Saturday, July 30, 2011

Digest of important case law – June 2011

Journals Referred : BCAJ, CTR, DTR, ITD, ITR, ITR (Trib), Income Tax Review, SOT, Taxman, Taxation, TLR, TTJ, BCAJ, ACAJ,

S. 2(28A) : Interest-Meaning.

Discounting of a promissory note does not involve creation of a debt or existence of a debtor – creditor relationship, the amount of discount cannot be termed as "interest" paid by seller of promissory note with in the meaning of section 2 (28A).

ABC International Inc USA ( 2011) 199 Taxman 211/ 241 CTR 289 / 55 DTR 393(AAR).

S.5 : Income- Accrual of income-Waiver of interest –Method of accounting ( S.145.)

Waiver of interest before end of accounting year , interest did not accrue to assessee. (Asst year 1997-98).

Bagoria Udyog v CIT ( 2011) 334 ITR 280 ( Cal) (High Court).

S.5: Income –Accrual- Tuition fees received in advance (S. 145.).

Assessee in receipt of non –refundable advances from coaching students can be charged to tax only to the extent of receipt which accrued to the assessee as income during the relevant previous year and not the entire receipts.

Career Launcher (India) Ltd v Asst CIT ( 2011) 139 TTJ 48 (Delhi) (Trib).

S.9: Income deemed to accrue or arise in India-Technical services- Drawings and designs.

An Indian Company ,entered in to technical assistance agreement with an American company ,under which American Co. agreed to render, outside India certain engineering and other related services in relation to its sponge iron plant in India. In accordance with agreement, the American Co. delivered total basic engineering package to representative of the Indian Co. in USA between November 1989 and August 1990 and also imparted training to 22 keys personnel of Indian Co. in Mexico. As a consideration, the Indian Co. paid certain amount to the American Co. The issue for consideration was whether income received by American Co. could not be deemed to have arisen / accrued in India because services under agreement were not rendered with in India though drawings /designs received from American Co. might have been utilized by Indian Co. in India. The Court held that an income received by non resident (Such person) by way of a payment from a resident for technical services rendered to him would be subject to Indian income tax only if it satisfies twin test, namely ,that income was received in respect of services (i) rendered in India and (ii) utilised in India or has such a live link with India that it can be treated as accrued or arisen in India. The expression " by such person " appearing in section 9 (1) (vii) (b) refers to recipient of income and not to person making payment.( Asst years 1990-91 and 1991-92)

Grasim Industries Ltd v S.M.Mishra , CIT ( 2011) 199 Taxman 184 (Bom) (High Court).

S.9: Income deemed to accrue or arise in India- Business income- Discounting of promissory note-DTAA- India- USA. (Art 7).

It was not in dispute that income arising to applicant from discounting promissory note payable in India , is business income taxable in India., However article 7 of DTAA , profits of an enterprise of a contracting State shall be taxable only in State unless enterprise of a contracting state, through a permanent establishment situated therein. It is assumed for the purpose of this Ruling that applicant has no permanent establishment in India ,it has to be ruled that income of applicant from discounting of promissory note would not be taxed in India. Even other wise , discounting of a bill of exchange or promissory note being a purchase of instrument as it were and especially when it discounted without recourse , applicant is not liable to tax in India in view of DTAA between India and USA.

ABC International Inc. ( 2011) 199 Taxman 211/ 241 CTR 289 / 55 DTR 393(AAR)

S.9: Income deemed to accrue or arise in India- Royalties and fees for technical services- DTAA- India- USA. ( S. 12 ).

Applicant a wholly owned subsidiary of US company, procured the services of US based personnel who are under the employment of GTE-OC, and affiliate of its parent company. Personnel secondment agreement specifically provides that the seconded employees shall remain the employees of GTE-OC and continue to get their salaries from GTE-OC as long as they remain in its employment. The authority held that (1) Amounts reimbursed by the applicant represent income accruing to GTE –OC (ii) The amounts reimbursed by the applicant are taxable as " Fees for Included Services (FIS) "under the DTAA and also under the Act. (iii) Fees for Included Services (FIS) is taxable at the rate of 20 percent as provide under article 12 (4) (b) of the DTAA. Accordingly TDS would be deductible as per section 195

Verizon Data Services India (P ) Ltd ( 2011) 199 Taxman 242/ 241 CTR 393/ 56 DTR 81(AAR).

S.9(1) (vii).Income deemed to accrue or arise in India- Fees for Technical Services- Permanent establishment- Deduction of tax at source- DTAA- India- Italy- ( S. 90, 195, arts 5,7, 13.)

Consideration paid to foreign company was only for supervising the erection of machines which can not be said to be a payment for assembly of machines to fall within the exclusion clause of Explanation 2 to section 9 (1) (vii). However , as persons who rendered services were not present in India for the required number of days as envisaged by art 5 (j) of the DTAA read with art 13 (5) ,income was not chargeable to tax in India and there was no obligation to deduct tax at source on such payment. ( Asst Year 2006-07).

Aditya Birla Nuvo Ltd v Asst CIT ( 2011) 56 DTR 100 ( Mumbai ) (Trib).

S.9 (1) (vii).Income deemed to accrue or arise in India-Fees for technical services- Developing tooling- validating new process for manufacture-Deduction of tax at source- DTAA- India- USA.(S. 195, 201, Art 12 (4).

Assessee is engaged in the manufacture of steel wheels for commercial vehicles, passenger cars ,utility vehicles , earth moving construction equipment , agricultural tractors and defence vehicles. Assessee developed the new process of manufacturing steel wheels for trucks etc, however it did not have requisite know how for designing the machine capable of manufacturing the product as patented process. Assessee approached the two US Companies which had the required knowledge. Assessee made advance payment in respect of entire services under the agreement were rendered outside India and hence no income chargeable to tax in India. The Tribunal held that in terms of Article 12(4) of India US tax treaty, payment made to US company for `developing tooling' and `validating new process for manufacture' of wheels for commercial vehicles is `fees for included services'

Wheels India Ltd. vs ITO, ITA No. 1792/Mds./2006, dt.19-04-2011, A.Y. 2005 – 2006, Chennai ITAT, BCAJ pg. 29, Vol. 43-A, Part 3, June 2011.

S.9 (1) (vii): Income deemed to accrue or arise in India- Fees for technical services- Deduction of tax at source- DTAA- India- UK. ( 90, 195 ).

Services rendered by the UK company to the applicant Indian Company pursuant to the data processing services agreement being in the nature of routine data entry ,application sorting document handing and data capturing services, cannot be said to be managerial or technical services with in the meaning of art 13 of the Indo –UK DTAA or Explanation 2 to section 9 (1) (vii) and therefore , consideration received for such services is not taxable in India and accordingly ,there is no question of withholding tax under section 195.

R.R.Donnelley India Out source (P ) Ltd ( 2011) 241 CTR 305 / 199 Taxman 255 / 56 DTR 1(AAR).

S.10 (23C):Charitable purpose- Education- Subsidy grant from Government.( S.2.(15).)

A grant coming from Government will qualify for exemption from taxation if same has been granted for a particular purpose of public utility or public importance or to alleviate a situation affecting general public and cannot be used for any other purpose. Assessee which is Government company within the meaning of section 617 of Companies Act ,1956 , which is engaged in business of printing, sale of text book and job works relating to printing, etc., the income will be exempt. The activity of assessee were covered by expression "education" as well as "advancement of any other object of general public utility" occurring in definition of "Charitable purpose" under section 2 (15).( Asst year 2005-06)

Bihar State Text Book Publishing Corporation v CIT ( 2011) 199 Taxman 196/ 241 CTR 403 (Patna) (High Court).

S. 10B :Exemption- Computation- Transaction with related concern.(S.80IA (10).

Assessee engaged in manufacturing of precious and semi precious stones . GP rate assessed was much higher as compared to another concern i.e. V.R. Exports. Assessing Officer clubbed the turnover of both the concerns and determined the average GP rate after considering the direct expenses and reduced deduction under section 10B. The Tribunal held that since there is no business between the assessee and VR Exports, provisions of section 80IA (10) are not applicable and net profit rate of the two concerns cannot be apportioned in the ratio of turnover of both concerns. (Asst year 2005-06).

ITO v Kanchan Tara Exports ( 2011) 138 TTJ 592 ( JP) (Trib).

S.11. Charitable Trust- Application of income- Legal expenses to defend member of society in contempt proceedings. ( S 12, 37(1 )).

Legal expenses incurred by the assessee Society to defend its member in contempt of Court Proceedings cannot be said to be for promoting the objects of the association nor for the benefit of the association , therefore , could not be allowed as deduction. (Asst years 2004-05 , 2005-06 and 2006-07 ).

CIT v IAS Officers Association ( 2011) 56 DTR 239 ( Kar) (High Court).

S.14A: Exempted income- Interest on borrowed capital- Direction of Tribunal.

During the course of assessment proceedings , the Assessing Officer made a query in respect of disallowance under section 14A of the Income tax Act ,however no disallowance was made . Revenue had not challenged the non applicability of section 14A. Tribunal gave direction to consider applicability of section 14A. The direction of Tribunal was quashed.

Topstar Mercantile P. Ltd v Asst CIT ( 2011) 334 ITR 374 (Bom) (High Court).

S. 14A : Business Expenditure – No disallowance if assessee has no tax-free income- Exempted income .

S. 14A uses the words "for the purpose of computing the total income under this Chapter ……. expenditure incurred in relation to income which does not form part of the total income under this Act". Thus for the applicability of s. 14A there must be (a) taxable income and (b) tax-free income. If either one is absent, s. 14A has no applicability. If there is no claim for tax-free income, there cannot be any disallowance u/s 14A . If the transaction of lending monies between the assessee and the AE is in foreign currency and the transaction is an international transaction, it has to be evaluated by applying the commercial principles applicable to international transaction.

Siva Industries & Holdings Ltd. vs ACIT(ITAT )(Chennai) ()

Editorial - Walfort Share and Stock Brokers 326 ITR 1 (SC), Godrej & Boyce 328 ITR 81 (Bom) & Winsome Textile 319 ITR 204 (P&H) referred ( A. Y. 2006-07)

S. 23: Income from house property- Annual Letting value- Maintenance and other charges.

Maintenance and other charges are deductible from rent while calculating annual letting value. ( Asst years 1996-97-200-01 ).

CIT v R.J.Wood P. Ltd ( 2011) 334 ITR 358 (Delhi) (High Court)

S. 25B: Income from house property- Arrears of rent.( S. 23.).

Arrears of rent received in subsequent year cannot be spread over previous years , it is taxable in the year of receipt.( Asst years 1996-97 -2000-01 ).

CIT v R.J.Wood P. Ltd ( 2011) 334 ITR 358 ( Delhi) (High Court).

S. 28(i) : Business Income – Capital gains – Tests to determine whether shares gains assessable as STCG or business profits:

The Supreme Court vide order dated 15.11.2010 dismissed the Department's Special Leave Petition against the judgment of the Bombay High Court in CIT vs. Gopal Purohit (2010) 228 CTR 582 (Bom) .

CIT vs Gopal Purohit (2011) 334 ITR 308 (St.) (SC)

S. 28(i): Business income- Income from other sources- Interest income. (S. 56.)

The tribunal has given finding that the borrowings , made by the assessee, were very much part and parcel of assessee's investment in acquiring the ship. Even the RBI `s permission was obtained for the same and interest earned from the unutilised portion of the said borrowing will constitute business income.

CIT v Varun Shipping Co Ltd ( 2011) 334 ITR 263 (Bom) (High Court).

Editorial- The Supreme court has granted special leave to the department to appeal against this judgment. ( 2010) 325 ITR (ST) 5(Bom).

S. 28(i ): Business income- Valuation of closing stock-Firm dissolved – Business taken over by another concern – S. 45 (4).

Where assessee firm was dissolved and its closing stock was taken over by another concern , same had to be valued in profit and loss account itself on date of dissolution on market price and excess of market price of closing stock over its book value had to be assessed as business profits of assessee firm.( Asst year 1992-93).

Asst CIT v Goel Udyog ( 2011) 45 SOT 444( Delhi) (Trib).

S. 28(i) Business Income – Property Rental assessable as "business profits" if commercial activities carried out

Merely because income is attached to immovable property, it cannot be the sole factor for assessment of such income as income from property. Primary object of the assessee while exploiting the property has to be considered . If the main intention is to exploit the immovable property by way of complex commercial activities, the income is assessable as business income. (Asst. Year : 2006-07)

ITOI vs Shanaya Enterprises (Mumbai) (ITAT) ()

Editorial-Sultan Brothers (1964) 51 ITR 353 (SC) explained as not being in conflict with Shambhu Investments (2003) 263 ITR 143 (SC).

S. 28 (1) : Capital gains- Business Income–Shares PMS transaction gains are STCG and not business profits.( S. 45.)

(i) Given the definitions of the term "business" and "capital asset" in s. 2(13) & 2(14), shares, if held for more than 12 months, will be a long-term capital asset, inspite of continued and systematic dealings;

(ii) On facts, as the assessee had engaged a portfolio manager to look after its' investments and all decisions to buy and sell were taken by the portfolio manager and not by the asessee, the assessee cannot be called a "dealer";

(iii) The object of the PMS was to maximize the value of the portfolio. It was "wealth maximization" and not "profit maximization";

(iv) In the balance sheet, the shares were valued at cost and not at lower of cost or market value;

ARA Trading & Investment Pvt. Ltd. vs DCIT (Pune)(ITAT) .

S.32: Depreciation- Leasing of vehicles- Higher rate of depreciation.

Assessee company engaged in business of leasing of motor vehicles etc to its clients is not entitled to higher rate of depreciation. The basic requirement for being entitled to depreciation at higher rate of 50 percentage under Entry No 111 (2) (ii) of Appendix –I to Income Tax Rules is user of vehicles in business of transportation or business of hire.( Asst years 1989-90-1992-93).

Bhatwati Appliances v ITO ( 2011) 199 Taxman 131 (Guj) (High Court).

S. 32. Depreciation- Rate – UPS at 60%.

Depreciation is allowable on UPS @ 60%

CIT v Orient Ceramics & Industries Ltd ( 2011) 56 DTR 397 ( Delhi) (High Court).

S. 32: Depreciation- Toll Road- Business of setting up of infrastructural facilities.

Assessee was entitled to depreciation on toll road which is constructed on "Build –own –operate –transfer" basis (Asst years 2003 & 2004-05).

Gujarat Road & Infrastructure Co Ltd v CIT ( 2011) 56 DTR 73 (Ahd) (Trib).

S. 32 : Depreciation- Block of assets- Sale of assets- Closure of one manufacturing activities . ( S. 50).

Assessee having closed down its manufacturing activities in one of Unit and sold all the assets of that unit except motor vehicles and software , block of assets viz, building and plant and machinery , ceased to exist and thereafter these assets neither belonged to the assessee nor were used for the purpose its business and therefore , assessee is not entitled to depreciation thereon . ( Asst years 2005-06 and 2006-07).

Sony India (P) Ltd v Addl CIT ( 2011) 56 DTR 156 ( Delhi) (Trib).

S. 32: Depreciation- Goodwill- Commercial rights- Commercial benefits.

Where the assessee has made the excess payment over and above the cost of intangible assets and that excess payment was claimed to have been made against goodwill , only the portion of goodwill representing cost of acquisition of the commercial rights shall be eligible for depreciation and not the portion relating to acquiring commercial benefits. On the facts Tribunal directed the Assessing Officer to divide the entire cost of goodwill in two parts and 50 percent of the cost of the goodwill be treated as a cost of acquisition of the commercial rights and allow the depreciation thereon at a prescribed rate. ( Asst years 2005-06 & 2006-07).

Jeypore Sugar Company Ltd v Asst CIT ( 2011) 56 DTR 229 ( Visakha) (Trib).

S. 35D: Business expenditure- Preliminary expenses-Public issue expenses.

Assessee company was incorporated in 1976, hence public issue expenses relating to assessment year 1995-96 could not be claimed under section 35D.(Asst years 1999-2000 and 2001-02).

CIT v Shasun Chemicals & Drugs Ltd ( 2011) 199 Taxman 107 (Mad) (High Court).

S. 35DDA.Business expenditure-Payment to employees on voluntary retirement- (S. 10(10C), 37 (1).)

Section 35DDA would be attracted only when payment has been made to an employee in connection with his voluntary retirement , in accordance with the scheme or schemes of voluntary retirement. Since the payment reduces the burden on the assessee relatable to subsequent years , the legislature inserted this section in order to allow only 1/5 of total sum paid by the assessee to its employees . This amount in the hands of the employee has been exempted under section 10 (10C) to the extent of Rs 5 Lakhs.. Provisions of section 35DD were not attracted in the matter of VRS compensation paid to the retiring employees as the conditions of Rule 2BA were not met and the said expenditure is allowable under section 37 (1). ( Asst year 2003-04)

DY CIT v Warner Lambert ( India ) (P ) Ltd ( 2011) 56 DTR 121 (Mumbi) (Trib).

S. 35DDA – Business expenditure-Scheme floated by the assessee giving option to the employees of one unit. ( S.10(10C), read with rule 2BA).

The scheme floated by the assessee giving option to the employees of one unit to leave its employment without any qualifying condition regarding age or length of service against payment of compensation is to be treated as VRS though it is not conformity with Rule 2BA and assessee is entitled to deduction of one fifth of the expenditure incurred on the payments under then scheme in accordance with the provisions of section 35DDA.( Asst years 2005-06 & 2006-07).

Sony India (P) Ltd v Addl CIT ( 2011) 56 DTR 156 ( Delhi) (Trib).

S. 36(1)(ii) : Business Expenditure – Commission -Dividend – applicable to all employees including shareholder employees - Bars tax avoidance scheme of paying commission instead of dividend.

The argument that s. 36(1)(ii) is applicable only to employees who are not shareholders is not acceptable because payment of dividend to shareholders is not compulsory. S. 36(1)(ii) applies to all employees including shareholder employees though the disallowability is restricted to partners and shareholders because it is only in those cases that payment can be said to be in lieu of profit or dividend. The word "payable" means that dividend would have been declared by any reasonable management . The device adopted by the assessee was obviously with the intention to avoid payment of full taxes. There is obvious tax avoidance. S. 36(1)(ii) is intended to prevent escape from taxation by describing the payment as bonus or commission when in fact it should have reached the shareholders as profit or dividend ( A. Y. 2006-07)

Dalal Broacha Stock Broking Pvt. Ltd. vs ACIT (ITAT Mumbai- Special Bench).  

Editorial-Loyal Motor ( 1946 )14 ITR 647 (Bom) referred)

S. 37 (1): Business expenditure- Tractor Charges- Assessee requesting the AO to issue summons- Addition without issuing summons – Not valid.( S. 131.).

Assessee made payments of tractor charges to parties partly in cheque and partly in cash. Assessee requested the assessing officer to summon person to whom cash payments were made. Assessing officer made addition without summoning person. The court held that addition was not proper.

CIT v Brij Pal Sharma ( 2011) 333 ITR 229 (P &H ) (High Court)

S. 37(1). Business expenditure-Capital or revenue-Expenditure on glow sign board.

Expenditure on glow sign boards is allowable as revenue expenditure.

CIT v Orient Ceramics & Industries Ltd ( 2011) 56 DTR 397 ( Delhi) (High Court).

S.37 (1): Business expenditure-Service charges to Government-

Service charges paid to Government as per directives of State Government allowable as deduction.( Asst Year 1998-99 ).

Dy CIT v Travancore Titanium Products Ltd ( 2011) 130 ITD 161 ( Cochin ) (TM ) (Trib).

S.40(a) (i): Amounts not deductible-Business expenditure- Discounting charges- Export sales bill- Deduction of tax at source-Interest. [ S.2 (28A) , 195 ]

Discounting charges paid by assessee to a foreign company for discounting export sale bills is not "interest" as defined in section 2 (28A), since foreign company has no permanent establishment in India, it was not liable to tax in respect of discounting charges and therefore , assessee was under no obligation to deduct tax at source under section 195 and the discounting charges could not be disallowed under section 40 (a) (i).( Asst years 2004-05 & 2005-06 ).

CIT v Cargill Global Trading (I) (P) Ltd (2011) 241 CTR 443 / 56 DTR 188 / 199 Taxman 320 (Delhi) (High Court).

S. 40 (a) (i): Amounts not deductible- Business expenditure- Deduction of tax at source- Royalty- Paid or deducted.

As per the proviso to section 40 (a) (i), deduction for royalty could be allowed in the year in which TDS was either paid or deducted under Chapter XVII –B; where as tax was deducted in Asst year 1995-96 but payment was made in the next assessment year i.e. 1996-97 , assessee was not entitled to claim the same as deduction in Asst Year 1996-97 but could be claimed in asst year 1995-96, only. ( Asst Year 1996-97 ).

CIT v Whirpool of India Ltd ( 2011) 56 DTR 65 ( Delhi ) (High Court).

S. 40 (a)(ia).Amounts not deductible- Business expenditure- Payment to truck operators without deduction TDS- Deduction of tax at source. (S. 194C.)

Assessee operating trailer lorries disbursing freight charges amounting to Rs 46,70,365 to 16 parties without deducting TDS as specified in section 194C . Assessee was liable to deduct tax at source . Amendment to sub section (3) of section 194C made through Finance Act 2005, where by second and third provisions were added to it w.e.f 1st June, 2005 has no retrospective effect . The Tribunal held that the Assessing Officer was justified in making disallowance under section 40 (a) (ia).( Asst Year 2005-06).

ITO v M.Sankar ( 2011) 138 TTJ 690/ 55 DTR 289 ( Chennai) (Trib)

S. 40 (a)(ia).Amounts not deductible- Deduction of tax at source- Franchisee agreement- Sharing of profits. (S. 194C)

Franchisee agreement did not stipulate payment to be made to the licence for any work done on behalf of the assessee and it was merely a case of running a study centre and to apportion profits thereof between the assessee and the licence and therefore provisions of section 194C were not applicable and no disallowance under section 40 (a) (ia) can be made.( Asst years 2005-06, 2006-07).

Career Launcher ( India) Ltd v Asst CIT ( 2011) 139 TTJ 48/ 56 DTR 10 (Delhi) (Trib).

S. 40(a) (ia). Amounts not deductible-Payment of contractors- Deduction of tax at source- Form no 15-I – (S.194C)

Once assessee has obtained Form no 15 –I from the sub contractors , he is not liable to deduct tax from the payments made to sub contractors and no disallowance can be made under section 40 (a) (ia) . Belated furnishing of form No 15J to the CIT is an act posterior in time to payments made under to sub contractor and therefore this can not itself undo the eligibility of exemption created by second proviso to section 194 C (3) (i) by virtue of submission of Form no 15 -I by the sub contractors.( Asst Year 2006-07)

Valibhai Khanbhai Mankad v Dy CIT ( 2011) 56 DTR 89 ( Ahd ) (Trib).

S. 40 (a) (ia) Amounts not deductible- Payment to contractor ( S. 194C).

Section 40 (a) (ia) applies even in respect of amount paid and not merely payable to the contractors and therefore CIT (A) was justified in confirming disallowances under section 40 (a) (ia) as the assessee had failed to deduct tax under section 194C.( Asst year 2007-08).

Dy CIT v Ashika Broking Ltd ( 2011) 56 DTR 417 ( Kol) (Trib).

S. 40A (9): Amounts not deductible- Bonus to employees- Actual payment. (S.43B).

Section 40A (9), is an overriding section to 43B, therefore payment of bonus payable to employees to an employee's bonus trust would be hit by section 40A(9), even if such payment was made to comply with the provisions of section 43B. ( Asst Year 1999-2000 and 2001-02).

CIT v Shasun Chemicals & Drugs Ltd ( 2011) 199 Taxman 107 (Mad) (High Court).

S.43 (i) – Actual cost – Depreciation- Assets acquired from franchisees –Valuation on the basis of valuation report – [S. 32, 43(6)]

Assessee company engaged in the business of manufacture of soft drinks acquired manufacturing assets and other assets, land and building of its franchisees on the basis of valuation done by the approved valuer. Assessing Officer increased the value of land by 50 % on estimated basis and value of bottles and crates was reduced by 50% and plant and machinery by 25%. The Court held that Tribunal was justified in direction the Assessing Officer to accept the valuation of assets acquired by the assessee from five vendor companies on the basis of report of the registered valuer when there was no basis to discard the valuation report.( Asst Year 1996-97).

CIT v Pepsico India Holdings (P) Ltd ( 2011) 56 DTR 137 (Delhi) (High Court).

S. 43(1): Actual cost-Depreciation- Custom duty paid under protest. (S. 32 ).

Assessee is entitled to add the disputed customs duty paid by it under protest on the imported machinery to the cost of plant and machinery and depreciation thereon.

CIT v Orient Ceramics & Industries Ltd ( 2011) 56 DTR 397 ( Delhi) (High Court).

S.43B:Business expenditure-Deduction on actual payment- Contribution to Employees' State Insurance.

Omission of the second proviso and the amendment of the first proviso to section 43B by the Finance Act, 2003 , where by payment made by the employer towards contribution to provident fund, employees' State insurance , gratuity , superannuation and other welfare funds would operate retrospectively from April 1, 1998 onwards . The payment made for ESI contributions could not be disallowed. ( Asst year 1998-99).

CIT v Rai Agro Industries Ltd ( 2011) 334 ITR 122 ( P& H) (High Court).

S.43B : Business expenditure- Deduction on actual payment-Excise duty paid in advance.

Assessing officer holding that deduction can be claimed only on removal of goods from factories . High Court held that the assessee is entitled to deduction in respect of excise duty paid in advance.( Asst year 1989-90).

CIT v Modipon Ltd (NO 2). ( 2011) 334 ITR 106 ( Delhi) (High Court).

S.44BB: Business of exploration of mineral oil- Non-Resident – (S. 9(1)(vii), S. 44DA)

Revenues earned by the applicant , a UK company ,under seismic data acquisition and processing contracts in India are taxable under section 44BB.

OHM Ltd ( 2011) 241 CTR 327 / 55 DTR 413(AAR)

S. 44BB – Business expenditure – Non deduction of TDS – (S.40(a)(ia), 195)

Since payment to non-resident is covered under the special regime of section 44BB, withholding of appropriate tax by payer without approaching the A.O. does not lead to any violation of withholding tax provisions, expenses cannot be disallowed u/s 40(a)(ia) on the ground of short deduction of tax.

Frontier Offshore Exploration (India) Ltd. vs. DCIT, ITA No. 200/Mds./2009, A.Y. 2004 – 2005, dt.04-02-2011, ITAT, BCAJ pg. 35, Vol. 43-A, Part 1, April 2011.

S. 45: Capital gains-Compensation for giving up the right to specific performance- ( S. 48 ).

Compensation received for giving up the right to specific performance of an agreement to sell , constitutes capital gain chargeable to tax , however deduction is allowable as per section 48.( Asst year 1998-99).

CIT v H. Anil Kumar ( 2011) 56 DTR 384 ( Kar) (High Court).

S. 45: Capital gains- Transfer of shares to wholly owned subsidiary-Transaction not regarded as transfer – (S. 47 (iii), S. 92 to 92f, 139).

Transfer of shares of wholly owned Indian subsidiary by the applicant a US company to another group company based in Singapore without consideration being a gift is not taxable under the provisions of section 45 , in the absence any income accruing from the transfer of shares , provisions of section 92 to 92F relating to transfer pricing are not applicable , however applicant is under obligation to file return under section 139.

Deere & Company, In re ( 2011) 56 DTR 242 (AAR).

S. 45 – Capital gains – Capital asset – Deduction of tax at source – Non Resident – Corporate Veil can be lifted to tax sale – (S.2 (14), 195)

The assessee, a company based in Cyprus, bought shares (100% together with another company) of a UK company called Finsider International, from another UK company. Finsider, UK, held 51% shares of Sesa Goa Ltd, India. The AO took the view that the 51% shares in Sesa Goa held by Finsider, UK, constituted a capital asset u/s 2(14) and that the transfer of the shares of Finsider amounted to a transfer of the said 51% shares of Sesa Goa and that the assessee was liable to deduct tax at source u/s 195 when it bought the shares of Finsider, UK. He accordingly issued a show-cause notice u/s 201 seeking to treat the assessee as a defaulter. The assessee filed a Writ Petition to challenge the notice on the ground that as one non-resident had sold shares of a foreign company to another non-resident, there was no liability under Indian law. HELD not accepting the assessee's contention:

What is under challenge is only the show-cause notice issued u/s 195 … it may be necessary for the fact finding authority to lift the corporate veil to look into the real nature of transaction to ascertain virtual facts. It is also to be ascertained whether the assessee, as a majority shareholder, enjoys the power by way of interest and capital gains in the assets of Sesa Goa and whether transfer of shares in the case on hand includes indirect transfer of assets and interest in Sesa Goa.

Ricter Holding Ltd. vs ADIT (Karnataka) ( High Court). .

S. 45: Capital Gains- Deduction- Shares PMS fee, even if NAV based, is deductible in computing PMS capital gains.

(i) In computing capital gains u/s 48, payments are deductible in two ways, one by taking full value of consideration net of such payments and the other by deducting the same as "expenditure incurred wholly and exclusively in connection with the transfer". The expression "full value of consideration" contemplates additions and deductions from the apparent value. It means the "real and effective consideration", which can be arrived at only after allowing the deductible expenditure (CIT v Shakuntala Kantilal 190 ITR 56 (Bom) followed);

(ii) The PMS fee, on profit sharing basis, was for the twin purposes of acquisition and sale of the securities. The fact that bifurcation between the two is not possible is not relevant. The department's argument that fee should be share-specific is absurd because fees for shares transactions is never share specific but is volume based;

(iii) Accounting Standard 13 (Accounting for Investments) issued by ICAI provides that brokerage, fees and duties have to added to the cost of investments. The assessee's method of accounting is to proportionately load the PMS fees on the opening portfolio and investments made during the year which means that no deduction is claimed for the fees on the unsold investments;

(iv) Devendra Kothari 50 DTR 369 (Mum) cannot be followed because (i) it unfortunately did not refer to the `read down' interpretation of s. 48 as laid down in Shakuntala Kantilal and (ii) on facts, the claim there was on the entire turnover on global basis and not restricted to only investments.

KRA Holding & Trading Pvt. Ltd. vs DCIT (Pune )(ITAT)  

S. 50: Capital gains- Depreciable assets- -Income include loss- Sale of entire assets of manufacturing Unit.

On the sale of entire assets of manufacturing unit , case of assessee falls with in the ambit of section 50 because the word "income" includes within in the ambit the "loss" , Assessing Officer is directed to hear the assessee and compute the loss as provided in section 50 (2).( Asst years 2005-06 and 2006-07)

Sony India (P) Ltd v Addl CIT ( 2011) 56 DTR 156 ( Delhi) (Trib).

S. 49(1) – Capital gains – Cost of acquisition – S.50C

Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred.

Section 50C applies to a capital asset being `land or building or both' and not to `any right in land or building or both'. Leasehold rights in plot of land is not `land or building or both' and hence section 50C does not apply to leasehold rights.

Anil G. Puranik vs. ITO, ITA No. 3051/Mum/2010, dt.13-05-2011, `A' Bench, A.Y. 2006 – 2007, Mumbai ITAT, BCAJ pg. 27, Vol. 43-A, Part 3, June 2011.

S. 50B. Capital gains- Slump sale – Depreciation- Block of assets ( S. 2(11), 32, 43 (6) (i) (C ) ).

In the case of slump sale , depreciation has to be allowed on the assets sold in slump sale up to date of transfer and allowable depreciation has to be computed for all years after 1st April 1998, for computing value of assets to be reduced from block of assets irrespective of the fact whether in the books the assessee had charged depreciation or not. ( Asst Year 2003—04).

DY CIT v Warner Lambert ( India ) (P ) Ltd ( 2011) 56 DTR 121 (Mumbai) (Trib).

S. 54EC: Capital gains Deduction allowable before set-off of brought-forward loss.

While s. 54EC is an exemption provision which exempts capital gains and takes them outside the purview of chargeable "capital gains", s. 74 deals with the carry forward and set off of loss under the head "capital gains". The stage at which set off of carried forward long term capital loss is to be given is subsequent to the stage at which income under the head capital gains is computed and deduction u/s 54EC is to be given in the course of the latter. Accordingly, s. 54EC deduction has to be given before set-off of losses.

The Tata Power Co. Ltd. vs. ACIT ((Mumbai) ( ITAT). .

S. 56(2)(v) : Income from other sources-Amount received by legal heir for abstaining form contesting the will of deceased.

Assessee , a legal heir of deceased having received a compromise amount under a settlement with the legatee for agreeing to the Court granting probate in respect of the last will of the deceased and withdrawing his caveat against grant of probate , the abstinence of the assessee from contesting the will constituted the consideration for payment and ,therefore the provisions of section 56 (2 ) (v ) are not attracted and the amount received by the assessee can not be treated as income under section 56( 2) (v). ( Asst Year 2006-07).

Purvez A. Poonawala v ITO ( 2011) 138 TTJ 773/ 55 DTR 297 (Mumbai ) (Trib).

S. 56(2)(v) : Income from other sources – Gift received from HUF – Exempt – HUF is a "relative" u/s 56(2)(v), (vi) & (vii)

Where assessee receives gift from HUF it was held that though the definition of the term "relative" does not specifically include a Hindu Undivided Family, a `HUF" constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these persons fall in the definition of "relative", an HUF is `a group of relatives'. As a gift from a "relative" is exempt, a gift from a `group of relatives' is also exempt since the singular will include the plural;(A. Y. 2005-06)

Vineetkumar Raghavjibhai Bhalodia vs ITO (ITAT)(Rajkot)  

S.69: Income from undisclosed sources-Addition –Set off on account of intangible.

If the intangible additions are made as undisclosed income during survey for earlier assessment years , while considering the assessment of subsequent assessment year and making addition of unexplained investment in stock , the assessing Officer should consider the question of set off of the intangible addition made in appeal.( Asst Year 1997-98).

Blaram Saha v CIT ( 2011) 56 DTR 209 (Cal) (High Court).

S.69A: Unexplained money-Statement of third party- Survey.

No incriminating material was found during search proceedings . Merely on the basis of statement of third party no addition can be made.

CIT v Concorde Capital Management Co Ltd ( 2011) 334 ITR 346 ( Delhi) (High Court).

S.69B: Income from undisclosed sources- Reference to DVO- Block assessment- Search and seizure.( S. 142A).

Proviso to section 142A has no retrospective effect , assessment by Assessing Officer and appeal by CIT (A) having been decided prior to 30th Sept , 2004 , it was not open to the Assessing Officer to order valuation of property by DVO.

CIT v Naveen Gera ( 2011) 56 DTR 170 ( Delhi) (High Court).

S. 80I: Deductions- Profits and gains from Industrial undertakings- Reconstruction of business.

Where assessee firm was formed by reconstruction of a business already in existence as a sole proprietary concern, it did not fulfil condition laid down in section 80I (2) (i) and therefore , it was not entitled to deduction under section 80I. In order to claim deduction under section 80I an Industrial undertakings has to fulfil all four clauses under section 80I (2) , and if it does not fulfil even one clause thereof , deduction is not allowable.( Asst Year 1992-93).

Asst CIT v Goel Udyog ( 2011) 45 SOT 444 ( Delhi ) (Trib)

S. 80IA: Deductions- Profits and gains derived from Industrial undertaking- Transport subsidy.

Source of transport subsidy is not the business of the assessee but the scheme framed by the Central Government and therefore ,'transport subsidy' received from the Government by the assessee cannot be included in profits derived from the industrial undertaking and is not eligible for deduction under section 80 IA.

CIT v Maharani Packaging (P) Ltd ( 2011) 55 DTR 340 (HP) ( High court).

S.80IB:Dedcutions-Manufacture or production- Converting raw fish into finished fish.

Process involved in converting raw fish into tinned fish did not amount to manufacture and therefore assessee was not entitled to deduction under section 80 IB. (Asst year 2004-05).

CIT v Gitwako Farma (I) (P) Ltd( 2011) 241 CTR 449 (Delhi) (High Court).

S.80IB (10). Deduction- Housing Project-Commercial area- Projects commenced prior to 1-4-2005- Restriction of 5% is not applicable.

The tribunal noted that the assessee's project had commenced prior to 1-4-2005 . It also noted that in the case of Brahma Associates ,the High Court has held that the amendment to section 80IB is prospective in operation . Since the assessesse' s project had commenced in December 2003 ,the Tribunal held that amendment to section 80IB (10) w.e.f Assessment Year 2005-06 , restricting the commercial area to 5 % is not applicable to projects commenced prior to 1-4-2005.( Asst Year 2005-06).

ITO vs. Chheda Construction Co., ITA No. 2764/Mum/2009, dt.27-04-2011, `C' Bench, A.Y. 2005 – 2006, Mumbai ITAT, BCAJ pg. 29, Vol. 43-A, Part 3, June 2011.

S.90: Double taxation relief- Interest on income tax refund- India- German –DTAA . – Art 11, 8 (3).

Interest on income tax refund is chargeable to tax under art 11 of Indo –German DTAA , Authorities below were justified in rejecting the contention of the assessee for its inclusion in art 8 (3) as only interest on funds which are connected with the operation of ships or aircrafts is covered with in the ambit of art 8 (3). ( Asst year 2004-05).

Hapag Lloyd Container Line GMBH v Asst Director ( 2011) 56 DTR 185 (Mumbai ) (Trib).

S.90: Double taxation Relief-Royalty- DTAA- India- Sri lanka.(art , 7, 12 ).

Applicant , a Sri Lankan company having undertaken a contract for dredging from an Indian company and granted non transferrable and non exclusive right to the Indian company to use its proprietary software as part of the agreement in order to transfer the scientific experience in hydrology possessed by the applicant without transfer of intellectual property rights in the software and therefore , consideration received by the applicant falls under the term "royalties" and is liable to tax under art 12 of the DTAA between India and Sri Lanka and not under art 7 thereof.

Lanka Hydraulic Institute Ltd ( 2011) 241 CTR 314 / 199 Taxman 232/ 56 DTR 11(AAR).

S. 92C: Avoidance of tax- Transfer Pricing-Comparison-Quality – Size.

Without ascertaining the quality and size of precious stones as sold to Associated Enterprise as compared to other enterprises, the Assessing Officer could not have made any adjustment on account of quality, and therefore, the addition made by Assessing officer on account of ALP was liable to be deleted.(Assst Year 2005-56).

ITO v Kanchan Tara Exports ( 2011) 138 TTJ 592 (JP) (Trib).

S.92C. Avoidance of tax- Transfer Pricing-Net margin- Adjusted book profits.

While determining arm's length price, it is profit as per books of account that has to be considered for computing net margin of assessee and not adjusted book profits. ( Asst Year 2006-07).

Geodis Overseas (P) Ltd v Dy CIT ( 2011) 45 SOT 375 (Delhi )(Trib).

S.92C: Avoidance of tax- Transfer Pricing-Selection of comparable- (S.10B(1) (e).

The AO had accepted the license fees for the month of February and March , 2003 to be at arm's length . However the steep increase given from the beginning of the year with retrospective effect has not been accepted .CIT (A) has accepted the computation made by the assessee, based on the comparable as well as department has accepted the method of computation for the asst year 2004-05. The Tribunal restored the matter to the file of AO for re working of the transfer pricing adjustments using TNMM on the basis of facts and figures available for asst year 2003-04 in respect of the comparable selected by the assessee.( Asst Year 2003-04)

Asst CIT v NCG Net work (India ) (P ) Ltd ( 2011) 56 DTR 1 (Mumbai) (Trib).

S.92C: Avoidance of tax- Transfer Pricing-Computation of arm's length price- Provision for import duty.

Provision for import duty made by the assessee which has been reversed in the immediately succeeding year being merely a book entry , is to be excluded for working out the operating profit ratio for computation of ALP (Asst year 2005-06 & 2006-07)..

Sony India (P) Ltd v Addl CIT ( 2011) 56 DTR 156 ( Delhi) (Trib).

S. 92C: Avoidance of Tax- Transfer Pricing-Computation-Expenses of personal nature-Compensation – Interest Income on investment- -benefit of 5 %.

In computing ALP , expenses in the nature of abnormal items or personal nature are to be excluded from operating cost. Where the assessee had failed to bring any evidence on record to show that there exists any difference in the risk profile of the comparable companies vis –a vis the assessee , no benefit of adjustment to be given to assessee in determination of ALP. Benefit of 5 percent provided in the proviso to section 92 C (2) is available only when assessee is computing the ALP and not when the AO/TPO is computing the ALP. Interest income on investment should be excluded from operating income while working out ALP. When , by virtue of closing down certain branches , assessee has reduced the cost of AE and if such a closure has a direct link with the international transaction and compensation received for such a closure can not be excluded from operating expenses.( Asst years 2002-03, 2003-04)

Marubeni India (P ) Ltd v Addl . CIT ( 2011) 56 DTR 252 (Delhi) (Trib).

S. 92C. Avoidance of Tax- Transfer Pricing – Computation-Comparable- Adjustment.

Transfer Pricing Officer having excluded the loss making companies from the list of comparables in the transfer pricing analysis , one company which showed the super profits is also to be excluded as it is engaged in software product company. Where as the assessee is engaged in rendering soft ware development services in OP/TC of the assessee is with the safe harbour range of + 5 percent , no adjustment is warranted on account of difference in ALP of the international transaction. (Asst Year 2006-07).

Sapient Corporation ( P) Ltd v Dy CIT ( 2011) 56 DTR 465 ( Delhi ) (Trib).

S. 92C : Avoidance of Tax – Transfer Pricing – Despite FAR matching, Loss Co to be excluded.

From the list of comparables provided by the assessee (after excluding persistent loss-making companies), the TPO rejected some other loss-making companies & determined the ALP applying the TNMM and made an adjustment of Rs. 2.28 crores. The Tribunal dismissing the appeal held that :

Merely because a company is showing losses, it does not lose its status of comparable if the other criteria depict its status as a comparable because the declaration of loss is an incident of business which is at par with profit. The FAR Analysis of a company indicated the avowed objective of the company and the tools that it sought to employ to achieve that objective but it was the financial result which decided whether that company has been successfully in achieving the objective or not. The TPO held that if the assessee's contention based on FAR analysis only is accepted then the process of choosing comparable will not proceed beyond the matching of FAR. All types of other tests i.e. data base screening, quality and quantitative screening or use of diagnostic with ratios will be rendered meaningless and unnecessary. Comparablity has been taken into consideration by the assessee on the basis of FAR analysis and "other aspects" have not been considered. TPO had looked into "other aspects" also.

Yum Restaurants(India) Pvt. Ltd (ITAT Delhi). .

S. 132: Search and Seizure. If Search & Seizure action violates "human rights", officers personally liable to pay compensation

The income-tax department conducted search and seizure operations u/s 132 at the premises of the assessee when interrogation & recording of statement was conducted for more than 30 hours and till the odd hours of the night without any break or interval. The assessee filed a complaint alleging violation of human rights. HELD upholding the plea:

The Commission is of the view that the members of the raiding party may take their own time to conclude the search & seizure operations but such operations must be carried out keeping in view the basic human rights of the Individual. They have no right to cause physical and mental torture to him. If the officer-in-charge of the Interrogation/recording of statements wanted to continue with the process he should have stopped the same at the proper time and resumed it next morning. But continuing the process without any break or interval at odd hours up to 3:30 AM, forcing the applicant and/ or his family members to remain awake when it is time to sleep was torturous act which and cannot be countenanced in a civilised society. It was violative of their rights relating to dignity of the individual and therefore violative of human rights. Even die-hard criminal offenders have certain human rights which cannot be taken away. The applicant's position was not worse than that. In the opinion of the Commission, the Income Tax Department should ensure that the search & seizure operations at large in future are carried out without violating one's basic human rights.

Rajendra Singh (Bihar Human Rights Commission). .

S. 143 :Assessment- Opportunity for cross examination-Entire order cannot be set aside.

Where an order had been passed by the Assessing officer without granting the assessee an opportunity to cross examine and the assessee preferred a writ petition. The Apex court held that the High Court ought not to have set a side the order of assessment but to have only granted the assessee an opportunity to cross examine the witness. (Asst year 2004-05).

ITO v M. Pirai Choodi ( 2011) 334 ITR 262 ( SC).

Editorial- Decision of madras High Court in M.Pirai Choodi v ITO ( 2008) 302 ITR 40( Mad) , set a side.

S.143 (2): Assessment- Search and Seizure- Notice. ( S. 153A).

While making an assessment under section 153A service of notice under section 143 (2), within the prescribed time is mandatory. In the absence of service of such notice , the Assessing Officer cannot make the addition in the income of the assessee and the Assessing Officer is bound to accept the income as returned by the assessee. (Asst year 2001-02)

Narendra Singh v ITO ( 2011) 138 TTJ 615 (Agra ) (Trib)

S. 144C. Dispute Resolution Panel – Transfer pricing- Speaking order. (S.92C.).

Where order of DRP is a non speaking order, same cannot withstand test of law. ( Asst Year 2006-07).

Geodis Ovearseas (P) Ltd v Dy CIT ( 2011) 45 SOT 375 (Delhi) (Trib).

S. 147: Reassessment-Settlement commission- (S.254D(4).)

Settlement Commission having already accepted the undisclosed income as shown by the assessee which covered all the issues arising out of the seized papers including rental income , order under section 245 (D) (4) was passed . In the absence of any new document or material to come to a different conclusion than that was accepted by the Department, assessments of the relevant period could not be reopened by the AO by taking a different view regarding assessability of rental income.(Asst years 2004-05 to 2006-07).

Jamula Shyam Sundar Rao (HUF) v Asst CIT ( 2011) 138 TTJ 602 (Ctk.)(Trib).

S.147: Reassessment-Full and true disclosure- Beyond four years- EOU. (S.10B).

When there was no failure to disclose fully and truly all material facts by assessee, presumption on the part of the AO that the assessee has failed to achieve 82 percent value addition in order to be treated as hundred percent EOU required for availing deduction under section 10B was incorrect and reopening of the assessment beyond four years was bad in law.(Asst Year 2003-04).

Jayant Agro Chemicals Ltd v ITO ( 2011) 241 CTR 242 / 55 DTR 361(Bom) (High Court).

S. 147 : Reassessment – Despite "Wrong Claim", reopening invalid if failure to disclose not alleged.

It is necessary for the AO to first state that there is a failure to disclose fully and truly all material facts. If he does not record such a failure he would not be entitled to proceed u/s 147.There is a well known difference between a wrong claim made by an assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts.

Titanor Components Limited vs ACIT (Bombay (High court At Goa). .

Editorial-Hindustan Lever( 2004) 268 ITR 332 (Bom) followed).

S. 147 : Reassessment- Rectification pending – (S.154)

When proceedings under section 154 were pending on the same issue and not concluded , parallel proceedings under section 147 initiated by the Assessing Officer are invalid ab inito , especially when except the return and its enclosures , no other material or information was in the possession of the assessing Officer.( Asst year 2004-05)

Mahinder Freight Carriers v Dy CIT ( 2011) 56 dtr 247 (Mumbai ) (Trib).

S. 147 : Reassessment–If assessee does not ask for s. 147 reasons & object to reopening, ITAT cannot remand to AO & give assessee another opportunity.

While the AO is required to record reasons, Law does not mandate the AO to suo moto supply the reasons to the assessee. It is for the assessee to demand the reasons and raise objections to the reopening which the AO is required to dispose of by passing a speaking order. As the assessee did not ask for the reasons and instead participated in the reassessment proceedings, the Tribunal could not have restored the matter back to the file of the AO and give another opportunity to the assessee to raise objections to the "reasons to believe" recorded by the AO. It is trite that what cannot be done directly, it is not allowed indirectly as well. This novel and ingenuousness method adopted by the Tribunal in setting aside the reassessment orders on merits cannot be accepted.

However, also held that as the assessee had challenged the validity of reassessment before the CIT(A), it ought to have been provided with the reasons and so the matter was remitted for supply of reasons.

CIT vs Safetag International India Pvt. Ltd. (Delhi)(High Court)


S. 147: Reassessment – If AO does not assess income for which reasons were recorded u/s 147, he cannot assess other income u/s 147.

Though Explanation 3 to s. 147 inserted by the F.A. 2009 w.e.f 1.4.1989 permits the AO to assess or reassess income which has escaped assessment even if the recorded reasons have not been recorded with regard to such items, it is essential that the items in respect of which the reasons had been recorded are assessed. If the AO accepts that the items for which reasons are recorded have not escaped assessment, it means he had no "reasons to believe that income has escaped assessment" and the issue of the notice becomes invalid. If so, he has no jurisdiction to assess any other income. (Jet Airways 331 ITR 236 (Bom) followed).

Ranbaxy Laboratories Ltd. vs CIT (Delhi) ( High Court). .

S.158BB: Block Assessment-Undisclosed income- Some evidence must be found in the course of search.

Block assessment can be made in respect of undisclosed income which is recovered as a result of evidence found during the course of search and not as a result of other documents or material which came to possession of Assessing Officer subsequent to conclusion of search operation unless and until such evidence recovered during course of search .It is apparent that some evidence is to be found as a result of operation and it is only thereafter that remaining part of provisions come in to play.

Krishna Terine (P) Ltd v Asst CIT( 2011) 130 ITD 411 (Ahd) (Trib).

S. 158BC: Block Assessment- Search and Seizure- Notice under section 158BD- Statement of persons. ( 158BD.).

In the absence of any search warrant in the name of the assessee and search against him ,the provisions of section 158BC in the hands of the assessee without issuing any notice under section 158BD , only on the basis of statements of three persons that the money recovered from them belonging to the assessee was held to be illegal.

Anil Kumar Chadha (Guddu ) v Dy CIT ( 2011) 138 TTJ 574 (All) (Trib).

S. 194A: Deduction of tax at source- Interest on compensation by Motor Accident Claims Tribunal.

If the amount of interest on compensation awarded by Motor Accident Claims Tribunal payable to the claimant in particular financial year does not exceed fifty thousand rupees then the person responsible for payment is not required to deduct tax at source under section 194A. Interest Awarded has to be spread over in number of years from the date of filing of claim petition till the due of payment.

United India Insurance Co Ltd v Ramanlal & Ors ( 2011) 56 DTR 407 (MP) (High Court).

S. 194C.: Deduction of tax at source- Payment to truck operators without deduction TDS- Deduction of tax at source- Second and third proviso to section 194C (3) w.e.f. 1st June 2005 is not retrospective. ( S. 40 (a) (ia).).

Assessee operating trailer lorries disbursing freight charges amounting to Rs 46,70,365 to 16 parties without deducting TDS as specified in section 194C . Assessee was liable to deduct tax at source . Amendment to sub section (3) of section 194C made through Finance Act 2005, where by second and third provisions were added to it w.e.f Ist June ,2005 has no retrospective effect . The Tribunal held that the Assessing Officer was justified in making disallowance under section 40 (a) (ia).( Asst Year 2005-06).

ITO v M.Sankar ( 2011) 138 TTJ 690 ( Chennai) (Trib).

S. 194C.Dedcution of tax at source- Franchisee agreement- Sharing of profits. (S. 40 (a) (ia).

Franchisee agreement did not stipulate payment to be made to the licence for any work done on behalf of the assessee and it was merely a case of running a study centre and to apportion profits thereof between the assessee and the licence and therefore provisions of section 194C were not applicable and no disallowance under section 40 (a) (ia) can be made.( Asst years 2005-06, 2006-07).

Career Launcher ( India) Ltd v Asst CIT ( 2011) 139 TTJ 48 / 56 DTR 10(Delhi) (Trib).

S.195:Dedcution of tax at source- Discounting charges- Export sales bill- Deduction of tax at source-Interest. S.2(28A) , 40(a)(i)

Discounting charges paid by assessee to a foreign company for discounting export sale bills is not "interest" as defined in section 2 (28A), since foreign company has no permanent establishment in India, it was not liable to tax in respect of discounting charges and therefore , assessee was under no obligation to deduct tax at source under section 195 and the discounting charges could not be disallowed under section 40 (a) (i).( Asst years 2004-05 & 2005-06 ).

CIT v Cargill Global Trading (I) (P ) Ltd ( 2011) 241 CTR 443/ 56 DTR 188 (Delhi) (High Court).

S. 195 – Deduction of Tax at source – sale of shares of Foreign Co by Non-Resident to Non-Resident attracts Indian tax -AO to first record finding and decide "preliminary issue"

Where one non resident had sold shares of a foreign company to another and show cause notice was issued u/s 195 , in view of the judgement of the Supreme Court in Vodafone International vs. UOI 221 CTR 617 it was held that the interest of the assessee is safeguarded by directing that the AO shall record a finding on the preliminary issue relating to jurisdictional fact (as to whether the overseas transaction attracts Indian tax at all). If the assessee is aggrieved by the finding, it is entitled to challenge the same by a Writ Petition.

Richter Holding Ltd. vs ADIT(IT) (Karnataka)(High Court).


Editorial -See also Vodafone International Holdings B.V. vs. UOI 329 ITR 126 (Bom) on the same point

S. 226 (3): Recovery- Stay – Garnishee proceedings- Application pending.

Though application has been filed by petitioner under section 220 (6) , no order was passed and therefore notice under section 226 (3) can not be acted upon . Revenue was directed to decide the application under section 220 (6) without taking any steps under section 226 (3).( Asst year 2004-05)

Dagny De souza (Smt) v ITO ( 2011) 56 DTR 263 ( Bom) (High Court).

S. 226 (3): Recovery- Assessing Officer is directed to pay costs for "recovery harassment".

The AO's order of attaching the bank account of the assessee even before the service of the CIT(A)'s order was wrong in view of

(a) the CBDT's letter dated 25.3.2004 advising that penalties u/s 271-D & 271-E for violation of s. 269-SS & 269-T should not be indiscriminately imposed without considering s. 273-B,

(b) the CCIT's direction that demand arising out of penalties imposed u/s 271-D & 271-E should be stayed in cases of co-operative credit societies,

(c) UOI v/s Raja Mohammed Amir Mohammed AIR 2005 SC 4383 where concern was expressed over dangerous attitude developing amongst Executive resulting in institutional damage &

(d) KEC International Ltd 251 ITR 158 (Bom) where it was held that generally coercive measures may not be adopted during the period provided by the Statute to go in appeal.

Accordingly, the assessee was unnecessarily subjected to harassment by the actions of the lower authorities. It is thus a fit case for imposing costs u/s 254(2B) on the Revenue to compensate the harassment caused by the officers of the Revenue at fault.

Shramjivi Nagari Sahakari Pat Sanstha vs ACIT (ITAT Pune)  

S. 244A.: Interest- Self assessment tax.

An assessee is entitled to interest on excess payment of self assessment tax in terms of section 244A (1) (b) , from date of payment of such amount up to date on which refund is actually granted . ( Asst year 2007- 08) .

Asst Director of Income tax v Royal Bank of Scotland N.V. ( 2011) 130 ITD 305/ 138 TTJ 698S (Kol) (Trib).

S. 245R: Advance Ruling- Procedure- Jurisdiction.

Section 245R is an integrated section not only dealing with admission of an application but also its final disposal .AAR can independently consider nature of transaction put forward in context of proviso (iii) to section 245 R (2) because said proviso gives jurisdiction to Authority to test transaction projected before it in order to find out whether it is designed prima facie for avoidance of income tax.

ABC International Inc ( 2011) 199 Taxman 211/ 241 CTR 289 / 55 DTR 393( AAR).

S. 254 (1). Appeal- Tribunal- CBDT Circular on monetary limits for filing appeals applies to pending appeals

As per Instruction No. 3 of 2011 dated 09.02.2011 appeal before Tribunal can be filed where the tax effect exceeds the monetary limit of Rs. 3 lakhs. However, considering the similar situation where tax limits were modified by the CBDT Instruction No. 5 of 2008 the jurisdictional High Court in Madhukar K. Inamdar (HUF) 318 ITR 149 held that the circular will be applicable to the cases pending before the court either for admission or for final disposal. In view of the order of the jurisdictional High Court we hold that Instruction No. 3 dated 09.02.2011 is applicable for the appeal preferred by the Revenue.

ITO vs Laxmi Jewel Pvt. ( Mumbai) (ITAT)  

S. 254 (2). Appellate Tribunal- Rectification of mistakes- Business loss ( S. 28.)

Loss was allowed for earlier and subsequent year . Appellate Tribunal refused the rectify the order . The Apex court remanded the matter to Tribunal for consideration afresh in light of CIT v Woodward Governor India P.Ltd ( 2009)312 ITR 254 (SC).( Asst year 1998-99).

Perfetti Van Melle India (P) Ltd v CIT ( 2011) 334 ITR 259 (SC).

S. 254 (2): Appellate Tribunal- Rectification of mistakes- Admission by counsel.

Tribunal recording admission by counsel for assessee , assessee filing application denying admission , application should be considered on merits.( Asst year 1997-98 ).

Bagoria Udyog v CIT ( 2011) 334 ITR 320 ( Cal) (High Court).

S. 260A – Appeal to High Court – condonation of delay – Long Delay due to procedural reasons in filing Dept appeals cannot be condoned

The SLP challenging the order of the Bombay High Court declining to condone delay of 656 days in filing the appeal was dismissed on the basis that several facts such as non traceability of case records, procedural formalities involved in the Department and the papers are to be processed through different officers in rank for their comments, approval etc. and then the preparation of the draft of appeal memo, paper book and the administrative difficulties such as shortage of staff does not make sufficient cause for condonation of delay .

CIT v Indian Hotels Co. Ltd. (Supreme Court) ()

S. 263: Revision of orders prejudicial to revenue – effect order not passed within "reasonable time" – order becomes "infructuous"

Even if there is no period of limitation prescribed u/s153 (3)(ii) to give effect to s. 263 orders, the AO is required to pass the order within a "reasonable period". Non-specification of period of limitation does not mean that the AO can wait for indefinite period before passing the consequential order.

CIT vs Goyal M. G. Cases Pvt. Ltd. (Delhi ) (High Court)..

S. 271 (1) (C ): Penalty – Concealment-Valuation of closing stock- Explanation 1.

Valuation of stock on account of deterioration of old stock and the same has not been accepted by the Revenue , penalty under section 271 (1) (c ) is not leviable, in the absence of any finding that the claim of the assessee was false or that it fudged the books of account.( Asst year 1987-88).

CIT v H.P.State Forest Corporation Ltd ( 2001) 56 DTR 113 (HP ) (High Court)

S. 272A(2)(c) : Penalty- Failure to file TDS return-Statement- Quarterly Return.

Failure to file quarterly return penalty is not leviable. Clause ( c ) of section 272 A (2 ) relates to return / statement under section 133 , 206 and 206C , which are unrelated to TDS , therefore ,penalty under section 272 A (2 ) (C ) is not leviable for non submission of quarterly returns for TDS.

Porwal Creative Vision (P ) Ltd v Addl CIT ( 2011) 139 TTJ 1/ 55 DTR 241. (Mumbai ) (Trib).

Precedent- Binding nature- Non Jurisdictional High Court- Tribunal.

In the absence of any contrary view , decisions of non jurisdictional High Court have to be followed by the Tribunal . It is not permissible for the authorities below to ignore the decision of the higher forum on pretext that an appeal is filed in the Supreme Court, which is pending or that steps are to be taken to file an appeal (Asst year 2007-08).

Addl CIT v Royal Bank of Scotland N.V. ( 2011)130 ITD 305/ 138 TTJ 698 (Kol) (Trib).

Bias-Question of "bias" in judicial function must be seen from "reasonable man's" perspective.

To decide whether there is "bias", the "real likelihood test" has to be adopted. In each case, the Court has to consider whether a fair minded and informed person, having considered all the facts would reasonably apprehend that the Judge would not act impartially. To put it differently, the test would be whether a reasonably intelligent man fully apprised of all the facts would have a serious apprehension of bias. In deciding the question of bias one has to take into consideration human probabilities and ordinary course of human conduct;

P. D. Dinakaran, Justice v Hon'ble Judges Inquiry committee (supreme court) www.

Black Money-DTAA Does Not Protect Tax Evaders. SIT Formed To Probe Black Money.

We are convinced that the said agreement, by itself, does not proscribe the disclosure of the relevant documents and details of the same, including the names of various bank account holders in Liechtenstein. The "information" that is referred to in Article 26 is that which is "necessary for carrying out the purposes of this agreement", i.e. the Indo-German DTAA. Therefore, the information sought does not fall within the ambit of this provision. It is disingenuous for the Union of India, under these circumstances, to repeatedly claim that it is unable to reveal the documents and names as sought by the Petitioners on the ground that the same is proscribed by the said agreement. It is for the Union of India, and the courts, in appropriate proceedings, to determine whether such information concerns matters that are covered by the double taxation agreement or not.

Ram Jethmalani vs UOI(Supreme court) ()

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