ITR reports Issue dated 20.06.2011 Volume 334 part 4

INCOME TAX REPORTS (ITR) HIGHLIGHTS

ISSUE DATED 20-6-2011

Volume 334 Part 4

HIGH COURT JUDGMENTS

--> Reassessment during pendency of proceedings before High Court on ground that a larger amount than that disclosed had been received : Direction by Tribunal for assessment of additional amount similar to original amount valid : Debaprasad Paul v. CIT (Cal) p. 274

--> Waiver of interest before end of accounting year : Interest did not accrue to assessee : Bagoria Udyog v. CIT (Cal) p. 280

--> Tribunal recording admission by counsel for assessee : Application by assessee denying admission should be considered on merits : Bagoria Udyog v. CIT (Cal) p. 280

--> Tribunal finding assessee could not prove gift : Assessment u/s 68 valid : Balbir Singh v. CIT (P&H) p. 287

--> Acquisition of company and subsequent sale : No evidence that transaction was not genuine : Loss deductible : CIT v. Oberoi Hotels P. Ltd. (Cal) p. 293

--> Publication of papers and holding of seminars ancillary objects : Institution cannot be denied exemption : New Noble Educational Society v. Chief CIT (AP) p. 303

--> Amount paid for parking autorickshaws deductible : CIT v. Gautam Motors (Delhi) p. 326

--> Provision for pension payable on retirement/resignation of eligible employees entitled to deduction :CIT v. Ranbaxy Laboratories Ltd. (Delhi) p. 341

--> Duty drawback benefits do not form part of net profit : CIT v. Ranbaxy Laboratories Ltd. (Delhi) p. 341

--> No discovery in search : S. 69A not applicable : CIT v. Concorde Capital Management Co. Ltd. (Delhi) p. 346

--> Joint Director of I. T. (Investigation) cannot issue warrant unless authorised specifically by notification of CBDT : CIT v. Capital Power Systems Ltd. (Delhi) p. 349

--> Search taking place after close of financial year : Assessee liable to pay interest u/ss. 234B and 234C and entitled to benefit of payment out of seized cash from date of making application for adjustment of seized cash towards tax liability : CIT v. Arun Kapoor (P&H) p. 351

--> Assessee requesting prior to due date for payment of instalment of advance tax to adjust advance tax payable out of cash seized : Assessee entitled to adjustment : CIT v. Ashok Kumar ( P&H) p. 355

--> Arrears of rent received taxable in year of receipt : CIT v. R. J. Wood P. Ltd. (Delhi) p. 358

--> Tribunal finding expenditure actually incurred : Finding of fact : CIT v. H. B. Leasing and Finance Co. Ltd. (Delhi) p. 367

--> Letter by developer showing receipt of a sum as advance from assessee : AO before discarding evidence ought to have summoned developer to find out fact : Faiz Murtuza Ali v. CIT (Delhi) p. 370

--> Interest on borrowed capital : No disallowance in terms of s. 14A : Tribunal not justified in directing consideration of disallowance u/s 14A : Topstar Mercantile P. Ltd. v. Asst. CIT (Bom) p. 374

--> Tribunal finding no nexus between borrowed funds and amount advanced : Assessee entitled to deduction : CIT v. Century Flour Mills Ltd. (Mad) p. 377

--> Suppression of sales : AO to consider set off of amount which has been legalised by payment of tax : Balaram Saha v. CIT (Cal) p. 383

--> Liquor license in individual name of partner but business carried on by firm : Firm not legal : CIT v. Swarna Bar Restaurant (AP) p. 387

--> Purchase of assets from franchisee companies : No defects in valuation reports : Depreciation allowable : CIT v. Pepsico India Holdings P. Ltd. (Delhi) p. 404

--> Units purchased cum-dividend : Sales ex-dividend : Loss allowable : Eveready Industries India Ltd. v. CIT (Cal) p. 413

--> Reassessment on ground computation of deduction u/s 80HHC not correct not valid : Cadila Healthcare Ltd. v. Deputy CIT (Guj) p. 420

--> Assessee entitled to benefit under VDIS where no prosecution initiated or pending when she applied for certificate under VDIS : CIT v. Smt. Meena Goyal (Uttarakhand) p. 428STATUTES AND NOTIFICATIONS

The Supreme Court :

--> Advance tax : Interest whether leviable where tax deducted at source and deductor paying tax with interest p. 306

--> Appeal to High Court : Substantial question of law p. 306

--> Book profits : Computation : Deduction under section 80HHC p. 306

--> Business expenditure : Deferred revenue expenditure : Allowability p. 307

--> Business expenditure : Professional fees, consultancy charges p. 307

--> Business income or capital gains : Profit from sale and purchase of shares p. 307

--> Business or investment : Two separate portfolios p. 308

--> Capital gains : Short-term capital loss p. 308

--> Capital or revenue expenditure : Expenditure on new project p. 308

--> Cash credit : Genuineness of transaction p. 309

--> Charitable purpose : Foreign exhibition expenses whether application of income under section 11(1)(a)p. 309

--> Co-operative bank : Interest from non-SLR funds whether attributable to banking business p. 309

--> Deduction of tax at source : Hotel charges, navigational facility and landing charges paid by airline company whether "rent" p. 310

--> Deduction of tax at source : Revenue sharing under franchisee agreement, whether payment of rent for premises p. 310

--> Depreciation : Lessor whether owner of assets p. 310

--> Depreciation : Plant and machinery received as grant p. 311

--> Exemption : Compliance with section 11(5) p. 311

--> Heads of income : Letting of premises with fittings : Apportionment of income as between two heads p. 311

--> Industrial undertaking : Core lamination whether manufacture of article or thing p. 312

--> Penalty : Wrong claim to deduction whether furnishing inaccurate particulars p. 312

--> Search and seizure : Retention of seized assets p. 312

Rules :

--> Income-tax (Third Amendment) Rules, 2011 : Gazette reference p. 328

Notifications :

--> Income-tax Act, 1961 : Notifications under section 10(23C)(iv)/(vi) : Approved institutions p. 327

--> Income-tax Act, 1961 : Notifications under section 35(1)(ii)/(iii) : Scientific research associations notified by the Central Government for the purpose of section 35(1)(ii)/(iii) p. 323

--> Income-tax Act, 1961 : Notification under section 90 : Agreement between the Government of the Republic of India and the Government of the Isle of Man for the Exchange of Information with respect to taxes p. 313

NEWS-BRIEF

F Double Taxation Avoidance Agreement between India and Mozambique notified

The Government of India notified the Double Taxation Avoidance Agreement (DTAA) with the Government of Mozambique for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income on May 31, 2011.

The DTAA provides that business profits will be taxable in the source State if the activities of an enterprise constitute a permanent establishment in the source State. Profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. Capital gains from the sale of shares will be taxable in the country of source. The DTAA further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

The DTAA will provide tax stability to the residents of India and Mozambique and facilitate mutual economic co-operation as well as stimulate the flow of investment, technology and services between India and Mozambique. [Source : www.pib.nic.in dated June 2, 2011]

F Black money : CBDT plans global information hub

The Central Board of Direct Taxes (CBDT) is coming up with an information hub with a view to fast-tracking money laundering and tax evasion cases and make exchange of tax-related information easier and faster between India and other countries. The exchange of information unit (EoIU) in New Delhi, a part of the Income-tax Department, will provide and exchange information on issues related to direct taxes-suspicious transactions, tax evasion, money laundering, income generated through business activities by companies in India and abroad, and issues covered under the existing Double Taxation Avoidance Agreement (DTAA).

India currently has amended DTAAs with 40 nations for sharing bank and tax-related transactions.

"Information will be provided and exchanged between the competent authorities of the two countries, which will be helpful for the newly-created Directorate of Income-tax (Criminal Investigation) in probing cases both in India and abroad," a Finance Ministry official said.

The unit will act as a nodal point, where all information coming to India from other countries including tax havens shall be processed, classified and disseminated to tax authorities across the country. "It is a two-way process and similar information will be provided to tax authorities abroad," the official said.

The implementation is in the final stage and the board is looking out for a location outside the North Block to set up the unit. "The software required to operate this unit is ready and once a location is finalised, the unit will be operational," the official said.

However, according to a section of tax officials, the shortage of manpower may affect the functioning of the new unit. [Source : www.hindustantimes.com dated June 7, 2011]

F Tax evasion may be a criminal offence

In a throwback to the past, the committee on black money is considering making tax evasion a criminal offence.

But given the pressure on the Government to crack down on black money, the proposal is back on the table though it might require amendment to the law. The move would create a strong deterrent as evaders simply pay tax and penalty.

In the past, Government had provisions under laws such as FERA to put offenders behind bars even for minor offences. Given the misuse and economic liberalization that led to several controls on foreign capital vanish, the Government repealed it and replaced it with Foreign Exchange Management Act (FEMA). The review is being initiated along with a fresh look at FEMA, Prevention of Money Laundering Act and those dealing with indirect taxes, the official who was present in the committee's meeting said.

Members of the committee were also of the opinion that instead of enacting a fresh law to deal with black money, a better option would be to plug the gaps.

Given the pressure on the Government to act on black money and corruption, the committee headed by the CBDT chairman has decided that Government agencies would exchange notes in around 10 days and work out the basic structure by the end of June so that the six-month deadline is met.

Over the last few weeks, the Finance Ministry has been moving at full speed and has set up at least three committees related to generation of illicit wealth besides roping in experts to estimate the extent of black money in the economy. [Source : www.economictimes.com dated June 10, 2011]

F Committee to examine recovery of income-tax demand organised at centre 

In order to examine certain suggestions on income-tax demand classified under the categories "Assessees not traceable" and "No assets/inadequate assets for Recovery", a Committee has been constituted by the Central Board of Direct Taxes (CBDT) with DGIT (Admn.) as Chairperson.

The modified terms and conditions of the Committee will be as follows :-

(i) To suggest modalities for utilization of the information available with FIU-IND and the Directorate of income-tax (Systems) for the recovery of outstanding demand in such cases.

(ii) To examine the possibilities of engaging the outside agencies to locate the whereabouts of non-traceable assessees or their assets and also unknown/undisclosed assets owned by the assessees with inadequate assets vis-a-vis the outstanding demand.

(iii) To propose a reward scheme for informants who supply information about such tax defaulters and which results into collection of the outstanding demand.

(iv) To propose a scheme regulating such outsourcing to outside agencies for its administration by the field formation.

(v) To examine the feasibility and methodology of putting the names of chronic tax defaulters in public domain.

The Committee shall submit its report within two months of its constitution.

Earlier, it was noticed that there is a huge outstanding demand which is not recoverable due to the following reasons :

(i) Demand difficult to recover due to reason that assessee is not traceable.

(ii) Demand difficult to recover due to reason that no assets are available for recovery.

Attempts are being made from time to time to recover this outstanding demand by using the asset and bank information available with the Finance Intelligence Unit (FIU) and Annual Information Report Data of System Directorate of Income Tax Department. To further achieve this objective, synergy in the functioning of Directorate of Recovery, Directorate of Systems, CBDT and Financial Intelligence Unit is also created. [Source : www.pib.nic.in dated June 8, 2011]

F Low income category absolved from filing income-tax return

As many as 85 lakh salaried taxpayers whose taxable income, including salary and interest income, is up to Rs. 5 lakh, are not required to file income-tax return from now onwards.

"No income-tax returns is required for salaried persons whose annual taxable income including salary and interest is up to Rs. 5 lakh. We would shortly notify this," a Central Board of Direct Taxes official said.

However, he said this would not cover income from other sources like house property, capital gains and gains from profession and business.

The scheme would be applicable from assessment year 2011-12 onwards. This means that the salaried persons eligible under the scheme would not have to file returns for the financial year 2010-11 in 2011-12 (assessment year).

Under the scheme, those salaried persons who want to claim tax refund, would have to file income-tax return.

As per the Memorandum to the Finance Bill, 2011, the Government will be issuing a notification exempting "classes of persons" from the requirement of furnishing income-tax returns.

Under the scheme, the salaried person who wants exemption from filing IT return, has to disclose about the incomes like dividend and interest to his employer for tax deduction.

In the scenario, the Form 16 issued to salaried employees will be treated as income-tax return. At present, it is obligatory for all salaried persons to file income-tax return under the Income-tax Act, 1961.

The idea behind the move is that in cases where there are no other sources of income, filing of a return is a duplication of existing information. [Source : www.economictimes.com dated June 6, 2011].

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ITAT (DEL) : claim u/s 10A benefits from FE. Favor of revenue

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Whether assessee is entitled to claim Sec 10A benefits even if foreign exchange fluctuation gain is derived from ECBs and not from export activity - NO: ITAT

THE Income Tax – Sections 10A, 143(3), 263 – Whether assessee is entitled to deduction u/s 10A even if the foreign exchange fluctuation gain is derived from external commercial borrowings and not from the export activity. NO is the Tribunal's answer.

Facts of the case

Assessee company had raised external commercial borrowings from its parent company for meeting its working capital requirements which were reinstated on year end which resulted in a notional foreign exchange gain of Rs. 382,15,000/- to the company. After adjusting the loss on export remittance, net income of Rs. 3,52,90,374/- was shown as "other income" in the profit and loss account and deduction was claimed u/s 10A – AO accepted the claim of the assessee in the order made u/s 143(3).

CIT initiated proceedings u/s 263 of the IT Act stating that the assessee had shown income from foreign exchange fluctuation gain of Rs. 352,90,374/- under the head "other income" and this income was different from "income from operation". Provisions of section 10A envisage deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software so such deduction on foreign exchange gain u/s 10A was clearly deviation from law and directed the AO to not allow deduction u/s 10A on the said amount - accordingly deduction claimed by the assessee u/s 10A on foreign exchange gain of Rs. 352,90,374/- was disallowed by AO.

CIT (Appeal) dismissed the appeal of the assessee observing that the deduction u/s 10A on the `other income' which was derived on account of fluctuation of foreign exchange did not satisfy the mandatory conditions of section 10A and was rightly disallowed.

In appeal before the ITAT, an additional plea was raised by assessee that no income had accrued to it, as it was a case of merely reflecting the income by a book entry made in accordance with the AS 11 issued by the ICAI - the said sum did not represent an income, since it was an amount, which represented the difference between the amount credited to the account of the loan creditor by adopting the rate of exchange in Indian Rupees to the Foreign Currency on the date of raising the loan and the rate of exchange at the close of the year, which sum alone was the liability to be discharged by the assessee - thus there was no gain other than artificial gain.

After hearing both the parties, the ITAT held that,

++ followed the decision of Supreme Court in the case of Woodword Governor India Pvt. Ltd. (2009-TIOL-50-SC-IT) in which it was held that "in case of revenue item falling under section 37(1), paragraph 9 of AS-11, which deals with recognition of exchange differences, needs to be considered. Under that paragraph, exchange differences arising on foreign exchange transactions have to be recognized as income or as expenses in the period in which they arise". The assessee was following mercantile system of accounting. The same is followed in respect of fluctuation in rate of foreign exchange. The assessee has made entries in the books on this basis for profits and losses. Rule 115 requires that reduction in liability on revenue account on account of rate of foreign exchange shall be reckoned on the last date of the previous year as per telegraphic transfer buying rate. This means that any reduction in liability, leading to revenue gain will have to be accounted as profits in case of business income. Thus, this rule independently reinforces the contents of AS-11 for recognition of income as well as loss arising on revenue account. Thus the additional ground was dismissed;

++ section 10A(1) provides for connotation of such profit or gain as are derived from the export of articles or things or computer software. By using the expression "derived from" in S. 10A(1), the Parliament intended to cover sources not beyond the first degree. Gain is not on account of fluctuation in foreign exchange relating to assessee's export activities. The same is with respect to the external commercial borrowings. This cannot be termed as derived from the export activity of the assessee. Section 10A(4) only provides the formula for computing profits derived from the export activity. First, the income or gain has to be derived from export activity, only then the computation formula can be applied. Thus, the assessee is not entitled to deduction u/s 10A.

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Penalty 271(1)(c)

(2010) 34 (II) ITCL 552 (Mum `B'-Trib)

ACIT v. Bhoruka Logistics (P) Ltd.


Counsel: Shri M Jagdish, Shri SS Rana Appellant Rep by q None Respondent Rep by


ORDER


This is an appeal filed by the revenue directed against the order of the Commissioner (Appeals)-VI, Mumbai dated 12-05-2009 for the assessment year 2005-09 on the following grounds :


"On the facts and in the circumstances of the case, the Ld. Commissioner (Appeals) has erred in cancelling the penalty levied depending on the decision of the Hon'ble Apex court in the case of Dilip N. Shroff v. JCIT (2007) 16 (I) ITCL 246 (SC) : (2007) 291 ITR 519 (SC) ignoring the decision of the Hon'ble Apex court in the case of UOI v. Dharmendra Textile Processors and others (2008) 306 ITR 277 (SC)."


2. None appeared on behalf of the assessee despite visual of notice. A letter dated 7th May, 2010 was filed by the Chartered Accountant firm requesting for adjournment. As no power of attorney has been filed, no cognizance is taken of this letter. As nobody has filed a power of attorney, and as none appeared on behalf of the assessee, we dispose of the case exparte, qua the assessee, on merits, after hearing the learned DR.


3. Facts in brief :


The assessee is a company and is engaged in the business of transporter and public carrier. During the course of assessment proceedings, the assessing officer made a disallowance under section 40(a)(ia) of the Act by observing that the assessee had deducted tax at source but there was some delay in payment of TDS in the Govt. Treasury. The assessing officer asked the assessee to file details of party-wise freight rate, with corresponding details of TDS deducted and the date on which the amount was credited in the Govt. Treasury. The assessee admitted delay and requested the assessing officer to disallow the amount under section 40(a)(ia) of the Act. He requested that the amount in question should be allowed as an expenditure in the assessment year 2006-07, as the payment of TDS was made in that year. The assessing officer disallowed this amount of Rs.56,38,686/- under section 40(a)(ia) in this year and also levied a penalty under section 271(1)(c) by observing that the assessee had made a mention about the delay in TDS payment in the audit report, while at the same time, he did not disallow the amount in the computation of income filed by it. Thus he concluded that the assessee had furnished inaccurate particulars of income. He levied a penalty under section 271(1)(c) of the Act. Aggrieved, the assessee carried the matter in appeal.


4. The first appellate authority agreed with the submissions of the assessee that the disallowance of expenditure does not amount to concealment of income or furnishing of inaccurate particulars of income. He held that the assessee had made full disclosure. He deleted the penalty. Aggrieved, the revenue is in appeal before us.


5. We have heard Mr. M. Jagdish and Mr. S.S. Rana, the learned representatives appeared on behalf of the revenue.


6. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below, we hold s follows.


7. This is a case where the dispute arose against the disallowance of expenditure in view section 40(a)(ia) of the Act. The assessee had in fact paid TDS and it is not in dispute that the expenditure should be allowed in the subsequent year in which the TDS has been paid to the Govt. Treasury. The first appellate authority, in our considered opinion, has rightly relied upon the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Ajain Singh & Co. (2002) 253 ITR 630, wherein it is held that mere disallowance of expenditure will not per se amount to furnishing of inaccurate particulars of income. At para 4 page 3 of his order, the first appellate authority rightly held as follows :


" Once the explanation of the assessee is not considered false and explanation has been given, the penalty can only be levied if the explanation is not bona fide and full details for the computation of income has not been given by the appellant. It may be noted that Rajasthan High Court decision in (2001) 251 ITR 373 has enunciated the principle of bona fide, wherein it has been held that there is presumption that explanation given is bona fide unless proved to be otherwise."


We uphold this finding of the first appellate authority.


8. In the result, the appeal of the revenue is dismissed.

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Exemption under s 10(23C)(vi)

Exemption under s 10(23C)(vi)

The assessee, a registered-society providing education to children upto 12, has been running a school named Little Angels High School. The assessee filed an application seeking an exemption under s 10(23C)(vi) for the AY 2007–2008. Exemptions were granted to the assessee under s 10(20), which stood omitted by the Finance Act (No. 2), 1998 w.e.f. 1 April 1999 and was replaced by s 10(23C), which contains exemption provisions for educational institutions. The Chief CIT rejected the assessee’s application for an exemption under s 10(23C)(vi) on the ground that the assessee-society does not exist solely for educational purposes and two objects, ie to manage/maintain a library and a reading room, and conduct classes in stitching, embroidery, weaving, function as a centre for adult education and provide education in the filed of entertainment arts, etc, and to make necessary arrangements for the overall development and growth of children when required, are non-educational in nature and the society can apply its income to any of the objects mentioned in the memorandum in its discretion. Being aggrieved, the assessee has filed the present writ petition.

The issue is whether the educational society can be denied an exemption under s 10(23C) on the ground that it has introduced the object to manage/maintain a library and a reading room, and conduct classes of stitching, embroidery, weaving, function as a centre for adult education and provide education in the field of entertainment arts, etc, and the same was not for educational purposes.

In the instructions issued by the Board of Secondary Education in regard to practical examinations for home science, stitching, embroidery and weaving subjects have been mentioned. Adult education is also a part of education. If an educational society introduced the aforesaid object, it cannot be said that the object of the petitioner society was not of educational purposes. The other object of the society to manage/maintain a library and a reading room is a necessary arrangement for the complete development of the children and it is in consonance with the modern concept of education because education is not only to impart education through book reading, it also includes sports activities and other recreational activities, dance, theatre, and even through having an education tour within the country and abroad so the children can develop their overall talent. It cannot be said that the object is not for educational purposes.

An educational institution cannot be denied exemption under s 10(23C) on the ground that it has introduces the object to manage/maintain a library, reading room, and conduct classes of stitching, embroidery, weaving, function as a centre for adult education and education in the field of entertainment arts, etc, and same was not for educational purposes — as held by MPHC in Little Angels Shiksha Samiti v UOI — In favour of: The Assessee ; Writ Petition No. 1733 of 2008

Decided on: 30 March 2011

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ITAT (DEL) : -Software embedded in off-shore supply may be taxable even if supply not taxable

Raytheon Company vs. DDIT (ITAT Delhi)

Software embedded in off-shore supply may be taxable even if supply not taxable

The assessee, a USA company, entered into two separate contracts with AAI, one for supply of equipment and the other for rendering installation and training services. The AO & CIT(A) held (i) that the two contracts were an "indivisible works contract", (ii) that as the supply involved embedded software, the income had to be bifurcated between "supply of equipment" and "royalty" in the ratio of 30:70, (iii) that the equipment-supply profits had accrued on completion of contract and not at the time of transfer of title, (iv) that 50% of the equipment-supply profits was attributable to the assessee's PE in India and this was taxable at the global profit rate of 13.4%. On appeal to the Tribunal, HELD:

(i) The two contracts constitute one agreement because (a) the essential purpose of both contracts was to set up the ATS, (b) the contract for supply of equipment and software would have been of no consequence without installation and performance services, (c) the dates of payment for the supply contract were connected with the service contract and (d) it was difficult to segregate the contract from installation/service contract (Ishikawajima-Harima 288 ITR 408 (SC) referred);

(ii) The PE came into existence on clearance of the goods in India because after transfer of title outside India, the possession was handed over to the assessee for safe custody, installation etc. This required storage space and supervision which cannot be said to be preliminary or auxiliary activities in nature as the equipments were required to be installed;

(iii) The bifurcation of revenue into supply of equipment and software in the ratio of 30:70 had to be upheld because (a) though the software was embedded in the equipment and supplied as one package for one price, it was permissible to segregate the composite consideration into different components and (b) the assessee had not shown the segregation done by the customs authorities for imposing duty on the equipment and software (Rotem Company 279 ITR 165 (AAR) & Motorola 95 ITD 269 (SB) referred);

(iv) In a turnkey contract, in which the assessee is under obligation to supply the equipment and the software and also install them, the profit is taxable on completion of each milestone and not at the time of handing over the functioning system to the contracting party. The department's argument that in a works contract, mere supply of equipment and software is of no consequence till installation and so profits should be taxed at that stage is not correct because even if "turnkey", the taxable events in the execution of a contract may arise in several stages in several years if the obligations under the contract are distinct ones. The supply profits are consequently not taxable as it accrued on supply outside India;

(v) On facts, as the supply of equipment and software constituted a milestone in the contract, the income therefrom arose in the year of shipment which was in an earlier year. It did not accrue or arise in the present year. As the PE came into existence when the equipment was handed over to it by the AAI, the profits from installation contract and services was taxable.

Note: In Motorola Inc vs. DCIT 95 ITD 269 (Del)(SB) it was held that supply of embedded software in equipment was not taxable as "royalty" on the ground that the users had acquired a "copyrighted article" and not a "copyright". See Also DIT vs. LG Cable Ltd 237 CTR 438 (Del)

Related Judgements
1.DIT vs. LG Cable Ltd (Delhi High Court) Though the two contracts were entered into on the same day and between the same parties, the department's argument that they should be viewed as a composite contract is not sustainable because even assuming they should be read as one turnkey contract, offshore supplies are not taxable in India…

2.L. G. Cable Ltd vs. DDIT (6.2 MB) (ITAT Delhi) Where the assessee, a Korean company, had entered into two contracts, one for on-shore execution of a fiber optic system and the other for offshore supply and services and it had a project office in India and the question arose whether any part of the profits from offshore supply…

3.Airports Authority vs. DIT (AAR) Where the applicant entered into a contract with Raytehon USA for the acquisition of hardware and customized software and the title to the hardware was to pass outside India and all activities under the contract (except for installation and support activities) were to be performed by Raytheon outside India,…

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High Court, appeals to [Section 260A] : High Court cannot condone d

Income-tax - High Court, appeals to [Section 260A] : High Court cannot condone delay in filing appeal - [2011] 9 taxmann.com 269 (MP)

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Block assessment

Undisclosed income — Matter remitted to Tribunal to decide as to whether M/S Globe Meditech was dummy concern of assessee and whether order of CIT(A), dealing with addition and holding that assessee herein was not benamidar, was correct or not, as held by Del HC in CIT v Mukesh Luthra — In favour of: Others; ITA Nos 1115, 1122 of 2009.

CIT v Mukesh Luthra
High Court of Delhi
ITA Nos. 1115, 1122 of 2009

A K Sikri and M L Mehta, JJ
Decided on: 3 June 2011

Counsel appeared:
Ms Prem Lata Bansal, Sr. Adv. & Mr Deepak Anand, Adv. for the appellant
Mr Ajay Vohra, Ms Kavita Jha & Mr Somnath Shukla, Advs. for the respondent

Judgment
Per: A K Sikri, J:
1. On 18.05.2001, ITA No.1115 of 2009 was admitted on the following substantial question of law: “Whether order passed by ITAT is perverse in law and on facts when it deleted the addition of Rs.92,29,561/- ignoring the material fact that said concern was a dummy concern and that the money was reflected in the regular books of accounts though found during the course of search and therefore, the addition could be made only in the regular assessment.”

2. The question of law in ITA No.1112 of 2009 is the same except the quantum of addition.

3. As the counsel for the parties were ready to argue the matter finally at that stage itself, the hearing also took place immediately after the admission of the appeal. The counsel for the parties took time to file the written submissions which have been filed as well. The dispute which has given rise to the aforesaid substantial question of law can be traced from the following events.

A search was carried in the case of the assessee on 30.08.2001. The assessee is a Director and one of the major shareholders of M/s CCIL which is in the business of running of health care centre under the name and style of M/s VLCC.
The assessee is also proprietor of M/s Shine International & Fashion dealing in export of garments. The assessee filed the block return on 31.12.2002 declaring undisclosed income at NIL.
Block assessment was completed on 31.10.2003 at undisclosed income for the block period at Rs.10,19,594/-.


4. In the course of block assessment proceedings, AO was noticed that there is a concern M/s Globe Meditech in the name of Shri Rajesh Khurana and this concern was in fact controlled by the assessee, Shri Mukesh Luthra. It was also noted by the AO that to investigate the case further, assessment in the case of Shri Rajesh Khurana for Assessment Years 1999-20000 to 2001-02 were reopened and on analysis of various evidences listed in detail in the case of Shri Rajesh Khurana.
In the said order, passed on 27.02.2004, it was held that M/s Globe Meditech is, in fact, a dummy concern of Shri Mukesh Luthra, but operated in the name of Shri Rajesh Khurana.
The AO reproduced the entire assessment order of Shri Rajesh Khurana in the assessment order for the present two assessment years in the name of the assessee. The AO added the income of Rs.92,29,561/- in Assessment Year 2001-02 and Rs.66,87,523/- in Assessment Year 2002-03 in the hands of the assessee on substantive basis which were added in the hands of Shri Rajesh Khurana on protective basis. The assessee carried the matter in appeal before the CIT(A) in both the years.

5. In Assessment Year 2001-02, the CIT(A) set aside the assessment that any undisclosed income for the period covered by search can be assessed only under section 158BC of the Income Tax Act (hereinafter referred to as 'the Act'). It was observed by him that if regular assessment is pending pertaining to the block period, only such income should be considered in the regular assessments, the detail of which is disclosed in the books of account maintained in the normal course of business by the assessee. Even on merits, the addition was deleted as it was held by CIT(A) that no evidence had been found to assume that the assessee is the owner of M/s Globe Meditech. The CIT(A) opined that the onus was on the AO to prove that M/s Globe Meditech belongs to the assessee, but the AO had not brought on record any material which could establish that the profits out of the business of M/s Globe Meditech were enjoyed by the assessee either through direct or circumstantial evidence. On this basis, it was held by CIT(A) that he was unable to accept the AO's view that what is apparent is not real and that Shri Rajesh Khurana is the benamidar of Shri Mukesh Luthra. On this basis, he deleted the addition in Assessment Year 2001-02. In the Assessment Year 2002-03, he deleted the addition by following his order in Assessment Year 2001-02.

6. The Department/Revenue preferred appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') against the aforesaid findings of the CIT(A) deleting the addition for both the assessment years. The Tribunal has repelled the challenge laid by the Department concurring with the opinion of the CIT(A) that the matter could be gone into and examined in the course of block assessment and addition could be made in those proceedings if the AO was in a position to establish that M/s Globe Meditech was a dummy concerned of the assessee. For this reason, the Tribunal did not go into the merits.

7. It is in this backdrop the issue that has arisen for consideration is whether addition could be made in the regular assessment proceedings as done by the AO or it could be the subject matter of block assessment proceedings alone.

8. In an endeavour to demonstrate that the course of action taken by the AO was valid and justified, Ms. Prem Lata Bansal, learned Senior Counsel appearing for the Revenue argued that search at the premises of the assessee was conducted on 30.08.2001 and much thereafter belated return for the Assessment Year 2001-02 was filed on 31.12.2002. It is during the block assessment proceedings that the AO noticed that there was a concern M/s Globe Meditech in the name of Shri Rajesh Khurana which was, in fact, controlled by the assessee herein. Since the entries were recorded in the regular books of account maintained for M/s Globe Meditech and Shri Rajesh Khurana, proprietor thereof regularly filing the returns declaring the income earned from M/s Globe Meditech, as far as Shri Rajesh Khurana is concerned, the assessment in respect of Assessment Years 1999-2000, 2000-01, 2001-02 were reopened under section 148 of the Act, which resulted in passing of the reassessment orders on 27.02.2004 making protective assessment in his hands. According the learned Senior Counsel, since the entries were recorded in the regular books of account of M/s Globe Meditech, insofar as Shri Rajesh Khurana its sole proprietor is concerned, no addition could be made by the AO for the block assessment year and therefore, proceedings were rightly initiated under section 148 of the Act. According to her, such a course of action was in conformity with the judgment of this Court in the case of Commissioner of Income Tax v Ravi Kant Jain [250 ITR 141], wherein it is held that the block assessment under Chapter XIV of the Act is not intended to be a substitute for regular assessment. It was also contended that unless and until the transactions were examined in the hands of M/s Globe Meditech, the AO could not have made any additions in the hands of the present assessee, Shri Mukesh Luthra. She argued that in a sense, in the case of the present assessee, the AO has only lifted the veil and found out that M/s Globe Meditech actually belonged to the assessee and not Shri Rajesh Khurana. Otherwise, all the entries have been recorded in the books of account maintained in a regular manner by M/s Globe Meditech. Therefore, the AO was justified in making the additions in the regular assessment.

9. Mr. Ajay Vohra, learned counsel appearing for the respondent, on the other hand, sought to justify the orders of the Tribunal which has held that such a course of action was available only in the block assessment. His submission was that as per provisions of Chapter XIV-B, in the block assessment, additions can be made for income which is relatable to evidence unearthed during the course of search. Any other income would be outside the purview of block assessment and can only be added in the regular assessment proceedings. Conversely, in the regular assessment, no addition can be made for income which has its genesis in materials found during the course of search. In other words, block assessment and regular assessment are mutually exclusive. While in the block assessment, addition can only be made for undisclosed income discovered during the course of search, such income cannot be the subject matter of regular assessment. He referred to the judgment of this Court in the case of Commissioner of Income Tax v Jupiter Builders P. Ltd. [287 ITR 287 (Del) and the judgment of the Gujarat High Court in the case of N.R. Paper and Board Limited and Ors. v Deputy Commissioner of Income Tax [234 ITR 733].

10. He argued that in the present case, the apparent position is that M/s Globe Meditech is the proprietary concern of Shri Rajesh Khurana. On the basis of evidence alleged to be found during the course of search, it is the allegation of the Revenue that the apparent is not the real, viz., that M/s Globe Meditech is not owned/controlled by Shri Rajesh Khurana but is a dummy concern of the respondent assessee. Such an allegation raised by the Revenue is sought to be substantiated by documents alleged to be found during the course of search at the premises of the respondent assessee. In that view of the matter, such addition, if otherwise sustainable, could only be made in the block assessment proceedings.

11. We have considered the respective submissions.

12. We are of the firm view that the view taken by the Tribunal is not proper in law. Learned Counsel for the Revenue is right in her contention that it is not a case where any evidence was unearthed during the course of the search. In fact, it was during block assessment proceedings the AO noticed that M/s Globe Meditech was in fact controlled by the assessee herein, though one Mr. Rajesh Khurana was shown as the proprietor of the said firm. Otherwise, entries were recorded in the regular books of accounts maintained by M/s Globe Meditech and Sh. Rajesh Khurana was even filing the income tax return declaring his income earned from M/s Globe Meditech as its proprietor. It was thus a case of lifting of the veil by the Assessing Officer and this could be done in the regular assessment proceedings, insofar as the assessee is concerned. At the same time, protective assessment is made at the hands of Mr. Rajesh Khurana in whose case the assessment is reopened under section 148 of the Act as that was the only course of action available qua Rajesh Khurana.

13. We, therefore, set aside the order of the Tribunal. Since the Tribunal has not gone into the merits of the additions made by the AO, the matter is remitted back to the Tribunal to decide as to whether M/s Globe Meditech was a dummy concern of the assessee herein and the order of the CIT (A) dealing with the addition holding that the assessee herein was not the benamidar is correct or not. The question of law is answered in the aforesaid terms, without any order as to cost.

14. The appeal is disposed of accordingly.

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