ITR HIGHLIGHTS, ISSUE DATED 29-8-2011 Volume 336 Part 4

INCOME TAX REPORTS (ITR) HIGHLIGHTS

ISSUE DATED 29-8-2011

Volume 336 Part 4

 

SUPREME COURT JUDGMENTS

 

>  Partner signing return filed by firm at no point of time during assessment or penalty proceedings or in appeal therefrom disputing signature on return : Department need not prove signature in prosecution : ITO v. Mangat Ram Norata Ram Narwana p. 624

 

 

HIGH COURT JUDGMENTS

 

>  Weighted deduction u/s. 35(2AB) : Prescribed authority approving existence of R and D facility and expenditure incurred on such scientific research : Assessee entitled to expenditure incurred for whole of assessment year : CIT v. Wheels India Ltd. (Mad) p. 513

 

>  Income from investment of voluntary reserves entitled to deduction u/s. 80P(2)(a)(i) : CIT v. Andhra Pradesh State Co-operative Bank Ltd. (AP) p. 516

 

>  Error in mention of provision in notice would not invalidate search : Dr. V. S. Chauhan v. Director of I. T. (Investigations) (All) p. 533

 

>  Writ may not be issued where no reasonable explanation for delay : Dr. V. S. Chauhan v. Director of I. T. (Investigations) (All) p. 533

 

>  Block assessment of third person : Satisfaction that such other person had undisclosed income and forwarding of material to officer having jurisdiction : Failure : Assessment on other person not valid : CIT v. Sunil Bhala (Delhi) p. 550

 

>  Office note of AO regarding undisclosed income of third person : Notice under s. 158BD valid : CIT v. Mukta Metal Works (P & H) p. 555

 

>  Additional evidence necessary for deciding case : Duty of Tribunal to consider additional evidence : CIT v. Mukta Metal Works ( P & H) p. 555

 

>  Draft order to be sent to IAC having concurrent jurisdiction : CIT v. Saraya Sugar Mills P. Ltd. (All) p. 572

 

>  Revised statement accepted as such by AO and the revised statement submitted beyond time specified u/s. 139(5) and therefore invalid, not a ground for commencement of reassessment : Rotary Club of Ahmedabad v. Asst. CIT (Guj) p. 585

 

>  Transfer of know-how from UK company to Indian company : Agreement for complete transfer of know-how and not merely its use : Tax not to be deducted at source on such remittance : CIT v. D. C. M. Ltd. (Delhi) p. 599

 

>  Recovery proceedings against property standing in name of trust having three beneficiaries : Writ petition by only two beneficiaries not maintainable : Sagar Sharma v. Addl. CIT (Bom) p. 611

 

>  Failure to file Form 37-I by purchaser of immovable property : notice not necessary before launching prosecution : Rattan Singh Gupta v. State (Delhi) p. 629

 

>  Appeal from single order of Tribunal in a batch of cases : Single appeal to High Court maintainable : Director, I. T. (International Taxation) v. Transocean Offshore International Ventures Ltd. (Uttarakhand) p. 637

 

>  Agricultural marketing committee entitled to registration u/s 12A/12AA : CIT v. Agricultural Market Committee (AP) p. 641

 

 

STATUTES AND NOTIFICATIONS

 

>  From our Reporter at the Supreme Court :

 

Appeal to High Court : Nil tax effect p. 13

 

Block assessment : Determination of undisclosed income by estimation of cost of construction whether permissible p. 13

 

Carry forward of loss : Whether return of loss filed within time extended p. 13

 

Deduction of tax at source : Whether transaction of sale or works contract p. 14

 

Deduction of tax at source : Payment whether for contract work p. 14

 

Income : Interest on advances waived p. 14

 

Income : Remission of interest p. 14

 

Income : Business expenditure : Creation of statutory reserve under section 36(1)(viii) p. 14

 

Income or capital : Gains from repatriation of share capital raised outside India p. 15

 

Income or capital : Gifts received on birthdays and other occasions p. 15

 

Income-tax : General principles : Rule of consistency p. 15

 

Infrastructure facility : Special deduction p. 15

 

Manufacture : Assembling diesel generating sets p. 16

 

Penalty : Claim that loss not speculative, whether bona fide p. 16

 

Penalty : Claim to deduction whether furnishing inaccurate particulars p. 17

 

Unexplained investment : Genuineness of transaction, question of fact p. 17

 

Wealth-tax : Exemption in respect of land held for industrial purpose p. 17

 

>  General Circulars :

General Circular No. 41 of 2011, dated 6th July, 2011-E-filing of income-tax return in respect of companies under liquidation p. 18

 

>  Notifications :

Income-tax Act, 1961 : Notification under section 10(6C) : Exemption of income for providing services in or outside India in projects connected with the security of India p. 20

 

 

NEWS-BRIEF

 

>  Dearth of a Central bank policy on overseas investments

 

The Reserve Bank of India which decides on overseas investments in investing companies on a case-by-case basis, has written to the North Block, highlighting its concern about multi-layered structures of investments of Indian companies as they make tracking funds flow difficult. The Central bank has raised objections which can be a systemic risk related to setting up of special purpose vehicles or SPVs likely to be used to make onward investments in other countries. One, these SPVs float opaque structures, such as trusts, in tax havens. Two, they leverage domestic assets to give guarantees without informing RBI as required under the Foreign Exchange Management Act. There have also been cases where the Indian parent gave guarantees to its subsidiary abroad to enable it to borrow from foreign banks.

 

Sources said the Central bank has already become strict with companies when they come for approval to invest overseas. In a specific case, it told a company to collapse its multi-layered structure into two tiers before approving its proposal.

 

In May, the RBI had mandated that the parent company should own more than half of step-down operating subsidiary to be able to offer guarantee. But a number of companies have tried to get around the rule by floating SPVs, or holding companies, instead of operating company.

 

The new Companies Bill seeks to bar investment companies from having more than two tiers of subsidiaries, but it is not clear if this proposal will apply overseas. Multi-layered structures, especially through SPVs in tax havens, have come under the scanner, particularly after the inquiry into the Indian Premier League revealed a complex web of companies to route funds. The Central Board of Direct Taxes has proposed a new regime called Controlled Foreign Corporations in the new Direct Taxes Code to ensure that tax due to the exchequer is not lost. Under this regime, the undistributed dividends of foreign corporations controlled or owned by Indian companies will be added to the parent's income and taxed in India. [Source : www.economictimes.com dated August 19, 2011]

 

>  CBDT Chairman actively looking to improve the collection target

 

The Chairman of the Central Board of Direct Taxes (CBDT), has asked Income-tax (I-T) department officials to work without "fear or favour" to achieve this fiscal's tax collection target of Rs. 5.32 lakh crore although the task of achieving the target was difficult, nothing was "impossible".

 

He further called upon every member of the Aayakar parivar (I-T family) to take on the call of duty and put in their best efforts for the attainment of the revised target.

 

The CBDT Chairman said that being "futuristic and responsive" should be the hallmark of I-T officials while dealing with taxpayers.

 

The Chief Commissioners (CCsIT) of each region are expected to be the pioneers for their action plan targets pertaining to their respective regions, he said.

 

"In my task ahead, I will be consulting the CCsIT of each region who are the custodians of each region to find out ways and means to augment the revenue collection and render better taxpayer services," he added. [Source : www.businessstandard.com dated August 18, 2011]

 

>  Panel set up to scrutinise tax-related offences

 

"The Directorate of Income-tax (Criminal Investigation) is mandated to perform functions in respect of criminal matters having any financial implication punishable as an offence under any direct tax law," the Minister of State for Finance said in a written reply in the Lok Sabha.

 

The DCI, to be a part of the Central Board of Direct Taxes (CBDT), will seek and collect information about persons and transactions suspected to be connected with criminal activities "having cross-border, inter-State or international ramifications, that pose a threat to national security and are punishable under the direct tax laws", he said.

 

The directorate will also investigate the source and use of funds involved in such criminal activities.

In a separate reply, the Minister said the tax department is in the process of collating data on the indirect tax evasion by pharmaceutical companies.

 

"Investigations are currently underway and as such it would not be appropriate in the interest of investigation to divulge details of cases at this stage," the Minister said. [Source : www.businessstandard.com dated August 19, 2011]

 

>  GST gets IT criteria to reveal exposure to PAN as the unique identity

States have agreed to roll out the IT framework needed for the proposed goods and service tax (GST), raising hopes for an early resolution to the deadlocked discussions on the Government's efforts to reform the indirect taxes regime.

 

The rollout of an IT framework will allow traders all over the country to use their permanent account number, or PAN, as the tax identification number for all direct and indirect taxes in the country. "For the first time PAN will become a kind of unique identity for all taxes paid across the country," the chairman of the empowered group on IT infrastructure for GST, said.

 

A common identification number benefits not just taxpayers but also helps authorities keep tab on transactions by establishing links with other tax payments. Taxpayers would be able to register using their PAN and also be able to file a common return form.

 

The chairman of the empowered group on IT infrastructure for GST said a pilot of IT framework has already been launched in 11 States including Maharashtra, Karnataka and Gujarat, and now it would be implemented countrywide after the final approval.

 

IT infrastructure is crucial for the success of the proposed GST, which will replace a plethora of indirect taxes including excise duty, service tax, value-added tax, octroi. "Without a well designed and well functioning IT system, the benefits of GST will remain elusive," the empowered group had said in its report.

 

The Empowered Committee of State Finance Ministers has appealed for more flexibility from the Centre to ensure timely implementation of GST. "The Central Government will have to be flexible and address all concerns of State Governments," the chairman of the Empowered Committee of State Finance Ministers told reporters after the meeting of State Finance Ministers here.

 

Mr. Modi, who was last month elected new chairman of the panel, said it had decided to ask for compensation for the loss on account of phasing out of Central sales tax for 2010-11 and 2011-12 fiscal. [Source : www.economictimes.com dated August 20, 2011]

 

A gift received from 'relative', irrespective of whether it is from an indi

IT : A gift received from 'relative', irrespective of whether it is from an individual relative or from a group of relatives (e.g., HUF) is exempt from tax - [2011] 11 taxmann.com 384 (Rajkot - ITAT)

Whether when entire business is taken over as going concern, and a composi

Whether when entire business is taken over as going concern, and a composite fee is paid for same, plea of assessee that fee paid for use of trade mark is different from non-compete fee can be sustained - NO, says ITAT

MUMBAI : THE issues before the Tribunal are - Whether trade mark is inseparable from business and hence when the entire business is taken over as a going concern the trademark alone holds no meaning and whether when the entire business is taken over as a going concern, and a composite fee is paid for the same, the plea that the fee paid for use of trade mark is different from non-compete fee is sustainable. NO is the Tribunal's order.

Facts of the case

The assessee company is engaged in the manufacturing and trading of textile chemicals and auxiliaries including export thereof. Assessee entered into separate agreements effective from 01.09.1996 with the proprietors of two sister concerns, viz., Supertex (India) Corporation (proprietor M.G. Saraf) and Superchem (prop. M.G. Saraf, HUF), which were engaged in trading of chemicals in earlier years for a long period. As per the agreements the assets of the proprietary concerns were valued and the business was taken over as a going concerns. In addition to the amounts paid on the basis of valuation reports towards acquiring the assets and liabilities of the two proprietary concerns, the company also undertook to pay a sum of Rs 3.5 lakhs per month to Shri M.G. Safar and a sum of Rs 2,00,000/- per month to M.G. Saraf, HUF for a period of 15 years starting from 01.09.1996 to 31.08.2011. These amounts were payable as per the relevant clauses of agreements in consideration of the transfer and assignment of specific business as going concern and considering the non-compete obligation undertaking by the aforesaid two proprietary concerns. Accordingly assessee claimed the total amount of Rs 66,00,000/- as deduction in the respective assessment years, stated to be amount of Rs 9,00,000/- towards assignment fees and royalty of Rs57,00,000/. This claim was for the first time made in A.Y. 1997-98 and in subsequent years and the A.O. in the respective scrutiny assessments held the amount as capital expenditure and disallowed the same. This matter was carried to the ITAT, which by the orders in ITA 2218/Mum/2002 for A.Y. 1997-98 and ITA No. 3170/Mum/2002 for AY 1998-99 and ITA no. 3171/Mum/2002 for A.Y. 1999-2000 dated 17th October 2005 held that the amounts were capital in nature. However, during the impugned assessment years assessee made a separate claim on the basis of the supplementary agreement entered into by assessee company w.e.f. the first day of April 2002 with the above said two persons on the basis of which the payment of Rs 3, 50,000/- and Rs 2,00,000/- payable to the respective parties were in turn bifurcated as Rs 3,00,000/- towards use of trade name Supertex and Rs50,000/- towards non compete fees in the case of M.G. Saraf and Rs1,75,000/- towards use of trade name Superchem and Rs25,000/- towards non-compete fees to M.G. Saraf, HUF. On the basis of these supplementary agreements assessee claimed the amounts as assignment fees and royalty for the use of trade name. The A.O., while relying on the findings of the ITAT with reference to the original agreement also held that the supplementary agreements in the name of making a clarificatory deed was a colourable transaction and the real purpose was to scuttle the legal and factual conclusion taken by the ITAT. Further he also held that the clarificatory deed was a sham transaction and was stage-managed merely with a view to evade income-tax, vide para 4.17 and 4.18 of the assessment order. Thus upholding the stand taken earlier AO disallowed the amount paid to the tune of Rs66,00,000/- holding it for non-compete fees and as capital expenditure. Aggrieved by the said order assessee preferred appeals before the CIT(A). The CIT(A) in the respective orders not only relied on the findings of the ITAT in earlier years but also agreed with the Assessing Officer's contentions that supplementary/clarificatory deed does not change the issue during this year as the same is an afterthought of assessee and which have been rightly held by the A.O. as a sham transaction and stage managed just to escape from the ITAT order against assessee in its own case. Thus holding, the CIT(A) rejected assessee's contentions more so relying on the order of the ITAT.

After hearing the parties the ITAT held that,

++ the ITAT considered the entire agreement and held that use of trade mark, if any, by the assessee company is only an inseparable part of the entire agreement. By the non-compete clause of the agreement erstwhile owners are automatically excluded from use of such trade mark and they have bound themselves contractually not to carry on similar activities in whatever name for a period of 15 years. In view of this, since the payment was composite payment at the time of acquiring the business, eventhough payable over a period of 15 years in monthly instalments, the ITAT came to a conclusion that the amount has to be treated as capital expenditure;

++ in view of the clear findings of the ITAT on the original agreement, we are of the opinion that the supplementary agreement bifurcating the monthly payments into use of trade mark and non-compete fee does not help assessee's case. Since the payments were also held to be capital in nature, respectfully following the Coordinate Bench decision we agree with the findings of the CIT(A) that the amounts cannot be allowed a revenue expenditure. In the course of argument the learned counsel tried to distinguish the facts in the present issue with that of the earlier year when the ITAT has considered the issue. It was his submission that consequent to the principles established by the Supreme Court in the case of Continental Construction Ltd. vs. CIT (2002-TIOL-661-SC-IT), the ITAT is bound to apportion the amount paid towards various services and accordingly the amount paid towards use of trade marks should be considered as revenue and the amount paid for non-compete fees should be considered as capital expenditure. We are unable to pursue ourselves with the argument of the learned counsel. First of all, as seen from the agreements entered with the erstwhile proprietary concerns by Assessee Company dated 02.09.1996 effective from 01.09.1996 the agreements were very clear that the entire specified business was transferred as ongoing concern to that of the company. This aspect was also discussed by the ITAT in its order in para 10, which was extracted above. The specified business as defined in the agreement includes the running business and infrastructural facilities, including continued use of registered trade names of the companies, i.e. the name of Supertex and Superchem in the respective cases.

Whether, to avail benefit of tonnage tax, it is necessary for ship to unde

Whether, to avail benefit of tonnage tax, it is necessary for ship to undertake voyage between international ports - NO, transportation between two domestic ports is also entitled: ITAT Third Member

CHENNAI, JULY 29, 2011: THE issues before the Third Member were - Whether, for the purpose of claiming the benefit of tonnage tax scheme under Chapter XII-C of the Act, the ship should always do its voyage between international ports; Whether the ship operated by the assessee company cannot be termed as a qualifying ship u/s 115VD on the ground that the ship operated by the assessee is rendering the same services which could be provided on land also and whether the ship transporting thermal coal from one location to another within the country, is a qualifying ship u/s 115VD of the Act. And the verdict goes in favour of the assessee.

Facts of the case

The assessee company is engaged in the business of shipping/port services. The company filed its return of income for the AY 2006-07 on a tonnage income of Rs. 76,85,246/-. The assessee opted for tonnage tax scheme and worked out the shipping income on tonnage basis as provided in section 115VG. The assessee was a co-owner of the ship "M.V.Gem of Ennore", engaged on a long term charter for transporting thermal coal for Tamil Nadu Electricity Board. The coal was transported from Haldia, Paradip and Vizag ports to Ennore and Tuticorin ports in Tamil Nadu. The assessee exercised its option for tonnage tax scheme for the ship "M.V.Gem of Ennore".

The assessing authority denied the benefit of tonnage tax scheme to the assessee in respect of its operating ship "M.V.Gem of Ennore" by holding that the ship was not a qualifying ship u/s 115VD. The basis of such a finding was that the ship operated by the assessee was transporting thermal coal from Haldia, Paradip and Vizag ports to Ennore and Tuticorin ports in Tamil Nadu, where all the ports were located within the country and well connected by road and rail on land. Therefore, the Assessing Officer held that the transport of coal between these ports can be routed through land either by road or rail transport. As it was possible to transport the coal through land by road or rail transport, the Assessing Officer held that the operating vessel was used for the provision of goods or services normally provided on land. As the transportation of coal between the above ports was possible by land routes, the assessee cannot claim the benefit of tonnage tax scheme.

In its appeal before the CIT(A), the assessee relying on the opinion of one of the Members of the Core Committee, Mr D P Sengupta, who had drafted the Tonnage Tax Scheme, argued that the AO grossly erred in considering `M.V.Gem of Ennore' to be not a qualifying ship. According to the assessee, carrying of cargo from one Indian port to another would not disentitle the assessee from returning the income of a ship under the Tonnage Tax Scheme, especially since, there was no disabling provision in Chapter XIIG of the Act. The CIT(A) allowed the appeal of the assessee and held that the core shipping activity of carrying goods from port to port was carried on by the ship operated by the assessee and only for the reason that it was possible to transport the coal between the places by means of land routes, the assessee cannot be denied the benefit of tonnage tax scheme.

On appeal to the tribunal, there was a conflict of opinion between the members and hence the matter was referred to the Third Member. The AM upheld the order of the CIT (A) holding that the ship operated by the assessee company was a qualified ship and, therefore, the assessee was entitled for the benefit of tonnage tax scheme u/s 115VG of the Act. On the other hand, the JM held that the assessing Officer was justified in holding that the ship "M. V. Gem of Ennore" was not a qualified ship for the benefit of tonnage tax scheme as envisaged under the relevant provisions of law. He held that the United Kingdom law and the Indian law on the subject cannot be considered as analogous for the purpose of interpreting the statutory provisions involved in the present appeal. The JM agreed with the view of the AO that coal can be transported between the concerned ports by land routes and, therefore, what for the assessee's ship was used was for the provision of goods or services of a kind normally provided on land and therefore it was not qualified u/s 115VD of the Act in the light of sub-clause(i) of section 115VD. He opted to allow the appeal filed by the Revenue.

After hearing the parties, the Third Member held that,

++ shipping companies are given option to pay tax as per normal provisions of computation or on the basis of presumptive tax regime described as `Tonnage Tax Scheme'. The income arising from operation of qualifying ship is determined based on the tonnage tax scheme. Normally a shipping company is to be assessed at the normal corporate tax rate. If the assessee chooses for tonnage tax scheme, it pays tax at a prescribed rate with reference to the tonnage of the ship. The actual loss or profit of the shipping company is not taken into consideration. Irrespective of the other factors, income is always computed but at a tonnage rate, de facto much lower to normal corporate tax rate. The accounting or actual income is replaced by a notional income. The business of operating a qualifying ship is treated as a separate business and income is also computed on stand-alone basis;

++ the conditions are that it must be a sea going ship; it must have a net tonnage of 15 tons or more; it must be a ship registered under the Merchant Shipping Act and it must possess a valid certificate from the Director-General of Shipping. The assessee must be a company engaged in the business of operating qualifying ship and income from the business of operating of qualifying ship would be deemed to be chargeable to tax under the head profits and gains of business or profession. The assessee has complied with the above conditions;

++ the contention of the assessing authority that the ship was excluded from the ambit of tonnage tax scheme mainly for the reason that the ship is rendering services only between Indian ports, which would have also been rendered on land by road or rail, is too far-fetched. There is no such stipulation anywhere in law. The tonnage tax scheme does not distinguish ships operating in coastal waters ad ships operating in international waters. There is no bar on the coastal shipping for the tonnage tax scheme. If the contention of the assessing authority is accepted, the income from coastal shipping would be outside the purview of tonnage tax scheme;

++ the normal activities of operating a sea going ship is to carry passengers, carry cargo, to do towage, salvage or other marine assistance or transport in connection with other services of kind necessarily provided at sea. The restriction has to be looked into in the above background. The restriction is that the vessel is not a qualifying ship for the purpose of section 115VD if the main purpose for which it is used is the provision of goods or services of a kind normally provided on land. It is to be seen that no services can be rendered by ships on land. If that is the case wherever land routes are available one has to presume that an assessee cannot opt for sea routes and cannot claim the benefit of tonnage tax scheme. The law is not making any reference to any other alternative method available for transportation of goods and cargo from destination to destination. The law only says that an assessee company is entitled for opting for tonnage tax scheme if it is operating qualifying ship and satisfies other conditions provided therein. The law does not say that the ship should always do its voyage between international ports. The law does not say anything about the distance to be covered by ship in a single voyage. The law presumes that the benefit of tonnage tax scheme is available to all sea going ships satisfying the condition where it is operated between Indian ports or between Indian ports and foreign ports. The operation of a sea going ship does not assume any different character only for the reason that the ship is operating between two Indian ports. The character of operating a ship does not assume any other dimension only for the reason that the ship is operated between one Indian port and another foreign port. These are all matters never construed in the scheme of the Act providing the benefit of tonnage tax scheme to the assessees who are in the shipping industry and operating qualifying ships;

++ this is not an issue particular to India. World over countries are providing such incentives to shipping industry for their own economic advantage. The policy of giving such incentives to shipping industry is a matter of larger policies relating to economic priorities. If the intent of the law is interpreted in such a manner to arrive at an erratic conclusion, that interpretation must always be avoided;

++ the only provocation for the Assessing Officer to hold that the ship operated by the assessee company is not a qualifying ship is that the ship operated by the assessee is doing the same services that could be provided on land also. It is in that context that the CIT(A) has made a reference to the English law on the subject. The United Kingdom law while using the same phraseology in drafting the law in the matter of tonnage tax scheme has provided certain examples. It says what could be those items coming under the provisions provided to restrict the abuse of the tax incentive. The examples given in the English law states the examples such as business that could be provided on land or retailers, restaurants, hotels, radio stations, casinos, etc. Only for the reason that examples have been taken from English law it does not mean that it is not relevant to Indian law. The normal interpretation of the provision makes it clear that the restriction provided in sub section (i) applies only to those provisions of goods or services unrelated to the core activities of operating ship. Even though the ship operated by the assessee is transporting thermal coal from Indian ports to Indian ports, the ship is performing exactly the core function of a ship of carrying bulk cargo from port to port. There may be alternative means available for transportation of thermal coal on land route by truck or train. Theoretically speaking, even transport planes can carry coal from one destination to another destination. These kinds of extreme views are not at all called for in interpreting a beneficial provision couched in simple language. The assessing Officer is trying to bring in additional conditions which have never been contemplated in drafting the law;

++ on the facts and circumstances of the case, the TM agreed with the view of the AM to hold that the ship operated by the assessee "M.V.Gem of Ennore" transporting thermal coal from one location to another location within the country, is a qualifying ship u/s 115VD of the Act and the assessee is entitled for the benefit of tonnage tax scheme provided under Chapter XII-C of the Act

Where profits of business of eligible industrial undertaking were reduced t

Where profits of business of eligible industrial undertaking were reduced to extent of expenses incurred by assessee, amount of reimbursement of part of said expenses would be eligible for exemption under section 10A - [2011] 10 taxmann.com 112 (Delhi)

Vodafone questions I-T Dept's ambit to levy capital gains tax

Vodafone questions I-T Dept's ambit to levy capital gains tax British telecom giant Vodafone has questioned the jurisdiction of the Income Tax Department in slapping the Rs 11,000-crore capital gains tax over its buy out of Hutchison's 67 per cent stake in Essar-Hutchison joint venture, the final hearing on which began in the Supreme Court today.


Appearing before a three-judge Bench headed by the Chief Justice, Mr S. H. Kapadia, senior advocate Mr Harish Salve contended that as the transaction between two foreign companies — Vodafone International Holding BV and Hutchison Communication International Ltd — had happened outside India, the I-T Department could not impose capital gain tax. "Transfer of control of downstream companies (in this case, Hutchison's Indian telecom assets) by two foreign companies cannot be a basis for (the I-T Department) asserting tax jurisdiction. This is the heart of the matter," Mr Salve said. Mr Salve submitted that Vodafone was not liable to pay capital gains tax on the 2007 deal because all the parties involved were foreign companies and also the transaction was not carried out in India.

Therefore, there was no income that could be subjected to tax in India. Mr Salve said the complex structure of the deal had not been created to evade any tax, as claimed by the I-T Department. The structure was instead a result of several players entering and exiting the telecom business before Vodafone acquired Hutchison's Indian telecom assets. Therefore, it was not a device to perpetrate a tax fraud and did not amount to a dishonest scheme or money laundering, he claimed.

The Bombay High Court's order on the matter, which is being challenged by Vodafone before the apex court, notes that between 1992 and 2006 Hutchison had acquired interests in 23 mobile telecommunication circles in India. The Bombay High Court had said the I-T Department has the jurisdiction to claim the tax in this case. The Supreme Court sought to know from Mr Salve the nature of the transaction, the reason for routing the deal through a company based in a tax haven (Cayman Islands), and whether the I-T Department could demand tax as the underlying assets were in India. Mr Salve said though a tax haven was involved, the transaction was genuine and honest as it was transparent.

The case involves the Netherlands-based Vodafone International Holdings BV (VIH), a subsidiary of the UK-based Vodafone Group, acquiring a 67 per cent controlling stake in the Cayman Islands-based CGP Investments Ltd that held the Indian telecom assets (Hutchison Essar) of the Hong Kong-based Hutchison Whampoa. The shares in Hutchison Essar were held through companies based in Mauritius and India. The I-T Department says Vodafone failed to deduct tax at source while acquiring the controlling stake. The high-profile case is keenly watched by many across the globe as the apex court order is expected to have ramifications on India-related acquisitions and foreign investments into the country. - www.thehindubusinessline.co

If assessee not ask for reasons,ITAT cannot remand to AO

If assessee does not ask for s. 147 reasons & object to reopening, ITAT cannot remand to AO & give assessee another opportunity

The assessee’s assessment was reopened u/s 147. The assessee did not ask for the recorded reasons. Even before the CIT(A), though the assessee challenged the reopening as being without jurisdiction, it did not ask for the reasons. Before the Tribunal, the assessee claimed that it was not aware that it could demand the reasons and object thereto. Pursuant thereto the Tribunal remitted the case to the AO with direction that the reasons & opportunity to object be provided and denovo assessment be framed if objections were rejected. On appeal by the department, HELD allowing the appeal:

The “short-cut method” adopted by the Tribunal is totally unsustainable. While the AO is required to record reasons, Law does not mandate the AO to suo moto supply the reasons to the assessee. It is for the assessee to demand the reasons and raise objections to the reopening which the AO is required to dispose of by passing a speaking order. As the assessee did not ask for the reasons and instead participated in the reassessment proceedings, the Tribunal could not have restored the matter back to the file of the AO and give another opportunity to the assessee to raise objections to the “reasons to believe” recorded by the AO. It was the assessee‟s own creation that it did not ask for the reasons or raise objection thereto. Merely because the assessee was oblivious of such a right would not mean that the Tribunal should have granted this right to the assessee, that too, at the stage when the matter was before the Tribunal and travelled much beyond the AO‟s jurisdiction. It is trite that what cannot be done directly, it is not allowed indirectly as well. This novel and ingenuousness method adopted by the Tribunal in setting aside the reassessment orders on merits cannot be accepted.

However, also held that as the assessee had challenged the validity of reassessment before the CIT(A), it ought to have been provided with the reasons and so the matter was remitted for supply of reasons.

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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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An income, so as to be characterized as 'derived from' an undertaking u/s 80-IA,

An income, so as to be characterized as `derived from' an undertaking u/s 80-IA, should directly result from it; it should be "generation of profits (operational profits)" of eligible undertaking

In order to be covered within the expression "derived from" it is sine qua non that the relation between the income and source must be that of the first degree
Where the relation between income and source slips from first to second degree, income stands excluded from the scope of expression "derived from" and may fall within the purview of "attributable to"


[2010] 6 taxmann.com 88 (Mum. - ITAT)

ITAT MUMBAI BENCHES, `E', MUMBAI

ITO

v.

E. A. Infrastructure Operations Pvt. Ltd.

ITA Nos. 887 & 4555/Mum/2008

July 9, 2010

FACTS
The only issue projected through the solitary ground in assessment years 2004-05, 2005-06 and the first ground in assessment year 2006-07 is against the direction of the learned CIT(A) for allowing deduction u/s.80-IA(4) in respect of compensatory payment received by the undertaking. This issue has been discussed at length in the assessment order for assessment year 2004-05, which are taking up on representative basis. The factual matrix of this ground is that the assessee was awarded the project for Biomedical Waste Treatment ("BMW" for short) at G.T.B. Hospital on BOOT basis by the Municipal Corporation of Greater Mumbai ("MCGM" for short). The assessee claimed deduction u/s.80-IA of the Income-tax Act, 1961, similar to that claimed in earlier years. The entire profit of the business amounting to Rs.1,47,25,111 was claimed as deductible. The Assessing Officer sent a letter dated 14-8-2006 to the Director (ES&P), MCGM requesting to furnish certain information. In reply, the Chief Engineer (Solid Waste Management) replied vide letter dated 29-8-2006 stating that the assessee was awarded contract to set up the requisite BMW facility like incinerator and autoclave system at Sewree in the premises of G.T.B. Hospital of MCGM on Built, Own, Operate & Transfer (BOOT) basis. As per the terms of contract MCGM was to make payment towards the weight of BMW treated at their plant with minimum guaranteed charge for 5000 kg. which included 3500 kg. of non-anatomical waste (treated by autoclave) and 1500 kg. of anatomical waste (burnt by incinerator). The rate agreed for the above guaranteed load was Rs.10.50 per kg. with fixed escalation of 10% compounded annually effective after 24 months from the date of submission of bid (November, 1999) till the plant is handed over to MCGM after the completion of BOOT period. It was further informed by the Chief Engineer that work order to assessee was issued in 2000 and the plant started its operation in November, 2001. From the reply submitted by the Chief Engineer, the Assessing Officer noted that the assessee was not getting the payments for actual work carried out of treatment of BMW only but also against the guaranteed supply of BMW for treatment. Information was called from Municipal Corporation about the actual BMW treated by the assessee, which has been tabulated on pages 4 and 5 of the assessment order. It was noted by the Assessing Officer that the assessee was entitled to deduction for a sum of Rs.40,46,173 for the actual work done by it towards treatment of anatomical waste, whereas the assessee was actually paid a sum of Rs.57,91,200. Similarly for non-anatomical waste treatment, the assessee was entitled to deduction for a sum of Rs. 47,90,112 whereas the actual payment was made to it to the tune of Rs.1,35,12,800. The total excess amount received by the assessee came to Rs.1,04,67,715, representing difference between the minimum guaranteed work and actual work carried on. On being show caused as to why deduction u/s.80-IA(4) be not denied on such excess amount, the assessee furnished its reply which has been reproduced on pages 5 to 8 of the assessment order. The Assessing Officer noted that section 80-IA(1) talks of deduction for profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4). Relying on some judgments including that of the Hon'ble Supreme Court in Pandian Chemicals Ltd. Vs. CIT [(2003) 262 ITR 278 (SC)], the Assessing Officer noted that the deduction is available in respect of profits and gain derived from business as referred to in sub-section (4). Since the expression "derived from" has a narrower meaning than the expression "attributable to", the Assessing Officer opined that the excess receipts could not be considered as derived from the eligible business. He, therefore, excluded the excess receipt of Rs.1.04 crore from the eligible profit for deduction u/s.80-IA(4) in assessment year 2004-05. In the same manner he did not allow deduction u/s.80-IA(4) in the other two assessment years under consideration amounting to Rs.1,55,19,246 for assessment year 2005-06 and Rs.88,84,565 for assessment year 2006-07. The learned CIT(A) concurred with the submission advanced on behalf of the assessee and held that the entire minimum guaranteed charges received by the assessee were eligible for deduction u/s.80-IA. The Revenue is in appeal against such order.

HELD
On going through the principle laid down in above judicial pronouncements, it is manifest that the expression "derived from" is constricted in its ambit when considered in juxtaposition to the expression "attributable to". In order to be covered within the former expression it is sine qua non that the relation between the income and source must be that of the first degree. In other words, income must directly spring from the source, which is subject-matter of consideration in the language of section. Where the relation between income and source slips from first to second degree, income stands excluded from the scope of expression "derived from" and may fall within the purview of "attributable to". Consequently an income, so as to be characterized as `derived from' an undertaking, should directly result from it. To put it simply, it should be "generation of profits (operational profits)" [as held in Liberty India (supra)] of the eligible undertaking. If however the income has got some indirect or remote relation with the industrial undertaking but does not spring from it, the same cannot be held to be derived from it.

The entire receipt, whether on account of actual treatment (4000 kgs) or notional treatment (1000 kgs.) of BMW, has direct relation with the eligible enterprise. There is no trace of the source of income from 1000 kgs. of BMW without the eligible undertaking. It is but for such undertaking alone that there is a receipt on account of 1000 kgs. Relation between the income from the notional treatment of BMW with the undertaking is direct, as it is so in the case of actual treatment of BMW. Since the very source of such income is from undertaking, which is otherwise eligible for deduction u/s.80-IA, it falls beyond our comprehension as to how deduction could be denied on receipts towards such notional treatment of BMW.

The payment in respect of notional treatment of BMW is not flowing from any different scheme or any other provisions of the Act. The entire receipt of 5000 kgs is flowing from the contract entered into by the assessee with MCGM. Whole of the amount is operational income, be it from actual or notional operation of undertaking. As the relation between income from notional operation and undertaking is direct and not indirect or remote, by no standard can it be viewed as anything other than not derived from the eligible undertaking. Under such circumstances we hold that the learned CIT(A) has taken an unimpeachable view. The same is, therefore, upheld.

ORDER


Per R.S.Syal, AM :

These three appeals by the Revenue arise out of the orders passed by the Commissioner of Income-tax (Appeals) in relation to the assessment years 2004-2005, 2005-2006 and 2006-2007. Since one issue raised in these three appeals is common, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.

2. The only issue projected through the solitary ground in assessment years 2004-2005, 2005-2006 and the first ground in assessment year 2006-2007 is against the direction of the learned CIT(A) for allowing deduction u/s.80-IA(4) in respect of compensatory payment received by the undertaking. This issue has been discussed at length in the assessment order for assessment year 2004-2005, which are taking up on representative basis. The factual matrix of this ground is that the assessee was awarded the project for Biomedical Waste Treatment ("BMW" for short) at G.T.B. Hospital on BOOT basis by the Municipal Corporation of Greater Mumbai ("MCGM" for short). The assessee claimed deduction u/s.80-IA of the Income-tax Act, 1961, similar to that claimed in earlier years. The entire profit of the business amounting to Rs.1,47,25,111 was claimed as deductible. The Assessing Officer sent a letter dated 14.8.2006 to the Director (ES&P), MCGM requesting to furnish certain information. In reply, the Chief Engineer (Solid Waste Management) replied vide letter dated 29.8.2006 stating that the assessee was awarded contract to set up the requisite BMW facility like incinerator and autoclave system at Sewree in the premises of G.T.B. hospital of MCGM on Built, Own, Operate & Transfer (BOOT) basis. As per the terms of contract MCGM was to make payment towards the weight of BMW treated at their plant with minimum guaranteed charge for 5000 kg. which included 3500 kg. of non-anatomical waste (treated by autoclave) and 1500 kg. of anatomical waste (burnt by incinerator). The rate agreed for the above guaranteed load was Rs.10.50 per kg. with fixed escalation of 10% compounded annually effective after 24 months from the date of submission of bid (November 1999) till the plant is handed over to MCGM after the completion of BOOT period. It was further informed by the Chief Engineer that work order to assessee was issued in 2000 and the plant started its operation in November 2001. From the reply submitted by the Chief Engineer, the Assessing Officer noted that the assessee was not getting the payments for actual work carried out of treatment of BMW only but also against the guaranteed supply of BMW for treatment. Information was called from Municipal Corporation about the actual BMW treated by the assessee, which has been tabulated on pages 4 and 5 of the assessment order. It was noted by the A.O. that the assessee was entitled to deduction for a sum of Rs.40,46,173 for the actual work done by it towards treatment of anatomical waste, whereas the assessee was actually paid a sum of Rs.57,91,200. Similarly for non-anatomical waste treatment, the assessee was entitled to deduction for a sum of Rs.47,90,112 whereas the actual payment was made to it to the tune of Rs.1,35,12,800. The total excess amount received by the assessee came to Rs.1,04,67,715, representing difference between the minimum guaranteed work and actual work carried on. On being show caused as to why deduction u/s.80-IA(4) be not denied on such excess amount, the assessee furnished its reply which has been reproduced on pages 5 to 8 of the assessment order. The Assessing Officer noted that section 80-IA(1) talks of deduction for profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4). Relying on some judgements including that of the Hon'ble Supreme Court in Pandian Chemicals Ltd. Vs. CIT [(2003) 262 ITR 278 (SC)], the Assessing Officer noted that the deduction is available in respect of profits and gain derived from business as referred to in sub-section (4). Since the expression "derived from" has a narrower meaning than the expression "attributable to", the Assessing Officer opined that the excess receipts could not be considered as derived from the eligible business. He, therefore, excluded the excess receipt of Rs.1.04 crore from the eligible profit for deduction u/s.80-IA(4) in assessment year 2004-2005. In the same manner he did not allow deduction u/s.80-IA(4) in the other two assessment years under consideration amounting to Rs.1,55,19,246 for assessment year 2005-2006 and Rs.88,84,565 for assessment year 2006-2007. The learned CIT(A) concurred with the submission advanced on behalf of the assessee and held that the entire minimum guaranteed charges received by the assessee were eligible for deduction u/s.80-IA. The Revenue is in appeal against such order.

3. Before us the learned Departmental Representative contended that the ld. first appellate authority was not justified in granting deduction on the excess amount which was not derived from the eligible business. He argued that the use of expression "derived from" in the language of section 80IA shows that the income must directly result from the eligible business and hence it should have a direct nexus with the eligible business. He made up the case that since the excess receipts was not derived from the eligible business, the deduction ought not to have been allowed. In support of the contention that excess realization on account of guaranteed clause of contract could not be treated as derived from the eligible business, he relied on the judgement of the Hon'ble Supreme Court in the case of Liberty India Vs. CIT [(2009) 317 ITR 218 (SC)] and that of the Hon'ble Madhya Pradesh High Court in CIT Vs. Alpine Solvex Ltd. [(2005) 276 ITR 92 (MP)].

4. In the opposition the learned A.R. supported the impugned order. His submissions were the reiteration of the reasoning adopted by the ld. CIT(A) in accepting the assessee's case. To bolster his submission that deduction was rightly

allowed on the excess realization, he relied on several judgements including Fenner (India) Ltd. Vs. CIT (No.2) [(2000) 241 ITR 803 (Mad.)] and CIT Vs. Ratnagiri District Central Co-operative Bank Ltd. [(2002) 254 ITR 697 (Bom.)] for bringing home the point that excess receipt was very much profit derived from the eligible business and hence the learned CIT(A) was justified in allowing the deduction. On a specific query, he admitted that there was no direct precedent available on the issue.

5. We have heard the rival submissions in the light of material placed on record and precedents relied upon. It is an admitted position that the issue involved in this batch of appeals is virgin inasmuch as there is no direct precedent available on it in the public domain. There is no dispute on the fact that the assessee has, otherwise, satisfied other necessary conditions entitling it to deduction u/s.80-IA(4). The controversy centers around only on the amount which was received by the assessee representing the excess amount over and above the actual work done up to the minimum guaranteed amount in respect of treatment of BMW pursuant to contract with MCGM assuring minimum 5000 kg. of BMW load. It has not been controverted that in the earlier year the assessee claimed deduction on the entire minimum guaranteed amount including such excess realization, which was promptly allowed by the Assessing Officer without any fuss. Without any difference in the facts of this year via-a-vis the earlier year, the principle of consistency should have come to play inhibiting the AO from going ahead with this disallowance. Be that as it may we will decide the issue on merits as well.

6. In the instant years the contention of the Revenue is that the excess realization over and above the actual work done should not be considered as eligible for deduction u/s.80-IA(4). Before we proceed to examine and evaluate the rival contentions, it will be befitting to note down the provisions of section 80-IA(1) as under:-

"80-IA(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years."

7. On circumspection of this provision it is discernible that deduction u/s 80IA is allowable to an enterprise on the profits and gains derived from the eligible business. The case of the Revenue is that the excess amount of realization on account of guarantee clause of the contract cannot be held as profit derived from the eligible business. The point of debate is the interpretation of the expression "derived from" such business, which has been used in this section. In contrast to that, some provisions employ the expression "attributable to". It is fairly settled that ambit of the expression "derived from" is much narrower than `attributable to'. In order to be covered within its purview, there must be a direct nexus between two ends preceded and succeeded by this expression. Such nexus should be of first degree. On the other hand the expression `attributable to' has a wider scope and brings within its fold not only the items having direct nexus of one with the other but also having indirect nexus. In the case of CIT vs. Sterling Foods [(1999) 237 ITR 579 (S.C.)] it has been held that the sale consideration of import entitlements would not be held to constitute profits and gains derived from assessee's industrial undertaking for the purpose of computing deduction under section 80HH as the source of import entitlements was the export promotion scheme of the Central Government and not the industrial undertaking. Similarly in the case of Pandian Chemicals Ltd. vs. CIT [(2003) 262 ITR 278 (S.C.)] their Lordships did not accept the argument on behalf of the assessee that the interest earned by the industrial undertaking on deposits with the Electricity Board qualified for relief under section 80HH for the reason that section 80HH contains the words `derived from'. It was observed that though electricity may be required for the purposes of industrial undertaking but the deposit required for the purpose of supply of electricity was a step away from the business of the industrial undertaking and hence the interest on the deposits could not be said to flow directly from the industrial undertaking itself. It was emphasized that the words "derived from" must be understood as something which has direct or immediate nexus with the assessee's industrial undertaking. However, where the words "attributable to" have been used, the Courts have held that if the income is related to the industrial undertaking, even though not directly emanating there from, it would still fall within the scope of this expression. In the case of Ashok Leyland vs. CIT [(1997) 224 ITR 122 (S.C.)] the Hon'ble Supreme Court held that the assessee engaged in manufacturing and sale of trucks in collaboration with a foreign company importing spare parts and selling it to the purchasers of the trucks when such purchaser found it difficult to get them in the initial years of production, profits and gains from the sale of such spare parts was `attributable to' the priority industry carried on by the assessee as the same was intimately connected with the main activity of priority industry.

8. Let us examine the facts of Liberty India (supra), which is trump card case of the learned Departmental Representative. In that case the assessee owned a small scale industrial undertaking engaged in manufacturing of fabrics. Deduction u/s.80-IB was claimed on the increased profits of Rs.22.70 lakhs as profits of the industrial undertaking on account of DEPB and duty draw back credited to the profit and loss account. The Assessing Officer denied deduction on the ground that the said two benefits constituted export incentives and hence did not represent profits derived from industrial undertaking. The Hon'ble High Court, relying on the judgement in the case of CIT vs. Sterling Foods [(1999) 237 ITR 579 (S.C.)], held that the assessee failed to prove the nexus between duty draw back / DEPB benefit and industrial undertaking. When the matter came up before the Hon'ble Apex Court, it was held that DEPB and duty drawback are incentive profits which flow from the schemes framed by the Central Government u/s.75 of the Customs Act, 1962, hence, such incentive profits are not profits derived from the eligible business but belong to the category of ancillary profits of such undertaking and, therefore, they do not form part of net profit of industrial undertaking for the purposes of deduction u/s.80-IA or 80-IB. The Hon'ble Supreme Court illuminated on the scope of the expression "derived from" by reiterating that it is narrower in connotation as compared to the words "attributable to". In this case, it has been thus held that: "What attracts the incentives under section 80-IA / 80-IB is the generation of profits (operational profits)".

9. On going through the principle laid down in above judicial pronouncements, it is manifest that the expression "derived from" is constricted in its ambit when considered in juxtaposition to the expression "attributable to". In order to be covered within the former expression it is sine qua non that the relation between the income and source must be that of the first degree. In other words, income must directly spring from the source, which is subject matter of consideration in the language of section. Where the relation between income and source slips from first to second degree, income stands excluded from the scope of expression "derived from" and may fall within the purview of "attributable to". Consequently an income, so as to be characterized as `derived from' an undertaking, should directly result from it. To put it simply, it should be "generation of profits (operational profits)" [as held in Liberty India(supra)] of the eligible undertaking. If however the income has got some indirect or remote relation with the industrial undertaking but does not spring from it, the same cannot be held to be derived from it.

10. With this background in mind, we now advert to the facts of the instant case. The assessee set up the project for BMW treatment, income from which is otherwise eligible for deduction u/s.80-IA. The project was awarded by MCGM for treatment of BMW on BOOT basis. As per terms of contract, the assessee was to treat BMW at the specified rate. It was subject to minimum guarantee of treating BMW for 5000 kgs. Minimum guarantee here means that if assessee gets more than 5000 kgs of bio medical waste for treatment, it would get the amount at the rate specified for such quantity actually treated. If, however the assessee gets lower quantity of bio medical waste for treatment, then it would be entitled to such minimum receipt. It has been accepted by the A.O. in the former case, that the assessee is entitled to deduction u/s.80-IA(4) on the full amount as such income is derived from the operation of infrastructure project. The problem is only in the latter case, that is, where the quantity of BMW available for treatment is less than 5000 kgs., and the assessee has got receipts from MCGM at the rate specified for 5000 kgs. of BMW. For the sake of proper understanding, we are splitting this 5000 kgs. into two parts viz., 4000 kgs. actually treated by the assessee and 1000 kgs. which are not treated but payment is made as per agreement with MCGM. Deduction has been negatived by the AO on the income from receipts towards 1000 kgs. by assigning the reason that it can not be held as derived from the eligible undertaking.

11. We are not convinced with the view point of the AO. The entire receipt, whether on account of actual treatment (4000 kgs) or notional treatment (1000 kgs) of BMW, has direct relation with the eligible enterprise. There is no trace of the source of income from 1000 kgs. of BMW without the eligible undertaking. It is but for such undertaking alone that there is a receipt on account of 1000 kgs. Relation between the income from the notional treatment of BMW with the undertaking is direct, as it is so in the case of actual treatment of BMW. Since the very source of such income is from undertaking, which is otherwise eligible for deduction u/s.80-IA, it falls beyond our comprehension as to how deduction could be denied on receipts towards such notional treatment of BMW.

12. We have noted from the case of Liberty India (supra) that the dispute in that case was towards duty draw back / DEPB incentives which the assessee claimed to have derived from the eligible business. The Hon'ble Supreme Court noted that these incentive flow from the scheme framed by the Central Government u/s.75 of the Customs Act, 1962, hence, the incentive profits are not profits derived from eligible business u/s.80-IB. Coming back to the facts of our case we note that the payment in respect of notional treatment of BMW is not flowing from any different scheme or any other provisions of the Act. The entire receipt of 5000 kgs is flowing from the contract entered into by the assessee with MCGM. Whole of the amount is operational income, be it from actual or notional operation of undertaking. As the relation between income from notional operation and

undertaking is direct and not indirect or remote, by no standard can it be viewed as anything other than not derived from the eligible undertaking. Under such circumstances we hold that the learned CIT(A) has taken an unimpeachable view. The same is, therefore, upheld.

13. The only other ground in appeal for assessment year 2006-2007 is against the deletion of addition of Rs.7,50,000 made by the AO u/s 41(1) of the Act. Factual scenario of this ground is that the assessee included a sum of Rs.7,50,000 in the list of sundry creditors shown as payable to M/s.PHE Consultants, Mumbai. The assessee was called upon to submit details in this regard. On the perusal of such details it was noticed by the A.O. that this amount was outstanding since accounting year 2001-2002. The assessee claimed that there was some dispute with M/s.PHE Consultants which was not yet settled and hence the amount was outstanding. Information u/s.133(6) was called for from M/s PHE Consultants, who stated as under:-

"We worked as Consultant to EA Infrastructure Operation Pvt. Ltd. during the FY 99-2000 when EA infrastructure Operations Pvt. Ltd. was setting up a Bio Medical Waste Treatment plant at GTB Hospital, Mumbai for MCGM. The consultation fee of Rs.750000/- was agreed to be paid to us. However, dispute regarding the extent of services provided and fees payable arose between EA Infrastructure having disputed the consultation work and did not shown any amount as due from EA Infrastructure Operations P.Ltd. till date, the dispute is still not settled. We therefore, do not have any ledger account in the name of EA Infrastructure Operations Pvt. Ltd. in our books of accounts."

14. In the light of this reply of PHE Consultants, the Assessing Officer made addition of Rs.7,50,000 u/s 41(1) of the Act as in his opinion the amount was no more payable by the assessee. The learned CIT(A) overturned the assessment order on this point and ordered for the deletion of this addition.

15. After considering the rival submissions and perusing the relevant material on record we find that the assessee availed some consultation from M/s PHE Consultants in the previous year relevant to the assessment year 2002-2003 for which a sum of Rs.7.50 lakhs was credited to their account. The assessment year under consideration is 2006-2007 and the amount has been continuously shown as liability by the assessee. However, letter from M/s PHE Consultants clarified the position that some dispute arose between the assessee and them, which was not settled and consequently they squared up assessee's account in their books by showing Nil balance. From here it is obvious that it is a case of remission or cessassion of trading liability by M/s PHE Consultants in favour of the assessee. Both the authorities below have recorded a categorical finding that the said sum of Rs.7.50 lakhs was claimed by the assessee as an expenditure in assessment year 2002-2003. On a pertinent query from the bench, the learned A.R. admitted that till date the said amount of Rs.7.50 lakhs has not been paid. In view of these facts it becomes patent that the provisions of section 41(1) are rightly attracted here inasmuch as the assessee claimed deduction for the same in an earlier year and subsequently the amount ceased to be payable as is manifest from the information supplied by M/s PHE Consultants who erased the amount due from assessee by showing Nil balance as recoverable. In our considered opinion the learned CIT(A) was not justified in deleting this addition. We, therefore, set aside the impugned order on this issue and restore the action of the Assessing Officer.

16. In the result, appeals for assessment years 2004-2005 and 2005-2006 are dismissed and that of assessment year 2006-2007 is partly allowed.

Order pronounced on this 9th day of July, 2010.

Whether services like repair and maintenance constitute an integral part o

 

Whether services like repair and maintenance constitute an integral part of manufacturing of Industrial Undertaking as per Sec 80IB - NO, rules ITAT SB

KOLKATA, AUG 18, 2011: THE issues before the Special Bench are - Whether services like repair and maintenance constitute an integral part of manufacturing of industrial undertaking - Whether any income derived from such jobwork of repair and maintenance is also eligible for Sec 80IB benefits and whether such income has any direct nexus with the main activity of the industrial activity. And the verdict has gone against the assessee.

Facts of the case

Assessee is a manufacturer of moulds for ball pen and mould parts. Revenue issued notices u/s 143(2) and 142(1). Assessee stated that it was a manufacturing unit and claimed deduction u/s. 80-IB of the Act but it failed to produce details due to fire break-out in the office premises of M/s Today's Writing Product Ltd and all the records were destroyed. Assessee HUF through Karta Shri `R' was one of the promoters/directors of `TWPL'. AO made assessment u/s 144 stating that assessee was selling as well as providing services to `TWPL' and another group concern `PWP' by way of repair and maintenance of moulds sold to them. Deduction claimed u/s 80IB in respect of repair and maintenance was disallowed stating that it provided only services for repairing and maintenance of moulds which did not constitute manufacturing activity and no new article or thing came into existence. CIT (A) allowed the appeal of the assessee following the order of the ITAT in preceding years.

In appeal, the Revenue contended that the repair and maintenance was not an ancillary activity of the assessee and once assessee did not file details and did not produce books of account, it was not possible to know the exact nature of `job work charges' on which assessee claimed deduction u/s 80IB. It was further contended that the Tribunal heavily relied upon erroneous interpretation of "job work charges". In the preceding year also nature of "job work charges" remained vague, unclear and liable to be misinterpreted by CIT(A) as well as Tribunal. The job work was nothing but repairing and maintenance of the mould which had been sold by the assessee earlier. Due to repairs and maintenance of old moulds, their life might be renewed and they might become useful for further use. But, the activity of repairing and maintenance brings no new article or thing, therefore, assessee was not eligible for deduction U/s 80IB of the Act on such job charges. Reliance was placed on the judgement of Apex Court in the case of Liberty India v CIT (2009-TIOL-100-SC-IT), wherein it was held that the words "derived from" are narrower in connotation as compared to the words "attributable to" and that by using the expression "derived from" the Parliament intended to cover sources not beyond the first degree and also that the source of receipts must be manufacture and production of an article. Deduction U/s.801B of the Act will be available to assessee only if a new article comes into existence as a result of manufacture or production but in the present case, assessee was doing only repairs and maintenance of old moulds which were sold by him earlier in the garb of so-called job charges. As a result of repairs and maintenance, no new articles came into existence. Accordingly, it was urged that the order of CIT(A) be reversed and that of the AO be restored.

On the order hand, the assessee contended that it was a manufacturer of moulds for ball pen and mould parts and these moulds were hollow design of ball pen parts which were manufactured with the help of Injection moulding machines. Mould manufactured consisted of the parts punches, pin point, guide pins, guide/degree bush, hanging pin/link rode, ejector bush and cavities which were also manufactured by the assessee itself. Manufacture of these parts with its own material as well as steel supplied by customers and sale of moulds as well as supply of mould parts manufactured qualifies for deduction u/s 80-IB of the Act, whether manufactured on its own material or on job work basis. It was further contended that supplying of manufactured parts in the course of after sales service s very much manufacturing activity. Assessee provided after sales service to its valued customers, which was essential for selling moulds. After sales service was an exclusive service to its own customers and it was not that assessee carried on the business of doing repair. It was an indispensable part of manufacturing, almost universally, undertaken by manufacturers to maintain confidence and dependence of the users and to retain market of manufactured items.

It was further contended by the assessee that until recently nowhere in Section 80 IA or 80 IB of the Act, no definition of the word `manufacture' was available. The absence of definition of the word was not by chance but by design to leave the word to its widest amplitude possible consonant with incentive nature of benefits of deduction/exemption under various sections hinging on manufacture as the central condition precedent. Under Export Import Policy 2002 to 2007, the word `Manufacture' is defined as "Manufacture means to make, produce, fabricate, assemble, process or drawing into existence by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, polishing, blending, reconditioning, repair, refurbishing, testing calibration, reengineering. "Manufacture" for the purpose of this policy shall also include agriculture, aquaculture, animal husbandry, floriculture, pisci-culture, poultry, sericulture, viti-culture and mining." which is inserted in Explanation 1 below sub section 9 of section 10AA by insertion of clause (c) of Schedule of the SEZ Act where the said definition is lifted. The work relating to "repair" finds place in definition of "manufacture" as adopted for the purpose of Section 10AA of the Act and it is for the first time that a definition of the word "manufacture" is available in the Act. Logic for calling into aid the definition in section 10AA of the Act is straightforward and forthright and provisions of deduction in Section 80-IB of the Act are undisputedly meant to encourage entrepreneurs to set up manufacturing undertakings in identified backward areas. This section gives entrepreneurs reward for undergoing hardihood in venturing out in such areas and contributing towards nation's strife for even growth of the industry nationwide. So, it is essentially an incentive provision and a relief provision as well. This needs a purposive approach while giving the word "manufacture" its connotation. It was further contended that since definition of "manufacture" in Section 10AA of the Act includes repair as one of the parameters of the expression "manufacture", it is only fair, reasonable and irresistible that repair should also be taken as a parameter of "manufacture" for the purpose of Section 80-IB of the Act. There is nothing in the object of Section 80-IB of the Act, which can be said to be repugnant to the object of Section 10AA of the Act. Both provisions stand on equation in regard to the basic nature of the objects, i.e., growth of industry - one, for the purpose of export development and the other for the purpose of removing the pockets of industrial backwardness of the national economy. Further in case of doubts the construction most beneficial or favourable to assessee should be adopted even if it results in his obtaining a double advantage and if it is a case of considering respective hardships or inconveniences of revenue and assessee, the court should lean in favour of assessee.

After hearing both the parties, the Special Bench, ITAT held that,

++ the expression used in section 80-IB of the Act is "where the gross total income of an assessee includes any profits and gains derived from any eligible business in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains….", it means that the purpose for providing deduction from business profits u/s. 80-IB of the Act was to encourage industrial activity in India and it is inconceivable that deductions should be made available in respect to profits and gains which are not derived from an activity having a direct nexus to the industrial activity as contemplated in this section. The entire section has to be read as a whole and interpretation placed thereon has to fit the overall scheme of the provision, which is to encourage industrial activity in India and if the interpretation sought to be placed by the assessee is accepted, then it might possibly lead to a situation where profits from repairs and maintenance apart from job work for which industrial undertaking has been set up for manufacturing may undertake very little manufacturing in an assessment year but assessee yet claimed deduction from the profits and gains of business including repairs and maintenance;

++ service and maintenance is not an integral part of manufacturing activity of industrial undertaking and as is clear from the opening word of section 80-IB of the Act that deduction in respect of profits and gains from certain industrial undertaking is to be allowed under the provisions of section 80-IB of the Act while computing taxable income in respect of profits derived from an industrial undertaking and not from any other activity which has no immediate or direct nexus to the essential activity of the industrial undertaking. Section 80-IB of the Act uses the opening word that where the gross total income of assessee includes any profits and gains derived from any business and the deduction under this provision be allowed in computing the total income of the assessee from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. The Apex Court has also drawn a distinction between the expression `derived from' and `attributable to' in the case of Cambay Electric Supply Co. Ltd Vs. CIT (2002-TIOL-76-SC-IT), wherein it is held that the expression `attributable to' was wider in import than the expression `derived from'. But in the present case, the assessee's source of income is from repairs and maintenance i.e. after sale services and it may have commercial connection between the profits earned and the industrial undertaking but industrial undertaking itself is not the source of this profit. This profit from repair and maintenance earned by assessee is not a direct yield from industrial undertaking as the word used in section 80-IB of the Act of profits and gains derived from;

++ the provisions of section 10AA(9) and explanation (1) below section 10AA(9) of the Act is for the purpose of this section only and it cannot be enlarged to other chapters of this Act as section 10AA is a code in itself and it gives complete exemption to the income earned by units in SEZs. The income earned from units in SEZs do not form part of total income u/s. 10AA of the Act, whereas u/s. 80-IB of the Act the deduction is to be allowed where gross total income of assessee includes any profits and gains derived from business profits of industrial undertaking while computing the total income of the assessee. Inclusion of the definition of `manufacture' as assigned in clause (r) of section 2 of the SEZ Act, 2005 in section 10AA of the Act, will not apply to other provisions of the Act, particularly section 80-IB of the Act in view of specific mention in Explanation (1) that these definitions are for the purposes of this section i.e. sec. 10AA of the Act. There is marked difference between the provisions of section 10AA of the Act that is meant for exemption of income from the total income of the Assessee, whereas section 80-IB of the Act grants deduction to the assessee from the profits and gains derived from its industrial undertaking and that also from the business of the industrial undertaking that had directly yielded that profit;

++ there is no quarrel over the proposition and in case the assessee is selling moulds manufactured by it and spare parts of moulds also sold for doing repairs and maintenance, qua sale of moulds and spare parts of moulds assessee is entitled for deduction u/s. 80-IB of the Act. But in respect to repair of moulds, it charges two types of receipts i.e. receipt on account of sale of spare parts as well as repairs and maintenance charges, in case of sale of spare parts assessee is entitled for deduction u/s. 80-IB of the Act but in respect to repairs and maintenance charges it is not entitled for deduction in view of clear provisions of section 80-IB of the Act, because that receipt has no immediate or direct nexus with the industrial undertaking and that is not the source of profit of industrial undertaking. Since there was a major fire broke out and as such entire record of the assessee was destroyed and it would not be possible to furnish books of account and other documents to AO instead of restoring the matter to AO and with a view to finally decide the issue it will be reasonable to consider 50% of the receipt as job work charges on which assessee will be entitled to get deduction u/s. 80-IB of the Act and the balance 50% is the receipt on account of repair and maintenance charges on which the assessee will not be entitled to get deduction u/s. 80-IB of the act.