Penalty is leviable u/s 271(1)(c)

Where the assessee is not able to substantiate his claim of expenditure with any evidence, penalty is leviable under section 271(1)(c)

Only when assessee is able to offer reasonable explanation, based on some evidence, Assessing Officer cannot invoke Part B of Explanation to section 271(1)(c)

 

·        Where the assessee is not able to substantiate his claim of expenditure with any evidence, penalty is leviable under section 271(1)(c)

 

[2010] 5 taxman 107 (Hyd. - ITAT)

ITAT, HYDERABAD BENCH ‘B’, HYDERABAD

V. Kumara Swamy Naidu  v.  ITO

ITA no. 108/Hyd/2009

May 14, 2010  

FACTS

 

The assessee is an individual deriving income from poultry farming. Before the assessing officer, the assessee has shown to have purchased a site property at Chennai in the assessment year 1994-95 and development charges for the said property were stated to have been spent during the period relevant to the assessment year 1995-96. For the assessment year under consideration, the indexed cost of the said development charges were taken at Rs.83,398/- for the purpose of working out the capital gains. During the course of assessment proceedings for the assessment year 2005-06 it was noticed by the assessing officer that the said development charges were not shown either in the balance sheet or cash flow statement attached to the return of income filed by the assessee for the assessment year 1995-96. Hence the assessing officer has rejected the claim of the assessee for considering the indexed value of the said development charges and the capital gains on the said property was computed accordingly. Simultaneously, the assessing officer has initiated penalty proceedings u/s 271 (1) ( c) for concealment of income by way of false claim under the head ‘development charges’.

In response to the show cause notice issued by the assessing officer in this respect, the assessee has replied that most of the additions made in the assessment for the assessment year 2005-06 were accepted by him, but claimed that the development charges were met out of egg collections during the relevant period and therefore requested for dropping of the penalty proceedings. However, the assessing officer was not satisfied with the said explanation because the assessee has neither shown any income from supply of eggs to Chennai nr any expenditure towards development charges were reflected in the balance sheet or cash flow statement. In view of this, the assessing officer has concluded in the penalty order that the assessee has furnished inaccurate particulars, thereby concealing the true income of the assessee. Hence penalty u/s 271 (1) ( c) of the IT Act was levied at maximum penalty of Rs.50,040/-.

 

HELD

 

The assessing officer has given ample opportunity to the assessee to prove the expenses incurred towards the development charges. The assessee had not furnished any evidence. The primary burden cast upon the assessee was not discharged. In these circum stances, it is to be construed that assessee has concealed his income and there is a provision regarding deemed concealment in the form of explanation in section 271 (1) (c) of the IT Act which reads as follows:

Explanation 1: Where in respect of any facts material to the computation of the total income of any person under this Act, (A) Such person fails to offer an explanation or offers an explanation which is found by the assessing officer or the Commissioner (Appeals) or the Commissioner to be false, or

(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub section, be deemed to represent the income in respect of which particulars have been concealed.”

 

It is clear from the above Explanation that the statute visualized that the assessment and penalty proceedings to be wholly distinct and independent of each other. Part B of the Explanation is that the person must provide an explanation which is bona fide and he should substantiate that explanation by some evidence with him. If he fails to do so, his Explanation is treated as untenable. Only when the assessee is able to offer reasonable explanation, based on some evidence, the assessing officer cannot invoke Part B of the Explanation unless the assessing officer has given finding based on some contradictory evidence to disprove that explanation offered by the assessee false. When the assessee is not able to substantiate the explanation and failed to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then the amount added or disallowed in computing the total income of the assessee as a result thereon, shall, be deemed to be represent income in respect of which particulars have been concealed. In the present case, assessee is not able to substantiate his claim of expenditure with any evidence and in the circumstances, we are of the opinion that penalty is leviable u/s 271 (1) (c) of the Act.

 

RELEVANT EXTRACTS:

**       **          **          **          **          **          **          **          **          **          **          **

 

5. We have heard both the parties and perused the material on record. The main contention of the assessee’s counsel is that the assessee has co-operated with the Department in the course of assessment proceedings, the assessee also paid the due tax. Because of the smallness of amount involved, the assessee has not filed an appeal in the case of quantum addition. The assessee has given bona fide explanation for the lapse which was not accepted by the assessing officer. That itself cannot be a reason for levying penalty. Alternatively, she prayed to levy minimum penalty. Admittedly, in the present case, the assessee has claimed ‘development expenditure’ w.r.t. capital assets which was not able to substantiate with the evidence in spite of giving opportunity to the assessee. Having regard to these circumstances, the assessing officer reached the conclusion that the assessee has furnished inaccurate particulars of income thereby it lead to concealment of true income and levied maximum penalty u/s 271 (1) ( c ) of the Income Tax Act. We have carefully gone through the factual position of the case. The assessing officer has given ample opportunity to the assessee to prove the expenses incurred towards the development charges. The assessee had not furnished any evidence. The primary burden cast upon the assessee was not discharged. In these circum stances, it is to be construed that assessee has concealed his income and there is a provision regarding deemed concealment in the form of explanation in section 271 (1) (c) of the IT Act which reads as follows:

Explanation 1: Where in respect of any facts material to the computation of the total income of any person under this Act, (A) Such person fails to offer an explanation or offers an explanation which is found by the assessing officer or the Commissioner (Appeals) or the Commissioner to be false, or

(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub section, be deemed to represent the income in respect of which particulars have been concealed.”

 

6. It is clear from the above Explanation that the statute visualized that the assessment and penalty proceedings to be wholly distinct and independent of each other. Part B of the Explanation is that the person must provide an explanation which is bona fide and he should substantiate that explanation by some evidence with him. If he fails to do so, his Explanation is treated as untenable. Only when the assessee is able to offer reasonable explanation, based on some evidence, the assessing officer cannot invoke Part B of the Explanation unless the assessing officer has given finding based on some contradictory evidence to disprove that explanation offered by the assessee false. When the assessee is not able to substantiate the explanation and failed to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then the amount added or disallowed in computing the total income of the assessee as a result thereon, shall, be deemed to be represent income in respect of which particulars have been concealed. In the present case, assessee is not able to substantiate his claim of expenditure with any evidence and in the circumstances, we are of the opinion that penalty is leviable u/s 271 (1) (c) of the Act.

 

 

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

 

Let pass this mails , and invite other friends to join the group.

 

Dear,

 

I hereby request you to post your good  stuff to the following group also.

While forwarding remove other matters, link etc..

To subscribe click on the following link.

 

http://groups.google.co.in/group/fun-finder

 

 

Please include the following mail-id in your "to" fields.

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Regards

 

Note : I set the emails to be posted in the group through Uotlook on different dates. So, the mail will be posted to group every alternate day. Due to non-start of the outlook , non availability of net connection etc.. , it may happened that the email may not be sent of the perticular date, but the outlook will send it next time, when connection is available. So, it may happen that instead of alternate day, the mail more than one, may sent to the group on one perticular day. So, bear with me.

 

But I see that you will never missed the fun mail.

Enjoy....

 

Special Bench judgment in Topman Exports reversed (DEPB sale)

Special Bench judgment in Topman Exports reversed

In Topman Exports vs. ITO 318 ITR 87 (Mum)(SB)(AT) the Special Bench held that for purposes of s. 80HHC only the "profit" on sale of DEPB entitlements (i.e. the sale value less the face value) was required to be considered. In an appeal by the department, this judgment has been reversed by the Bombay High Court today, 29th June 2010. 

The judgment of the High Court shall be available shortly.


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ITAT (AHM):Royalty: Necessary ingredient for treating a payment as royalty is exclusiveness of right of a person over design or invention invented by him

Royalty: Necessary ingredient for treating a payment as royalty is exclusiveness of right of a person over design or invention invented by him

Once there is no patent or any intellectual right vested in a person over a thing, no claim of royalty can be allowed to him.

[2010] 5  TAXMAN 113 (Ahd. - ITAT) ITAT, AHMEDABAD BENCH `C' AHMEDABAD ITO v.Patwa Kinariwala Electronics Ltd.ITA Nos. 2781/Ahd/2008, 934/Ahd/2006, 2448/Ahd/2005 and 2826/Ahd/2006 May 31, 2010

FACTS 

During the course of assessment proceedings in the first round AO noted that assessee company as paid royalty of Rs.8,22,773/- @ 3% of the net value of the "electrical yarn cleaner & classikin". When enquired it was explained that `electrical yarn cleaner is a product which is originally manufactured by few companies in the world. It requires high degree of technology and is costly if imported. Shri Rajan Patwa is a technical expert who invented an electrical yarn cleaner in India. These instruments are now manufactured by the assessee company. Shri Rajan Patwa gave advice and guidance right from the design, development and manufacturing stage. It was for the said services that company has paid royalty @ 3% to him. The AO however, held that payments to Shri Rajan Patwa were unjustified and unreasonable and accordingly he disallowed the entire claim. The ld. CIT(A) vide his order dated 19.11.2001 sustained the said disallowance of royalty payment. In second appeal vide its order dated 27.10.2006, the Tribunal set aside the issue and restored the matter to the file of AO with direction to decide the matter considering the evidence produced by the assessee to prove that the payment of royalty was for business purposes. Fresh evidences were called for in the reassessment proceedings. The assessee furnished copies of patent certificate, copy of agreement dated 12.12.1976 between Shri Rajan Patwa and M/s Kinariwala R.J.K. Industries which was one of the patent holders. Subsequently fresh agreement renewing the terms of the agreement of 12.12.76 was executed on 4.4.1996. The AO after examining all these documents held that the patent is not registered in the name of Shri Rajan Patwa to whom the royalty payment was made. Therefore, following the decision in first round, the AO disallowed the claim again 

HELD
Firstly when we examine the present case, we notice that no material is placed before us to show that there was a claim of royalty in the firm and it was allowed after scrutinizing the issue. The necessary data like profit and loss account or balance sheet, assessment order under section 143(3) in the case of the firm are not produced before us. Secondly the firm is no longer in existence in the assessment year 1997-98. We are examining the case of the company and, therefore, the issue is required to be looked into differently afresh. Earlier the patent certificate issued in 1978 had the effect of allowability of the claim of royalty. There is no evidence before us to show that patent certificate(s) were submitted to the AO while making the assessment of the firm so that they could know that patent had expired after 14 years and, therefore, claim of royalty is required to have a re-look. After formation of the company in 1996, the effect of allowability of the claim in earlier years in the firm no longer survives in the subsequent years. Once there is no patent or any intellectual right vested in Shri Patwa no claim of royalty can be allowed to him. The term royalty has been defined by Courts as a payment of any kind received as consideration for the use of or the right to use industrial, commercial or scientific equipment. It normally connotes, the payment made to a person, who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. Mere passing of information concerning the design of a machine which is a tailor made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user so as to term the payment made therefore as royalty. The expression `royalty' defined in Explanation-2 of section 9(1)(vi)(b) means consideration including any lump sum consideration paid for imparting any information concerning the working of or use of a patent, invention, model, design, secret formula, or process or trade mark or similar property. The dictionary meaning of the term royalty connotes payment of periodic or at one time for use by one person of such exclusive right belonging to any other person. Thus the necessary ingredient for treating the payment as royalty is exclusiveness of the right. After patent having expired it cannot be said that Shri Patwa had exclusive right over the design or invention invented by him in 1978. In fact he never had any such patent in his name. We agree with ld. DR that after expiry of life of patent exclusiveness comes to an end and the invention goes into public domain, any one can use the technology and manufacture the device. Whether other manufacturers have so far not used the technology to manufacture similar device is not relevant as what is important is the legal right available to use the

invention for own advantage. Unless Shri Patwa can show that legal action can be taken against any manufacturer manufacturing same device as being manufactured by the assessee company exclusiveness over the right cannot be accepted. In view of this, we hold that what is being paid by assessee company to Shri Patwa cannot be termed as royalty.

______ORDER________
Per D. C. Agrawal, Accountant Member.

These are four appeals –one filed by the Revenue for Asst. Year 1997-98, i.e. ITA No.2781/Ahd/2008 and the other three are filed by the assessee i.e. ITA Nos.934/Ahd/2006, 2448/Ahd/2005 & 2826/Ahd/ 2006 for Asst. ITA No.2781/Ahd/2008 Asst . Year :1997-98 ITA Nos.934/Ahd/2006,2448/Ahd/2005 & 2826/Ahd/2006 Asst . Years : 1998-99, 2002-03 & 2003-04 Years 1998-99, 2002-03 & 2003-04 respectively. These appeals involve common issue and therefore, they are taken up together for the sake of convenience. The lead year in which the issue has first arisen is Asst. Year 1997-98 being the appeal filed by the Revenue and hence it is taken up first. 

2. In this year the Revenue has raised the following ground :- 

(1) The ld. CIT(A) has erred in law and on facts in directing the A.O. to delete the addition of Rs.8,27,773/- in respect of royalty payment though it is in violation of Section 40(A)(2).

3. The main issue involved in this appeal and other appeals is about claim of royalty expenses paid to Mr. Rajan Patwa. The brief facts of the case are that during the course of assessment proceedings in the first round AO noted that assessee company has paid royalty of Rs.8,22,773/- @ 3% of the net value of the "electrical yarn cleaner & classikin". When enquired it was explained that `electrical yarn cleaner is a product which is originally manufactured by few companies in the world. It requires high degree of technology and is costly if imported. Shri Rajan Patwa is a technical expert who invented an electrical yarn cleaner in India. These instruments are now manufactured by the assessee company. Shri Rajan Pata gave advice and guidance right from the design, development and manufacturing stage. It was for the said services that company has paid royalty @ 3% to him. The AO however, held that payments to Shri Rajan Pata were unjustified and unreasonable and accordingly he disallowed the entire claim. The ld. CIT(A) vide his order dated 19.11.2001 sustained the said disallowance of royalty payment. In second appeal vide its order dated 27.10.2006, the Tribunal set aside the issue and restored the matter to the file of AO with direction to decide the matter considering the evidence produced by the assessee to prove that the payment of royalty was for business purposes. Fresh evidences were called for in the reassessment proceedings. The assessee furnished copies of patent certificate, copy of agreement dated 12.12.1976 between Shri Rajan Patwa and M/s Kinariwala R.J.K. Industries which was one of the patent holders. Subsequently fresh agreement renewing the terms of the agreement of 12.12.76 was executed on 4.4.1996. The AO after examining all these documents held that the patent is not registered in the name of Shri Rajan Patwa to whom the royalty payment was made. Therefore, following the decision in first round, the AO disallowed the claim again 

4. The ld. CIT(A) examined the issue and found that as per article of the agreement dated 12.12.76 between Shri Rajan Patwa and M/s Kinariwala R.J.K. Industries, R.J.K. Industries would be bearing monthly expenses of Shri Rajan Patwa while the technology was being developed. Article-5 of the agreement stipulated that technology after development would be registered in the name of the firm. Article -7 provided a joint right between Shri Rajan Patwa and RJK to commercially exploit the invention, by providing licence to others. In that case it was mutually agreed that 4.5% of the value of the sales would be charged and which would be shared as 1.5% to M/s R.J.K. Industries and 3% to Shri Rajan Patwa. This agreement was considered valid for 21 years. Shri Rajan Patwa succeeded in developing the technology for clearing yarn by opto electric method in 1978 and patent certificate was issued by Patent Office on 23.10.1978 registering the invention. The device was allowed to be manufactured by M/s Patwa Kinariwala Electronics firm whose managing partner was Shri Patwa himself. It paid the royalty @ 4.5% which was shared by M/s R.J.K. Industries @ 1.5% and Shri Rajan Patwa at 3%. This arrangement continued upto 4.4.1996 and as per earlier agreement the right of the technology claimed to have reverted back to Shri Rajan Patwa the inventor. Thereafter it is claimed that Shri Rajan Patwa entered into agreement dated 4.4.96 with Patwa Kinariwala Electronics Ltd. (PKEL) when the firm with the same name was converted in the company with the same name. It is claimed that with the agreement dated 4.4.1996 Shri Rajan Patwa and P.K.E.L. agreed to continue the earlier arrangements on the same terms for 10 years and accordingly PKEL would continue to pay 3% royalty to Shri Rajan Patwa. On the basis of these facts, the ld. CIT(A) held that :- 

(a) Shri Rajan Patwa was the inventor of the device. 

(b) There was an agreement between Shri Rajan Patwa and RJK Industries to allow PKE to exploit the device commercially on payment of royalty. 

(c) the payment of royalty was under contractual obligation, and

(d) the agreement was carried on vide agreement dated 4.4.96 between Shri Rajan Patwa and M/s PKEL (the successor to PKE).

On this basis, he further held that payment was not made to a stranger. There is a contractual agreement between the company and the assessee. The payment of royalty was not without consideration as Shri Patwa provided valuable services to the company. It is immaterial that Shri Rajan Patwa himself is not the holder of the patent. On this basis ld. CIT(A) allowed the claim of the assessee.

5. Before us, ld. DR submitted that what is paid by the company to Shri Rajan Patwa who is the Managing director of the company cannot be termed as royalty because Shri Patwa is no longer or rather never a patent holder of the alleged design. Once the patent is expired after 14 years of certification, the design comes into public domain and, therefore, no payment under the head `royalty' can be paid to Shri Patwa. There is no material on record, the ld. DR submitted, that Shri Patwa has provided any special service of the nature of intellectual property right so as to enable Shri Patwa to receive royalty from the company. He referred to the decision of ld. CIT(A) in the first inning and submitted that there is no evidence that he is rendering services and advice of the technical nature as claimed. The payment is not justified looking into the nature and extent of the services/advice provided by Shri Patwa to the assessee company. Shri Patwa is the Managing Director and his family members control the entire business of the company. The onus lying on the assessee that what was paid in fact was royalty is not discharged. The ld. DR then submitted that the agreement dated 4.4.96 between the assessee and the company is a self-serving instrument in the sense that both the parties signing the agreement have a vested interest and they are on the same side. Shri Patwa is the Managing Director himself or his family members on behalf of the company could sign the agreement. Therefore, such an agreement cannot become the basis for reducing the taxable income by claiming expenses which are otherwise not supported by any evidence. Even before the Tribunal evidences for alleged royalty payment were not furnished.

6. Against this, ld. AR for the assessee submitted that assessee company is carrying on the business of manufacturing of electronic equipments for textile industries. These instruments are electronic yarn cleaner (EYC. The assessee company has exclusive right of manufacturing these products. The technology was invented by Shri Rajan Patwa who is B.E., M.S. Electronic from USA. He is a technical expert. Royalty has been paid to Shri Rajan Pata following agreement dated 12.12.76. The patent was also registered in the name of the firm and Shri Rajan Patwa was allowed to share the royalty payment. Since 1978 onwards the manufacturer of these instruments are paying royalty and Shri Patwa is enjoying it @ 3%.. The patent was registered in the name of RJK industries (KRJK) and Ahmedabad Texteile Industries Association (ATIRA). The partnership firm in the name of Patwa Kinariwala Electrical Industries has started manufacturing these instruments/devices. Licence was given to this firm who paid the royalty to KRJK and Shri Rajan Patwa. The royalty is being paid since 1978, initially by the firm. The firm is now converted into a company under the same name and the royalty is being paid by the company to Shri Patwa @ same rate of 3%. For this arrangement agreement was entered into between the assessee company and Shri Rajan Patwa on 4.4.96.

7. The ld. AR submitted that in the past no disallowance of royalty paid has been made. Therefore, following the principle of consistency, payment of this royalty should have been allowed in the case of assessee company. Ld. AR submitted that payment is being made as per the agreement. Shri Rajan Patwa, the Managing Director is not receiving any other payment for managing the affairs of the company. He is not taking any remuneration except the royalty. Therefore, the claim of the royalty was justified.

8. The ld. AR submitted that as Managing Director Shri Patwa is providing following services :-

(1) Maintenance and upgradation of technology used by the company in manufacturing the device.

(2) Further development/improvement in the technology in manufacturing this device. These developments from 1996 onwards were as under :-

Developed common sensor for manual winding machine and auto winder 
1996

Redesign cleaner for product to an MC68HC811E2P 1998

Redesign cleaner for product cost effective, Mc908SRl2 1999

Cost reduction of cleaner by 25% using DSP TMS320LF2407 for 8 clearer 2002

Develop cleaner for Jute Yarn  2003

Due to memory of space constrain, we develop new control box using DSP TMS320F2812 2004

Used CPLD to reduced size of the product 2005

Develop clearer for Chenille yarn cleaner 2006

Yarn diameter tracking that is calibration of continuous yarn sensor calibration for avoiding unnecessary cuts  2006

Introduced capacitance type sensor for effectively detecting long thin & long thick place  2006

Fail Safe Power supply for better reliability  2008

Making clearer for different version of Automatic winding Machines  2009-10

9. Ld. DR in rejoinder submitted that merely maintenance or development or upgradation of technology used by an assessee company cannot be made equivalent to a patent or any intellectual property right entitling the assessee company to make the payment of royalty. It may be the payment for technical services rendered by Shri Patwa but not a payment against intellectual property right. Further evidence of services rendered justifying payment of royalty to Shri Patwa have not been provided.

10. We have considered the rival submissions and perused the material on record. What is undisputed is that Shri Patwa is a technocrat. He has originally invented the devices which were later got patented in 1978 in the name of two concerns namely ATIRA and RJK Industries. Licences were issued to PKE a firm run by Shri Patwa. Royalty @ 4.5% was paid by the firm which was shared @ 3% by Shri Patwa and 1.5% by RJK Industries. It is not known as to whether payment @ 1.5% continued to the firm RJK Industries. However, payment @ 3% continued upto 4.4.96 by the firm to Shri Patwa. The firm was taken over by the company and Shri Patwa became the Managing Director thereof. Other shareholders of the company are the family members of Shri Patwa. The patent certificate issued in 1978 expired after 14 years. There is no evidence as to what extent Shri Patwa has rendered services to the company except a general statement that he is continuously engaged in development of the product, providing technical services, advice and guidance. It is also clarified that Shri Patwa is not claiming any remuneration from the company except royalty. It is also emphasized by the ld. AR that claim of royalty has been allowed in the assessment of the firm and, therefore, merely because firm is now converted into a company the claim should not be disallowed.

11. In our considered view consistency is the recognized principle and carves out an exception from the principle of res judicata, if facts and circumstances of the case remain the same and position of law has not changed. In any case there is a necessary condition inherent in the "principle of consistency" that stand of the AO in the past should be legally correct and there is no error, either of law or of fact. It is also a judicially recognized principle that there is no heroism to continue to commit errors from one year to another. If AO has not at all considered the issue; or assessment has been accepted under section 143(1); or all the necessary facts for applying mind on the issue are not brought into the knowledge of the AO; or while accepting a position in the earlier assessment years, grave error of law or fact has been committed; or there has been change in law; or there is a judicial decision on the subject; or there are discovery of new facts which were not available in the earlier years then principle of consistency cannot bind the AO and he has to apply his mind afresh and arrive at a fresh decision.

12. Firstly when we examine the present case, we notice that no material is placed before us to show that there was a claim of royalty in the firm and it was allowed after scrutinizing the issue. The necessary data like profit and loss account or balance sheet, assessment order under section 143(3) in the case of the firm are not produced before us. Secondly the firm is no longer in existence in the assessment year 1997-98. We are examining the case of the company and, therefore, the issue is required to be looked into differently afresh. Earlier the patent certificate issued in 1978 had the effect of allowability of the claim of royalty. There is no evidence before us to show that patent certificate(s) were submitted to the AO while making the assessment of the firm so that they could know that patent had expired after 14 years and, therefore, claim of royalty is required to have a re look. After formation of the company in 1996, the effect of allowability of the claim in earlier years in the firm no longer survives in the subsequent years. Once there is no patent or any intellectual right vested in Shri Patwa no claim of royalty can be allowed to him. The term royalty has been defined by Courts as a payment of any kind received as consideration for the use of or the right to use industrial, commercial or scientific equipment. If normally connotes, the payment made to a person, who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. Hon. Madras High Court in Commissioner of Income tax v. Neyveli Lignite Corporation Ltd. (2000) 243 ITR 459 (Mad) had an occasion to explain the term `royalty'.

The Hon. Court held that the exclusivity of the right in relation to the thing for which royalty is paid should be with the guarantor of that right. Mere passing of information concerning the design of a machine which is a tailor made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user so as to term the payment made therefore as royalty. The expression `royalty' defined in Explanation-2 of section 9(1)(vi)(b) means consideration including any lump sum consideration paid for imparting any information concerning the working of or use of a patent, invention, model, design, secret formula, or process or trade mark or similar property. The dictionary meaning of the term royalty connotes payment of periodic or at one time for user by one person of such exclusive right belonging to any other person. Thus the necessary ingredient for treating the payment as royalty is exclusiveness of the right. After patent having expired it cannot be said that Shri Patwa had exclusive right over the design or invention invented by him in 1978. In fact he never had any such patent in his name. We agree with ld. DR that after expiry of life of patent exclusiveness comes to an end and the invention goes into public domain. any one can use the technology and manufacture the device. Whether other manufacturers have so far not used the technology to manufacture similar device is not relevant as what is important is the legal right available to use the invention for own advantage. Unless Shri Patwa can show that legal action can be taken against any manufacturer manufacturing same device as being manufactured by the assessee company exclusiveness over the right cannot be accepted. In view of this, we hold that what is being paid by assessee company to Shri Patwa cannot be termed as royalty.

13. We, however, uphold the alternative arguments of ld. AR that Shri Patwa being Managing Director is providing services to the assessee company as Managing Director and supervising the manufacturing of the device by the assessee company. He is, therefore, rendering technical services to the assessee company in the form of guidance and advice though, however, extent of such services and proof thereof is not brought on record. In view of this, what can be paid by the assessee company to the Managing Director would be the remuneration and not the royalty. Once no remuneration is claimed by Shri Patwa then what is paid by the assessee company to Shri Patwa has to be alternatively considered as remuneration and claim can be allowed in the hands of the company to the extent, payment of remuneration is permissible to Shri Patwa under Companies Act. We, therefore, restore the matter to the file of AO to calculate the permissible payment of remuneration to Shri Patwa as Managing Director of assessee company and to allow the claim of expenditure to that extent. If permissible claim under Companies Act is more that the payment of royalty then entire claim should be allowed but in case any restriction is placed for which no material is placed before us, then to the extent of maximum permissible limit remuneration should be allowed as deduction in the hands of the assessee company. In view of this, we restore the matter to the file of AO for calculating the allowable remuneration as deduction to the assessee.

14. As a result, appeal filed by the Revenue is allowed but for statistical purposes.  ITA No.934/Ahd/2006 for Asst. Year 1998-99

15. This appeal is filed by the assessee raising following grounds :-

(1) The Learned Asstt. Conunissiloner of Income Tax has erred in law and on facts of the appellant' s case in passing an order U/s 147 r.w.s.143[3) of the Act.

The appellant's most humbly submits that the order passed u/s 147 r.w,s 143(3) of the Act is bad in law and prays that the Hon' ble Tribunal be pleased to hold so now and quash the order passed. (2) The Learned Asst. Commissioner of Income Tax has erred in law and on facts of the appellant's case in disallowing entire royalty expense of Rs . 7, 19, 774/- paid on the erroneous plea that the same has been paid to the promoter. 

The appellant most humbly submits that on the facts and circumstances of it's case and in law no part of royalty paid is disallowance as royalty expenses have been incurred wholly & exclusively for the purpose of it's business and looking to the nature of the business of the appellant and the benefit derived from it, same is reasonable. 

In view of the above, the appellant prays that the Hon'ble Tribunal be pleased to hold so now and delete the additions made.

15. The first ground is regarding reopening of assessment which is not pressed and hence dismissed as not pressed.

16. Ground No.2: In this year the AO has disallowed and ld. CIT(A) has confirmed the disallowance in respect of claim of royalty of Rs.7,19,774/-. Following our decision for Asst. Year 1997-98 above, we restored this issue to the AO for deciding the amount of maximum remuneration payable to the Managing Director, as per Companies Act and allow the claim to that extent out of payment of royalty. The claim of royalty as such cannot be allowed except to the extent of maximum permissible remuneration. Therefore, this appeal of the assessee is partly allowed but for statistical purposes.

17. In this year the assessee has raised grounds relating to claim of royalty at Rs.3,25,245/-.

The ground No.3 is relating to disallowance of 1/3 motor car expenses and depreciation. The next ground is regarding disallowance of Rs.13,600/- out of telephone expenses.

18. Ground No.1 being general is not pressed hence it is rejected.

19. Ground No.2 relate to claim of royalty. Following our decision for Asst. Year 1997-98 above, we restore this issue to the AO for deciding the amount of maximum remuneration payable to the Managing Director, as per Companies Act and allow the claim to that extent out of payment of royalty. The claim of royalty as such cannot be allowed except to the extent of maximum permissible remuneration.

20. Ground No.3 is relating to disallowance of 1/3 motor car and depreciation expenses. The issue is covered in favour of the assessee by the decision of the Tribunal in ITA No.55/A/02 for Asst. Year 1997-98. Following the same this ground of assessee is allowed. 

21. Similarly disallowance of telephone expenses is decided in favour of assessee following above referred decision of the Tribunal. As a result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes. 

22. There are three issues – the first is about royalty expenses of Rs.4,41,285/- and the other two issues are regarding disallowance of 1/3 motor car and depreciation and 25% of telephone expenses.

23. The issue regarding royalty is set aside to the file of AO following our decision for Asst. Year 1997-98 as above and to follow direction as given there this year also.
24. The issue regarding motor car and telephone expenses are allowed following our decision in ITA No.55/Ahd/2002 for Asst. Year 1997-98. As a result, appeal filed by the assessee is partly allowed and partly allowed for statistical purposes. 

25. In the result, appeal of Revenue is allowed for statistical purposes and the appeals of assessee are partly allowed for statistical purposes.

 

 

 

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Case Law Digest

Monthly Digest of Case Laws (May 2010)

Section wise digest of Income tax India.

 

S. 2(1A) ~ Agricultural income - Trees of spontaneous growth on waste land

In the absence of any evidence of any agricultural operations having been carried out on the waste lands, the enhanced compensation received by the assessee for compulsory acquisition of the said waste lands and trees by the State Government can not be treated as agricultural income.

Sajjansinh N. Chauhabvxs.ITO (2010) 38 DTR 155 (Guj.).

S. 4 ~ Income - Capital or revenue receipt - Surplus on cancellation of forward foreign exchange contract

[S. 2(47), 28(iv)] Surplus received by the assessee upon cancellation of forward foreign exchange contract was a capital receipt not liable to tax, as the foreign exchange acquired under the contract is for the purpose of discharging an obligation on capital account. Mere cancellation of the contract does not result in any transfer of any asset, even if the extended definition under section 2(47) is made applicable.

Dy. CITvxs.Garden Silk Mills Ltd. (2010) 38 DTR 48 (Guj.)

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S. 4 ~ Income - Reimbursement of expenses

Amount received by assessee towards reimbursement of traveling expenses of its technicians who were deputed to the establishment of a customer is not chargeable to tax.

Director ITvs.Krup Udhe GmbH. (2010) 38 DTR 251 (Bom.)

S. 5 ~ Income – Accrual - Interest on enhanced compensation

Interest on enhanced compensation accrues from year to year and has to be spread over respective years.

Sajjansingh N. Chauhanvxs.ITO (2010) 38 DTR 155 (Guj.)

S. 9(1)(vii) – Income Deemed to accrue arise in India - fees for technical services – International Taxation

Income deemed to accrue or arise in India. Service rendered outside India. Fees for Technical Services, even if rendered outside India, are taxable.

Ashapura Minichemvxs.ADIT (ITAT Mumbai)

Monthly Digest of Case Laws (May 2010) 2 

S. 10(23C)(vi) - Exempted income - charitable purpose

Surplus does not mean trust ceases to be "solely for educational purposes and not for profit".

Vanita Vishram Trustvxs.CCIT (Bombay High Court)

S. 10(23G) ~ Infrastructure capital company - change of name

Change in the name of the entity at the time when the shares of such undertaking are sold does not affect the claim of exemption under section 10(23G).

Jaykay fineholdings (India) (P) Ltd.vxs.Addl. CIT (2010) 38 DTR 302 (Mum.) (Trib.)

S. 14A ~ Expenditure incurred in relation to income not includible in total income -Insurance business.

Section 14A, is not applicable in the case of insurance business, which is governed by specific provisions of section 44.

Bajaj Alliance General insurance Co. Ltd.vxs.Addl. CIT (2010) 38 DTR 282 /130 TTJ 398 (Pune) (Trib.)

S. 17(1)(iv) ~ Salary - Profit in view of salary - restrictive covenant – Non compete fee - value of shares

Value of shares issued to the assessee-director by the employer company as consideration in terms of restrictive covenant whereby the assessee agreed to desist from participating in a similar or competitive business for a period of ten years after termination of his employment or association with the company assessable as "profit in lieu of salary". Receipt can not be construed as capital receipt.

Neville Tulivxs.ITO (2010) 38 DTR 325 (Mum.)

S. 22 ~ Income From House Property - Principle of Mutuality

Income of the association of flat owners is not taxable on the principle of mutuality, despite the fact that most of the flats are let out and tenants are paying the contribution. Interest earned from bank on surplus funds deposited in the bank is not taxable on the principle of mutuality.

Wellington Estate Condominiumvxs.ITO, ITAT `I' Bench Delhi, ITA No. 2846/Del./2007, dated on 16-10-2009 (BCAJ 42-A, June 2010 pg. 346)

S. 28 ~ Capital gains - Business income - sale of shares

Assessee dealer in shares can also hold certain shares as investment. When shares are sold from investment portfolio which were purchased two three years back the same is chargeable to tax as capital gains and not as business income.

Monthly Digest of Case Laws (May 2010) 3 

Saranath Infrastructure (P) Ltd.vxs.ACIT (2010) 124 ITD 71 (Luck.)

S. 28 ~ Business loss - loans advanced to subsidiaries

Loans advanced to subsidiaries can not be allowed as bad debt or business loss. The loss is capital loss.

Jt. CITvxs.Rallies India Ltd. (2010) 3 ITR 1 (Mum.) (Trib.)

S. 37(1) ~ Business expenditure - premium on redemption on non convertible debenture

Assessee is entitled to the proportionate deduction, of premium on redemption of non-convertible debenture.

CITvxs.Indian Rayon & Industries Ltd. (2010) 38 DTR 313 (Bom.)

S. 37(1) ~ Capital or Revenue expenditure - Travelling and incidental expenses

Travelling and incidental expenditure in finalization of project for existing business allowable as revenue expenditure.

Jt. CITvxs.Rallies India Ltd. (2010) 3 ITR 1 (Mum.) (Trib.)

S. 37(1) ~ Business expenditure - Licence fee

Fees paid by assessee Telecom Company to department of telecommunication for use of licence was to be allowed as revenue expenditure.

ACITvxs.Vodafone Essar Gujarat Ltd. (2010) 38 SOT 51 (Ahd.)

S. 37(1) ~ Business expenditure - capital or revenue expenditure - year of allowability - cash system - spare parts.

Where assessee following cash system of accounting, the expenditure incurred for purchase of second hand machinery for using its spare parts is revenue expenditure and the same is deductible in the year in which the sale consideration was paid even though the machinery was received in India after the end of relevant year.

Aswath N. Rao (Dr)vxs.ACIT (2010) 38 DTR 205 (Kar.)

S. 37(1) ~ Business expenditure - extra payment of sugarcane price to cane growers

Matter is remanded to CIT(A) to decide whether the differential payment made by the assessee to cane growers after the close of the financial year / balance sheet date constitute an expenditure or distribution of profit, after taking in to account the resolution of the State Government modalities and the manner in which SAP and SMP are decided, the timing difference which will arise on account of the difference in the accounting years, etc.

Monthly Digest of Case Laws (May 2010) 4 

Dy. CITvxs.Shri Satpuda Tapi Parisar SSK Ltd. (2010) 231 CTR 224 (SC)

S. 37(1) ~ Capital or Revenue Expenditure - Mobile Talktime and headset Charges

The amount paid for handsets and for talktime charges were not capital in nature.

Radical Marketing Pvt. Ltd.vxs.ITO, ITAT `SMC' Bench, Mumbai, ITA No. 3868/Mum/2008, decided on 19-5-2009 (BCAJ 42-A, May 2010 pg. 171)

S. 41(1) ~ Profit chargeable to tax - Business income

There is no remission or cessation of liability within the meaning of section 41(1), on unilateral entry of write back of the unclaimed credit balances by the assessee.

CITvxs.Indian Rayon & Industries Ltd. (2010) 38 DTR 313 (Bom.)

S. 44 ~ Insurance Business - sale of investments

Income from sale of investments by insurance company is not taxable after deletion of sub r(b) of r 5 of first schedule.

Bajaj Allianz General Insurance Co. Ltd.vxs.Addl. CIT (2010) 38 DTR 282 /130 TTJ 398 (Pune) (Trib.)

S. 44BBA ~ Aircraft - Presumptive Taxation - Non resident

When assessee incurred loss, income can not be computed under section 44BBA as the said section is machinery section.

Royal Jordanian Airlinesvxs.Dy. DIT (2010) 3 ITR 181 (Delhi)(Trib.)

S. 44BBB ~ Civil construction - Barge hire charges – DTAA - India – Mauritius – Royalty - Permanent establishment (S. 5(2)(i), 9(1)(vi), Arts 5, 7,12)

Barge hire charges amounts to `royalty' within the meaning of section 9(1)(vi) and under Art. 12 of DTAA, between India and Mauritius and is liable to tax in India under section 44BB. In terms of Art 5(2)(i), of DTAA between India and Mauritius each of the building site, construction project, assembly project or supervisory activities in connection therewith is to be viewed on stand alone basis and where the duration of work under each such separate contracts does not exceed the period of nine months, the assessee cannot be said to have a PE in India, even otherwise, none of the contracts were such that those could be viewed as interconnected or independent so as to call for aggregation of their duration.

Asst. Director of ITvxs.Valentine Maritime (Mauritius) Ltd. (2010) 38 DTR 117 /130 TTJ 417 (Mum.) (Trib.)

S. 44D ~ Royalties – Foreign Companies - Double Taxation relief - India & Australia - Art.7, Income

Tax Act (S. 5, 9(1)(vii), 115A)

Monthly Digest of Case Laws (May 2010) 5 

Fees received by non-resident for performing services in India through a PE are taxable in accordance with Article 7 of DTAA. If Article 7 applies, S. 9(1)(vii), 44D and 115A would not apply.

Rio Tinto Technical Servicesvxs.Dy. CIT, ITA No. 3399/Del./2002, 5372/Del./2003, 4742/Del./2004, (BCAJ 42-A, June 2010 pg. 352)

S. 45 ~ Capital gains - slump sale - (S. 50)

Sale of industrial unit by the assessee firm as a "going concern", in its entirety on "as is where is" basis for a lump sum sale consideration which was arrived at by profit capitalization method and is not allocable to individual assets was a slump sale of the business and not a case of itemized sale.

J. B. Electronicsvxs.Jt. CIT (2010) 38 DTR 393 (Pune) (TM) (Trib.)

S. 45(4) ~ Capital gains - Distribution of assets on dissolution of firm [S. 50(1)]

Distribution of assets among the partners at the time of dissolution of the firm is to be assessed under section 45(4) and the same is not covered by section 50(1). Assessing Officer was free to refer the assets for valuation under section 55A, as the transfer value shown in the book value which can not be accepted as the fair market value of the assets i.e. Land and Building.

CITvxs.Kumazha Tourist Home (Dissolved) (2010) 38 DTR 166 (Ker.)

S. 45(5)(b) ~ Capital gains – Compensation - Compulsory acquisition

Enhanced compensation by the assessee for compulsory acquisition of waste lands and trees by the State Government under the Jagir Abolition Act is taxable as per the provisions of section 45(5)(b), therefore, the amount of enhanced compensation is chargeable to tax despite the fact that the cost of acquisition of the said capital asset is nil.

Sajjansinh N. Chauhanvxs.ITO (2010) 38 DTR 155 (Guj.)

S. 48 ~ Capital gains - Interest - Borrowed Funds - Acquisition of Shares

When interest bearing funds are utilized for making an application for allotment of shares and the number of shares allotted is less than the number of shares applied for, the entire interest is to be treated as cost of acquisition of shares allotted.

Neera Jain (Smt.)vxs.ACIT, ITAT `B' Bench, Mumbai, ITA No. 1861/Mum./2009, decided on 22-2-2010 (BCAJ 42-A, June 2010 pg. 347)

S. 50 ~ Capital gains - Depreciable assets - short term capital gains [S. 2 (11)]

Monthly Digest of Case Laws (May 2010) 6 

When assessee had been allowed depreciation on flat in question as a business asset up to asst year 1995-96, flat continued to be business asset, not allowing the depreciation for two years prior to date of sale, profit arising on sale of said flat would be assessable as short term capital gain.

CITvxs.Shakti Metal Depot (2010) 189 Taxman 329 (Ker.)

S. 50(2) ~ Capital gains - Depreciable assets [S. 2 (11)]

Set off of the sale proceeds was available to the assessee against the purchase cost of new property falling under the same block of assets.

CITvxs.Scindia Investment (P) Ltd. (2010) 39 DTR 12 (Bom.)

S. 54EC ~ Capital gains - Investment in bonds - date of investment

For the purpose of calculation of period of six months the date to be calculated from the date of receipt issued by the national housing bank and not from the date of issue of certificate.

Hindustan Unilever Ltd.vxs.Dy. CIT (2010) 38 DTR 91 (Bom.)

S. 69B ~ Unexplained investment - Discrepancy in stock

Stock shown more to bank, additions deleted by the Tribunal was confirmed.

ITOvxs.Bhagwati Prasad Raika (2010) 39 DTR 45 (Chhattisgarh)

S. 73 ~ Speculation - Loss

For the purpose of deciding weather the case of assessee is covered by exception provided in explanation to S. 73, speculation loss is to be excluded while computing business income and arriving at the gross total income.

Paramount Information Systems Pvt. Ltd.vxs.ITO ITAT `K' Bench, Mumbai, ITA No. 921/Mum/2008, decided on 24-2-2010 (BCAJ 42-A, May 2010 pg. 169)

S. 80HH ~ Deduction - New industrial undertaking - expansion of production capacity (S. 80I)

Expansion of production capacity of the existing unit by merely adding some equipments when raw material finished products, employees electric connection, maintenance of books of account etc. are all common and cannot be identified with new or old plant, did not constitute setting up of new industrial undertaking eligible for deduction under section 80HH and 80I.

Jt. CITvxs.Thirani Chemicals Ltd. (2010) 38 DTR 137 (Del.) (SB) (Trib.)

S. 80HHF ~ Deduction - Export of film soft ware

Monthly Digest of Case Laws (May 2010) 7 

Assessee not being the owner of the software that came to be developed as a result of the services provided by it in connection with the production of a film produced by the foreign company, there was no export or transfer of film software by the assessee and therefore, it is not entitled to deduction under section 80HHF in respect of the fixed fee received for the services rendered by it.

Kas Movie Makers (P) Ltd.vxs.CIT (2010) 38 DTR 121 (Del.)

S. 80HHF ~ Deduction – Export - Service income and income from music

Service income, income from music were operational income hence entitled to deduction under section 80HHF.

ACITvxs.Set India Pvt. Ltd. (2010) 3 ITR 454 (Mum.) (Trib.)

S. 80IA ~ Deduction - Profits and gain from infrastructure undertakings

Assessee carrying on the business of container handling Cranes at Jawaharlal Nehru Port Trust can be considered as developing, maintaining and operating an infrastructural facility is entitled to deduction under section 80IA.

CITvxs.ABG Heavy Industries Ltd. (2010) 189 Taxman 54 (Bom.)

S. 80IA ~ Deduction - Income from Power Plant - Valuation

Deduction in respect of profit of power generating undertaking generate by eligible unit captively consumed valuation at market price. Rates charged by the state electricity board, including the electricity tax levied thereon, adopted as a benchmark to arrive at the market value and CIT was not right in excluding the electricity tax to arrive at the market value.

DCWvxs.ACIT, ITAT `D' Bench Mumbai, ITA No. 126/Mum./2008, decided on 29-1-2010 (BCAJ 42-A, May 2010 pg. 170)

S. 80M ~ Deduction - inter-corporate dividend - gross or net

Where the various activities carried out by assessee constituted one single indivisible business of promoting industries in State and dividend income earned in that process assumed character of its business income earned, in such a situation .deduction under section 80M could be allowed on gross amount of dividend income.

Dy. CITvxs.Tamil Nadu Industrial Development Corpn. Ltd. (2010) 124 ITD 117 (Chennai)(TM)

S. 80P(2)(e) ~ Deduction - Co-operative society - Income from letting of godowns

Department is directed to examine the total income of the assessee society and determine the amount allocable as rental income in the composite charge received by it towards ginning and

Monthly Digest of Case Laws (May 2010) 8 

passing charges and godown rent by applying the principle of proportionally instead of adopting an ad hoc measure of attributing 50 percent of the charges as rental income.

CITvxs.Baba Saheb Kedar Ginning & Pressing Co-operative Society Ltd. (2010) 38 DTR 153 (SC)

S. 90 ~ Double taxation relief - International Taxation - India-Mauritius - Permanent establishment – Construction - Assembly project (Art. 5 &7)

For the purpose of determining the applicability of the threshold time-limit under Art. 5(2)(i), of the Indo-Mauritius DTAA, what is to be taken in to account is the duration of the activities of the foreign enterprise on a particular site or a particular project or supervisory activity connected therewith, on a standalone basis and not all the activities in a tax jurisdiction as a whole.

JRAY McDermott Eastern Hemisphere Ltd.vxs.Jt. CIT (2010) 38 DTR 161 (Mum.) (Trib.)

S. 90 ~ Double taxation relief - International Taxation - Indo-US treaty - charter of air craft - FDR interest (Art. 8)

Activity which is directly related to transportation of passengers by assessee as owners / lessee / charter of aircraft would alone fall within the ambit of para. 2(b) of Article 8 of Indo-US Treaty. Deposit of amount in FDR could not be said to be connected with operation of aircrafts para. 5 of Article 8 would not apply.

Asst. DITvxs.Delata Airlines Inc. (2010) 124 ITD 114 (Mum.)

S. 90 ~ Double Taxation relief - International Taxation – India-Singapore - Permanent establishment (Art. 7, 8)

Income of assessee, a tax resident of Singapore having been taxed in India, denying the benefits of Art. 8,without examining the issue whether the assessee had a PE in India within the meaning of Art. 7, matter remanded for examining the issue of PE and assessment accordingly.

J. M. Baxi & Co.vxs.Dy. Director of IT (2010) 39 DTR 1 (Mum.) (Trib.)

S. 90 ~ Double Taxation Relief - International Taxation

Despite cessation of PE, gains on transfer of PE asset taxable under Act and DTAA

Cartier Shippingvxs.DDIT (ITAT Mumbai)

S. 90 ~ Double Taxation Relief – International Taxation – INDIA - Permanent Establishment

No PE under DTAA if three criteria are not fulfilled.

Airlines Rotablesvxs.JDIT (ITAT Mumbai)

Monthly Digest of Case Laws (May 2010) 9 

S. 90 ~ Double Taxation Relief – International Taxation - India & USA - Art. S. 5(2) & 7, Income Tax Act

No income arises to the foreign company in India in the course of deputing personnel to an Indian company, who work under the control and supervision of the Indian company and thus become employee of the Indian company. Amount of salary of deputed employees reimbursed to the foreign company is not taxable in India.

DDITvxs.Tekmark Global Soutions LLC, ITAT Mumbai, ITA No. 671/2007, decided on 23-2-2010, (BCAJ 42-A, May 2010 pg. 171)

S. 92C ~ Transfer pricing – International Taxation - Arm's length price - bad debt written off - (Rule 10B)

In view of parameters prescribed in Rule 10B, bad debt written off can not be a factor to determine arm's length price of any international transaction.

CA Computer Associates (P) Ltd.vxs.Dy. CIT (2010) 37 SOT 306 (Mum.)

S. 92C ~ Transfer pricing – International Taxation - Arm's length price - Scope of adjustment

Economic and market conditions of Thailand and Vietnam being totally different, adjustments for volume off take, credit period and credit risk though material are not sufficient to make the sale price to AE in Thailand comparable with the sale price to unrelated party in Vietnam, unless suitable adjustments are made for disparity between the two transactions and therefore, matter is set aside to the CIT (A) for deciding the same afresh.

Intervet India (P) Ltd.vxs.ACIT (2010) 38 DTR 422 (Mum.) (Trib.)

S. 92C ~ Transfer pricing - International Taxation - Arm's length price - service fee from principal

Assessee earned service fees from principal at 12.5% of net advertisement revenue receipt. In the case of principal the same has been accepted at arm's length price. Computation at 15% of gross revenue receipt not justified.

ACITvxs.Set India Pvt. Ltd. (2010) 3 ITR 454 (Mum.) (Trib.)

S. 92C ~ Transfer Pricing - International Taxation - Comparables

Assessee's TP study cannot be rejected lightly, "comparables" have to be comparable on all parameters, no incentive to shift profits offshore if tax rates there are higher.

Dy. CITvxs.Indo American Jewellery (ITAT Mumbai)

Monthly Digest of Case Laws (May 2010) 1 0 

S. 133A ~ Survey - Loose slips found during survey

Assessee explain the loose slips pad found during survey, as wages paid in earlier. High court held that as there was no iota of evidence in the form of sale bills, bank account, money or property additions cannot be made.

CITvxs.Atma Valves (P) Ltd. (2010) 216 Taxation 241 (P & H)

S.115JA ~ Book profit - unabsorbed depreciation

Brought forward unabsorbed depreciation has to be set off while computing the book profit under section 115JA.

CITvxs.Gokudas Appearels (P) Ltd. (2010) 38 DTR 199 (Kar.)

S. 115JB ~ Book Profit - Club registered (S. 25)

A company registered under section 25 of the companies Act, whose income is exempt under principles of mutuality can not be brought with in the purview of section 115JB.

Delhi Gymkhana Club Ltd.vxs.Dy. CIT (2010) 39 DTR 48 (Del.) (Trib.)

S. 127 ~ Power to transfer case - opportunity of hearing

Assessee must be given an opportunity of being heard before transferring the case, further "administrative convenience and for co-ordinating effective investigation" cannot be said to be the reasons as envisaged in section 127(1).The order was quashed.

Anil Kumar Koharivxs.UOI (2010) 39 DTR 19 (Gau.)

S. 143(2) ~ Assessment – Notice - beyond twelve months - Block assessment - (S. 158BC)

Assessing officer had issued notice under section 143(2), after expiry of twelve months from the end of month in which return was filed, notice issued was barred by limitation and therefore, assessment made in pursuance of said notice was quashed.

Dy. CITvxs.National Refinery (P) Ltd. (2010) 38 SOT 36 (Mum.)

S. 148 ~ Reassessment – Jurisdiction

Reassessment completed by an Assessing Officer on the basis of a notice under section 148 issued by another Assessing Officer who had no jurisdiction over the assessee is not valid.

K. B. Kumar ( Dr. Mrs.)vxs.ITO, ITAT `D' Bench, Delhi, ITA No. 4436/Del./2009, decided on 20-1-2010 (BCAJ 42-A, June 2010 pg. 348)

S. 153A ~ Search and Seizure – Assessment - Joint warrant (S. 132)

 Joint warrant in name of assessee and another party is permissible. Search in purulent of search is valid.

Rajat Tradecom India Pvt. Ltd.vxs.Dy. CIT (2010) 3 ITR 321 (Indore) (Trib.)

S. 153A ~ Search and seizure – Retraction – warrant - (S. 132)

S. 153A order void if search warrant in improper status. Assessee can retract admission of undisclosed income.

Mansukh Kanjibhai Shah (Dr).vxs.ACIT (ITAT Ahmedabad)

S. 153C ~ Search and seizure - assessment of income of any other person - loose papers

Notice under section 153C, can be issued only where the money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned actually belong to assessee. Notice issued on the basis of loose papers which bear the name of assessee actually not belong to assessee was without jurisdiction.

Vijaybhai N. Chandranivxs.ACIT (2010) 38 DTR 225 / 231 CTR 474 (Guj.)

S. 158BD ~ Block assessment of third person - Satisfaction

Assessing officer of searched person should record his satisfaction that undisclosed income found during search belonged to such person. If no satisfaction recorded block assessment was invalid.

Dy. CITvxs.Flair Builders P. Ltd. (2010) 3 ITR 158 (Delhi) (Trib.)

S. 158BFA(2) ~ Search and Seizure - Penalty - Block assessment - filing an appeal

Assessee by filing an appeal against the order of block assessment disputing the rate of tax payable on long term capital gains fails to comply with cl (iv) of the first proviso to section 158BFA(2), and hence is not entitled to the benefit of the proviso regarding non levy of penalty.

CITvxs.Anju R.Innani (Smt.) (2010) 38 DTR 75/ 231 CTR 417 (Bom.)

S. 194C ~ Deduction of tax at source – Sub-contractor - lorry owners - amount not deductible – [S. 40)(a)(ia)]

The payment made to lorry owners at par with payments made towards salaries, rents etc, therefore, payment made to hired vehicles would not be considered as towards sub-contractor with lorry owners. As the provisions of section 194C is not applicable payment made can not be disallowed by applying the provision of section 40(a)(ia).

Mythri Transport Corporationvxs.ACIT (2010) 124 ITD 40 (Visakhapatnam)

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S. 194C ~ Deduction of tax at source – Financing - Payments to contractors and sub-contractors (S. 194J)

Finance agreement of assessee with producer /director of films is not a contract with in the meaning of section 194C, but only a financing arrangement therefore neither section 194C nor section 194J is applicable for composite contracts for financing film project.

Entertainment One India Ltd.vxs.ITO (2010) 39 DTR 26 (Mum.) (Trib.)

S. 194LA ~ Deduction of tax at source - Acquisition of property - Compensation

Mere issuance of notification under section 4 of the land Acquisition Act, provision of section 194LA was not attracted.

Infopark Keralavxs.ACIT (2010) 38 DTR 180 (Ker.)

S. 195 ~ Deduction of Tax at Source – Non-resident - agent

Despite TDS under section 195, payer is liable as "agent" under section 163. However, if payee is assessed, payer cannot be assessed as "representative assessee".

Hindalco Industriesvxs.Dy. CIT (ITAT Mumbai)

S. 195(1) ~ Deduction of tax at source – Non-resident - Purchase of software

Remittances made by the assessee to the non-resident for purchase of software were in the nature of trading receipt and price of goods purchased by it bear the character of income receipt in the hands of non-resident and therefore, assessee is liable to deduct tax at source under section 195(1).

CITvxs.Sonata Information Technology Ltd. (2010) 38 DTR 350 (Kar.)

S. 195(3) ~ Deduction of tax at source – Non – Resident - Double Taxation relief - India-USA – Certificate – Writ (Art. 226, Art. 27, Rule 29B)

Certificate under section 195(3), could not be declined on the ground that when the matter is pending before the Dispute Resolution Panel. As no appeal is available against order under section 195(3), writ is maintainable.

Mckinsey & Company Incvxs.UOI (2010) 38 DTR 34 / 323 ITR 544 / 231 CTR 430 (Bom.)

S. 195 ~ Deduction of tax at source – Non-resident - Double Taxation relief - India & Switzerland -Art. 5& 7, Income Tax Act

Payments made towards the share of the cost incurred in respect of research and development activities pursuant to cost contribution arrangement is not the payment towards fees for technical

Monthly Digest of Case Laws (May 2010) 1 3 

services or royalty. Such contribution is not liable to tax in the hands of the co-ordinating agencies.

ABB Limited, (2010) TIOL 94 ARA-IT dated 15-3-2010

S. 195 ~ Deduction of tax at source – Non-resident - Double Taxation relief - India & US - Art. 12, Income Tax Act

Basic design services provided by US entity which includes preparation of plan, concept design, design development and other related consultancy services during construction phase are part of architectural services provided by the US entity. Payment received for such services are fees for included services as it involved development and transfer of technical plan and design. The agreement needs to be read having regard to the predominant features of the contract and by taking into account crux and substance of the contract.

Remittance made to the US entity for making payment to consultants directly to the taxpayer represents reimbursement of actual expenses and does not represent income chargeable to tax.

HMS Real Estate (2010) TIOL 17 ARA-IT dated 18-3-2010

S. 195 ~ Deduction of tax at source – Non-resident - Double Taxation relief– India & USA – Art. 7, Income Tax Act

Consideration paid by Indian company to American company under assignment agreement was not capital gains but business profits. Since American company did not have PE in India, consideration not chargeable to tax in India. Payer not required to withhold tax under section 195.

Laired Technologies India Pvt. Ltd. (2010) 323 ITR 598 (AAR)

S. 234B ~ Interest - Advance Tax - Retrospective Amendment

Assessee is not liable to pay interest under section 234B when by retrospective amendment made later the amount becomes taxable. Administrative relief can be obtained by the assessee cannot erode the powers of the tribunal while dealing with the valid appeal laid before it.

Sun Petrochemicals Pvt. Ltd.vxs.ITO, ITAT `D' Bench, Ahmedabad ITA No. 1010/Ahd./2009, decided on 5-6-2009 (BCAJ 42-A, May 2010 pg. 168)

S. 234B ~ Interest - Advance tax - MAT Credit (S. 115JAA)

MAT credit available under section 115JAA, represents tax paid by the assessee before determination of total income under section 143(1) or completion of regular assessment within the meaning of sub section (2) of section 234B and therefore credit for MAT under the provisions of section 115JAA has to be reckoned in computing interest payable under section 234B .Amendment made by Finance Act, 2006, by substituting Expln 1 to section 234B was clarificatory or curative in nature and consequently , even prior to the amendment, the credit

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under section 115JAA could not be ignored in determining the liability to pay interest under section 234B.

CITvxs.Apar Industries Ltd. (2010) 38 DTR 128 / 323 ITR 411 / 231 CTR 313 (Bom.).

S. 234B ~ Interest – Tax Deduction at Source

Interest under section 234B is not chargeable where the income of the assessee is subject to Tax deduction at source.

Director ITvxs.Krupp Udge GmbH (2010) 38 DTR 251 (Bom.)

S. 244A ~ Interest on refunds - MAT- (S. 115JAA)

Interest under section 244A, is allowable on the refundable taxes arrived after giving credit of brought forward MAT under section 115JAA.

CITvxs.Apar Industries Ltd. (2010) 38 DTR 128 (Bom.)

S. 248 ~ Appeal - Denial of liability to deduct tax

Dispute relating to the chargeability of income of the non-resident recipient can alone be the subject matter of an appeal under section 248 and not the possibility of assessing of the income of the non resident in the hands of the resident payer as no procedure of assessment of the income of the non-resident in the hands of the resident payer is contemplated in sub section 1 of section 195.

CITvxs.Sonata Information Technology Ltd. (2010) 38 DTR 350 (Kar.)

S. 251 ~ Powers of the Commissioner (Appeals) - Finding - Direction

An appellate authority can not give direction or finding in respect of other years, direction or finding can be given only in respect of year or period which is before the authority.

Sun Metal Factory (I) (P) Ltd.vxs.ACIT (2010) 124 ITD 14 (Chennai)

S. 253(4) ~ Appellate Tribunal - Cross objection

Cross objection at assessee's instance in its own appeal is not maintainable.

Vidya Institutevxs.CIT (2010) 3 ITR 491 (Delhi) (Trib.)

S. 253(6) ~ Appellate Tribunal - Appeal fees - Penalty

An appeal against levy of penalty under section 271 is covered by cl. (d) of section 253(6), and the fee payable is Rs. 500 only.

Dabwali Transport Companyvxs.ACIT (2010) 38 DTR 434 (Chd.) (Trib.)

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Editorial Note~- Refer Ajit Kumar Pandey (Dr.) (2009) 310 ITR 195 (Patna)

S. 254(1) : Appellate Tribunal – Power - Deduction under an alternative section

Assessee having claimed deduction under section 36(1)(vii), Tribunal was empowered to deal with the issue of allowability of the impugned amount as an expenditure under section 37(1).

CITvxs.Khaitan Chemicals & Fertilizers Ltd. (2010) 38 DTR 86 (Del.)

S. 254(1) ~ Appellate Tribunal – Duty - Reasoned order

While deciding the appeal, Tribunal should del with issues both on facts and law with reference to submissions urged and then return its own reasoning, quoting the finding of CIT (A) and simply upholding the same without its own reasoning is not proper.

K. D. Wires (P) Ltd.vxs.CIT (2010) 38 DTR 210 (MP)

Editorial Note:- Refer Jt. CITvxs.Saheli leasing & Industries (2010) 324 ITR 170 (SC)

S. 254(2) : Appellate Tribunal - Rectification of mistake

Second application for rectification is not maintainable.

S. Panneerselvam (Dr.)vxs.ACIT (2010) Tax. L.R. 326 (Mad.) (Vol. 40 May 2010)

S. 254(2) ~ Appellate Tribunal - Rectification of Mistake – Book Profit – Retrospective Amendment (S. 115JB)

Retrospective amendment after passing order does not lead to "apparent mistake".

ACIT vs.GTL Ltd. (ITAT Mumbai)

S. 260A ~ Appeal - High Court - Condonation of delay - Amendment

In view of the amendment of the Act, giving power to the High Court to condone the delay in filing appeals, liberty is given to the department to move the High court by way of review of the impugned order dismissing department's belated appeal on the ground that it has no power to condone the delay.

CITvxs.ICICI Bank Ltd. (2010) 38 DTR 319 / 231 CTR 439 (SC)

S. 263 ~ Revision - erroneous and prejudicial order - merger

Where the Assessing Officer has applied his mind to the issue of applicability of section 40A(3), vis-à-vis block assessment and taken a possible view, the CIT is not justified in exercising powers of revision under section 263. Once the issue was considered and decided by the CIT(A) revision under section 263 cannot be done.

Ranka Jewellersvxs.Addl. CIT (2010) 38 DTR 293 (Bom.)

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S. 263 ~ Revision - non compete fee - possible view

The view taken by the Assessing Officer on the date of passing of order being a possible view as per legal position, it cannot be said to be erroneous or prejudicial to the interest of revenue.

Double Dot Finance Ltd.vxs.ACIT (2010) 38 DTR 220 (Mum.) (Trib.)

S. 271(1)(c) ~ Penalty – concealment - false claim of depreciation

Assessee having entered in to an artificial arrangement of purchase and lease back transaction to evade tax liability and the transaction having found to be bogus penalty under section 271(1)(c) is leviable.

Ultramarine & Pigments Ltd.vxs.ACIT (2010) 38 DTR 42 (Mum.) (Trib.)

S. 271(1)(c) ~ Penalty – concealment - advice of the tax consultant

Where the claim of deduction was made on the basis of advice of the tax consultant supported by tax audit report, there was no concealment or furnishing of inaccurate particulars on the part of the assessee penalty can not be made merely because the claim of deduction was disallowed in assessment proceedings.

Yogesh R. Desaivxs.ACIT (2010) 38 DTR 101 (Mum.) (Trib.)

S. 271(1)(c) ~ Penalty – concealment - disallowance on estimate basis

Assessing Officer having disallowed assessee's claim for expenses on estimation basis and the Tribunal has sustained the addition partly, it cannot be said that there was conscious act of concealment of income or furnishing of inaccurate particulars of income and therefore levy of penalty under section 271(1)(c) is not justified.

Dabwali Transport Companyvxs.ACIT (2010) 38 DTR 434 (Chd.) (Trib.)

S. 271(1)(c) ~ Penalty – concealment - duty draw back – DEPB - debatable claim

Assessee having included duty drawback / DEPB in the amount eligible for deduction under section 80IB at the time when there was a debatable regarding allowability or otherwise of such claim, hence the issue being debatable penalty under section 271(1)(c) is not justified.

Baldev Wollen Internationalvxs.ITO (2010) 39 DTR 12 (Del.) (Trib.)

 

WEALTH TAX

S. 2(ea) : Assets – stock-in-trade

Building was held as stock in trade it could not be included in definition of "asset" as per section 2(ea) even though pending completion of sale transaction and it was given on rent to purchasing party.

Dy. CWTvxs.Brilliant Estate Ltd. (Indore) (2010) 124 ITD 8 (Indor

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