INCOME TAX REPORTS (ITR)

Volume 341 : Part 2 (Issue dated 20-2-2012)

SUBJECT INDEX TO CASES REPORTED IN THIS PART

HIGH COURTS

Business expenditure --Deduction only on actual payment--Assessee taking over sick company--Rehabilitation scheme--Interest payable by sick company to bank--Assessee entitled to benefit under scheme--Income-tax Act, 1961, s. 43B--Sick Industrial Companies (Special Provisions) Act, 1985, s. 32-- CIT v. Tube Investments of India Ltd. (Mad) . . . 199

Capital gains --Agricultural land--Whether land agricultural land or otherwise--Date of permission for conversion treated as the cut-off date--Tribunal finding land retained its agricultural character till date of order permitting non-agricultural use--No capital gains tax leviable--Income-tax Act, 1961, ss. 2(14), 45, 48-- CIT v. Smt. K. Leela-vathy (Karn) . . . 287

Capital or revenue expenditure --Construction works--Amount spent on acquiring unfinished works and inventories of another company--Revenue expenditure--Income-tax Act, 1961, s. 37-- Alacrity Housing Ltd . v. CIT (Mad) . . . 264

Cash credit --Production of demand drafts and confirmation letters--Denial of financial transaction by parties before Tribunal--Credits not satisfactorily explained--Addition justified--Income-tax Act, 1961, s. 68-- CIT v. S. L. N. Traders (No. 1 )

(Karn) . . . 232

Depreciation --Higher rate of depreciation--Assessee leasing truck--Assessee not entitled to higher rate of depreciation because not engaged in business of hire--Income-tax Act, 1961--Income-tax Rules, 1962, Appendix I, entry III, clause (2)(ii)-- Deputy CIT v. Pradip N. Desai (HUF) (Guj) . . . 277

----Ownership of asset--Assessee-company giving vehicles on hire--Vehicles registered in the names of directors--Funds for purchase of vehicles provided by company--Income from vehicles assessed in hands of company--Company entitled to depreciation on vehicles--Income-tax Act, 1961, s. 32-- CIT v. Aravali Finlease Ltd.

(Guj) . . . 282

----Rate of depreciation--Vehicles given on lease--Assessee not entitled to higher rate of depreciation--Income-tax Act, 1961, s. 32--Income-tax Rules, 1962-- CIT v. Aravali Finlease Ltd. (Guj) . . . 282

Dispute Resolution Panel --Assessee referring matter to Panel and submitting objections to draft assessment order--Subsequent application to withdraw reference and file appeal--Panel not right in confirming draft assessment order without considering assessee's objections--Income-tax Act, 1961, s. 144C-- AIA Engineering Ltd. v. Dispute Resolution Panel (Guj) . . . 145

----Constitutional validity of provisions--Panel having Commissioner as member--Possibility of bias of Commissioner--Not a ground for declaring section 144C and rule 3(2) invalid--Income-tax Act, 1961, s. 144C--Income-tax (Dispute Resolution Panel) Rules, 2009, r. 3--Constitution of India-- Hyundai Heavy Industries Ltd . v. Union of India (Uttarakhand) . . . 203

----Draft assessment--Assessee to file objections--Panel to pass speaking order with cogent reasons--Income-tax Act, 1961, ss. 94C, 144C(6), (7)-- Ericsson AB v. Additional Director of Income-tax (International Taxation) (Delhi) . . . 162

Export --Special deduction--Computation of special deduction under section 80HHC--Effect of clause (baa) in Explanation to section 80HHC and Circular No. 772--Special deduction under section 80-IB not to be taken into account--Income-tax Act, 1961, ss. 80HHC, 80-IB--CBDT Circular No. 772, dated 23-12-1998-- CIT v. Millipore India P. Ltd . (Karn) . . . 219

Penalty --Concealment of income--Addition of credits in assessment--Assessee explaining in penalty proceedings that it had agreed to addition because of its inability to prove genuineness of credits--Explanation accepted by Commissioner (Appeals) and Tribunal--Penalty could not be levied--Income-tax Act, 1961, s. 271(1)(c)-- CIT v. S. L. N. Traders (No. 2 ) (Karn) . . . 235

Reassessment --International transactions--Arm's length price--Requirement of notice under section 143(2)--Time limit for service of notice--Draft assessment order--Not a final order--Notice issued beyond time limit under section 143(2)(ii)--Assessment invalid--Income-tax Act, 1961, ss. 143(2)(ii), 144C, 292BB-- Alpine Electronics Asia Pte. Ltd . v. Director General of Income-tax (Delhi) . . . 247

Rectification of mistakes --Condition precedent--Mistake must be obvious--Debatable issue--Rectification proceedings not justified--Subsequent decision of Supreme Court would not obliterate conflict of opinion existing on date of order--Income-tax Act, 1961, s. 154-- CIT v. Thambi Modern Spinning Mills Ltd .

(Mad) . . . 229

Revision --Business expenditure--Year in which allowable--Mercantile system of accounting--Interest on belated payment--No evidence that liability accrued during relevant assessment year--Order revising to that extent justified--Income-tax Act, 1961, s. 263-- CIT v. Madras Electrical Conductors Pvt. Ltd. (Mad) . . . 155

----Commissioner--Business loss--Carry forward and set of--Continuance of business--Manufacture and sale of aluminium conductors--Temporary break--Purchase and sale of aluminium foils and other materials thereafter as distributor of group concern--Both activities not separate or independent--Revision on premise that activity not revival of old business--Not justified--Income-tax Act, 1961, s. 263-- CIT v. Madras Electrical Conductors Pvt. Ltd . (Mad) . . . 155

----Commissioner--Reassessment--No addition made on grounds mentioned in reasons recorded--Assessment order not erroneous--Order under section 263 to be set aside-- Income-tax Act, 1961, s. 263-- CIT v. Software Consultants

(Delhi) . . . 240

----Condition precedent--Commissioner not doubting statement of finished goods but directing deeper probe--Insurance claim--No accrual of income without enforceable right--Rejection of claim under section 80HHC--No necessity of further inquiries--Variation in exchange rate--Order not indicating whether there was no such income or income shown was lower--Order not mentioning how order of Assessing Officer was erroneous and prejudicial to interests of Revenue--Revision not valid--Income-tax Act, 1961, s. 263-- CIT v. Leisure Wear Exports Ltd . (Delhi) . . . 166

----Powers of Commissioner--Assessment after enquiry --No error in order--Order cannot be revised on ground enquiry should have been more detailed--Income-tax Act, 1961, s. 263-- CIT v. Hindustan Marketing and Advertising Co. Ltd.

(Delhi) . . . 180

Search and seizure --Block assessment--Penalty--Tribunal confirming addition over and above income declared by assessee--Imposition of penalty proper--Income-tax Act, 1961, s. 158BFA(2)-- Kandoi Bhogilal Mulchand v. Deputy CIT

(Guj) . . . 271

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Income-tax Act, 1961 :

S. 2(14) --Capital gains--Agricultural land--Whether land agricultural land or otherwise--Date of permission for conversion treated as the cut-off date--Tribunal finding land retained its agricultural character till date of order permitting non-agricultural use--No capital gains tax leviable-- CIT v. Smt. K. Leelavathy (Karn) . . . 287

S. 32 --Depreciation--Ownership of asset--Assessee-company giving vehicles on hire--Vehicles registered in the names of directors--Funds for purchase of vehicles provided by company--Income from vehicles assessed in hands of company--Company entitled to depreciation on vehicles-- CIT v. Aravali Finlease Ltd.

(Guj) . . . 282

----Depreciation--Rate of depreciation--Vehicles given on lease--Assessee not entitled to higher rate of depreciation-- CIT v. Aravali Finlease Ltd.

(Guj) . . . 282

S. 37 --Capital or revenue expenditure--Construction works--Amount spent on acquiring unfinished works and inventories of another company--Revenue expenditure-- Alacrity Housing Ltd . v. CIT (Mad) . . . 264

S. 43B --Business expenditure--Deduction only on actual payment--Assessee taking over sick company--Rehabilitation scheme--Interest payable by sick company to bank--Assessee entitled to benefit under scheme-- CIT v. Tube Investments of India Ltd.

(Mad) . . . 199

S. 45 --Capital gains--Agricultural land--Whether land agricultural land or otherwise--Date of permission for conversion treated as the cut-off date--Tribunal finding land retained its agricultural character till date of order permitting non-agricultural use--No capital gains tax leviable-- CIT v. Smt. K. Leelavathy (Karn) . . . 287

S. 48 --Capital gains--Agricultural land--Whether land agricultural land or otherwise--Date of permission for conversion treated as the cut-off date--Tribunal finding land retained its agricultural character till date of order permitting non-agricultural use--No capital gains tax leviable-- CIT v. Smt. K. Leelavathy (Karn) . . . 287

S. 68 --Cash credit--Production of demand drafts and confirmation letters--Denial of financial transaction by parties before Tribunal--Credits not satisfactorily explained--Addition justified-- CIT v. S. L. N. Traders (No. 1 ) (Karn) . . . 232

S. 80HHC --Export--Special deduction--Computation of special deduction under section 80HHC--Effect of clause (baa) in Explanation to section 80HHC and Circular No. 772--Special deduction under section 80-IB not to be taken into account--CBDT Circular No. 772, dated 23-12-1998-- CIT v. Millipore India P. Ltd .

(Karn) . . . 219

S. 80-IB --Export--Special deduction--Computation of special deduction under section 80HHC--Effect of clause (baa) in Explanation to section 80HHC and Circular No. 772--Special deduction under section 80-IB not to be taken into account--CBDT Circular No. 772, dated 23-12-1998-- CIT v. Millipore India P. Ltd . (Karn) . . . 219

S. 94C --Dispute Resolution Panel--Draft assessment--Assessee to file objections--Panel to pass speaking order with cogent reasons-- Ericsson AB v. Additional Director of Income-tax (International Taxation) (Delhi) . . . 162

S. 143(2)(ii) --Reassessment--International transactions--Arm's length price--Requirement of notice under section 143(2)--Time limit for service of notice--Draft assessment order--Not a final order--Notice issued beyond time limit under section 143(2)(ii)--Assessment invalid-- Alpine Electronics Asia Pte. Ltd . v. Director General of Income-tax (Delhi) . . . 247

S. 144C --Dispute Resolution Panel--Assessee referring matter to Panel and submitting objections to draft assessment order--Subsequent application to withdraw reference and file appeal--Panel not right in confirming draft assessment order without considering assessee's objections-- AIA Engineering Ltd. v. Dispute Resolution Panel

(Guj) . . . 145

----Dispute Resolution Panel--Constitutional validity of provisions--Panel having Commissioner as member--Possibility of bias of Commissioner--Not a ground for declaring section 144C and rule 3(2) invalid-- Hyundai Heavy Industries Ltd . v. Union of India (Uttarakhand) . . . 203

----Reassessment--
International transactions--Arm's length price--Requirement of notice under section 143(2)--Time limit for service of notice--Draft assessment order--Not a final order--Notice issued beyond time limit under section 143(2)(ii)--Assessment invalid-- Alpine Electronics Asia Pte. Ltd . v. Director General of Income-tax

(Delhi) . . . 247

S. 144C(6) --Dispute Resolution Panel--Draft assessment--Assessee to file objections--Panel to pass speaking order with cogent reasons-- Ericsson AB v. Additional Director of Income-tax (International Taxation) (Delhi) . . . 162

S. 144C(7) --Dispute Resolution Panel--Draft assessment--Assessee to file objections--Panel to pass speaking order with cogent reasons-- Ericsson AB v. Additional Director of Income-tax (International Taxation) (Delhi) . . . 162

S. 154 --Rectification of mistakes--Condition precedent--Mistake must be obvious--Debatable issue--Rectification proceedings not justified--Subsequent decision of Supreme Court would not obliterate conflict of opinion existing on date of order-- CIT v. Thambi Modern Spinning Mills Ltd . (Mad) . . . 229

S. 158BFA(2) --Search and seizure--Block assessment--Penalty--Tribunal confirming addition over and above income declared by assessee--Imposition of penalty proper-- Kandoi Bhogilal Mulchand v. Deputy CIT (Guj) . . . 271

S. 263 --Revision--Business expenditure--Year in which allowable--Mercantile system of accounting--Interest on belated payment--No evidence that liability accrued during relevant assessment year--Order revising to that extent justified-- CIT v. Madras Electrical Conductors Pvt. Ltd. (Mad) . . . 155

----Revision--Commissioner--Business loss--Carry forward and set of--Continuance of business--Manufacture and sale of aluminium conductors--Temporary break--Purchase and sale of aluminium foils and other materials thereafter as distributor of group concern--Both activities not separate or independent--Revision on premise that activity not revival of old business--Not justified-- CIT v. Madras Electrical Conductors Pvt. Ltd . (Mad) . . . 155

----Revision--Commissioner--Reassessment--No addition made on grounds mentioned in reasons recorded--Assessment order not erroneous--Order under section 263 to be set aside-- CIT v. Software Consultants (Delhi) . . . 240

----Revision--Condition precedent--Commissioner not doubting statement of finished goods but directing deeper probe--Insurance claim--No accrual of income without enforceable right--Rejection of claim under section 80HHC--No necessity of further inquiries--Variation in exchange rate--Order not indicating whether there was no such income or income shown was lower--Order not mentioning how order of Assessing Officer was erroneous and prejudicial to interests of Revenue--Revision not valid-- CIT v. Leisure Wear Exports Ltd . (Delhi) . . . 166

----Revision--Powers of Commissioner--Assessment after enquiry--No error in order--Order cannot be revised on ground enquiry should have been more detailed-- CIT v. Hindustan Marketing and Advertising Co. Ltd. (Delhi) . . . 180

S. 271(1)(c) --Penalty--Concealment of income--Addition of credits in assessment--Assessee explaining in penalty proceedings that it had agreed to addition because of its inability to prove genuineness of credits--Explanation accepted by Commissioner (Appeals) and Tribunal--Penalty could not be levied-- CIT v. S. L. N. Traders (No. 2 )

(Karn) . . . 235

S. 292BB --Reassessment--International transactions--Arm's length price--Requirement of notice under section 143(2)--Time limit for service of notice--Draft assessment order--Not a final order--Notice issued beyond time limit under section 143(2)(ii)--Assessment invalid-- Alpine Electronics Asia Pte. Ltd . v. Director General of Income-tax (Delhi) . . . 247

Income-tax (Dispute Resolution Panel) Rules, 2009 :

R. 3 --Dispute Resolution Panel--Constitutional validity of provisions--Panel having Commissioner as member--Possibility of bias of Commissioner--Not a ground for declaring section 144C and rule 3(2) invalid-- Hyundai Heavy Industries Ltd . v. Union of India (Uttarakhand) . . . 203

Income-tax Rules, 1962 :

Appendix I, entry III, clause (2)(ii) --Depreciation--Higher rate of depreciation--Assessee leasing truck--Assessee not entitled to higher rate of depreciation because not engaged in business of hire-- Dy. CIT v. Pradip N. Desai (HUF) (Guj) . . . 277

Sick Industrial Companies (Special Provisions) Act, 1985 :

S. 32 --Business expenditure--Deduction only on actual payment--Assessee taking over sick company--Rehabilitation scheme--Interest payable by sick company to bank--Assessee entitled to benefit under scheme-- CIT v. Tube Investments of India Ltd.

(Mad) . . . 199

[GlobalIndianCAs] S.14A does not apply to shares held as stock-in-trade

 

S.14A does not apply to shares held as stock-in-trade

Karnataka High Court

CCI Ltd vs. The Joint Commissioner of Income tax

ITA NO. 359 of 2011

Date of Decision 28.02.2012

HC held that When no expenditure is incurred by the assessee in earning dividend income, notional expenditure cannot be disallowed u/s 14A. The assessee had not retained shares with the intention of earning dividend. The dividend income was incidental to the business of sale of shares, which remained unsold by the assessee. It cannot be said that the expenditure incurred in

ITAT's Guidelines to AOs for making additions under section 68

 

ITAT's Guidelines to AOs for making additions under section 68


a) No additions in respect of loan repayments can be made under section 68; additions cannot exceed new loans/credits received during year;

b) Opinion of AO that explanation offered by assessee is not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record; once explanation of assessee is found unbelievable or false, AO is not required to bring positive evidence on record to treat amount in question as income of assessee;

c) Evidence produced by assessee cannot be brushed aside in a causal manner; assessee cannot be asked to prove impossible; explanation about 'source of source' or 'origins of origin' cannot and should not be called for while making inquiry under section 68;

d) Burden of proof under section 68 cannot be discharged to hilt - such matters are decided on particular facts of case as well as on basis of preponderance of probabilities; credibility of explanation, not materiality of evidences, is basis for deciding cases falling under section 68 - ITO VS. ANANT SHELTERS (P.) LTD. [2012] 20 taxmann.com 153 (Mumbai - ITAT)

Analysis

 

Slump Sale – Whether breaking up of price permissible:-

1.1 The decision of the Calcutta High Court in the case of Kwality Ice Creams {I} Ltd [2011] 336 ITR 100 {Cal} may provide fodder for interesting appraisal by the readers. In this case, the assessee, an ice cream manufacturer, transferred its marketing undertaking for a price of Rs. 3 crores. There is nothing in the decision to suggest that the price of Rs. 3 crores was a composite price for transfer of individual assets of the marketing undertaking sold. On the contrary, from the facts of the case, it appears that the price was paid for a slump sale of the marketing undertaking as a whole. The decision related to Assessment Year 1996-97 i.e. before the slump sale provisions of section 50B were brought on the statute book.


In short, the decision of the Supreme Court in the Artex case never carried an authority that if the sale is factually a slump sale, it is permissible for the tax authority to break down the price – even on any scientific basis – and allocate the price over the assets. The finding of the Calcutta High Court that the Apex Court in Artex case permitted such breaking up of the slump price does not appear manifest from a reading of the Artex decision

The issues for consideration of the High Court was whether the price of Rs. 3 crores could be severed and allocated individually to the various assets of the marketing undertaking transferred – so that the capital gains relating to depreciable assets could be taxed separately u\s 50. The High Court here has held in affirmative. In coming to this conclusion, it was drawn support from the decision of the Supreme Court in the case of CIT vs. Artex Manufacturing Co [1997] 227 ITR 260 {SC}. According to the High Court, the Supreme Court has specifically held that if item wise allocation of the price is possible towards the assets of the business transferred, then capital gains should be determined vis-à-vis the individual assets.

1.2 According to me, the Supreme Court has not held in this manner in the Artex decision. In the Artex case, though it was stated in the transfer agreement that the business was transferred for a lump sum price, the Assessing Officer had found that the assessee had obtained a valuation report of the individual assets for the purpose of fixing the sale price of the business. This meant that the lump sum price in the agreement was, in reality, not a slump sale price for the business as a whole, but an aggregated price of the individual assets of the business sold. It was a composite price for the sale of a bunch of assets and not a single price for the business as a whole. The findings of the Apex Court are understandable because the real underlying agreement between the parties was to transfer itemized assets at a bunched price and this was not a case of slump sale simpliciter as made out in the written agreement.

In fact, in another decision of the same date of the Supreme Court in the case of CIT vs. Elecon Control Gear Mfg. Co. [1997] 227 ITR 278 {SC}, the Apex Court distinguishing its earlier decision in the Artex case, has held that the agreement of the assessee was for a slump sale of the business as a whole as there was nothing in the transfer agreement to suggest that there was itemized sale of the assets.

1.3 Whether a transfer agreement is of a slump sale of a business undertaking or a sale of a bunch of assets of the business undertaking for a composite price, should be discerned from the terms and conditions of the agreement. If the transfer agreement shows that the real intention of the parties was to effect a transfer of the business as a whole for a slump price, then it would not be permissible for the Court to read the agreement otherwise. The sale must then be assessed to tax as on slump sale basis only. The decision of the Supreme Court in Elecon Control Gear is a clear authority for this proposition.

On the other hand, if the real intention of the parties, as apparent from their conduct, was sell individual assets only, the fact that transfer agreement cites a slump sale should hardly matter. Here, it should definitely be permissible for the Court to come to the conclusion that the price mentioned in the agreement was merely a composite price for itemized sale of various assets and the Court should sever the sale consideration over the transferred assets as done by the Supreme Court in the Artex Case. After all, if the substance of an agreement is manifestly at variance from the form in which it is projected, nothing should preclude the Court from ignoring the form and assessing the transaction on the basis of this substance.

In short, the decision of the Supreme Court in the Artex case never carried an authority that if the sale is factually a slump sale, it is permissible for the tax authority to break down the price – even on any scientific basis – `and allocate the price over the assets. The finding of the Calcutta High Court that the Apex Court in Artex case permitted such breaking up of the slump price does not appear manifest from a reading of the Artex decision.

There is tangible difference between slump sale of a business for a unit price and composite sale of assets of the business at an aggregated price. Whereas in the former, it is not permissible for the tax authority to split the price over the assets transferred even on scientific basis, in the latter case it is permissible. This distinction, according to me, has been well maintained in a balanced manner by the Supreme Court in its Artex and Elecon Control decisions. Readers are invited to form their opinions on this issue.

Capital Gains on retirement of partner on assignment of his share.

The sum and substance of these decisions is that whenever an obligation to pay any income is created by way of a charge on the income, a superior title is created over the income in favour of the charge holder to the extent of the charge. Qua this income, the charge holder has a paramount or superior title over that of the assessee. The income, to the extent of the charge, is diverted in favour of the assessee before it reaches the assessee

2.1 The decision of the Mumbai Tribunal in the case of Sudhakar M. Shetty decision – [2011] 130 ITD 197 {Mum} makes a distinction between the tax incidents visiting a partner who merely realises his share due to him on retirement and a retiring partner who assigns his share to a continuing partner for lump sum consideration. Whereas the former mode has been held not to invite capital gains tax, the latter was held to be not so fortunate.

The Tribunal has observed that a partner' share' in the partnership is a `property' and its assignment would constitute a transfer of a capital asset giving rise to capital gains. The difference between consideration received on assignment and his capital account balance was held taxable as capital gains

According to the Tribunal, the assessee, Sudhakar Shetty's retirement was under the second mode – i.e. by assignment of share and hence, his retirement gave rise to taxable capital gains

2.2. It is pertinent that the issue in the decision concerns the normal capital gains' provisions of section 45 [1] i.e. between partners inter se in their individual capacities and has nothing to do with the provisions of section 45 [4], where the transfer contemplated is between the firm and a partner.

2.3 For analysing this decision, let us first understands as to what constitutes a partner's `share' in partnership?

As per the classical English partnership law cited by Lindsay and adopted by Indian Courts in Narayanappa vs. Bhaskara Krishnappa {AIR 1966 SC 1300}and Dewas Cine Corporation – 68 ITR 240 {SC}, a partner's monetary rights are two folds . Firstly, during his tenure as partner, whereas he has no specific right in any individual asset of the partnership, his right is only to receive his share of profit Secondly, on dissolution or retirement, he has a right to a share in the net estate of the firm {i.e. assets minus liabilities and winding up expenses- valued on the basis of a notional sale} as on date of the retirement or dissolution. This bundle of rights constitutes the `share `of the partner.

So, when a partner retires, the accounts of the firm are made up –valuing the assets on basis of a notional sale, the liabilities and notional winding up expenses are deducted – and the amount due to the retiring partner towards his share, as worked out by this arithmetic, is determined as payable to him.

It is pertinent that a partner's right to this share is not created on retirement. This right existed the moment he joined the partnership. It was a right in presenti , whose value was merely determinable at time of retirement and this right, the partner carried with him all along as `his property' from the time of his joining till he retires.

On retirement, the retiring partner takes away his own money due to him and the shares of the continuing partners remain intact without an enlargement. So, there is no `transfer" of any property from such retiring partner to the continuing partners. This logic can be found in the decision of the Gujarat High Court decision in the case of Mohanbhai Pamabhai as reported 91 ITR 393 {Guj} as approved by the Supreme Court in 165 ITR 166 {SC}

Even if the continuing partners bring in further capital to settle the retiring partner, the enlargement of the continuing partner's shares is due to their own `self –acts" of bringing in more funds and not due to anything done by the retiring partner. Hence, there is no act of `transfer' from the retiring partner to continuing partner.

The Gujarat High Court decision in the case of Mohanbhai Pamabhai – 91 ITR 393 {Guj} referred above was distinguished by the Bombay High Court in Tribhuvandas Patel case – 115 ITR 95 {Bom} . The Bombay High Court distinguished between two modes of retirement as under ;-

[a] Where a partner merely retires by taking away the money due on his share as per accounts – no transfer and capital gains – agreeing with Mohanbhai Pamabhai – 91 ITR 393 {Guj}.

[b] But, where the partner assign his share to a continuing partner for a lump sum consideration, the `share' is property in hands of the retirement partner and hence a capital asset. Its assignment is a transfer. On such assignment, there is a transfer of capital asset from retiring partner to continuing partner and hence, capital gains result.

In the case before the Bombay HC, there was dispute between the partners and under a court settlement agreement, it was cited that the retiring partner was `assigning' his share to the continuing partner for an amount of say – Rs. 4.71 lacs. It was held that there was transfer on such assignment resulting in capital gains. This Bombay High Court decision has also been followed by the same High Court in other decisions.

The Bombay High Court decision in Tribhuvandas Patel [115 ITR 95] came up for consideration before the Supreme Court in 236 ITR 515 {SC}. Here, it appears that a short question was put to the Supreme Court as to whether the amount of Rs. 4.71 lacs received on retirement attracted capital gains. The Supreme Court, probably appraising the issue as a case involving a retiring partner merely realising the money due towards his share on retirement, held that this amount was not taxable as capital gains following its earlier decision in Mohanbhai Pamabhai 165 ITR 166 {SC}.

The Mumbai Tribunal in Sudhakar Shetty's case has apparently taken the view that the issue about capital gains implications on assignment of share by partner had not been addressed as a question before the Apex Court in Tribhuvandas Patel case in 236 ITR 515 {SC} and therefore, the decision of the Bombay HC in Tribhuvandas Patel's case in 115 ITR 95 {Bom} remains not overruled and binding on it as a decision of jurisdictional High Court.

It is in this scenario that readers are invited to appraise the decision of the Mumbai Tribunal in Sudhakar Shetty`s case.

In order to do, let us firstly understand what is the general partnership law relating to assignment of share by partner?

Section 29 of the Indian Partnership Act cites the rights of an assignee of share by partner as under:-

Firstly, when a partner assigns his `share', the assignor continues to be the partner and the assignee can neither take part in the conduct of the partnership business nor has right to ask or inspect the accounts. He has only a right to receive the share of profit due to the assignor-partner, which accounts he must accept without demur. In short, it is not open to the assignee to challenge the correctness of the accounts and has to accept it as correct.

Secondly, when the assignor-partner ceases to be a partner, the assignee gets the right to demand the assignor-partner's share in the assets of the firm as due to him on such cessation and also a right to the accounts from the date of cessation onwards till he is fully settled.

So, on the issue of assignment of a partner's share, the following points emerge-

[a] It is not specified in the section 29 as to who can be an assignee. So, the assignee can be a rank outsider to the partnership or even a continuing partner.

[b] An assignee does not automatically become a partner in place of the assignor-partner. He remains only an assignee. This is even so if the other partners have consented to the assignment. This is because the consent operates only in respect of the `assignment'. They cannot be presumed to have agreed to his introduction as partner.

[c] The assignee cannot take part in the business of the partnership.

[d] The assignor-partner continues to remain the partner and is not relieved from his mutual obligations to the other partners under the partnership deed.

[e] The assignment does not take place under the auspices of the partnership deed, but is private deal between the assignor-partner and the assignee. This is in marked contrast to retirement, which takes places under the terms and conditions of the partnership deed.

Therefore, a possible view is that even if the assignment of the partner's share is done to a continuing partner, the continuing partner remains an `assignee' qua the share assigned and not a `partner'. No doubt, in his capacity as an existing partner, he can take part in the business of the partnership and access the accounts directly. But, it may be noted that this right is due to his natural right as an existing partner and has nothing to do with his acquiring the subsequent partnership share on assignment

The disability of the assignee-partner, in operating as a fully fledged partner qua the share assigned can be best understood by this example. Assume A, B & C are partners. As per the partnership deed, A is designated as Managing Partner and B is supposed to remain as dormant partner. An assignment by A of his share to B cannot make B the Managing Partner. This is because as per section 29 [1] of Partnership Act, a partner cannot assign his right to take part in the business to an assignee. So, the disability of the assignee remains.

In contrast to a retirement by a partner, an assignment by a partner of his `share' to a continuing partner results in enlargement of his property holdings. The assignee partner now has two properties – [a] his original share as partner and [b] his new share as assignee. The assignment also results in diluting of the assignor-partner's rights in the sense that he can no longer take home his share in profits or his share in the net asset on retirement or dissolution, since these rights he has given to the assignee.

If seen from the above angle, a transfer of property rights from the assignor partner to the assignee partner would be evident and the assignment transaction gets exposed to capital gains' tax. In contrast, a `transfer' is not existent when a partner merely realises his share on retirement as he is merely getting the money due to him from the firm.

2.12. More ever, when a partner retires, it become necessary to prepare the accounts in order to determine the share payable to the retiring partner. But, in an assignment, the question of preparing the accounts of the firm for the purpose of settling the assignee partner does not arise. The price is fixed between the assignor and assignor without reference to the accounts and that is why, I think, it was referred as `lump sum bases by the Bombay High Court decision in Tribhuvandas Patel's case.

It may be noted that the expression `lump sum' – does mean that amount due to a retiring partner cannot be determined at an agreed `rounded – up' figure by the continuing partners. After all, the rounded up figure is also agreed after a fair assessment of the accounts.

It is in this legal background that the decision of the Mumbai Tribunal in Sudhakar Shetty's case may be appraised by the readers now.

In Sudhakar Shetty's case, both the assessee and his wife were partners with a few others. His wife retired in the prior financial year and for settling her account, a revaluation [assumedly at market value on basis of a notional sale] was done of the assets and the surplus on revaluation was credited to all partners.

In the next financial year, within few months of his wife's retirement, the assessee also retired. No fresh revaluation was apparently done as a revaluation was done only a few months ago. On retirement, he received the amount due on his capital, which includes his share on revaluation surplus. A possible view is that this was a case of a normal retirement by a partner and did not involve any assignment. The assessee had apparently taken only the money due to him on retirement.

A citation in the retirement deed that the assessee would not have any right in the assets of the firm after retirement should not constitute an assignment. The cessation of the rights in the net assets of the partnership was a natural incidence of his retirement.

It may be noted that there is a significant difference between [a] an assignment of share by partner followed by retirement and [b] only retirement simpliciter. In the former case, the transfer event takes place because of a prior assignment and the subsequent retirement is only a consequential incident. On the other hand, when a partner retires, the nature of his right in his hands undergoes a transformation. His original contractual rights qua the other partners are not the same as he had when he was a partner. For example, he ceases to have the right to profits, right to take part in the business thereafter etc. What remains in his hands is only to seek the money worth of the net assets due to his share. In short, on retirement, he ceases to have the original rights of a partner and there can be obviously no assignment of rights which he longer has. Readers may thus note that whereas there can be an assignment before retirement. there cannot be an assignment of a partner's share after retirement . A citation in the retirement deed that the retiring partner would no longer have any right in the assets of the partnership cannot therefore amount to an assignment of a partnership share by the retiring partner to the continuing partner.

It is therefore a possible view that there was no assignment of share by the retiring partner to the continuing partner in the Sudhakar Shetty's case. Readers may therefore examine this decision carefully.

Income – Diversion vs. Application

3.1 The decision of the Mumbai Tribunal in the case of RSM and Co vs. Addl. CIT [2011] 10 ITR {Trib} 614 {Mumbai} is a thought provoking decision. In this case, partnership deed of the assessee chartered accountant firm, provided in its terms and conditions for payment to a retiring partner, who had completed fifty years of age, an amount [calculated at 25 % of the average earnings of the partner from the firm of three completed years prior to his retirement] payable in four quarterly instalments for a period of five years. The issue, before the Tribunal, was whether the payments made by the assessee to the retiring partners was a case of diversion of income at source by an overriding title or application of income after it accrued to the assessee.

3.2 The Tribunal firstly considered the decision of The Supreme Court in the case of CIT vs. Sitladas Tirathdas [1961] 41 ITR 367 {SC}. Here, the Apex Court had laid down the ground rules as to when a payment made under an obligation would constitute a diversion of income by overriding title and per contra, when such payment would otherwise be a mere application of income after it accrued to the assessee. The Apex Court had observed as under:-

"Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable"

3.3 The Tribunal then dealt with various decision of the Bombay High Court where the issue of diversion of income by overriding charge was involved. These decisions were rendered after considering the decision of the Supreme Court in the case of Sitaldas Tirathdas cited above.

The decisions are:-

CIT vs. Patuck {C.N.}[1969] 71 ITR 713 {Bom}

CIT vs. Crawford Bayley and Co [1977] 106 ITR 884 {Bom}

CIT vs. Nariman B. Bharucha & Sons [1981] 130 ITR 863 {Bom}

The sum and substance of these decisions is that whenever an obligation to pay any income is created by way of a charge on the income, a superior title is created over the income in favour of the charge holder to the extent of the charge. Qua this income, the charge holder has a paramount or superior title over that of the assessee. The income, to the extent of the charge, is diverted in favour of the assessee before it reaches the assessee. Even if the income charged lands in the hands of the assessee, he is only its collector of the sum on behalf of the charge holder. The position of the assessee, as such collector, is that of a `cestui que' trustee, who holds the income in trust for the charge holder. The income belongs to the charge holder only and cannot be assessed in the hands of the assessee.

It is pertinent that the decisions in the cases of CIT vs. Crawford Bayley and Co [1977] 106 ITR 884 {Bom}and CIT vs. Nariman B. Bharucha & Sons [1981] 130 ITR 863 {Bom}directly involved cases where the payments, made by partnership firms to erstwhile partners or their heirs under obligations agreed in the partnership deeds, were held to be diversions of incomes not taxable in hands of the firms.

3.4. After considering the above precedents laid down by the Supreme Court and the Bombay High Court, the Mumbai Tribunal in the case of RSM and Co held that covenant in the partnership deed to make payment to the retired partner created an overriding charge on the income of the assessee in favour of the retired partner. By virtue of this charge, the income to the extent of the charge was diverted to the retiring partner before it reached the hands of the assessee. The Tribunal thus held that this income cannot be assessed in the hands of the assessee.

3.5. According to me, whereas the decision of the Mumbai Tribunal has been correctly laid, it is also possible support the decision from another angle. Some Courts have made a fine distinction between an obligation which attaches to the source of income and an obligation which attaches to the income itself According to these decisions, the diversion of income is only in the former case and in the later cases, it application of income. Without dwelling at length on these decisions, I would invite the attention of the readers to the decision of the Supreme Court in the case of CIT vs. Travancore Sugars and Chemicals Ltd [1973] 88 ITR 1 {SC}, which comes to my mind. Here, it appears that the Apex Court has made an observation to the effect that where the obligation is attached to the profit earning apparatus, the income can be said to be diverted at the source. On the other hand, if the obligation is attached to the profit earning process, the payment may have to be considered as to whether the same is allowable as expenditure from business profits.

From the facts of the case cited in the Mumbai Tribunal decision in the case of RSM & Co, it can be seen that there was a covenant in the partnership deed obliging the partnership firm to pay an assured amount to a retiring partner. When the partners sign such a deed, the covenant binds both the continuing partners and the retiring partners at the time of future retirement. The effect of this covenant is that the continuing partner would be entitled to continue the business of the partnership only under a pre-condition that the retiring partner would be paid this assured amount. In short, the profit earning apparatus of the partnership firm is released by retiring partner in to the hands of the continuing partners subject only to their commitment to this obligation. This is veritably a case, where the obligation to pay an income is attached to the very source of income i.e. the profit earning apparatus.

Therefore, even viewing from this angle, it is possible to also support the decision of that the Mumbai Tribunal in RSM & Co's case.

CA Anant PAi

Tax exemption limit should be Rs 2 lakh

Tax exemption limit should be Rs 2 lakh

This time around, the Budget will be presented amid heady inflationary winds and much jostling over the bills which are long pending before Parliament. The initiatives will be seen in the backdrop of the government making a desperate attempt to provide succour to the ululating common man. But apart from this, there are some banking-related issues waiting for some signals. These include a stand on domestic bank licences, capital gain tax on transition from a branch to a wholly-owned subsidiary of a foreign bank, besides a rollout of specific measures for mortgage and MFI sectors. As per RBI figures, aggregate deposits of scheduled commercial banks (SCBs) have increased from Rs 4,49,000 crore as of March 31, 2010, to Rs 4,97,000 crore as of December 10, 2010 —a growth of 10.6%. Also, bank loans have grown from Rs 3,24,000 crore to Rs 3,76,000 crore as of December 10, 2010 — a growth of 16% in the said period. This shows significant credit growth vis-a-vis deposit growth. In fact, it was in the third quarter of the current fiscal that the difference between deposit and credit growth peaked, thus putting pressure on liquidity. On the bright side, strong domestic demand and government capex in the financial year has provided a big boost to GDP growth, which has been more than 8.5% till date for the fiscal. The International Monetary Fund (IMF) projects India's GDP growth for FY11 at 8.8%, while the government has projected it at 8.6%. However, firmer crude oil prices and sectoral imbalances, particularly the supply-demand mismatch for non-cereal food items, has led to a consistently high inflation rate. Steps taken by the Reserve Rank of India (RBI) to maintain a balance between growth and inflation have produced muted results indicating that monetary measures to control inflation have their limitations.

Some of the key steps taken since the last budget impacting the banking sector are as follows:

1.) Statutory liquidity ratio (SLR) reduced to 24% from 25%.

2.) Repo rate increased by 175 bps (100 basis points is 1%), from 4.75% to 6.5% and reverse repo rate by 225 bps, from 3.25% to 5.5%. Also, cash reserve ratio (CRR) also increased by 50 bps from 5.5% to 6%.

3.) Base rate for banks introduced for lending purposes.

In view of the above-mentioned facts, some fiscal measures to help banks participate more substantially in infra-related sectors and continue their support to retail mortgages would be welcome. Also, giving infrastructure status to townships, providing tax breaks for housing development will act as growth catalysts. Further, extending tax holiday benefits for export-oriented units by another three years will be well received. Besides, tax-free status for fixed deposits up to three years and more would also be a welcome move. This will help banks manage their asset liability management (ALM) mismatches better. In addition, enhancing the tax exemption limit to Rs 2,00,000 in line with the proposed Direct Tax Code Bill (DTC) from April 2012,would provide immediate relief to the salaried class going by the present inflationary scenario. – www.financialexpress.com

Whether when assessee acquires a running cement plant in slump sale

 

Income tax - Whether when assessee acquires a running cement plant in slump sale, if price paid for assets is more than book value in hands of seller, excess is to be attributed to consideration for goodwill - NO, rules ITAT

MUMBAI, JAN 17, 2012: THE issues before the Bench are – Whether when assessee acquires a running cement plant in a slump sale, if the price paid for the assets is more than book value of assets in the hands of the seller, the excess is to be attributed to goodwill; Whether depreciation is to be allowed by taking WDV as per books of seller as cost of acquisition of assets in the hands of the assessee; Whether when the seller and the purchaser are not related parties, even then valuer's report is to be rejected alleging collusion in the deal and Whether the one time settlement premium paid to financial institutions in consideration for reduction in the interest rates is allowable as revenue expenditure in the year of expenditure. And the verdict partly goes agaisnt the assessee.

Facts of the case

A) Assessee company started its business operation w.e.f. 01/11/99, i.e., the date on which it acquired the cement business of the TISCO, as a going concern. During the current year it acquired cement manufacturing unit of Raymonds Ltd (RL). AO asked the assessee to furnish copy of the valuer's report, date of actual transfer of assets, written down value of each asset taken over in the books of previous owner, treatment of excess payments, i.e. written down value and amount capitalised in the books for I.T. purpose and treatment given by seller in their books in respect of this transaction and date of actual production of this unit along with documentary evidence after take over.

Assessee acquired the plant on "as and where" basis i.e., as a going concern. There was no change/alteration/ modification in the plant & machinery after purchase of the same, except few repairs, renovations & improvisation. The cement plants along with the land holding and all current assets, such as raw-material, semi-finished goods & finished goods, sundry debtors, spares & tools and other movable and immovable assets were acquired, lock, stock and barrels for a consolidated lumpsum consideration of Rs.751 crores. This consideration was allocated towards fixed assets and towards goodwill. Assessee incurred certain expenses towards further modification and improvisation and capitalized pre-operating expenses incurred by it and claimed depreciation on the same.

AO rejected the valuation report on the ground that the price of the plant and machineries were artificially jacked up in the report to the level of consideration paid by appellant, the valuer had adopted the `Net Replacement Cost' method which was nothing but the cost of brand new individual machinery or the cement plant, and the valuation report should have been prepared much prior to the date of Business Transfer Agreement. The survey was carried out subsequent to the date of the Business Transfer Agreement, the only purpose, for which the valuation report had been prepared, was to help and assist the assessee to appropriate the differential cost to its fixed assets in its books of accounts, thereby entitling the assessee to claim a larger chunk of depreciation. AO called for the information regarding the WDV of the assets transferred, directly from RL and substituted the same in place of the cost of acquisition assigned by the assessee. Since the said WDV of fixed assets as on the date of acquisition was less than the consideration paid, the excess was considered as goodwill by the AO.

CIT (A) allowed the appeal of the assessee stating that AO had not made out a case in any manner to show that the transaction of sale of the cement unit as a going concern was collusive or that there was any tacit understanding with the seller to attach a higher value to the cost of acquisition of capital assets. The deal was not between related parties. The cost had been assessed and worked out by an expert agency and unless the expert advice was proved to be manipulative or worked up with reference to some tangible piece of evidence, the AO could not disregard the veracity of the expert valuation. The observation of AO that valuation had been done at net replacement cost was not correct since depreciation had been duly deducted to arrive at market price of the plant and assets. Thus, depreciation was allowable to assessee with reference to the cost of acquisition as shown by the appellant duly supported by the Expert / Approved Valuer's report.

Revenue contended that the CIT (A) erred in holding that the assessee was entitled to claim depreciation with reference to the cost of acquisition of cement unit purchased from `RL' without appreciating the provision of Explanation 3 to section 43(1).

B) Assessee obtained loan funds from various financial institutions by way of term loans and issue of non-convertible debentures on which the company was required to pay interest in the range of 14.5% to 15%. The company claimed interest on such borrowings as deduction u/s 36(1)(iii). During the impugned financial year, assessee paid one time settlement premium to some financial institutions in consideration for reduction in the interest rates agreed upon by them. In the books of accounts the said premium was amortised over a period of 3 years. However, in the return of income, assessee claimed deduction in respect of the entire amount of settlement premium paid to the financial institutions. AO disallowed the assessee's claim stating that the assessee had not furnished the details and it was not justified for deduction of entire expenditure when it had itself amortised the said premium amount for a period of three years in the books.

CIT (A) allowed the appeal observing that the benefit secured by incurring expenditure, although for a longer duration, did not result in acquisition of any tangible or intangible assets and hence should be considered on revenue account and allowed as deduction. The settlement premium paid on restructuring of loan merits to be considered as a revenue expenditure and it has also been made to effect saving in future interest outgo of the assessee.

Assessee contended that payment in question was nothing but interest paid on money borrowed in terms of section 36(1)(iii) and allowable as revenue expenditure in the year of accrual. Revenue contended that the benefit in question is spread over the period of time and under the matching concept, only proportionate expenditure is allowable in this year.

C) Assessee acquired the cement unit of RL on a going concern basis with all its assets, tangible or intangibles, and liabilities vide the Business Transfer Agreement. Assessee carried out a valuation for the tangible assets acquired in course of acquisition and capitalized them at the value arrived at by the valuer in his valuation report. The excess payment made over and above the value of tangible assets acquired was claimed attributable to various intangibles transferred alongwith the undertaking such as licenses, know-how, trade marks, coal linkages, rail linkages, business rights, etc. For the sake of convenience and in accordance with the generally accepted accounting practices and provisions of Accountant Standard 14, the said payments were capitalized in the books as goodwill and depreciation was claimed.

AO rejected the claim stating that the definition of intangible assets as defined in Explanation 3(b) to section 32 does not leave any scope for goodwill and thus, the depreciation on goodwill was disallowed.

CIT (A) held that on perusal of the Business Transfer Agreement, the assessee had indeed acquired various intangible assets in course of the acquisition like mining rights, coal linkages, rail linkages, trade marks, other licenses, etc. which would be covered under the definition of intangible assets as trade marks/licenses and other business or other commercial rights in the nature of licesnes and hence would qualify for depreciation as per the Explanation 3(b) in section 32. On the part amount which is held to be on account of pure goodwill was not entitled to depreciation.

Assessee contended that merely because the assessee disclosed the total payment as goodwill, in the books of account, no adverse inference could be drawn against the assessee. Without prejudice, the assessee submitted that excess amount paid for acquisition of the unit, were towards factors like locational advantage, contacts with dealers and customers attached to the business etc. which was nothing but an advantage or right to carry on a business or commercial activity in a more efficient manner. Therefore, the term goodwill was covered by the expression `business or commercial right of similar nature' and eligible for depreciation.

After hearing both the parties, the ITAT held that,

A) ++ in the preceding year, the ITAT had considered a similar issue arising out of acquisition of cement unit of TISCO in which it held that as per section 43(1) that the actual cost to be considered for the purpose of section 32 should be the actual cost paid by the assessee. Since the cost has not been directly or indirectly met by any other person or authority, the cost paid by the assessee for acquisition of the assets of the units is the cost under section 43(1). However, Explanation (3) makes it clear that where the assets are used at any time by any other person for the purpose of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets directly or indirectly to the assessee was reduction of liability to tax for claiming depreciation with reference to enhanced cost, the actual cost of the assets shall be such an amount as the AO may determine having regard to all the circumstances of the case. As rightly considered by the CIT(A) the parties are unrelated and the transaction is at arms length basis. The registered valuer also valued the assets as on 01.11.1999, the price of which was considered to be the cost of fixed asset acquired and the balance to the current assets including the current liabilities. In view of this, there is no reason to invoke Explanation (3) as the AO nowhere stated that the main purpose of such a valuation was for reduction of liability to tax. It is a direct acquisition by the assessee company from another public limited company in an open bid, being the highest bidder;

++ as per AS 10 para 35 the assessee was supposed to take the value on the fair basis as determined by competent valuers. The observations of the AO are not correct. Since the assets are acquired on slump sale basis and individual assets are not priced or purchased item-wise, the assessee as per the Accounting Standard 10 to be adopted for the purpose of maintaining the books of account, has obtained a valuation report which has taken the net replacement cost method and has adopted the value in the books of account. Thus, the AO's observation that the value adopted by the assessee is exactly tallying with the subsequent valuation by the surveyor is without any basis. AO has not analysed the actual WDV in the hands of the TISCO. What he has adopted is the book value in the books of TISCO which incidentally will be different from the actual WDV for the purpose of income tax. Even though the seller has shown the profit on sale of net assets of the cement Division and taken the income to the P & L Account, the said company adjusted the cost of sale in the WDV of the assets for the purpose of income tax and offered incomes only under section 115JA of the Income Tax Act on the book profits made. AO failed to consider the net consideration adopted by the TISCO for adjustments in the books of account and the values adopted for current assets. The computation in the hands of the TISCO is quite different from the computation to be made in the hands of the assessee. Thus, AO has not examined the facts and arrived at wrong conclusions without any basis;

++ the registered valuers are experts and value and reliability of their opinion would depend upon the material contained in their report. They are competent to fix value of properties for several earlier years. Even otherwise WTO in the wealth-tax purposes is required to determine in the present, the value of assets as on the valuation dates which may be five or seven years earlier. If this is not possible, then scheme of fixation of value of assets under the WT Act cannot work. Such a view would defeat the very purpose of the WT Act and, therefore, cannot be accepted as correct. Since the deal was at arms length price and since the parties are not related and there is no evidence that the transaction is a collusive one or done with an intention to reduce the tax liability and also further that there is no clause for payment of goodwill by the assessee in the Business Transfer Agreement, the AO's action in considering the price paid for acquiring the assets at more than the book value in the hands of the seller to be treated as goodwill has no basis at all;

B) ++ in the case of Overseas Sanmar Financial Ltd. (Chennai) similar issue was considered in which it was held that the reduction in the rate of interest for fresh loans to be advanced by the financial Institutions led the assessee-company to pay off the entire loan that carried the burden of higher rate of interest. The assessee apparently calculated the amount of interest, that would be paying over the years at the agreed rate of interest and compared it with the foreclosure premium together with the interest that it would pay on the revised rate basis and found it to be advantageous to the company by paying the foreclosure premium. This advantage that the company wanted to benefit from is clearly a well-judged business decision and, therefore, it is laid out wholly for the purposes of its business. This itself is sufficient for allowing the claim in full in the year in which it was incurred. Following the said decision, the expenditure is allowed in the impugned assessment year in full;

C) ++ it is true that the nature of payment has to be considered and terminology used in the books of account does not determine the allowability of claim. The assessee has made a vague claim. On the one hand it states the excess payment made, over and above the value of tangible asset acquired, is for licences, quotas, business rights etc. and whereas on the other hand it states the excess amount should be taken as that paid for factors like locational advantage, contracts with dealers and customers attached to the business etc. This second limb, cannot be a business or commercial right but only goodwill. While stating facts, alternate or without prejudice stand cannot be taken. The assessee is supposed to know exactly the purpose for which the amount is paid. While tangible assets were valued, intangible assets were not valued in this case. Contacts with the customers, with dealers, locational advantage, rail linkage etc. when valued, are goodwill and not business or commercial right of similar nature. A separate valuation, asset-wise has to be undertaken and appropriate conclusions drawn. CIT (A) had not given the AO an opportunity to examine the facts as presented before CIT(A). Assessee had not challenged the finding of CIT(A) that depreciation is not allowable on goodwill. Thus, this issue has attained finality. The only issue is, to determine the value of intangible assets other than goodwill. The issue is set aside to the file of the AO for fresh adjudication in accordance with law.

READING [Art of reading]

 

READING

INTRODUCTION:

Reading is inevitable for knowledge gaining. The main purpose behind our reading is to make connections between what we have already known and what we need to know. Knowledge is wide. Gaining knowledge or updating in particular subject is highly required for the present business world. There may be many reasons for reading-

Practical application;

To get an overview;
To locate specific information;
To identify the central idea of theme;
For pleasure and enjoyment.
FAST AND SLOW READING:

How to read. The style of reading may be of two types – fast reading and slow reading. Fast reading may be used for the following:

To gain an overview of the material;
To separate relevant from irrelevant material;
To locate specific information;
To identify the central theme or idea;
There are three effective fast reading styles which are scanning, key words spotting and skimming. The speed reading aims to improve reading skills by-

Increasing the number of words read in each block;
Reducing the length of time spent reading each block; and
Reducing the number of times your eyes skip back to a previous sentence.
Slow reading helps to gain a detailed understanding of the material and maintain your connection. A slow reading is useful to-

Evaluate what you have read;
Remember exactly what you have read;
Follow instructions or directions;
Understand difficult terms or ideas.
TECHNIQUES:

The following are the techniques of reading-

Reading for enjoyment – like reading a novel or magazine – it is involves light reading;
Exploratory reading – skimming through the book to get the gist of the topic. Skimming involves finding out what something is all about. In order to skim one is to formulate questions before begin to read. E.g., What is this all about. Does this article deal with the subject one is researching. Etc.,
Revision reading – skimming through a book which is familiar in order to confirm knowledge;
Search reading – scanning for a specific piece of information or to answer a specific question;
Proof reading – carefully focusing on spelling, punctuation and sentence structure and checking accuracy;
Reading for mastery – to get detailed information or understanding the topic; For this careful, slow and repeated reading is adopted;
Critical reading – reading for stimulus, for challenge, to assess values and ideas an in reading a book for review or critically analyzing a novel. The most important skill in critical reading is asking questions. Skim through the passage first read the passage more slowly keeping in mind certain questions like why does the author make this statement; how do you feel about this information; what opinions, feelings and attitudes are being expressed; are they facts or opinions; is the information logical; examine the choice of words used – what connotations are suggested; then re read silently and aloud for a number of times and finally form the opinion as derived from critical reading.
READING PURPOSE:

Reading is essential for success. It also means taking some risks. One cannot read everything. One cannot read everything in the same way. One has to decide why he is reading and he what he wants to get out of it and this means of selecting what to read and how much attention to give certain parts of his reading. Deciding the purpose of reading one is to decide the approach and the depth of reading-

For a set text or wider reading.
For a lecture
For a tutorial/seminar.
For an assignment
For an exam.
Before reading one has to look-

at the title, details about the author and work out how the work fits in with other texts in the subject;
scan the contents page and the index to gain an overview of the are covered by the work;
skim through the work, picking up key paragraphs and sentences, particularly the opening and closing sections of chapters or articles
and then read the whole carefully, nothing major points and ideas in one's one words as well as sections to which one may wish to return later.

For assignment or for research one may try the following steps:

start with a book from the reading list which gives an overview of the topic;
as you read, keep asking yourself exactly what you are looking for and write down those questions as a guide to reading;
keep doing the look, scan and skim procedure to make sure the material is both relevant to your needs, and that you are not duplicating information you have already found;
record the details of author, title, place of publication, publisher and date as you select each work so that you don't have the frustration of trying to find it again and preparing your reference list/bibliography. Record page numbers with any notes you take;
take notes from your reading as you would if you were reading for research purposes.
DIFFICULT READING:

When you find reading is difficult there are several strategies that you can try-

Be an active reader by asking yourself questions about what you are reading and how it relates to your research;
Prepare for reading by consulting your lecture, notes beforehand for guidance and an overview;
Turn section headings in the book or article into questions and answer them in your own words after you have read the section;
Break the reading into smaller sections and note one section at a time;
If the language or style used make the work too difficult to grasp, seek help from your tutor or lecture, who may be able to suggest a more straightforward introduction to the topic.
STRATEGIC READER:

Strategic readers actively construct meaning as they read, interacting with the text. They set purposes for reading, select method of accomplishing these purposes, monitor and repair their comprehension as they read and evaluate the completed task. A strategic reader constructs, examines and extends meaning before, during and after reading for a variety of texts. There are a number of differences between strategic readers and poor readers during all phases of the reading process.

By: Mr. M. GOVINDARAJAN

re-opening

 

Intimation under section 143(1) issued but not communicated to assessee - Whether reopening of assessment justified
Once the order under section 143(1) was passed, and no notice under section 143(2) had been issued, the AO can issue notice under section 147/148, if the pre-conditions are satisfied. -Vide Atsushi Yoshida & Others v. Assistant Commissioner of Income Tax (2012) 43 (I) ITCL 64 (Del-HC)