ITR (TRIB) Volume 10 : Part 3 Issue dated : 18-07-2011

ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))

Volume 10 : Part 3 (Issue dated : 18-07-2011)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

Accounting --Rejection of accounts--Book profits--Accrual basis followed under Companies Act and cash basis under Income-tax Act--Rejection of accounts and additions to income--Not justified--Income-tax Act, 1961, s. 115JB-- Asst. CIT v. Shriram Transport Finance Co. Ltd. (Chennai) . . . 277

Bad debt --Non-banking financial company--Bona fide writing off of debt in conformity with Reserve Bank directions--To be allowed--Income-tax Act, 1961, s. 36(1)(vii) -- Asst. CIT v. Shriram Transport Finance Co. Ltd. (Chennai) . . . 277

Business expenditure --Provision for warranty made on scientific basis--Allowable --Income-tax Act, 1961, s. 37-- Asst. CIT v. Simpson and Co. Ltd. (Chennai) . . . 283

Business income --Assessee carrying on business of distribution of computer products--Taking business decision to transfer distribution to another company and earn commission--Memorandum of association of assessee permitting assessee to make arrangement with any company to achieve its objects--Income from commission is business income, not income from other sources--Income-tax Act, 1961, ss. 28, 56-- Deputy CIT v. FX Info Technologies P. Ltd. (Delhi) . . . 250

Capital gains --Capital loss--Loss on divestment of shares in sister concern--Commercial transaction between two separate legal entities though belonging to same group--Disallowance not based on valid grounds--To be allowed--Income-tax Act, 1961-- Asst. CIT v. Shriram Transport Finance Co. Ltd. (Chennai) . . . 277

Capital or revenue expenditure --Assessee running tannery business--Assessee to make necessary provisions for disposal of effluents to prevent pollution under Government regulations--Compliance with Pollution Control Board to run unit--Amount paid to agent and other boards for treating effluents--Expenditure on account of business exigency--Revenue expenditure--Income-tax Act, 1961, s. 37-- Asst. CIT v. T. M. Abdul Rahman and Sons (Chennai) . . . 272

----Expenditure on designing charges of telecom equipment--Technical improvement a recurring necessity in the line of manufacturing of telecom equipment--Is revenue expenditure--Income-tax Act, 1961-- Matrix Telecom P. Ltd. v. Asst. CIT (Ahmedabad) . . . 258

Charitable trust --Charitable purpose--Definition--Donation for charitable purposes--Special deduction under section 80G--Approval of institution--Trust for construction and maintenance of Brij Chaurasi Kos Parikrama way and construction and maintenance of dharamshala, tents, etc. for tourists coming to have parikrama--Object of general public utility--No evidence that object was religious--Trust entitled to approval for purposes of section 80G--Income-tax Act, 1961, ss. 2(15), 80G(5)-- Brij Vikas Trust v. CIT (Agra) . . . 310

Income from house property --Deduction--Assessee's father mortgaging property for business purposes--Assessee inheriting property with subsisting mortgage--Assessee offering same property as collateral security and taking loan for investment in shares and in firms--Assessee taking second loan to pay off all previous loans--Original loans taken by father and assessee not for purpose of construction or acquisition of house property--Interest paid on loan--Not deductible--Income-tax Act, 1961, s. 24(1)(vi)-- K. S. Kamalakannan v. Asst. CIT (Chennai) . . . 321

Income-tax --General principles--Rule of consistency-- ITO v. Anjani Synthetics Ltd. (Ahmedabad) . . . 291

Interest on borrowed capital --No nexus between borrowed funds and investments made for non-business purpose--Interest allowed in earlier years--Rule of consistency--Interest to be allowed--Income-tax Act, 1961, s. 36(1)(iii)-- ITO v. Anjani Synthetics Ltd. (Ahmedabad) . . . 291

Non-resident --Agent--French company entering into agreement with Indian company--French company obtaining services of associate company--Employees of associate company working in India--French company cannot be treated as agent of such employees--Income-tax Act, 1961, s. 163-- Pride Foramer S. A. S. v. Asst. CIT (Delhi) . . . 340

Penalty --Concealment of income--Cash credits--Amounts shown as loans assessed as income--Assessee not able to prove genuineness of loans--Imposition of penalty--Valid--Income-tax Act, 1961, s. 271(1)(c)-- STS Chemicals Ltd. v. Asst. CIT (Mumbai) . . . 303

----Concealment of income--Claim to set off carried forward business loss of earlier years of firm in which assessee a partner--Claim untenable and not bona fide--Penalty leviable--Income-tax Act, 1961, s. 271(1)(c)-- Asst. CIT v. Dinesh Goel (Delhi) . . . 330

----Concealment of income--Order of Supreme Court holding interest on price realised from levy sugar payable--Claim to deduction of provision made for interest--No mala fide intention to evade payment of tax--Assessee establishing claim bona fide--Penalty not leviable--Income-tax Act, 1961, s. 271(1)(c)-- Mawana Sugars Ltd. v. Deputy CIT (Delhi) . . . 266

Reassessment --Notice--Reassessment after four years--Assessee disclosing facts truly and fully--Reassessment proceedings after four years on change of opinion--Not valid--Income-tax Act, 1961, ss. 147, 148-- Asst. CIT v. Simpson and Co. Ltd. (Chennai) . . . 283

Revision --Condition precedent--Order of Assessing Officer should be erroneous and prejudicial to Revenue--Assessing Officer allowing deduction after considering facts--Order not erroneous--Order cannot be revised because Commissioner has different opinion--Income-tax Act, 1961, s. 263-- Aditi Developers v. Asst. CIT (Mumbai) . . . 241

Search and seizure --Block assessment--Undisclosed income--Penalty--Assessee filing belated voluntary return after search and offering capital gains--Assessing Officer charging tax at 60 per cent. and imposing penalty--Penalty cannot be imposed--Income-tax Act, 1961, s. 158BFA(2)-- K. Ramakrishnan (HUF) v. Deputy CIT (Chennai) . . . 269

Words and phrases --"Religion","Religious community"-- Brij Vikas Trust v. CIT (Agra) . . . 310

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Income-tax Act, 1961 :

S. 2(15) --Charitable trust--Charitable purpose--Definition--Donation for charitable purposes--Special deduction under section 80G--Approval of institution--Trust for construction and maintenance of Brij Chaurasi Kos Parikrama way and construction and maintenance of dharamshala, tents, etc. for tourists coming to have parikrama--Object of general public utility--No evidence that object was religious--Trust entitled to approval for purposes of section 80G-- Brij Vikas Trust v. CIT (Agra) . . . 310

S. 24(1)(vi) --Income from house property--Deduction--Assessee's father mortgaging property for business purposes--Assessee inheriting property with subsisting mortgage--Assessee offering same property as collateral security and taking loan for investment in shares and in firms--Assessee taking second loan to pay off all previous loans--Original loans taken by father and assessee not for purpose of construction or acquisition of house property--Interest paid on loan--Not deductible-- K. S. Kamalakannan v. Asst. CIT (Chennai) . . . 321

S. 28 --Business income--Assessee carrying on business of distribution of computer products--Taking business decision to transfer distribution to another company and earn commission--Memorandum of association of assessee permitting assessee to make arrangement with any company to achieve its objects--Income from commission is business income, not income from other sources-- Deputy CIT v. FX Info Technologies P. Ltd. (Delhi) . . . 250

S. 36(1)(iii) --Interest on borrowed capital--No nexus between borrowed funds and investments made for non-business purpose--Interest allowed in earlier years--Rule of consistency--Interest to be allowed-- ITO v. Anjani Synthetics Ltd. (Ahmedabad) . . . 291

S. 36(1)(vii) --Bad debt--Non-banking financial company--Bona fide writing off of debt in conformity with Reserve Bank directions--To be allowed-- Asst. CIT v. Shriram Transport Finance Co. Ltd. (Chennai) . . . 277

S. 37 --Business expenditure--Provision for warranty made on scientific basis--Allowable-- Asst. CIT v. Simpson and Co. Ltd. (Chennai) . . . 283

----Capital or revenue expenditure--Assessee running tannery business--Assessee to make necessary provisions for disposal of effluents to prevent pollution under Government regulations--Compliance with Pollution Control Board to run unit--Amount paid to agent and other boards for treating effluents--Expenditure on account of business exigency--Revenue expenditure-- Asst. CIT v. T. M. Abdul Rahman and Sons (Chennai) . . . 272

S. 56 --Business income--Assessee carrying on business of distribution of computer products--Taking business decision to transfer distribution to another company and earn commission--Memorandum of association of assessee permitting assessee to make arrangement with any company to achieve its objects--Income from commission is business income, not income from other sources-- Deputy CIT v. FX Info Technologies P. Ltd. (Delhi) . . . 250

S. 80G(5) --Charitable trust--Charitable purpose--Definition--Donation for charitable purposes--Special deduction under section 80G--Approval of institution--Trust for construction and maintenance of Brij Chaurasi Kos Parikrama way and construction and maintenance of dharamshala, tents, etc. for tourists coming to have parikrama--Object of general public utility--No evidence that object was religious--Trust entitled to approval for purposes of section 80G-- Brij Vikas Trust v. CIT (Agra) . . . 310

S. 115JB --Accounting--Rejection of accounts--Book profits--Accrual basis followed under Companies Act and cash basis under Income-tax Act--Rejection of accounts and additions to income--Not justified-- Asst. CIT v. Shriram Transport Finance Co. Ltd. (Chennai) . . . 277

S. 147 --Reassessment--Notice--Reassessment after four years--Assessee disclosing facts truly and fully--Reassessment proceedings after four years on change of opinion--Not valid-- Asst. CIT v. Simpson and Co. Ltd. (Chennai) . . . 283

S. 148 --Reassessment--Notice--Reassessment after four years--Assessee disclosing facts truly and fully--Reassessment proceedings after four years on change of opinion--Not valid-- Asst. CIT v. Simpson and Co. Ltd. (Chennai) . . . 283

S. 158BFA(2) --Search and seizure--Block assessment--Undisclosed income--Penalty--Assessee filing belated voluntary return after search and offering capital gains --Assessing Officer charging tax at 60 per cent. and imposing penalty--Penalty cannot be imposed-- K. Ramakrishnan (HUF) v. Deputy CIT (Chennai) . . . 269

S. 163 --Non-resident--Agent--French company entering into agreement with Indian company--French company obtaining services of associate company--Employees of associate company working in India--French company cannot be treated as agent of such employees-- Pride Foramer S. A. S. v. Asst. CIT (Delhi) . . . 340

S. 263 --Revision--Condition precedent--Order of Assessing Officer should be erroneous and prejudicial to Revenue--Assessing Officer allowing deduction after considering facts--Order not erroneous--Order cannot be revised because Commissioner has different opinion-- Aditi Developers v. Asst. CIT (Mumbai) . . . 241

S. 271(1)(c) --Penalty--Concealment of income--Cash credits--Amounts shown as loans assessed as income--Assessee not able to prove genuineness of loans--Imposition of penalty--Valid-- STS Chemicals Ltd. v. Asst. CIT (Mumbai) . . . 303

----Penalty--Concealment of income--Claim to set off carried forward business loss of earlier years of firm in which assessee a partner--Claim untenable and not bona fide--Penalty leviable-- Asst. CIT v. Dinesh Goel (Delhi) . . . 330

----Penalty--Concealment of income--Order of Supreme Court holding interest on price realised from levy sugar payable--Claim to deduction of provision made for interest--No mala fide intention to evade payment of tax--Assessee establishing claim bona fide--Penalty not leviable-- Mawana Sugars Ltd. v. Deputy CIT (Delhi) . . . 266

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Income of a recreation club from FDRs, dividend, etc., would be exempt from

Income of a recreation club from FDRs, dividend, etc., would be exempt from income-tax on principle of mutuality - [2011] 10 taxmann.com 114 (Delhi)

Guj HC : Waiver of interest & Penalty. in favor of revenue.

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

SPECIAL CIVIL APPLICATION No. 5993 of 2001

SHAYAMA SANJAY SHAH Versus COMMISSIONER OF INCOME TAX

Date : 25/03/2011

ORAL JUDGMENT

(Per : HONOURABLE MS.JUSTICE HARSHA DEVANI)

1. By this petition under Article 226 of the Constitution of India, the petitioner has challenged order dated 28.3.2001 passed by the Commissioner of Income Tax, Surat, under section 273A of the Income Tax Act, 1961 (the Act), whereby, he has rejected the petitioner's application for waiver of interest and penalty.

2. The facts of the case stated briefly are that in respect of the assessment year 1987-88, the petitioner was charged interest under section 139 as also under section 215 of the Act and penalty was also levied under sections 271(1)(a) and 273(1)(b) of the Act. The petitioner made an application under section 273 of the Act on 30.11.1992, inter alia, stating that the petitioner had fulfilled all the conditions mentioned in section 273A of the Act for total waiver of the interest and penalties. It was also stated in the application that the petitioner had voluntarily and in good faith made full and true disclosure of her income prior to the issue of notice under section 139(2) of the Act and had cooperated in the inquiry relating to the assessment of income and had also paid the tax and interest payable in consequence of the assessment order. After a period of about eight years the Commissioner of Income Tax Surat the respondent herein rejected the said application by the impugned order dated 28.03.2001. Being aggrieved, the petitioner has filed the present petition challenging the said order.

3. Mr. J. P. Shah, learned advocate appearing on behalf of the petitioner invited attention to the provisions of section 273A of the Act to submit that while considering an application for waiver under the said section, the Commissioner is required to record satisfaction in respect of the matters provided under the said section. Inviting attention to the impugned order, it was submitted that the Commissioner has rejected the application on the ground that the reasons advanced by the petitioner for not filing the return in time were not reasonable and that the petitioner had already made payment of entire penalties and interest demanded by the said order and, therefore, there was nothing to waive. It was submitted that the Commissioner has failed to take into consideration the relevant factors as contemplated under section 273A of the Act and has rejected the application on extraneous grounds which are not relevant insofar as the provisions of section 273A of the Act are concerned. Referring to the provisions of section 273A of the Act, it was submitted that while making the order under section 273A of the Act the Commissioner was required to consider the relevant factors as envisaged thereunder even in case where the assessee had paid the tax and interest payable in consequence of the order in respect of which the application under section 273A had been filed. It was, accordingly, submitted that the second ground for rejecting the application, viz., the payment of entire interest and penalty demanded under the order in respect of which the application had been filed had already made, and therefore, there was nothing to waive, is contrary to the provisions of the section 273A of the Act under which the Commissioner has exercised powers. It was submitted that under the circumstances, the impugned order being inconsistent with the provisions of section 273A of the Act, is required to be quashed and set aside. In support of his submission, the learned advocate placed reliance upon a decision of this High Court in the case of Vinodchandra C. Patel Vs. Commissioner of Income Tax, (1995) 211 ITR 232.

4. On the other hand, Mrs. Mauna Bhatt, learned Senior Standing Counsel appearing on behalf of the respondent submitted that powers exercised by the Commissioner under section 273A of the Act are in the nature of discretionary powers, hence, this Court in exercise of powers under Article 226 of the Constitution of India would ordinarily not interfere with the same and substitute its own opinion in place of that of the Commissioner. It was, accordingly, urged that the petition being devoid of merit deserves to be dismissed.

5. Section 273A makes provision for "Power to reduce or waive penalty, etc., in certain cases" and as it stood at the relevant time, insofar as the same is relevant for the present purpose, reads thus:

273A.-.(1) Notwithstanding anything contained in this Act, the Commissioner may, in his discretion, whether on his own motion or otherwise,-

reduce or waive the amount of penalty imposed or imposable on a person under clause (i) of sub-section (1) of section 271 for failure, without reasonable cause, to furnish the return of total income which he was required to furnish under sub-section (1) of section 139; or

reduce or waiver the amount of penalty imposed or imposable on a person under clause (iii) of sub-section (1) of section 271; or

reduce or waive the amount of interest paid or payable under sub-section (8) of section 139 or section 215 or section 217 or the penalty imposed or imposable under section 273, if he is satisfied that such person-

(a) in the case referred to clause (i), has, prior to the issue of a notice to him under sub-section (2) of section 139, voluntarily and in good faith made full and true disclosure of his income;

(b) in the case referred to in clause (ii), has, prior to the detection by the Income-tax officer, of the concealment of particulars of income or of the inaccuracy of particulars furnished in respect of such income, voluntarily and in good faith, made full and true disclosure of such particulars;

(c) in the cases referred to in clause (iii), has, prior to the issue of a notice to him under sub-section (2) of section 139, or where no such notice, has been issued and the period for the issue of such notice has expired, prior to the issue of notice to him under section 148, voluntarily and in good faith made full and true disclosure of his income and has paid the tax on the income so disclosed.

and also has, in all the cases referred to in clauses (a), (b) and (c), co-operated in any enquiry relating to the assessment of his income and has either paid or made satisfactory arrangements for the payment of any tax or interest payable in consequence of an order passed under this Act, in respect of the relevant assessment year.

Explanation: For the purpose of this sub-section, a person shall be deemed to have made full and true disclosure of his income or of the particulars relating thereto in any case where the excess of income assessed over the income returned is of such a nature as not to attract the provisions of clause (c) of sub-section (1) of section 271."

On plain reading of the aforesaid provision, it is apparent that the same empowers the Commissioner in his discretion, whether on his own motion or otherwise, to reduce or waive the amount of penalty imposed or imposable on a person under clause (i) of sub-section (1) of section 271 for failure, without reasonable cause, to furnish the return of total income which he was required to furnish under sub-section (1) of section 139. Thus, the question of waiver would arise in a case where there is failure without reasonable cause to furnish return of total income as required under sub section (1) of section 139 of the Act. In the circumstances, the question as to whether there was a reasonable cause for failure in furnishing return of total income under section 139(1) would have been considered at the time of levying penalty under clause(i) of sub-section (1) of section 271 of the Act and it is only when the adjudicating authority finds that there is no reasonable cause for such failure that penalty would have been levied. In view of the provisions of section 273B of Act, in case, the assessee were in a position to make out a case that there was reasonable cause for such failure, no penalty could have been imposed under sec 271(1)(i) of the Act. Therefore, the very fact that penalty has been imposed under the said section indicates that no reasonable cause had been made out. Also the opening portion of section 273A makes it amply clear that such power has to be exercised where penalty has been levied for failure to show reasonable cause. Hence, when the question of waiver of penalty already imposed arises, there would be no reason for the Commissioner to go into the question as to whether the return has been filed belatedly without reasonable cause. While deciding an application under section 273A of the Act in a case where penalty is imposed or imposable on a person under clause (i) of sub-section (1) of section 271, the Commissioner is required to be satisfied that the assessee had prior to issue notice to him under sub-section (2) of section 139, voluntarily and in good faith made full and true disclosure of his income. In case, where reduction or waiver of interest is sought for, the Commissioner has to record satisfaction to the effect that prior to the issue of notice under section (2) of section 139, or where no such notice, has been issued and the period for the issue of such notice has expired, prior to the issue of notice under section 148, the assessee has voluntarily and in good faith made full and true disclosure of his income and has paid the tax on the income so disclosed. The Commissioner is also required to be satisfied that such person has co-operated in any enquiry relating to the assessment of his income. He is also required to be satisfied that such person has either paid or made satisfactory arrangements for the payment of any tax or interest payable in consequence of an order passed under the Act in respect of the relevant assessment year. Thus, while considering the application under section 273A, the Commissioner is required to be satisfied as aforesaid.

A perusal of the impugned order shows that two factors have weighed with the Commissioner while rejecting the said application. Firstly that the reasons advanced by the petitioner for failure to file return within time cannot be said to be reasonable; and secondly that the petitioner had made payment of entire penalty and interest, therefore, there was nothing to waive. Insofar as the first factor is concerned, as discussed hereinabove, no question arises of going into that issue while considering an application under section 273A of the Act. Insofar as the second factor is concerned, as is apparent on a plain reading of section 273A, for granting relief under the said provision the Commissioner is required to record satisfaction that such person has either paid or made satisfactory arrangements for payment of any tax or interest payable in consequence of an order passed under the Act in respect of the relevant assessment year. Thus, the very reason why the Commissioner should have recorded satisfaction in favour of the petitioner has been considered to be a ground for non-consideration of the application by the Commissioner. Thus, instead of recording satisfaction or otherwise, in respect of the grounds prescribed under section 273A of the Act, the Commissioner had totally misdirected himself and decided the application on grounds that were not germane for the purpose of deciding the application under section 273A of the Act.

8.Though it is true that powers under section 273A of the Act are discretionary powers, it is equally true that powers conferred under a statute are required to be exercised in consonance with the provisions of the said statute. In the present case, as discussed hereinabove, the Commissioner instead of recording satisfaction or otherwise in respect of the grounds prescribed under section 273A of the Act, has rejected the petition on irrelevant grounds, firstly, on the ground that there was no reasonable cause for failure in filing the return of income belatedly, and secondly, on the ground that the petitioner had already paid the tax payable in consequence of the order of penalty, which ground in view of the provisions of section 273A of the Act should have, in fact, weighed in favour of the petitioner. Thus, the Commissioner has not exercised discretion as required under section 273A of the Act and as such the impugned order suffers from the vice of non application of mind to the relevant factors and as such cannot be sustained.

9. For the foregoing reasons, petition succeeds and is accordingly allowed. The impugned order dated 28.3.2001 passed by the Commissioner of Income Tax, Surat (Exhibit "B" to the petition), is hereby quashed and set aside. The application made by the petitioner under section 273A of the Act shall stand restored to the file of the Commissioner who shall decided the same afresh in accordance with law keeping in mind the provisions of section 273A of the Act. Considering the fact that this is a matter pertaining to Assessment Year 1987-88 and the present petition has been pending before this Court for a period of about ten years, it would be in the interests of justice that the matter be decided at the earliest. The respondent Commissioner, therefore, shall decide the application as expeditiously as possible, and not later than three months from the date of receipt of a copy of this order. Rule is made absolute accordingly with no order as to costs.

(HARSHA DEVANI, J.)

(BELA TRIVEDI, J. )

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TPO cannot suo moto take cognizance of any international transaction for su

TPO cannot suo moto take cognizance of any international transaction for suggesting adjustment in arm's length price

Income-tax : Section 92CA - Transfer Pricing - As per section 92CA(1), TPO can suggest adjustment on international transaction entered into by an assessee with its associate enterprises which were sent to him for computation of arm's length price by Assessing Officer, suo moto, he cannot take cognizance of any international transaction for suggesting adjustment in arm's length price

l Section 92CA nowhere reveals that TPO can take any transaction suo moto for verification and then suggest necessary adjustment. - [2011] 10 taxmann.com 88 (Delhi - ITAT)

Delay in filing appeal beyond period of 120 days prescribed under section 2

Delay in filing appeal beyond period of 120 days prescribed under section 260A(2)(a) cannot be condoned by entertaining an application under section 5 of Limitation Act - [2011] 10 taxmann.com 113 (Punj. & Har.)

There is no obligation on part of a foreign bank's Indian branch to deduct

There is no obligation on part of a foreign bank's Indian branch to deduct tax at source while making interest remittance to its head office abroad

Income-tax : Section 195 - Deduction of tax at source - Payment to Non-resident : In making payment of interest by an Indian branch of a foreign bank to its head office abroad, no tax has to be deducted by it under section 195(1).

l By virtue of the Indo-Netherlands convention, the head office of the foreign bank is not liable to pay any tax under the Income-tax Act; therefore, there was and still is no obligation on the part of the foreign bank's said branch to deduct tax while making interest remittance to its head office or any other foreign branch

l Therefore, there is no scope for any argument that for the purpose of computation of expenditure the branch and the head office are to be taken as separate entities but for the purpose of payment of tax to be deducted at source on interest payment, it is to be taken as one bank and no deduction is to be made as sought to be made by the foreign bank. - [2011] 10 taxmann.com 89 (Cal.)

Transfer of shares by a foreign company to its wholly owned Indian subsidiary no

Transfer of shares by a foreign company to its wholly owned Indian subsidiary not taxable in India

Praxair Pacific Limited (PPL ), a company incorporated in Mauritius, proposes to transfer its 74% equity stake in Jindal Praxair Oxygen Company Private Limited (JPOCPL) to its wholly owned subsidiary in India, Praxair India Private Limited (Praxair India). The consideration for the proposed transfer is stated to be determined on the basis of cost, unless a higher consideration is required under the pricing guidelines prescribed by the Reserve Bank of India as applicable for transfer of shares.
Issues before the AAR

» Whether the investment held by PPL in equity shares of JPOCPL would be considered as "capital asset" under section 2(14) of the Income-tax Act, 1961 ("ITA")?
» Whether transfer of JPOCPL from PPL to its wholly owned subsidiary Praxair India would be liable to tax in India in view of the exemption under section 47(iv) of the ITA?
Exemption under section 47(iv) of the ITA is available if the capital asset is transferred by a holding company to its wholly owned Indian subsidiary.

» Whether PPL would be entitled to the benefits of the India – Mauritius Tax Treaty ("Treaty") and whether the gain arising to PPL would be liable to tax in India having regard to the provisions of Article 13 of the Treaty?
» Whether the gains arising to PPL from the sale of equity shares of JPOCPL would be taxable in India in the absence of Permanent Establishment ("PE") of PPL in India in light of the provisions of Article 7 read with Article 5 of the Treaty?
» Whether PPL would be liable to Minimum Alternate tax under the ITA?
» Where the gains arising to PPL on account of the proposed transfer is not taxable in India under the Act or the Treaty, whether Praxair India, the transferee company, is required to withhold tax in accordance with the provisions of section 195 of the ITA?
» If the gains are not taxable in India, whether PPL is required to file any return of income of income under section 139 of the ITA? This question was not pressed by PPL.
» Whether the proposed transfer of equity shares by PPL to Praxair India attracts the transfer pricing provisions of section 92 to 92F of the ITA?
Contention of the applicant

» The shares held by PPL in JPOCPL are not held as stock-in-trade but represent investments and thus should be classified as a capital asset.
» As PPL proposes to transfer its equity shareholding in JPOCPL to Praxair India, its wholly owned subsidiary in India, the provisions of section 47(iv) of the ITA are fulfilled. Gains, if any, on the transfer of equity shares in JPOCPL would not be taxable in India.
» PPL would not be liable to tax book profits or Minimum Alternate tax under the ITA as the provisions of section 11 5JB would be applicable only to domestic companies and not to foreign companies.
» The gains from the proposed transfer of shares in JPOCPL by the Applicant would not be taxable in India as capital gains or business income in the light of the treaty.
» In case the proposed gains are not considered as capital gains but as business income, such business income will not be taxable in India since PPL does not have a PE in India.
Observations / Rulings of the AAR

» The shares in JPOCPL have been held as "Non-current assets – investment in subsidiaries" since 1995 and were never a subject matter of any transaction till date. As the shares were not held as stock in trade, the nature of the investment in these shares is held to be a "capital asset" as defined in section 2(14) of the ITA.
» As PPL proposes to transfer its equity share holding in JPOCPL to Praxair India which is its wholly owned subsidiary in India, the conditions under section 47(iv) of the ITA are fulfilled and hence the gains if any arising on transfer would not be taxable in India.
» As PPL is tax resident of Mauritius and has been issued Tax Residency Certificate by the Mauritius Revenue Authority, it would not be subjected to tax in India on the capital gains arising from the proposed transaction in India under the Treaty.
» The annual accounts of the applicant cannot be prepared in accordance with Schedule VI of the Companies Act 1956. The provision under the ITA relating to Book Profits Tax is not designed to be applicable to a foreign company which has no presence or PE in India. The AAR relied on its ruling in the case of Timken USA (AAR 836 of 2009) where it was held that under the Companies Act 1956 only such foreign companies who have established a place of business within India are required to make out a Balance Sheet and Profit and Loss account as required under the said Act.
» Sections 11 5JB of the ITA is not attracted in the case of PPL.
» The transfer pricing provisions of section 92 to 92F of the ITA would not be attracted in the absence of liability to pay tax on the capital gain.

Conclusion:-Gains from the transfer of shares by a Mauritius company to its wholly owned subsidiary in India would not be taxable in India either under the ITA. The AAR has also reiterated the benefit of the India- Mauritius tax treaty would be available to PPL as it had adequate tax residency certificate issued by the Mauritius Revenue Authority. Further, the gains from such transfer would not be subject to Minimum Alternate Tax as the provisions under the ITA governing such tax do not apply to a foreign company that has no presence or PE in India

Source: M/s. Praxair Pacific Limited (A.A.R. No. 855/2009 dated 23 July 2010)

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Teach pupils why paying tax is important

I-T to teach pupils why paying tax is important

New Delhi: The income-tax department (I-T) will soon depute its "dynamic officers" to address school students during morning assemblies to make them aware of the benefits of paying tax.

A power point presentation, recounting the history on the concept of taxation and its relevance in this day and age, will be used to disseminate information. Batches of students, particularly from convent and public schools, would be brought to the I-T offices across the country for a closer interaction. Every I-T commissioner has been asked to look for one such young and dynamic officer under his charge who will be responsible to visit the schools to talk to children during morning assemblies. This is part of the central action plan as envisaged for 2011-12.

"Visits to I-T offices should be organized with batches of 20 to 25 students in the age group of 16-18 years," according to the proposal by the Central Board of Direct Taxes. TNN

Prior to 1-4-2003 payment under a negative covenant agreement for not to co

Prior to 1-4-2003 payment under a negative covenant agreement for not to compete was a capital receipt

Income-tax : There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant; the compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/restrictive covenant is a capital receipt [Section 4 of the Income-tax Act, 1961 - Income-Chargeable as]

l Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04; it is only vide Finance Act, 2002 with effect from 1.4.2003 that the said capital receipt is now made taxable - [2011] 10 taxmann.com 105 (SC)

Where DIT (Exemptions) rejected assessee's application under section 12A on

Where DIT (Exemptions) rejected assessee's application under section 12A on ground of certain discrepancies in assessee's accounts, Tribunal was not justified in allowing assessee's appeal without noticing discrepancies pointed out by DIT (Exemption) - [2011] 10 taxmann.com 83 (Kar.)