Thursday, May 5, 2011

Exemption under section 10B

(2011) 37 (II) ITCL 97 (Chen `C'-Trib)(SB)

Zylog Systems Ltd v. ITO

Counsel: Shri V.D. Gopal, for the Assessee q Shri Tapas Kumar Dutta, for the Revenue q Shri H. Padamchand Khincha For M/s Changepond Technologies Intervener

ORDER

The Hon'ble President, Income Tax Appellate Tribunal, vide orders dated 13.10.2009 constituted the present Special Bench to dispose of the captioned appeals as well as to adjudicate the following question of law:

"Whether the expenses incurred in foreign currency on computer software development onsite at the client's place outside India is to be excluded from export turnover?"

2. Both the appeals filed by the assessee and the revenue revolve around the above mentioned question of law.

3. The brief facts of the case are that the assessee is a company engaged in the business of development of software both by way of onsite development and offshore development and it has a branch in USA for which separate accounts were maintained. In its return of income, the assessee being 100% EOU, had claimed deduction u/s 10B of Income Tax Act in respect of the exports of software made. Before the assessing officer, the assessee pointed out that the profits of USA branch are eligible for double tax relief and furnished a copy of the agreement for avoidance of double taxation of income with USA. During the assessment proceedings, the assessing officer had observed that the assessee had total export turnover of Rs. 28,61,13,408 and out of this amount, the assessee had utilized the export proceeds to the tune of Rs. 15,14,20,226 in USA for the purpose of carrying on export activities. The assessing officer was of the view that since the said amount had not been received in convertible foreign exchange in India within the prescribed time u/s 10B(3) of Income Tax Act, the said amount utilized in USA can not be treated as a part of export turnover for computing deduction u/s 10B of Income Tax Act. The assessing officer also excluded from the export turnover of Rs. 3,33,46,591.81 incurred by the assessee outside India in foreign exchange in providing technical services, while computing deduction u/s 10B of Income Tax Act. Aggrieved by this order of the assessing officer, the assessee moved the matter in appeal before the first appellate authority .

4. The first appellate authority allowed the assessee's appeal in respect of inclusion of Rs. 15,14,20,226 in export turnover for computing deduction u/s 10B of Income Tax Act whereas he has rejected the claim of the assessee in respect of inclusion of Rs. 3,33,46,591.81 incurred by the assessee outside India in providing technical services to the export turn over while computing deduction u/s 10B of Income Tax Act.

5. Now the assessee is on second appeal before us with respect to exclusion of Rs. 3,33,46,591.81 from the export turn over for computing deduction u/s 10B of Income Tax Act whereas the revenue is on appeal before us against the Ld. Commissioner (Appeals)'s direction to include the foreign exchange of Rs. 15,14,20,226 utilised by the assessee in foreign country while computing deduction u/s 10B of Income Tax Act.

6. The assessee is on second appeal before us with the following grounds of appeal:

"1 The order of the Ld. Commissioner (Appeals) is contrary to the law, facts & circumstances of the case in so far as he confirms the addition of Rs. 3,33,46,592/- representing the expenses in foreign exchange for providing technical services abroad out of the export turnover.

2. The Ld. Commissioner (Appeals) erred in holding that the definition of (export turnover) u/s10B of Income Tax Act justifies the action of the assessing officer in excluding the expenses in foreign exchange incurred towards technical services abroad from the export turnover u/s 10B of Income Tax Act.

3. The Ld. Commissioner (Appeals) failed to appreciate that the action of the assessing officer results in double additions of expenses incurred for the onsite development of computer software.

4. The Ld. Commissioner (Appeals) failed to appreciate that 70% of the export turnover was separately excluded from the export turnover by the assessing officer himself and so the expenses not being excluded would amount to double addition.

In addition to the above grounds, the assessee has filed following additional ground also:

The Ld. Commissioner (Appeals) should have been pleased to hold that the sum of Rs. 3,33,46,592 should not have been excluded from Export turnover as clause (III) of explanation of Sec 10B(8) is not applicable to the facts of the appellant's case wherein the above amount was incurred as expenditure in foreign exchange for onsite development of software and even if applicable, should have been excluded from total turnover also."

7. On the other hand, the revenue is on appeal before us with the following effective grounds of appeal:

"2.1 The Ld. Commissioner (Appeals) erred in directing the assessing officer to include the foreign exchange retained by the assessee abroad (in accordance to the RBI guidelines) while computing deduction under section 10B of the Income Tax Act.

It is submittedthat the decision relied upon by Ld. Commissioner (Appeals) in the case of J.B. Boda & Co Pvt Ltd V CBDT (1997) 223 ITR 271 (SC) and the Board's circular No. 731dated 20-12-1995 are not applicable here since the decision of the circular were concerned with section 80-O and in the context of remitting the net insurance premia and not section 10B which is the section applicable here.

The Ld. Commissioner (Appeals) failed to note that Explanation 2 to section 10B(3) allows sale proceeds credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the RBI and there is no such corresponding provision in section 80-O. Hence what was relevant to section 80-O cannot be automatically considered applicable to section 10B. Since this explanation has already toned down the rigours of bringing the convertible foreign exchange within the stipulated time into India no further relaxation thereon is permissible."

8. Now let us take up assessee's appeal first in whose case, the question of law as mentioned elsewhere of this order has been referred to Special Bench. The brief facts of this issue are that while framing assessment u/s 143(3) of Income Tax Act, the assessing officer asked the assessee to furnish the details of expenses incurred by the assessee in foreign currency in providing technical services outside India. Vide its letter dated 19-12-2005 the assessee has furnished the following details:

Expense details
Amount in USD
Amount in INR (Rs.)

1
Payroll
412,046.78
19,980,770.74

2
Sales commission
178,989.53
8,679,472.56

3
Travel expenses
40,245.68
1,951,573.80

4
Business consultancy
44,435.00
2,154,720.24

5
Entertainment
7,564.88
366,832.46

6
Advertisement
4,397.10
213,222.01

687,678.97
3,33,46,591.31


9. According to the assessing officer the above expenses incurred by the assessee in foreign currency outside India cannot be reckoned for the purpose of export turn over. The intention of legislature is to give the benefit of exemption only to those export earnings which are brought into India. That is why any expenses incurred in foreign currency outside India has to be excluded from the export turnover. `Export turnover' has been defined in section 10B of Income Tax Act as under:

"Export turnover" means the consideration in respect of export by the undertaking of article or things or computer software received in, or brought into India, by the assessee in convertible foreign exchange in accordance with Sub-Sec (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the article or thing or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India."

10. In view of the above explanation, the assessing officer excluded from the export turn over, the expenses of Rs. 3,33,46,592 incurred by the assessee outside India in providing technical services, while computing deduction u/s 10B of Income Tax Act. Aggrieved by this order of the assessing officer, the assessee moved the matter in appeal before the first appellate authority.

11. Before the Ld. Commissioner (Appeals), it was submitted by the Ld. Counsel for the assessee as under:-The above action of the assessing officer has resulted in double addition of expenses incurred for the onsite development of computer software for the very purpose of export. 70% of the export turnover amounting to Rs. 15.14 crores was separately excluded by the assessing officer from the export turnover for relief u/s 10B of Income Tax Act. Therefore, expenses incurred for onsite development amounting to Rs. 3.33.crores mentioned above excluded by the assessing officer from the total export turnover of Rs. 28.61 crores has resulted in double deduction. The said expenses represented the utilization of sale proceeds in USA and hence the same can not again be excluded from export turnover. It could have been reduced either by the amount of Rs. 15.14 crores retained in USA or Rs. 3.33 crores utilized for onsite development in USA. Therefore, the above mistake of the assessing officer has resulted in double addition in this case.

12. The Ld. Commissioner (Appeals) after considering the submissions in the light of facts & circumstances of the case has observed as under:

"The assessing officer has excluded the said amount from export turnover for the reason that one has to follow the intention of legislature which provides benefit u/s 10B of IT Act only with respect to those export earning which are brought back to India. The expenses of technical services in foreign exchange abroad have therefore been excluded from turnover. The issue is required to be decided in favour of the revenue in view of clear provisions of the Act. The definition of "export turnover" given in Explanation 2(iii) of section 10B of Income Tax Act is abundantly clear, that there is no such definition of "total turnover" given in section 10B of Income Tax Act and therefore, no exclusion of expenditure incurred for providing technical services can be made from the total turn over for the purpose of computing deduction u/s 10B of Income Tax Act. From the clear definition of the export turnover, there is no scope for having any other interpretation than what has been explicitly provided therein. Therefore, action of the assessing officer in excluding the expenses in foreign exchange incurred for providing technical services abroad from the export turnover while computing deduction u/s 10B of Income Tax Act has to be upheld. Thus the Ld. Commissioner (Appeals) sustained the addition made by the assessing officer in a sum of Rs. 3,33,46,592.

13 At the time of hearing, Ld. Counsel for the assessee placed on record three paper books consisting of materials mentioned in the index thereof to the respective paper books. By placing the above paper books, the Ld. Counsel for the assessee Shri V.D. Gopal, Advocate submitted as under:

The explanation 2(iii) to section 10B of Income Tax Act reads as under:

"Export turnover" means the consideration in respect of export (by the undertaking) of articles or things or computer software received in, or brought into India, by the assessee in convertible foreign exchange in accordance with Sub-Sec (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the article or thing or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India."

From the above explanation it can be seen that the expenses if any, incurred in foreign exchange in providing technical services outside India, will not be included in "export turnover". The theory of "net foreign exchange" discussed by Chennai Bench of Income Tax Appellate Tribunal in California Software Co. Ltd., is not valid. "Technical services" is contemplated in Explanation 2(3). The assessee is not involved in rendering technical services in foreign country. The assessee has only sent its staff to the foreign country, namely, New Jersy of USA for development of software. It is only on-site work at USA done by the assessee for developing software. "On-site work" would include expenses incurred in foreign soils. Explanation 3 to section 10B of IT Act reads as under:

"For the removal of doubts, it is hereby declared that the profits and gains derived from on-site development of computer software (including services for development of software) outside India, shall be deemed to be profits and gains from export of computer software outside India"

From the above Explanation, it can be seen that people are encouraged for on-site development of software. The combined reading of Explanation 2(iii) and Explanation 3 as narrated above, would show that the expenses incurred by the assessee in foreign soils for on-site development, is nothing but export turnover. On the other hand, "technical services" would mean advises given to third party and any expenditure incurred on it. The circular No. 564 dated 5.7.99 by the C.B.D.T in respect of deduction u/s 80 HHC of Income Tax Act is more relevant.

Paras No. 5 & 6 of the said Circular reads as under:

"5 The Finance Act, 1990 has amended section 28 by inserting therein, clauses (iiia), (iiib) and (iiic) with retrospective effect with a view to ensuring that cash compensatory support (CCS), duty drawback (DDK) and profit on sale of import entitlement licences (I/L) shall be taxable under the head "Profits and gains of business or profession". In view of this amendment, it is clarified that the three export incentives shall have to be included in the profits of the business for computing the deduction under section 80 HHC.

6.The term "export turnover" under the existing provisions, means the sale proceeds (excluding freight and insurance) receivable by the assessee in convertible foreign exchange. In other words, the FOB value of exports. The Finance Act, 1990 has restricted the definition of the term "export turnover" to mean FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commissioner / Commissioner may allow in this regard."

Moreover Circular No. 54 of 2002:RB dated 29-6-2002 issued by Reserve bank of India is also very relevant. The above circular was issued by Reserve bank of India on the subject "maintenance of foreign currency account abroad by a Company / Firm / Body corporate incorporated in India."

In the above Circular Para No. 3 reads as under:

"3. The authorized dealers may, therefore, allow remittances for the purpose of normal business operations of the office (trading/non-trading)/branch of representative outside India as per the provisions of the Regulations in this regard subject to the following terms and conditions:

(i) The overseas office(trading/non-trading)/branch/representative should not create any financial liabilities contingent or otherwise for Head Office in India.

(ii) The overseas office(trading/non-trading)/branch/representative should not invest surplus funds abroad without prior approval of Reserve bank of India. Any funds rendered surplus should be repatriated to India.

(iii) The overseas office/branch of software exporter company/firm, may repatriate to India 100% of the contract value of each `off-site' contract as also at least 30% of the contract value of each `on-site' contract and may utilize the balance amount (70%) of the contract value of `on-site' contract for contract related expenses including office/branch expenses abroad. A duly audited yearly statement showing receipts under `off-site' and `on-site' contracts undertaken by the overseas office, expenses and repatriation thereon may be sent to the authorized dealer.

(iv) The details of bank account opened in the overseas country should be promptly reported to authorized dealer.

14 Shri Padamchand Khincha appeared as intervener on behalf of M/s Changepond Technologies Pvt Ltd and his submissions are as follows: Expenditure on technical services are to be excluded from export turnover. There is difference between computer Software and technical services. Sec 80 HHE deals with software industries.

Sub-sec (1) of the said section considers two types (i) computer software and technical services. Thus there is distinction between computer software and technical services. Before amendment computer software meant computer programme. Circular No. 621 dated 19-12-1991(195 ITR (St) 154 at Para No. 34.2 mentions as under:

"The tax concession will be available with regard to profits from export of software not only through magnetic media or on paper but also through satellite data link and consultancy delivered at the location of foreign client outside India.

Thus after the amendment expenditure incurred `on site' outside India should not be excluded from the export turnover. Software has number of stages. Circular No. 694 dated 23-11-1994 (211 ITR (ST) 26) (Page 5 of the paper book) at para No. 5 & 7 has mentioned as under:

"5 Since computer programmes are not physical goods but are developed as a result of an intellectual analysis of the systems and methods followed by the purchaser of the programme, it is often prepared on site, with the software personnel going to the client's premises. Doubts have been raised whether units taking up such production of software at the client's premises would be eligible for the tax holiday.

6. The Government's policy on tax incentive to software export is reflected in the provisions of section 80 HHE introduced in 1991. Under this provision, technical services provided outside India, for the development or production of computer software, are included for the purpose of the tax incentive.

7. Similarly, for the purpose of section 10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and export them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under section 10A or 10B on the ground that it was prepared on site, as long as the software is a product of the unit, i.e., it is produced by the unit.

15 From the above it can be seen that the expenditure incurred at client's site abroad is eligible for deduction u/s 10A and 10B. The memorandum explaining the provisions of Finance Bill, 2001 (248 ITR (St) 35 had well explained clause 39. It is mentioned as under:

"It is proposed to insert an Explanation after sub-sec (1) of the said sec so as to clarify that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.

The bill also clarifies that export of computer software shall include development of software at the client's site which would also be eligible for the benefit under these provisions. The development of software can be compared to bridge construction where various stages are involved.

These are all well explained in the decision of Bangalore Bench in the case of Infosys Technoligies Ltd (page 21 to 38 of paper book). The list of case laws supporting the assessee's contentions are listed as under:

Infosys Technologies Limited v. JCIT, ITA No. 50, 732 to 734, 742, 793 to 795 vide order dated 31-3-2005 – ITAT Bangalore Bench

Infosys Technologies Limited v. JCIT (SR)-6, Bangalore, ITA No. 1922, dated 7-4-2006, assessment year 1998-99

Infosys Technologies Limited v. JCIT, ITA No. 140 & 149

ACIT v. Infosys Technologies Limited, ITA No. 653 & 969, assessment year 2002-03 & 2003-04 order dated 17-10-2007 reported in 172 Taxman 134 (Mag)

ACIT v. Infosys Technologies Limited, ITA No. 635, assessment year 2001-02 order dated 2-11-2007

Infosys Technologies Limited v. DCIT (SR)-35, ITA No. 3086 & 5703 order dated 2-11-2007

Infosys Technologies Limited v. JCIT, ITA No. 627 order dated 2-11-2007

i-Gate Global Solution Ltd V. ACIT, ITA No. 2291 assessment year 2001-02 order dated 11-8-2006

DCIT v. i-Gate Global Solution Ltd, ITA No. 391 & 392 assessment year 2002-03 & 2003-04 order dated 30-11-2007

ACIT v. i-Gate Global Solution Ltd, ITA No. 624 & 625, assessment year 2002-2003 & 2003-04 decision dated 18-12-2009

Mphasis Ltd v. ACIT 2008-TIOL-366

ACIT v.. Hewlett Packard Global Soft Ltd. decision dated 19-9-2008

Relq Software Pvt Ltd in ITA No. 767 vide order dated 16-5-2008 [reported in (2009) 29 (I) ITCL 647 (Bang-Trib)]

Changepond Technologies P Ltd V. ACIT (2008) 22 (II) ITCL 297 (Chenn-Trib) : (2008) 22 SOT 220 (Chennai)

Patni Telecom (P) Ltd v. ITO (2009) 308 ITR (AT) 414 (Hyd-Trib) : (2008) 22 SOT 26 (Hyd-Trib)

DCIT v. Softsil India Ltd (2008) 23 (II) ITCL 46 (Hyd-Trib) : (2008) 22 SOT 271 (Hyd)

ACIT v. Kshema Technolgies Ltd (2009) TIOL-440-ITAT-BANG

Relq Software (P) Ltd v. ITO (2009) 29 (II) ITCL 647 (Bang-Trib) : (2009) 123 TTJ 856 (Bang)

The expenditure incurred in foreign currency on client's site at foreign country cannot be excluded from export turnover unless it is excluded from total turnover otherwise numerator and denominator should consist same items as held by Special Bench in the case of ITO v. Sak Soft Ltd. (2009) 27 (II) ITCL 506 (Chen-Trib)(SB) : (2009) 313 ITR (AT) 353 ITAT (Chen) SB.

16. Per contra, Ld. D.R. for the revenue submitted that the basic definition is in sub-sec (4). He posed a question why there is separate sub-sections and explanations. Sub-section 4 only talks about profits and gains and export turnover is different. On site development cannot be without technical services. The decision of Madras Bench in the case of Polaris Software says that there is no software development without technical services. There is ambiguity in the definition of export turnover. Accordingly in view of the decision of Hon'ble Supreme Court in the case of IPCA Laborataries if the words are clear strict interpretation is to be given. Each limb section is defined in the Act. He relied on the following decisions:

California Software Co Ltd v. ACIT (2009) 26 (II) ITCL 81 (Chenn-Trib) : (2008) 118 TTJ (Chenn-Trib) 842

ITO Company Ward III (1) v. Polaris Software (unreported)

Ld. D.R. for the revenue also reiterated the contents of the assessment order as his submissions in addition to the above submissions.

17. In reply Shri V.D. Gopal, Ld. Counsel for the assessee submitted that a person cannot provide services to the self. In technical services there is no export contents, therefore, it is excluded from the export turnover whereas in assessee's case no services are rendered to any outsider at a foreign country.

18. Shri Padamchand Kincha, Ld. Counsel for the assessee for the intervener submitted that if on site work is equated to technical services then the work done in India also would be technical service which would violate the statute. He also submitted that in the decision of California Software Co Ltd. v. ACIT, there was presumption where in the intervener's case Sec 10A and Sec 10B were given and the fact of STP is not objected. He also submitted that in that case in the case of intervener audit report was also not objected.

19. We have heard the rival submissions and considered the facts and materials on record including contents of the paper book submitted by the Ld. Counsel for the assessee and the intervener and also relevant circulars of CBDT and Reserve bank of India referred to by the Ld. Counsels for the assessee and intervener during their arguments.

20. There is no dispute about the fact that the assessee is a company engaged in business of development of software both by way of on site development and off shore development and also that it has branch in USA for which separate accounts were maintained. There is also no dispute about the fact the there is approval of the authorized dealer namely Central bank of India, Chennai for opening the overseas branch at New Jersy, USA.

21. Now we are called upon to adjudicate whether the assessing officer and the Ld. Commissioner (Appeals) were right in excluding from the "export turnover" Rs. 3,33,46,592/- incurred by the assessee outside India in foreign exchange in providing technical services, while computing deduction u/s 10B of Income Tax Act. For adjudicating this issue first of all we should consider what is "soft ware" and what is "technical services". Explanation (ii) to sub-sec 9A of Sec 10B defines computer software. Explanation reads as under:

"Clause (ii): "for the purpose of this section –

(i) Computer software means

(a)any computer programme recorded on any disk, tape, perforatedmedia or other information storage device or;

(b)Any customized electronic data or any product or service of similarnature as may be notified by the Board which is transmitted or exportedfrom India to any place outside India by any means."

"Clause (iii) of Explanation (2) to sub-section 9A of section 10B defines export turnover as under:

(iii) "Export turnover" means the consideration in respect of export (by the undertaking) of articles or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-sec (3) but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India." The combined reading of the definition of software as given in clause (i) of Explanation (2) and "export turnover" as defined in clause (iii) above, would go to show that "export turnover" of computer software means consideration received in respect of export of computer software but does not include freight, telecommunication charges or insurance to the delivery of computer software outside India or expenses incurred in foreign exchange in providing technical services outside India. "

22. In this case the assessee pleads that it has not rendered any technical services outside India to third party. Whatever the services were rendered in foreign country and expenses incurred as pay roll etc were incurred in connection with staff of the foreign branch in foreign country.

23. Now we have to consider what is technical services. Explanation (2) to Sec 9(vii) reads as under:

"For the purpose of this clause "fees have technical services" means any consideration (including any lump sum consideration) for rendering of any managerial, technical or consultancy services (including the provision of services of technical or software personnel) but does not include consideration for any construction, assembly, mining of like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries".

The department has not brought any thing on record to show during the hearing, that the assessee company was involved in rendering any managerial consultancy services at foreign country. Also it was not brought on record that the company was involved in providing the technical services to other personnel or any outside agency. All the services rendered by the company were to its staff located at New Jersy for the fulfillment of objects namely development of software. We find force in the contentions of the Ld. Counsel for the assessee that a person can not provide services to self. There is also force in the contentions of the Ld. Counsel for the assessee that in the case of California Software Co Ltd, Chennai Bench of ITAT, there is presumption by the Bench that technical services were rendered by the assessee to self. The circular No. 621 dated 19-12-1991, Circular No. 694 dated 23-11-1994 also go to show that the expenditure incurred on site abroad is eligible for deduction u/s 10B of the Income Tax Act.

24. To sum up, in this case whatever the expenditure has been incurred on foreign soil in a sum of Rs. 3,33,46,592 were incurred in connection with development of software by the employees of the assessee company at foreign branch and nothing has been incurred on managerial or technical services rendered to any outsider in foreign soil. In view of this discussion we are inclined to allow the ground of the assessee that Rs. 3,33,46,592/- should not be excluded from the export turnover for computing deduction u/s 10B of Income Tax Act. We answer the question referred to us in favour of the assessee. Thus the appeal of the assessee is allowed.

25. Now let us turn to revenue's appeal, the grounds of whom had already been extracted elsewhere of this order. Ld. D.R. for the revenue reiterated the grounds of appeal as his submissions. He also relied on the submissions made by him in the assessee's appeal which are extracted elsewhere of this order.

26. Ld. Counsel for the assessee supported the order of Ld. Commissioner (Appeals) and reiterated the contents of the Ld. Commissioner (Appeals)'s order in respect of the issue of inclusion of foreign exchange retained by the assessee abroad while computing deduction u/s 10B of Income Tax Act. He also relied on the submissions made in assessee's appeal (extracted elsewhere of this order).

27. We have heard the rival submissions and considered the facts and materials on record. The Ld. Commissioner (Appeals) while allowing the assessee's claim in respect of this issue, has observed as under:

"2.2 I have carefully perused the facts and examined all the submissions of the appellant on this issue. I am of the considered view that one limb of the Government cannot be allowed to defeat the operations of the other limb. Section 10B of the Act requires that foreign exchange in lieu of the exports should be brought to India within the prescribed time. However, the RBI allows the assessee to retain the said foreign exchange in foreign countries for the specific purposes and due approval is also granted for that purpose. The RBI and FEMA also monitor the utilization of such foreign exchange and the assessees are required to file periodic reports to those authorities. In such situation, the circulars of the RBI allowing its retention, utilization or capitalization abroad cannot be ignored. This becomes more important when provisions of section 10B(3) are considered which provide that the sale proceeds of the articles or computer software exported out of India are required to be brought in India in convertible foreign exchange within a period of six months from the end of the previous year or within such further time as the competent authority may allow in this behalf. Explanation (1) to section 10B prescribes the competent authority to be the RBI or any other authority as authorized under any law for the time being in force for regulating payments and dealing in foreign exchange. In the present case, the competent authority involved is RBI under whose schemes and circulars the appellant has capitalized the foreign exchange earning and invested the same in approved joint ventures in USA. Therefore, the said reinvestment of export earning is deemed to have been received in India. In other words, it is just like bringing the foreign exchange in India and thereafter remitting the same abroad for investment in the joint venture. The Hon'ble Supreme Court in the case of J.B. Boda & Co (supra) while deciding similar issue relating to deduction u/s 80-O had held that "two way traffic of receiving foreign exchange here and sending it back is a ritual which is unnecessary". The Hon'ble court had relied on the Board's Circular No.731 dated 20-12-2005, 217 ITR (ST) 5 to decide this matte5r in favour of the assessee.

2.3 Keeping in view the discussions held above, I am of the considered view that assessing officer was not justified in excluding a part to the export proceeds retained by the appellant abroad in accordance with the RBI guidelines while computing deduction u/s 10B of the Act. The said expenses have been incurred by the appellant for the on-site development of products abroad through its branch office and the utilization of the said proceeds by the appellant abroad for specific expenses related to exports have not been doubted by the assessing officer. The appellant is required to file periodic reports to the RBI regarding the exports and the utilization of the foreign exchange in accordance with the guidelines issued by the RBI. No specific instance have been brought on record by the assessing officer to prove that the said foreign exchange had not been realized by the appellant within the due date abroad from the contracting parties. Once the appellant receives the export proceeds in foreign exchange abroad within due dates and the same are utilized by the appellant for the purpose of its own business through its branch office abroad, the said sale proceeds are required to be considered as deemed receipts in India. I am of the view that the decision of Hon'ble Supreme Court in the case of J.B. Boda & Co (supra) and the Board's Circular No. 731 is directly applicable in favour of the appellant. Although the said decision and circular is with reference to Sec 80-O but the ratio and the reasoning is applicable for the purpose of deciding this issue u/s 10B also. In view of the above, the assessing officer is directed to include the export proceeds of Rs. 15,14,20,226/- retained by the appellant abroad in accordance with RBI guidelines while computing deduction u/s 10B of the Act. This ground of appeal is allowed."

As such we concur with the Ld. Commissioner (Appeals) for the reasons recorded by him as above and dismiss the revenue's appeal. We are also of the opinion that the decision of the Hon'ble Supreme Court in the case of J.B. Boda & Co. Pvt Ltd v. CBDT (1997) 223 ITR 271 (SC) would apply to this case also even though the present case is on Sec 10B of Income Tax Act.

28. In the result, appeal of the assessee is allowed and revenue's appeal is dismissed and the question referred to this Special Bench is answered in favour of the assessee.

Order Pronounced in the Open court on this 2-11-2010. .

(2011) 37 (II) ITCL 110 (Bang `B'-Trib)

The ITAT, Bangalore `B' Bench

Asstt. CIT v. Mandovi Motors (P) Ltd.

K. George George, J.M. & A. Mohan Alankamony, A.M.

ITA No. 631 (Bang) of 2010 q 12 November, 2010 q A.Y. 2007-08

I

Income Tax Act, 1961, S. 28(i)

Where the assessee had paid advance and security deposit in the normal course of its business and money so paid could not be recovered, then the money so paid was allowable as business loss.

Business loss—Amount given as advance, security deposit, etc.—Written off as non-recoverable

The assessee had paid advance to suppliers for supply of accessories in the normal course of its business. However, when the accessories supplied were found to be defective or of substandard quality and not according to the specifications of the assessee, the same was returned to the suppliers. But the suppliers did not refund the advance paid to them and the amount could not be recovered as they had failed in the business or had closed shutters. Further, certain sums were advanced to the contractors for carrying out repairs and renovation to the offices/workshops. Since these contractors failed to commence the work in time, the assessee made alternative arrangements to carry out the repairs and renovation. Some of the contractors failed to refund the advances paid to them inspite of the best efforts of the assessee to recover the same. As some of the persons were not traceable and others had no means to repay, the assessee had written off the same in books and claimed the deduction of same under section 28. The assessee-company had paid a security deposit of Rs.6,000 to M. for dealership to their mopeds. Since the said company failed in the business and went into liquidation, the assessee could not get refund of the security deposit. Therefore, the assessee had written off the same under section 28. Further, the assessee had paid a security deposit of Rs.1,25,000 to S, on their appointment as authorized dealers. As the business of S failed to sustain the competition, the company closed shutters. The assessee had to written off the same, as there was no chance of recovery. Held: All the above payments were made in the ordinary course of business of the assessee. Normal business of the assessee involved many such risks and expenditure which were unavoidable and had to be incurred by all businessmen in their business. All such expenditure was allowable under section 28(i). From the reading of the section 28, it is very clear that what law envisages to tax is only the profits or gains of the business. In arriving at the profits or gains of the business, all legitimate and normal expenditure of the business are to be deducted unless otherwise specifically provided in the IT Act. These were the legitimate amounts laid out for the purpose of business of the assessee and therefore, allowable as provided under section 28.

Decision: In assessee's favour.

II

Income Tax Act, 1961, S. 36(1)(ii)

Bonus paid to working directors of the company for services rendered by them could not be disallowed just because they held a few shares in the company.

Business deduction under section 36(1)(ii)—Bonus to employees—Bonus paid to employees being shareholders and promoters of company

A sum of Rs.2,04,000 paid as bonus to the employees, who were also shareholders and promoters of the company, was disallowed by AO. According to AO, section 36(1)(ii) provides that deduction shall be allowed in computing the total income, in respect of any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission. Before CIT(A), it was submitted that bonus was paid for services rendered by the working Directors, who happened to hold a few shares in the company. It was submitted that to invoke the provisions of section 36(1)(ii), the bonus paid had to be payable in its entirety as dividends or profits. Held: From reading of section 36(1)(ii) it is clear that the bonus will not be allowed only if such sum paid to employee is otherwise payable to him or her as profits or dividends. In the present case, the bonus was paid for the services of the working directors and the same could not be disallowed just because they hold a few shares in the assessee company. They will not be entitled to such sum in entirety as dividends or profits in case such sum is not paid as bonus to them. Whatever dividend if any, payable to them will be only a fraction of such sum. If the contention of the revenue is to be accepted, then bonus paid to all the employee shareholders of all corporate will have to be disallowed as a miniscule part of it might be payable to them as dividends.

Held: One of the conditions mentioned in section 36(1)(ii) is that the amount payable to employees as bonus or commission should not otherwise have been payable to them as profit or dividend. The plain reading of the clause means that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonus or commission, if the payment is in lieu of dividend or profits. This is provided to check the employer from avoiding tax by distributing his/its profits by way of bonus among the member employees of his/its concern, instead of distributing the sum as dividend or profits. However, the sum paid as bonus or commission is not affected by this condition, if the same is not otherwise payable as profit or dividend. For instance, if shareholders of a company are employees in their company and receive bonus (by virtue of their employment and not with reference to their shareholding), the admissibility of bonus would not be affected by this condition. [Para 4.5]

Let us have a glimpse of section 36(1)(ii) as under - "Section 36(1) - The deductions provided for the following clauses shall be allowed in respect of the matters dealt with herein, in computing the income referred to in section 28 - (i)************ (ia)************* (ib)************* (ii) any sum paid to an employee as bonus or commission for the services rendered where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission". [Para 4.6]

From reading of section 36(1)(ii), it is clear that the bonus will not be allowed only if such sum paid to him or her is otherwise payable to him or her as profits or dividends. In the present case, the bonus was paid for the services of the working directors and the same could not be disallowed just because they hold a few shares in the assessee company. They will not be entitled to such sum in entirety as dividends or profits in case such sum is not paid as bonus to them. Whatever dividend if any, payable to them will be only a fraction of such sum. [Para 4.7]

If the contention of the revenue is to be accepted, then bonus paid to all the employee shareholders of all corporate, will have to be disallowed as a miniscule part of it might be payable to them as dividends. [Para 4.8]

Followed: Loyal Motor Service Co. v. CIT (1946) 14 ITR 647 (Bom) and CIT v. Sesa Goa Ltd. (2009) 26 (I) ITCL 69 (Bom-HC) : (2009) 316 ITR 399 (Bom).

Decision: In assessee's favour.

Counsel: Shri Pratap Singh, Addl. CIT, for the Appellant q Shri B R Kamath, C.A., for the Respondent

ORDER

This appeal preferred by the revenue is directed against the order of the Commissioner (Appeals), Mangalore dated 8.3.2010. The relevant asst. year is 2007-08.

2. The effective grounds raised reads as follows:-

(i) The learned Commissioner (Appeals) has erred in deleting the disallowance of claim of bad debts on the advances written off which is contrary to the provisions of section 36(2) of the Act.

(ii) The learned Commissioner (Appeals) has erred in deleting the disallowance of claim of capital advance of Rs.7,76,000/- as bad debt against the provisions of law and against the law laid down in the case of Hasimara Industries Ltd. v CIT (1998) 231 ITR 842.

(iii) The learned Commissioner (Appeals) has erred in deleting the disallowance of bonus paid to shareholders against the provisions of section 36(1)(ii) of the Act.

3.The first and the second ground referred to above, relates to the issue of disallowance made by the assessing officer towards bad debts/irrecoverable balance written off.

3.1 The brief facts of the case are as follows:-

The assessing officer, in the course of scrutiny assessment, was of the view that out of bad debts of Rs.13,21,949/-claimed by the assessee, only a sum of Rs.1,19,210/- was allowable as deduction. Of the remaining, a sum of Rs.4,26,739/- represented advances paid for the purchase of audio sets, locks and mopeds, which are stock-in-trade, while Rs.7,76,000/- was an advance paid for capital expenditure. The assessing officer disallowed the amount of Rs.12,02,739/- (Rs.4,26,739 + Rs.7,76,000/-).

3.2 Before the Commissioner (Appeals), it was contended that these are expenses incurred in the normal course of business and the same is allowable as bad debts or alternatively, as business expenditure. It was submitted that these were written off, as there was no chance of recovery and since these amounts did not constitute profit within the meaning of section 28, the disallowance made by the Assessing Officer was not proper.

3.3 The Commissioner (Appeals), for his reasons mentioned in para 8 of the impugned order, allowed the appeal of the assessee.

3.4 The revenue, being aggrieved, is in appeal before us.

3.5 It was submitted by the learned DR that the claim of bad debts on advance written off is contrary to the provisions of section 36(2) of the Act. It was submitted that the claim of deduction on capital advance amounting to Rs.7,76,000/- as bad debt is against the provisions of law and against the law laid down in the case of Hasimara Industries Ltd. v CIT (1998) 231 ITR 842.

3.6 On the other hand, the learned AR reiterated the submission made before the authorities below.

3.7 We have heard the rival submission and perused the material on record. In the instant case, the assessee had paid advance to suppliers for supply of accessories in the normal course of its business. However, when the accessories supplied were found to be defective or of substandard quality and not according to the specifications of the assessee, the same was returned to the suppliers. But these suppliers did not refund the advance paid to them and the amount could not be recovered as they have failed in the business or have closed shutters. In these circumstances, the amount advanced to them was written off as irrecoverable and the same was claimed as expenditure in the normal course of business under section 28 of the I T Act.

3.8 Further, certain sums were advanced to the contractors for carrying out repairs and renovation to the offices/workshops. Since these contractors failed to commence the work in time, the assessee made alternative arrangements to carry out the repairs and renovation. Some of the contractors failed to refund the advances paid to them inspite of the best efforts of the assessee to recover the same. As some of the persons are not traceable and others have no means to repay, the assessee had written off the same in books and claimed the deduction of same u/s 28 of the Act.

3.9 The assessee company had paid a security deposit of Rs.6,000 to Mopeds India (P) Ltd. for dealership to their mopeds. Since the said company failed in the business and went into liquidation, the assessee could not get refund of the security deposit. Therefore, the assessee had written off the same u/s 28 of the Act.

3.10 Further, the assessee had paid a security deposit of Rs.1,25,000/- to Scooters India Ltd., Kanpur, on their appointment as authorized dealers for South Kanara, Kodagu, Shimoga and Hassan Districts. As the business of the Scooters India Ltd. failed to sustain the competition, the company closed shutters. The assessee had to written off the same, as there was no chance of recovery.

3.11 All the above payments are made in the ordinary course of its business. Normal business of the assessee involves many such risks and expenditure which are unavoidable and has to be incurred by all businessmen in their business. All such expenditure is allowable u/s 28(i) of the I T Act.

3.12 Section 28 of the I T Act reads as under.-

"Section 28 - The following income shall be chargeable to income tax under the head "Profit and gains of business or profession ".

(i)the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;

(ii)any compensation."

From the reading of the above provisions, it is very clear that what law envisages to tax is only the profits or gains of the business. In arriving at the profits or gains of the business, all legitimate and normal expenditure of the business are to be deducted unless otherwise specifically provided in the I T Act. These were the legitimate amounts laid out for the purpose of business of the assessee and therefore, allowable as provided under section 28 of the I T Act.

3.13 The decision relied on by the learned DR cited supra is distinguishable on the facts. In that case, the assessee company owning tea estates, entered into leave and licence agreement for 3 years with another company names S which was in the process of liquidation and advanced a sum of Rs.20 lakhs for the purpose of modernization of its plant. The assessee claimed before the assessing officer that the advance of Rs.20 lakhs was deductible as a business loss on the ground that it has become irrecoverable on account of the incapacity of S to repay the amount. The Hon'ble Supreme Court held that assessee's business was of manufacture and sale of tea and it was not engaged in cotton manufacturing business at all; that while it intended to enter into cotton manufacturing business it did not set up a cotton mill, but obtained operating rights from another company under the leave and licence agreement for the purpose of acquiring the profit making apparatus for a duration of 3 years or a little more; that the amount of advance in a sum of Rs.20 lakhs was given not for its own purpose by way of business expenditure for modernizing the mill, but as capital to the lessor who in turn had to modernize the mill. In the resolutions made by the board of directors it was clear that the transaction entered into was not in the nature of a loan transaction or money-lending transaction and thus the loss suffered by the assessee was a capital loss and hence, the amount could not be deducted from the assessee's income as business loss.

3.14 In the light of aforesaid reasons, we are of the view that the order of the Commissioner (Appeals) is in accordance with law and no interference is called for. Hence, ground nos.l and 2 referred above, are dismissed.

4. As regards to third ground, the brief facts of the case are as follows:-

A sum of Rs.2,04,000/- paid as bonus to the employees, who are also shareholders and promoters of the company, was disallowed by the assessing officer. According to assessing officer, section 36(1)(ii) provided that deduction shall be allowed in computing the total income, in respect of any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or commission.

4.1 Before the first appellate authority, it was submitted that bonus was paid to services rendered by the working Directors, who happened to hold a few shares in the company. It is submitted that to invoke the provisions of section 36(1)(ii), the bonus paid had to be payable in its entirety as dividends or profits. The Commissioner (Appeals) allowed the appeal of the assessee by observing thus:-

"I find that the assessing officer has not discussed the nature of payment in sufficient detail, to establish that the amount of bonus paid was otherwise payable to the employees as profits or dividend. In the absence of a categorical finding of fact to that effect, the provision of section 36(1)(ii) cannot be invoked, because section 36 deals with deductions that shall be allowed' to assesses, in contrast to section 40, which deals with `amounts not deductible'. The Hon'ble High Court of Bombay has held in the case of Sesa Goa Ltd. v CIT (2009) 26 (I) ITCL 69 (Bom-HC) : (2009) 316 ITR 399 (Bom) that bonus paid by an assessee which was in the nature of a customary bonus was allowable as deduction u/s 36(l)(ii). In these circumstances, I allow the ground of appeal and delete the disallowance of Rs.2,04,000".

4.2 The revenue, being aggrieved, is in appeal before us.

4.3 The learned DR submitted that the Commissioner (Appeals) is not justified in deleting the disallowance of bonus paid to the shareholders, since the claim of the assessee is against the provisions of section 36(1)(ii) of the Act.

4.4 The learned AR reiterated the submission made before the Income-tax authorities.

4.5 We have heard the rival submission and perused the material on record. One of the conditions mentioned in section 36(1)(ii) is that the amount payable to employees as bonus or commission should not otherwise have been payable to them as profit or dividend. The plain reading of the clause means that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonus or commission, if the payment is in lieu of dividend or profits. This is provided to check the employer from avoiding tax by distributing his/its profits by way of bonus among the member employees of his/its concern, instead of distributing the sum as dividend or profits. However, the sum paid as bonus or commission is not affected by this condition, if the same is not otherwise payable as profit or dividend. For instance, if shareholders of a company are employees in their company and receive bonus (by virtue of their employment and not with reference to their shareholding), the admissibility of bonus would not be affected by this condition. We are fortified by the decisions of the Hon'ble Bombay High Court in the case of Loyal Motor Service Co. v CIT (1946) 14 ITR 647 and CIT v Sesa Goa Ltd. (2009) 26 (I) ITCL 69 (Bom-HC) : (2009) 316 ITR 399 (Bom).

4.6 Let us have a glimpse of section 36(l)(ii) as under.-

"Section 36(1) - The deductions provided for the following clauses shall be allowed in respect of the matters dealt with herein, in computing the income referred to in section 28 -

(i)************

(ia)*************

(ib)*************

(ii)any sum paid to an employee as bonus or commission for the services rendered where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission", (emphasissupplied).

4.7. From the above, it is clear that the bonus will not be allowed only if such sum paid to him or her is otherwise payable to him or her as profits or dividends. In the present case, the bonus is paid for the services of the working directors and the same cannot be disallowed just because they hold a few shares in the assessee company. They will not be entitled to such sum in entirety as dividends or profits in case such sum is not paid as bonus to them. Whatever dividend if any, payable to them will be only a fraction of such sum.

If the contention of the revenue is to be accepted, then bonus paid to all the employee shareholders of all corporate' will have to be disallowed as a miniscule part of it might be payable to them as dividends.

4.9 In the light of the above, we dismiss third ground.

5.In the result, the appeal filed by the revenue is dismissed.

The order pronounced on Friday, the 12th day of November, 2010 at Bangalore. .

(2011) 37 (II) ITCL 116 (Mum `H'-Trib)

In the ITAT, Mumbai Bench "H"

Tata AIG GIC Ltd. v. ITO

Tata AIG General Insurance Company Ltd. v. ITO

P.M. Jagtap, A.M. & N.V. Vasudevan, J.M.

ITA Nos. 6410 to 6413 & 6282 to 6285/Mum/09 q 29 October, 2010
q A.Ys. 2005-06, 2006-07, 2007-08 & 2008-09

I

Income Tax Act, 1961, S. 194D

Where the assessee-company has provided reinsurance to other insurance company and received only net-premium on reinsurance from the other insurance company then the assessee was not liable to deduct tax under section 194D on the premium deducted by other insurance company.

Tax deduction at source—Under section 194D—Re-insurance commission

During the course of survey, it was found that the assessee had entered into an arrangement with Bajaj for facultative reinsurance. As per the said arrangement, the assessee was liable to pay certain percentage of premium ceded as reinsurance inward commission to Bajaj. The assessee was receiving only net premium on reinsurance from Bajaj and as per the arrangement, it was to bear a certain percentage of loss of the premium. The profit commission, if any, was shared between the assessee and Bajaj in certain percentage as agreed in the arrangement. According to the AO, if the transaction between the assessee and Bajaj was a business transaction of passing risk, there was no question of paying ceding premium/commission. He held that the assessee, therefore, was liable to deduct tax on reinsurance commission paid to Bajaj under section 194D of the Act. Held: The assessee-company has provided reinsurance to the insurance company and if the reinsurance companies have reduced the premium directly from the premium payable by the insured, such a deduction will not attract provisions of section 194-D.

Relied: General Insurance Corporation of India v. ACIT (2009) 27 (II) ITCL 290 (Mum-Trib) : (2009) 28 SOT 453 (Mum-Trib).

Decision: In assessee's favour.

II

Income Tax Act, 1961, Ss. 194C & 194-I

Where the assessee hired cars for use by its employees and guests, the payment made for hiring of car was liable to tax deduction under section 194C and not under section 194-I because the assessee had not made payment for any specific car.

Tax deduction at source—Under section 194C or under section 194-I—Payment for hiring of car

The assessee during the years under consideration had entered into arrangements with various parties for hiring of car. The cars were hired from time to time for transportation of employees and visitors for the purpose of assessee's business and tax at source was deducted by it from the payment of car hire charges as per the provisions of section 194-C of the Act. According to the AO, the payments made by the assessee to various parties by way of car hire charges were in the nature of rental of plant and machinery or equipment. He held that the assessee therefore was liable to deduct tax at source at higher rate as per the provisions of section 194-I. Held: From the details and documentary evidence furnished by the assessee, it was found by the CIT(A) that specific cars were not made available at the disposal of the assessee and the vendors were required to provide any cars belonging to a particular category for transportation of employees and guests of the assessee as per its requirement. As held by the CIT(A), the assessee thus had not made any payment for use of a particular motor car but the payments were made for transportation of its employees/guests as per the requirement. Based on these findings of facts recorded by him in the impugned order, the CIT(A) held that it was a case of contract for carriage of passengers as envisaged in Explanation (iv)(c) to section 194-C and tax at source was rightly deducted by the assessee at the rate prescribed in section 194-C. As held by the CIT(A), the assessee thus had rightly deducted tax at source from the payment of car hire charges as per the provisions of section 194-C and the AO was not correct in holding that the tax was required to be deducted by the assessee at higher rates as per the provisions of section 194-I.

Decision: In assessee's favour.

III

Income Tax Act, 1961, Ss. 194C & 194-I

Where the assessee hired buses for transportation of its employees then the hire charges paid to contractor for arranging the buses was liable to tax deduction under section 194C and not under section 194-I.

Tax deduction at source—Under section 194C or under section 194-I—Payment towards hire charges of bus

The bus hire charges were paid by the assessee during the years under consideration to various parties in pursuance of agreements entered into with them and from the said payments, tax was deducted at source in accordance with the provisions of section 194C(1). The AO as well as CIT(A), however, held that tax at source was required to be deducted by the assessee at higher rates from the payment of bus hire charges as per the provisions of section 194-I. Held: It was not a case of buses taken by the assessee on rent from the contractors as envisaged in section 194-I. The terms and conditions of the agreement nowhere indicated that any particular bus or buses were identified or earmarked for the assessee and the same were made available at its disposal. The contractor was at liberty to use any 23 seater bus for the purpose of commuting the staff of the assessee. There was also nothing in the agreement to suggest that the assessee was having any control over the buses which were to be used for commuting its staff. Rather there was no restriction on the contractor to use certain buses exclusively for providing services to the assessee as per the agreement and the said buses thus were available at his disposal during the period when they were not required for providing services to the assessee as agreed. Even the staff required for providing the bus services such as drivers/cleaners etc. was to be provided by the contractor and even running maintenance expenses such as diesel, repairs etc. were to be borne by the contractor. It was also agreed between the assessee and the contractor that the monthly compensation amount would be increased as a result of any increase in the diesel prices, rates of taxes etc. Having regard to all these terms and conditions of agreement, it was not a case in which it can be said that buses were taken by the assessee on rent so as to attract the provisions of section 194-I. On the other hand, it was a case where payments were made by the assessee for carrying out the work of carriage of its employees as passengers by buses as a mode of transport in pursuance of a contract with the concerned contractors. The said payments thus were clearly covered by the provisions of section 194-C read with Explanation (iv)(c) thereto and the tax at source was rightly deducted by the assessee from the said payments as per the said provisions.

Held: In order to ascertain whether the payment of bus hire charges made by the assessee is covered by the provisions of section 194C or 194-I, it is necessary to look into the clauses of the relevant agreement so as to ascertain the exact nature of arrangement between the assessee and the concerned parties. A copy of one such sample agreement is placed at page No. 68 to 70 of the assessee's paper book and a perusal of the same shows that the concerned party namely M/s Goel & Sons with whom the said agreement was entered into by the assessee was referred to as contractor mentioning further that the contractor was in the business of providing bus services to clients and was agreeable to provide bus services to the assessee who was referred to as client for its staff for their to and fro commutation between premises of the assessee located at Ahura Centre, Andheri(E), to Mulund railway station on certain terms and conditions. As per the said terms and conditions, the contractor had agreed to provide the bus services to the commuting staff twice in a day at specific timings. As further agreed, the assessee was to pay a total monthly fixed amount of Rs. 23,000/- with Service tax & Education Cess (as applicable) to the contractor for carrying out the services to its satisfaction on the basis of Invoice to be raised by the contractor in this regard. As per the said agreement, the contractor had assured the assessee that for the purpose of providing bus services, they had employed adequate and well trained staff such as drivers, cleaners and team of skilled personnel for fulfilling their agreement. The contractor had also undertaken to provide 23 seater bus for this purpose. The contractor had also agreed to provide a first party insurance cover for the employees of the assessee availing the bus services in a case of accident/damage etc. Both these parties had also agreed to increase the monthly compensation for use of bus services with a mutual consent as a result of any increase in the rates of taxes, dues and hike in diesel or oil prices. Even the formula to increase the compensation on the basis of increase in diesel or oil prices was also agreed between the assessee and the contractor. After having taken into consideration all these terms and conditions agreed between the assessee and the contractor, one finds merit in the contention of the Counsel for the assessee that it was not a case of buses taken by the assessee on rent from the contractors as envisaged in section 194-I. The terms and conditions of the agreement nowhere indicate that any particular bus or buses were identified or earmarked for the assessee and the same were made available at its disposal. The contractor was at liberty to use any 23 seater bus for the purpose of commuting the staff of the assessee. There was also nothing in the agreement to suggest that the assessee was having any control over the buses which were to be used for commuting its staff. Rather there was no restriction on the contractor to use certain buses exclusively for providing services to the assessee as per the agreement and the said buses thus were available at his disposal during the period when they were not required for providing services to the assessee as agreed. Even the staff required for providing the bus services such as drivers/cleaners etc. was to be provided by the contractor and even running maintenance expenses such as diesel, repairs etc. were to be borne by the contractor. It was also agreed between the assessee and the contractor that the monthly compensation amount would be increased as a result of any increase in the diesel prices, rates of taxes etc. Having regard to all these terms and conditions of agreement, it was not a case in which it can be said that buses were taken by the assessee on rent so as to attract the provisions of section 194-I. On the other hand, it was a case where payments were made by the assessee for carrying out the work of carriage of its employees as passengers by buses as a mode of transport in pursuance of a contract with the concerned contractors. The said payments thus were clearly covered by the provisions of section 194-C read with Explanation (iv)(c) thereto and the tax at source was rightly deducted by the assessee from the said payments as per the said provisions. [Para 19]

Decision: In assessee's favour.

IV

Income Tax Act, 1961, S. 194C

Where the assessee made payment for contract of work such as carpentry, loose furniture, carpets, partitions and flooring, civil work , internal lighting and power network, light fixtures, plumbing etc. carried out at various locations taken on lease by it then the tax was deductible under section 194C on the payment so made.

Tax deduction at source—Under section 194C—Payments for contract of work such as carpentry, loose furniture, carpets, partitions and flooring, civil work , internal lighting and power network, light fixtures, plumbing etc. carried out at various locations taken on lease by assessee

During the years under consideration, the assessee had made payments for contract of work such as carpentry, loose furniture, carpets, partitions and flooring, civil work, internal lighting and power network, light fixtures, plumbing etc. carried out at various locations taken on lease by it. Tax at source from the said payments was deducted by the assesse in accordance with the provisions of section 194-C. According to the AO, the said payments were made by the assessee for the work which was in the nature of `fees for professional and technical services'. He therefore held that the assessee was liable to deduct tax at source at higher rate from the said payments as per the provisions of section 194-J. Before the CIT(A), it was submitted on behalf of the assesse that the nature of work for which the impugned payments were made was not of `fees for professional and technical services' as contemplated under section 194J. It was submitted that it was in fact a contract for work involving carpentry, loose furniture, carpets, partitions and flooring, civil work, internal lighting and power network, light fixtures, plumbing etc. and the same being in the nature of works contract, tax at source was rightly deducted from the payments thereof as per the provisions of section 194C. Held: It is clearly evident from the description of work given in the bills raised by concerned parties that the work undertaken by the concerned parties was for repairs and renovation carried out in the premises taken by the assessee on lease. The work involved was mainly for interior work done at the call centres of the assessee and it involved making of partitions, doors, carpeting and flooring, painting, electrification etc. It also involved providing of false ceiling , painting and loose furniture as well as sanitary fixtures and light fixing. Keeping in view the description given in the relevant bills issued by the concerned parties/contractors, the nature of work involved was mainly of repairs and renovation of the premises taken by the assessee on lease which was carried out as works contract on which tax was rightly deducted by the assessee as per the provisions of section 194C.

Decision: In assessee's favour.

Counsel: Shri F.V. Irani Shri Manoj Purohit, for the Assessee q Shri R.S. Srivastava, for the Respondent

ORDER

These eight appeals, four filed by the assessee and four filed by the revenue, are cross appeals which are directed against four separate orders passed by the Id. Commissioner (Appeals) for A.Yrs. 2005-06, 2006-07, 2007-08 & 2008-09. Since some common issues are M/s Tata AIG General Insurance Co. Ltd. involved in these appeals, the same have been heard together and are being disposed of by this single composite order.

2. The first common issue relating to the liability of the assessee to deduct tax at source from reinsurance commission is involved in ground No. 1 of the revenue's appeal for all the four years under consideration.

3. In this case, a survey under section 133A was carried out on 27.8.08 to verify whether the assessee company was complying with the provisions of Chapter XVII-B of the Income Tax Act, 1961 relating to the requirement of tax deduction at source. During the courseof survey, it was found that the assessee had entered into an arrangement with Bajaj for facultative reinsurance. As per the said arrangement, the assessee was liable to pay certain percentage of premium ceded as reinsurance inward commission to Bajaj. Theassessee was receiving only net premium on reinsurance from Bajaj and as per the arrangement, it was to bear a certain percentage of loss of the premium. The profit commission, if any, was shared between the assessee and Bajaj in certain percentage as agreed in the arrangement. According to the assessing officer, if the transaction between the assessee and Bajaj was a business transaction of passing risk, there was no question of payingceding premium/commission. He held that the assessee, therefore, was liable to deduct tax on reinsurance commission paid to M/s Bajaj under section 194D of the Income Tax Act, 1961.This decision of the assessing officer was challenged by the assessee in the appeals filed before the ld. Commissioner (Appeals) and elaborate submissions were made on its behalf before him in support of the stand that tax at source was not liable to be deducted from reinsurance commission asper the provisions of section 194D of the Act. The gist of the said submissions was that no commission was paid by the assessee to Bajaj for soliciting or broking insurance business. It was contended that there was no agency relationship between the assessee and Bajaj and the arrangement between the parties was to share the premium, risk etc. on principal-to-principal basis. It was also contended that reinsurance commission was nothing but meant to take care of the cost of procurement, cost of funding claims till recovery is made from the reinsurers and to account for any non recovery in the event of their going insolvent. It was pointed out that a similar issue has already been decided by the Mumbai Bench of ITAT in favour of the assessee the case of General Insurance Corporation of India v. ACIT reported in (2009) 27 (II) ITCL 290 (Mum-Trib) : (2009) 28 SOT 453 (Mum-Trib). On appreciation of the relevant facts involved in the case of the assesse vis-à-vis the facts involved in the case of General Insurance Corporation of India (supra), the ld. Commissioner (Appeals) found that a similar issue involving identical facts was decided by the Tribunal in favour of the assessee in the case of General Insurance Corporation of India (supra). Accordingly, he followed the decision of the Tribunal and held that the provisions of section 194D were not applicable to the payment of reinsurance commission paid by the assessee to Bajaj. Accordingly, the action of the assessing officer in holding the assessee as in default under section 201(1) and in charging interest under section 201 (1A) for its alleged failure to deduct the tax at source from the payment of reinsurance commission was held to be unjustified.

4. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue has already been decided by the Coordinate Bench of this Tribunal in the case of General Insurance Corporation of India (supra) wherein after taking into consideration the provisions of section 194D and discussing the meaning of relevant expression used in the context such as `commission", "reinsurance" etc. as explained in the various judicial pronouncements as well as in the dictionary, it was held by the Tribunal as under:

"In order to attract section 194D, the commission or any other payment covered under the section should be a remuneration or reward for soliciting or procuring the insurance business. The insurance companies do not procure business for the assessee company nor does the assessee company pay commission or other payment for soliciting the business from the insurance companies. The language of section 194D clearly indicates that ordinarily there would be three parties involved in the payment of commission or other payments as remuneration or reward for soliciting or procuring the insurance business. Firstly, there would be an insurance company and the second would be insured. If the insurance company gets business directly from the insured, no payment would be required to be made by the insurance company to the insured by way of co0mmission or otherwise for soliciting or procuring the business for the assessee. If any discount is allowed by the insurance company to the insured that will not fall within the definition of brokerage or commission paid for soliciting for procuring insurance business. That payment, in our view would fall within the category of a discount offered to the insured for giving the business to the insurance company. Even otherwise the payment or deduction would neither be a reward nor remuneration for any services like soliciting or procuring insurance business for the assesssee. The assessee-company may be said to have solicited business from the insurance companies in certain cases but the commission credited/paid is not by way of remuneration or reward for soliciting or procuring of insurance business. As noted earlier, remuneration or reward would be related to services rendered in connection with soliciting or procuring business. In this case the payment of discount is made to insurance companies but the payee companies have not solicited or procured insurance business for the assessee. For the sake of arguments, it may be accepted that the assessee company has solicited or procured insurance business from the insurance companies but the payment is not made to the solicitor or procurer of insurance business but to those from whom business has been solicited or procured. In the present case, payer would be a solicitor or procurer of insurance business but not the payee companies. For attracting section 194D, the payment has to be by way of remuneration or reward not for giving business to the assessee but for soliciting or procuring the insurance business."

5. For the reasons given above as well as for the detailed discussion made in its order dealing with the other relevant aspects of the matter, the Tribunal finally held in para No. 37 that the insurance companies have not provided any service of soliciting or procuring insurance business for the assessee company. On the other hand, the assessee company has provided reinsurance to the insurance company and if the reinsurance companies have reduced the premium directly from the premium payable by the insured, such a deduction will not attract provisions of section 194-D. As the issue involved in the present case as well as all the material facts relevant thereof are similar to that of General Insurance Corporation of India (supra), we respectfully follow the order of the Tribunal passed in the said case and uphold the impugned order of the ld. Commissioner (Appeals) allowing relief to the assessee on this issue. Ground No. 1 of the revenue's appeals for all the four years under consideration is accordingly dismissed.

6. The next issue relating to the liability of the assessee to deduct tax at source from the payment of car hire charges is involved in ground No. 2 of the revenue's appeal for A.Y. 2007-08 and 2008-09.

7. The assessee during the years under consideration had entered into arrangements with various parties for hiring of car. The cars were hired from time to time for transportation of employees and visitors for the purpose of assessee's business and tax at source was deducted by it from the payment of car hire charges as per the provisions of section 194-C of the Act. According to the assessing officer, the payments made by the assessee to various parties by way of car hire charges were in the nature of rental of plant and machinery or equipment. He held that the assessee therefore was liable to deduct tax at source at higher rate as per the provisions of section 194-I.

8. Before the ld. Commissioner (Appeals), it was submitted on behalf of the assessee that even as per the definition of rent as extended with effect from 30.7.06, only the rent of machinery, plant and equipment is covered and not the rent for use of cars. It was submitted that section 194-Cprovides that any person responsible for paying any sum to a resident for carrying out "any work" in pursuance to a contract between the contractor and any company shall at the time of payment or credit of such sums deduct income tax @ 2%. It was also submitted that as per sub- section (3) of section 194-C, the expression "work" also includes carriage of goods and passengers by any mode of transport other than by railway. It was contended that the carriage of passengers by any mode of transportation will also cover hiring of cars and since the assessee had not made any payment for use of particular motor cars but for the facility of transport from one place to another, tax at source was deductible from the payment of car hire charges as per the provisions of section 194-C. Relying on the Board Circular No. 5 dtd. 30th July, 2002, it was contended that the assessee had entered into an arrangement for hiring of cars which was in the nature of rate contract for providing specified types of cars at pre-determined rates and since specific cars were not made available at the disposal of the assessee as per the said arrangement, the provisions of section 194-C were applicable and not the provisions of section 194-I. To further support and substantiate this stand, the assessee also filed a sample copy of invoice issued by the vendor to show that services rendered by the vendor were with respect to facility of transport of the assessee's employees from one place to another and specific cars were not earmarked for the assessee for this purpose.

9. The ld. Commissioner (Appeals) found merit in the submissions made on behalf of the assessee on this issue and accepted the stand of the assessee for the following reasons given in para No. 9 & 9.1 of his impugned orders which are identical for both the years under consideration i.e. 07-08 and 08-09

"I have considered the above submission very carefully and have perused the order of the assessing officer. I have also seen the copy of bills on the basis of which payment is made. I find that the assessing officer held that payments made to various parties by way of car hire charges are in the nature of rental of plant and machinery/equipment and therefore liable for withholding tax uder section 194 I of the Income Tax Act. On the other hand the appellant submitted that the cars were hired from time to time for transportation of employees/visitors for purpose of the business as such business meeting, local conveyance etc. The appellant also urged that even in the amended definition of rent introduced by Amendment Act of 2006 whereby the definition of rent is extended to cover machinery, plant and equipment within its scope with effect from 13.7.2006, cars are not expressly included in the definition of rent. The appellant also contended that sub-section 3 of section 194C of the Income Tax Act states that the expression `work' shall also include carriage of goods and passengers by any mode of transport other than by railways. The appellant has also placed reliance on Hon'ble Supreme Court judgment in the case of Associated Cement Company Ltd. v. CIT 67 Taxman 346. From the details furnished in this regard, I find that the vehicle is not at the disposal of the appellant and the appellant has to run the vehicle as per requirement/routes only. The appellant had not made any payment for use of particular motor car but for the facility of transport from one place to another and the rates are fixed for a particular vehicle and for distance and timings. I see merit in the submission of the appellant that it had entered into an Agreement for hiring of cars which is in the nature of rate contract for providing specified types of cars at predetermined rates. The cars are not at the disposal of the appellants. The sample copy of quotations is an evidence that the services rendered by the vendors was with respect to facility of transport of the appellant's employees from one place to another for a particular distance and timings. The contract with the vendors was for hiring of only particular category of cars and cars were not earmarked by the appellant.

Based on the above, it is amply clear that the nature of arrangements made by the appellant is in the nature of Service Contract only as the appellant does not enjoy the control over the vehicles and also the running and maintenance expenditure is borne by the car providers. Thus in view of the above facts I hold that the payment made by the appellant to the cars providers fall within the ambit of the provisions of section 194C of the Act . Accordingly, the appellant is treated assessee in default for not deducting tax at source. To this extent, the order of the assessing officer is confirmed."

10. The ld. D.R. submitted that the charges paid by the assessee for hiring the carswere clearly in the nature of rent paid for the cars and the provisions of section 194-1Awere squarely attracted as rightly held by the assessing officer He contended that the assessee thus was required to deduct tax at source at the higher rate as per the provisions of section 194-I as against tax deducted at low rate relying on the provisions of section 194-C, which were not applicable.

11. The ld. Counsel for the assessee invited our attention to the Explanation (iv)(c) to194C and submitted that the contract work for carrying passenger was covered u/s 194-Cand the tax deducted by the assessee from the payment of car hire charges which was purely a contract for carriage of passenger was in accordance with the requirements of section 194-C. He submitted that the cars provided by the vendors were not specifically earmarked for the assessee and the only requirement was to provide the cars of particular category with a choice to the vendor to provide any car falling within that category. He contended that it was therefore not a case where cars could be said to be taken on rent by the assessee and since the car hire charges were paid for the contract of carriage of passengers, tax was deductible from the payment thereof as per the provisions of section194-C as rightly held by the ld. Commissioner (Appeals). He, therefore, strongly supported the impugned order of the ld. Commissioner (Appeals) on this issue.

12. We have considered the rival submissions and also perused the relevant material on record. It is observed that from the details and documentary evidence furnished by the assessee, it was found by the ld. Commissioner (Appeals) that specific cars were not made available at the disposal of the assessee and the vendors were required to provide any cars belonging to a particular category for transportation of employees and guests of the assessee as per its requirement. As held by the ld. Commissioner (Appeals), the assessee thus had not made any payment for use of a particular motor cars but the payments were made for transportation of its employees/guests as per the requirement. Based on these findings of facts recorded by him in the impugned order, the ld. Commissioner (Appeals) held that it was a case of contract for carriage of passengers as envisaged in Explanation (iv)(c) to 194-C and tax at source was rightly deducted by the assessee at the rate prescribed in section 194-C. At the time of hearing before us, the ld. D.R. has not been able to controvert/rebut these findings of facts recorded by the ld. Commissioner (Appeals) on the basis of appreciation of evidence placed on record by the assessee. On the other hand, the ld. Counsel for the assessee has taken us through the relevant contracts entered into by the assessee with the concerned vendors for hiring of cars which clearly establish that there being no specific cars identified and earmarked for the assessee and it was only the arrangement for providing cars of a particular category to facilitate transportation of the employees and guests of the assessee from one place to another, the tax at source from the payment of car hire charges was required to be made by the assessee as per the provisions of section 194-C read with Explanation (iv)(c) thereto. As held by the ld. Commissioner (Appeals), the assessee thus had rightly deducted tax at source from the payment of car hire charges as per the provisions of section 194-C and the assessing officer was not correct in holding that the tax was required to be deducted by the assessee at higher rates as per the provisions of section 194-I. We, therefore, find no infirmity in the orders of the ld. Commissioner (Appeals) on this issue and upholding the same, we dismiss ground No. 2 of the revenue's appeal for A.Y. 2007-08 and 2008-09.

13. Now, we shall take up the appeals of the assessee. The first common issue relating to the liability of the assessee to deduct tax at source from bus hiring charges is involved in ground No. 1 & 2 of the assesse's appeal for A.Y. 2007-08 & 2008-09.

14. During the previous year relevant to A.Y. 2008-09, the assessee had entered into arrangements with various parties for hiring of buses. The buses were hired for the purpose of transportation of employees from specific railway stations to the place of office and vice-versa. From the payments made against bus hire charges, tax was deducted at source by the assessee as per the provisions of section 194-C. According to the assessing officer, the bus hire charges paid by the assessee were in the nature of rental of plant and machinery/equipment. He held that the assessee, therefore, was liable to deduct tax at source from the payments made against bus hire charges at a higher rate as per the provisions of section 194-I. Before the ld. Commissioner (Appeals), it was submitted on behalf of the assessee that as per the provisions of section 194C of the Act, any person responsible for paying any sum to a resident for carrying out any work in pursuance to a contract between the contractor and any company was required to deduct Income Tax @ 2% at the time of payment or credit of such sums. It was contended that as per the definition of the word "work" given in the section, payment in respect of carriage of goods and passengers by any mode of transport other than by railways was regarded as work. It was contended that the arrangement between the assessee and the various parties for carriage of passengers by hiring of buses thus was a work carried out in pursuance to a contract and tax at source was rightly deducted as per the provisions of section 194C. Reliance in support of this contention was placed by the assessee on the Board Circular No. 558 dtd. 28-3-1990 and Circular No. 715 dated 8the August, 1995.

The ld. Commissioner (Appeals) did not find merit in the submissions made on behalf of the assessee on this issue and proceeded to uphold the action of the assessing officer in treating the bus hire charges paid by the assessee as rent and in holding that tax at source from the payment thereof was liable to be deducted at higher rate as per the provisions of section 194-I for the following reasons given in para No. 11 & 11.1 of his impugned order.

"I have considered the above submission very carefully and have perused the order of the assessing officer. I have also analysed the copy of the Agreement entered by the appellant with bus providers. The assessing officer held that payments made to various parties by way of bus hire charges was in the nature of rental of plant and machinery/equipment and therefore liable for withholding tax under section 194-1 of the Act. On the other hand the appellant contended that its case is covered by section 194C. The expression `work' has been defined in section to include payment in respect of carriage of goods and passengers by any mode of transport. The appellant had placed reliance on CBDT Circular 558 dated 28/3/1990 and Question No. 6 of Circular 715, dt. 8-8-1995. The Agreement made between the appellant and M/s Suresh Travels transpires that the appellant agrees to pay monthly fixed rent of 23,000/- to the contractor for carrying out the services to the satisfaction. The Agreement is valid for one year.

From the Agreement it is clear that the amount is paid by the appellant as a `rent' to the bus owner on fixed monthly basis which is covered under section 194-1 of the Income Tax Act. In this case the charges are not fixed movement-wise or per kilometer or time duration –wise. Since the buses are hired on monthly basis, it is not correct to say that there was no control of the appellant over the buses used. I agree with the reasoning of the assessing officer. Therefore, I hold that the appellant was liable to deduct tax as per the provisions of section 194-C instead of section 194C. T his ground of the appeal is dismissed."

15. The ld. Counsel for the assessee at the outset invited our attention to Explanation (iv) to section 194C wherein the expression "work" is defined to include inter alia carriage of goods or passengers by any mode of transport other than by railways. He then invited our attention to the sample copy of bus hire agreement entered into by the assessee with one of the contractors placed at page No. 68 to 70 of his paper book, and took us through the different clauses of the said agreement to contend that if the said agreement is read as a whole, it cannot be said that it was a case of taking buses on rent. He contended that the said agreement as specifically mentioned therein was for the services to be rendered by the contractor for carrying the passengers i.e. employees of the assessee by buses which was a mode of transport. He pointed out that as per clause 1 of the said agreement, the contractor had agreed to provide bus services to the commuting staff of the assessee between the office premises and Mulund railway station twice in a day at specific timings. He submitted that even the experience of the contractor in the field of providing such bus services was specifically indicated in the said agreement. He submitted that as per the said agreement, the contractor had undertaken to provide 23 seater bus for this purpose and there is nothing to indicate that a specific bus was made available at the disposal of the assessee. He also pointed out that as per the said agreement, contractor had agreed to provide a first party insurance cover for the employees of the assessee availing the said bus services in case of any accident/damages etc. which is a condition that cannot be there in case of taking bus on rental basis. He contended that the said agreement thus was a contract for carrying out the work of carriage of passengers by buses as a mode of transport and merely because the nomenclature used for the payment made against the said work in the agreement was "rent", the nature of arrangement would not change which was purely a contract for the work of carriage of employees of the assessee by the contractor by buses as a mode of transport. He contended that the terms and conditions of the relevant agreements clearly show that the assessee had no control whatsoever over the buses which were hired and the arrangement with the contractor was only for providing bus services to the commuting staff between office premises and specific railway station. He contended that the payment made by the assessee for bus hire charges as per the said agreement thus was not in the nature of rent but the same was for the work of carriage of passengers by buses as a mode of transport and deduction of tax was rightly made by the assessee as per the provisions of section 194C. In support of this contention, he relied on the decision of Hon'ble Supreme Court in the case of Associated Cement Company v. CIT reported in 201 ITR 435 (SC) and Board Circular No. 558 dated 28-3-90.

16. The ld. D.R., on the other hand, submitted that the arrangement between the assessee and the concerned parties was for hiring of buses and the income arising from such arrangement from hiring was in the nature of rent as rightly held by the assessing officer as well as by the ld. Commissioner (Appeals). He invited our attention to the copy of sample agreement placed in the paper book of the assessee and pointed out that a monthly rent of 23,000/- was fixed between the assessee and concerned party which again shows that what was agreed to be paid by the assessee is rent for hiring of buses. He contended that it was thus a case of rent paid by the assessee for hiring of buses and tax at higher rate was required to be deducted there from as per the provisions of section 194-I. He contended that what is to be seen in this context is a substance of the agreement which in the present case was that the buses hired by the assessee were under his captive use.

17. We have considered the rival submissions and also perused the relevant material on record. It is observed that the bus hire charges were paid by the assessee during the years under consideration to various parties in pursuance of agreements entered into with them and from the said payments, tax was deducted at source in accordance with the provisions of section 194C(1) which are extracted below:

"194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—

(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family,

of such sum as income-tax on income comprised therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspenseaccount" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3)Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—

(i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

(ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

(5) No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed twenty thousand rupees :

Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.

18. The assessing officer as well as ld. Commissioner (Appeals), however, held that tax at source was required to be deducted by the assessee at higher rates from the payment of bus hire charges as per the provisions of section 194-I which as applicable to the years under consideration are extracted below:

"194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to (a resident) any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, (deduct income-tax thereon at the rate of—

(a) Ten percent for the use of any machinery or plant or equipment.

(b) Fifteen per cent for the use of any land or building (including factory building) or land appurtenant to a building(including factory building) or furniture or fittings where the payee is an individual or a Hindu undivided family; and

(c) Twenty per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings where the payee is a person other than an individual or a Hindu undivided family.

Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed one hundred and twenty thousand rupees :

19. In order to ascertain whether the payment of bus hire charges made by the assessee is covered by the provisions of section 194C or 194-I, it is necessary to look into the clauses of the relevant agreement so as to ascertain the exact nature of arrangement between the assessee and the concerned parties. A copy of one such sample agreement is placed at page No. 68 to 70 of the assessee's paper book and a perusal of the same shows that the concerned party namely M/s Goel & Sons with whom the said agreement was entered into by the assessee was referred to as contractor mentioning further that the contractor was in the business of providing bus services to clients and was agreeable to provide bus services to the assessee who was referred to as client for its staff for their to and fro commutation between premises of the assessee located at Ahura Centre, Andheri(E), to Mulund railway station on certain terms and conditions. As per the said terms and conditions, the contractor had agreed to provide the bus services to the commuting staff twice in a day at specific timings. As further agreed, the assessee was to pay a total monthly fixed amount of ` 23,000/- with Service tax & Education Cess (as applicable) to the contractor for carrying out the services to its satisfaction on the basis of Invoice to be raised by the contractor in this regard. As per the said agreement, the contractor had assured the assessee that for the purpose of providing bus services, they had employed adequate and well trained staff such as drivers, cleaners and team of skilled personnel for fulfilling their agreement. The contractor had also undertaken to provide 23 seater bus for this purpose. The contractor had also agreed to provide a first party insurance cover for the employees of the assessee availing the bus services in a case of accident/damage etc. Both these parties had also agreed to increase the monthly compensation for use of bus services with a mutual consent as a result of any increase in the rates of taxes, dues and hike in diesel or oil prices. Even the formula to increase the compensation on the basis of increase in diesel or oil prices was also agreed between the assessee and the contractor. After having taken into consideration all these terms and conditions agreed between the assessee and the contractor, we find merit in the contention of the ld. Counsel for the assessee that it was not a case of buses taken by the assessee on rent from the contractors as envisaged in section 194-I. The terms and conditions of the agreement nowhere indicate that any particular bus or buses were identified or earmarked for the assessee and the same were made available at its disposal. The contractor was at liberty to use any 23 seater bus for the purpose of commuting the staff of the assessee. There was also nothing in the agreement to suggest that the assessee was having any control over the buses which were to be used for commuting its staff. Rather there was no restriction on the contractor to use certain buses exclusively for providing services to the assessee as per the agreement and the said buses thus were available at his disposal during the period when they were not required for providing services to the assessee as agreed. Even the staff required for providing the bus services such as drivers/cleaners etc. was to be provided by the contractor and even running maintenance expenses such as diesel, repairs etc. were to be borne by the contractor. It was also agreed between the assessee and the contractor that the monthly compensation amount would be increased as a result of any increase in the diesel prices, rates of taxes etc. Having regard to all these terms and conditions of agreement, we are of the view that it was not a case in which it can be said that buses were taken by the assessee on rent so as to attract the provisions of section 194-I. On the other hand, it was a case where payments were made by the assessee for carrying out the work of carriage of its employees as passengers by buses as a mode of transport in pursuance of a contract with the concerned contractors. The said payments thus were clearly covered by the provisions of section 194-C read with Explanation (iv)(c) thereto and the tax at source was rightly deducted by the assessee from the said payments as per the said provisions. In that view of the matter, we set aside the orders of the authorities below on this issue for both the years under consideration i.e. 2007-08 and 2008-09 and allow ground No. 1 & 2 of the assessee's appeal.

20. The other issue relating to liability of the assessee to deduct tax at source from the payment of leasehold charges is raised in ground No. 1 & 2 of the assessee's appeals for A.Y. 2005-06 and 2006-07 and ground No. 3 & 4 in its appeal for A.Y. 2007-08 & 2008-09.

21. During the years under consideration, the assessee had made payments for contract of work such as carpentry, loose furniture, carpets, partitions and flooring, civil work, internal lighting and power network, light fixtures, plumbing etc. carried out at various locations taken on lease by it. Tax at source from the said payments was deducted by the assesse in accordance with the provisions of section 194-C. According to the assessing officer, the said payments were made by the assessee for the work which was in the nature of `fees for professional and technical services'. He therefore held that the assessee was liable to deduct tax at source at higher rate from the said payments as per the provisions of section 194-J. Before the ld. Commissioner (Appeals), it was submitted on behalf of the assesse that the nature of work for which the impugned payments were made was not of `fees for professional and technical services' as contemplated under section 194J. It was submitted that it was in fact a contract for work involving carpentry, loose furniture, carpets, partitions and flooring, civil work, internal lighting and power network, light fixtures, plumbing etc. and the same being in the nature of works contract, tax at source was rightly deducted from the payments thereof as per the provisions of section 194C. Reliance was placed on behalf of the assessee on the decision of Delhi Bench of ITAT in the case of DCIT v. Japan Airlines (2005) 4 (II) ITCL 348 (Del-Trib) : (2005) 93 ITD 163 (Del-Trib) : (2005) 92 TTJ 687 (Del-Trib) wherein the essential ingredients of transaction covered by section 194C were enumerated. It was held by the Tribunal in the said decision that for determining the true nature of any transaction, relevant agreements and other facts are to be examined. It was contended that ingredients enumerated by the Tribunal in the case of Japan Airlines (supra) were in existence in the case the relevant transactions made by the assessee and keeping in view of the nature of work carried out by the contractors, section 194-C was applicable and not section 194-J. It was contended that the intention of the assessee and the contractor was to carry out the work as particularly described in the contracts entered into with them and the same being in the nature of works contracts, the provisions of section 194C were attracted so far as deduction of tax was concerned. Relying on the Board Circular No. 720 dt. 30-8-95, it was contended on behalf of the assessee that even if the contracts were composite nature, tax at source was liable to be deducted only under section 194C keeping in view the nature of substantial work done by the contractors. Sample copies of the invoices raised by the contractors were also produced by the assessee to show the description of the service rendered by the contractors to carry out the work involved. It was submitted that fees for professional and technical services, designing etc. was paid separately to the architects and tax at source was deducted from such payments in accordance with law.

22. The ld. Commissioner (Appeals) did not find the submission made on behalf of the assessee on this issue to be acceptable and proceeded to agree with the assessing officer that tax at source from the payments made on account of lease hold charges was liable to be deducted by the assessee as per the provisions of section 194J for the following reasons given in para No. 13 of his impugned order:

"I have considered the above submission very carefully and have perused the order of the assessing officer. I find that the assessing officer has held that amount paid for the work was in the nature of `fees for professional and technical services' and therefore liable to TDS under section 194J of the Act. On the other hand the appellant has tried to establish that the payment made on account of leasehold charges are covered under section 194-C of the Income Tax Act. A perusal of bills issued by the various vendors show that the work is undertaken by the interior decorators or by the architectural experts i.e. by Nivea Enterprises Interior Contractors, allies Enterprises – Interior Decorators, Designer, civil Job, Concept Interiors, Sthapati Consultants- Architects, Interior Designers Construction, Management consultants. All this clearly indicates that the payment are covered under section 194J as `fees for professional or technical services'. The appellant has tried to bifurcate the fees paid towards professional and technical service and payment made for execution of work. But the fact is that the entire work has been done by the experts like interior designer/decorators and architects. The appellant has made payment of substantial amount and undergone substantial work but has not furnished any copy of contract with the parties in support of its contention. In view of the facts, I agree with the assessing officer that the entire payment is made as fees for technical and professional services. Therefore, the tax should have been deducted as per provisions of section 194J and not as per provisions of section 194C. in view of the fact, I confirm the action of the assessing officer. This ground of appeal is dismissed."

23. The ld. Counsel for the assessee at the outset invited our attention to the copies of bills raised by the contractors placed at page No. 83 to 129 of his paper book to point out that the said bills were for the expenses incurred by the assessee on repairs and renovation of the premises taken on lease. He contended that the payments made by the assessee against the said bills to the contractors thus were for the various types of work executed by him in terms of works contract and not for any professional services rendered by them. He contended that merely because the said work was done by interior decorators and designers, it cannot be said that the contract was for designing or decoration work. He contended that what is to be seen is the type of work undertaken by the contractor. He contended that if the nature and type of work undertaken by the contractors is seen from the description given in their bills, it becomes abundantly clear that it was a case of works contract executed by the contractors and not rendering of any professional services. He contended that section 194J therefore was not attracted and tax at source was rightly deducted by the assessee from the payments against the said work as per the provisions of section 194C.

24. The ld. D.R., on the other hand, submitted that the payments in question were made by the assessee to interior decorators and designers and even if the nature of work done by them as shown in the relevant bills was repairs and renovation to the premises taken by the assessee on lease, the payments made by the assessee need to be bifurcated into designing charges and works contract. He contended that tax at source from the payments of designing charges atleast has to be deducted in accordance with the provisions of section 194J.

25. We have considered the rival submissions and also perused the relevant material on record. As rightly contended by the ld. Counsel for the assessee, what is to be seen in order to ascertain whether section 194C is applicable or 194J is the exact nature of work against which payment is made and not to whom the said payment is made and even the ld. D.R. has not disputed this position. It appears from the impugned order of the ld. Commissioner (Appeals) that he has decided this issue on the basis that the payments in question were made by the assessee mainly to interior decorators and designers overlooking the exact nature of work done by them. In order to ascertain the exact nature of work done by the concerned parties, we have carefully perused the copies of bills raised by them which are placed at page No. 83 to 129 of the assessee's paper book. It is clearly evident from the description of work given in the said bills that the work undertaken by the concerned parties was for repairs and renovation carried out in the premises taken by the assessee on lease. The work involved was mainly for interior work done at the call centres of the assessee and it involved making of partitions, doors, carpeting and flooring, painting, electrification etc. It also involved providing of false ceiling , painting and loose furniture as well as sanitary fixtures and light fixing. Keeping in view the description given in the relevant bills issued by the concerned parties/contractors, we find that the nature of work involved was mainly of repairs and renovation of the premises taken by the assessee on lease which was carried out as works contract on which tax was rightly deducted by the assessee as per the provisions of section 194C. The ld. D.R. has submitted before us that since the said work was done by interior decorators and designers, it is bound to involve some designing charges which needs to be bifurcated and atleast payment made by the assessee to that extent was covered by section 194J. However, as categorically submitted on behalf of the assessee before the ld. Commissioner (Appeals), the designing charges were paid separately by the assessee and tax at source was deducted from the said payment as per the relevant provisions. As such considering all the facts of the case including especially the nature of work carried out by the concerned parties, we are of the view that the payments in question made by the assessee for the said work was in the nature of works contract as contemplated in section 194C and tax was rightly deducted by the assessee from the said payments in accordance with the said provisions. In that view of the matter, we decide this issue in favour of the assessee and allow ground No. 1 & 2 of the assessee's appeals for A.Y. 2005-06 and 2006-07 and ground No. 3 & 4 of its appeals for A.Y. 2007-08 & 2008-09.

26. In the result, appeals of the assessee are allowed and revenue's appeals are dismissed.

Order pronounced on 29-10-2010. .

(2011) 37 (II) ITCL 132 (Mum `F'-Trib)

In the ITAT, Mumbai `F' Bench

Vinod K. Nevatia v. Asst. CIT & Vice Versa

S.V. Mehrotra, A.M. & Vijay Pal Rao, J.M.

ITA No. 6556 (Mum) of 2009 & ITA No. 181 of 2010
q 3 December, 2010 q A.Y. 2005-06

I

Income Tax Act, 1961, Ss. 40(a)(ia) & 194J

No tax was deductible under section 194J in respect of transaction charges paid to National Stock Exchange by assessee share broker.

Tax deduction at source—Under section 194J—Payment of transactions charges to NSE—Assessee being a share broker

The assessee was a member of the NSE and proprietor of GT. In the relevant assessment year the assessee was engaged in the business of share trading and securities. He filed his return of income declaring total income of Rs. 2,12,77,512. The AO determined the total income at Rs. 2,24,50,205 inter alia, making the disallowance in respect of transaction charges paid to the NSE. The AO noticed that these charges were payable to stock exchange on account of services provided by it with regard to the transactions in securities through the exchange. He observed that as per the provisions of section 40(a)(ia) no deduction is to be allowed unless tax has been deducted at source from the payments made for technical services as per the provisions contained under Chapter-XVII-B of the Act. He examined the nature of services rendered by the NSE and concluded that they were in the nature of technical services rendered by the Stock Exchange and therefore, tax was deductible under section 194J of the Act. He, therefore, disallowed the assessee's claim of Rs.2,21,755. Held: Transaction fees paid to the stock exchange could not be said to be a fees paid in consideration of stock exchange rendering any technical service to the assessee. The provisions of section 9(1)(vii) Explanation 2, were, therefore, not attraced. Therefore, there was no obligation on the part of the assessee to deduct tax at source. Consequently, the provisions of section 40(a)(ia) were also not attracted and, therefore the disallowance made was to be deleted.

Followed: Kotak Securities Ltd. v. Addl. CIT (2009) 318 ITR (AT) 268 (Mum-Trib) : (2008) 25 SOT 440 (Mum-Trib).

Decision: In assessee's favour.

II

Income Tax Act, 1961, S. 14

Where the assessee was maintaining two portfolios viz., investment portfolio and trading portfolio then the gain arising from sale of shares out of investment portfolio will give rise to capital gain and not business income.

Head of income—Business income or capital gains—Income from purchase and sale of shares

The assessee in the relevant assessment year carried on the business as share broker of National Stock Exchange and carried on the business in the name and style of GT . The AO noticed that assessee had returned short term capital gains of Rs. 47,23,8928. He noted that the assessee had purchased shares during the year amounting to Rs. 4.21 crore. He noted that in the immediately preceding year the assessee had purchased shares of Rs.3.49 crores and sold shares worth 1.81 crores. Thus, he concluded that the purchase to sale ratio during the year was considerably higher than the ratio during the immediately preceding year. He pointed out that the assessee had not been able to show his intent to hold on the scrips. He accordingly, treated the sum of Rs. 47,23,828 as business income of the assessee. Before the CIT(A) the conclusion of AO was assailed firstly on the ground that in most of the scrips held in the field of the investment activity, the period of holding by the assessee had been several months and years and not few days only as concluded by the AO. It was pointed out that investment transactions of the assessee where shares of a particular company were sold within a few days from purchase were very few and far between. Secondly, it was pointed out that the assessee had been maintaining separate demat accounts of investment shares and only the shares where the intention is an investment were taken into investment demat account. Thus, there was clear demarcation of investments. Thirdly the assessee had offered long term capital gains on sale of shares aggregating to Rs.2,37,29,464 which had been accepted by the AO. Fourthly, from the perusal of analysis of period of holding of scrips yielding short term capital gains, it would be clear that the assessee had dealt only in 14 scrips. Out of the total STCG of Rs. 4,723,827 short term capital gains amounting to Rs.3,582,813 had arisen from the transactions where the holding period was more than six months. CIT(A) allowed the assessee's appeal taking note of the fact that assessee had maintained separate portfolio of scrips as stock in trade or investments by maintaining separate demat account for both. He also took into consideration the fact that share trading pertaining to stock in trade had been declared by the assessee as business income and the AO had accepted the assessee's claim with respect to long term capital gain of Rs. 2,37,29,463. Held: In the CBDT Circular No. 4/2007 dated 15-6-2007, the CBDT has emphasized that it is possible for a tax payer to have two portfolios, i.e. an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in trade which are to be treated as trading assets. Further, the AO has accepted the assessee's claim of LTCG to the extent of Rs. 2 crore which implies that he has accepted the assessee's claim regarding holding investment portfolio. In view of the above discussion there was no reason to interfere with the order of the CIT(A).

Held: It is not disputed that the assessee had maintained separate books of account as well as separate demant accounts in respect of its trading activity and for making investment in shares. The Supreme Court in the case of Raja Bahadur Visheshwar Singh v. CIT (1961) 41 ITR 685 (SC), inter alia, observed that the manner in which the books had been maintained is an important piece of evidence for arriving at proper conclusion in such circumstances. It all depends on facts and circumstances of each case whether the assessee's conduct was directed towards realizing its investment or change in investment or the act was done which truly could be branded as carrying on the business. No single fact can be said to be decisive factor under such circumstances. No acid test has been laid down in any of the judgments referred to by the AO. In all cases only certain principles have been laid down having regard to the peculiar facts obtaining in the said cases. Primarily, it is the intention with which an assessee starts its activity which is the most important factor which has to be considered keeping in view the adjoining circumstances. If the assessee purchases the shares from its own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of share over a period then merely because the assessee liquidates its investment within six months or eight months would not lead to the conclusion that the assessee had no intension to keep the funds as invested in equity shares but was actually intended to trade in shares. Mere intention to liquidate the investment at higher value does not imply that the intention was only to trade in security. However, it cannot be held that in all circumstances if assessee has used its own funds for share activity then it would only lead to inference of investment being the sole intention. In such circumstances, frequency of transactions will have to be considered to arrive at proper conclusion regarding the true intention of the assessee. However, if the assessee, on the other hand, borrows funds for making investment in shares then definitely it is a very important indicator of its intention to trade in shares. In the present case, the AO merely proceeded on the assumption that borrowed funds had been utilized for buying shares on the ground that funds were common and could not be segregated. Before the CIT(A) it was categorically pointed out that no part of the assessee's interest bearing funds were utilized for acquisition of shares on investment account. This plea has been accepted by the CIT(A) and the department has not brought on record anything to controvert the same. Further, in the CBDT Circular No. 4/2007 dated 15-6-2007, the CBDT has emphasized that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in trade which are to be treated as trading assets. Further, the AO has accepted the assessee's claim of LTCG to the extent of Rs. 2 crore which implies that he has accepted the assessee's claim regarding holding investment portfolio. In view of the above discussion there is no reason to interfere with the order of the CIT(A). [Para 11]

Distinguished: Gopal Purohit v. JCIT (2009) 29 (II) ITCL 284 (Mum-Trib). Applied: Raja Bahadur Visheshwar Singh v. CIT (1961) 41 ITR 685 (SC).

Decision: In assessee's favour.

III

Income Tax Act, 1961, S. 14A

Where the assessee claimed that he has not incurred any expenditure to earn exempt income and the AO has not examined the claim of the assessee and made the disallowance, the matter restored to the file of the AO.

Disallowance under section 14A—Expenditure against exempt income—No expenditure incurred to earn exempt income

The assessee during the year under consideration had received a dividend of Rs.35,53,986 and Rs.2,29,77,048 from long term capital gains. The AO observed that no deduction was allowable in respect of expenditure incurred by the assessee in relation to the income which did not form part of total income under the Act. After considering the assessee's submissions and case laws on the issue, he treated 10% of the total expenses as being incurred by the assessee towards earning of dividend income and made the disallowance accordingly. Before the CIT(A), the assessee had taken the ground that it had not incurred any expenditure to earn the dividend income and therefore, the disallowance to the extent of Rs.4,69,413 was not warranted as the same was attributable to its brokerage business income only. The CIT(A) following the decision of the Tribunal. Special Bench in the case of Daga Capital Management (P) Ltd. () 117 ITD 169, restored the matter to the AO for computing the disallowance in accordance with rule 8D. Held: Rule 8D was not applicable for the assessment year 2005-06 and, therefore, the directions of the CIT(A) were not sustainable. The assessee's plea that it had not incurred any expenditure for earning the dividend income had not been considered by the CIT(A) and, therefore, this issue restored to the file of the AO for deciding the same denovo after considering the assessee's submissions.

Decision: Matter remitted.

Counsel: Shri S.C.Tiwari, for the Appellant q Shri P. Peerya, for the Respondent

ORDER

These cross appeals by the assessee and the revenue are directed against the impugned order dated 21-10-2009, passed by the learned Commissioner of Income-tax (Appeals)-VIII, Mumbai, for the assessment year 2005-06.

ITA No.181/Mum/2010 (Revenue's appeal)

2. The grounds taken by the revenue read as under:

1 (i) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the disallowance of VSAT, Leaseline and Transaction charges of Rs. 2,21,755/- under section 40(a)(ia) without appreciating the facts that these were composite charges for professional and technical services rendered by the stock exchange to its members and the assessee has failed to deduct TDs thereon.

(ii) On the facts and in the circumstances of the case and in law the the Ld. Commissioner (Appeals) erred in ignoring the fact that these services are essential in nature as they can only be availed by members of Stock Exchange. (iii) On the facts and in the circumstances of the case and in law the Ld. Commissioner (Appeals) erred in ignoring the facts that use of technology and algorithmic based programs have converted an erstwhile physical market into a digitally operated market.

(iv) On the facts and in the circumstances of the case and in law, the Ld. Commissioner (Appeals) erred in ignoring the fact that the services rendered by the brokers are not standard services that has been developed to cater to the needs of the broker community to facilitate trading.

(v) On the facts and in the circumstances of the case and in law the Ld.Commissioner (Appeals) has overlooked the fact that the brokers have in subsequent years themselves started deducting the TDS on such payments and there is no reason to vive a different treatment in this year.

2. On the facts and in the circumstances of the case and in law the Ld.Commissioner (Appeals) erred in treating Rs.47,23,828/- as Capital Gain as againstbusiness income treated by the assessing officer since the assessee is trader and notinvestor without appreciating multiplicity of transactions.

3. The assessee, an individual, a Member of the National Stock Exchange and proprietor of M/s. Gaurav Trading Company, in the relevant assessment year was engaged in the business of share trading and securities. He filed his return of income declaring total income of Rs. 2,12,77,512/-. The assessing officer determined the total income at Rs. 2,24,50,205/-, inter alia, making the following disallowances: (a) Disallowance under section 40(a)(ia) on account of VSAT charges

Paid to National Stock Exchange

(i)
Leaseline charges
Rs.
67,828

(ii)
Transaction charges
Rs.
57,927

(b)
Disallowance u/s.14A
Rs.
4,69,413

(c)
Treating Income by way of capital gains as business income
Rs.
47,23,828


The assessing officer noticed that these charges are payable to Stock Exchange on account of services provided by it with regard to the transactions in securities through the Exchange. He observed that as per the provisions of section 40(a)(ia) no deduction is to be allowed unless tax has been deducted at source from the payments made for technical services as per the provisions contained under Chapter-XVII-B of the Act. He examined the nature of services rendered by the Stock Exchange and concluded that they were in the nature of technical services rendered by the Stock Exchange and therefore, tax was deductible under section 194 of the Act. He, therefore, disallowed the assessee's claim of Rs.2,21,755/-. The learned Commissioner (Appeals) deleted the addition by following the decision of the I.T.A.T Mumbai in ITA No.1955/Mum/2008 for the assessment year 2005-06 in the case of Kotak Securities Pvt. Ltd., vide order dated 26th August, 2008, (2009) 318 ITR (AT) 268 (Mum-Trib) : (2008) 25 SOT 440 (Mum-Trib) wherein it has been held that Stock Exchange does not provide managerial services and the fees paid by a member to the Stock Exchange is not for any technical services and therefore, no TDS was deductible from the assessee.

4. Having heard both the parties, we find no reason to interfere with the order of the Commissioner (Appeals) in view of the decision of the I.T.A.T in the case of Kotak Securities Ltd. v. Addl.CIT (2009) 318 ITR (AT) 268 (Mum-Trib) : (2008) 25 SOT 440 (Mum-Trib) wherein it has been held that "transaction fees paid to the stock exchange could not be said to be a fees paid in consideration of stock exchange rendering any technical services to the assessee. The provisions of section 9(1)(vii) Explanation 2, were, therefore, not attracted. Therefore, there was no obligation on the part of the assessee to deduct tax at source. Consequently, the provisions of section 40(a)(ia) were also not attracted and therefore the disallowance made was deleted". In view of the above decision of the Tribunal, we decide this issue in favour of the assessee and against the revenue.

5. The second ground is that the learned Commissioner (Appeals) erred in treating Rs.47,23,828/- as capital gains as against business income treated by the assessing officer as the assessee is a trader. Brief facts apropos the issue are that the assessee in the relevant assessment year carried on the business as share broker of National Stock Exchange and carried on the business in the name and style of M/s. Gaurav Trading Co. The assessing officer noticed that assessee had returned short term capital gains of Rs. 47,23,8928/-. He noted that the assessee had purchased shares during the year amounting to Rs. 4.21 crore. He noted that in the immediately preceding year the assessee had purchased shares of Rs.3.49 crores and sold shares worth 1.81 crores. Thus, he concluded that the purchase to sale ratio during the year was considerably higher than the ratio during the immediately preceding year. He further noted that during the year assessee had borrowed funds. He examined in detail various case laws laying down principles to decide whether an individual is trader or investor in shares and examined the facts qua these principles. He noted that the assessee's contention was that the funds were borrowed for conducting the business on National Stock Exchange. However, since the funds were common and could not be segregated as no evidence had been adduced with regard to the fact that the interest free funds were used to fund investments in shares, he concluded that borrowed funds were utilized for making investment in shares. He noted that the total loan taken during the year was to the extent of Rs.21,73,31,027/. He, therefore, concluded that the recordings made in the books of account were camouflaging devices to hide the real intent. He pointed out that the assessee had not been able to show his intent to hold on the scrips. He summed his finding in para 7.4 at page 13 as under:

(i) The assessee is a broker and a trader as per the audit report. The transactions in shares have been done in the ordinary course of assessee's business. The decision of Hon'ble Supreme Court in the case of CT v. Sutlej Cotton Mills (100 ITR 706) is squarely applicable to the facts of the case wherein the court has held – "If the transaction is in the ordinary course of assessee's business there can be little difficulty in holding that it is in the nature of trade".

(ii) Secondly it is a well settled principle of law that even a single transaction can be in the nature of trad. In our case the assessee has undertaken numerous transactions. In view of the multiplicity of transactions the assessee is treated as a trader. Reliance is placed on the decision of Hon'ble apex court in the case of Associated Industrial Development Co.(P) Ltd. (82 ITR 586)

(iii) Further the benchmarks of distinction between a trader and a investor as put forth by the royal commission in its report are clearly applicable on the assessee:

(A) The assessee deals in commodities or shares which are a subject matter of trading and are very exceptionally a subject matter of investment especially in case where trading in shares is the predominant source of income.

(B) As laid down by Royal Commission, usually profits on such a property are realized in short period of time. This is true in the case of assessee as already discussed above.

(C) Further there is no discernible reason of purchase and sale. That is the assessee acquired share to have substantial stakes in the company or sold them because he was in dire need of money. No such reason exists. The sale and purchase has been determined by the volatility at the markets, which is against the basic feature of an investor who is recognized by the discipline he displays in the market and is not easily swayed by the movements of the market.

(D) Finally the frequency and continuity in the nature of similar transactions is definitely indicative of his intent i.e. to trade.

(iv) Further during the assessment proceedings in the A.Y. 2004-05 the income from short term capital gain was treated as business income and the assessee has not preferred an appeal against the decision.

He, accordingly, treated the sum of Rs. 47,23,828/- as business income of the assessee.

6. Before the learned Commissioner (Appeals) the conclusion of assessing officer was assailed firstly on the ground that in most of the scrips held in the field of the investment activity, the period of holding by the assessee had been several months and years and not few days only as concluded by the assessing officer It was pointed out that investment transactions of the assessee where shares of a particular company were sold within a few days from purchase were very few and far between. Secondly, it was pointed out that the assessee had been maintaining separate demat accounts of investment shares and only the shares where the intention is an investment are taken into investment demat account. Thus, there is clear demarcation of investments. Thirdly the assessee had offered long term capital gains on sale of shares aggregating to Rs.2,37,29,464/- which has been accepted by the assessing officer Fourthly, from the perusal of analysis of period of holding of scrips yielding short term capital gains, it would be clear that the assessee had dealt only in 14 scrips. Out of the total STCG of Rs. 4,723,827 short term capital gains amounting to Rs.3,582,813/- had arisen from the transactions where the holding period was more than six months. Lastly, no part of the assessee's interest bearing borrowings was utilized for acquisition of shares on investment account. The learned Commissioner (Appeals) allowed the assessee's appeal taking note of the fact that assessee had maintained separate portfolio of scrips as stock in trade or investments by maintaining separate demat account for both. He also took into consideration the fact that share trading pertaining to stock in trade has been declared by the assessee as business income and the assessing officer had accepted the assessee's claim with respect to long term capital gain of Rs. 2,37,29,463/-.

7. The learned departmental Representative referred to the assessment order and pointed out that h has discussed in detail the guiding principles laid down in various laws for deciding whether the assessee has been doing business of trading in share or was holding the same as investment. He pointed out that assessee had not furnished any evidence before the assessing officer to establish that the borrowings made by it were only for business purposes and no borrowed funds were utilized for making the alleged investments in shares. He pointed out that in various case laws it has been laid down that multiplicity of transaction is an important factor for deciding whether the assessee was carrying on business or not. In this regard he referred to the decision of the Supreme Court in the case of Raja Bahadur Visheshwar Sing v. CIT (1961) 41 ITR 685 (SC), wherein it has been held that magnitude and frequency of transactions and the ratio of sales to purchases is an important factor for deciding whether the assessee was dealer in shares and security or not. Learned DR relied on various case laws referred to by the assessing officer in para 7.1 of his order.

8. Learned counsel for the assessee submitted that the assessing officer has relied only on two factors viz. frequency of transaction and borrowing made by the assessee. He pointed out that the assessee is primarily carrying on three activities which areas under:

(1) Regular brokerage business;

(2) Trading in shares and

(3) Investor in shares.

He pointed out that for all these three activities assessee has maintained separate books of account. Further he submitted that the assessing officer has not pointed out even a single instance regarding borrowed funds being used for investing in shares. He further pointed out that assessing officer has not considered the position of opening stock and closing stock.

9. The learned counsel for the assessee referred to CBDT's Circular No. 4/2007 dated 15-6-2007 wherein it has been, inter alia, observed as under:

"4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 dated 31-8-1989 had brought to the notice of the assessing officers that there is a distinction between shares held as investment (capital asset) and shares held as stock-in-trade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessee as well as for guidance of the assessing officers.

5. In the case of CIT (Central), Calcutta v. Associated Industrial Development Company (P) Ltd. (82 ITR 586), the supreme court observed that :

"Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.

6. In the case of CIT, Bombay v. H. Holck Larsen (160 ITR 67), the Supreme Court observed:

The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the name of investment was a question of law. This was a mixed question of law and fact.

"7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the assessing Officers."

"10. CBDT also wishes to emphasise that it is possible for a tax payer to have two portfolios, i.e. an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income."

With reference to above circular the learned counsel pointed out that the assessee has maintained separate demat account for its trading transactions vis-à-vis investment made in shares. He further submitted that the assessing officer has accepted long term capital gain which was more than Rs. 2 crores. He submitted that whereas a trader looks at margin of profit, the investor looks in realizing its investment in order to ensure that it does not looses its capital. He pointed out that in the case of trading transaction turnover is more and that is not so in the case of investment. He pointed out that in the present case, bulk of shares were sold after six months, number of scrips were only 14 in which assessee had made investments and, therefore, the learned Commissioner (Appeals) rightly accepted the assessee's contention. He submitted that the decision of the I.T.A.T in the case of Gopal Purohit v. JCIT, ITA No.4854/Mum/2008, for the assessment year 2005-06 dated 10-2-2009 [reported in (2009) 29 (II) ITCL 284 (Mum-Trib)] has been confirmed by the Hon'ble Bombay High Court wherein also the assessee's claim of short term capital gains was accepted by Tribunal.

10. We have considered the rival submissions and have perused the records of the case. Before we consider the merits of the case, we may first deal with the reliance placed by the Ld. Counsel on the decision in the case of Gopal Purohit v. JCIT (surpa). In this case the facts as fund by the Tribunal were that assessee was engaged in the activity of sale and purchase of shares for quite long time. It was also noted that non-delivery based transaction had been treated by the assessee as business activity and delivery based transaction had been treated as an investment activity and accordingly, the assessee had claimed himself both dealer as well as investor and had offered income for taxation accordingly. However, in the present case, the facts are entirely different, inasmuch as, even in respect of shares where delivery had been taken, the assessee had returned the income both under the head business income as well as capital gains. Therefore, the case of Gopal Purohit (supra) is clearly distinguishable on facts.

11. Now coming to the facts of the case, it is not disputed that the assessee had maintained separate books of account as well as separate demant accounts in respect of its trading activity and for making investment in shares. The Hon'ble Supreme Court in the case of raja Bahadur visheshwar Singh v. CIT (1961) 41 ITR 685 (SC), inter alia, observed that the manner in which the books had been maintained is an important piece of evidence for arriving at proper conclusion in such circumstances. It all depends on facts and circumstances of each case whether the assessee's conduct was directed towards realizing its investment or change in investment or the act was done which truly could be branded as carrying on the business. No single fact can be said to be decisive factor under such circumstances. No acid test has been laid down in any of the judgments referred to by the assessing officer in all cases only certain principles have been laid down having regard to the peculiar facts obtaining in the said cases. Primarily, it is the intention with which an assessee starts its activity which is the most important factor which has to be considered keeping in view the adjoining circumstances. If the assessee purchases the shares from its own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of share over a period then merely because the assessee liquidates its investment within six months or eight months would not lead to the conclusion that the assessee had no intension to keep the funds as invested in equity shares but was actually intended to trade in shares. Mere intention to liquidate the investment at higher value does not imply that the intention was only to trade in security. However, it cannot be held that in all circumstances if assessee has used its own funds for share activity then it would only lead to inference of investment being the sole intention. In such circumstances, frequency of transactions will have to be considered to arrive at proper conclusion regarding the true intention of the assessee. However, if the assessee, on the other hand, borrows funds for making investment in shares then definitely it is a very important indicator of its intention to trade in shares. In the present case, we find that the assessing officer merely proceeded on the assumption that borrowed funds had been utilized for buying shares on the ground that funds were common and could not be segregated. Before the Commissioner (Appeals) it was categorically pointed out that no part of the assessee's interest bearing funds were utilized for acquisition of shares on investment account. This plea has been accepted by the Commissioner (Appeals) and the department has not brought on record anything to controvert the same. Further, in the CBDT Circular No. 4/2007 dated 15-6-2007, the CBDT has emphasized that it is possible for a tax payer to have two portfolios, i.e. an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in trade which are to be treated as trading assets. Further, the assessing officer has accepted the assessee's claim of LTCG to the extent of Rs. 2 crore which implies that he has accepted the assessee's claim regarding holding investment portfolio. In view of the above discussion we do not find any reason to interfere with the order of the Commissioner (Appeals). Accordingly, we confirm the order of the Commissioner (Appeals). ITA No. 6556/Mum/2009-(Assessee's appeal)

12. The only effective ground of appeal raised by the assessee is in respect of direction of the assessing officer to recompute the disallowance under section 14A in accordance with rule 8D of the I.T. Rules. Brief facts apropos this issue are that the assessee during the year under consideration had received a dividend of Rs.35,53,986/- and Rs.2,29,77,048/- from long term capital gains. The assessing officer observed that no deduction was allowable in respect of expenditure incurred by the assessee in relation to the income which did not form part of total income under the Act. After considering the assessee's submissions and case laws on the issue, he treated 10% of the total expenses as being incurred by the assessee towards earning of dividend income and made the disallowance accordingly.

13. Before the learned Commissioner (Appeals), the assessee had taken the ground that the assessee had not incurred any expenditure to earn the dividend income and therefore, the disallowance to the extent of Rs.4,69,413/- was not warranted as the same was attributable to its brokerage business income only. The learned Commissioner (Appeals) following the decision of the I.T.A.T. Special Bench in the case of Daga Capital Management Pvt. Ltd. (117 ITD 169), restored the matter to the assessing officer for computing the disallowance in accordance with rule 8D.

14. Having heard both the parties, we find that the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. DCIT (2010) 194 Taxman 203 (Bom) has reversed the findings of the Special Bench of the Tribunal in holding that rule 8D is retrospective. Therefore, rule 8D was not applicable for the assessment year 2005-06 and, therefore, the directions of the Commissioner (Appeals) are not sustainable. The assessee's plea that it had not incurred any expenditure for earning the dividend income has not been considered by the learned Commissioner (Appeals) and, therefore, as agreed by both the parties, we restore this issue to the file of the assessing officer for deciding the same de novo after considering the assessee's submissions.

15. In the result, the revenue's appeal is dismissed while the appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on this 3-12-2010. .

(2011) 37 (II) ITCL 142 (Kol `B'-Trib)

In the ITAT, Kolkata `B' Bench

Kavita Chug v. ITO

D.K. Tyagi, J.M. & K.K. Gupta, A.M.

ITA No. 253 (Kol) of 2010 q 16 July, 2010 q A.Y. 2006-07

Income Tax Act, 1961, S. 194C

Where assessee was a transporter and arranged trucks from their owners but not under a contract then no tax was deductible under section 194C on freight payment made to truck owners.

Tax deduction at source—Under section 194C—Payment of freight charges to truck owners but not under a contract

The assessee was engaged in the business of transport business carrying commodities to various places belonging to business houses. It did not own any truck of its own and requisitions were made on daily basis from market of the available truck owners for transportation of goods to the various destinations. The assessee never passed its responsibility as a contractor to the truck owners who only acted in having delivered the goods at the instance of the assessee at necessary destinations. AO observed that the assessee in its P&L a/c had claimed lorry freight paid amounting to Rs. 2,06,42,880. During the assessment proceedings, it were stated that the trucks were arranged by the assessee on day-to-day basis as per requirement and particulars of transactions were recorded against truck registration number. No tax at source was deducted. On requisition, assessee filed the list of lorry freight paid indicating the names of the truck owners, lorry numbers, date of payment and payment made to such vehicles. AO on the basis of the information picked up 83 trucks to whom payments were made aggregating to more than Rs. 50,000 each in the impugned assessment year. The total of such payments came to Rs. 61,63,280. AO observed that the assessee's case was covered under sub-section (2) of section 194C wherein obligation is cast on the assessee to deduct TDS @ 1 per cent from the payment as made to a sub-contractor. Held: The assessee was a transport contractor having itself executed whole of the contract for transportation of goods by hiring lorries from its owners, it could not be said that the payments made for hiring of vehicles fell in the categories of sub-contractor. Therefore, the assessee was not liable to deduct tax at source as per provision of section 194C for the payments made to the lorry owners in the impugned assessment year. When the freight charges were paid directly by the assessee to the truck owners, there was no oral or written contract between the assessee and the transporters, no tax at source was to be deducted on the freight charges paid to the truck owners

Followed: Rakshit Transport v. Asstt. CIT (Decided by the Kolkata Bench on 11-9-2009) and Mythri Transport Corporation v. Asstt. CIT (2009) 30 (II) ITCL 392 (Visaka-Trib) : (2010) 1 ITR (AT) 290 (Visaka-Trib). Applied: CIT v. United Rice Land Ltd. (2008) 22 (I) ITCL 449 (P&H-HC) : (2010) 322 ITR 594 (P&H), National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) and Shree Choudhary Transport Co. v. ITO (2010) 32 (II) ITCL 601 (Jd-Trib).

Decision: In assessee's favour.

Counsel: S.K. Tulsiyan, for the Appellant q P. Kolhe, for the Respondent

ORDER

The assessee is in appeal agitating the order of the learned Commissioner (Appeals) observing that the assessee had not furnished Form No. 15-1 before the assessing officer as claimed, without any basis, when copies of such forms were duly placed before the learned Commissioner (Appeals) also. The assessee agitates that on the facts and circumstances of the case, learned Commissioner (Appeals) erred in holding on the claim of the assessee that she had furnished Form 15J with required details before the CIT (TDS), Kolkata had not been found to be genuine, overlooking the fact that the assessee held the acknowledgement receipt in support of having filed such forms with the relevant authorities. Therefore, on the facts and circumstances of the case, learned Commissioner (Appeals) erred in confirming the disallowance of Rs. 61,63,280 under the provision of section 40(a)(ia) of the Income Tax Act, 1961.

2. The learned counsel for the assessee has submitted an additional ground which reads as under :

"Without prejudice to grounds already taken, the learned assessing officer and Commissioner (Appeals) failed to appreciate that payment to the truck owners by the appellant was not made under any sub-contract requiring deduction of tax at source under section 194C of the Income Tax Act, 1961 resulting in disallowance under section 40(a)(ia) of the Income Tax Act, 1961."

3. The learned counsel initiating the argument reiterated the brief facts which were pertinent to filing of the appeal as well as the additional ground raised before the Tribunal.

4. He submitted that the assessee is engaged in the business of transport business carrying commodities to various places belonging to business houses. It does not own any truck of its own and requisitions are made on daily basis from market of the available truck owners for transportation of goods to the various destinations. The assessee never passed its responsibility as a contractor to the truck owners who only acted in having delivered the goods at the instance of the assessee at necessary destinations. He pursued the order of the assessing officer who had observed that the assessee in its P&L a/c had claimed lorry freight paid amounting to Rs. 2,06,42,880. During the assessment proceedings, it was stated that the trucks are arranged by the assessee on day-to-day basis as per requirement and particulars of transactions are recorded against truck registration number. He pointed out that it was submitted to the assessing officer that no tax at source was deducted. On requisition, assessee filed the list of lorry freight paid indicating the names of the truck owners, lorry numbers, date of payment and payment made to such vehicles. The assessing officer on the basis of the information picked up 83 trucks to whom payments were made aggregating to more than Rs. 50,000 each in the impugned assessment year. The total of such payments came to Rs. 61,63,280. He observed that the assessee's case was covered under sub-section (2) of section 194C wherein obligation is cast on the assessee to deduct TDS @ 1 per cent from the payment as made to a sub-contractor. He also noted Expln. (Ill) to section 194C brings the carriage of goods "work" under the ambit of sub-contract under which tax was to be deducted at source. He also stated that the provision of sub-section (3) of section 194C stipulates that TDS has to be deducted where the same is paid or is likely to be paid exceeding Rs. 50,000 during the financial year. After inviting the compliance of the said proviso, on the basis of furnishing of Forms 15-1 and 15J, assessing officer thought it fit that as the assessee had not deducted tax at source was to be considered for disallowance under the provisions of section 40(a)(ia).

5. Aggrieved the assessee appealed before the learned Commissioner (Appeals) and submitted that however, as the assessee was not required to deduct tax from the payment made to the owner of the lorries in terms of second proviso to sub-section 194C(3), the assessing officer was of the view that the assessee had not complied with the provisions and in fact, the evidence of having filed Form 15J and Form 15-1 available to the assessee was evident by filing the same Form 15J before the CIT (TDS) on 29-6-2006. The learned Commissioner (Appeals) on his own considered that this acknowledgement could be a fabrication and therefore, the assessee had not furnished Form 15J before the CIT (TDS) as claimed. In view of the fact that the receiving authority in the office of the assessing officer should have also correspondingly acknowledged the same which did not appear on his verification of the Dak register etc. by him, held filing of Form 15J as non-genuine, learned Commissioner (Appeals) adjudicated against the assessee as prime reason for upholding assessing officer's view which necessitates filing of this additional ground before the Tribunal.

6. He pointed out, as may be pursued, that it was not the assessing officer nor learned Commissioner (Appeals)'s case that the truck owners who had been utilized for transportation of goods by the assessee had undertaken to bear all the consequences arising from the contract prima facte as there was no contract between the truck owners and the assessee so far as the hiring of trucks for transporting goods was for the assessee on the basis of the business houses who had directly approached the assessee for transporting their goods. This clearly indicates that the tax to be deducted at source and payment to truck owners were never a part of any sub-contract. He pointed out that his case is squarely covered on the facts that were considered by the Tribunal "A" Bench, Kolkata in the case of Rakshit Transport v. Asstt. CIT delivered on 11-9-2009, copy of which is being furnished. In another decision of the Tribunal, Visakhapatnam Bench in the case of Mythri Transport Corporation v. Asstt. CIT (2009) 30 (II) ITCL 392 (Visaka-Trib) : (2010) 1 ITR (AT) 290 (Visaka-Trib), which copy is also being furnished indicates the characteristics of the sub-contractor to be spelt out clearly. In that particular case, the assessee had also hired the trucks from other truck owners. The individual vehicle owners were hired for their vehicles and that they were entitled to file Form 15-1 which in turn, would have been submitted to the CIT (TDS) in Form No. 15J. In the decision, the Tribunal held that sharing the liability of the contract was an essential requirement of the sub-contractorship. There was no material to suggest that the other lorry owners involved in carrying out any part of the work undertaken by the assessee by spending their time, energy and by taking the risk associated with the main contract work. Thus, according to the Tribunal, sub-contract would require stepping in the shoes of the main contractor and involving himself in execution of the main contract by even undertaking the risk involved in the main contract work. Coming to the case of the assessee, on the facts before the Tribunal, learned counsel submitted that the truck owners, whose trucks the assessee took on hire, from time to time, only hired out their trucks and even if there might have been some contracts between them and the assessee, they could, by no means, be considered as subcontractors in respect of the contract work undertaken by the assessee. They did not have to face the main contractee involved in the main contract work. Hence, if at all the provisions of section 194C are applied in assessee's case, it would be only section 194C(1) relating to the liability for payment made to the contractors and not section 194C(2) relating to payments made to sub-contractors. Prior to the amendment of sub-section 194C(1) by the Finance Act, 2007 with effect from 1-6-2007, an individual was not required under that sub-section to deduct tax at source in respect of payments made to the sub-contractor. The assessee's case, therefore, would be out of the ambit for the impugned assessment year in view of the fact that the truck owners cannot be subjected to tax as sub-contractors which exercise had been undertaken by the assessee. He, therefore, submitted that on the facts and circumstances of the assessee's case and on the basis of facts considered in the case of Rakshit Transport (supra) decided by the "A" Bench, Kolkata referred to above, section 194C(2) is not applicable as there was no contract between the assessee and the individual truck owners, the invocation of provision of section 40(a)(ia) is to be decided on the scope and ambit of such enactment. In the case of the assessee also, assessing officer has simply observed that the very fact that the assessee is a transport contractor and is engaging other transporters for carrying out the transport work means that there is a sub-contract for transportation of goods which need not be a written contract. He prayed that the learned Commissioner (Appeals), therefore, erred in confirming the disallowance of Rs. 61,63,280 under the provisions of section 40(a)(ia) which may be directed to be deleted.

7. The learned departmental Representative opposed the contention of the learned counsel in view of his seeking indulgence by the Bench to admit additional ground. He pointed out that in the paper book itself assessee had given the details of lorry freight paid during the year on the specific requisition by the assessing officer and the name of the party, lorry number and the date and amount paid has been given. The assessing officer proceeded to bring out the details of 83 vehicles who had been paid more than Rs. 50,000 during the financial year. Therefore, the assessee was directly covered by the provision of section 194C(2) which prompted the assessing officer for assessee's indulgence in compliance to provisions of section 194C(3). The learned Commissioner (Appeals) also considered that the assessee had also obtained Forms 15-1 and 15J and did not find the same available with the appropriate authority. Therefore, now the assessee cannot absolve himself for non-deduction of tax at source. In the bulky paper book, the assessee's learned counsel has filed various documents and Form Nos. 15J and 15-1 but had not filed before the appropriate authority. Form No. 15J at paper book p. 3.2 of the amount paid totalling Rs. 62,12,280,00, is approximately the figure on which the assessing officer has disallowed under section 40(a)(ia). He, therefore submitted that the order of the learned Commissioner (Appeals) be upheld.

8. We have considered the rival submissions and perused the material available on record. On careful consideration of the facts and circumstances and the additional ground raised before the Tribunal which is legally justified in any case does not dilute the proceeding on material as already considered by the assessing officer and the learned Commissioner (Appeals). In fact, on the basis of the assessee's repeatedly claiming that it is not covered by the provisions of section 194C(2) was negated by the assessing officer but to be considered under sub-section (3) when the exercise of obtaining Form 15-1 from the truck owners entitling them for non-deduction was to be considered and submitted to the CIT (TDS) in Form 15J which as per acknowledgement is placed at paper book pp. 3.7 was filed on 29-6-2006. The learned counsel before us has explained that the handling in the department of securing the bulky document might have been misplaced could not be held against the assessee. However, on the basis of the relevant facts and the case law cited at the Bar and also on our verification of facts only lead us to hold the view that the facts of the assessee's case are squarely applicable on the cited decision. We are of the considered view that the learned Commissioner (Appeals) ought to have considered the appeal's adjudication on the facts as enumerated by the assessing officer. The very requesting forms were incorporated by the assessing officer, therefore, clinches the issue in favour of the assessee, the assessee was not to be assessed as a sub-contractor. The truck owners in their relevant certification on Form No. 15-I declared for non-deduction of tax at source for not owning more than two heavy goods carriage trucks during the financial year. Fortified with these forms, the assessee was able to furnish Form No. 15J under the third proviso to clause (i) of sub-section (3) of section 194C for the assessment year 2006-07. As per certificate from the office of CIT(TDS), Kolkata, dated 23-4-2009, acknowledging submission of Form 15J to his office on 29-6-2006 vide receipt No. 2139, this procedure would have settled the issue in his favour. In our considered view, however, the case of the assessee stands fully covered by the decision of Tribunal, "A" Bench, Kolkata in the case of Rakshit Transport (supra) for the assessment year 2005-06, as per copy available on record coupled with the identical issue considered by the Tribunal, Visakhapatnam Bench in the case of Mythri Transport Corporation (supra) which is also placed on record. The submission of the learned counsel that the assessee is a transport contractor having itself executed whole of the contract for transportation of goods by hiring lorries from its owners, it cannot be said that the payments made for hiring of vehicles fall in the categories of sub-contractor. Therefore, the assessee was not liable to deduct tax at source as per provision of section 194C for the payments made to the lorry owners in the impugned assessment year. The learned counsel further relied on the decision of Punjab & Haryana High Court wherein it was held that when the freight charges are paid directly by the assessee to the truck owners, there was no oral or written contract between the assessee and the transporters, no tax at source was to be deducted on the freight charges paid to the truck owners (Hon'ble Punjab & Haryana High Court in the case of CIT v. United Rice Land Ltd. (2008) 22 (I) ITCL 449 (P&H-HC) : (2010) 322 ITR 594 (P&H) : (2008) 174 Taxman 286 (P&H) which copy is also placed on record). The learned departmental Representative could not relate the basis on which otherwise could be considered. It was not the assessing officer who had initiated the fact in favour of the assessee but only demolished the assessee's plea by holding the procedural non-genunity of the fact of having contravened the provisions of section 194C when the root cause for the disallowance has been considered by us in the cited decision, therefore, requires no further deliberation on the basis of learned counsel's submission for admission of the additional ground. No further controverting material has been brought out by the learned departmental Representative on this score. The facts were already available to the authorities below. Therefore, the issue involved being legal is considered relying on the apex Court's decision in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC). Learned counsel had made a plea for referring the issue to the file of the assessing officer for verification of the forms having been filed in accordance with law as per the decision of Tribunal, Jodhpur Bench in the case of Shree Choudhary Transport Co. v. ITO (2010) 32 (II) ITCL 601 (Jd-Trib) which order has also been placed on the paper book at p. 5.1. The alternate submission of the learned counsel is dismissed in view of the fact that the assessee is not a sub-contractor to comply with the provisions of sub-section (2) of section 194C. As we have decided the issue in favour of the assessee for the reasons cited above, in our considered opinion, adjudication of other contentions of the assessee as well as of the revenue is not necessary.

9. In the result, appeal of the assessee is allowed on the additional ground and the sum of Rs. 61,63,280 disallowed under section 40(a)(ia) is directed to be deleted. .

(2011) 37 (II) ITCL 147 (Chen `A'-Trib) (TM) (Chen `A'-Trib(TM))

In the ITAT, Chennai `A' Third Member Bench

ACIT v. Chennai Petroleum Corpn. Ltd.

Asstt. CIT v. Chennai Petroleum Corporation Ltd.

U.B.S. Bedi, J.M., T.R. Sood, A.M & R. V. Easwar, V.P.

ITA Nos. 1822, 1823 & 1967(Mds) of 2006 & 1643 (Mds) of 2007
q 26 August, 2009 q A.Ys. 1998-99, 2000-01 & 2003-04

I

Income Tax Act, 1961, S. 254(1)

Committee on Dispute (CoD) did not permit assessee to challenge validity of reopening of assessment, therefore, the appeal was not maintainable and the same was liable to be dismissed.

Appeal (Tribunal)—Maintainability—Non-approval of CoD—Appellant being assessee, a public sector undertaking

Where assessee was a public sector undertaking, it seems sufficiently clear that assessee was not permitted to challenge the validity of the reopening of assessment for the assessment year 1998-99. Therefore, the Judicial Member was right in holding that assessee's appeal challenging the validity of the reopening of assessment has to be dismissed.

Decision: Against the assessee.

II

Income Tax Act, 1961, S. 32(1)

Depreciation on gas sweetening plant was allowable as it was ready for use, but due to non-availability of raw-material it was not used.

Depreciation—User for business—Sweetening plant

Where gas sweetening plant was ready for use but not used due to non-availability of raw-material, depreciation was allowable.

Applied: CIT v. Heera Financial Services Ltd. (2008) 19 (I) ITCL 403 (Mad-HC) : (2008) 298 ITR 245 (Mad) and CIT v. Vayithri Plantations Ltd. (1981) 128 ITR 675 (Mad). Referred: Bhikaji Venkatesh v. CIT (1937) 5 ITR 626 (Nag) , B. Malani & Co. v. CIT (1995) 214 ITR 192 (Bom), Capital Bus Services P. Ltd. v. CIT (1980) 123 ITR 404 (Del), Central Provinces and Manganese Ore Co. Ltd. v. CIT (1937) 5 ITR 734 (Nag), CIT v. Chinnapandi V. (2006) 11 (I) ITCL 182 (Mad-HC) : (2006) 282 ITR 389 (Mad), CIT v. Dalmia Cement Ltd. (1945) 13 ITR 415 (Pat), CIT v. Indo Matsushita Carbon Co. Ltd. (2006) 286 ITR 201 (Mad) : (2006) 205 CTR (Mad) 493, CIT v. Jiwaji Rao Sugar Co. Ltd. (1969) 71 ITR 319 (MP), CIT v. Lakshmi Machine Works (2007) 290 ITR 667 (SC) : (2007) 160 Taxman 404 (SC), CIT v. Madras Motors Ltd. (2002) 257 ITR 60 (Mad), CIT v. Maps Tours and Travels (2003) 260 ITR 655 (Mad), CIT v. McDowell and Co. Ltd. (No.2) (2009) 28 (I) ITCL 264 (SC) : (2009) 314 ITR 174 (SC), CIT v. Nahar Exports Ltd. (2007) 18 (I) ITCL 98 (P&H-HC) : (2008) 296 ITR 419 (P&H), Dy. CIT v. N. K. Industries Ltd. (2008) 21 (I) ITCL 321 (SC) : (2008) 305 ITR 274 (SC), CIT v. Ravindranathan Nair, K. (2008) 19 (I) ITCL 71 (SC) : (2007) 295 ITR 228 (SC), CIT (Asst.) v. Rishiroop Polymers (P) Ltd. (2006) 286 ITR 54 (Mum-Trib), CIT v. Shaan Finance (P) Ltd. (1998) 231 ITR 308 (SC), CIT v. Southern Petrochemical Industries Corporation Ltd. (2007) 17 (I) ITCL 30 (Mad-HC) : (2007) 292 ITR 362 (Mad), CIT (Asst.) v. SRF Ltd. (2008) 21 SOT 122 (Del-Trib), CIT v. Suhrid Geigy Ltd. (1982) 133 ITR 884 (Guj), CIT v. Swarup Vegetable Products India Ltd. (2005) 6 (I) ITCL 214 (All-HC) : (2005) 277 ITR 60 (All), CIT v. Viswanath Bhaskar Sathe (1937) 5 ITR 621 (Bom), Dy. CIT v. Yellamma Dasappa Hospital (2007) 15 (I) ITCL 394 (Karn-HC) : (2007) 290 ITR 353 (Karn), Dineshkumar Gulabchand Agrawal v. CIT (2004) 267 ITR 768 (Bom), Dollar Apparels v. ITO (2007) 18 (I) ITCL 406 (Mad-HC) : (2007) 294 ITR 484 (Mad), Liquidators of Pursa Ltd. v. CIT (1954) 25 ITR 265 (SC), Nathani Steels Ltd. v. Dy. CIT (1996) 57 ITD 584 (Mum-Trib), ONGC v. CCE (1992) Suppl 2 SCC 432 and Whittle Anderson Ltd. v. CIT (1971) 79 ITR 613 (Bom).

Decision: In assessee's favour. .

(2011) 37 (II) ITCL 148 (Bang `A'-Trib)

In the ITAT, Bangalore `A' Bench

Intellinet Technologies India (P) Ltd. v. ITO

Dr. O.K. Narayanan, V.P. & Shailendra Kumar Yadav, J.M.

ITA No. 1021 (Bang) of 2009 q 12 March, 2010 q A.Y. 2004-05

Income Tax Act, 1961, Ss. 263 & 10A

By virtue of the supervening intervention on the declaration of law, made by the Hon'ble Karnataka High Court in the case of CIT v. Himatasingike Seide Ltd. (2007) 14 (I) ITCL 222 (Karn-HC) : (2006) 286 ITR 255 (Kar), the assessing authority has erred in giving exemption under section 10A before setting off the brought forward losses and unabsorbed depreciation of earlier assessment years. thus, the order of AO was a erroneous and prejudicial order.

Revision under section 263—Erroneous and prejudicial order—AO took one of possible view—Effect of law declared by High Court

While making the claim of deduction under section 10A, the assessee haf not set off the brought forward losses. The AO allowed the claim of deduction made by the assessee under section 10A after making certain adjustments in the matter of export turnover, etc. The AO had given the deduction under section 10A without setting off the brought forward losses and as computed by the assessee. The CIT, on perusal of the records of the case, found that the deduction under section 10A was given by the assessing authority without proper application of mind and against the provisions of the Income Tax Act, 1961. The CIT held that the deduction under section 10A ought to have been allowed after setting off the brought forward business loss and unabsorbed depreciation relating to the earlier assessment years. After hearing the assessee in detail and examining the materials available on record, the CIT came to the conclusion that the assessment order passed by the assessing authority was erroneous and prejudicial to the interests of the revenue. He, accordingly, set aside the computation of deduction under section 10A and directed the AO to revise the deduction after setting off the business losses/unabsorbed depreciation relating to the earlier assessment years. Held: But de hors all these Tribunal orders, there is a binding judgment of the Hon'ble jurisdictional High Court available which has been rendered by their Lordships in the case of CIT v. Himatasingike Seide Ltd. (2007) 14 (I) ITCL 222 (Karn-HC) : (2006) 286 ITR 255 (Kar). Their Lordships examined the contention whether the deduction available to an assessee under section 10B has to be allowed before setting off unabsorbed depreciation and unabsorbed investment allowance. The court went on to explain that after taking into consideration the unabsorbed depreciation, an assessee may get exemption but to a lesser extent and nonetheless it could not take only a portion of the depreciation just to suit its income for the purpose of nil liability and adjust the balance of unabsorbed depreciation against other business income. It is a settled law that when the Hon'ble Supreme Court or a High Court declares the law on a subject, the declaration goes back to the date of enactment of that particular law so as to state that the law, from the date of its enactment itself, was in the manner decided by the court subsequently. When that universal rule of interpretation is accepted, unabsorbed depreciation and brought forward losses have to be set off against the profits while computing the deduction under section 10A and this position of law has to be reckoned from the date of the enactment of the law itself. Therefore, the necessary finding is that even when the AO was passing the assessment order, the law on the subject of exemption available under section 10A was always the law as explained by the Hon'ble High Court in the case of CIT v. Himatasingike Seide Ltd. (2007) 14 (I) ITCL 222 (Karn-HC) : (2006) 286 ITR 255 (Kar). Once the law on the subject has been declared by the High Court, the pronounced judgment dates back to the date of enactment and, therefore, by superim position made by the judicial pronouncement, the assessment order has become erroneous. It is not only erroneous, but also prejudicial to the interest of the revenue inasmuch as the error has contributed in granting excessive relief to the assessee.

Referred: CIT v. Himatasingike Seide Ltd. (2007) 14 (I) ITCL 222 (Karn-HC) : (2006) 286 ITR 255 (Karn), Changepond Technologies (P) Ltd. v. Asst. CIT ACIT (2008) 22 (II) ITCL 297 (Chenn-Trib) : (2008) 22 SOT 220 (Chen-Trib), Enercon Wind Farms (Krishna) Ltd. v. Asst. CIT (2008) 21 SOT 29 (Mum-Trib), Ford Business Services Centre (P) Ltd. v. Asst. CIT (2008) 114 TTJ (Chen-Trib) 881, Global Vantedge Pvt. Ltd. v. Deputy CIT (2010) 33 ITCL 218 (Del-Trib) : (2010) 1 ITR 326 (Del-Trib) : (2010) 37 SOT 1 (Del-Trib), Gate Global Solutions Ltd. v. Asst. CIT (2008) 24 SOT 3 (Bang-Trib) : (2007) 112 TTJ (Bang-Trib) 1002, KPIT Cummins Infosystems (Bangalore) (P) Ltd. v. Asst. CIT (2009) 25 (II) ITCL 324 (Bang-Trib) : (2008) 26 SOT 529 (Bang-Trib), Lason India P. Ltd. v. ITO (2008) 22 (II) ITCL 496 (Chen-Trib) : (2008) 301 ITR 306 (Chen-Trib), Scientific Atlanta India Technology (P) Ltd. v. Asst. CIT (2010) 34 (II) ITCL 168 (Chen-Trib) (SB) : (2010) 2 ITR 66 (Chen-Trib) (SB) and Tata Consultancy Services Ltd. v. Asst. CIT (2009) TIOL-41-ITAT-Bang.

Decision: Against the assessee. .

(2011) 37 (II) ITCL 150 (Chen `B'-Trib)

In the ITAT, Chennai `B' Bench

DCIT v. Spic Gel Eng. Construction Co. Ltd.

Dy. CIT v. Spic Gel Engineering Construction Co. Ltd.

N. Barathvaja Sankar, V.P. & Hari Om Maratha, J.M.

ITA Nos. 1606 and 1607 (Mds) of 2008
q 26 May, 2010 q A.Ys. 2002-03 & 2004-05

I

Income Tax Act, 1961, S. 80HHB(2)(b)(ii)

Deduction under section 80HHB(2)(b)(ii) could not be allowed in respect of foreign projects viz., the refinery shut down and fertil shut down projects.

Deduction under section 80HHB—Foreign project, etc.—Supply of manpower for refinery shut down

The assessee was engaged in the business of executing power projects in India and abroad and also carrying on the business of conversion of steel for various projects. The assessee-company is assessed to tax for the past several years admitting earnings in foreign currency and claiming deduction under sections 80-O, 80HHC and 80HHB on export business over the years. During the assessment proceedings, the AO found that the assessee had claimed deduction under section 80HHB in respect of a project undertaken at Abu Dhabi during the assessment year under consideration. He also found that similar claim was made by the assessee during the assessment year 2001-02 also in respect of projects at Sharjah, Curaco, Abu Dhabi and Singapore. From the records, the AO found that the assessee executed a repairs and maintenance project which was not a foreign project within the meaning of section 80HHB. After going through the copies of invoices, working, etc., furnished by the assessee in support of its claim of deduction under section 80HHB and further clarification made by the assessee, the AO was of the view that the project at Abu Dhabi was for consultancy and not a project for installation of the machinery as envisaged in section 80HHB and the invoices and the receipts clearly showed that it was on account of manpower supply/arrangement at Abu Dhabi, Kuwait. Hence, the AO disallowed the claim of the assessee. Aggrieved, the assessee moved the matter in appeal before the first appellate authority. CIT(A) viewed that none of the receipts and invoices took away the fact that the work performed by the assessee-company was execution of a foreign project. Hence, he allowed the assessee's claim for deduction under section 80HHB. Supply of manpower for refinary shut down and fertil shut down would not be entitled to deduction under section 80HHB(2)(b)(ii).

Decision: Against the assessee.

II

Income Tax Act, 1961, S. 80-O

Section 80-O deduction cannot be said to be restricted to the consideration for a right to use drawings pre-existing with the assessee. Further, CIT(A) was of the view that even drawings made for a specific project would be entitled to deduction in terms of section 80-O as long as the consideration in convertible foreign exchange was received for supply of drawings.

Deduction under section 80-O—Royalty, etc., from foreign project, etc.—Supply of design, patent, invention, etc.

The AO observed from the records that the assessee claimed deduction for rendering professional services to T Power Plant and providing technical manpower to M/s. JEL and not for supply of any design, patent, invention or registered trade mark as envisaged in section 80-O. He was of the view that section 80-O is amended with effect from 1-4-1998 and consideration received from providing technical and professional services is not eligible for deduction. Hence, he disallowed the claim of the assessee under section 80-O .The CIT(A) observed that it was drawings and documents that were prepared by the assessee-company for M/s. JEL, specfic to the contract undertaken by M/s. JEL, and consideration was received for preparation of such drawings and documents. The CIT(A) was of the view that section 80-O deduction cannot be said to be restricted to the consideration for a right to use drawings pre-existing with the assessee. Further, he was of the view that even drawings made for a specific project would be entitled to deduction in terms of section 80-O as long as the consideration in convertible foreign exchange was received for supply of such drawings. Accordingly, he directed the AO to allow the claim of the assessee under section 80-O. Held: There was no infirmity in the order of CIT(A) in allowing deduction under section 80-O.

Decision: In assessee's favour.

III

Income Tax Act, 1961, Ss. 36(1)(vii) & 36(2)

After the amendment of section 36(1)(vii) with effect from 1-4-1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable; it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.

Business deduction under section 36(1)(vii)—Bad-debt—Condition precedent

The assessee was a limited company engaged in the erection work mainly of power projects in India and abroad as well as design work for the execution of the various projects outside India and manufacture of various items of steel under the fabrication division, which is used for the erection work at various sites. The assessee-company filed a return of income for the assessment year under consideration on 29-10-2004 showing a loss under the normal computation and a book profit. The assessee claimed bad debts under the head "Administrative expenses" and also bad debts under the head "Project cost". Before the AO, the assessee explained that these bad debts arose on account of additional claims raised by the assessee-company on its clients but not accepted or paid by such clients. The AO required the assessee to establish with demonstrative evidence that the concerned debt had become bad, but the assessee had not established with details that such debts had gone bad, then the AO disallowed the amount towards bad debts which was claimed as such under the head "project cost". The CIT(A) observed that the justification for bad debt demanded by the AO was beyond the scope of section 36(2). Thus, the CIT(A) was of the view that in principle, the claim of bad debts made by the assessee was allowable. However, he found that in the case of TAS, the assessee had claimed bad debts and, from the ledger account of this party, as appearing in the books of the assessee-company for the period from 1-4-2003 to 31-3-2004 the closing debit balance was only Rs. 1,65,794. Hence, he was of the view that this amount of bad debt alone could be written off and the bad debt claim of the assessee on account of this debtor would be restricted to that extent. CIT(A) held that bad debt claimed to the extent of Rs. 16,63,443 would be allowable on the facts of the assessee's case. He also held that disallowance of bad debts to the extent of excess bad debts claimed with reference to TAS amounting to Rs. 3,47,419 made by the AO was in order and thus, the CIT(A) partly allowed the claim of the assessee. Held: Justified.

Applied: T.R.F. Ltd. v. CIT (2010) 36 (I) ITCL 2 (SC) : (2010) 323 ITR 397 (SC). Referred: Kamla Cotton Co. v. CIT (1997) 226 ITR 605 (Guj).

Decision: Partly in assessee's favour. .

(2011) 37 (II) ITCL 152 (Chen `C'-Trib)

In the ITAT, Chennai "C" Bench

V. R. Chittanandam v. Asstt. CIT

Abraham P. George, A.M. & Vijay Pal Rao, J.M.

M. P. No. 3 (Mds) of 2007 in I.T.A. No. 2384
(Mds) of 2007 q 5 March, 2010 q A.Y. 2004-05

I

Income Tax Act, 1961, S. 10(10C)

Amounts received by retiring employees of the Reserve Bank of India would be eligible for exemption under section 10(10C).

Exemption under section 10(10C)—Amount received under "Optional Early Retirement Scheme (OERS)—Amount received be retiring employees of RBI

Assessee, an employee of the Reserve Bank of India claimed deduction under section 10(10C) Held : In view of the decision of Supreme Court in Chandra Ranganathan v. CIT (2010) 36 (I) ITCL 211 (SC) : (2010) 326 ITR 49 (SC), assessee is entitled to the benefit of deduction under section 10(10C).

Followed: Chandra Ranganathan v. CIT (2010) 36 (I) ITCL 211 (SC) : (2010) 326 ITR 49 (SC). Referred: CIT v. Koodathil Kallyatan Ambujakshan (2008) 24 (I) ITCL 453(Bom-HC) : (2009) 309 ITR 113 (Bom).

Decision: In assessee's favour.

II

Income Tax Act, 1961, S. 254(2)

Subsequent decision of Apex Court or jurisdictional High Court is binding on the Tribunal and, therefore, constitutes an apparent error in the order which is contrary to the principle laid down in the subsequent decision.

Appeals (Tribunal)—Rectification of mistake—Subsequent decision of Apex Court or jurisdictional High Court contrary to order of Tribunal

Subsequent law laid down by Apex Court or jurisdictional High Court has to be considered for rectifying the mistake under section 254(2).

Referred: Asstt. CIT v. Saurashtra Kutch Stock Exchange Ltd. (2008) 24 (I) ITCL 78 (SC) : (2008) 305 ITR 227 (SC).

Decision: In assessee's favour. .

(2011) 37 (II) ITCL 153 (Chd `B'-Trib)

In the ITAT, Chandigarh `B' Bench

Dy. CIT v. R.B. Knit Exports (Export Wing)

G.S. Pannu, A.M. & Sushma Chowla, J.M.

ITA No. 676 (Chd) of 2009 q 26 August, 2010 q A.Y. 2004-05

Income Tax Act, 1961, S. 154

While allowing the deduction under section 80HHC, in the assessment finalized under section 143(3) AO did not compute deduction under section 80HHC after reducing the deduction allowed under section 80-IB and as on this issue, there is a cleavage of opinion which shows that it is a debatable matter and, therefore, it would not come within the purview of section 154.

Rectification—Debatable issue—Deduction under section 80HHC allowed without reducing deduction under section 80-IB

An order under section 154 can be passed only with a view to rectify "any mistake apparent from the record". It is well-settled proposition that section 154 can be pressed into service by the AO only to rectify mistakes which are apparent from the record. In other words, any aspect which is of debatable nature or on which conceivably two views are possible, the same is outside the purview of section 154. While allowing the deduction under section 80HHC, in the assessment finalized under section 143(3) AO did not compute deduction under section 80HHC after reducing the deduction allowed under section 80-IB. However, on this issue, various decisions clearly show a cleavage of opinion which shows that it is a debatable matter and therefore, it would not come within the purview of section 154. Clearly, rectifying such a mistake is beyond the purview of section 154 and, in fact, is beyond the scope of a "mistake apparent from the record" for the purposes of section 154.

Followed: T.S. Balaram, ITO v. Volkart Bros. & Ors. (1971) 82 ITR 50 (SC). Applied: CIT v. Honda Siel Power Products Ltd. (2010) 194 Taxman 175 (Del). Referred: Asstt. CIT v. Gold Star Industries (2008) 24 (II) ITCL 211 (Del-Trib) : (2008) 118 TTJ (Del-Trib) 109, Asstt. CIT v. Hindustan Mint & Agro Products (P) Ltd. (2009) 29 (II) ITCL 245 (Del-Trib)(SB) : (2009) 315 ITR (AT) 401 (Del-Trib)(SB), Asstt. CIT v. Rogini Garments & Ors. (2007) 294 ITR (AT) 15 (Chen-Trib)(SB) : (2007) 108 ITD 49 (Chen-Trib)(SB), Bharat Heavy Electricals Ltd. v. Dy. CIT (2006) 9 SOT 89 (Del-Trib) : (2005) 98 TTJ (Del-Trib) 565, Dy. CIT v. Eltek SGS (P) Ltd. (ITA Nos. 3646 & 3669/Del/2003, dated 30-6-2006) [reported in (2008) 21 (II) ITCL 168 (Del-Trib)]], Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. (ITA No. 145/Del/2007, dt. 28-5-2008), Irfan Sheriff v. Asstt. CIT (2006) 7 SOT 57 (Bang-Trib), ITO v. R.V. Diamond Jewellers (P) Ltd. (ITA 2252/Del/2005, dated 30-11-2005), Mittal Clothing Co. v. Dy. CIT (2005) 4 SOT 626 (Bang-Trib), SCM Creations v. Asstt. CIT (2008) 24 ITCL 170 (Mad-HC) : (2008) 304 ITR 319 (Mad) and Toshica Creation v. ITO (2005) 96 TTJ (Jp-Trib) 651.

Decision: In assessee's favour. .

(2011) 37 (II) ITCL 154 (Nag-Trib)

In the ITAT, Nagpur Bench

Asstt. CIT v. Kamal Kumar S. Agrawal (Indl.) & Ors.

N.L. Dash, J.M. & V.K. Gupta, A.M.

IT(SS)A Nos. 61, 62,111 to 125, 130 to 179, 251 & 252 (Nag) of 2007 &
112 (Nag) of 2009 q 24 July, 2009 q A.Y. 1999-2000 to 2006-07

I

Income Tax Act, 1961, Ss. 153A & 68

Where share transactions were proved by assessee as genuine in original and regular returns in earlier years the addition to undisclosed income cannot be made under section 153A as at that time AO was satisfied about the same.

Search and seizure—Assessment under section 153A—Undisclosed income vis-a-vis—Addition under section 68--Share transaction

There was a search action on the H Group on 20-1-2005 pursuant to which notices under section 153A were issued to different assessees. In the course of assessment proceedings, apart from other enquiries, AO found that the various assessees of the group had shown long-term capital gain resulting from sale of shares. These share transactions were treated by AO as non-genuine share transaction. Majority of share brokers claimed in favour of assessee and also confirmed the transactions however, certain transactions were off the stock exchange transactions and proved by brokers. However, AO made addition under section 68, treating the same as undisclosed sources. Held: There was no materials before AO and the addition was properly proved by assessee in regular return filed by the assessee and cleared by AO and the issue come to end an at that time. Thus, no addition in assessment under section 153A could be made when once it was cleared and proved as genuine in regular return proceedings.

Distinguished: Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) and McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). Referred: CIT v. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 443 (SC) Mukesh R. Marolia v. Addl. CIT (2006) 6 SOT 247 (Mum) Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)

Decision: In assessee's favour.

II

Income Tax Act, 1961, S. 250(5)

Where capital gains on sale of shares, long-term, was accepted by the AO in regular assessment proceedings, however, in proceedings under section 153A the AO treated the same as sham and bogus thus, at appellate proceedings no alternative plea of revenue to treat the same as adventure in nature of trade can be entertained as if it was at AO level the same could be entertained.

Appeal (CIT(A)—Power of CIT(A)—Alternative plea vis-a-vis taxation of income under a different head

Capital gains on sale of shares was accepted by revenue in regular course of returns filed by assessee and in proceedings under section 153A AO without any incriminating material treated the same as sham and bogus transactions. The additional/alternative plea raised by the revenue before CIT(A) first time that the same income can be taxed under the head adventure in nature of trade could not be accepted. No new source of income can be found in the course of appellate proceedings if it was done at the stage of AO then other new head could be considered.

Decision: In assessee's favour.

III

Income Tax Act, 1961, Ss. 69 & 4

On the sole basis of office boy the value shown in entries recorded in his diary in which certain financial transactions were recorded could not be added under section 69 read with section 4, as the same had been reconcilled by assessee from the regular concerns/assessees.

Income from undisclosed sources—Addition under section 69 read with section 4—Entries in diary maintained by the office boy

On the basis of one diary maintained by assessee's office boy which was showing some financial transactions, upto Rs. 50 lakhs was added by AO during the course of proceeding under section 153A. Held: The sole basis for making this addition was the statement of T which had been retracted by him subsequently also. It is also noted that the said person is working in the capacity of peon/office boy. Hence, how his statement only can be a proper basis for making such addition. Further the entries recorded in such diary had been reconciled by assessee from the books of account of various group concerns/assessees. Hence, in these facts and circumstances, the order of CIT(A) in deleting the addition is correct in law.

Decision: In assessee's favour. .

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(2011) 37 (II) ITCL 156 (AAR)

Authority for Advance Rulings

In re, Aramco Overseas Company BV

P.V. Reddi, J., Chairman & J. Khosla, Member

AAR No. 825 of 2009 q 12 March, 2010

Income Tax Act, 1961, Ss. 9(1)(i), Expln. 1(b) & 5(2)

The applicant is not eligible to seek the aid of clause (b) of Explanation 1 to section 9(1)(i) to nullify the accrual or arising of income in India, when clause (b) of the Explanation is excluded from consideration, there is no denial of the fact that section 5(2) squarely applies in order to fasten the tax liability on the applicant in respect of the income by way of mark-up received on account of the support services rendered in India for its affiliate entities.

Income deemed to accrue or arise in India—Business connection—Support services rendered by Indian branch for purchases made by foreign buyer

AOC, a foreign company proposed to establish an office in India (`Indian office') for undertaking procurement support activities for its Head Office and/or Saudi AramCo. The Indian office will undertake procurement support services for the purpose of export outside India of various goods/products required by Saudi AramCo. The Indian office will not undertake any other business function of AOC or any of its group companies. The Indian office will be funded entirely by reimbursements received by it from its head office without any profit element thereon. Saudi AramCo which is the ultimate buyer of goods, compensates the applicant by paying the actual cost of services plus 5 per cent `mark-up'. Held: Keeping in view the background and the purpose behind the insertion of clause (b) of Explanation 1, that provision has to be interpreted. But the language of clause (b) of Explanation 1 of section 9(1)(i) cannot be stretched too far so as to extend the benefit to those who do not really act for and on behalf of the non-residents in the purchase-transactions, but only provide certain support services to the non-residents in connection with the purchases made by them. The applicant is not eligible to invoke the benefit of clause (b) of Explanation 1. The purchaser will be Saudi AramCo or some other group company. If the applicant itself is the purchaser of goods exported from India, the applicant can claim the benefit of clause (b) of Explanation 1 to section 9(1)(i). Otherwise, it cannot. In other words, if the purchasers are non-residents other than the applicant, the applicant is liable to pay tax in India on the amount received by it for the support services rendered through the branch office in India. The question was thus, answered partly in affirmative and partly in negative.

Relied: In re Mustaq Ahmed (2009) 176 Taxman 65 (AAR) : (2008) 307 ITR 401 (AAR). Distinguished: In re Ikea Trading (Hon Kong) Ltd. (2009) 308 ITR 422 (AAR), Nike Inc. v. Asstt. CIT (2009) 29 (II) ITCL 402 (Bang-Trib) : (2009) 122 TTJ (Bang-Trib) 201 and In re Angle Garment Ltd. (2006) 157 Taxman 195 (AAR) : (2006) 287 ITR 341 (AAR).

Decision: Against the applicant. .

(2011) 37 (II) ITCL 157 (AAR)

Authority for Advance Rulings

H M S Real Estate (P) Ltd.

P.V. Reddi, J., Chairman & J. Khosla, Member

AAR No. 832 of 2009 q 18 March, 2010

Income Tax Act, 1961, Ss. 90, 115A(1)(b) & 195
DTAA between India & USA, Art. 12

Basic design services during construction phase being part of architectural services undertaken by HOK as per agreement, the payment received by HOK would be treated as fees for included services., therefore, the entire consideration receivable by HOK from the applicant is liable to be taxed in India as `fees for included services' as per article 12.4 of the tax treaty. However, the amount payable as consultancy fees to the consultants in USA has to be excluded while computing the chargeable income.

Double taxation relief—Agreement between India and USA—Fees for included services

Applicant was an Indian company engaged in the business of development and management of commercial real estate. The applicant proposed to construct an international quality commercial office/hotel complex in Gurgaon. For this purpose, it had entered into an agreement with HOK, a limited partnership which was a resident of USA, for provision of architectural design services. The agreement also provided for appointment of a local architect as associate architect. Accordingly, RSP had been appointed as `associate architect'. Payments to the local associate architect were to be made separately and were not under consideration in the application. As per the agreement, both, HOK - the architect and RSP - the associate architect, had been retained "to work jointly and on a co-operative basis in order to perform the entire design, construction documents and construction administration for the project, each responsible for its share of work but jointly responsible in providing the entire design, construction documents and construction administration service necessary to complete the project". Held: Basic design services which include preparation of master plan, concept design, schematic design, design development and construction documents, assistance in bidding and contractors' selection process and consultancy during construction phase are all part of architectural services undertaken by the HOK as per the agreement and the payment received by HOK for furnishing all these documents and services to the applicant fall appropriately within the meaning of, `fees for included services' under article 12.4(b) of the India-US Treaty. They cannot be disintegrated and viewed in water-tight compartments. The contention of the applicant that the payments attributable to the sale of designs, plans and other construction documents cannot be subjected to tax in India as they do not fall within the purview of article 12 of the treaty was rejected. The payment of amounts to the architect HOK by way of reimbursement of expenses actually incurred by it does not constitute chargeable income and withholding tax under section 195 is not necessary.

Distinguished: CIT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal) and In re International Tire Engineering Resources LLC (2010) 32 (II) ITCL 550 (AAR) : (2009) 319 ITR 228 (AAR) : (2009) 185 Taxman 209 (AAR).

Decision: Partly in favour of applicant. .

(2011) 37 (II) ITCL 158 (AAR)

Authority for Advance Rulings

In re, ABB Ltd.

P.V. Reddi, J., Chairman & J. Khosla, Member

AAR No. 834 of 2009 q 15 March, 2010

Income Tax Act, 1961, Ss. 90, 9(1)(vi) & 195
DTAA between India Switzerland, Art. 7 & 12

ABB Zurich merely acted as a co-ordinating agency for the purpose of recouping the costs that are contributed by the various participants and acted as a medium for organizing and providing the CRCs with the funds for the research that was carried out, therefore, the payments made by the applicant to ABB Zurich cannot be treated as payments in the nature of royalties liable to be taxed in India.

Double taxation relief—Agreement between India and Switzerland—Royalty

The applicant-ABB was, a company incorporated in India, had filed application seeking advance ruling in respect of the cost contribution agreement (CCA) which it proposed to enter into with its group company by name, ABB Ltd., Zurich. ABB India a part of the ABB Group, which is a leader in power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact. The ABB Group of companies operates in over 100 countries. As per ABB Group's research and development (R&D) policy, all basic R&D for the ABB Group is co-ordinated and directed through ABB Zurich (ABB Zurich). ABB entities who wish to participate in the basic R & D enter into a cost contribution agreement CCA with ABB Zurich. As per the agreement, the entire costs of the basic R&D are shared between the ABB entities participating in the agreement, based on an allocation key. The participating ABB entities are allowed a royalty-free unlimited access to the research results including any intellectual property rights (`IPRs') generated from the basic R&D. However, for administrative reasons, the IPR generated as a result of the basic R&D under the agreement is legally owned by ABB Zurich. The applicant further submitted that ABB Group's basic R&D activities are coordinated and directed through ABB Zurich. ABB Group entities who wish to participate in the basic R&D activities entered into a CCA with ABB Zurich. As per the CCA, the entire costs of the basic R&D are shared between the ABB entities participating in the CCA based on a pre-agreed allocation key. Held: The ABB entities participating in the CCA are allowed a royalty-free unlimited access to the research results including any IPRs generated. It cannot be said that ABB Zurich has rendered any service of technical or consultancy nature to the applicant when it makes available to the applicant and other parties to the CCA the results of corporate research. From the statement of facts and the contents of the CCA, it is clear that rendering of any service of the nature of managerial, technical or consultancy is not involved and moreover, ABB Zurich does not deploy any personnel to perform any services in India any payment is being not made by the applicant to ABB Zurich in consideration of the conferment of any rights in respect of any of the items enumerated in the said definition clauses in Art. 7 and 12 of DTAA. These are broadly intellectual property rights. `Information' is defined in CCA as "the knowledge (data, technical documents, experience)". The information obtained by the applicant as a result of corporate R&D envisaged by the agreement would normally fall within the definition clause. ABB Zurich merely acts as a co-ordinating agency for the purpose of recouping the costs that are contributed by the various participants and acts as a medium for organizing and providing the CRCs with the funds for the research that is carried out. For the services rendered by ABB Zurich as a co-ordinating agency, it gets `co-ordination fee' the taxability of which is not under dispute in this application. Therefore, the payments made by the applicant to ABB Ltd. Zurich cannot be treated as payments in the nature of royalties liale to be taxed in India.

Relied: CIT v. Dunlop Rubber Co. Ltd. (1983) 142 ITR 493 (Cal) and Decta, In re (1999) 237 ITR 190 (AAR). Referred: Danfoss Industries (P) Ltd., In re (2004) 268 ITR 1 (AAR).

Decision: In applicant's favour. .

(2011) 37 (II) ITCL 159 (AAR)

Authority for Advance Rulings

In re, FICCI

In re, Federation of Indian Chambers of Commerce & Industry (FICCI)

P.V. Reddi, J., Chairman, J. Khosla, Member

AAR No. 812 of 2009 q 5 March, 2010

Income Tax Act, 1961, S. 90
DTAA between India & USA, Art. 4 & 12

Applicant, an Indian company was conducting India Innovative Growth Programme under the collaboration with the object to identify, award and accelerate innovative new India, technologies into the market space. Having regard to the short duration of the course, it cannot be said that there was a transfer of technical know-how/knowledge, no income-tax was therefore, liable to be paid by IC-2 Institute on the payments received by it from FICCI, no tax at source was also required to be deducted.

Double taxation relief—Agreement between India and USA—Fees for included services

Applicant, an Indian company is conducting India Innovation Growth Programme (IIGP) under collaboration with the American Institute IC-2 with the object to identify, award and accelerate innovative new Indian, technologies into the market space. IIGP will help Indian innovators to find markets globally. The participants of the programme will receive professional business development assistance to facilitate access to US, Indian and global markets. Having regard to the short duration of the course, with the contents and pattern of the modules presented, it is difficult to infer that any technical knowledge, experience, or skills were shared with and made available to the participant-innovators, much less it can be said that there was a transfer of technical know-how/knowledge. There was nothing like sharing the trade secrets or imparting skills in a practical manner. No doubt, the workshop was an enlightening exercise, opening up new vistas of thinking. The participants will benefit by the lectures and deliverables and they may be better motivated or equipped to deal with the problems in the field of commercialization/marketing of the technology. Orientation towards business and inculcation of entrepreneurial outlook does not really amount to "making available" the technical knowledge, experience or skills of the experts of IC-2 Institute. No income tax is liable to be paid by IC-2 Institute on the payments received by it from FICCI.

Followed: In re, Federation of Indian Chambers of Commerce & Industry (FICCI) (2010) 32 (II) ITCL 519 (AAR) : (2010) 320 ITR (AT) 124 (AAR). Referred: In re, Intertek Testing Services India (P) Ltd. (2008) 307 ITR 418 (AAR) : (2008) 175 Taxman 375 (AAR).

Decision: In favour of applicant. .

(2011) 37 (II) ITCL 160 (Del-Trib)

In the ITAT, Delhi `C' Bench

ITO v. Heartland Delhi Trans. & Services (P) Ltd.

ITO v. Heartland Delhi Transcription & Services (P) Ltd.

R.P. Tolani, J.M. & K.G. Bansal, A.M.

ITA Nos. 1551 to 1553 (Del) of 2008
q 25 June, 2010 q A.Y. 2002-03 to 2004-05

Income Tax Act, 1961, S. 10B

Assessee was not entitled to deduction/exemption under section 10B for assessment years 2002-03 and 2003-04 by reason of operation of section 10B(9), however, since provisions contained in section 10B(9) was not in statute book the assessee was entitled to exemption under section 10B for assessment year 2004-05.

Exemption under section 10B—Allowability—Transfer of undertaking eligible for exemption under section 10B

HICS set up an undertaking on the basis of the letter of intent issued by ISTP in financial year 1998-99. The business of the undertaking was to digitize medical prescription and export it. This business had been transferred to the assessee in financial year 2000-01. HICS set up the business with new machinery and it fulfilled all the conditions mentioned in sub-section (2) of section 10B. The case of the assessee was that deduction under section 10B(1) is granted to an undertaking and, therefore, if the ownership of the undertaking changes for reason whatsoever, the benefit continues to be given to the undertaking for the unexpired period and the new owner continues to get this deduction from its total income for such unexpired period. On the other hand, the case of the revenue was that the benefit is given to an assessee as the deduction is made from its gross total income. Therefore, if there is change in ownership, the benefit is not available to the new owner. In the alternative, the argument was that such deduction is not available with the assessee for assessment years 2002-03 and 2003-04 in view of the provision contained in sub-section (9) of section 10B. Held: Sub-section (9) deals with a situation where ownership or the beneficial interest in the undertaking is transferred by any means. The words "any means" are of wide import and take within their ambit the transfer of the undertaking either by sale of individual assets or as a going concern by way of slump sale. This provision is attracted to the facts of this case for assessment years 2002-03 and 2003-04. It is provided that in a case so covered, the deduction under sub-section (1) shall not be allowed in the year of transfer and subsequent years. There is no impediment in giving the finding that for assessment year 2004-05, the assessee is entitled to deduct the profits and gains of the undertaking from its total income. The assessee is entitled to the deduction under section 10B for assessment year 2004-05. The only point to be mentioned in this regard is that the undertaking was formed in the previous year relevant to assessment year 1999-2000. Therefore, this year is the first year of the functioning of the undertaking. Accordingly this year shall be the first year from which the period of 10 consecutive years will have to be reckoned.

Held: On prima facie perusal of these provisions, it is seen that the profits and gains derived by a 100 per cent export-oriented undertaking from inter alia export of computer software for a period of 10 years shall be allowed as deduction from the total income of the assessee. Therefore, in the first instance, the profits derived by the undertaking from the export of software are to be computed and thereafter such profits are to be deducted from the total income of the assessee. The emphasis is on the undertaking, whose profits are to be computed which thereafter have to be deducted from the total income of the assessee. The words "the assessee" mean any assessee as the article "the" is an indefinite article. The deduction is admissible in respect of profits and gains of an undertaking which inter alia satisfies the condition that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. This provision also uses the words "any undertaking" and not "the assessee". Therefore, this provision also lays emphasis on the undertaking and not the assessee. The words `new business' also imply that the emphasis is on the business and not the assessee. Sub-section (9) deals with a situation where ownership or the beneficial interest in the undertaking is transferred by any means. The words "any means" are of wide import and take within their ambit the transfer of the undertaking either by sale of individual assets or as a going concern by way of slump sale. This provision is attracted to the facts of this case for assessment years 2002-03 and 2003-04. It is provided that in a case so covered, the deduction under sub-section (1) shall not be allowed in the year of transfer and subsequent years. The case of the counsel is that this provision is applicable in the case of transferor and not the transferee. However, the case of the Departmental Representative is that this provision is applicable to both the transferor and the transferee in the year of transfer and to the latter in subsequent years. The Tribunal agreed with this view of the Departmental Representative for the reason that the words "and the subsequent years" will have no meaning if the provision is applicable only to the transferor for the simple reason that no income will accrue to the transferor in subsequent years. One of the cardinal principles of the construction of the statute is that no part thereof should be rendered otiose by interpretation. This principle supports the case of the Departmental Representative that the transferor and the transferee will not be entitled to the deduction in the year of transfer and the transferee will not be entitled to the deduction in the year of transfer and subsequent years, provided the transferee does not become entitled to the deduction for some other reason. [Para 5]

There is no impediment in giving the finding that for assessment year 2004-05, the assessee is entitled to deduct the profits and gains of the undertaking from its total income. The decision in the case of Heartland K.G. Information Ltd. supports the case of the assessee. This decision pertains to assessment year 2004-05, for which the provision contained in section 10B(9) does not exist on the statute book. Therefore, following this decision, it is held that the assessee is entitled to the deduction under section 10B for this year. The only point to be mentioned in this regard is that the undertaking was formed in the previous year relevant to assessment year 1999-2000. Therefore, this year is the first year of the functioning of the undertaking. Accordingly this year shall be the first year from which the period of 10 consecutive years will have to be reckoned. [Para 7]

The provision contained in section 10B(9) is clear in terms of its language. Its content has already been explained. The question is whether, when a provision is clear, then, reference can be made to a circular explaining its legal importance ? It is an accepted principle of interpretation of the fisical statutes that there is no need to seek any external aid when the language is clear. Therefore, it is not really necessary to look into the circular to place any interpretation of section 10B(9). [Para 7.2]

Although, it is the accepted position of both the parties that major ownership continues to be with the same persons, yet there is no evidence on record that the transfer was for genuine business purposes and not for any collateral purpose such as avoidance of tax. In view thereof, one is unable to give a finding that the Board circular, being a beneficial circular, is applicable to the facts of the case. As a specific circular, issued under section 10B has been considered, there is no need to consider the circular under a totally different provision, being section 84. The result is that the assessee is not entitled to the deduction for assessment years 2002-03 and 2003-04. [Para 7]

Followed: ITO v. Heartland K.G. Information Ltd. (2010) 131 TTJ (Chen-Trib) 216. Distinguished: Tech Books Electronics Services (P) Ltd. v. Addl. CIT (2007) 13 (II) ITCL 307 (Del-Trib) : (2006) 100 ITD 125 (Del-Trib), Kumaran Systems (P) Ltd. v. Asstt. CIT (2007) 14 SOT 1 (Chen-Trib) : (2007) 106 TTJ (Chen-Trib) 484, and Mohan Dairy v. Dy. CIT (2004) 90 TTJ (Del-Trib) 403. Referred: Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC) and CIT v. Haji Mohd. AH Mohd. Ishaq (2007) 295 ITR 109 (All).

Decision: Partly in assessee's favour.

Counsel: Manish Gupta, for the Appellant q Vinod Kumar Bindal & Ms. Sweeti Kothari, for the Respondent

ORDER

All these appeals of the revenue raise a common ground that on the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in allowing deduction under section 10B of the Income Tax Act, 1961, ignoring the fact that the assessee did not fulfil the conditions mentioned in sub-section (2) of this section. It is also mentioned that the machinery used by the assessee had been previously used by another assessee prior to its transfer and takeover by this assessee.

2. The learned Departmental Representative drew our attention towards the assessment order for assessment year 2002-03, passed by the Asstt. CIT, OSD, Ward 12(3), New Delhi (assessing officer for short), on 11-3-2005. It is mentioned that the assessee-company filed the return of income on 28-10-2002 declaring nil income. It was incorporated on 2-8-2000 and it is engaged in the business of export of digitized medical transcription. This business was earlier carried on by Heartland Information & Consultancy Services (P) Ltd. ("HICS" for short), a sister concern. All the assets now used by the assessee were received on transfer from the HICS. The details of these assets have been furnished on page Nos. 2, 3 and 4 of the assessment order.

2.1 The assessee had claimed deduction under section 10B of the Act. In view of the fact that the machinery used by the assessee had been earlier used by HICS, it was required to explain as to why the deduction may not be disallowed in view of the provision contained in sub-section (2) of this section. It was submitted that the new computers were purchased by the HICS in the period 29-9-1998 to 29-7-2000. These computers were transferred to the assessee-company. A no objection certificate regarding takeover of the operations of the HICS by the assessee, issued by the STPL, was also filed. The assessee also moved an alternative claim that if deduction under section 10B is not admissible, it may be granted deduction under section 80HHE of the Act. For completeness, it may be mentioned that no argument was made before us by any party regarding deduction under section 80HHE.

2.2 The assessing officer considered the facts of the case and submissions made by the assessee. It has been mentioned by him that the HICS claimed deduction of depreciation amounting to Rs. 1,41,62,841, including depreciation of Rs. 1,33,98,183 on the computers used now by the assessee. That company had also intimated to its assessing officer on 22-2-2004 that the assets held by it were transferred to the assessee at WDV as per books. On these facts it was held that the conditions mentioned in sub-section (2) do not stand satisfied in the case of the assessee. Accordingly the deduction was denied. The assessing officer also denied under section 80HHE on the ground inter alia that statutory report has not been filed along with the return of income or before the due date of filing the return under section 139(1), and the claim has not been made by way of a revised return.

2.3 The case of the learned departmental Representative is that since the assessee has used assets which had been previously used by the HICS and on which the latter claimed depreciation, it is not entitled to deduction under section 10B. The learned Commissioner (Appeals) allowed the deduction by relying on the decision of "B" Bench of Delhi Tribunal in the case of Tech Books Electronics Services (P) Ltd. v. Addl. CIT (2007) 13 (II) ITCL 307 (Del-Trib) : (2006) 100 ITD 125 (Del-Trib). However, it is contended that the facts of that case are different. In that case, the assets of the firm had been taken over by the company. There was no change in the business of the undertaking which was already in existence. The partners of the firm became the shareholders of the company. Thus, while some change might have taken place in the nature of ownership of the undertaking, there was no change whatsoever in the business activities of the undertaking. It was held that if the business remains unaffected or unchanged, mere change in ownership does not lead to the inference of splitting up or reconstruction of a business already in existence. Therefore, it was held that the company shall continue to get the benefit of deduction under section 10B for the unexpired period. It has been argued by the learned Departmental Representative that in that case the business of the firm had been taken over by a company as a going concern. The partners of the firm became the shareholders of the company. However, in this case the business of one company has been transferred to another company. The deduction is admissible to an assessee. Therefore, the assessee is not entitled to deduction as it has used assets for its business which were already used by a totally different assessee and who also claimed the deduction of depreciation of the machinery.

3. In reply, the learned counsel submitted that the HICS had set up the business in the financial year 1998-99. The undertaking was formed with new computers. This business was transferred as a going concern to the assessee in the previous year relevant to assessment year 2001-02. Therefore, it cannot be said that the undertaking was formed with the assets used previously by any other undertaking. The deduction is given to an undertaking and if the undertaking satisfies all the conditions mentioned in sub-section (2) of section 10B, the deduction shall continue to be available to the new owner, if there is any change in the ownership, in the unexpired period of deduction.

3.1 In order to support the aforesaid contention, reliance has been placedon Board Circular No. 378, dated 3-3-1984, in which it is mentioned that the Board agrees that benefit of section 84 attaches to the undertaking and not to the owner thereof. The successor will be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a running concern.

3.2 Reliance is also placed on the decision in the case of ITO v. Heartland K.G. Information Ltd. (2010) 131 TTJ (Chen-Trib) 216, Kumaran Systems (P) Ltd. v. Asstt. CIT (2007) 14 SOT 1 (Chen-Trib) : (2007) 106 TTJ (Chenn-Trib) 484, Mohan Dairy v. Dy. CIT (2004) 90 TTJ (Del) 403, CIT v. Haji Mohd. All Mohd. Ishaq (2007) 295 ITR 109 (All) and Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC)

4. In the rejoinder, the learned Departmental Representative submitted that the Board circular was issued in the context of the provision contained in section 84 and not section 10B. The latter section grants deduction to an assessee from its total income. Sec. 10B(9), applicable to assessment years 2002-03 and 2003-04, provides that where the ownership or the beneficial interest in the undertaking is transferred, the deduction shall not be allowed to the assessee for the assessment year relevant to such previous year and subsequent years. This provision was omitted by the Finance Act, 2003, with effect from 1-4-2004 and, therefore, it is not applicable to assessment year 2004-05. The decision in the case of Heartland K.G. Information Ltd. (supra) is in respect of assessment year 2004-05, for which the provision contained in sub-section (9) is not applicable.

5. We have considered the facts of the case and submissions made before us. The facts are that the HICS set up an undertaking on the basis of the letter of intent issued by ISTP in financial year 1998-99. The business of the undertaking is to digitize medical prescription and export it. This business has been transferred to the assessee in financial year 2000-01. The HICS set up the business with new machinery and it fulfilled all the conditions mentioned in sub-section (2) of section 10B. The case of the assessee is that deduction under section 10B(1) is granted to an undertaking and, therefore, if the ownership of the undertaking changes for reason whatsoever, the benefit continues to be given to the undertaking for the unexpired period and the new owner continues to get this deduction from its total income for such unexpired period. On the other hand, the case of the revenue is that the benefit is given to an assessee as the deduction is made from its gross total income. Therefore, if there is change in ownership, the benefit is not available to the new owner. In the alternative, the argument is that such deduction is not available with the assessee for assessment years 2002-03 and 2003-04 in view of the provision contained in sub-section (9) of section 10B.

5.1 Sub-section (1) of section 10B reads as under :

"(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee."

5.2 Sub-section (2) of section 10B reads as under :

"This section applies to any undertaking which fulfils all the following conditions, namely—

(i) it manufactures or produces any articles or things or computer software;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose."

5.3 Sub-section (9), applicable for assessment years 2002-03 and 2003-04 reads asunder :

"Where during any previous year, the ownership or the beneficial interest in the undertaking is transferred by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years."

5.4 On prima facie perusal of these provisions, it is seen that the profits and gains derived by a 100 per cent export-oriented undertaking from inter alia export of computer software for a period of 10 years shall be allowed as deduction from the total income of the assessee. Therefore, in the first instance, the profits derived by the undertaking from the export of software are to be computed and thereafter such profits arc to be deducted from the total income of the assessee. The emphasis is on the undertaking, whose profits are to be computed which thereafter have to be deducted from the total income of the assessee. The words "the assessee" mean any assessee as the article "the" is an indefinite article. The deduction is admissible in respect of profits and gains . of an undertaking which inter alia satisfies the condition that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. This provision also uses the words "any undertaking" and not "the assessee". Therefore, this provision also lays emphasis on the undertaking and not the assessee. The words `new business' also imply that the emphasis is on the business and not the assessee. Sub-section (9) deals with a situation where ownership or the beneficial interest in the undertaking is transferred by any means. The words "any means" are of wide import and take within their ambit the transfer of the undertaking either by sale of individual assets or as a going concern by way of slump sale. This provision is attracted to the facts of this case for assessment years 2002-03 and 2003-04. It is provided that in a case so covered, the deduction under sub-section (1) shall not be allowed in the year of transfer and subsequent years. The case of the learned counsel is that this provision is applicable in the case of transferor and not the transferee. However, the case of the learned Departmental Representative is that this provision is applicable to both the transferor and the transferee in the year of transfer and to the latter in subsequent years. We agree with this view of the learned Departmental Representative for the reason that the words "and the subsequent years" will have no meaning if the provision is applicable only to the transferor for the simple reason that no income will accrue to the transferor in subsequent years. One of the cardinal principles of the construction of the statute is that no part thereof should be rendered otiose by interpretation. This principle supports the case of the Departmental Representative that the transferor and the transferee will not be entitled to the deduction in the year of transfer and the transferee will not be entitled to the deduction in the year of transfer and subsequent years, provided the transferee does not become entitled to the deduction for some other reason.

6. Coming to various cases relied upon by the rival parties, the decision of the Tribunal in the case of Tech Books Electronics (supra) decided under section 10A, insofar as we are concerned, is as under :

"In view of the above maxim of rule of interpretation, the term `reconstruction is to be seen and considered in the light of splitting up'. Otherwise also, as per the dictionary meaning of `reconstruction', as given in Judicial Dictionary by K.J. Iyer Eighth Edition 1980, the word `reconstruction' is expressed by synonymous `rebuild'. Thus, if there is change of ownership from one person to another but the business continued to be the same, it cannot be said that the undertaking is formed as a result of reconstruction."

It will be seen that the decision has been rendered on the issue as to whether there had been reconstruction of a business already in existence on account of transfer of business of a firm to a company when partners of the firm become the shareholders in the company.

6.1 The decision in the case of Kumaran Systems (P) Ltd. (supra) has also been rendered under section 10A, which is on the same lines as the decision in the case of the aforesaid Tech Books Electronics (supra).

6.2 The decision in the case of Mohan Dairy (supra) has been rendered under sections 80-I and 80-IA. The question in this case is totally different as to whether a cold storage is required to fulfil the conditions mentioned in section 80-IA(2) ? The decision is that cold storage does not produce any article or thing. It is engaged in the business of preservation. Therefore, it is not an industrial undertaking, which is required to satisfy the conditions mentioned in sub-section (2) of that section.

6.3 The decision in the case of Heartland K.G. Information Ltd. (supra) has been rendered under sections 10A and 10B. In this decision the Tribunal did not agree with the arguments of the learned Departmental Representative that the assessee has been shifting its stand by claiming deduction under section 10A, 10B or 80HHC by holding that an assessee is entitled to claim any relief admissible to it, which the revenue authorities are bound to allow as per law. Coming to the controversy of undertaking versus the assessee, it has been held that the transferee shall be entitled to the deduction for the unexpired period. It may be mentioned that while deciding this case the provision contained in sub-section (9) of section 10A or section 10B was not brought to the notice of the Tribunal and, therefore, this provision was not considered in the order.

6.4 in the case of Bajaj Tempo Ltd. (supra) it has been held that the incentive provisions, intended for growth and development, should be liberally interpreted. The decision was rendered under section 15C(2)(i) of the 1922 Act. The assessee had taken a building on lease for setting up of its new industrial undertaking and the exemption was denied on this ground. The Hon'ble court held that lease of previously used building was not the dominant factor in setting up a new industrial undertaking and thus the claim of the revenue was negated. In the case of Haji Mohd. All Mohd. Ishaq (supra), it has been held that the benefit under section 84, later section 80J, attaches to the undertaking and not to the assessee.

7. Coming to the facts of this case, there is no impediment in giving the finding that for assessment year 2004-05, the assessee is entitled to deduct the profits and gains of the undertaking from its total income. The decision in the case of Heartland K.G. Information Ltd. (supra) supports the case of the assessee. This decision pertains to assessment year 2004-05, for which the provision contained in section 10B(9) does not exist on the statute book. Therefore, following this decision, it is held that the assessee is entitled to the deduction under section 10B for this year. The only point to be mentioned in this regard is that the undertaking was formed in the previous year relevant to assessment year 1999-2000. Therefore, this year is the first year of the functioning of the undertaking. Accordingly this year shall be the first year from which the period of 10 consecutive years will have to be reckoned.

7.1 It has already been discussed that the provision contained in section 10B(9) is applicable to the facts of the case for other two years. In this connection, the submission of the learned counsel is that this provision has been explained by the Board in Circular No. 8 of 2002, dated 27-8-2002, a copy of which was placed before us. This circular explains the intendment behind its introduction as under :

"19.6 Sub-section (9) of section 10A and sub-section (9) of section 10B provide that no deduction under those sections shall be available where during any previous year the ownership or the beneficial interest in the undertaking is transferred by any means.

19.7 The above provision was introduced by the Finance Act, 2000 to prevent trading in incentives by such companies formed only for that purpose. However, the above provision was not intended to bring within its purview cases of genuine business reorganization while maintaining the major portion of ownership or beneficial interest with the same persons who were the owners of the business before such reorganization."

7.2 This circular has been considered by the learned Commissioner (Appeals) and construed in favour of the assessee. It is argued by the learned counsel that it is entitled to deduction for other years also on the basis of this circular. We have considered this matter. The provision contained in section 10B(9) is clear in terms of its language. Its content has already been explained by us. The question is whether, when a provision is clear, then, reference can be made to a circular explaining its legal importance ? It is an accepted principle of interpretation of the fisical statutes that there is no need to seek any external aid when the language is clear. Therefore, it is not really necessary for us to look into the circular to place any interpretation of section 10B(9).

7.3 There is another aspect of the issue, namely, that if this circular is construed to be a beneficial circular, then, it is binding on the lower authorities. The assessing officer has not followed this circular by implication as the deduction has been denied. However, neither the provision nor the circular was before him and it was brought into picture for the first time before the learned Commissioner (Appeals). The circular furnishes the intendment behind the provision, which is to prevent trading in incentives by such companies formed only for such purpose. It is further stated that the provision is not intended to bring within its purview cases of genuine business reorganization while maintaining the major portion of ownership or beneficial interest with the same persons. Thus, in order to grant benefit of the provision to the assessee, two conditions are required to be satisfied : (i) the transfer is not in the nature of trading in incentives by the companies formed for this purpose, and (ii) it is intended to operate in a case of genuine business reorganization wherein major portion of ownership or beneficial interest remains with the same persons. There is no fact on record brought by the assessee to prove that these conditions are satisfied. The learned Commissioner (Appeals) merely took note of the circular at page Nos. 3 and 4 of his order and thereafter allowed relief to the assessee. However, it is also a fact that no evidence exists on record to show HICS did not become a shell company after transfer of the business to the assessee. Further, there is no evidence on record to prove that the transfer of the undertaking was made for reasons of business exigencies such as for more efficiency conduct of the business etc. and not for any avoidance of tax payable as dividend-distribution tax. We have carefully perused the submissions of the assessee made before the learned Commissioner (Appeals), in a letter placed before us in the paper book on page Nos. 1 to 24. This letter contains only the legal submissions, but does not contain any fact leading to a conclusion that the case is covered by aforesaid Circular No. 8 of the Board. Although, it is the accepted position of both the parties that major ownership continues to be with the same persons, yet there is no evidence on record that the transfer was for genuine business purposes and not for any collateral purpose such as avoidance of tax. In view thereof, we are unable to give a finding that the Board circular, being a beneficial circular, is applicable to the facts of the case. As a specific circular, issued under section 10B has been considered, there is no need for us to consider the circular under a totally different provision, being section 84 of the Act. The result is that the assessee is not entitled to the deduction for assessment years 2002-03 and 2003-04.

8. In the result, appeals for assessment year 2002-03 and 2003-04 are allowed, and the appeal for assessment year 2004-05 is dismissed.

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