ITR (Trib) HIGHLIGHTS ISSUE DATED 29-08-2011 Volume 11 Part 1

ITR'S TRIBUNAL TAX REPORTS (ITR (Trib)) HIGHLIGHTS

ISSUE DATED 29-08-2011

Volume 11 Part 1

APPELLATE TRIBUNAL ORDERS

>> Search and seizure : Amounts disclosed in returns of third person additions not valid : Asst. CIT v. Bhagwan Prasad (Ranchi) p. 1

>> Interest awarded by High Court, capital receipt : Sushil Kumar Das v. ITO (Kolkata) p. 17

>> Where loan not out of accumulated surplus of accounting year, exemption cannot be denied u/s. 11 : Kanpur Subhash Shiksha Samiti v. Deputy CIT (Lucknow) p. 23

>> Where claim for loss on sale of units against other taxable income, relevant particulars and basic facts required u/s. 94(7) not disclosed in return, penalty leviable : Survidhi Financial Services Ltd. v. Asst. CIT (Delhi) p. 49

>> Modification of wooden partitions and work stations in premises taken on lease are temporary structure, eligible for 100 per cent. depreciation : Deputy CIT v. Win Medicare Ltd. (Delhi) p.66

>> Where assessee cannot be compelled to provide for depreciation in books of account, deduction of interest payment made to partners to be allowed : Swaraj Enterprises v. ITO (Visakhapatnam) p. 70

>> Tippers, vibrators, vibrator soil compactor are commercial vehicles, higher rate of 40 per cent. depreciation allowable : Deputy CIT v. Rakesh Jain (Chandigarh) p. 82

>> Question referred to Special Bench pending consideration before High Court not precluded from deciding reference : Deputy CIT v. Summit Securities Ltd. (Mumbai) [SB] 88

>> Where addition not made on basis of any evidence found during search, penalty cannot be imposed : Beena Rani v. Deputy CIT (Delhi) p. 106

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 income-tax 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]

.......

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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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Despite bar in Proviso to s. 14A, s. 147 reopening for earlier years valid

Honda Siel Power Products Ltd vs. DCIT (Supreme Court)

Despite bar in Proviso to s. 14A, s. 147 reopening for earlier years valid

For AY 2000-01, the assessee filed a return on 30.11.2000. As s. 14A was inserted subsequently by FA 2001 (w.r.e.f 1.4.62) and was tabled in Parliament on 28.2.2001, the assessee did not make any disallowance u/s 14A. The AO also did not make a disallowance in the s. 143 (3) order passed on 7.3.2003. After the expiry of 4 years, the AO sought to reopen the assessment to make a disallowance u/s 14A. The assessee challenged the reopening on the ground that (i) under the Proviso to s. 14A, a reopening u/s 147 for AY 2001-02 & earlier years was not permissible, (ii) as s. 14A was not on the statute when the ROI was filed, there was no failure to disclose & (iii) as the AO had also sought to rectify u/s 154, he could not reopen u/s 147. The High Court (click here) (197 TM 415) dismissed the Writ Petition inter alia on the ground that "the Proviso to s. 14A bars reassessment but not original assessment on the basis of the retrospective amendment. Though the ROI was filed before s. 14A was enacted, the assessment order was passed subsequently. The AO ought to have applied s. 14A and his failure has resulted in escapement of income. The object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality". On appeal by the assessee to the Supreme Court, HELD dismissing the SLP:

In our view, the re-opening of assessment is fully justified on the facts and circumstances of the case. However, on the merits of the case, it would be open to the assessee to raise all contentions with regard to the amount of Rs.98.46 lakhs being offered for tax as well as it's contention on Section 14A of the Income Tax Act, 1961.

See also Mahesh G. Shetty vs. CIT 238 CTR 440 (Kar)

Related Judgements
1.Honda Siel Power Products Ltd vs. DCIT (Delhi High Court) The assessee has "accepted and admitted" that it has not given details with regard to proportionate expenses relatable to tax free income and argued that it was not required to disclose the same as s. 14A was not in the statute book when the ROI was filed. However, the…

2.Mahesh G. Shetty vs. CIT (Karnataka High Court) The Proviso to s. 14A which gives protection to the assessee with respect to AY 2001-02 & earlier years was inserted w.e.f. 11.5.2001. As the order of the CIT u/s 263 was passed earlier on 29.12.99, the protection under the Proviso is not available

3.Rallis India vs. ACIT (Bombay High Court) The retrospective amendment to s. 115JB was of no avail because it was enacted after the issue of the s. 148 notice. In Max India, the SC held in the context of s. 263 that the validity of the revision order had to be determined on the basis of…
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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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