Friday, March 26, 2010



ISSUE DATED 29-3-2010

Volume 2 : Part 4


Fines paid to SEBI for unfair trading practice and unbusiness like conduct cannot be disallowed : Goldcrest Capital Markets Ltd. v. ITO (Mumbai) p. 355

Amount paid as salary to employees disallowed on ground of decrease in profits not justified : Goldcrest Capital Markets Ltd. v. ITO (Mumbai) p. 355
Amount spent on acquiring non-competition rights entitled to depreciation : ITO v. Medicorp Technologies India Ltd. (Chennai) p. 367
AO estimating value as on 1-4-1981 at 10 times cost of acquisition for agricultural land fair and reasonable : Arun Sunny v. Dy. CIT (Cochin) p. 380
Assessee has no right to produce additional evidence before Tribunal unless leave granted by Tribunal for valid reasons : Arun Sunny v. Dy. CIT (Cochin) p. 380
Interest income arising out of contractual obligation taxable : Lanco Kondapalli Power P. Ltd. v. Dy. CIT (Hyd.) p. 392
Assessee following method of "cost or market price whichever is lower" consistently, deletion of addition justified : Dy. CIT v. Majestic Holdings and Finvest P. Ltd (Mumbai) p. 407
Interest on temporary surplus funds deposited in bank for business purposes assessable as business income : Voltas International Ltd. v. Asst. CIT (Mumbai) p. 410
Interest income on margin money assessable as business income : Voltas International Ltd. v. Asst. CIT (Mumbai) p. 410
Interest earned on FD in bank, income-tax refunds and inter-corporate deposits assessable as income from other sources : Voltas International Ltd. v. Asst. CIT (Mumbai) p. 410
Net interest income alone to be excluded u/s. 80HHB : Voltas International Ltd. v. Asst. CIT (Mumbai) p. 410
Interest on refund assessable in year of receipt : Dy. CIT v. Seshasayee Paper and Boards Ltd. (Chennai) p. 417
Assessment made on satisfaction of queries, not a case of lack of enquiry : Order not to be revised : Gupta International v. ITO (Delhi) p. 428
Where assessment barred by limitation, CIT cannot direct AO to pass fresh assessment order : V. Narayanan v. Dy/Asst. CIT (Chennai) p. 446


TDS to distinguish "works" against "sales" contract
In a landmark ruling recently, the Bombay High Court has said that sale contracts will not be subject to tax deducted at source (TDS), thereby giving relief to manufacturing companies, and also clarifying the issue by distinguishing between works contracts and sale contracts. In an oral judgment, delivered on March 12, the court held that while "works contract" were subject to TDS under section 194C of the Income-tax Act, "sales contract" were not. Section 194C deals with TDS on payments to contractors and sub-contractors, while section 40a(ia) disallows those expenses which are liable to TDS but on which no TDS has been deducted.
The court upheld the arguments of the pharmaceutical companies that contract manufacturing agreements entered into by them with other manufacturers amounted to a sales contract, which was not liable to TDS under section 194C. The High Court ruling will give clarity to companies whose appeals are pending at various levels like Income-tax Tribunals, courts or even with Commissioners of Income-tax (Appeals). The Bombay High Court judgment also clears doubts that had risen concerning deduction of TDS on sale contracts after a Karnataka High Court ruling that asked technology firms to deduct tax on all payments made to non-residents on software purchases.
The ruling also makes it clear that companies that outsource their manufacturing to other manufacturers, acting as contractors, will not be liable to deduct TDS on payments to the latter, and will also be allowed to treat these payments as deductible expenses, even though no TDS has been deducted.
The Revenue Department has been holding that manufacturing agreements entered into by companies with contractors make the former liable to deduct tax at source while making payments to the contractors under section 194C of the Income-tax Act and also disallowed the same as expense under section 40a(ia) as these amounted to "works contracts."
Under a "sales contract", the object of the sale is the transfer of property from one entity to the other, while a "works contract" involves the change of form and not transfer of property.
Therefore the court ruled that while a "works contract" attracts TDS and disallowance provisions, a "sales contract" does not. [Source : dated March 16, 2010]
F Employer's contribution towards overseas social security treated non-taxable
The Income-tax Appellate Tribunal, New Delhi, has recently held that the mandatory contribution by the employer towards the social security in the home county of the employee (foreign national), wherein no benefit/right gets vested in the year of contribution should not be considered as a taxable perquisite in hands of such employee.
The ruling came in the wake of a case wherein an employee, a Japanese national, was working as a general manager with an Indian company. The employee's residential status under the Income-tax Act, 1961 for the financial year 2003-04 was that of a "resident but not ordinarily resident". In the return of income filed for the said financial year, the employee did not offer to tax the employer's contribution towards social security, health insurance, etc., in his home country, i.e., Japan.
The employee contended that the issue in hand is fully covered in the favour of the employee in earlier decisions of the Tribunal wherein contribution towards social security made by the employer in the home country of the foreign national was held to be not taxable as a perquisite. Therefore, in the instant case, the amount contributed by the employer should not be treated as a taxable perquisite in the hands of the employee.
The Assessing Officer (AO) added the employer's contribution towards social security, health insurance, etc. in Japan to the taxable income of the employee in India. The Commissioner of Income-tax (Appeals), however, on the basis of Tribunal earlier decisions on the similar matter deleted the addition made by the AO.
The Tax Department contented that it should be granted time to go through the decisions relied on by the employee and for that matter the case should be adjourned.
The Delhi Tribunal held that the said contribution did not give any right/benefit to the employee in the year of contribution and such benefit was dependent upon happening of an event in the future which is beyond the control of the employee, i.e., death, permanent disability, etc. Therefore, no income can be said to be earned/accrued to the employee in the year of payment. [Source : dated March 17, 2010]
Petition RTI to know why tax refund delayed ?
Life just got better for millions who have ran from pillar to post for years to secure their tax refunds from the Income-tax (I-T) Department.
In a landmark ruling, the Central Information Commissioner has passed an order which says information on refunds is covered under the Right to Information (RTI) Act.
An assessee had filed an RTI petition with the (I-T) Department in Chennai, asking for information as to why was there a delay in the payment of his IT refunds for 2003-04, 2005-06, 2006-07 and 2008-09, amounting to Rs. 3,32,457.
The Department, however, refused to provide as the information sought is covered under section 8(1)(e) of the RTI Act, wherein the information sought is not in larger public interest and is purely personal in nature.
The Central Information Commissioner, while passing the order on another appeal to the Income-tax Department said : "To deny the appellant information sought by him under clause (e) or clause (j) of section 8(1) is nothing but misappreciation of law."
While directing the Income-tax Department to disclose information for the inordinate delay, he also ordered the issue of refunds within three months. The CIC also rapped the Department for failing to appear in a hearing arranged by the Commission where the appellant was present. [Source : dated March 15, 2010]
Top security arm to look into cyber attacks affecting I-T Department, banks
The Government's top cyber security arm has initiated a probe into complaints of Income-tax Department, banks and other financial bodies who have reported a spurt in cyber attacks and fake mails which was affecting their operations.
The Computer Emergency Response Team (CERT-In) CERT-In, a technical and cyber security department under the Ministry of Communications and Information Technology, is the nodal agency to analyse and respond to cyber attacks and intrusions into country's information and technology networks.
These agencies have asked the CERT-In to arm them with pro-active measures so that they can prevent phishing attacks as huge monetary transactions are involved and also recover any lost data.
"The CERT-In is working on incident reports sent by the I-T Department and various banks who have complained about phishing attacks on their servers and in one case even the facsimile of a banking institution was stolen and used for fraudulent purposes," a source said.
While banks have reported about "fraudulent entities" interacting with their customers to share passwords, account details and PIN numbers to the CERT-In, the Income-tax Department and its directorates have reported fake mails sent to taxpayers and have also asked for securing passwords used by income tax officials, especially handling refunds. [Source : dated March 15, 2010]

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