Section 271 (1) (c) of the Income-tax Act, 1961

Section 271 (1) (c) of the Income-tax Act, 1961

SECTION 271 (1) (c)

PENALTIES

Penalty under clause c of Sub-Section 1 of Section 271 of the Income-tax Act, 1961, if the Assessing Officer or the Commissioner of Income Tax (Appeals) during the course of the Assessment Proceedings under the Act is satisfied that any person has ‘concealed’ or ‘furnished inaccurate particulars of income’. The words ‘concealed’ or ‘furnished inaccurate particulars of income’ has been defined either in this Section nor any where else of the Act. One thing is certain that these two circumstances are not identical in details although they may lead to the same effect, namely, keeping a certain portion of the income. The word ‘conceal’ is derived from the Latin word ‘concelare’ which implies to ‘hide’. It signifies a deliberate act of omission on the part of the assessee. A mere omission or negligence would not constitute a deliberate act suppressio veri or suggestio falsi – T. Ashok Pai Vs. CIT (2007) 161 Taxman 340, 292 ITR 11 (SC).

The words ‘furnishing inaccurate particulars of income’ refer to the particulars which have been furnished by an assessee of his income and the requirements of concealment of income is that income has not been declared at all or is not even recorded in the books of accounts or in a particular case the concealment of the particulars of income may be from the books of accounts as well as from the furnished – CIT vs. Raj Trading Co. (1996) 217 ITR 208, 86 Taxman 282 (Raj).

Above provisions of the Section clarifies that:

a) The penalty could only be levied by the Assessing Officer and/or the Commissioner of Income Tax (Appeals) and not higher authorities to that such as Income Tax Appellant Tribunal, High Court, and Supreme Court.

b)   It would only be levied during the Assessment Proceedings under the Income-tax Act, 1961.

c)   The penalty is in addition to the tax, if any payable by the assessee.

d)  Penalty could not be levied where the Total Income of the Assessee is in negative i.e. loss after the completion of the Assessment Proceedings under the Income-tax Act, 1961. Commissioner of Income Tax vs. Rajasthan Vanaspati Product Limited, (2008) 8 DTR (Raj) 282, were it has been held that, Penalty under section 271(1)(c)—Concealment—Assessment at loss—Penalty under s. 271(1)(c), prior to amendment of Explanation 4 thereof by the Finance Act, 2002, w.e.f. 1st, April, 2003, could not be imposed in cases where, even after adding the concealed income, the assessed income remained a loss. And concluded that, Penalty under s. 271(1)(c), prior to amendment of Explanation 4 thereof by the Finance Act, 2002, w.e.f. 1st April, 2003, could not be imposed in cases where, even after adding the concealed income, the assessed income remained a loss.

HISTORY OF THE SECTION

It all started way back in 01.04.1965 when the word ‘deliberately’ was omitted by the Finance Act 1964. It is obvious that the onus to prove the ‘deliberately’ was on the department. But, the same had been causing difficulties to the assessee as the departments are used to levy penalty almost under all the circumstances of disallowance or additions as the case may be.

The principal object of enacting this section was to provide prevention against recurrence of default on the part of the assessee. The basic sense of this section was to stop the practice of what the legislature considers to be against the public interest. The department was unable to prove one’s deliberateness towards certain act, thus the whole onus was on the laps of the department wholly and solely.

To overcome this difficulties in discharging this ‘onus’ the legislature came with an amendment under the Finance Act, 1964 w.e.f. 01/04/1965 by deleting the word ‘deliberately’ from the section. With this the burden once again fell on the assessee. Thus, the assessee was the one who had to prove that the particular act has not been done deliberately. An explanation was also added at the end of the section in order to cast upon the assessee the ‘onus’ to prove that the omission of income did not arise from any fraud or gross or wilful neglect in case where the difference between the returned income and assessed income was at a certain specified percentage.

DETAILED VIEW ON CASE LAWS

1.   VOLUNTARY SURRENDER OF UNDISCLOSED INCOME

A close study of the recent cases reveals the liberal judicial approach in applying the specific and strict provisions of section 271(1)(c). Voluntary surrender of the alleged undisclosed income just to buy peace of mind has emerged as an exception protecting the assessee against penalty even in an obvious case.

Thus, the Madras High Court in the case of CIT vs. Jayaraj Talkies (1999) 239 ITR 914 (Mad) held that mere agreement to addition of income or surrender of income did not imply concealment of income where the assessee surrendered certain amount to assessment because it was unable to substantiate its claims with necessary vouchers.

Similarly, the Kerala High Court in the case of CIT vs. M. George & Brothers (1987) 59 CTR (Ker) 298 : (1986) 160 ITR 511 (Ker) held that where the assessee for one reason or the other agrees or surrenders certain amounts for assessment, the imposition of penalty solely on the basis of the assessee's surrender will not be well founded.

In CIT vs. Suraj Bhan (2006) 203 CTR (P&H) 230 : (2007) 294 ITR 481 (P&H), the Punjab & Haryana High Court held that penalty cannot be imposed merely on account of higher income having been subsequently declared.

In this case, the assessee filed revised return showing higher income and gave the explanation that the higher income was offered to buy peace of mind, and to avoid litigation.

The Punjab & Haryana High Court, again, seems to have gone a step further in defying the specific provision of Explanation 1. In this case, transportation charges to the tune of Rs. 12,12,880 debited in the profit and loss account, when detected and investigated by the Assessing Officer during the assessment proceedings, the assessee could not satisfactorily explain the same. The assessee, without filing a revised return, surrendered the said uncorroborated amount of expenses merely to buy peace of mind and to avoid further litigation.

Although it was a clear-cut case of concealment penalty but the Punjab & Haryana High Court rather unconvincingly found that since the impugned payments were directly made by the suppliers, therefore, there was neither concealment of income nor furnishing of inaccurate particulars of income within the meaning of section 271(1)(c). "The Department has to prove mens rea before levying penalty under section 271(1)(c) and it cannot be made out that the assessee has concealed income or furnished inaccurate particulars merely because he has surrendered certain amount to avoid litigation and to buy peace of mind."

It appears that in all the aforediscussed cases, the respective Madras, Kerala, Punjab & Haryana High Courts relied on the two rulings of the Supreme Court, viz., Sir Shadi Lal Sugar & General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199 : (1987) 168 ITR 705 (SC) and CIT vs. Suresh Chandra Mittal (2001) 170 CTR (SC) 182 : (2001) 251 ITR 9 (SC).

In Sir Shadi Lal Sugar & General Mills Ltd. (supra) it was categorically ruled that if the assessee had agreed to the assessment of undisclosed income, it did not absolve the Revenue from proving mens rea in a quasi criminal offence.

In Suresh Chandra Mittal's case (supra) the Court came out with an epoch-making ruling, viz., if an assessee files a revised return showing higher income and gives explanation that he has offered higher income to buy peace of mind and to avoid litigation, penalty cannot be imposed merely on account of higher income having been subsequently declared.

2.   IF EXPLANATION IS NOT PRESSED INTO SERVICE BURDEN IS ON THE DEPARTMENT

It would indeed be a misconception of law to assume that merely by bringing the case under section 271(1)(c), its Explanation 1 would automatically be made applicable. Instead, Explanation 1 has to be specifically referred in the relevant notice; otherwise the case has to be adjudicated in the light of the main provision of section 271(1)(c) which has to be construed in the light of the ruling of Anwar Ali (supra). Consequently, the initial burden which has been cast upon the assessee by reason of Explanation 1 would automatically be on the Department by virtue of the rule of Anwar Ali. This, as a matter of fact and law, is the stand repeatedly taken by the Bombay High Court in the two cases of CIT vs. P.M. Shah (1993) 203 ITR 792 (Bom) : TC 50R.800 and CIT vs. Dharamchand L. Shah (1993) 113 CTR (Bom) 214 : (1993) 204 ITR 462 (Bom).

In both the cases, penalty proceedings were initiated without mentioning in the notice that Explanation 1 to section 271(1)(c) was being resorted to. The assessee objected the application of Explanation 1 at a subsequent stage. When the controversy came up before the Bombay High Court by way of a reference, the Court, concurring with the Tribunal, held that in the absence of any intimation of penalty proceedings under the Explanation 1 to section 271(1)(c), levy of penalty under the Explanation was not sustainable.

To clarify its finding, the Court, stressed that the Explanation cannot in any manner be said to be merely an elucidation of what was already contained in section 271(1)(c); instead, the Explanation makes a considerable difference to what was contained in section 271(1)(c).

3.   UNSATISFACTORY EXPLANATION WOULD NOT ATTRACT PENALTY

In the case of Roshan Lal Madan (supra), the Chandigarh Bench of the Appellate Tribunal came out with a very peculiar construction of clause (A) to Explanation 1, which, in effect, renders the whole statutory exercise in this respect as quite futile.

It was virtually pointed out that "The words used in clause (A) of the Explanation 1 "found to be false" expressly imports the element of deceitful intent. The word "false" in its juristic sense implies something more than a mere untruth. Untruth is simply a statement which is not true and may have been uttered without intention to deceive and through ignorance. However, falsehood necessarily denotes the violation of truth for the purposes of deceit. Merely because the explanation furnished by the assessee is considered not satisfactory or unreasonable would not ipso facto justify the invocation of clause (A) to levy penalty under section 271(1)(c)".

The Tribunal, accordingly, came to the conclusion that an unsatisfactorily explained investment would result into the addition of the impugned amount as income from undisclosed sources under section 69 but would not justify the levy of penalty under section 271(1)(c), Explanation 1(A).

4.   SPECIFIC INVOCATION OF EXPLANATION NOT REQUIRED

As has already been stated in the beginning, in the recent case of K.P. Madhusudhanan (supra) a three Judges Bench of the Supreme Court has categorically laid down that no express invocation of the Explanation to section 271 in the notice under section 271 is necessary for applying the provisions of said Explanation and after the introduction of Explanation, there is no question of proof of mens rea.

Affirming the decision of the Kerala High Court in CIT vs. K.P. Madhusudhanan (2001) 165 CTR (Ker) 353 : (2000) 246 ITR 218 (Ker) and overruling the aforediscussed (contrary) decision of the Bombay High Court, the apex Court in K.P. Madhusudhanan’s case (supra) clarified that "The Explanation to section 271(1)(c) is a part of section 271". Therefore, when the designated tax-authority issues to an assessee a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. The notice under section 271 puts the assessee to notice that he has to rebut the presumption drawn against him by virtue of the Explanation; otherwise he has to bear the penalty, emphatically concluded the Court.

5.   ASSESSEE’S CONSENT FOR ADDITION SHALL NOT ABSOLVE THE ASSESSEE FROM BURDEN OF PROOF

In an earlier case of Sir Shadilal Sugar & General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199: (1987) 168 ITR 705 (SC) : TC 50R.300, a two Judges Bench of the Supreme Court, in the context of the assessment year 1958-59, firmly stated that if an assessee admitted that there were incomes, it could not amount to an admission that there was deliberate concealment. "From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of a quasi criminal offence".

The three Judges Bench of the Supreme Court in the recent case of K.P. Madhusudhanan (supra) expressly stated that the aforequoted observation was made prior to the insertion of Explanation. Therefore, it is no longer good after the insertion of Explanation. No burden lies on the Revenue to prove mens rea even if the assessee has agreed the additions to his income as by virtue of the Explanation the assessee is not absolved from the initial burden laid on him by the Explanation, Emphatically stated the Court.

6.   PRINCIPLES EMERGING FROM DILIP N. SHROFF'S CASE

A careful reading of the judgment of the Supreme Court reveals the following legal positions regarding the provisions of section 271(1)(c) read with Explanation 1 thereto :

(a)     The Explanations to section 271(1)(c) are applicable to both the concealment of income and the furnishing of inaccurate particulars. Clause (c) of sub-section (1) of section 271 categorically states that the penalty would be leviable if the assessee conceals the particulars of his income or furnishes inaccurate particulars thereof. By reason of such concealment or furnishing of inaccurate particulars alone, the assessee does not ipso facto become liable for penalty. Imposition of penalty is not automatic. Levy of penalty not only is discretionary in nature but such discretion is required to be exercised on the part of the Assessing Officer keeping the relevant factors in mind. Penalty proceedings are not to be initiated, only to harass the assessee. The approach of the Assessing Officer in this behalf must be fair and objective.

(b)     Only in the event the factors enumerated in clauses (A) and (B) of Explanation 1 are satisfied and a finding in this behalf is arrived at by the Assessing Officer, the legal fiction created thereunder would be attracted.

(c)      Both the expressions, viz., concealment and the furnishing of inaccurate particulars signify a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing of inaccurate particulars.

(d)     In view of clause (A) of Explanation 1, the Assessing Officer is required to arrive at a finding that the explanation offered, if any, by the assessee is false. In view of clause (B), findings have to be given by the Assessing Officer (i) that the assessee has failed to prove that explanation given by him is bona fide and (ii) that all the facts relating to the same and material to the computation of income have not been disclosed by him. Thus, apart from his explanation being not bona fide, it should have been found as of fact that he has not disclosed all the facts which are material to the computation of his income.

(e)     Primary burden of proof, therefore, is on the Revenue. The statute requires satisfaction on the part of the Assessing Officer. He is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee has concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the Department.

(f)       While considering as to whether the assessee has been able to discharge his burden, the Assessing Officer should not begin with the presumption that he is guilty.

(g)     Once the primary burden of proof is discharged, the secondary burden of proof would shift on to the assessee because the proceeding under section 271(1)(c) is of penal nature in the sense that its consequences are intended to be an effective deterrent  which will put a stop to practices which the Parliament considers to be against the public interest and, therefore, it is for the Department to establish that the assessee is guilty of concealment of income or of furnishing inaccurate particulars thereof.

(h)     The order imposing penalty is quasi-criminal in nature and, thus, burden lies on the Department to establish that the assessee has concealed his income. Since burden of proof in penalty proceedings varies from that in the assessment proceedings, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitutes good evidence in the penalty proceeding. In the penalty proceedings, thus, the authorities must consider the matter afresh as the question hasto be considered from a different angle.

(i)       Thus, before a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represents income and that the assessee has consciously concealed the particulars of his income or has furnished inaccurate particulars thereof.

(j)       Penalty provisions have to be strictly construed. Even when the burden is required to be discharged by an assessee, it would not be as heavy as in the case of prosecution.

(k)     It may be true that the legislature has attempted to shift the burden from Revenue to the assessee. It may further be correct that different views have been expressed as regards construction of statutes in the light of the changing legislative scenario, but the tenor of a penal proceeding remains the same.

(l)       The omission of the word "deliberately" from section 271(1)(c), thus, may or may not be of much significance but what is material is its application.

(m)   "Concealment of income" and "furnishing of inaccurate particulars" are different. Both concealment and furnishing of inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppression veri or suggestio falsi. Although it may not be very accurate or apt but suppressio veri would amount to concealment, suggestio falsi would amount to furnishing of inaccurate particulars.

(n)     The Assessing Officer is required to arrive at a satisfaction that there is "falsity" in furnishing of explanation by the assessee. Explanation 1, therefore, categorically states that such Explanation must either be false or not otherwise substantiated.

(o)     Concealment and furnishing of inaccurate particulars would not overlap each other as they represent different concepts. Had they not been so, the Parliament would not have used the different terminologies. Where the show-cause notice issued by the Assessing Officer does not clearly say whether it is issued for concealment of income or for furnishing inaccurate particulars of income, it will mean non-application of mind on the part of the Assessing Officer.

(p)     The Assessing Officer is bound to comply with the principles of natural justice while passing the order levying penalty for concealment.

Understanding Deemed Dividend with Latest Case Laws

See the artical at
http://www.caclubindia.com/articles/understanding-deemed-dividend-with-latest-case-laws-11385.asp?utm_source=newsletter&utm_content=article&utm_medium=email&utm_campaign=nl_02_10_2011#.ToiLJtQWCJI.gmail

Judicial Pronouncements - International Taxation

Judicial Pronouncements - International Taxation

M/s Havells India Ltd. Vs. Addl.CIT [ITA No.1300/Del./2010, dtd. 27.05.2011] (2011) 59 DTR (Del)(Trib) 118

Fees paid to a foreign company for rendering testing and certification services cannot be treated as income deemed to accrue or arise in India under Section 9(1)(vii) of the Income-tax Act

ITAT Delhi Bench held that where services have been rendered outside India and have been utilised for the purpose of making or earning any income from any source outside India, such payments would fall outside the purview of Section 9(1)(vii) of the Act and will not be deemed to accrue or arise in India. The Tribunal observed that the testing and certification was necessary for the export of the product and was utilised for such export. The said services were rendered and utilised outside India. Therefore, the income fell outside the purview of Section 9(1)(vii) of the Act and did not deem to accrue or arise in India. The Tribunal observed that the tax department had failed to prove its contention that the testing and certification were utilised in the taxpayer’s production activity in India. The burden in this regard was entirely on the tax department, which the tax department had failed to discharge. The tax department’s argument on remitting the matter to the AO was neither required, nor appropriate to be adopted. The Tribunal observed that it was not possible to remit the matter to the AO since the appellate authority examines whether the assessment had been framed in accordance with law and if the assessment was not framed in accordance with law it was not the responsibility of the authority to start investigation suo moto and in order to fill up the gap which was missing. The Tribunal further observed that the tax department did not bring anything on record to substantiate its observation of the testing and certification services provided to the taxpayer by CSA having been utilised for the taxpayer’s business activity in India.

Accordingly, it was held that fees paid by the taxpayer did not deemed to accrue or arise in India and withholding of tax under Section 195 of the Act was not required and thus disallowance under Section 40(a)(i) of the Act was also not required. [Post amendment of section 9(1)(vii)]

Nippon Keiji Kyokoi Vs. ITO [ITA no.6329, 6330, 6331/Mum./2007, dtd. 29.07.2011]

Income of non-resident attributed to its PE in India taxable as business profits; balance income not to be taxed as fee for technical services

Notwithstanding a change in the position by the assessee, the Tribunal has held that the effective connection with the permanent establishment in India has to be determined based on a functional test in the case of fees for technical services . Furthermore, the Tribunal also upheld that if the services are said to have been effectively connected with the permanent establishment, the income would be taxable only as business profits to the extent of attribution and the balance income would not be liable to tax in India as fees for technical services. Article-12(5) of the DTAA, excludes the entire receipt from Article-12(1) and 12(2), if the receipt has an effective connecting with the P.E. The argument that Port is to be taxed under Article-7 and balance under Article-12, is devoid of merit. The DTAA does not contemplate the same. Such an interpretation said to be placed by learned Departmental Representative is incorrect and, hence, we reject the same. When certain FTS is effectively connected with the P.E., then so much of the fees i.e., directly or indirectly attributable to the P.E. is to be taxed under Article-7. Services rendered through own staff and those rendered through independent surveyors cannot be dealt with differently and hence the services rendered through independent surveyors have an effective connection with the PE.

Destination of the World (Subcontinent) Pvt. Ltd., Vs. Asstt. CIT [ITA No. 5534(Del)/2010, dtd. 08.07.2011]

For transfer pricing, internal comparability to be given preference over external comparables

The ITAT Delhi Tribunal held that in the first instance, the attempt should be made to determine arm’s length price of controlled transactions by comparing the same with internal uncontrolled transactions undertaken in same or similar economic scenario.

ACIT Vs. Anchor Health and Beauty Care Pvt Ltd [ITA No. 7164/ Mum/2008, dtd. 26.08.2011]

Fee for “user of name” and “accreditation” not taxable as “royalty”

The assessee, engaged in manufacture of tooth paste etc paid Rs 11,71,826 as “accreditation panel fees” to British Dental Health Foundation UK without deduction of tax at source. The AO disallowed the sum u/s 40(a)(i) on the ground that the sum was taxable as “royalty” and tax had not been deducted at source u/s 195(1). The CIT (A) deleted the disallowance. Before the Tribunal, the department argued that since the assessee derived valuable advantage from the accreditation by BDHF and use the same as a marketing tool, the amount constituted “royalty”. ITAT Mumbai bench dismissing the appeal held that (i) The obligation to deduct tax u/s 195(1) arises only if the payment is chargeable to tax in the hands of non-resident recipient. If the recipient of the income is not chargeable to tax, the vicarious liability on the payer is ineffectual. As the AO had not established how the recipient was liable to pay tax, he was in error in disallowing u/s 40(a)(i) (GE India Technology Center 327 ITR 456 (SC) followed; (ii) On merits, though the accreditation fees permitted the assessee the use of name of British Dental Health Foundation, it did not constitute “royalty” under Article 13 of the India-UK DTAA because it did not allow the accredited product to use, or have a right to use, a trademark, nor any information concerning industrial, commercial or scientific experience so as to fall within the definition of the term. The purpose of the accreditation by a reputed body was to give certain comfort level to the end users of the product and to constitute the USP of the product. The term “royalty” cannot be construed as per its normal connotations in business parlance but has to be construed as per the definition in Article 13. The amount constituted “business profits” and as the recipient did not have a PE in India, it was not taxable in India.

DCIT Vs. RBS Equities India Ltd [ITA No. 2570/Mum/2010, dtd. 26.08.2011]

When method changed by TPO, no penalty is leviable

The assessee adopted the TNMM to determine the ALP in respect of the broking transactions entered into with its affiliates. The AO & TPO held that the assessee ought to have adopted the CUP method and made an adjustment of Rs. 1.10 crores. This was accepted by the assessee.

The AO levied penalty under Explanation 1 to s. 271(1)(c) on the ground that the assessee had filed inaccurate particulars of income. This was deleted by the CIT (A). On appeal by the department to the Tribunal, ITAT Mumbai Bench dismissing the appeal held that explanation 1 to s. 271(1)(c) does not apply to transfer pricing adjustments. Penalty for transfer pricing adjustments is governed by Explanation 7 to s. 271 (1)(c). Under Explanation 7 to s. 271(1) (c), the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of s. 92 C in “good faith” and with “due diligence”. The assessee adopted the TNMM and no fault was found with the computation of ALP as per that method. Instead, the method was rejected on the ground that CUP method was applicable. It is a contentious issue whether any priority in the methods of determining ALPs exists. So, when TNMM is rejected, without any specific reasons for inapplicability of the TNMM and simply on the ground that a direct method is more appropriate to the fact situation, it is not a fit case for imposition of penalty. The expression ‘good faith’ used alongwith ‘due diligence’, which refers to ‘proper care, means that not only must the action of the assessee be in good faith, i.e. honestly, but also with proper care. An act done with due diligence would mean an act done with as much as care as a prudent person would take in such circumstances. As long as no dishonesty is found in the conduct of the assessee and as long as he has done what a reasonable man would have done in his circumstances, to ensure that the ALP was determined in accordance with the scheme of s. 92 C, deeming fiction under Explanation 7 cannot be invoked.

ADIT Vs. TII Team Telecom International Pvt Ltd [ITA No. 3939/ Mum/2010, dtd. 26.08.2011]

Income from license of software not assessable as “royalty”.

The assessee, an Israeli company, entered into an agreement with Reliance Infocom for supply and licence of software for RIL’s wireless network in India. The assessee received Rs. 3 crores which it claimed to be “business profits” and not taxable for want of a permanent establishment (PE) in India. The AO took the view that the said sum was assessable as “royalty”. This was reversed by the CIT (A) following Motorola Inc 96 TTJ 1 (Del) (SB). In appeal before the Tribunal, the department argued that in view of Gracemac Corp 42 SOT 550 (Del), the use of software was assessable as “royalty”. ITAT Mumbai bench dismissing the appeal held that (i) Under Article 12 (3) of the India- Israel DTAA, royalty is defined inter alia to mean payments for the “use of” a “copyright” or a “process”. There is a distinction between “use of copyright” and “use of a copyrighted article”. In order to constitute “use of a copyright”, the transferee must enjoy four rights viz: (i) the right to make copies of the software for distribution to the public, (ii) The right to prepare derivative computer programmes based upon the copyrighted programme, (iii) the right to make a public performance of the computer programme and (iv) The right to publicly display the computer programme. If these rights are not enjoyed, there is no “use of a copyright”. The consideration is also not for “use of a process” because what the customer is paying for is not for the “process” but for the “results” achieved by use of the software. It will be a “hyper technical approach totally divorced from ground business realities” to hold that the use of software is use of a “process”. (Motorola Inc 96 TTJ 1 (Del) (SB) and Asia Sat 332 ITR 340 (Del) followed. Gracemac Corp 42 SOT 550 (Del) not followed); (ii) It is well settled that a DTAA prevails over the Act where it is more favourable to the assessee. The view taken in Gracemac, relying on Gramophone Co AIR 1984 SC 667, that the Act overrides the treaty provisions where there is irreconcilable conflict is not acceptable because (a) it is obiter dicta, (b) contrary to Azadi Bachao Andolan 263 ITR 706 (SC) and (c) Gramophone Co not applicable to I. T. Act as it dealt with law in which specific enabling clause for treaty override did not exist. (Ram Jethmalani vs UOI also considered).

LS Cable Limited Vs. DIT [ A.A.R. Nos. 858-861 of 2009, dtd. 26.07.2011]

Off-shore supplies not taxable despite composite contract & PE’s role in clearance

The assessee, a Korean company, entered into three contracts with Delhi Transco Ltd for (i) offshore supply contract on CIF basis, (ii) onshore supply contract and (iii) onshore service contract. The applicant claimed that the income arising from the offshore supply contract was not taxable in India. The revenue claimed that the profits from the off-shore supply was taxable in India on the basis that (a) though the supply contract was awarded of sepa successful completion of the facility as per specifications, (c) the three contracts were separate contracts did not dilute the responsibility of the applicant for successful completion of the facility as per specifications, (c) the three contracts were composite contracts and one could not exist without the other, (d) the offshore supplies were on CIF basis and the contracts for offshore supply and onshore contracts were signed on the same date, (e) the insurance requirement of the offshore supplies contract require that the applicant will take out and maintain insurance of cargo, installation, worker compensation, etc, (f) the case is not a case of a sale simpliciter but is for full package involving onshore services. It could not have made a difference had the contract been one instead of three divisible contracts. AAR rejecting the contentions of the department held that (i) The clauses in the offshore supply contract agreement regarding the transfer of ownership, the payment mechanism in the form of letter of credit which ensures the credit of the amount in foreign currency to the applicant’s foreign bank account on receipt of shipment advice and insurance clause establish that the transaction of sale and the title took place outside Indian Territory. The ownership and property in goods passed outside India. The transit risk borne by the applicant till the goods reach the site in India is not necessarily inconsistent with the sale of goods taking place outside India. The parties may decide between them as to when the title of the goods should pass. As the consideration for the sale portion is separately specified, it can well be separated from the whole. (Ishikwajima Harima 288 ITR 410 (SC) & Hyosung Corporation 314 ITR 343 (AAR) followed; Ansaldo Energia SPA 310 ITR 237 (Mad) distinguished); (ii) Nothing in law prevents parties to enter into a contract which provides for sale of material for a specified consideration although they were meant to be utilized in the fabrication and installation of a complete plant; (iii) Though the assessee had a PE in India, that came into existence for the purpose of carrying out the contract for onshore supplies and services etc and had no role to play in offshore supplies. Even if the PE was involved in carrying on some incidental activities such as clearance from the port and transportation, it cannot be said that the PE is in connection with the offshore supplies.

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Dear Friends : The emails are schedule to be posted in the blog (itronline.blogspot.com)and will sent to the group on various dates and time fixed. Instead of sending it on one day.

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Easier PAN norms for FIIs, foreign nationals

Breaking News:

NEW DELHI: In a move which could improve the fund flow and provide some stability to the choppy Indian bourses, the finance ministry has relaxed norms for foreign nationals and foreign institutional investors to obtain Permanent Account Numbers (PAN) that could also double up as KYC (know your customer) compliance for any investment they make in Indian stocks.

Till now, FIIs or foreign nationals had to obtain a PAN and separately meet KYC requirements prescribed by the market regulator before investing in stocks. The tax obligation on any transaction is twice the due amount if they fail to mention PAN.

In the revised rules that come into effect from October 1, a foreign national will have to only produce either h/his citizenship number or taxpayer identification number to obtain a PAN. The government is making amendments in Rule 114 and Form 49A of the Income Tax Rules and has proposed to introduce a new Form 49AA. While Form 49A will be used for Indian citizens, the other is for foreign nationals and FIIs.

Earlier rules stipulated that citizenship or taxpayer identification number would not be accepted as proof of identity in case of foreign nationals seeking PAN card. The applicant is required to take prescribed documents to an officer of Indian Embassy or High Commission where he is a resident to get them attested.

The revised guidelines ensure that a foreign national or an FII need not make rounds of Indian Embassies or High Commissions anymore. They can get copies of their documents attested by recognized authorities in their respective countries. Several countries and trade and industry organizations had represented the finance ministry seeking changes in the rules, in particular documents to be accepted as proof of identity and address and their attestation.

The department of economic affairs and the central board of direct taxes (CBDT) also worked on harmonizing the requirements of PAN and meeting KYC obligation. "Since most of the basic information for both are common, it was decided to harmonize them into one so that compliance burden for a foreign investor is substantially reduced," said a senior finance ministry official. The directorate of Income Tax has devised a single integrated form that incorporates the requirements of both PAN and KYC.

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Section 115BBD of the I.T. Act - Disguised Amnesty

Section 115BBD of the I.T. Act - Disguised Amnesty

T.N. PANDEY
EX-CHAIRMAN, CBDT

In this article, the author has examined the nuisances of newly introduced section 115BBD in the I.T. Act, 1961 by the Finance Act, 2011 for an year only and has demonstrated that this section is in the nature of disguised tax amnesty for short period for getting foreign funds taxed in India at 15% rate, making the country lose the balance tax @15% without mentioning any ostensible justification for doing so. Such an amnesty is against the assurance given on behalf of the Govt. to the Supreme Court of India and the Government's doing so is apparently unfair and morally unjustified.

A new section 115BBD titled 'Tax on certain dividends received from foreign companies' has been inserted in the Income Tax Act, 1961 (Act) by the Finance Act, 2011. The reason for such a provision has been explained in para 146 of the budget speech of the FM as under:-

"It has been represented that the taxation of foreign dividends in the hands of resident taxpayers at full rate is a disincentive for their repatriation to India and they continue to remain invested abroad. For the year 2011-12, I propose a lower rate of 15% tax on dividends received by an Indian company from its foreign subsidiary. I do hope these funds will now flow to India".

In the Explanatory Memorandum to the Finance Bill, 2011, the rationale for this provision has been elucidated saying that the provision is being enacted to give relief in respect of dividends received from foreign companies, which are presently taxable in the hands of the Indian taxpayers at the rates applicable in their cases. The provision is applicable only for one year. There is no corresponding section in the Direct Taxes Code, 2010.

The new section relates to taxation of dividends received from foreign companies. Under the existing provisions of the Act, dividend received from foreign companies is taxable in the hands of the recipient at applicable marginal rate of tax. Therefore, in case of companies, who receive foreign dividend, such dividend is taxable at the rate of 30% plus applicable surcharge and cess.

** ** **

The new section raises the issue as to why this provision for taxation of foreign dividends at reduced rate for one year has been considered necessary. The provision is seemingly in the nature of tax amnesty for facilitating transfer of tax evaded incomes from abroad at concessional rate of tax without any liability for penalty or prosecution.

The word 'amnesty' properly belongs to international law, and is applied to treaties of peace following a state of war, and signifies there the burial in oblivion of the particular cause of the strife, so that shall not be again a cause for war between the parties. And so amnesty is applied to rebellions, which by their magnitude are brought within the rules of international law, and in which multitudes of men are the subjects of the clemency of the government [Knote v. US, 95 US 149, 24, L.Ed. 442]. Broadly, it implies general pardon [see Deputy Inspector General of Police v. D. Rajaram, AIR 1960 AP 259, 262 [Constitution of India, Art. 72].

Tax amnesty implies an opportunity offered by a government to tax evaders to declare their past concealment of income, wealth, etc., without fear of being prosecuted. Tax amnesty (or impunity) is granted only for the past in order to secure better compliance and higher tax yield in the present and future.

Taxing dividends from foreign subsidiary company @15% rate only, without mentioning any cogent necessity for the same for the first time, gives an indication that at a time when there is so much stress for repatriation of tax evaded incomes slashed in foreign companies, the Govt. has quietly decided to lessen its quantum by giving incentive in the nature of an amnesty, when persons stocking such money abroad should be penalized.

** ** **

The last amnesty scheme under the Act was announced by the Finance Act, 1997 by Shri P. Chidambaram, the then Finance Minister titled "Voluntary Disclosure Scheme, 1997". The concept of this scheme has been explained in the Memorandum of the Ministry of Finance, explaining the Finance Bill, 1997, in the following words:-

"In order to mobilize resources and to channelise funds into priority sectors of the economy, and to offer an opportunity to persons, who have evaded tax in the past, to declare their undisclosed income, pay a reasonable tax and in future adopt the path of rectitude and civic responsibility, a voluntary disclosure of income and wealth is proposed to be introduced".

The validity of the scheme was challenged before the Bombay HC in the case of All India Federation of Tax Practitioners v. UOI. The HC upheld the constitutional validity of the VDIS, 1997. The matter was then taken to the Supreme Court, where an assurance was given by the Attorney General (AG) of India, inter alia, that amnesty schemes would not be introduced in future. On the basis of assurances by the AG, the SLP against the Bombay HC's decision was dismissed. Introducing section115BBD in the Act, when there is demand for transparency apparently flouts the assurance given to the Apex Court and is unfair and regrettable.

The FM needs to answer the following queries:-

(i) Why such scheme was not thought of earlier?

(ii) Why it has been brought in for one year only?

(iii) If the reply to the query at (ii) above is that the life left for the I.T. Act, 1961 is only one year then, why there is no such provision in the DTC, 2010?

INTEREST-FREE LOANS TO LOSE TAX BURDEN

INTEREST-FREE LOANS TO LOSE TAX BURDEN

ITAT Ruling On Loans From Non-Relatives

IN A first-of-its- kind judgement, the Income-Tax Appellate Tribunal (ITAT) recently ruled that a recipient of an interest-free loan from a non-relative is not liable to pay tax. The judgement will come as a major relief for people who borrow money from friends and colleagues and latter grapple with notices from tax authorities.

Section 56 (2)(v) of the Income Tax Act provides for taxing any sum of money in excess of Rs 25,000 received without consideration by an individual or a Hindu Undivided Family (HUF) from any source other than a relative. Occasions where the recipient is exempted from tax are during a marriage, or in cases where the amount is received under a will, or by way of inheritance or in contemplation of death of the payer.

Applying this section, an income-tax assessing officer treated interest-free loans amounting to Rs 54.7 lakh received by one Chandrakant Shah from nonrelatives as a sum without consideration and taxed it.

New section came into force in 2004

THE assessee approached the Commissioner of I-T (Appeals), but was not granted relief. He then appealed before the Mumbai ITAT, where his legal counsel said that the lower authorities had "misinterpreted" the new section, which came into effect on September 1, 2004. Furthermore, Mr Shah's counsel said the sum of interest-free loans taken by him even before that date (September 1, 2004) did not fall within the ambit of the amended section.

Bhupendra Shah, Mr Shah's counsel, argued before a division bench comprising Madhavi Devi and VK Gupta that an interest-free loan could not be taxed under Section 56 (2)(v), as the repayment of a loan itself is treated as consideration between two parties and not a sum without consideration. The counsel said the amounts were shown in the balance sheet by the assessee as unsecured loan liabilities, and, hence, could not be treated as an addition to capital as in the case of a gift.

The counsel contended that the term "loan" meant delivery by one party to and receipt by another party of a sum of money upon agreement expressed or implied condition, to repay it with or without interest.

He maintained that it was inessential for an interest component to make a transaction of lending of money a loan transaction, by referring to a decision of the Court of Appeal of State of California. The US court had observed that a loan of money was a contract by which one delivered a sum of money to another, and the latter agreed to return at a future time without interest that sum which he borrowed.

The bench upheld the counsel's argument, saying: "We hold that a transaction of loan can be without interest and a transaction of loan implies an agreement to repay the money that is borrowed, which also gives reply to the revenue's query regarding the existence of the obligation to repay the money at the time of taking such loan." Section 56 (2)(v) was introduced to fill up the vacuum created by the abolition of the Gift Tax Act in 1997, which was donor-based, meaning the give

Publish Post

r of a gift was taxed.
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Human body treated like a factory in IT assessment?

By T N Pandey

Section 28 of the Income-Tax Act, 1961, taxes income from business or profession after deduction of expenses, as provided in Section 29. These expenses, among others, include expenses on current repairs, insurance and depreciation. Plant has been defined in Section 43(1) in an inclusive way, where there is no mention of 'human body'.

Shanti Bhushan case:

This issue has recently been considered by theDelhi High Court in Shanti Bhushan versusCIT (2011) 199 Taxman 280 (Del). The assessee, an eminent lawyer, incurred expenditure on his heart surgery and claimed such expenditure in his income-tax assessment under Section 31 of the Act as akin to repairs of plant. For 1983-84, he declared professional income of 2,14,050 after claiming deduction of 1,74,000 incurred as expenditure on coronary heart surgery . The surgery considerably improved his health and earning capacity. His income rose from 3.50 lakh in the year of surgery to 106 lakh five years later.

Shanti Bhushan lost his claim up toIncome-Tax Appellate Tribunal (ITAT). TheITAT rejected the claim by a peculiar reasoning saying that a man cannot stop or regulate the functioning of his heart or use it at will to suit his purpose. Since the functioning of heart is involuntary, it cannot be said to have been 'used' for a specific purpose or activity, except to live and to be alive. Therefore, a professional cannot claim that he uses his heart for the purpose of profession. In the case of the assessee, he sharpens his professional skills not by using his heart but by using his brain.

The reasoning given by the ITAT is far-fetched. If the heart stops functioning, the brain will become dead automatically. Good health and life have to go together and, hence, the whole human body is a plant and cannot be dissected into parts such as brain and heart. To make the brain work, keeping the heart in a healthy condition is imperative and only a novice can say that heart is not like a tool in the plant and machinery of human body.

There is apparently a contradiction in the ITAT reasoning. It tantamounts to saying that only the engine in a car is functional - not other parts - and, hence, depreciation should be allowed only on the value of the engine - not on the value of the entire car. In CIT versus Sibbal Cold Storage (1996) 135 Taxation 576 (MP), it has been said that both operative and supportive structures constitute 'plant', and 'plant' includes within its ambit building in which machines are installed. On this analogy, the brain cannot function unless it is in a sound body.

Delhi High Court decision:

The high court has decided the appeal against Shanti Bhushan. The grounds are:

- General well-being of the heart and its functionality cannot be equated with using heart for engaging in trade and professional activity as expenses on repairs and renewals under Section 31 of the I-T Act.

- Section 31 can be invoked when value of plant and machinery is reflected as an asset in the account books; only then can claim for repairs be made.

- The claim is not admissible under Section 37(1) of the Act as it cannot be said to have been incurred wholly and exclusively for the purpose of the Act.

The high court has argued that if the heart was an asset, then it should have been listed as such in the list of assets (properties) of the appellant. This does not weaken the claim of the appellant because there are assets like self-generated goodwill, patents, etc, which are not in the balance-sheet but become liable to capital gain tax when sold. The tax liability under the Act does not depend on accounting entries is an accepted principle in the income-tax law.

Webster defines the word 'plant' as 'the fixtures and tools necessary to carry on any trade (as also profession) or business'. It is 'the machinery, apparatus or fixtures by which business is carried on'. In Scientific Engineering House (P) Ltd versus CIT, AIR 1986 (SC) 338, the observations of the court are that 'plant' will include any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business and it is not necessarily confined to an apparatus, which is used for mechanical operations or processes or is employed in mechanical or industrial business.

Apparently, it is hard to say that a human body is not plant in the case of businessmen and professionals. It is the basis for earning income and, hence, incurring of expenses in keeping it fit and in working condition is primarily for business or profession. The third ground (supra) given by the high court is equally not convincing. The tremendous rise in income of Shanti Bhushan clearly establishes that the amount was spent wholly and exclusively for the purpose of his profession.

It is time that rigid distinction between personal and business expenses is avoided. This does not imply that all personal expenses be deductible without looking at the nexus of expenses in earning incomes. Each issue has to be decided against the background of facts. Recently, the ITAT, in the case of DCIT versusSalman Khan (2011) 130 ITD 81 (Mum), has decided that the expenses incurred by actor Salman Khan in criminal proceedings arising out of hunting and killing a black deer had nothing to do with his professional activity as an actor and, hence, the expenditure was in the nature of personal expenditure - not deductible against his professional income for income-tax computation. No exception can be taken to such decisions. But not in cases like that of Shanti Bhushan.

Once the concept that human body is a plant is accepted, other expenses such as insurance, costs of body part replacement, depreciation, etc, too will become deductible.

(The author is former chairman ofthe Central Board of Direct Taxes)

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