FBT - In absence of proximate purpose of expenses incurred by assessee com

FBT - In absence of proximate purpose of expenses incurred by assessee company for agencies cannot be treated as fringe benefit

BANGALORE, AUG 09, 2010: THE issue is - When there is no proximate purpose of the expenses paid by the assessee company for its agencies other than the employees then whether the same can be considered as fringe benefit under the deeming provision of section 115WB(2) of Act. And the answer is NO.

Facts of the case

Assessee, an Electricity Supply Company, filed the return of income on 27.11.2006 declaring NIL income and book profit of Rs.27,86,58,020/- u/s 115JB. The A.O. assessed the income at Rs.32,33,81,280/- after making certain disallowances and additions. The assessee also filed the return of fringe benefit u/s 115WE declaring total value of fringe benefits at Rs.11,55,82,989/-. A notice u/s 115WE(2) was issued to the assessee on 6.8.2008 calling for the details of the fringe benefits. The assessee vide letter dated 15.12.2008 furnished the details, according to which, the vehicle hire expenses were of Rs.1,02,05,805/- and the assessee stated that the vehicles were hired by the company to be used by the officers exclusively for the official purpose and not used for any tours and travel. The AO was however not satisfied with the assessee's explanation and held that this is a facility provided by the assessee company to its employees/officers for conveyance purpose and therefore, it is covered by section 115WB(F) in respect of fringe benefit and added 20% of the vehicle hiring charges i.e. Rs.20,41,161/- to the total value of the fringe benefits.

CIT(A) observed on the basis of the Circular No.8/2005 dated 29.8.2005 issued by the CBDT, that the word "purposes" used in sub-section 2 refers to the proximate purpose and not the distant purpose and that the proximate purpose of expenses is for conveyance of employees within the meaning of clause (F) of section 115WB(2) and the proximate purpose of expenses mentioned in clause (iii) of paragraph 5 is for conveyance of employees within the meaning of clause (F) of section 115WB(2). He thereafter held that the A.O. was right in including vehicle hire charges as the total value of fringe benefits to the extent of Rs.33,15,367/- representing conveyance paid indirectly to employees and directed the AO to restrict the addition to 20% of the same which works out to Rs.6,63,073/-. As regards to the remaining addition, he deleted the same, as these are the expenses incurred for agencies other than employees.

Being aggrieved the Revenue filed appeal before the tribunal which held that:

++ 115WB(3) provides that for the purposes of sub-section (1), the privilege, service, facility or amenity does not include perquisites in respect of which tax is paid or payable by the employee [or any benefit or amenity in the nature of free or subsidized transport or any such allowance provided by the employer to his employees for journeys by the employees from their residence to the place of work or such place of work to the place of residence.

++ It can be seen that what is intended to be taxed is a benefit attributable to employees collectively but the transport services for workers and staff are to be outside the tax net. In the case before us, items 1, 2 and 3 considered by the CIT(A) are for the purposes of carrying on the business activities of the assessee company by the agencies of the assessee company and it is only item 4, which is spent on the employees for attending the meetings, inspections and other official functions. From the reading of the provisions of section 115WB(2), it is clear that the benefits given to an employee directly or indirectly only would be taxable under Chapter XII-H. As rightly pointed out by the CIT(A), the other expenditure is incurred for agencies other than the employees, who are outside the scope of the provisions of section 115WB(2). Therefore, we do not see any reason to interfere with the order of the CIT(A). 

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Recent Case law

[2011] 11 taxmann.com 333 (MUM. - ITAT)

IT : If appeal filed by assessee is only defective, it assumes validity on removal of such defect or irregularity; whereas payment of such tax is mandatory but requirement of paying such tax before filing appeal is only directory

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[2011] 11 taxmann.com 332 (MUM. - ITAT)

IT : Where assessee, owner of a trademark, entered into licence agreements with various Indian hotels in terms of which said hotels became licensees of assessee's trademark and, assessee, besides receiving licence fee, received marketing and reservation contribution from Indian hotels, in view of fact that said amount was received with a corresponding obligation to use it for agreed purposes, it could not be regarded as assessee's income and, moreover, since assessee did not have a PE in India, amount in question could also not be treated as business profits in terms of article 7 of Indo-US DTAA

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[2011] 11 taxmann.com 331 (MUM. - ITAT)

IT : In view of Explanation 1 inserted to section 90 by the Finance Act, 2001 with retrospective effect from 1-4-1962, tax rates prescribed in Finance Act are to be applied even if an assessee-company is covered by provisions of DTAA

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[2011] 11 taxmann.com 330 (MUM. - ITAT)

IT : Transfer pricing : Where assessee sought stay of demand of tax without showing any financial hardship, same could not be accepted

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Dear Friends : The emails are schedule to be posted in the blog and will sent to the group on carious dates and time fixed. Instead of sending it on one day it is spread on various dates. regards. R R Makwana

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Case laws Digest

Journals Referred : 30 SOT, 118 ITD, 123 TTJ, 180 Taxman, 313 ITR, 23 & 24 DTR, & 224 CTR.

1. AUTHORITY FOR ADVANCE RULING WRIT – S. 245U, ART. 226.

Authority for Advance Rulings is a Tribunal, hence, High Court can issue writ against advance ruling.

U.A.E. Exchange Centre Ltd. vs. UOI (2009) 313 ITR 94 (Delhi)

2. ADVANCE TAX – INTEREST – COMPANY – BOOK PROFIT – S. 115JA, 234B, 234C

Interest under section 234B and 234C, cannot be levied when book profit is computed under section 115JA.

Snowcem India Ltd. vs. Dy. CIT (2009) 313 ITR 170 (Bom.)

3. APPEAL (TRIBUNAL) – APPEAL FEE – NOT MAINTAINABLE – S. 253(6)(d)

Appeal dismissed by CIT(A) as not maintainable hence such orders would fall within clause (d) of section 253(6) and hence, appeal fee would be only Rs. 500/-.

Dr. A. Naresh Babu vs. ITO (2009) 24 DTR 41 (Hyd.)(Trib.)

4. APPEAL – ORDER GIVING EFFECT – S. 246A(1)(a), 264

Appeals are maintainable from fresh orders passed by the AO to give effect to revisional order passed under section 264, but only such issues can be agitated in such appeals which have not attained finality by virtue of order passed under section 264.

Jai Hotels Co. Ltd. vs. Asst. Director of Income-tax (2009) 24 DTR 37 (Del.)

5. APPEAL (TRIBUNAL) RECTIFICATION OF MISTAKES – CONDONATION OF DELAY – S. 254(2)

There is no provision under section 254(2) to entertain rectification application received after the expiry of period of four years nor the provisions of section 5 of the Limitation Act are applicable to proceedings before quasi judicial authorities like Tribunal and, therefore, condonation of delay in filing miscellaneous application for rectification of order under section 254(1) cannot be allowed.

Rahul Jee & Co. (P) Ltd. vs. ACIT (2009) 123 TTJ 217 (Del )

6. ASSESSMENT – RULE OF CONSISTENCY – PRECEDENT – TRIBUNAL WAS NOT JUSTIFIED IN ALLOWING DEDUCTION RELYING ON THE DECISION REVERSED / OVERRULED BY SUPREME COURT – S. 80HH, 80I, ART. 141

Assessee was allowed deduction in the earlier year and so cannot claim the benefit in the subsequent year based on the judgment passed by the High Court in the Assessee owns case. However, before assessment is made in the subsequent year, principal of law which is applicable to such assessment is clarified by Supreme Court. The principal of law laid down by Supreme Court becomes binding on all the judicial and quasi judicial authorities under Art. 141 of the Constitution and cannot be ignored. Thus, the tribunal by ignoring the mandate of the Supreme Court judgment and continue to give benefit was wrong.

CIT vs. Indian Railways Construction Co. Ltd. (2009) 24 DTR 130 (Del)

7. ASSESSMENT – HUF – PARTITION – S. 171

When there is no order recording partition under section 171(3), original assessment in the status of family attaining finality, assessment to be made as family.

Gaurikanta Barkataky vs. CIT (2009) 313 ITR 34 (Gau.)

8.BUSINESS EXPENDITURE – AD-HOC DISALLOWANCE – TELEPHONE, VEHICLE – S. 37

Ad-hoc disallowance of expenditure without any reason is not proper, further, there is no element of personal user out of telephone expenses, vehicle expenses, car insurance expenses and office expenses of the company.

Rajat Tradecom India (P) Ltd. vs. Dy. CIT (2009) 23 DTR 311 (Ind.)(Trib.)

9. BUSINESS EXPENDITURE – DISALLOWANCE – DEDUCTION OF TAX AT SOURCE – S. 40(a)(iii)

Overseas maintenance allowance paid by assessee by way of reimbursement of maintenance expenses incurred by employees deputed abroad was not part of salary, but covered by Rule 2BB(1)(b), hence, could not be disallowed under section 40(a)(iii) for non deduction of tax at source.

ITO vs. Information Architects (2009) 123 TTJ 35 (Mum.)

10. BUSINESS EXPENDITURE – COMMUNITY ASSISTANCE PROGRAMME – S. 37

Expenditure incurred by the assessee on community assistance programme and the welfare measures undertaken in the vicinity of the manufacturing unit which also benefited its employees is allowable as business expenditure.

CIT vs. Madura Coats Ltd. (2009) 24 DTR 24 (Mad)

11. BUSINESS EXPENDITURE – SETTING UP AND COMMENCEMENT OF BUSINESS – S. 37(1)

The business of assessee cannot be said to have been setup on the date of incorporation of the company as the main objects of the assessee was to acquire the international express business of AFL Ltd., which in turn was subject to necessary approvals of the law. As the setting up and commencement date of business is different and the expenditure incurred after setting up of business i.e. 2nd Nov., 2001, is allowable as revenue expenditure, though business commenced from 1st Jan., 2002.

DHL Express (I) Pvt. Ltd. vs. ACIT (2009) 24 DTR 602 (Mumbai) (Trib.)

12. BUSINESS LOSS – SHARE BROKER – IRRECOVERABLE AMOUNTS FROM CLIENTS – S. 28(i)

Assessee a share broker writing off amounts due from clients in the course of business as irrecoverable, same is allowable as business loss under section 28(i).

Kotak Securities Ltd. vs. Addl. CIT (2009) 24 DTR 214 (Mum.)(Trib.)

13. BLOCK ASSESSMENT – PENALTY – S. 158BFA(2)

Expression "or any expenses deduction or allowance claimed under this Act, which is found to be false" not being there in section 158B(b) at the time of filing the return on 31st May, 2001, penalty under section 158BFA(2) could not be imposed on the basis of disallowance of expenditure claimed and rejection of claim of set off of business loss.

Super Metal Industries vs. Dy. CIT (2009) 123 TTJ 23 (Mumbai)(TM)

14. BLOCK ASSESSMENT – COMPUTATION OF UNDISCLOSED INCOME – SEARCH AND SEIZURE – SHORT OF STOCK – SCRIBBLING PAPERS – S. 132,158BB

In the absence of any corroborative evidence in the possession of the assessee firm or its partners to support its explanation regarding short stock at the time of search, addition in respect of estimated profit on unaccounted sales relatable to stock found was justified.

Addition on account of deficit stock could not be made simply on the basis of some vague scribbling on papers seized in the case of search of an ex-partner of the assessee firm in the absence of anything to connect the contents of said material with the transactions of the firm.

Bhajan Das & Brothers vs. ACIT (2009) 24 DTR 68 (TM) (Trib.)

15.BLOCK ASSESSMENT – REASSESSMENT – S. 147, 148 & 158BC

Provisions of section 147/148 will apply to an assessment for a block period made under Chapter XI B.

CIT vs. Peerchand Ratanlal Baid (HUF) (2009) 24 DTR 209 (Gau.)

16. BLOCK ASSESSMENT – SEARCH AND SEIZURE – SEARCH WARRANT ON DEAD PERSON – S. 132, 158BC

Search warrant issued in the name of dead person, search held to be invalid and assessment based on search also invalid.

CIT vs. Rakesh Kumar (2009) 313 ITR 305 (P & H)

Editorial Note: – SLP rejected (2009) 313 ITR 29 (ST)

17. BUSINESS INCOME – INCOME FROM HOUSE PROPERTY – INCOME FROM WARE HOUSING – S. 22, 28(i)

Assessee not merely letting out its premises for warehousing but being also under obligation to provide adequate security to the material stored apart from receiving and delivering stock, taking physical inventory at regular intervals, to do loading and unloading and stock taking in addition to ensuring proper spray of pesticides in the godown, it was doing a complex commercial activity, hence, receipts were taxable as business income and not income house property, more so when receipts were assessed as business income in the past and there was no change in factual or legal position.

ITO vs. Rasiklal & Co. (P) Ltd. (2009) 123 TTJ 279 (Mum.)

18. CASH CREDITS – GIFT FROM BROTHER – S 68

Addition under section 68 cannot be made in respect of gift received from his real brother by cheque who had annual income of more than Rs. 6.65 lacs, assessed to tax and sufficient creditworthiness.

ACIT vs. Sarv Prakash Kapoor (2009) 24 DTR 91 (Agra) (TM) (Trib.)

19. CAPITAL GAINS – CHARGEABILITY – MONEY RECEIVED FROM INSURANCE COMPANY – S. 43 (6), S.45(IA) & S.50

Expenditure incurred by the assessee on repairs of building damaged tanks and terminals being more than the insurance receipts resulting in to no profits or gains, the provisions of section 43(6)(c)(I) or 45(IA) or 50 were not applicable.

J. R. Enterprises vs. ACIT (2009) 24 DTR 311 (Mum.) (Trib.)

20. CAPITAL GAINS – SLUMP SALE – COST OF ACQUISITION – S. 45, 50

Cost of acquisition of business, transferred lock, stock and barrel being ascertainable even according to assessee's own admission before CIT(A). CIT(A) was justified in holding that the transaction was exigible to capital gains tax, however, as assessee was unable to establish any cost of improvement no benefit on that account will be allowable.

CEAT vs. Dy. CIT (2009) 24 DTR 445 (Mumbai) (Trib.)

21. DEDUCTIONS – DEVELOPER – INFRASTRUCTURE UNDERTAKINGS – S. 80IA(4 )

Assessee which is engaged in `developing' infrastructural facility i.e. road, and not engaged in `operating and maintaining' said facility, is entitled to benefits of deduction under section 80 IA(4) of the Act.

ACIT vs. Bharat Udyog Ltd. (2009) 118 ITD 336 (Mum.) / (2009) 23 DTR 433 (Mum.)(Trib.)

22. DEDUCTION OF TAX AT SOURCE – FEES FOR PROFESSIONAL OR TECHNICAL SERVICES – TRANSACTION FEE – S. 9(I)(vii), 40(a)(ia), 194 J

Transaction fee paid to stock exchange on the basis of volume of transaction is payment for use facilities provided by stock exchange and not for any services, either technical or managerial, hence, provisions of section 194 J are not attracted and no disallowance can be made by invoking section 40(a)(ia).

Kotak Securities Ltd. vs. Addl. CIT (2009) 24 DTR 214 (Mum.) (Trib.)

23. DEDUCTION OF TAX AT SOURCE – LIMITATION – S. 143, 147, 149, 153, 195, 201(1)

As there is no time limit is prescribed order must be passed within reasonable time which is an order akin to assessment i.e. the time limit on par with time available for assessment or reassessment of recipient. Time of one year is available from initiation of proceedings for passing order.

Mahindra and Mahindra Ltd. vs. Dy. CIT (2009) 313 ITR 263 (AT)(Mum.)(SB)

24. DEDUCTION OF TAX AT SOURCE – ASSESSEE IN DEFAULT – S. 195, 201 (1)

Person responsible for paying not to be treated as in default if recipient pays tax or is not chargeable to tax under Act, but may be liable for interest.

Mahindra and Mahindra Ltd. vs. Dy. CIT (2009) 313 ITR 263 (AT) (Mum.) (SB)

25. DEDUCTION –INFRASTRUCTURAL FACILITY-DEVEVELOPER.- s. 80 IA

The assessee need not be engaged in the activity of `operating and maintaining the facility' for availing deduction. As the benefit is given to the developer it pre-supposes income to the developer which would accrue only on the receipt of the money by the developer on transfer of infrastructural facility. It was further held that an assessee was engaged in developing infrastructural facility is also eligible for the benefits of s. 80 IA.

Asst. CIT v. Bharat Udyog Ltd. [2009] 118 ITD 336 (Mum , (2009 ) 24 SOT 412 (Mum)

26. DEEMED DIVIDEND – DEPOSIT – S. 2(22)(e)

Amount received from a company as security by assessee firm. Assessee firm is not registered shareholder hence amount received as security not assessable as deemed dividend in hands of assessee firm.

CIT vs. Hotel Hilltop (2009) 313 ITR 116 (Raj.)

Editorial Note:- See CIT vs. Bhaumik Colour P. Ltd. (2009) 313 ITR 146 (AT) (Mum.) (SB) / (2009) 118 ITD 1 (Mum.) (SB)

27. DEEMED DIVIDEND- LOAN IN ORDINARY COURSE OF BUSINESS- s.2 (22) (e).

The Tribunal accepted assessee contention that both the companies were non-banking companies and the amounts were given in the ordinary course of business hence the receipt of loan as deemed dividend cannot be taxed.

ITO v. Usha Commercial (P) Ltd. [2009] 30 SOT 37 (Kol) (URO).

28. DEPRECIATION – MOTOR LORRY – S. 32

Higher rate of depreciation is also admissible when motor lorry is used by assessee in his own business of transportation of goods on hire.

CIT vs. S. C. Thakur & Bros. (2009) 180 Taxman 348 (Bom.)

29. DEPRECIATION – MEMBERSHIP CARD OF STOCK EXCHANGE – S. 32

Membership card of stock exchange would be entitled to claim depreciation on the WDV of the membership right of the stock exchange.

Kotak Securities Ltd. vs. Addl. CIT (2009) 24 DTR 214 (Mum.) (Trib.)

30. Depreciation – Trial run- s 32.

Depreciation is allowable even where trial – run production takes place.

Dy CIT v Finolex Cables Ltd (2009) 29 SOT 595 (Pune ).

31. EXPORT – COMPUTER SOFTWARE – S. 80HHE

Services rendered by assessee's employees abroad were both for onsite development of software, including services for such development and also in connection with the development or production of computer software entitling assessee to deduction under section 80HHEE.

ITO vs. Information Architects (2009) 123 TTJ 35 (Mum.)

32. EXPORT – DEDUCTION – EXPORT AS WELL AS LOCAL SALES SEPARATE BOOKS OF ACCOUNTS – S. 80HHC

Assessee having maintained separate books of accounts for export business and local business deduction under section 80HHC is to be computed on the basis of total turnover, export turnover and profits of the business of the export division alone and not the total turnover and the profits of the entire business of the assessee.

CIT vs. Sivagami Match Industries (2009) 24 DTR 109 (Mad.)

33. EXPORT – PROFIT ON CANCELLATION FORWARD EXCHANGE CONTRACTS – S. 80HHC

Profits on cancellation of forward exchange contracts were assessee's profits of business, but as such profits were not derived from export activity and were received from banks in India not convertible foreign exchange in terms of sub section (2) of section 80HHC, 90 percent of the same has to be reduced from profits of business as per Expln. (baa) of section 80HHC.

Dy. CIT vs. Intergold (I) Ltd (2009) 24 DTR 250 (Mum.)(Trib.)

34. EXPORT – LEASE OF RIGHT TO EXPLOIT FILMS OUTSIDE INDIA – S. 80HHC

Telecasting rights fell in the category of articles of trade and commerce and hence, within the category of "merchandise" and the transfer of the said rights by way of lease fell within the meaning "sale" and would attract section 80HHC. Lease of right to exploit films out side India amounts to sale.

CIT vs. B. Suresh (2009) 313 ITR 149 (SC)

Editorial Note:- Abdulgafar A. Nadiadwala vs. ACIT (2004) 267 ITR 488 (Bom.) affirmed.

35. GIFT – HUF – DAUGHTER IN LAW AT THE TIME OF MARRIAGE – S. 2(xii), 3

A karta of the family or father in law has no moral obligation to gift gold ornaments to daughter in law and therefore, gift of gold by the father in law at the time of her marriage is chargeable to gift tax.

CGT vs. Smt. Triveni Devi (2009) 24 DTR 143 (Raj.)

36. HEAD OFFICE EXPENSES – APPLICABILITY OF 44C – EXPENSES INCURRED BY OVERSEAS BRANCHES OF THE ASSESSEE BANK FOR ITS INDIAN OPERATION ARE NOT HIT BY SECTION 44C – S. 37, 44C

The book entries are not very important for determining the correct assessed income. The claim can be made through the `computation of income' route. The provisions of s. 44C are in applicable in a case of expenses incurred exclusively by the bank branches abroad in respect of NRI desk maintained by those branches. Therefore, the provisions of s. 44C of the Income-tax is not applicable in respect of expenses incurred by the overseas branches of the assessee bank for its Indian operations are not hit by section 44C.

Bank of America NT & SA vs. Dy. CIT (2009) 24 DTR 409 (Mum.) (Trib).

37. INCOME FROM UNDISCLOSED SOURCE – BOGUS PURCHASES – POWER OF TRIBUNAL – S. 69, 254(1)

Tribunal can set aside the matter or remand it to the file of AO for further enquiry to make the proper assessment by allowing the parties including the revenue authorities to raise a contention for the first time before it.

ACIT vs. Amar Mining Co. (2009) 24 DTR 139 (Ahd.)(TM)(Trib.)

38. INTEREST ON BORROWED CAPITAL – S. 36(1)(iii)

If there were funds available both interest free and overdraft and / or loans taken a presumption would arise that investment would be out of the interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investments, presumption that the borrowed capital was used for purposes of business hence interest was deductible.

CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.)

39. INTEREST- CASH SEZIED–s. 158 BFA

Cash seized in search to be taken as tax deposited for the purpose of levy of interest under section 158 BFA.

Asst CIT v. Kwality Bar and Resturant [2009] 118 ITD 108 (Bang).

40. INTERNATIONAL TAXATION – DOUBLE TAXATION AVOIDANCE AGREEMENT – INDIA – SWEDEN – AGREEMENT FEES PAYABLE IN RESPECT OF TECHNICAL CONSULTING SERVICES ARE MANAGEMENT FEES – S. 90, ART. 3(3)

Assessee was not managing the affairs of VSNL. Therefore, technical service rendered by Assessee cannot be treated as "management fees". Besides providing technical service assessee was also engaged in the service of supervising installation of all the terminal equipments and the cables in the terminal buildings. The charges received by the Assessee cannot be treated has a commercial profits. So, technical service charges should be taken as "management charges". The matter decided in favour of revenue.

CIT vs. Swedish International AB (2009) 24 DTR 233 (Bom.)

41. INTERNATIONAL TAXATION – TRANSFER PRICING – STEPS TO BE TAKEN TO DETERMINE THE TNMM

Method adopted by the AO suffered from various deficiencies and infirmities and lacked information and data comparables. Matter remanded to file of TPO for determination of arm's length price relating to transaction in question.

UCB India (P) Ltd. vs. ACIT (2009) 30 SOT 95 (Mum.)

42. INTERNATIONAL TAXATION – FOREIGN COMPANY – ROYALTY – DTAA – INDIA – GERMANY – S. 44D, 115JA, 90

Assessee being a person to whom DTAA applied had option being subjected to tax as per DTAA or Act, which was more beneficial to it, hence, it had rightly subjected it self to tax at reduced rate of 10 percent as per DTAA.

Asstt. DIT vs. Chiron Behring GmbH & Co. (2009) 118 ITD 324 (Mum.)

43. INTERNATIONAL TAXATION – DOUBLE TAXATION AVOIDANCE AGREEMENT – INDIA – CANADA – S. 90, ARTS. 18 & 23

Income of Indian cine artiste from entertainment show in Canada is taxable in Canada only in terms of Art. 18 of the DTAA between India and Canada.

MS Pooja Bhatt vs. Dy. CIT (2009) 123 TTJ 404 (Mum.)

44. INTERNATIONAL TAXATION – DTA – INDIA AND FRANCE – S. 44B, 90, ART. 9

Income earned by the assessee on account of transportation by ships operated by other enterprises under slot chartering arrangement is covered by art.9 and is taxable only in the State of residence and accordingly, such income will be exempt from the Income-tax under the Income-tax Act.

Jt. Director of Income-tax (International Taxation) vs. CMA CGM SA France (2009) 24 DTR 37 (Mum.) (Trib.)

45. INTERNATIONAL TAXATION – TRANSFER PRICING – S. 92C

For determination of ALP under TNMM assessee was justified in taking profit level indicator of comparable companies as operating cash profits without taking into consideration, exclusion of depreciation was justified to eliminate difference in technology used, age of assets used in production, differences in capacity utilisation and different depreciation policies adopted by various companies.

Schefenacker Motherson Ltd. vs. ITO (2009) 24 DTR 561 (Del.)(Trib.)

46. INTERNATIONAL TAXATION – TAXABILITY IN INDIA – S. 9(1)(vii) EXPLN. 2

Underwriting commission paid to lead managers to issue of global depository receipts by Indian party, are business profits which are not taxable in absence of permanent establishment in India. Reimbursement of expenses no element of income hence not taxable.

Mahindra and Mahindra Ltd. vs. Dy. CIT (2009) 313 ITR 263 (AT)(Mum.)(SB)

47. MANUFACTURE OR PRODUCTION – ACTIVITY OF RAILWAY LINE IS CONSTRUCTION ACTIVITY AND CANNOT BE AMOUNTED TO MANUFACTURE OR PRODUCTION ACTIVITY – S 80HH, 80I

The activity of laying down railway line does amount to construction activity and not manufacture or production. The assessee was seeking benefit on the ground that the strength of manufacturing activity carried on by the assessee i.e. manufacturing of numerous parts, components etc. which go into the working and operational railway tracks. The matter to be remitted for fresh consideration as per the parameters laid down by the Supreme Court in N. C. Budharaja and the impugned order of the Tribunal is set aside.

CIT vs. Indian Railways Construction Co. Ltd. (2009) 24 DTR 130 (Del.)

Editorial Note:- See amendment in Finance Bill 2009, Source: www.itatonline.org (Article)

48. PENALTY – CONCEALMENT – REVISED RETURN – S. 148, 271(1)(c)

Assessee having surrendered additional income along with an explanation in the revised return filed in pursuance of notice under section 148, and the assessing authority having not taken, any objection that the assessee's explanation was not bona fide, penalty under section 271(1)(c) is not leviable.

CIT vs. Rajiv Garg & Ors. (2009) 224 CTR 321 (P & H) / (2009) 313 ITR 256 (P & H).

49. PENALTY – CONCEALMENT – S. 271(1)(c)

The assessee has furnished all the relevant material which was neither in accurate nor has concealed any particulars of his income which is necessary for computation of total income. The AO did not find the explanation given by Assessee to be false in spite of this AO imposed penalty on Assessee. As AO has failed to point any exact failure of the Assessee for which penalty was levied u/s. 271(1)(c). As Assessee has furnished all the details and has given substantial evidence penalty cannot be levied by invoking explanation 1.

Mrs. Najma M. Kanchwala vs. ITO (2009) 24 DTR 369 (Mum.)(Trib.)

Editorial Note:- UOI vs. Dharmendra Textile Processors & Ors. (2008) 219 CTR 489 (SC) discussed and distinguished.

50.PRECEDENT – DISMISSAL OF SPECIAL LEAVE AND APPEAL – ART. 136, 141

Dismissal of appeal means that the judgement of appealed has been affirmed.

Snowcem India Ltd. vs. Dy. CIT (2009) 313 ITR 170 (SC)

51. PRECEDENT – HIGH COURT – S.254

Tribunal is not bound by decisions of Courts other than jurisdictional High Court.

Mahindra and Mahindra Ltd. vs. Dy. CIT (2009) 313 ITR 263 (AT) (Mum.)(SB) (309)

52. PRECEDENT – HIGH COURT – S. 254

A solitary judgement of any High Court in country on a particular point or issue should be followed in its letter and spirit by all Benches of Tribunal notwithstanding contrary views expressed by some Benches of Tribunal notwithstanding contrary views expressed by some Benches of Tribunal, unless there is strong reason to deviate from view expressed by High Court.

ITO vs. Ranisati Fabric Mills (P) Ltd. (2009) 118 ITD 293 (Mum.)

53. PROFIT CHARGEABLE TO TAX –LIABILITY PAYABLE TO CREDITORS -41 (1)

The provision under section 41 (1) could not be applied in the absence of cessation of liabilities, on the mere fact that the amounts were outstanding for more than 3 years and also in case of absence of unilateral entries in the books of accounts.

DSA Engineers (Bombay) v. ITO [2009] 30 SOT 31 (Mum).

54. REVISION – ERRONEOUS AND PREJUDICIAL – LACK OF PROPER ENQUIRY – S. 263

Assessing Officer having accepted the accounts of the assessee after the latter had submitted the details as called for by the Assessing Officer, it could not be said that he has not applied his mind to the relevant issues and therefore, order passed by CIT under section 263 is not sustainable, more so when he did not record a finding as to how the order of the Assessing Officer is erroneous.

Rajiv Agnihotri vs. CIT (2009) 23 DTR 476 (Del.)(Trib.)

55. REVISION – S. 263

Merely because an assessment order does not refer to queries raised by Assessing Officer during course of scrutiny and response of assessee thereto, it can not be said that there has been no enquiry and, hence, assessment is erroneous and prejudicial to interest of revenue.

CIT vs. Ashish Rajpal (2009) 180 Taxman 623 (Delhi)

56. REVISION – ERRONEOUS AND PREJUDICIAL ORDER – ONE POSSIBLE VIEW – S. 263

The assessee claimed that these expenses were in executing the projects regarding development of the packaged software and were revenue in nature. These expenses of the Assessee were considered as ongoing expense and lead to benefit of enduring nature on development of packaged software. Therefore, the order of AO in allowing this expenditure cannot be said to be erroneous and prejudicial to the interest of the Revenue as the view of the AO having followed one possible view.

Flextronics Software System Ltd. vs. CIT (2009) 24 DTR 551 (Del.) (Trib.)

57. SCIENTIFIC RESEARCH EXPENDITURE – IN HOUSE SCIENTIFIC RESEARCH – S. 35(1)(iv)

For claiming deduction under section 35, there should be nexus between scientific research and with business carried on by assessee. If an assessee does not develop in house scientific research activities but is engaged in development and supply of scientific research to business of other assessee, deduction under section 35 would not be available hence expenditure incurred on the subsidiary would not be entitled deduction under section 35.

Ciba India (P) Ltd. vs. ITO ( 2009) 30 SOT 269 (Mum.)

58. SHIPPING COMPANIES – QUALIFYING COMPANY – TONNAGE TAX – S. 115VC, 115VA, 115VC(d)

Concept of the `the main object of company' in section 115VC(d), in absence of any provision to contrary in Chapter XII-G, has necessarily to be understood in manner in which that term is understood in common parlance without being tied down to any requirement of Companies Act to classify objects of a company in to principal and ancillary and show them distinctly in object clauses in memorandum of association of company, hence, only on the basis of object clause of company the provisions of tonnage tax can not be denied.

South India Corpn. Ltd. vs. Addl. CIT (2009) 180 Taxman 319 (Ker.)

59. SEARCH AND SEIZURE – SATISFACTION NOTE – S. 132(1)

A copy of the information or the satisfaction note need not furnished to the Petitioner.

Genom Biotech (P) Ltd. & Ors. Vs. Director of IT (Investigation) (2009) 224 CTR 270 (Bom.)

60. SEARCH AND SEIZURE – WARRANT- BLOCK ASESSEMENT- s. 132(1), S.158 BC.

No block assessment can be made directly where no search warrant is issued.

Smt. Nasreen Yusuf Dhanani v. Asst CIT [2009] 118 ITD 133 (Mum).

61. Survey- Statement – Assessment – s. 133A.

A survey was conducted in the premises of the assessee and was not signed not by the Inspector or by the Assessing officer nor the contents of the statement was explained to the person who gave the statement. The Assessing Officer based on the statement of the person made addition by applying higher gross profit . As the Assessee had also disclosed higher gross profit than in the preceding two years. The tribunal deleted the addition which was made merely on the basis of statement.

Kailash Chand v. ITO [2009] 29 SOT 63 (Jodh) (URO)

62. Speculative Transaction – Future and option ( Derivatives ) – s.43 (5)(d)

Future and options not to be regarded as an speculation loss when it is treated as a business loss and set off against other incomes in accordance with the provisions of the Income Tax Act. The provisions u/s. 43 (5) is clarifiactory in nature and therefore has retrospective operation.

P.S. Kapur v. Asst. CIT [2209] 29 SOT 587 (Jp.)

Editorial – refer . Dy CIT v SSKI Investors Services ( P ) Ltd ( 2009 ) 29 SOT 78 (Mum) (URO ).

63. TAX DEDUCTION AT SOURCE – FEES FOR TECHNICAL SERVICES – S. 194 J, 201, 201(1A)

Fees for technical services would not include purchase of material by the assessee for the purpose of imparting computer education at their centre, hence, provisions of section 194J and for that purpose section 201(1) and 201(1A) are not attracted.

Taxes having been duly paid by the deductee same can not be recovered from the assessee for failure to deduct tax at source.

ACIT vs. Frontline Software Services (P) Ltd. (2009) 24 DTR 232 (Ind.)(Trib.)

64. TAX DEDUCTION AT SOURCE PERQUISITE- TRANSPORT FACILITY FROM RESIDENCE TO OFFICE- S. 17 (2) 192

The employees were given pick and drop facility from their residence to office and employee also paid conveyance allowance to every employee. The tribunal held that use of any vehicle provided by company or an employer for journey by the employee from his residence to office or office place to his residence shall not be regarded as a benefit or amenity liable for tax as perquisite. Further, since it was not perquisite the question of deducting tax at source u/s. 192 in respect of such payments/ expenditure could not arise.

Transworks Information Services Ltd. V. ITO (TDS) [2009] 29 SOT 543 (Mum).

65. WEALTH TAX – PENALTY – LEGAL REPRESENTATIVE – S. 15B, 18, 19

Assessee filing return and receiving notices of initiation of penalty proceedings. Penalty order was passed after death of assessee, the Court held that no penalty can be levied against legal representative.

ACIT vs. Late Shrimant F. P. Gaekwad (2009) 313 ITR 192 (Guj.)

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Dear Friends : The emails are schedule to be posted in the blog and will sent to the group on carious dates and time fixed. Instead of sending it on one day it is spread on various dates. regards. R R Makwana

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Gift under Income Tax Act

An attempt is made to highlight some of the salient features of Taxability of Gifts as Income under sections 56(vii) and (viia) of the Income Tax Act, 1961 (`the Act') i.e., mainly gifts received after 1-10-2009.

1.1 The charging section of the Gift Tax Act, 1957 was suspended w.e.f. 1-10-98 to say that Gifts made after 1-10-98 would not be chargeable to Tax. It is a misnomer to state that the Gift Tax Act has been abolished as it is only the Charging Section which has been kept in abeyance. In short it can be revived if the Legislature deems it fit.

The Law On Taxation Of Gifts

CA K. C. Devdas

Clauses (v) to (viia) of s. 56(2) incorporate the law on taxation of gifts. The author, an eminent Chartered Accountant, has meticulously analyzed the provisions of law and identified numerous problems therein. Using his vast experience in the subject, the author has proposed a number of credible solutions as well.

It is doubtful whether basis of valuation for the purpose of stamp duty has been notified by all the State Governments in respect of all the properties, including agriculture land, etc. In case basis for valuation has not been notified for the purpose of stamp duty, the value taken would only be value as is mentioned in the documents registered or the value as would have been adopted by concerned authorities for the purpose of stamp duty
1.2 In order to augment the sources of revenue and as the charging provisions of Gifts Tax Act have been kept in abeyance, the Legislature in its wisdom introduced section 56(2) (v) of Income tax Act, 1961 with effect from 1-4-2005 to state that Gifts received without consideration by an individual or aHUF from any person after 1.9.2004 would be deemed as Income unless it is received from the exempted persons and categories as stated in the Proviso to section 56(2) (v) of the Act. There were amendments to this sub-clause by way of introduction of 56(2) (VI) of the Act with effect from 1-4-2007. Both the sub-clauses covered only Gifts of any sum of money subject to the stipulations laid down therein. In short gifts in kind were not covered under these sub-clauses.

1.3 In order to extend the taxability of Gifts to properties other than cash, sub-clause (vii) was introduced with effect from 1-10-2009 to cover gifts of immovable properties, shares and securities, jewellery, archaeological collections, drawings, paintings, sculpture, any work of art, and bullion (1-6-2010).

1.4 I t is the paper writer's view that taxability of gifts as income which started on a small scale to include only sums of money seems to have spread its net wide enough to include gifts in kind also. The future enactments would further see a plethora of items being added to the definitions of property so that gifts barring few exceptions would be covered under the Act. The Paper writer is reminded of the levy of service tax where it is started as a levy on 5 or 6 items and gradually got extended to over 100 services. The fate of taxability of gifts as income would also be the same and amendments are not far off to say that all gifts would be income except those specifically exempted. The Government is always contemplating to raise revenues and the taxability of gifts as income is very valuable tool. At the same time there would be a lot of litigation on the principles of valuation on the taxability of gifts under the Act like sections 68, 115JB and other vexatious provisions.

1.5 Be that as it may an attempt is made in this paper to highlight some of the features governing gifts covered by clauses (vii) and (viia) to section 56(2) of the Act. 1.6 Section 56(2) (vii) of the Act. The previous provisions of sub-clause (vi) of section 56 provided that any `sum of money' (in excess of the prescribed limited of rupees fifty thousand) received without consideration by an individual or HUF would be chargeable to income-tax in the hands of the recipient under the head `Income from other Sources'. However, receipts from relatives or on the occasion of marriage or under a will were outside the scope of the provisions of clause (vi) of sub-section (2) of section 56 of the Income-tax Act. Similarly, anything which is received in kind having `money's worth', i.e., property also remained outside the purview of these provisions.

Section 47 governs transactions not regarded as transfer and covers distribution of Assets on total or partial partition, Transfer under Will, etc. These exceptions are not covered under the proviso to Section 56(2) (viia) and therefore could it be considered that such transactions would be caught within the mischief of section 56(2)(viia) of the Act? It may also be noted that the gifts received from exempted categories stipulated u/s 56(2)(vii) would not govern gifts u/s. 56(2)(viia) and therefore are to be strictly interpreted
The above section being an anti-abuse measure, has been amended by inserting a new clause (vii) in sub-section (2) to provide that the value of any property would be included in the computation of total income of the recipient as "income from other sources". Such properties will include immovable property being land or building or both, shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art. In a case where an immovable property is received without consideration and the stamp duty value of such property exceeds fifty thousand rupees, the whole of the stamp duty value of such property shall be taxed as the income of the recipient.

If the stamp duty value of immovable property is disputed by the assessee, the Assessing Officer may refer the valuation of such property to a Valuation Officer. In such cases, the provisions of existing section 50C and subsection (15) of section 155 of the Income-tax Act shall, as far as may be, apply, for determining the value of such property.

It has been provided that in a case where movable property is received without consideration and the aggregate fair market value of such property exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property shall be taxed as the income of the recipient. If a movable property is received for a consideration which is less than the aggregate fair market value of the property and the difference between the two exceeds fifty thousand rupees, the difference between the fair market value of such property and such consideration shall be taxed as the income of the recipient.

The method for the determination of fair market value of property other than immovable property has been provided in rules 11U and 11UA of Income-tax Rules, 1961.

Consequential amendment has been made in section 2 by inserting sub-clause (xv) in clause (24) thus expanding the definition of income to include any sum of money or value of property referred to in clause (vii) of sub-section (2) of section 56. Further, section 49 has also been amended by way of inserting a new subsection (4) providing that for the purposes of computing capital gains, if the transaction of receipt of the asset is subject to tax under clause (vii) of sub-section (2) of section 56, then the cost of acquisition of the asset shall be the stamp duty value (for immovable property) or fair market value (for asset being a movable property), as the case may be.

These amendments have been made applicable with effect from 1st October, 2009 and will accordingly apply for transactions undertaken on or after such date.

The Finance Act, 2010 amended the definition of Property u/s. 56(2) (vii) of the Act w.e.f. 1-10-2009 to provide that section 56(2)(vii) will have application to the "Property" which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.

Further clause (vii) of section 56(2) was amended w.e.f. 1-10-2009 to provide that it would apply only if the Immovable Property is received without any consideration (Underlining mine) and to remove the stipulation regarding transactions involving cases of inadequate consideration in respect of Immovable property.

1.7 The Finance Act of 2010 w.e.f. 1-6-2010 has introduced yet another sub-clause to section 56(2) which is numbered as sub-clause (viia) to tax shares of a company, not being a company in which public are substantially interested, received by a firm or a company (Not being a company in which the public are substantially interested). Thus the Taxable assessee's are closely held companies and firms.

The aggregate value of inadequate consideration or absence of consideration should exceed Rs. 50,000/. When the shares are received without consideration or for Inadequate consideration and the lack of consideration is more than Rs. 50,000/-, then the entire amount of shortfall in consideration would be taxable. In case the aggregate shortfall in consideration is less than Rs. 50,000/- no chargeability arises. The method of ascertaining Fair Market Value (`FMV') of shares has been laid down in Rule 11UA(C) of Income Tax Rules, 1962 (`IT Rules'). However, the proviso to clause (viia) clearly provides that this clause shall not apply to any such property received by way of transaction not regarded as Transfer under Clause (via), (vic), (vicb) (vid) or clause (vii) of section 47.

Accordingly shares received on account of the transactions governed of the aforesaid clauses of Section 47 would not be liable to tax. Section 47 governs transactions not regarded as transfer and covers distribution of Assets on total or partial partition, Transfer under Will, etc. These exceptions are not covered under the proviso to Section 56(2) (viia) and therefore could it be considered that such transactions would be caught within the mischief of section 56(2)(viia) of the Act? It may also be noted that the gifts received from exempted categories stipulated u/s 56(2)(vii) would not govern gifts u/s. 56(2)(viia) and therefore are to be strictly interpreted.

2. Having brought out the salient features of amendment made to Section 56(2) (vii) and introduction of clause (viia) to the Act, I would dwell in a nut shell to the provisions of Section 56(2) governing gifts in general in the concept of gifts, related persons, exempted categories, threshold etc.

2.1 Provisions of Section 56(2)(vii) applicable only if the recipient of sum of money or specified property is an Individual or HUF The provisions of section 56(2) (vii) inserted w.e.f. 1-10-2009 are applicable only if the recipient of sum of money or specified property is an Individual or HUF.

However section 56(2)(viia) has been introduced to cover partnership firms and certain companies if they receive specified shares.

2.2 Provisions not applicable in case the specified properties are received from a relative or in other prescribed circumstances The provisions of section 56(2)(vii) inserted w.e.f. 1-10-2009 are applicable in case the specified properties are received from a relative or in other prescribed circumstances. In the following circumstances the prescribed amounts or the value of the property received are not chargeable to tax u/s 56(2)(vii) of the Act

(i) Any receipt of sum of money or any property from any relative;

(ii) Receipt on occasion of the marriage;

(iii) Receipt under a Will;

(iv) Receipt by way of inheritance;

(v) Receipt in contemplation of death;

(vi) Receipt from a local authority as defined in the Explanation to section 10(20;

(vii) Receipt from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in section 10(23C);

(viii) Receipt from any trust or institution registered u/s 12AA.

2.3 Meaning of relative


The provisions of section 56(2)(vii) inserted w.e.f. 1-10-2009 are not applicable in case the specified properties are received from a relative or in other prescribed circumstances.

The term "relative" as defined includes spouse, brother, sister, brother or sister of spouse, brother or sister of either of the parents, any lineal ascendant or descendant of the individual or of the spouse and spouse of any of the persons mentioned above. Following is the list of some persons considered relative of an individual for the purpose of section 56(2)(vii).

2.4 Specified properties covered u/s. 56(2) (vii):

The provisions of section 56(2) (vii) are applicable w.e.f. 1.10.2009 on the receipt of a sum of money and specified properties, as mentioned hereunder.

For this purpose "property" means the following "property" capital assets –

(i) Immovable property being land or building or both;

(ii) Shares and securities;

(iii) jewellery;

(iv) archaeological collections;

(v) drawings ;

(vi) paintings;

(vii) sculptures ;

(viii) any work of art; or

(ix) bullion (w.e.f. 1-6-2010)

These are summarized below–

(a) Sum of money


Where any sum of money exceeding Rs.50,000 in aggregate in any previous year is received by an individual or HUF without any consideration the aggregate sum shall be deemed to be the income of the recipient.

(b) Immovable property transferred without consideration


Where immovable property is received by an individual or HUF without any consideration and the value of such property for stamp duty purpose exceeds Rs. 50,000, the value of the said property for the stamp duty purpose would be taxable as income from other sources.

(c) Transfer of specified properties other than immovable properties without consideration Where a property, specified for this purpose, other than immovable property, is received by an individual or HUF without any consideration and the fair value of the same exceeds Rs.50,000 then the fair market value of the property shall be deemed to be the income of the recipient.

(d) Transfer of specified properties other than immovable properties for a consideration lower than fair market value

Where a property specified for this purpose, other than immovable property is received by an individual or HUF for a consideration and such consideration is less than the fair market value of the property by an amount exceeding Rs. 50,000, the fair market value reduced by the consideration paid, would be taxable as income from other sources.

For the purpose of computing capital gains on subsequent transfer of such property by the recipient, cost of acquisition u/s.49 shall be increased by the amount of value taxed as above under the head `income from other sources'.

3. Threshold limit: (Rs. 50,000)


The threshold limit of Rs. 50,000/- would apply separately for each kind of receipt in the form of cash, immovable property and other property.

4. Stamp Duty Value to be adopted in case of Immovable Property


Stamp duty value as is assessed or assessable by any authority or Central Government or State Government for the purpose of stamp duty is to be adopted. It is doubtful whether basis of valuation for the purpose of stamp duty has been notified by all the State Governments in respect of all the properties, including agriculture land, etc. In case basis for valuation has not been notified for the purpose of stamp duty, the value taken would only be value as is mentioned in the documents registered or the value as would have been adopted by concerned authorities for the purpose of stamp duty. In the cases where documents have not been executed or registered, there are likely to be dispute in determination of assessable value in view of positive or negative aspects of a property.

In respect of immovable properties the A.O. has also been authorized to make reference to Valuation Officer.

5. Fair Market Value/Valuation of Jewellery


As per Rule 11UA(a), The Valuation of Jewellery will be made as per Rule 11(UA)(a) of I.T. Rules 1962.

6. Determining FMV for Archaeological collections, drawings, paintings etc:


Rule 11UA(b) governs the valuation of the above items.

7. Taxable event is Receipt


The Taxable event is receipt of money or immovable property or property other than Immovable property. As regards sum of money, shares, drawings, paintings etc., are concerned, they can be taken as received when they are physically handed over and as regards shares when they are transferred in the name of the recipient.

In the case of immovable property received without consideration, it appears that the receipt would be treated as complete ownership vests on the date of execution of the deed though registered later. Thus ownership relates back to the date of execution of the deed though registered at a later date. The concept of possession of the property coupled with registration or as envisaged in sections 2(47) (v) and (vi) and section 27of the Act can also be enforced to determine the date of receipt.

8. Corresponding provisions in Direct Tax Code (`DTC')


Under DTC section 56(2) which with taxation residuary income includes any income in the nature of gifts under sections 56(2)(h) and (i) of DTC which reads as under:

"(h) the aggregate of any money's and the value of any specified property received, without consideration by an individual or a HUF;

(i) the amount of voluntary contribution received by a person, other than an individual or HUf, from any other person;"

Section 56(3) provides the exceptions for the amount received under 56(2)(h) and is pari materia with section 56(2)(vii) of the Act except that the meaning of the word relative will not include any lineal descendant of a brother or sister of the either the individual or of the spouse of the individual. Likewise the definition of "specified property" under section 56(4) of the DTC is the same as in section 56(2)(vii) except that it does not include Bullion.

Section 56(4)(d) of DTC states that:

"the value of any property by referred to in clause (h) of sub-section(2) shall be:-

(i) the stamp duty value in the case of an immovable property as reduced by the amount of consideration, if any, paid by the assessee; and

(ii) the fair market value in the case of any property as reduced by the amount of consideration, if any, paid by the assessee.

9. Issues for Consideration

• Whether the provisions of sub-clause (viia) of Section 56(2) of the Act would apply to convertible debentures?

• Whether Family Settlements wherein the shares are allotted inter-se amongst family members to avoid disputes would be covered by the aforesaid provisions.

• A firm or a proprietary concern may hold the shares of a closely held company. On conversion into a company all the Assets of Firm/Proprietary concern become the assets of the company. On such conversion, if shares are received by the company at less than the specified value, would the provisions of Section 56(2) (viia) be attracted. Likewise, what would be the position of a partner contributing shares of a closely held company as his capital contribution on becoming partner of a firm?

• What would be the position of shares received through "Will" by a firm or a company?

• How would be the provisions of sub-clause (viia) of Section 56(2) of the Act apply to transfer of right of shares or receipt of bonus shares.

• Company "A" has issued Bonus shares in the ratio of 1:1. Prior to the issue of Bonus the price of each share is Rs.2000/- and Ex. Bonus the price is Rs.1100/-. In such a case the value of two shares (original and Bonus) is Rs.2200 as against cost/pre Bonus of Rs.2000/-. The actual benefit is only Rs.200/. The Assessing Officer suppose contemplates to adopt the FMV of the Bonus shares i.e. Ex. Bonus he may consider income of Rs.1100/- per Bonus Share ignoring the fact that the price of original share has diminished by Rs.900/- per share due to issue of Bonus shares. What would be the position?

10. Conclusion

I have made an attempt to highlight some of the salient features of Gifts being treated as deemed income within the meaning of Sections 56(2)(vi) (vii) & (viia) of the Act and being a complicated subject prone to vexatious litigation.

Income of a foreign cricket team is taxable

Income of a foreign cricket team for participating in a cricket match in India is taxable u/s. 115BBA and therefore, section 194E is attracted

The amount paid to the foreign team for participation in the match in India in any shape, either as prize money or as the administrative expenses, is the income deemed to have accrued in India and is taxable under section 115BBA and thus, section 194E is attracted

However, the payments made to the Umpires or Match Referees do not come within the purview of section 115BBA because the Umpires and Match Referee are neither sportsmen (including an athlete) nor are they non-resident sports association or institution so as to attract the provisions contained in section 115BBA, although the payments made to them are "income" which have accrued in India, yet, those are not taxable under the aforesaid provision and thus, the liability to deduct tax under section 194E would never accrue. [Section 194E of the Income-tax Act, 1961 - Deduction of tax at source - Payments to non-resident sportsman or sports association] - [2011] 11 taxmann.com 109 (Cal.)

Section 40(b), Quantification of remuneration,

Quantification of remuneration, whether necessary in partnership deed
 
In Asstt. CIT v. Suman Construction (2009) 27 (II) ITCL 329 (Pune 'A'-Trib) the assessing officer had noticed that the assessee had claimed salary to partners of Rs. 2,20,000. However, in his opinion as per the partnership deed filed along with the return in the past assessment year, there was no specification of this salary payable to the partners. According to assessing officer, there was neither the quantification of the salary payable to the partners nor it was prescribed the manner in which such quantification would be done. By referring CBDT Circular No. 739, dated 25-3-1996 the assessing officer said that the provisions of payment of salary have been made clear and since there was no specified quantification therefore, assessee was not entitled for claim of deduction under section 40(b) of the Act regarding salary to partners.

It was held that by Finance Act, 1992 with effect from 1-4-1993 an insertion was made in section 40 vide clause (b) which prescribes that in the case of a firm assessable as such any payment of remuneration to any partners who is a working partner, if not authorized by the terms of the partnership deed shall not be entitled for deduction in computing the income chargeable under the head "Profits and gains of business or profession". This section also contains sub-clause (v) which prescribes that any payment of remuneration to any partner who is a working partner who is authorized by and is in accordance with the terms of the partnership deed, then the amount of such payment of partnership should not exceed the aggregate amount as prescribed in this sub-clause. Meaning thereby that section 40, clause (b), sub-clause (ii) and another sub-clause (v) prescribes that a deduction in the case of a firm can be allowed in respect of salary or remuneration to working partners if it is duly authorized by the terms of a partnership deed, however, to the extent of prescribed limit as has also been prescribed in the statute. Therefore, on plain reading of this section, it is understood that the section does not make it mandatory to quantify the amount of salary in one of the clauses of the partnership deed because of the main reason that the monetary limit or ceiling is otherwise prescribed in the statute itself.

The statute has used the term "authorize" and not used the term "quantify". On the other hand, the AO had made the disallowance mainly because of the reason that the amount of salary was not quantified in the clause of the partnership deed and in support he had relied upon CBDT Circular No. 739, dated 25-3-1996. Since the statute has used the term "authorize", therefore, the CBDT had no jurisdiction to substitute the term "authorize" by the term "quantify". While interpreting the clause of a statute there is no scope for importing into the statute some other words which are not there. Such an interpretation, if any, made by any of the authority would amount to an amendment in the statute which is a prerogative of the legislative body, i.e., Hon'ble Members of the Parliament. Even if there be a situation of casus omissus even then the defect can be cured only by a proper legislation and not by any interpretation. There appears no justification to deviate from the general principles of interpretation according to which the intention of the legislature is to be interpreted from the terms used or the words contained in a statute. It is not permissible to add words into a taxing provisions which are not there or exclude words which are there. So, the words contained in a provision must be given a natural meaning as commonly understood in legal parlance.

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Dear Friends : The emails are schedule to be posted in the blog and will sent to the group on carious dates and time fixed. Instead of sending it on one day it is spread on various dates. 

regards. R R Makwana

=============================================================================

Some case laws

2011-TIOL-294-HC-DEL-IT + loss story

CIT Vs M/s Nalwa Investments Ltd (Dated: May 11, 2011)

Income tax – Sections 14, 56, 72(1), 263 – Whether when assessee lends colour of business income to dividend income declared as 'income from other sources' in the previous year and AO allows set off of brought forward losses against such income, it is a fit ground for CIT to invoke revisionary powers u/s 263. - Revenue's appeal allowed: DELHI HIGH COURT;

2011-TIOL-293-HC-DEL-IT

CIT Vs The Simbhaoli Sugar Mills Ltd (Dated: March 9, 2011)

Income tax – Sections 147, 148 – Whether when the assessment was completed u/s 143(3) and the assessee made full and complete disclosure of facts, the reassessment proceedings initiated beyond the expiry of 4 years on the basis of an opinion formed by the internal auditor of the department, cannot be treated valid as it amounts to change of opinion. - Revenue's appeal dismissed: DELHI HIGH COURT;

2011-TIOL-311-ITAT-MUM

Thirumalai Chemicals Ltd Vs DCIT, Mumbai (Dated: December 29, 2010)

Income Tax - Section 40A(2)(b) - Whether disallowance of payments made under section 40A(2)(b) is sustainable when relevant factors influencing cost are not taken into consideration - Whether when both enterprises are in highest tax bracket the exercise of 40A(2)(b) is futile. - Assessee's appeal allowed : MUMBAI ITAT;

2011-TIOL-310-ITAT-MUM

Sanjeev Woollen Mills Vs ITO, Mumbai (Dated: February 4, 2011)

Income Tax - Sections 80HHC, 263, 271(1)(c), 275 - Whether additional ground raised by the assessee challenging that the action of the AO was barred by limitation, is a legal ground and hence the same can be raised for the first time before the ITAT - Whether time taken by CIT(A) in disposing up the quantum appeal is to be excluded to count the limitation period of levying penalty, and hence penalty imposed by the AO within one year after the receipt of CIT(A) order, in pursuance of a notice of initiation, issued at the time of completion of assessment, can not be termed as barred by limitation - Whether after 1.6.2003 it is incumbent on AO to levy penalty after the arrival of CIT(A) order without waiting to the outcome of appeal pending before the ITAT. - Assessee's appeal allowed : MUMBAI ITAT;

2011-TIOL-309-ITAT-MUM

N H Securities Ltd Vs ACIT, Mumbai (Dated: May 11, 2011)

Income Tax - Section 37 - Whether deduction of interest accrued on account of loan borrowed is allowable even in absence of corresponding provisional entry. - Assessee's appeal allowed : MUMBAI ITAT;

SERVICE TAX SECTION

2011-TIOL-610-CESTAT-DEL

M/s Shilpkar Interiors Designers Consultant Pvt Ltd Vs CST, New Delhi (Dated: April 1, 2011)

Service Tax – Commercial or Industrial construction service – Denial of exemption under Notification No 15/2004 ST dated 10.9.2004 on the ground that the service undertaken were only finishing services - Appellant plead that the services are taxable only with effect from 1.6.2007 under works contract – Matter remanded to examine the pleadings in the light of decision of Tribunal in Alstom Projects Ltd. vs. CCE, Delhi 2011-TIOL-459-CESTAT-DEL: DELHI CESTAT;

2011-TIOL-609-CESTAT-DEL

M/s Satish Kumar Contractor Ltd Vs CCE, Panchkula (Dated: February 23, 2011)

Service Tax - Construction Service - Demand - Stay / Dispensation of pre-deposit - The demand of service tax for construction of residential flats is stayed. However, on the question of jurisdiction that the Commissioner with whom they are registered does not have jurisdiction at the place of construction is not acceptable. Assessee directed to deposit 50% of tax liability under dispute on account of jurisdiction and 100% of the tax liability already accepted: DELHI CESTAT;

CENTRAL EXCISE SECTION

2011-TIOL-47-SC-CX + sc story

CCE, Mumbai Vs Sunil Silk Mills (Dated: April 20, 2011)

Excise - Rule ZQ - Penalty has to be equal to the duty - No discretion: if there is any failure to pay the amount of duty by the date specified in sub-rule (3), the assessee is liable to pay penalty equal to an amount of duty outstanding from him at the end of such month or Rs.5,000 /-, whichever is greater. The expression 'shall' used in the said provision, also indicates that such a provision is mandatory. The same view is also taken in the decision of this Court in Union of India and others v. Dharamendra Textile Processors and others 2008-TIOL -192-SC-CX- LB: SUPREME COURT;

2011-TIOL-612-CESTAT-MUM

CCE, Raigad Vs M/s Silvo Liacal Chemicals Ltd (Dated: February 1, 2011)

Hydrogenated Castor Oil in flake form [heading 15.04] melted and spray dried and converted into powder form does not constitute manufacture of a new product – process carried out without any chemical or material being added – no change in form and no change in the chemical composition – nothing new emerged – appeal of revenue seeking classification of impugned goods under heading 38.12 as stabilizer rejected: MUMBAI CESTAT;

2011-TIOL-611-CESTAT-MUM

CCE, Raigad Vs Santogen Exports Ltd (Dated: February 2, 2011)

Furnace oil used by 100% EOU in their boiler is a consumable and is eligible for exemption under Notification No.1/95-CE - Revenue Appeal rejected: MUMBAI CESTAT;

CUSTOMS SECTION

NOTIFICATION

ctariff11_040

Regarding inclusion of ICD Marripalem (Guntur Dist.) in Customs Notifications under specified Export Promotion Schemes;

CASE LAW

2011-TIOL-295-HC-DEL-CUS + cus story

Jagmohan Singh Vs CCE (Dated: April 27, 2011)

Customs - One Statement retracted but penalty imposed on the basis of un-retracted statement and corroborative evidence - Penalty Upheld: Tribunal has come to a specific finding that the appellant herein had issued airway bills; he had acted as an agent of the 5 concerns which were owned by Sh. Tejwant Singh; he played his role on specific instructions of Sh. Tejwant Singh; and he was dealing with the Customs Officers in respect of export of these very goods. The Tribunal is thus categorical that the appellant was connected with the procurement of the goods by the exporters and there were other statements and sufficient material to implicate the appellant. : DELHI HIGH COURT;

WRITING A WILL

WRITING A WILL

Gajanan Khergamker


According to the provisions of law, Hindus, Jains, Sikhs, Christians, Jews and Parsis should make their will in writing. However, if the people belonging to these religions are members of the armed forces employed in an expedition or engaged in actual warfare or mariners at sea, then, they are allowed to make an oral will. Oral wills made in such circumstances are known as privileged wills. Otherwise, only Muslims are allowed to make oral wills, as their personal laws permit them to do so. However, if a Muslim makes a will in writing, such a will would not be void.
There is no particular format, for a will to be legal. To avoid confusion of any sort, it is always better to keep the language of the will as simple as possible. It should be kept free of technical words, so that the language is easily understandable and leaves no room for any misinterpretation. A will should be worded in such a way that the intention of the testator (the person making the will) is clear. A benefit bestowed under a will is called a bequest. A will or bequest that does not express a definite intent is void, due to uncertainty.
Under the Indian Stamp Act, it is not necessary to execute a will on stamp paper. So, a will can be made on any plain paper, which for practical purposes, should be of a durable kind. A will does not need to be typed. It can be hand-written by the testator, with a ball-point pen or a fountain pen. A hand-written will is known as a holograph will. While no one can deny the legality of a hand-written will, it is always better to leave plenty of empty margin space on both sides of the paper, while typing a will. This is because there is always a chance that the testator's handwriting could be illegible and could cause unnecessary confusion.