact nature of the business needs to be taken in to consideration vis-a-vis the nature of business activity carried on by other parties so as to ascertain whether the said parties can be selected as comparable cases for transfer pricing analysis; Four companies included by the assessee company, there was no justifiable reason to select the same as comparables; however, exclusion of companies showing supernormal profits as compared to
other comparable is fully justified. (Asst Year 2004-05).

Teva India (P) Ltd vs. Dy CIT (2011) 57 DTR 212 (Mumbai).

474. S. 92C : Avoidance of Tax – Transfer Pricing – Comparable

In view of the fact that annual reports/data base extracts of three companies which were selected as comparable cases were not available earlier in the public domain and having regard to the fact that these documents are essential for determining ALP, these additional evidences are admitted for consideration : TPO is directed to make a fresh transfer pricing order by taking into account database of said companies now submitted and also to decide as to whether all the comparables selected by the assessee are proper comparables for the purpose of determining ALP after considering the relevant parameters. (Asst Year 2005-06).

Asst CIT vs. NIT Ltd. (2011) 57 DTR 334 (Del.).

475. S. 92C : Avoidance of tax – Transfer Pricing – Comparables – Domestic – External

Assessee having cited six comparables, TPO /AO was not justified in rejecting the same and applying domestic transactions of the assessee when the AO/TPO has accepted said six external comparables in the subsequent assessment year and there is similarity of facts in both the years, further the assessee is entitled to economic adjustments in the circumstances of under capacity utilization of the company, matter is set aside for examining the issue de novo. (Asst Year 2006-07)

Bringtons Carpets Asia (P) Ltd vs. Dy CIT (2011) 57 DTR 121 (Pune).

476. S. 92C : Avoidance of Tax – Transfer Pricing – Computation – Arm’s length price – 5% variation in ALP

When assessee showed the price charged was within 5% variation of ALP, no addition was required to be made. (Asst Year 2006-07)

Capgemini India (P) Ltd. vs. Addl CIT (2011) 46 SOT 195 (Mumbai) (Trib).

477. S. 92C : Avoidance of tax – Transfer Pricing – Computation – Arm’s Length Price – One price determined – Concession prescribed in proviso

The Hon’ble Tribunal held that, where there was shortage of price in respect of transactions entered with AE vis-à-vis NAE the AO was right in rejecting the contention that price need not be disturbed as one declared by assessee was less than 5% variation in transaction with AE and NAE relying on CBDT circular No. 12 dated 23-8-2011. The Tribunal further observed that Proviso, for which Circular No. 12 was issued had never come into operation and hence question of administration of said proviso to section 92C(2) did not arise at all. Subsequent amendment brought in Finance Act, 2002, said circular had became otiose therefore the assessee could not place reliance on circular No. 12 and for relevant year under consideration only proviso to section 92C(2) as amended by Finance Act, 2002 was applicable. Since in the instant case, only one price had been determined under "most appropriate method" assessee was not entitled to concession, as prescribed in proviso to section 92C(2), hence the order of
Assessing Officer was confirmed. (Asst Year 2004-05).

Asst CIT vs. Essar Steel Ltd (2011) 131 ITD 22 (Visakh).

478. S. 92C : Avoidance of tax – Transfer Pricing – Computation – of arm’s length price – Adjustment of 5% to single price determined by the assessee.

Adjustment of 5% is not applicable if a single price is determined by the assessee. Circular No. 12 dated 23-8-2001 does not apply to the case under consideration as the price variation is more than 5%. (Asst Year 2004-05).

ADP (P) Ltd vs. Dy. CIT (2011) 57 DTR 310 (Hyd).

479. S. 92C : Avoidance of tax – Transfer pricing – Computation – Selection of comparables and maintenance of documents. (Rule 10D)

Each transaction of sale made by the assessee to its AE in UK being a separate transaction and there being no subsisting agreement between the assessee and the AE from beginning in 1996, proviso to rule 10(4) is not applicable to the facts of the case and therefore, assessee was required to maintain documents as per rule 10D. Cases relied upon by the TPO not being comparable cases, matter is restored to the AO to obtain data of comparable cases so as to come to an informed decision as to whether the price charged by the assessee from its AE is arm’s length or not. (A.Y. 2006-07).

Airtech (P) Ltd. vs. Dy CIT (2011) 57 DTR 169 (DelhI).

480. S. 92C : Avoidance of tax – Transfer Pricing : Important Principles on comparability & +/-5% adjustment stated

(i) The expression "shall" in Rule 10B(4) makes it clear that it is mandatory to use the current year data first and if any circumstances reveal an influence on the determination of ALP in relation to the transaction being compared than other data for period not more than two years prior to such financial year may be used. If the current year’s data of comparables is not available at the time of filing the ROI a fresh search of comparables during
the transfer pricing proceedings is permissible;

(ii) The +/-5% tolerance band in s. 92C is not a standard deduction. If the arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it exceeds the said tolerance band, ALP adjustment is not required to be computed after allowing the deduction at 5%. That means, actual working is to be taken for determining the ALP without giving deduction of 5%;

(iii) The transfer pricing rules apply when one of the parties to the transaction is a non-resident, even if the transaction takes place within India. There is no need to find out the legislative intent behind the transfer pricing provision when the provisions were unambiguous. The existence of actual cross border transactions or motive to shift profits outside India or to evade taxes is not a pre-condition for transfer pricing provisions to apply.

481. S. 92C : Avoidance of tax – Transfer Pricing : Disallowance of costs on ground that AE also benefited not permissible

(i) A continuing debit balance per se, in the account of the associated enterprises, does not amount to an international transaction u/s 92B in respect of which ALP adjustments can be made. It is a result of international transaction. The factum of payment has to be considered vis-à-vis terms of payment set out in the transaction arrangement, and not in isolation with the commercial terms on which transaction in respect of which payment is delayed. (Nimbus Communications followed);

(ii) U/s 92B(1), the apportionment of cost is permissible only where there exists a "mutual agreement or arrangement" between two or more Associated Enterprises for apportionment of cost incurred in connection with a benefit, service or facility provided to any one or more of such Enterprises. In the absence of such an agreement to share the costs incurred on the McKinsey study, the costs cannot be apportioned. The bare allegation that the AEs had received "specific and identifiable benefits" is not sufficient to justify apportionment. Further, even assuming that the AEs were liable to compensate the assessee, the TPO ought to have determined the ALP of such "international transaction" after taking into consideration all the rights obtained and obligations incurred by the two entities, including the advantages obtained by the AEs. He ought to have identified comparables and recorded a finding that the consultancy charges were higher than what a similarly situated and comparable independent domestic entity would have incurred.

Patni Computer Systems Ltd. DCIT (Pune). www.itatonline.org.

482. S. 92C : Avoidance of tax – Transfer Pricing: CBDT’s view that +/-5% variation amendment applies to pending proceedings incorrect

In respect of A.Y. 2006-07, the assessee entered into international transaction with its associate enterprises for a sum of ` 14.33 crores. The TPO applied the TNMM and determined the ALP at ` 15.08 crores and made an adjustment of ` 75 lakhs. The assessee claimed that as the said adjustment was within +/-5% of the ALP, no adjustment could be made under the proviso to s. 92C(2) as it stood pre-amendment by the Finance (No. 2) Act, 2009. The Department relied on Circular No.F.142/13/2010-SO (TPL) dated 30-9-2010 (Corrigendum) where the view was expressed that as the amendment came into effect from 1-10-2009, it would apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer on or after such date. HELD disagreeing with the Department’s contention:

While the Finance (No. 2) Act, 2009 provides that the substituted proviso shall come into effect on 1-10-2009 and applies in respect of A.Y. 2009-10 and subsequent years, the Explanatory Notes to the Finance (No. 2) Act, 2009 issued vide Circular No. 5/2010 dated 3-6-2010 incorrectly states that the amendment comes into effect on 1-4-2009. In the Corrigendum, it is stated that the amendment shall apply to proceedings pending before the TPO on or after 1-10-2009. It is difficult to accept the argument of the Department that retrospective or prospective applicability of a provision should be decided in the manner explained by the CBDT. A procedural provision resulting in creating a new disability or which imposes a new duty in respect of transactions already completed cannot be applied retrospectively. As the amended Proviso brings about a substantial change in the relief available to an assessee, it cannot be treated as being retrospective in nature. Kuber Tobacco Products 117 ITD 273 (Del) (SB) & Ekta Promoters 113 ITD 719 (Del) (SB) followed

iPolicy Network Pvt. Ltd. vs. ITO (Delhi). www.itatonline.org.

483. S. 92C : Avoidance of tax – Transfer pricing – Computation – Cup method

Where no data was available in respect of uncontrolled transactions which were similar to transactions of assessee with its foreign associated enterprise, CUP method could not be considered as most appropriate method to determine arm’s length price of royalty by assessee to its AE for technology collaboration. Tribunal set aside matter to the file of Assessing Officer with direction to do the exercise of determining the arm’s length price by applying the most appropriate method. (A.Y. 2005-06)

Cabot India Ltd vs. Dy CIT (2011) 46 SOT 402 (Mum).

484. S. 92C : Avoidance of tax – Transfer pricing – Computation – CUP method – TNMM

TPO having computed the ALP by applying CUP method as against TNMM adopted by the assessee and rejecting the objections raised by the assessee on the ground that all those objections were considered by the TPO in earlier years. The assessee having raised various submissions before the Tribunal which need verification at the level of the AO/TPO matter restored for fresh verification as per law. (A.Y. 2006-07).

Fulford (India) Ltd. vs. Dy CIT (2011) 59 DTR 106/140 TTJ 183 (Mumbai).

485. S. 92C : Avoidance of tax – Transfer pricing – Computation – Data – Selection of comparable – 5% Adjustments

The expression "shall" has been used in rule 10B(4) which makes it abundantly clear that only current year data of an uncontrolled transaction is to be used for the purpose of comparability while examining the international transactions with AEs, unless the case is covered by the proviso i.e. if the data of preceding two years reveals facts which could have an influence on the determination of transfer price. Assessee company being engaged in producing semi-conductor integrated circuits is a complex product requiring skilled workforce. TPO was justified in treating it as high end service provider for the purpose of selection of comparables. The fact that the assessee’s role is only 2 to 3 per cent of the overall operations performed by the group is not at all relevant for deciding whether it is high end performer or low end performer. Assessee having submitted a TP report every year by using different filters for selecting comparables are commensurate to the result declared by it. TPO was justified in rejecting the same and selecting new comparables by applying quantitative as well as qualitative filters. Tolerance band provided in the proviso to section 92C(2) is not to be construed as a standard deduction. If the arithmetic mean of comparables falls within range of said tolerance band, no adjustment is required, if it exceeds then the ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5 per cent. (A.Ys 2003-04, 2004-05, 2006-07)

ST Microelectronics (P) Ltd. vs. CIT (2011) 61 DTR 1 (Delhi).

486. S. 92C : Avoidance of tax – Transfer Pricing & "Cost Contribution Agreements": Law Explained – Commercial wisdom not to be questioned

The assessee entered into a ‘cost contribution agreement’ with its parent company pursuant to which it paid a sum of ` 10.55 crores as its share of the costs. The TPO, AO & DRP disallowed the expenditure. On appeal by the assessee, the Tribunal held that

(i) The TPO was not entitled to determine the ALP under the cost contribution agreement at "Nil" on the basis that the assessee did not need the services at all. How an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. The TPO went beyond his powers in questioning the commercial wisdom of the assessee’s decision to take benefit of its parent company’s expertise. Further, the TPO’s argument that the assessee did not benefit from the services is irrelevant because whether there is benefit or not has no bearing on the ALP of the services. The fact that similar services may have been granted in the past on gratuitous basis is also irrelevant in determining the ALP. The argument that no evidence of services having been rendered was produced is not acceptable because the assessee did produce voluminous evidence before the DRP which was not dealt with. The DRP ought to have dealt with the material and given reasons. Matter remanded to the AO to determine actual rendering of services (Vodafone Essar Ltd vs. DRP 240 CTR 263 (Del) followed);

(ii) A cost contribution arrangement has to be consistent with the arm’s length principle. The assessee’s share of overall contribution to costs must be consistent with the benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation;

(iii) The disallowance of payment under the ‘cost contribution agreement’ u/s 37(1) & 40A(2) is not justified because the payment did not involve mark-up and was at arm’s length price. The services were for furtherance of the assessee’s business interests;

(iv) The disallowance of payment u/s 40(a)(i) for want of TDS is not justified because the payment was not taxable in the AE’s hands under Articles 5 & 12 of the India-USA DTAA as the AE did not have a PE and the services did not constitute "fees for included services". (GE India Technology Centre 327 ITR 456 (SC) followed);

(v) The TPO’s argument that in charging for the services rendered to the AE, a 10% discount could not be given is not acceptable. Discount is a normal occurrence even in independent business situations. The material factor is whether the 10% discount is an arm’s length discount and there is nothing on record to suggest that it is not so.

Dresser-Rand India Pvt. Ltd. vs. ACIT (Mum). www.itatonline.org.

487. S. 92C : Avoidance of tax – Transfer pricing – Interest on loan granted by assessee to AE

In case of grant of loan by assessee to its foreign subsidiary in foreign currency out of its own funds. For determining ALP, it is the international LIBOR rate that would apply and not the domestic prime lending rate, and assessee charging interest at a rate higher than the labour rate, no addition can be made on this count. (A.Y. 2006-07)

Siva Industries & Holdings Ltd vs. Asst CIT (2011) 59 DTR 182 (Chennai) (Trib).

488. S. 92C : Avoidance of Tax – Transfer Pricing – Methods of computing ALP – Important Principles of Cost Plus, CUP & TNMM Explained

The assessee, engaged in the business of manufacture and export of studded diamond and gold jewellery, imported & exported diamonds and exported jewellery to associated enterprises. For transfer pricing purposes, the ALP of the imported & exported diamonds was evaluated using the "Comparable Uncontrolled Price" (CUP) method while the exports of jewellery was evaluated using the "Cost Plus Method" (CPM). The TPO & AO rejected both methods on the ground that adequate material to support it was not available and instead adopted the TNMM and made an adjustment. On appeal, the CIT(A) upheld the adoption of CPM on the imports & exports of diamonds on the ground that total cost details were maintained and the average margin earned from AE transactions was higher than that earned from non-AE transactions. However, he did not deal with the ALV on export of jewellery. On appeal by the department, HELD reversing the CIT(A):

(i) As regards the CPM, it had not been correctly applied. The application of CPM provides for (a) ascertaining the direct and indirect costs of property transferred, or services rendered, to the AE; (b) ascertaining the normal mark up of profit over aggregate of costs in respect of similar property or services to unrelated enterprises and (c) adjusting the normal mark up for differences, if any, in the material factors such as risk profile, credit period, etc. While the benchmark gross profit can be set by taking into account several transactions with unrelated enterprise on a ‘global basis’, the benchmark cannot be applied on a global basis but has to be on a transaction basis. E.g. if the benchmark GP is 20% and the assessee charges a mark-up of 2% in one transaction with AE and 38% in another transaction with the AE, both transactions, will meet the ALP test resulting in an incongruity. On facts, while the normal mark-up has been computed at 16.31%, and the average of mark-up on sales to AEs has been taken at 17.08% and all AE transactions taken to be at ALP, there are individual instances which are less than the benchmark. This is not the correct way to apply the CPM. Also, the costs of inputs have not been verified and it is not shown that the terms of sale to the AEs and all other relevant factors are materially similar to the transactions with independent enterprises. Also, the CPM has been applied by comparing gross profit on sales, whereas the method requires comparison of mark-up on costs on transactions with AEs vis-à-vis mark up on costs on transactions with non AEs (matter remanded to CIT (A) for de novo consideration);

(ii) As regards the CUP for import & export of diamonds (which was not decided by the CIT(A)), the assessee ought to have produced evidence to show that the transactions are at prevailing market prices;

(iii) As regards the TNMM, International transactions with AEs have three significant areas of impact on the overall profitability i.e. sales of finished goods to AEs, sales of raw materials to AEs and purchase of raw materials of AEs), and if the ALP cannot be reasonably determined by CUP or any other direct method (i.e., CPM and RPM) in respect of even one of these areas, the application of TNMM or other indirect method ( i.e., profit split method) is inevitable. On a conceptual note, when ALP of the transactions with AEs cannot be reasonably ascertained, the profit earned by the assessee entering into these transactions is to be estimated, and that is precisely what TNMM does. When TNMM is applied in the context of sales of finished goods to AEs, it is this figure which is taken as variable figure and it bears the impact of higher margins, and when TNMM is applied in the context of purchases of raw materials from AEs, it is the figure of purchases of raw material from AEs which is taken as variable figure and it bears the impact of higher margins. Beyond that, the cause of invoking TNMM does not make much material difference (point whether TNMM has to be applied to the transactions and not on overall profits left open);

(iv) The argument, relying on Indo-American Jewellery Ltd 41 SOT 1, that no ALP adjustment can be made as the assessee enjoys s. 10A tax benefits and has no "motive" to avoid tax is not acceptable because those observations are "obiter dicta" without binding force and in view of Aztech Software 107 ITD SB 141 where it was held that tax avoidance motives need not be shown before invoking transfer pricing provisions.

ACIT vs. Tara Ultimo Private Limited (Mum) (www.itatonline.org)

489. S. 92C : Avoidance of Tax – Transfer Pricing – Sale of IPRs – Important Principles of Law Explained

There is nothing in s. 92CA that requires the AO to first form a "considered opinion" before making a reference to the TPO. It is sufficient if he forms a prima facie opinion that it is necessary and expedient to make such a reference. The making of the reference is a step in the collection of material for making the assessment and does not visit the assessee with civil consequences. There is a safeguard of seeking prior approval of the CIT. Moreover, by virtue of CBDT’s Instruction No. 3 of 2003 dated 20-5-2003 it is mandatory for the AO to refer cases with aggregate value of international transactions more than ` 5 crores to the TPO

The argument that the "Excess Earning Method" adopted by the TPO is not a prescribed method is not acceptable. A sale of IPR is not a routine transaction involving regular purchase and sale. There are no comparables available. The "Excess Earning Method" is an established method of valuation which is upheld by the U.S. Courts in the context of software products. The "Excess Earning Method" method supplements the CUP method and is used to arrive at the CUP price; i.e., the price at which the assessee would have sold in an uncontrolled condition.

Tally Solutions Pvt. Ltd. vs. DCIT (Bang) (www.itatonline.org)

490. S. 115AD : Foreign Institutional Investors – Capital gains – Business income – Investment in securities. (S, 43 (5 ))

Foreign institutional investors (FIIs) can only make investment in securities in country’s capital market and they cannot undertake trade in them. Income arising to a FII from transfer of securities falls within ambit of section 115AD, as per which income arising from transfer of such securities is held to be falling under head ‘capital gains’, it cannot be considered as ‘business income’ whether speculative or non speculative. Section 43(5) has no application to FIIs in respect of securities as defined in Explanation to section 115AD, income from sale of securities is to be considered as short
term or long term capital gains. (Asst Year 2004-05).

LG Asian Plus Ltd vs. Asst DIT (International Taxation) (2011) 46 SOT 159/60 DTR 159 ( Mumbai).

491. S. 115F : Capital gains – Foreign exchange assets – Non-resident –Bonus shares

The assessee acquired the original shares by investing in convertible foreign exchange and therefore, it cannot be said that the bonus shares are acquired in isolation without taking in to consideration the original shares acquired by the assessee. Therefore bonus shares were held to be covered by section 115C(b) of the Act and the same are eligible for benefit under section 115F. (A.Y. 2006-07).

Sanjay Gala vs. ITO, ITA No. 2989/Mum/2008, Dt. 15-7-2011, A.Y. 2005-06, BCAJ September 2011, p. 20, Vol. 43-A, Part 6

492. S. 115 F: Capital gains – Foreign exchange assets – Bonus shares eligible for s. 115F relief if original shares acquired in foreign currency

The assessee, a NRI, purchased shares in foreign currency. On the sale of bonus shares, the assessee claimed relief u/s 115F.  The department’s objection that the assessee has received bonus shares without investing any convertible foreign exchange is not correct because as the original shares were acquired by investing convertible foreign exchange, it cannot be said that the bonus shares were acquired without taking into consideration the original shares. In accordance with Dalmia Investment 52 ITR 567 (SC) the cost of acquisition of the original shares is closely interlinked with the bonus shares. Once bonus shares are issued, the averaging out formula has to be followed with regard to all shares. Accordingly, bonus shares are covered by s. 115C(b) and eligible for benefit u/s 115F.

Sanjay Gala vs. ITO (Mumbai). www.itatonline.org.

493. S. 115JA : Book Profits Company – Provision for Bad Debt

While working out book profit provision for bad debt has to be added back to the net profit under section 115JA Expl. (g).

ACIT vs. Chettinad Cement Corporation Ltd. (2011) 140 TTJ 100 (Chennai).

494. S. 115JB : Company – Book profits – Minimum alternative tax – Capital gains – Exemption (S. 54EC)

Profit on sale of assets credited to profit and loss account cannot be excluded in computing book profit under section 115JB even though capital gain arising from sale of that asset is not subject to tax under normal provisions of Act by virtue of provisions of section 54EC. ( A.Y. 2005-06).

Technicarts (P) Ltd vs. ITO (2011) 46 SOT 294 (Mum).

495. S. 115JB : Company – Book profits – Minimum alternative tax – Provision for diminution in value

Reflection of amount of provision for diminution in value of investment separately on liability side of balance sheet or by way of reduction from figure of investment on asset side of balance sheet is totally alien for computing book profit and only requirement is that if any provision for diminution in value of any asset has been debited to profit and loss account same will automatically stand added to amount of net profit for working out book profit. Therefore, once provision is made for diminution in value of any asset, same has to be added for computing book profit, regardless of fact whether or not there is any balance value of asset. (Asst Year 2004-05).

ITO vs. TCFC Finance Ltd ( 2011) 131 ITD 103 (Mumbai).

496. S. 144C : Dispute Resolution Panel – Speaking Order – Objections of assessee

DRP passed an order under section 144C upholding the order of the TPO and making an adjustment of ` 10.62 crores to the income of assessee. Assessee filed the instant appeal contending that while passing the impugned order, DRP had not considered the objections taken by the assessee and hence the matter was remanded back to DRP for disposal afresh in accordance with law and to pass necessary speaking order, considering the objections raised by assessee.

Agilent Technologies India (P) Ltd. vs. Addl. CIT (2011) 46 SOT 150 (URO).

497. S. 145 : Method of Accounting –Despite s. 209(3) of the Co’s Act, company can follow cash system for tax purposes

As per Sec. 209(3) of the Companies Act, a company is obliged to follow the mercantile system and that is its "regular method" for purposes of s. 145. It was held that the assessee has regularly employed the cash system of accounting in recording its day-to-day business transactions. It is not a case where the assessee has been maintaining its accounts of day-to -day business under the mercantile system of accounting and thereafter prepares accounts in accordance with cash system of accounting for income tax purposes. Section 209(3) of the Companies Act, 1956 does not override s. 145 of the Income-tax Act. There was also no valid basis for the AO’s action in rejecting the books of account and system of accounting followed by the assessee. Further, since the department has accepted the assessee’s system for the past several years, the principles of consistency apply and there should be finality and certainty in litigation in the absence of fresh facts to show that the assessee’s system of accounting is arbitrary or perverse.

DCIT vs. Stup Consultants Pvt. Ltd. (Mum) (www.itatonline.org)

498. S. 145 : Method of accounting –Estimation of profits – Survey –Rejection of books of account

For the relevant assessment year the assessee filed the nil income. In the course of survey the Assessing Officer found that there was certain unaccounted stock. The Assessing Officer rejected the books of account under section 145 (3) and estimated the net profit and also sales. He also made separate addition were made in respect of unaccounted stock under section 69 as well as disallowances and additions in respect of excess wastages, etc. The direction given to the Commissioner (Appeals) to work out the net profit by applying a rate as had been in the immediately preceding assessment year. (A.Y. 2001-02).

Asst CIT vs. Ratan Industries (P) Ltd. (2011) 131 ITD 195 (Agra) (TM).

499. S. 147 : Reassessment – Additions not made on the basis of reopening – Reassessment bad in law. (S. 148)

If no addition is made on the basis of recording of reasons, the reassessment is bad in law. (A.Y. 2000-01).

ITO vs. Bidbhanjan Investment & Trading Co. (P) Ltd. (2011) 59 DTR 345 (Mum).

500. S. 147 : Reassessment – Double taxation avoidance – India-Malaysia (S. 90)

Assessee having permanent establishment in Malaysia. Income earned in Malaysia is taxable thereunder the provisions of Double Taxation Avoidance Agreement between India and Malaysia. No tax actually levied because amount had not been brought in to Malaysia. The amount not taxable in India. Reassessment proceedings to tax amount in India not valid. There is no Rule that assessee should pay tax in at least one jurisdiction to be eligible for relief.

(Asst Years 2001-01 to 2002-03 and 2005-06).

Sivagami Holdings P. Ltd vs. Asst CIT (2011) 10 ITR 48 (Chennai).

501. S. 147 : Reassessment – Housing project (S.80-IB(10).

As the reassessment proceedings are aimed at taxing the income which has escaped assessment, these cannot be taken as a tool for putting the assessee in a better position than in which it was before such proceedings.(A.Y. 2004-05).

Bhumiraj Homes Ltd vs. Dy CIT (2011) 60 DTR 65 (Mum).

502. S. 147: Reassessment – Income from house property – Co-owner – Assessment. (S. 22)

Scheme of the Act does not envisage that annual value of co owned property, upon being determined in assessment of AOP, is to be divided amongst co-owners in pre determined ratio in hands of AOP was wholly academic infructuous. Quantification of annual value of co-owned property in course of assessment of AOP consisting of co-owners is not a condition precedent for taxability of individual share of such income in hands of co-owners. The very initiation of reassessment proceedings in hands of AOP of co-owners was unsustainable by law.(A.Y. 2002-03).

Sujeer Properties (AOP) vs. ITO (2011) 131 ITD 377 (Mum).

503. S.147: Reassessment – Issue is subject matter of appeal – Tribunal (S. 148)

Once an issue is subject-matter of appeal before Tribunal, issuance of notice of reassessment on said ground has to be considered bad in law. (A.Y. 2000-01).

Chika Overseas (P) Ltd vs. ITO (2011) 131 ITD 471 (Mum.).

504. S. 147 : Reassessment within four years – Reason to believe – Change of opinion

Once an assessment has been completed under sec. 143(3) after raising a query on a particular issue and accepting assessee’s reply to the query, AO has no jurisdiction to reopen the assessment merely because the issue in question is not specifically adverted to in the assessment order, unless there is tangible material before the AO to come to the conclusion that there is escapement of income.

ACIT vs. Rolta India Ltd (2011) 57 DTR 370 (Mum). / 139 TTJ 385 (Mumbai) (TM).

505. S. 147 : Reassessment – Valuation of property – Inspectors report

Merely because the stamp valuation authority has adopted certain valuation for payment of stamp duty on the property purchased by the assessee, the same cannot be the basis to conclude that assessee’s income has escaped assessment, particularly when no tangible material has been brought on record to suggest escapement of income except the inspector’s report which could not be relied upon to ascertain the market value of property, hence reassessment quashed by the CIT(A) was up held. (A.Y. 2005-06).

ITO vs. Shiv Shakti Build Home (P) Ltd (2011) 141 TTJ 123 (Jodhpur).

506. S. 148 : Reassessment – Sanction to issue notice – Chief Commissioner – Commissioner – After four years (S. 151)

Original assessment was completed under section 143(3) on 29-1-2001. Subsequently, Assessing Officer who was of rank of Assistant Commissioner (ACIT) initiated proceedings under section 147 vide notice dated 24-3-2005 issued under section 148 , after obtaining approval from Joint Commissioner (JCIT). As proceedings under section 147 were initiated after 4 years from relevant assessment year, assessee objected to jurisdiction of Assessing Officer in issuing notice under section 148 on ground that Assessing Officer had not obtained sanction of Chief Commissioner (CCIT) or Commissioner (CCIT). In view of Shashi Kant Garg (Dr) vs. CIT (2006) 285 ITR 158 (All), objection raised by assessee was to be upheld and consequently, impugned notice was quashed. (Asst Year 1998-99).

ITO vs. Bhavesh Kumar (2011) 131 ITD 1 (Agra) (TM).

507. S. 150 : Reassessment – Finding – Direction – Limitation (S. 149)

Since no findings or directions had been given in assessment year 1992-93 to tax the receipt in question in assessment year 1994-95 under appeal which is also inherently impossible in view of the findings that it is capital receipt, provisions of section 150 would apply in the case of the assessee and reopening of the assessment made after a period of six years from the end of the assessment year was clearly time barred. (A.Y. 1994-95).

Vadilal Dairy International Ltd vs. Asst CIT (2011) 140 TTJ 371 (Ahd).

508. S. 150 : Reassessment – Power of Appellate authority

Section 150 does not enable or require an Appellate Authority to give any directions for reopening of assessment, but it deals with a situation in which a reassessment is to be initiated to give effect to finding or direction of Appellate Authority or Court (A.Y. 2002-03).

Sujeer Properties (AOP) vs. ITO (2011) 131 ITD 377 (Mum).

509. S. 153A : Search and Seizure – Abatement – Assessment pending

Only the assessments pending before the Assessing Officer for completion shall abate and under section 153A the issues decided in the assessment cannot be reconsidered and readjudicated unless there is some fresh material found during the course of search in relation to such points. (Asst Years 2003-04 to 2005-06 & 2007-08).

Guruprerana Enterprises vs. Asst CIT (2011) 57 DTR 465 (Mumbai).

510. S. 153C : Search and Seizure – Assessment – Computation of undisclosed income – Cash Credit

Where the assessee has proved identity of the person the genuineness of the transaction as well as the capacity of the lenders and departmental authorities have not found any falsity in the evidences no addition could be made under section 68. (Asst Years 2003-04 to 2005-06 & 2007-08).

Guruprerana Enterprises vs. Asst CIT (2011) 57 DTR 465 (Mumbai).

511. S. 158BC : Block assessment –Search and Seizure – Warrant of authorization – Joint names – Assessment in the name of Individual is not invalid

Warrant of authorization issued in the names of three companies including assessee, separated only by a comma without the word "and" between the names of the companies is a common warrant in the case of said three companies and not a warrant in the joint names of three companies and therefore, the block assessment order framed in the individual name of the assessee company is not invalid.

Radan Multimedia Ltd vs. Dy CIT (2011) 58 DTR 129 (Mumbai).

512. S. 158BC : Block assessment – Transactions which are subject matter of regular assessment –Cannot be treated as undisclosed income – Depreciation – Finance charges

Assessee having disclosed all the transactions relating to its claim for depreciation on plant and machinery as well as payment of finance charges by filing all details in the return filed prior to the date of search which has been subject matter of enquiry in a regular assessment and all the machineries having been physically found at the time of survey as well as search at the business premises of the assessee, depreciation and finance charges could not be disallowed and treated as undisclosed income in the block assessment in the absence of detection of any material as a result of search.

Radan Multimedia Ltd. vs. Dy CIT (2011) 58 DTR 129 (Mumbai).

513. S. 158BFA : Interest – Tax paid after due date of filing of return – Credit

While calculating interest under section 158BFA (1), credit cannot be allowed for the tax paid by the assessee on various dates after the due date of filing of return.

Kirti Foods Ltd vs. Asst CIT (2011) 60 DTR 96 (Pune).

514. S. 194D : Commission paid on reinsurance – Deduction of tax at source

TDS is not deductible on payment of reinsurance commission by the insurance company.

Tata AIG General Insurance Co. Ltd. vs. ITO (2011) 140 TTJ 319 (Mum.).

515. S. 194H : Deduction of tax at source – Commission – Brokerage – Discount

The assessee mobile phone service provider to the distributors in the course of selling SIM cards and recharge coupons under prepaid scheme against advance payment received from the distributors. Section 194H is applicable. (A.Ys. 2007-08 & 2008-09).

ITO vs. Vodafone Essar Cellular Ltd (2011) 59 DTR 75 (Chennai).

516. S. 194LA : Payment of compensation on acquisition of certain immovable property – Deduction of tax at source – Agricultural land [S. 2(14)]

When land itself was agricultural land though it may not be used for agricultural purpose but unless and until same was used for non agricultural purpose, it had to be treated as agricultural land for purpose of section 194LA, therefore Special Land Acquisition Officer was not required to deduct tax at source from amount of compensation paid for acquisition of land. Definition of "agricultural land" as given in section 2(14) cannot be imported for purpose of section 194LA. (A.Y. 2005-06).

ITO, TDS vs. Special land Acquisition Officer (2011) 46 SOT 458 (Mum).

517. S. 195 : Deduction of tax at source – Non – Resident – Commission paid outside India – Fees for technical services – DTAA – India-Russia (Ss. 9(1)(i), 40(a)(ia), Article 7, 13)

Commission was paid outside India for services rendered outside India, tax was not deductible at source. The definition of "fees for technical services" in Article 13 of the Double Taxation Avoidance Agreement does not include managerial service. Hence the definition of the technical services as given in the Double Taxation Avoidance Agreement is to be applied and it was beneficial. Hence the sales commission in respect of parties situated in the U.K. could not have been subjected to tax at source because it was business profits and not fees for technical services. Moreover the non-residents had not made available technical knowledge or experience. Hence clause 13 of the Double Taxation Avoidance Agreement between India and the U.K was not applicable. (Asst. Years 2007-08 to 2010-2010- 11).

Asst CIT vs. Modern Insulator Ltd (2011) 10 ITR 147 (Jaipur).

518. S. 195 : Deduction of tax at source – Other sums – Non resident –Commission – Support services

Commission earned by UK company from its Indian WOS for providing support services taxable as business income. Accrual by virtue of parent company’s business connection/operations in India. Circular No. 23, dt. 23-7-1969 cannot be relied on after its withdrawal.

ADIT vs. ACM Shipping India Ltd., ITA No. 5085/Mum/2009, Dt. 10-6-2011, BCAJ August 2011, p. 25, Vol. 43-A, Part 5.

519. S. 195 : Deduction of tax at source-Other sums – Non resident – Principal to principal – Sales support

Sales, support and marketing activities of independent nature by an Indian affiliate. Not to result in PE for US company. Contracts entered on principal to principal basis and all operations carried out and concluded outside India.

Lubrizol Corporation USA vs. ADIT, ITA No.7420/Mum/2010, Dt. 3-6-2011, BCAJ August 2011, p. 26, Vol. 43-A, Part 5

520. S. 195 : Deduction of tax at source – Other sums – Payment to non resident – Training its personnel –Fees for technical service – Income deemed to accrue or arise in India (S. 9)

Assessee company during relevant assessment year made payment to non-resident party for training its personnel or customers to explain proposed buyers salient features of products imported by assessee in India and to impart training to customers to use equipment. The payment made could not be said to be fees for technical services and not liable for deduction of tax at source. (Asst Year 2007-08).

Asst CIT vs. PCI Ltd. (2011) 46 SOT 183 (Delhi).

521. S. 195 : Deduction of tax at source – Other sums – Remittances of sale proceeds of shares by bank – UAE resident – DTAA – India-UAE. (Ss. 201, 201 (1A), Article 13 (3)

Abu Dhabi Commercial Bank, (ADCB) was engaged in the business of banking and operated through branch in India. ADCB made remittances to individuals being UAE residents, in respect of sale proceeds of shares which resulted in short term capital gain in India. Remittance was made without deducting tax at source. AO treated the ADCB as an assessee in default, under section 201 and also levied interest under section 201(IA). On appeal CIT (A) held that though ADCB could be regarded as payer under section 204, there was no with holding tax obligation due to availability of treaty benefit. The Tribunal held that liability to deduct tax on remittance, does not arise as bank is only acting as an authorized dealer in transferring the funds on behalf of the share broker in absence of liability to deduct tax, the bank could not be treated as an assessee in default.

ITO vs. Abu Dhabi Commercial Bank (2011) TII 103 ITAT –Mum-ITNL dated 12-5-2011 (591 (2011) 43-A BCAJ –August P. 27. (Mumbai) (Trib).

522. S. 195 : Other sums – Payments to non-residents – Deduction of tax at source – Income deemed to accrue or arise in India – Foreign agent – Commission – Business connection – Permanent establishment (Ss. 4(1), 40(a)(ia), 195)

A foreign agent of an Indian exporter operates in his own country and his commission is directly remitted to him. Such commission is not received by him or in his behalf in India, and such agent is not liable to income tax in India on commission received by him. As there was no right to receive income earned in India nor there was any business connection between assessee and ETUK, therefore when income was not chargeable to tax in India under section 4(1), there was no question of invoking provisions of section 195 hence no disallowance can be made under section 40(a)(ia). (A.Y. 2007-08).

Dy CIT vs. Eon Technology (P) Ltd (2011) 46 SOT 323 (Delhi).

523. S. 195 : Other sums – Payments to non residents – Deduction of tax at source- Off the Shelf Software – Fee for user of software taxable as "Royalty" – DTAA – India-Switzerland. (S. 9(1)(vi), 201)

While the licence to use the "shrink wrapped" or "off the shelf" software does not involve transfer of intellectual property, it constitutes "royalty" u/s 9(1)(vi) and Article 12(3) of the DTAA because it is for "the use of and the right to use of intellectual property such as copyright of a literary, artistic or scientific work or any patent, trade mark, design or model, plan, etc". Thus, the consideration received by Oracle for use of its software constitutes "royalty" and the assessee ought to have deducted tax at source.

ING Vysya Bank Ltd vs. DDCIT (Bang.). www.itatonline.org.

524. S. 195 : Deduction of Tax at Source – non – Other sums – Resident – Commission paid outside India – Fees for technical services – DTAA – India-Russia. (Ss. 9(1)(i), 40(a) (ia), Article 7, 13).

Commission was paid outside India for services rendered outside India, tax was not deductible at source. The definition of "fees for technical services" in Article 13 of the Double Taxation Avoidance Agreement does not include managerial service. Hence the definition of the technical services as given in the Double Taxation Avoidance Agreement is to be applied and it was beneficial. Hence the sales commission in respect of parties situated in the U.K. could not have been subjected to tax at source because it was business profits and not fees for technical services. Moreover the, non-residents had not made available technical knowledge or experience. Hence clause 13 of the Double Taxation Avoidance Agreement between India and the U.K was not applicable. (Asst Years 2007-08 to 2010-11).

Asst CIT vs. Modern Insulator Ltd. (2011) 10 ITR 147 (Jaipur).

525. S. 195 : Deduction of tax at source – Other sums – Remittances of sale proceeds of shares by bank – UAE resident – DTAA – India-UAE. (Ss. 201, 201(1A), Article 13(3)

Abu Dhabi Commercial Bank, (ADCB) was engaged in the business of banking and operated through branch in India. ADCB made remittances to individuals being UAE residents, in respect of sale proceeds of shares which resulted in short term capital gain in India. Remittance was made without deducting tax at source. AO treated the ADCB as an assessee in default, under section 201 and also levied interest under section 201(IA). On appeal CIT(A) held that though ADCB could be regarded as payer under section 204, there was no with holding tax obligation due to availability of treaty benefit. The Tribunal held that Liability to deduct tax on remittance, does not arise as bank is only acting as an authorized dealer in transferring the funds on behalf of the share broker in absence of liability to deduct tax, the bank could not be treated as an assessee in default.

ITO vs. Abu Dhabi Commercial Bank (2011) TII 103 ITAT–Mum-ITNL dated 12-5-2011 (591 (011) 43-A BCAJ–August P. 27. (Mumbai).

526. S. 199 : Deduction of tax at source – Credit for tax deducted

Credit for TDS, under section 199 is to be allowed in year in which corresponding income is assessable to tax. (Asst Year 2006-07).

ITO vs. Shri Anupallavi Finance & Investments (2011) 131 ITD 205 (Chennai).

527. S. 199 : Deduction of tax at source –Credit for tax deducted

Credit for TDS, under section 199 is to be allowed in year in which corresponding income is assessable to tax. (Asst Year 2006-07).

ITO vs. Shri Anupallavi Finance & Investments (2011) 131 ITD 205 (Chennai).

528. S. 201(IA) : Interest – Deduction of tax at source – Payment by cheque – Delay by collecting bank

Assessee having deposited the TDS for June 2008, vide pay order dated 4th July 2008, in the authorized bank and the latter having collected the same on 7th July, 2008, which was the due date for payment of said TDS, it cannot be said that there was a default on the part of the assessee simply because the amount was credited to the Central Government by the bank on 8th July 2008, and therefore, interest under section 201(IA) was not chargeable. (A.Y. 2009-10).

ICIC I Bank Ltd vs. Dy CIT (2011) 58 DTR 284 (Lucknow).

529. S. 246A(1)(a) : Appeal – Commissioner (Appeals) – Withholding tax (Ss. 90, 91)

Question of not allowing relief in respect of withholding tax under section 90/91 has direct effect of reducing refund or enhancing amount of tax payable, such an issue is squarely covered with in ambit of section 246A (1) (a). ‘Amount of tax determined’ as per section 246A(1)(a) encompasses not only determination of amount of tax on total income but also any other thing which has an effect of reducing or enhancing total amount of tax payable by assessee. (A.Y. 2006-07).

Capgemini Business Services ( India) Ltd vs. Dy CIT (2011) 131 ITD 396 (Mum).

530. S. 246A : Appealable Order before CIT(A) – Tax determined as per section 246(1)(a) – Relief in respect of under section 90 or section 91

Section 246A(1)(a) covers issue of not allowing relief in respect of withholding tax under section 90 or section 91.

Capgemini Business Services (India) Ltd. vs. Dy. CIT (2011) 131 ITD 396 (Mum.)

531. S. 251(1)(c) : Powers of the Commissioner (Appeals) – New claim – Non filing of revised return – Power of CIT(A)

When the assessee, during the course of assessment claimed the cost of acquisition of the capital asset as per the valuation report stating the fair market value as on Ist April 1981, the Assessing Officer should have entertained the said claim and CIT(A) also erred in not considering the claim, which is a legally permissible claim. (Asst Year 2005-06).

Gopi S. Shivnani ( Mrs) vs. ITO (2011) 139 TTJ 308 (Mumbai).

532. S. 253(1) : Appeal to the Appellate Tribunal – Power – Penalty (Ss. 246A (1)(q), 271FA)

Income Tax Appellate Tribunal has no power to entertain the appeal against the order passed under section 271FA, i.e. delay in filing information. An appeal against the order passed under section 271FA can be preferred before the CIT(A) (A. Ys. 2005-06 to 2008-09)

Sub-Registrar Nakoar vs. Director of Income Tax (2011) 57 DTR 497 / 139 TTJ 734 (Asr).

533. S. 254(1) : Orders of Appellate Tribunal – Additional evidence – Data of comparables – Annual reports

In view of the fact that annual reports / data base extracts of three companies which were selected as comparable cases were not available earlier in the public domain and having regard to the fact that these documents are essential for determining ALP, these additional evidences are admitted for consideration. (Asst Year 2005-06).

Asst. CIT vs. NIT Ltd. (2011) 57 DTR 334 (Delhi).

534. S. 254(1) : Orders of Appellate Tribunal – Even issues "sub judice" before High Court can be heard by Tribunal

The objection to the Special Bench hearing the issue only on the ground that the High Court has admitted the appeal is not acceptable for two reasons. Firstly, the mere fact that a superior authority is seized of an issue identical to the one before the lower authority does not create any impediment on the powers of the lower authority in disposing of the matters involving such issue as per prevailing law. If the suggestion is accepted, there would be chaos and the entire working of the Tribunal will come to standstill. Secondly, the Special Bench was constituted at the assessee’s request because it then wanted an "escape route" from a potential adverse view. The assessee cannot now argue that the Special Bench be deconstituted. Such "vacillating stand" cannot be approved.

DCIT vs. Summit Securities Limited (Mumbai) (Special Bench). www.itatonlne.org.

535. S. 254(2) : Orders of Appellate Tribunal – Second Rectification Application – Power

The Tribunal has no power to adjudicate upon subsequent application filed under section 254(2). Only course permissible to assessee in such a case is to file an appeal against that order. (Asst Year 1995-96).

Shri Padma Prakash (HUF) vs. ITO (2011) 131 ITD 121 (DelhI) (SB).

536. S. 254(1) : Appeal – Tribunal –Precedent – Decision of Co–ordinate Bench

A Co-ordinate Bench decision, which is admittedly contrary to earlier precedents on the issue from other Co-ordinate Benches, does not bind the subsequent Co-ordinate Benches. (A.Y. 2006-07).

Additional Director of IT (International Taxation) vs. TII Team Telecom International (P) Ltd. ( 2011) 60 DTR 177 (Mum).

537. S. 254(1) : Appellate Tribunal –Powers – Assessment – New claim – Without revised return

Assessee has raised new claim before the Assessing Officer with regard to doctrine of mutuality without filing revised return under section 139. Assessing Officer has not entertained the claim following the judgment of Apex court in Goetze (India) Ltd vs. CIT (2006) 284 ITR 323 (SC), which was confirmed by CIT(A). On further appeal, the Tribunal held that as the issue required proper verification of facts and relevant facts are not available on record nor in the assessment proceedings it could not be admitted. If this ground was admitted, it had to go back to the Assessing Officer to verify the facts and adjudicate the claim of assessee would be against the spirit of the Supreme
Court Judgment. Therefore, the claim of assessee with regard to doctrine of mutuality could not be entertained at this stage. (A.Y. 2004-05).

Jay Bharat Co-operative Society Ltd vs. ITO (2011) 10 ITR 717 (Mumbai).

Editorial – Refer (Mumbai ) and Delhi (High Court) – CIT vs. Jai Parabolic Springs Ltd (2008) 306 ITR 42 (Delhi) & CIT vs. Ramco International (2009) 221 CTR 491 (P & H)

538. S. 254(1) : Appellate Tribunal –Powers – Contempt – CIT-DRs "false & frivolous" submissions constitute "criminal contempt" and
justify recovery of costs from salary

In the department’s appeal, the assessee raised a preliminary objection that the notice u/s 143(2) was not issued within the prescribed period of 12 months. The AO accepted that the s. 143(2) notice had not been issued in time. Accordingly, the Tribunal, relying on Hotel Blue Moon 321 ITR 362 (SC), dismissed the department’s appeal without going into the merits of the appeal. Thereafter, the CIT-DR addressed two letters to the Hon’ble Members in which it made certain allegation against the bench. It was also alleged that the letter was sent by post as the Bench clerk had refused to accept the letter. The letters were treated as a MA by the Tribunal and heard. Thereafter, the CIT-DR filed a letter of apology clarifying that it was not his intention to "hurt the sentiments" of the Members though he did not appear personally before the Bench. The Tribunal dealing meticulously with each assertion made by the CIT-DR and terming them as "frivolous and untrue" and held that :

"We are of the view that the conduct of the learned CIT(A) in addressing correspondence to the Hon’ble Members in respect of an appeal which has been heard and under consideration for passing orders is improper. It is an attempt to interfere with the due course of any judicial proceeding and tends to interfere with or obstructs or tends to obstruct the administration of justice and as such would be "Criminal contempt" within the meaning of the Contempt of Courts Act, 1971. The allegations made in the letters dated 23-3-2010 and 24-3-2010 are serious enough to warrant an action seeking protection of the Hon’ble High Court in exercise of its powers to punish for contempt of the sub-ordinate Courts and Tribunals. In our opinion, there cannot be a fitter case for imposition of exemplary costs on the learned Departmental Representative, who in our view, is responsible for such a M.A. and for wasting the time of the Tribunal by raising frivolous arguments and making blatantly false submissions. The cost should have to be recovered from the salary of the delinquent employee, who is responsible for such actions and entry made in his service record on the adverse comments made against the D.R. by the Tribunal. We however refrain from doing so in the hope that such indiscretion would not be repeated in future and also in view of the letter of apology filed by the D.R."

Commissioner (Departmental representative) vs. Simoni Gems (Mum). www.itatonline.org.

539. S. 254(2) : Appellate Tribunal –Rectification of mistakes – Review or Recall of the order

Tribunal cannot recall its previous order unless there are manifest errors which are obvious, clear and self-evident.

Sudhakar M. Shetty vs. ACIT (2011) 139 TTJ 687 (Mum.).

540. S. 254(2) : Orders of Appellate Tribunal – Second rectification application – Power

The Tribunal has no power to adjudicate upon subsequent application filed under section 254 (2). Only course permissible to assessee in such a case is to file an appeal against that order. (Asst Year 1995-96).

Shri Padma Prakash (HUF) vs. ITO (2011) 131 ITD 121 (DelhI ) (SB).

541. S. 255 : Appeal – Tribunal –Abatement – Legal heirs on record – Rule 26 ITAT Rules – CPC 1908, order 22, r. 4

Though Rule 26 of the ITAT Rules 1963, provides for bringing legal heirs of deceased on record, no time limit has been prescribed under that rule, and provisions of order 22 rule 4 of the CPC, 1908 have to be applied. Revenue having failed to bring the legal heirs of deceased assessee on record, in spite of giving reasonable opportunity the appeal of revenue was dismissed. (A.Ys. 1999-2000 to 2002-03).

ITO vs. Myeni Raghava Rao (2011) 139 TTJ 740 / 131 ITD 321 (Visakhapatnam).

542. S. 271(1)(c) : Penalty – Concealment – AO reprimanded for harassing the assessee by wrongly levying penalty

In the instant case, the assessment order supplied by AO to assessee did not contain any direction for initiation of penalty though assessment order filed by dept. with memo of appeal had a reference to issue of notice u/s. 271(1)(c). The Tribunal considering the case fit for awarding cost u/s. 254(2B) of the Act, held that they were inclined to record over here that AO should have confined himself in making just and proper assessment only, as per the provisions of the law and harassment of assessee, which is not permitted under the statute should have been avoided at all cost.

ITO vs. Audyogik Tantra Shikshan (Pune) (Trib).www.itatonline.org.

543. S. 271(1)(c) : Penalty – Concealment – Carry forward loss shown at a wrong figure – Mistake of consultant – Disallowance of deduction under section 80G

Carry forward loss shown at a wrong figure due to mistake of tax consultant would not attract penalty under section 271(1)(c), as the correct figure was available with Assessing Officer from the assessment of earlier years and the mistake was rectified on being pointed out before finalization of assessment. Recognition to donee trust under section 80G being available earlier, there was bona fide belief to claim deduction under section 80G hence there was no case for levying penalty under section 271(1)(c). (A.Y. 2004-05)

Asst CIT vs. A.H. Wheeler & Co. (P) Ltd. (2011) 60 DTR 25 (All).

544. S. 271 (1) (c) : Penalty – Concealment – Despite disclosure, legal opinion, favourable CIT(A) order & High Court appeal on merits, s. 271(1)(c) penalty leviable if issue not "debatable" in Tribunal’s view.

The assessee, a firm of Chartered Accountants, was one of the "associate members" of Deloitte Haskins & Sells pursuant to which it was entitled to practice in that name. Deloitte desired to merge all the associate members into one firm. As this was not acceptable to the assessee, it withdrew from the membership and received consideration of ` 1.15 crores from Deloitte. The said amount was credited to the partners’ capital accounts and claimed to be a non-taxable capital receipt by the assessee. The AO rejected the claim though the CIT(A) accepted it on the ground that it had "great force". The Tribunal reversed the CIT(A). The AO levied s. 271(1)(c) penalty which the CIT(A) deleted. On appeal by the department to the Tribunal, the assessee argued that penalty was not leviable because (i) there was a disclosure of the facts in the computation & the balance sheet, (ii) the opinion of 3 tax experts had been taken, (iii) the issue was debatable and (iv) the assessee’s appeal on the merits had been admitted by the High Court. HELD allowing the appeal:

(i) S. 271(1)(c) imposes "strict civil liability".

(ii) The fact that the legal opinions were not furnished during the assessment proceedings (but were furnished only during the CIT(A) penalty proceedings) indicates that the assessee realized the ineffectiveness of these opinions and still ventured into making the non-allowable claim;

(iii) Though there was disclosure in the computation and balance sheet, in order to minimize disclosure, the assessee took the "smart route" of directly crediting the receipt in the capital accounts of partners to evade tax;

(iv) The fact that a substantial question of law on the merits was admitted by High Court does not mean penalty is not leviable (Rupam Mercantiles 91 ITD 237 (Ahd) (TM) not followed).

ACIT vs. Khanna & Annadhanam (Delhi) (Trib).www.itatonline.org.

545. S. 271(1)(c) : Penalty – Concealment- Fees paid for ROC for increasing authorized share capital

Assessee having claimed deduction of fees paid to the ROC for increasing authorized share capital contrary to the ruling of the Supreme Court, the claim is ex facie wrong and cannot be accepted as a bona fide claim as the circumstances in which the auditors committed the error of treating the same as revenue expenditure have not been explained and, therefore, levy of penalty under section 271(1)(c) is justified. (A.Y. 2006-07).

Trinity Touch (P) Ltd vs. ITO (2011) 59 DTR 195/140 TTJ 309 (Delhi).

546. S. 271 (1) (c) : Penalty – Concealment – Non genuine gift claimed as capital gains – Transfer of tenancy right

In the return of income the assessee declared of ` 17 lakhs as long term capital gains arising from transfer of tenancy right and paid tax @ 20% applicable to long term capital gains. Claim of assessee was that amount paid for receiving the gift was from the cash received on surrender of tenancy right. Assessing Officer held that as there was no supporting evidence the amount was assessed as income from undisclosed sources.

The Tribunal held that as tax sought to be evaded is very clear as the tax rate applicable on the impugned receipt of ` 17 lakhs is 30 % being income from undisclosed sources, whereas the assessee has paid 20% claiming the same to be capital gain on transfer of tenancy right, provisions of Explanation 1 are not applicable to the instant case as tax sought to be evaded was because of the lower rate of tax paid and not because of any addition to the income and, therefore, penalty is imposable under the main provisions of s. 271(1)(c).

Harish P. Mashruwala vs. Asst CIT (2011) 139 TTJ 563 (Mumbai) (SB).

547. S. 271 (1) (c) : Penalty – Concealment – Revised return – Additional income – Explanation 2

Additional income offered by way of revised return and accepted by Assessing Officer cannot be said to be an addition so as to attract Explanation 2 to section 271(1)(c). (A.Y. 2004-05).

SVC Projects ( P) Ltd vs. JCIT (2011) 58 DTR 433/ 140 TTJ 79 / 132 ITD 11 (Visakha).

548. S. 271(1) (c) : Penalty – Concealment – Survey – Surrender of additional income

Assessee having surrendered additional income following detection of certain discrepancies in the documents found during the survey proceedings at its premises despite filing an explanation and AO proceeded to assess the said income on the basis of the surrender made by the assessee Penalty under section 271(1)(c) is not leviable. (Asst Year 2005-06).

Ajay Sangari & Company vs. Additional CIT ( 2011) 57 DTR 397 (Chd).

549. S. 271 (1) (c) : Penalty – Concealment – Transfer pricing – No penalty under Expl. 7 to s. 271(1)(c) for dispute regarding ALP method

The assessee adopted the TNMM to determine the ALP in respect of the broking transactions entered into with its affiliates. The AO & TPO held that the assessee ought to have adopted the CUP Method and made an adjustment of ` 1.10 crores. This was accepted by the assessee. The AO levied penalty under Explanation 1 to s. 271(1)(c) on the ground that the assessee had filed inaccurate particulars of income. This was deleted by the CIT(A). On appeal by the department to the Tribunal, the Tribunal dismissing the appeal held that, Explanation 1 to s. 271(1)(c) does not apply to transfer pricing adjustments. Penalty for transfer pricing adjustments is governed by Explanation 7 to s. 271(1)(c). Under Explanation 7 to s. 271(1)(c), the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of s. 92 C in "good faith" and with "due diligence". The assessee adopted the TNMM and no fault was found with the computation of ALP as per that method. Instead, the method was rejected on the ground that CUP Method was applicable. It is a contentious issue whether any priority in the methods of determining ALPs exists. So, when TNMM is rejected, without any specific reasons for inapplicability of the TNMM and simply on the ground that a direct method is more appropriate to the fact situation, it is not a fit case for imposition of penalty.

DCIT vs. RBS Equities India Ltd. (Mum) (Trib). www.itatonline.org.

550. S. 271(1)(c) : Penalty – Concealment – Non genuine gift claimed as capital gains – Transfer of tenancy right

In the return of income the assessee declared of ` 17 lakhs as long term capital gains arising from transfer of tenancy right and paid tax @ 20% applicable to long term capital gains. Claim of assessee was that amount paid for receiving the gift was from the cash received on surrender of tenancy right. Assessing Officer held that as there was no supporting evidence the amount was assessed as income from undisclosed sources.

The Tribunal held that as tax sought to be evaded is very clear as the tax rate applicable on the impugned receipt of ` 17 lakhs is 30% being income from undisclosed sources, whereas the assessee has paid 20% claiming the same to be capital gain on transfer of tenancy right, provisions of Explanation 1 are not applicable to the instant case as tax sought to be evaded was because of the lower rate of tax paid and not because of any addition to the income and, therefore, penalty is imposable under the main provisions of s. 271(1)(c).

Harish P. Mashruwala vs. Asst CIT (2011) 139 TTJ 563 (Mumbai ) (SB ) (Trib).

551. S. 271(1)(c) : Penalty – Concealment – Survey – Surrender of additional income

Assessee having surrendered additional income following detection of certain discrepancies in the documents found during the survey proceedings at its premises despite filing an explanation and AO proceeded to assess the said income on the basis of the surrender made by the assessee. Penalty under section 271(1)(C) is not leviable. (Asst Year 2005-06).

Ajay Sangari & Company vs. Additional CIT (2011) 57 DTR 397 (Chd).

552. S. 271D : Penalty – Loans or deposits – Other than by account payee cheque or draft – Bona fide belief (S.269SS)

Penalty for acceptance of loan/deposit otherwise than by account payee cheque/draft. Assessee’s bona fide belief and conduct established a sufficient and reasonable cause.

Raman Gupta, Prop. M/s Raman & Co. vs. ACIT, ITA No.05/ASR/2010, Dt. 31-01-2011, A.Y. 2003-04, BCAJ August 2011, p. 24, Vol. 43-A, Part 5

553. S. 288 (2) : Authorised Representative – Need not be a registered Income Tax practitioner

Under rule 49 (a), of the Income Tax Rules, 1962, an authorized income tax practitioner means any authorized representative as defined in clause (v) or clause (vi) or clause (vii) of section (2) of section 288 of the Income-tax Act, 1961, for appearing before the Tribunal. It cannot be read to mean that an authorized representative as defined in sub–section (2) has to get him self registered as an authorized income tax practitioner. Section 288 (2) does not say that the authorized representative shall also be an authorized income tax practitioner registered under rule 54 and 55 of the Rules. The right given in this respect by the Act cannot be diluted by the Rules nor can it be restricted, by specifying a procedure for registration. The right given to an assessee to appoint a qualified authorized representative cannot be denied.

Vidya Siksha Educational and Charitable Trust vs. CIT (2011) 11 ITR (Trib) 236 (Chennai).