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

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

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

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

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

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

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

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

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

Doctrine of unjust enrichment - recovery of entertainment tax from cinema goers

Doctrine of unjust enrichment - recovery of entertainment tax from cinema goers during availment of exemption is recoverable; when law is not clear, superior courts not to interpret law in such a way as to confer unjust benefit to any party: SC

NEW DELHI, AUGUST 08, 2009: THE Supreme Court had recently delivered a landmark Judgment on the doctrine of unjust enrichment. In instances where an assessee recovers tax from taxpayers in spite of an exemption (absolute or partial) from levy of tax and retains the same without depositing the same with the State, by following the ratio laid down by the Apex Court in Mafatlal Industries Ltd vs. Union of India 2002-TIOL-54-SC-CX , the Court held that it amounts to unjust enrichment; but at the same time it was held that if the provisions for recovery are not clear in the Statute then the Superior Courts cannot interpret the statute in such a way so as to confer an unjust benefit to any of the parties, i.e. the taxpayer or tax collector or the State. The brief facts of the case are as follows:

A multiplex theatre in Brihan Mumbai Municipal Corporation limits was enjoying the exemption from levy of entertainment tax conferred by the State Government as per the scheme of exemption applicable to multiplex theatre complexes. In the first three years of operation, the exemption will be absolute i.e. no entertainment tax is payable and in the subsequent two years, the exemption will be to the extent of 75% of the entertainment tax payable and from the sixth year they are subject to a levy of applicable entertainment tax without any exemption. The respondent in this case availed the exemption from levy of entertainment tax conferred by the State but recovered the tax from the cinema goers. The State of Maharashtra initiated recovery proceedings for recovery of the tax collected by the multiplex theatre from the cinema goers. The respondents succeeded in the High Court of Mumbai wherein the High Court held that the State was not entitled to claim more than what could be levied as entertainment duty during the period of dispute irrespective of the fact that the exhibitors have shown on admission tickets issued to patrons 45% of the duty though they were liable to pay only 25% of 45% during the incentive period of 2 years.

The State of Maharashtra appealed to the Supreme Court against this judgment of the High Court and contended that the multiplex theatre complex is liable to pay back the tax collected from the cinema goers in terms of the provisions of Bombay Entertainments Duty Act, 1923 read with Section 72 of the Indian Contract Act, 1872 and Article 296 of the Constitution of India. It was contended that the respondent had collected the tax over and above the exemption provided by the State Government and the tax so collected is liable to be paid back to the State Government. The respondents i.e. the multiplex theatre among other things contended that the admission charges collected by the respondent being a matter of contract by and between them and the cinema goers and the Act having not provided for any forfeiture clause, the question of the respondents being unjustly enriched does not arise, more so when it is not a case where the amount of tax had been deposited which the State was entitled to keep with it having regard to the statutory provisions in this behalf.

The Apex Court after analyzing the relevant provisions of the statute and relying on the decisions of the Court in Mafatlal Industries Ltd vs. Union of India 2002-TIOL-54-SC-CX, Union of India vs. Solar Pesticide Pvt Ltd 2002-TIOL-57-SC-CX , Sahakari Khand Udyog Mandal vs. Commissioner of Customs & Central Excise 2005-TIOL-48-SC-CX-LB and Indian Banks' Association, Bombay and Others v. Devkala Consultancy Service and Others observed as follows:

++ Respondent has shown the net rate of tickets which they charged by way of admission charges & entertainment duty separately. Respondent had indisputably been collecting 45% of the amount of admission fee by way of entertainment duty, i.e. the full duty payable in terms of the provisions of the said Act and the Rules.

++ Whether a statute expressly confers power on an assessee to realize the amount of tax payable to the State from its customers or not is not material. An assessee has to collect such taxes which are required to be levied and collected from the consumers. Once the taxes are levied, Section 3 of the Bombay Entertainments Duty Act entitles the State to collect the same from the owner of the multiplex theatre complex, subject to the concession given to them.

++ The terms "concession" and "exemption" are a form of privilege. When a statute confers a privilege, the same must be confined only to the extent provided for therein.

++ Once it is held that the amount realizable from the cinema goers by way of entertainment duty comes within the purview of the definition of `tax', there is no reason to justify the conclusion of the High Court that the State Government for all intent and purport conferred the retention benefit on the multiplex theatre. If the State intended to provide for a grant, the same should have expressly been stated in the statute. The respondents cannot be granted a huge amount by a welfare State indirectly which it cannot do directly.

++ State has a power to grant exemption or concession in respect of payment of tax and no power under the provisions of the Constitution or otherwise to allow an assessee to collect tax and retain the same.

++ When the provisions are not very clear Superior Courts will not interpret the statute in such a way as to confer an unjust benefit to any of the parties, i.e., the taxpayer or tax collector or the State.

++ When a person collects tax illegally, it has to be refunded to the taxpayers and if taxpayers cannot be found, the court would direct the same to be paid and/or appropriated by the State.

Pursuant to these observations, the Supreme Court concluded that the State has to realize the amount unjustly enriched by respondent and pay the same to a reputed voluntary or a charitable organization, which had been rendering good services to any sections of the disadvantaged people and in particular women and children. The Court put the onus on the Chief Minister of Maharashtra to take up the responsibility of ensuring full, proper and effective utilization of the said amount so given to the charity.

ITR (TRIB) Volume 10 : Part 2 Issue dated : 11-07-2011

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

Volume 10 : Part 2 (Issue dated : 11-07-2011)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

Appeal to Commissioner (Appeals) --Income from house property--Annual letting value--Municipal taxes--Subletting of property--Sub-tenants directly depositing municipal taxes--Assessee admitting annual letting value without explaining facts--Additional ground raising annual letting value--Commissioner (Appeals) dismissing additional ground--Not proper--Matter remanded--Income-tax Act, 1961-- Urmila and Co. Ltd. v . Deputy CIT (Mumbai) . . . 217

Assessment --Limitation--Report of special auditors received on 20-6-2005--Assessing Officer has no power to extend period of limitation--Assessment order passed on 29-8-2005 barred by limitation--Income-tax Act, 1961, s. 142-- Deputy CIT v. Ramachandra Dashrath Hande and Co. (Mumbai) . . . 117

Business expenditure --Disallowance--Excessive and unreasonable payments--Tug charges paid to sister concern--Tug not used for any transportation during relevant period--No case for commercial expediency of payment to sister concern--Disallowance justified--Income-tax Act, 1961, s. 40A(2)(b)-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Disallowance--Expenditure on Diwali gift--Claim not substantiated by evidence --Disallowance of fifty per cent.--Proper--Income-tax Act, 1961, s. 37-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Disallowance--Expenses relating to civil work--No evidence to show amount not encashed by department--Disallowance justified--Income-tax Act, 1961, s. 37-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Disallowance--Motor car expenses and current repairs--Disallowance modified to 10 per cent.--Income-tax Act, 1961, s. 37-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Fee for utilisation of club facilities by executive officer of assessee--Allowable--Sum towards receivables--Not allowable--Income-tax Act, 1961, s. 37-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Reimbursement of telephone expenses by assessee to its executives--Perquisites in hands of executives--No addition could be made--Income-tax Act, 1961, s. 37-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Tug hire charges--Period of contract more than thirteen months--Accrual of hire charges--Hire charges for months and part thereof allowable--Claim of hire charges for tug for thirteen months--Proper--Hire charges for demobilisation period--Assessee not entitled to hire charges--Income-tax Act, 1961-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Capital gains --Computation of capital gains--Deductions--Cost of improvement--No evidence that sums had been spent on improvement of property--Expenditure on general maintenance--Amounts not deductible--Income-tax Act, 1961-- Mrs. Kiran Bansal v. Asst. CIT (Delhi) . . . 180

Computation--Understatement of sale consideration--Burden of proof--No proof of understatement of sale consideration--Assessing Officer to adopt sale consideration of shares as disclosed by assessee--Income-tax Act, 1961, s. 48-- Deputy CIT v. Jindal Equipment Leasing and Consultancy Services Ltd. (Delhi) . . . 128

Long-term capital gains--Exemption--Sale of shares--Assessee's primary business, dealing in shares--Assessee holding controlling shares in particular company promoted by assessee and treating shares as investment and not in nature of stock-in-trade--Transfer of shares give rise to long-term capital gains--Assessee entitled to exemption--Income-tax Act, 1961, s. 10(38)-- Asst. CIT v. Stargate Investments P. Ltd. (Chennai) . . . 211

Charitable trust --Exemption--Assessee engaged in imparting education and training in traditional art forms--Assessee entitled to exemption--Income-tax Act, 1961, ss. 10(23C)(iiiad), 11-- Vempati Chinna Satyam Kuchipudi Art Foundation v. Deputy CIT (Chennai) . . . 201

Exemption--Money utilised by trustee to meet his medical emergency--Trustee not beneficiary and trust entitled to exemption--Income-tax Act, 1961, ss. 11, 13(3)-- Vempati Chinna Satyam Kuchipudi Art Foundation v. Deputy CIT (Chennai) . . . 201

Commissioner -Revision-Capital gains-Cost of acquisition--Tiles laying, white washing, electrical rewiring and wood work expenses--Are post-acquisition expenses--To be excluded--Brokerage and legal fees--Part of acquisition cost--To be allowed--Income-tax Act, 1961, ss. 54, 263-- Smt. S. Sudha v. Asst. CIT (Chennai) . . . 206

Revision-Penalty--Commissioner can interfere only in case of failure by assessing authority to levy penalty where it is imperative--Assessee claiming expenses as part of acquisition cost on a bona fide belief--Penalty cannot be imposed--Income-tax Act, 1961, ss. 271(1)(c), 274-- Smt. S. Sudha v. Asst. CIT (Chennai) . . . 206

Company – Dividend- Deemed dividend --Company in which public was not substantially interested--Loan to shareholder holding more than 10 per cent. voting rights--Loan out of accumulated profits--No evidence that loan was for purposes of business of company--Loan assessable as deemed dividend--Income-tax Act, 1961, s. 2(22)(e)-- Mrs. Kiran Bansal v. Asst. CIT (Delhi) . . . 180

Deduction of tax at source - Payments to non-residents--Commission paid outside India for services rendered outside India--Tax not deductible at source--Fees for technical services--Insulator testing, advertising, etc.--Not technical services--Tax not deductible at source--Income-tax Act, 1961, ss. 9(1)(i), (vii), 40(a)(ia), 195--Double Taxation Avoidance Agreement between India and the U. K., arts. 7, 13--Double Taxation Avoidance Agreement between India and the U. A. E., art. 7--Double Taxation Avoidance Agreement between India and Russia, arts. 7, 12--Double Taxation Avoidance Agreement with South Africa, art. 7--Circular No. 786, dated February 7, 2000--Circular No. 7, dated 22-10-2009-- Asst. CIT v. Modern Insulator Ltd. (Jaipur) . . . 147

Depreciation - Higher rate of depreciation--Tractors and trailers--Assessee in business of transportation of goods on hire basis--Entitled to higher rate of depreciation--Circular No. 652 dated June 14, 1993--Income-tax Act, 1961, s. 32-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Exemption - Venture capital fund--Interest on temporary investments and profit on sale of units of mutual fund--Assessee entitled to exemption--Amendment with effect from April 1, 2008 restricting exemption to income from investment in venture capital undertaking--Not applicable to earlier years--Income-tax Act, 1961, s. 10(23FB)-- ITO v. Kshitij Venture Capital Fund (Mumbai) . . . 136

Export - Special deduction- Computation--Interest received treated as business income by Assessing Officer--Only 90 per cent. of net interest received to be excluded from business profit --Net interest computation--Gross interest less expenditure incurred for earning interest income--Matter remanded to examine nexus between interest received and interest payment--Income-tax Act, 1961, s. 80HHC-- Nancy Krafts P. Ltd. v. Asst. CIT (Delhi) . . . 193

Property - Annual letting value- Rent Control Act--Prohibition on charging more than standard rent permissible under Act--Assessing Officer directed to compute annual letting value in terms of standard rent payable under Act--Bombay Rent Control Act--Income-tax Act, 1961, s. 23-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Reassessment - Cost of construction- Reference to Valuation Officer--No proceedings pending before Assessing Officer--Assessing Officer has no jurisdiction to refer property for valuation to Valuation Officer--Reassessment notice issued on basis of valuation--Not permissible--Income-tax Act, 1961, s. 148-- ITO v. Nisarg Co-op. Housing Society Ltd. (Ahmedabad) . . . 174

Validity of notice - Notice issued after four years--No inquiry in original assessment by Assessing Officer nor disclosure by assessee as to nexus between interest received and interest payment--Non-application of mind by Assessing Officer during original assessment--Reassessment valid--Income-tax Act, 1961, ss. 147, 148-- Nancy Krafts P. Ltd. v. Asst. CIT (Delhi) . . . 193

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

for services rendered outside India - Tax not deductible at source--Fees for technical services--Insulator testing, advertising, etc.--Not technical services--Tax not deductible at source--Circular No. 786, dated February 7, 2000--Circular No. 7, dated 22-10-2009-- Asst. CIT v. Modern Insulator Ltd. (Jaipur) . . . 147

services rendered outside India - Tax not deductible at source--Fees for technical services--Insulator testing, advertising, etc.--Not technical services--Tax not deductible at source--Circular No. 786, dated February 7, 2000--Circular No. 7, dated 22-10-2009-- Asst. CIT v. Modern Insulator Ltd. (Jaipur) . . . 147

services rendered outside India - Tax not deductible at source - Fees for technical services--Insulator testing, advertising, etc.--Not technical services--Tax not deductible at source--Circular No. 786, dated February 7, 2000--Circular No. 7, dated 22-10-2009-- Asst. CIT v. Modern Insulator Ltd. (Jaipur) . . . 147

for services rendered outside India - Tax not deductible at source - Fees for technical services--Insulator testing, advertising, etc.--Not technical services--Tax not deductible at source--Circular No. 786, dated February 7, 2000--Circular No. 7, dated 22-10-2009-- Asst. CIT v. Modern Insulator Ltd. (Jaipur) . . . 147

interested- Loan to shareholder holding more than 10 per cent. voting rights--Loan out of accumulated profits--No evidence that loan was for purposes of business of company--Loan assessable as deemed dividend-- Mrs. Kiran Bansal v. Asst. CIT (Delhi) . . . 180

services rendered outside India- Tax not deductible at source - Fees for technical services--Insulator testing, advertising, etc.--Not technical services--Tax not deductible at source--Circular No. 786, dated February 7, 2000--Circular No. 7, dated 22-10-2009-- Asst. CIT v. Modern Insulator Ltd. (Jaipur) . . . 147

in traditional art forms- Assessee entitled to exemption-- Vempati Chinna Satyam Kuchipudi Art Foundation v. Deputy CIT (Chennai) . . . 201

of units of mutual fund--Assessee entitled to exemption--Amendment with effect from April 1, 2008 restricting exemption to income from investment in venture capital undertaking--Not applicable to earlier years-- ITO v. Kshitij Venture Capital Fund (Mumbai) . . . 136

business, dealing in shares--Assessee holding controlling shares in particular company promoted by assessee and treating shares as investment and not in nature of stock-in-trade--Transfer of shares give rise to long-term capital gains--Assessee entitled to exemption-- Asst. CIT v. Stargate Investments P. Ltd. (Chennai) . . . 211

beneficiary and trust entitled to exemption-- Vempati Chinna Satyam Kuchipudi Art Foundation v. Deputy CIT (Chennai) . . . 201

Trustee not beneficiary and trust entitled to exemption-- Vempati Chinna Satyam Kuchipudi Art Foundation v. Deputy CIT (Chennai) . . . 201

rent permissible under Act--Assessing Officer directed to compute annual letting value in terms of standard rent payable under Act--Bombay Rent Control Act-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

transportation of goods on hire basis- Entitled to higher rate of depreciation--Circular No. 652 dated June 14, 1993-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

evidence- Disallowance of fifty per cent. -Proper-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

not encashed by department--Disallowance justified-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Allowable--Sum towards receivables--Not allowable-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

Perquisites in hands of executives--No addition could be made-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

for services rendered outside India--Tax not deductible at source--Fees for technical services--Insulator testing, advertising, etc.--Not technical services--Tax not deductible at source--Circular No. 786, dated February 7, 2000--Circular No. 7, dated 22-10-2009-- Asst. CIT v. Modern Insulator Ltd. (Jaipur) . . . 147

charges paid to sister concern--Tug not used for any transportation during relevant period--No case for commercial expediency of payment to sister concern--Disallowance justified-- Urmila and Co. Ltd. v. Deputy CIT (Mumbai) . . . 217

of understatement of sale consideration--Assessing Officer to adopt sale consideration of shares as disclosed by assessee-- Deputy CIT v. Jindal Equipment Leasing and Consultancy Services Ltd. (Delhi) . . . 128

electrical rewiring and wood work expenses--Are post-acquisition expenses--To be excluded--Brokerage and legal fees--Part of acquisition cost--To be allowed-- Smt. S. Sudha v. Asst. CIT (Chennai) . . . 206

Assessing Officer--Only 90 per cent. of net interest received to be excluded from business profit--Net interest computation--Gross interest less expenditure incurred for earning interest income--Matter remanded to examine nexus between interest received and interest payment-- Nancy Krafts P. Ltd. v. Asst. CIT (Delhi) . . . 193

Officer has no power to extend period of limitation--Assessment order passed on 29-8-2005 barred by limitation-- Deputy CIT v. Ramachandra Dashrath Hande and Co. (Mumbai) . . . 117

assessment by AO nor disclosure by assessee as to nexus between interest received and interest payment--Non-application of mind by Assessing Officer during original assessment--Reassessment valid-- Nancy Krafts P. Ltd. v. Asst. CIT (Delhi) . . . 193

pending before Assessing Officer--Assessing Officer has no jurisdiction to refer property for valuation to Valuation Officer--Reassessment notice issued on basis of valuation--Not permissible-- ITO v. Nisarg Co-op. Housing Society Ltd. (Ahmedabad) . . . 174

by Assessing Officer nor disclosure by assessee as to nexus between interest received and interest payment--Non-application of mind by Assessing Officer during original assessment--Reassessment valid-- Nancy Krafts P. Ltd. v. Asst. CIT (Delhi) . . . 193

services rendered outside India--Tax not deductible at source--Fees for technical services--Insulator testing, advertising, etc.--Not technical services--Tax not deductible at source--Circular No. 786, dated February 7, 2000--Circular No. 7, dated 22-10-2009-- Asst. CIT v. Modern Insulator Ltd. (Jaipur) . . . 147

electrical rewiring and wood work expenses--Are post-acquisition expenses--To be excluded--Brokerage and legal fees--Part of acquisition cost--To be allowed-- Smt. S. Sudha v. Asst. CIT (Chennai) . . . 206

assessing authority to levy penalty where it is imperative--Assessee claiming expenses as part of acquisition cost on a bona fide belief--Penalty cannot be imposed-- Smt. S. Sudha v. Asst. CIT (Chennai) . . . 206

acquisition cost on a bona fide belief--Penalty cannot be imposed--Smt. S. Sudha v. Asst. CIT (Chennai) . . . 206

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

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ITR Vol 335 Part 2 dated 11-07-2011

INCOME TAX REPORTS (ITR)

Volume 335 : Part 2 (Issue dated 11-7-2011)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

HIGH COURTS

Appeal to Appellate Tribunal --Powers of Tribunal--Business expenditure--Commission paid to direct selling agents for services in sourcing hirers--Tribunal remanding matter to Assessing Officer as no sufficient material to give a finding as to allowability of entire brokerage--No infirmity--Income-tax Act, 1961-- Citi Financial Consumer Finance India Ltd . v. CIT (Delhi) . . . 209

Assessee --Person--Sports association is an assessee--Income-tax Act, 1961, s. 2(17), (31)-- PILCOM v. CIT (Cal) . . . 147

Assessment --Special audit--Order under section 142(2A) directing special audit--Condition precedent--Assessing Officer should be satisfied that accounts were complex and special audit was necessary--Reasons for special audit not mentioned--Order under section 142(2A)--Not valid--Income-tax Act, 1961, s. 142(2A)-- Hind Samachar Ltd . v. Asst. CIT (P&H) . . . 277

Business expenditure --Expenditure on advertisement and sales promotion--To be allowed--Income-tax Act, 1961, s. 37-- CIT v. Casio India Ltd . (Delhi) . . . 196

----General principles--Travel expenses--Resolution of company authorising foreign travel of managing director and his wife for business purposes--Travel expenses deductible--No resolution authorising foreign travel of wife of deputy managing director--Travel expenses of wife of deputy managing director--Not deductible--Income-tax Act, 1961, s. 37-- J. K. Industries Ltd . v. CIT (Cal) . . . . 170

----Manufacturer of soft beverages--Loss on bottle breakage--Deductible--Cost of repairs to wooden crates--Deductible--Income-tax Act, 1961, s. 37-- CIT v. Brindavan Beverages P. Ltd . (Karn) . . . 163

Capital gains --Capital asset--Definition--Exception--Personal effects--Sale of household items--Whether falling under section 2(14)--Matter remanded--Income-tax Act, 1961, s. 2(14)-- CIT v. Faiz Murtaza Ali (Delhi) . . . 272

Depreciation --Rate of depreciation--100 per cent. depreciation for machinery and plant used in mineral oil concerns--Wireline logging and perforation equipment used for oil companies--Entitled to 100 per cent. depreciation--Income-tax Act, 1961, s. 32--Income-tax Rules, 1962, r. 5-- CIT v. HLS India Ltd . (Delhi) . . . 292

Income from undisclosed sources --Manufacturer of soft beverages--Security deposit from distributors towards wooden crates and bottles--No evidence that amounts not received--Amount cannot be treated as income of assessee merely because distributors were related to assessee or employees of assessee--Income-tax Act, 1961-- CIT v. Brindavan Beverages P. Ltd. (Karn) . . . 163

Industrial undertaking --Investment allowance--Special deduction under sections 80-IA and 80-IB--Meaning of industrial undertaking--Manufacture or production of article or thing--Assessee providing wireline logging and perforation services to oil companies--Assessee is an industrial undertaking for purposes of section 32A and section 80-IA/80-IB--Income-tax Act, 1961, ss. 32A, 80-IA, 80-IB-- CIT v. HLS India Ltd .(Delhi) . . . 292

Interest on borrowed capital --Exemption--Claim to deduction of interest paid on borrowed capital--Borrowing for purpose of investment in partnership--Claim not established--Interest not allowable--Income-tax Act, 1961, ss. 10(2A), 36(1)(iii)-- CIT v. K. L. Srihari (Karn) . . . 215

Interpretation of taxing statutes --Interpretation should not lead to anomaly-- CIT v. Mridula, Prop. Dhruv Fabrics (P&H) . . . 266

Non-banking financial company --Income--Mercantile system of accounting--Interest on loans given--Loans became non-performing assets--Interest not received and possibility of recovery nil--Interest not to be treated to be accrued in favour of assessee--Income-tax Act, 1961, s. 5-- Director of Income-tax v. Brahamputra Capital Financial Services Ltd. (Delhi) . . . 182

Penalty --Concealment of income--Commissioner (Appeals) setting aside penalty, without going into merits--Matter to be heard with quantum appeal filed by assessee--Income-tax Act, 1961, s. 271(1)(c)-- CIT v. Rajesh Rana (P&H) . . . 207

----Concealment of income--Discrepancy in stocks found during search--Voluntary surrender of income by assessee during assessment proceedings to buy peace--Not by itself ground to impose penalty--Assessee placing evidence with corroborating proof explaining discrepancy in stocks--Deletion of penalty in identical circumstances in case of firm of which assessee partner becoming final--Penalty not imposable on assessee--Income-tax Act, 1961, s. 271(1)(c)-- CIT v. Harsh Talwar (Delhi) . . . 200

----Concealment of income--Survey--Assessing Officer initiating penalty on ground of discrepancies found during survey--Assessee disclosing particulars of income and surrendering entire amount in return duly filed--Penalty cannot be imposed --Income-tax Act, 1961, s. 271(1)(c)-- CIT v. SAS Pharmaceuticals (Delhi) . . . 259

Precedent --Effect of decision of Supreme Court in CIT v. Walchand and Co. P. Ltd. [1967] 65 ITR 381--J . K. Industries Ltd . v. CIT (Cal) . . . . 170

Reassessment --Notice after four years--Failure to disclose material facts necessary for assessment--Original assessment allowing deduction for housing project after examining facts--Notice after four years alleging that assessee was a works contractor and not a developer--No failure to disclose material facts necessary for assessment--Notice not valid--Income-tax Act, 1961, ss. 80-IB(10), 147, 148-- Aayojan Developers v. ITO (Guj) . . . 234

----Notice--Condition precedent--Recording of reasons--Effect of affidavit--Affidavit can explain reasons but cannot validate notice--Income-tax Act, 1961, s. 148-- Aayojan Developers v. ITO (Guj) . . . 234

----Notice--Validity--Notice for rectification issued beyond period of limitation--Rectification proceedings not pending--Notice of reassessment can be issued--Income-tax Act, 1961, ss. 148, 154-- CIT v. S. M. Overseas P. Ltd . (P&H) . . . 281

----Notice--Validity--Payment of usance interest on purchase of ship without deducting tax at source for assessment year 1994-95--Amendment of section 10(15) with retrospective effect from 1-4-1962 exempting usance interest--Notice not valid--Income-tax Act, 1961, ss. 10(15)(iv)(c), 40(a)(i), 148-- Trivenu Ship Breakers v. Harsh Prakash (Guj) . . . 284

Rectification of mistakes --Application for rectification--Effect of sub-section (8) of section 154--Order on application to be made within six months of receipt of application--Failure to pass order--Application again made to new incumbent upon restructuring of Department--Application cannot be rejected on the ground of limitation--Income-tax Act, 1961, s. 154(8)-- State Bank of India v. CIT (TDS) (Patna) . . . 287

Return --Delay in filing return--Interest--Assessing Officer holding assessee not eligible for benefit of loss to be carried forward for failure to file return within due date and levying interest--Tribunal following identical issue in the case of a family member allowing assessee's claim--That assessee, a partner of firm in whose case due date for filing return was later--Whether assessee also partner--Matter remanded--Income-tax Act, 1961, ss. 139, 234A-- CIT v. Sashi Prakash Khemka (Delhi) . . . 176

Search and seizure --Block assessment--Assessment of third person--Scope of section 158BD--Action under section 158BD must be taken before completion of assessment of searched person--Block assessment under section 158BC completed on 30-3-2005--Satisfaction under section 158BD recorded on 15-7-2005--Proceedings not valid--Income-tax Act, 1961, ss. 158BC, 158BD-- CIT v. Mridula, Prop. Dhruv Fabrics (P&H) . . . 266

----Block assessment--Delay in filing returns--Interest payable--Income-tax Act, 1961, s. 158BFA-- CIT v. K. L. Srihari (Karn) . . . 215

----Block assessment--Surcharge to be paid--Income-tax Act, 1961, s. 113-- CIT v. K. L. Srihari (Karn) . . . 215

----Requisitioning of assets--Warrant of authorisation under section 132A--Cash and silver seized by Railway police--Report of Director of Income-tax that assets would not be disclosed to Revenue--Warrant of authorisation under section 132A--Valid--Income-tax Act, 1961, s. 132A-- Smt. Suman Singhai v. Director of Income-tax (Investigation) (MP) . . . 188

Sports association --Deduction of tax at source--Effect of sections 115BBA and 194E--Sports association in England granting permission to Indian sports association to conduct matches in India--Amount paid by Indian sports association to non-resident sports association--Tax to be deducted on such payments--Income-tax Act, 1961, ss. 115BBA, 194E-- PILCOM v. CIT (Cal) . . . 147

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Income-tax Act, 1961 :

S. 2(14) --Capital gains--Capital asset--Definition--Exception--Personal effects--Sale of household items--Whether falling under section 2(14)--Matter remanded-- CIT v. Faiz Murtaza Ali (Delhi) . . . 272

S. 2(17) --Assessee--Person--Sports association is an assessee-- PILCOM v. CIT (Cal) . . . 147

S. 2(31) --Assessee--Person--Sports association is an assessee-- PILCOM v. CIT (Cal) . . . 147

S. 5 --Non-banking financial company--Income--Mercantile system of accounting--Interest on loans given--Loans became non-performing assets--Interest not received and possibility of recovery nil--Interest not to be treated to be accrued in favour of assessee-- Director of Income-tax v. Brahamputra Capital Financial Services Ltd. (Delhi) . . . 182

S. 10(2A) --Interest on borrowed capital--Exemption--Claim to deduction of interest paid on borrowed capital--Borrowing for purpose of investment in partnership--Claim not established--Interest not allowable-- CIT v. K. L. Srihari (Karn) . . . 215

S. 10(15)(iv)(c) --Reassessment--Notice--Validity--Payment of usance interest on purchase of ship without deducting tax at source for assessment year 1994-95--Amendment of section 10(15) with retrospective effect from 1-4-1962 exempting usance interest--Notice not valid-- Trivenu Ship Breakers v. Harsh Prakash (Guj) . . . 284

S. 32 --Depreciation--Rate of depreciation--100 per cent. depreciation for machinery and plant used in mineral oil concerns--Wireline logging and perforation equipment used for oil companies--Entitled to 100 per cent. depreciation-- CIT v. HLS India Ltd .(Delhi) . . . 292

S. 32A --Industrial undertaking--Investment allowance--Special deduction under sections 80-IA and 80-IB--Meaning of industrial undertaking--Manufacture or production of article or thing--Assessee providing wireline logging and perforation services to oil companies--Assessee is an industrial undertaking for purposes of section 32A and section 80-IA/80-IB-- CIT v. HLS India Ltd . (Delhi) . . . 292

S. 36(1)(iii) --Interest on borrowed capital--Exemption--Claim to deduction of interest paid on borrowed capital--Borrowing for purpose of investment in partnership--Claim not established--Interest not allowable-- CIT v. K. L. Srihari (Karn) . . . 215

S. 37 --Business expenditure--Expenditure on advertisement and sales promotion--To be allowed-- CIT v. Casio India Ltd . (Delhi) . . . 196

Business expenditure--General principles--Travel expenses--Resolution of company authorising foreign travel of managing director and his wife for business purposes--Travel expenses deductible--No resolution authorising foreign travel of wife of deputy managing director--Travel expenses of wife of deputy managing director--Not deductible-- J. K. Industries Ltd . v. CIT (Cal) . . . 170

Business expenditure--Manufacturer of soft beverages--Loss on bottle breakage--Deductible--Cost of repairs to wooden crates--Deductible-- CIT v. Brindavan Beverages P. Ltd . (Karn) . . . 163

S. 40(a)(i) --Reassessment--Notice--Validity--Payment of usance interest on purchase of ship without deducting tax at source for assessment year 1994-95--Amendment of section 10(15) with retrospective effect from 1-4-1962 exempting usance interest--Notice not valid-- Trivenu Ship Breakers v. Harsh Prakash (Guj) . . . 284

S. 80-IA --Industrial undertaking--Investment allowance--Special deduction under sections 80-IA and 80-IB--Meaning of industrial undertaking--Manufacture or production of article or thing--Assessee providing wireline logging and perforation services to oil companies--Assessee is an industrial undertaking for purposes of section 32A and section 80-IA/80-IB-- CIT v. HLS India Ltd . (Delhi) . . . 292

S. 80-IB --Industrial undertaking--Investment allowance--Special deduction under sections 80-IA and 80-IB--Meaning of industrial undertaking--Manufacture or production of article or thing--Assessee providing wireline logging and perforation services to oil companies--Assessee is an industrial undertaking for purposes of section 32A and section 80-IA/80-IB-- CIT v. HLS India Ltd . (Delhi) . . . 292

S. 80-IB(10) --Reassessment--Notice after four years--Failure to disclose material facts necessary for assessment--Original assessment allowing deduction for housing project after examining facts--Notice after four years alleging that assessee was a works contractor and not a developer--No failure to disclose material facts necessary for assessment--Notice not valid-- Aayojan Developers v. ITO (Guj) . . . 234

S. 113 --Search and seizure--Block assessment--Surcharge to be paid-- CIT v. K. L. Srihari (Karn) . . . 215

S. 115BBA --Sports association--Deduction of tax at source--Effect of sections 115BBA and 194E--Sports association in England granting permission to Indian sports association to conduct matches in India--Amount paid by Indian sports association to non-resident sports association--Tax to be deducted on such payments-- PILCOM v. CIT (Cal) . . . 147

S. 132A --Search and seizure--Requisitioning of assets--Warrant of authorisation under section 132A--Cash and silver seized by Railway police--Report of Director of Income-tax that assets would not be disclosed to Revenue--Warrant of authorisation under section 132A--Valid-- Smt. Suman Singhai v. Director of Income-tax (Investigation) (MP) . . . 188

S. 139 --Return--Delay in filing return--Interest--Assessing Officer holding assessee not eligible for benefit of loss to be carried forward for failure to file return within due date and levying interest--Tribunal following identical issue in the case of a family member allowing assessee's claim--That assessee, a partner of firm in whose case due date for filing return was later--Whether assessee also partner--Matter remanded-- CIT v. Sashi Prakash Khemka (Delhi) . . . 176

S. 142(2A) --Assessment--Special audit--Order under section 142(2A) directing special audit--Condition precedent--Assessing Officer should be satisfied that accounts were complex and special audit was necessary--Reasons for special audit not mentioned--Order under section 142(2A)--Not valid-- Hind Samachar Ltd . v. Asst. CIT (P&H) . . . 277

S. 147 --Reassessment--Notice after four years--Failure to disclose material facts necessary for assessment--Original assessment allowing deduction for housing project after examining facts--Notice after four years alleging that assessee was a works contractor and not a developer--No failure to disclose material facts necessary for assessment--Notice not valid-- Aayojan Developers v. ITO (Guj) . . . 234

S. 148 --Reassessment--Notice--Condition precedent--Recording of reasons--Effect of affidavit--Affidavit can explain reasons but cannot validate notice-- Aayojan Developers v. ITO (Guj) . . . 234

Reassessment--Notice--Validity--Notice for rectification issued beyond period of limitation--Rectification proceedings not pending--Notice of reassessment can be issued-- CIT v. S. M. Overseas P. Ltd . (P&H) . . . 281

Reassessment--Notice--Validity--Payment of usance interest on purchase of ship without deducting tax at source for assessment year 1994-95--Amendment of section 10(15) with retrospective effect from 1-4-1962 exempting usance interest--Notice not valid-- Trivenu Ship Breakers v. Harsh Prakash (Guj) . . . 284

Reassessment--Notice after four years--Failure to disclose material facts necessary for assessment--Original assessment allowing deduction for housing project after examining facts--Notice after four years alleging that assessee was a works contractor and not a developer--No failure to disclose material facts necessary for assessment--Notice not valid-- Aayojan Developers v. ITO (Guj) . . . 234

S. 154 --Reassessment--Notice--Validity--Notice for rectification issued beyond period of limitation--Rectification proceedings not pending--Notice of reassessment can be issued-- CIT v. S. M. Overseas P. Ltd . (P&H) . . . 281

S. 154(8) --Rectification of mistakes--Application for rectification--Effect of sub-section (8) of section 154--Order on application to be made within six months of receipt of application--Failure to pass order--Application again made to new incumbent upon restructuring of Department--Application cannot be rejected on the ground of limitation-- State Bank of India v. CIT (TDS) (Patna) . . . 287

S. 158BC --Search and seizure--Block assessment--Assessment of third person--Scope of section 158BD--Action under section 158BD must be taken before completion of assessment of searched person--Block assessment under section 158BC completed on 30-3-2005--Satisfaction under section 158BD recorded on 15-7-2005--Proceedings not valid-- CIT v. Mridula, Prop. Dhruv Fabrics (P&H) . . . 266

S. 158BD --Search and seizure--Block assessment--Assessment of third person--Scope of section 158BD--Action under section 158BD must be taken before completion of assessment of searched person--Block assessment under section 158BC completed on 30-3-2005--Satisfaction under section 158BD recorded on 15-7-2005--Proceedings not valid-- CIT v. Mridula, Prop. Dhruv Fabrics (P&H) . . . 266

S. 158BFA --Search and seizure--Block assessment--Delay in filing returns--Interest payable-- CIT v. K. L. Srihari (Karn) . . . 215

S. 194E --Sports association--Deduction of tax at source--Effect of sections 115BBA and 194E--Sports association in England granting permission to Indian sports association to conduct matches in India--Amount paid by Indian sports association to non-resident sports association--Tax to be deducted on such payments-- PILCOM v. CIT (Cal) . . . 147

S. 234A --Return--Delay in filing return--Interest--Assessing Officer holding assessee not eligible for benefit of loss to be carried forward for failure to file return within due date and levying interest--Tribunal following identical issue in the case of a family member allowing assessee's claim--That assessee, a partner of firm in whose case due date for filing return was later--Whether assessee also partner--Matter remanded-- CIT v. Sashi Prakash Khemka (Delhi) . . . 176

S. 271(1)(c) --Penalty--Concealment of income--Commissioner (Appeals) setting aside penalty, without going into merits--Matter to be heard with quantum appeal filed by assessee-- CIT v. Rajesh Rana (P&H) . . . 207

Penalty--Concealment of income--Discrepancy in stocks found during search--Voluntary surrender of income by assessee during assessment proceedings to buy peace--Not by itself ground to impose penalty--Assessee placing evidence with corroborating proof explaining discrepancy in stocks--Deletion of penalty in identical circumstances in case of firm of which assessee partner becoming final--Penalty not imposable on assessee-- CIT v. Harsh Talwar (Delhi) . . . 200

Penalty--Concealment of income--Survey--Assessing Officer initiating penalty on ground of discrepancies found during survey--Assessee disclosing particulars of income and surrendering entire amount in return duly filed--Penalty cannot be imposed -- CIT v. SAS Pharmaceuticals (Delhi) . . . 259

Income-tax Rules, 1962 :

r. 5 --Depreciation--Rate of depreciation--100 per cent. depreciation for machinery and plant used in mineral oil concerns--Wireline logging and perforation equipment used for oil companies--Entitled to 100 per cent. depreciation-- CIT v. HLS India Ltd .(Delhi) . . . 292

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

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Foreign training expenses incurred on son of director, who is not even an e

Foreign training expenses incurred on son of director, who is not even an employee of company, is not an allowable expenditure - [2011] 10 taxmann.com 91 (Mum. - ITAT)

Capital gain on sale of property is assessable in that assessment year only

Capital gain on sale of property is assessable in that assessment year only when sale deed is executed and possession of property is handed over to buyer - [2011] 10 taxmann.com 92 (Mum. - ITAT)

Once assessee should excess consumption of raw material....

IT : Once assessee should excess consumption of raw material, natural inference was that there would be excess production which would have been sold outside books of account and, thus, matter was to be remanded back to Commissioner (Appeals) with a direction to make separate addition in respect of excess consumption of raw material as deemed sales - [2011] 11 taxmann.com 425 (Agra - ITAT)(TM)