Notional interest

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "G", MUMBAI
BEFORE SHRI P.M.JAGTAP (A.M) & SHRI N.V.VASUDEVAN(J.M)

ITA NO.591/MUM/07(A.Y. 2003-04)

The DCIT 5(1),Vs. M/s. Gagan Trading Co. Ltd.
ITA NO.678/MUM/07(A.Y. 2003-04)
M/s. Gagan Trading Co. Ltd.Vs. The DCIT 5(1),
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ORDER

PER N.V.VASUDEVAN, J.M,

ITA No.678/Mum/07 is an appeal by the assessee while ITA No.591/M/07 is an appeal by the revenue. Both these appeals are directed against the order dated 8/11/2006 of CIT(A)-V, Mumbai relating to assessment year 2003-04.

2. First we shall take up for consideration the appeal by the revenue. The ground of appeal raised by the revenue reads as under:
"On the facts and in the circumstances of the case and as per law, the ld. CIT(A) erred in deleting the notional interest taxed by AO on deposits received while calculating income from house property."

3. The assessee is owner of the commercial premises know as Jindal Mansion situate at Peddar Road, Mumbai. The assessee let out the premises to two tenants since 1987 namely Jindal Steel Ltd. and Jindal Iron & Steel Ltd. for a monthly rent of Rs. 5000/- & 6500/- respectively. In respect of the area occupied by them in the F.Y.95-96 relevant to A.Y. 96-97, the assessee had reconstructed the property and thereafter the property consisted of ground plus five upper floors. The assessee has let out the property to the following companies 1) Jindal Steel Ltd. 2) Jindal Thermal Power Co. Ltd. 3)Jindal Iron & Steel Co. Ltd. 4) Jindal Vijay Nagar Ltd., on a monthly rent of Re.1/- per sq.ft. and collected security deposit totalling to 85 crores from them. The deposits so collected were interest free deposits and they do not carry any interest as per terms of these agreement. The total area so let out was 26,200/- sq.ft. According to the AO, the Assessee has used the interest free deposit to make investment in equity shares of group companies. In this background, the AO called upon the Assessee to show cause as to why interest on such security deposit should not be taken as indirect rent for purpose of determining the Annual Value for the purpose of determining income under the head "income from house property". According to the AO, the assessee filed its explanation and the same has been placed on the records.

4. Thereafter, the AO has observed in the order of assessment that similar issue has been discussed in assessment order for A.Y 1996-97 to 2002-03 and in view of the detailed discussion contained in those orders, he was of the view that the motive of the assessee in collusion with group company was to reduce the tax liability by showing nominal rate and accepting huge deposit carrying no interest. The Assessee pointed out that the in the earlier years the Hon'ble ITAT Mumbai, had held that notional interest on interest free security deposit cannot be added cannot be added to the rent received to arrive at the Annual Value for determining income under the head "Income from House Property". The AO however observed that the department has not accepted the decision of the Hon'ble ITAT and on this issue and has filed an appeal under section 260A before the Hon'ble Bombay High Court. For the reasons stated above and to keep the issue alive as per the assessment orders of his predecessor a notional interest @18% was worked out on the interest free deposit and the same was considered for determining ALV in order to determine income from house property. The AO accordingly determined income under the head "Income from House Property as follows:
The Annual Area of the Property is computed as under:-
Total notional interest on deposit of Rs.85 Crores @ 18% Rs.15,30,00,000
Add: Actual rent received Rs. 26,200
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Gross Annual value Rs.15,30,26,200
Less: Deduction u/s. 24(1)
i) ¼ repair and collection charges Rs. 3,82,56,550
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Rs.11,47,69,650

Income from House Property Rs.11,47,69,650/-

5. On appeal by the assesse, the CIT(A) following the decision of the ITAT in assessee's own case for A.Y 1999-2000 held that notional interest of interest free security deposit cannot be added to the actual rent received while determining the annual value for the purpose of determining the annual value for the purpose of determining income from house property.

6. Aggrieved by the order of the CIT(A) the revenue has preferred the present appeal before the Tribunal.

7. We have heard the rival submission. The ld. D.R while admitting that similar issue has been decided in favour of the assessee by the ITAT in A.Y 1999-2000 relied on the order of AO. The ld. counsel for the assessee relied on the order of the Tribunal in assessee's own case for A.Y 1999-2000.

8. We have considered the rival submissions. The very same issue was considered and decided in favour of the assessee by the Tribunal in ITA NO.3799/Mum/99 for A.Y 1999-2000 in assessee's own case. For the reasons given in the said order, we uphold the order of CIT(A) and dismiss the appeal by the revenue.

9. Now we will take up for consideration ITA No.678/M/07, the appeal of the assessee. Ground raised by the Assessee reads as follows:

"The learned Assessing erred in disallowing set off of brought forward losses of Rs. 43,48,809/- against dividend income of Rs.43,48,809/- earned on the shares held in stock in trade."

10. We have already seen that the Assessee is in the business of purchase and sale of shares, debentures and earning dividend income. The Assessee had suffered a loss under the head business and profession in A.Y.95-96. That loss could not be set off in that year against any head of income in accordance with the provisions of section 71 of the Income Tax Act, 1961 (the Act). It was accordingly carried forward for the following Assessment year to be set off in accordance with the provisions of Section 72 of the Act. The loss so carried forward for being so set off remained unabsorbed till A.Y.03-04. In A.Y.03-04, the Assessment Year to which this appeal relates to, the Assessee had income under the head "Income from other sources" viz., Dividend Income of Rs.43,48,809. There is no dispute that the dividend income was in respect of shares held by the Assessee as stock-in-trade of its business of trading in shares. The Assessee made a claim for set off of carried forward business loss in A.Y.95-96 to the extent of dividend income which was assessable under the head "Income from other sources". The claim of the Assessee was that the business of the Assessee was purchase and sale of shares and the nature of the dividend income is income from business, though the same is assessed under the head "Income from other sources. The Assessee relied on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Cocanada Radhaswmi Bank 57 ITR 306 (SC) wherein it was held that though income in the form of interest earned by an Assessee from its business of banking is assessed under the head "Interest on Securities", the same is nevertheless profits and gains of business and therefore carried forward business loss of earlier years can be set off against interest income. The Assessee also relied on the decision of the Hon'ble Calcutta High Court in the case of CIT Vs. New India Investment Corporation Ltd. 130 ITR 778 (Cal) laying down identical proposition.
11. The AO however rejected the claim of the Assessee for the reason that the decision of the Hon'ble Supreme Court was in relation to AY 49-50 and 63-64 when dividend income was treated as Interest on securities. According to the AO, from AY 91-92 the Act was amended and dividend income is being brought to tax under the head "Income from other Sources vide Sec. 56 (2)(i) of the Act, even though they are held as stock in trade of business by an Assessee. Hence the claim of the Assessee for set off was rejected by the AO.
12. Before CIT(A), the Assessee reiterated its stand as was made before AO and further relied on the decision of the Hon'ble Delhi High Court in the case of Excellent Commercial Enterprises and Investments Ltd. 197 CTR 187 (Del) in which similar claim made in relation to A.Y. 96-97 was directed to be allowed. The CIT(A) however held that the decision in the case before the Ho'ble Delhi Court related to a case where dividend income was taxed as business income and therefore Sec.72(1)(i) and 72(1)(ii) of the Act applied and set off was allowed. Whereas in the case of the Assessee, dividend income was offered to tax by the Assessee as income from other sources and was assessed as such and therefore prohibition u/s.72 of the Act clearly applied. He therefore confirmed the action of the AO. Hence, the appeal by the Assessee before the Tribunal.
13. We have heard the rival submissions. The learned counsel for the Assessee reiterated the stand of the Assessee as was put forth before the Revenue authorities. The learned D.R. relied on the orders of the Revenue authorities.
14. We have considered the rival submissions. The issue that arises for our consideration is as to whether the claim of the Assessee for set off of carried forward business loss against income in the form of dividend which was assessed under the head "Income from other sources", can be set off. The relevant provision under the which the Assessee made a claim for such set off was Sec.72(1)(i) of the Act, which is as follows:
"Sec.72(1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and - (i) It shall be set be off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year:"
15. The Hon'ble Supreme Court had an occasion to consider the question as to whether set off the business loss brought forward from the preceding year against interest income which was assessed under the head "interest on securities" could be allowed in the case of Cocanada Radhaswamy Bank (supra). The interest income arose on securities held by the Assesse in its business of banking. The said interest income, was however assessed under the head "Interest on securities". The question arose in the context of the Income Tax Act, 1922 (1922 Act) the relevant provisions equivalent to Sec.72 of the Act under the 1922 Act was Sec.24 of the 1922 Act and it read as follows:
"24. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year............
(2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year...........".
The Hon'ble Supreme Court held:

"While sub-section (1) of section 24 provides for setting off of the loss in a particular year under one of the heads mentioned in section 6 against the profits under a different head in the same year, sub-section (2) provides for the carrying forward of the loss of one year and setting off of the same against the profits or gains of the assessee from the same business in the subsequent year or years. The crucial words, therefore, are "profits and gains of the assessee from the same business", i.e., the business in regard to which he sustained loss in the previous year. The question, therefore, is whether the securities formed part of the trading assets of the business and the income there from was income from the business. The answer to this question depends upon the scope of section 6 of the Act. Section 6 of the Act classified taxable income under the following several heads: (i) salaries; (ii) interest on securities; (iii) income from property; (iv) profits and gains of business, profession or vocation; (v) income from other sources; and (vi) capital gains. The scheme of the Act is that income-tax is one tax. Section 6 only classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. Though for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of the income from business if the securities are part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of section 6 but on commercial principles. To put it in other words, did the securities in the present case which yielded the income form part of the trading assets of the assessee? The Tribunal and the High Court found that they were the assessee's trading assets and the income there from was, therefore, the income of the business. If it was the income of the business, section 24(2) of the Act was immediately attracted. If the income from the securities was the income from its business, the loss could, in terms of that section, be set off against that income.
A comparative study of sub-sections (1) and (2) of section 24 yields the same result. While in sub-section (1) the expression "head" is used, in sub-section (2) the said expression is conspicuously omitted. This designed distinction brings out the intention of the legislature. The Act provides for the setting off of loss against profits in four ways. To illustrate, take the head "profits and gains of business, profession or vocation". An assessee may have two businesses. In ascertaining the income in each of the two business, he is entitled to deduct the losses incurred in respect of each of the said businesses. So calculated, if he has loss in one business and profit in the other both falling under the same head, he can set off the loss in one against the profit in the other in arriving at the income under that head. Even so, he may still sustain loss under the same head. He can then set off the loss under the head "business" against profits under another head, say "income from investments", even if investments are not part of the trading assets of the business. Notwithstanding this process he may still incur loss in his business. Section 24(2) says that in that event he can carry forward the loss to the subsequent year or years and set off the said loss against the profit in the business. Be it noted that clause (2) of section 24, in contradistinction to clause (1) thereof, is concerned only with the business and not with its heads under section 6 of the Act. Section 24, therefore, is enacted to give further relief to an assessee carrying on a business and incurring loss in the business though the income there from falls under different heads under section 6 of the Act."

16. We are of the view that the aforesaid decision of the Hon'ble Supreme Court will squarely apply to a claim of set off u/s.72(1)(i) of the Act, by the Assessee in the present case. In this regard, we find the provisions of the 1922 Act and the Act i.e., 1961 Act, to be identical, as can be seen from the chart given below:

1922 Act
Section 24 of the Income Tax Act, 1922:
"24. (1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year............
(2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year and set off against the profits and gains, if any, of the assessee from the same business, profession or vocation for that year; and if it cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following year...........".
1961 Act
Section 72 of the Income Tax Act, 1961.
CARRY FORWARD AND SET OFF OF BUSINESS LOSSES.
(1) Where for any assessment year, the net result of the computation under the head "Profits and gains of business or profession" is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and - (i) It shall be set be off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year :
Provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year; and
(ii) If the loss cannot be wholly set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on

In the earlier part of Sec.72(1) the expression used is "under the head "Income from business and profession", while in clause (i) of Sec.72(1) the expression used is "the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year. Though for the purpose of computation of the income, dividend is classified as "Income from other Sources", income by way of Dividend was very much part of the income from business, because the shares on which dividend income was earned was stock in trade of business of trading in shares carried on by the Assessee and they formed part of the trading assets.

17. Under the 1922 Act, the question whether dividend income should be assessed under the head "income from Business" or "Income from other Sources" had come up before Hon'ble Courts for consideration. The view expressed in decided cases was that where the shares, on which dividend income is earned, if held as stock-in-trade, would be "business income". Otherwise it was assessed as "Income from other Sources". The Revenue has always been contending that merely holding of investments which yield dividend income can never be said to be carrying on "Business". The 1922 Act was therefore Amended by Finance Act, 1955, whereby Dividend Income was to be assessed as "income from other sources". Therefore dividend income even though it relates to shares held as stock-in-trade of business by an Assessee had necessarily to be assessed under the head "Income from business". Though for the purpose of computation of the income, dividend is separately classified, income by way of dividend does not cease to be part of the income from business, because the shares on which dividend income was earned were admitted part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of section 14 of the Act, but on commercial principles.
18. The argument of the learned D.R. was that the decision of the Hon'ble Supreme Court in the case of Cocanada Radhaswamy Bank(supra) was rendered in the context of interest income which was assessed under the head "Interest on Securities" and w.e.f. 1-4-1989, Chapter IV of the Act, dealing with "Interest on Securities" was omitted and therefore the same analogy cannot be applied to "Dividend" income which is treated as "Income from other sources". In this regard, we find that by the Finance Act, 1988 w.e.f. 1-4-1989, "Interest on Securities" as a separate head of income enumerated u/s.14 of the Act, was omitted as a measure of rationalisation to treat all interest income as "Income from other sources". Prior to the above rationalisation, interest on securities held as investment was treated as "Income from other sources" and those held as stock-in-trade were treated as "Income from Business". It is thus seen that the reason for the change in law both for interest and dividend income are one and the same. Therefore there can be no basis to say that the decision in the case of cocanada Radhaswamy Bank(supra), will apply only in the context of interest income being treated as "Income from other sources".
19. Another argument of the learned D.R. was that Section 14 of the Act provides that "Save otherwise provided by this Act, all income shall, for the purpose of charge of income tax and computation of total income, be classified under the following heads of income.....". According to him, the corresponding provision in Sec.6 of the 1922 Act, did not contain such provision. We are afraid, the contention is without merit. Sec.6 of the 1922 Act, reads "Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing namely.....". The provisions of Sec.6 of the 1922 Act and the provisions of Sec.14 of the Act, in our view mean the one and the same thing viz., classification of different heads of income for the purpose of computation of total income. Another argument was that whatever a company does can be considered as business under the Companies Act, 1956 and that cannot hold good for the purposes of the Act. This argument runs contrary to the finding of the AO. The AO has not disputed that the shares which yielding dividend income formed part of the stock in trade of the Assessee.

20. For the reasons given above, we hold that the Assessee is entitled to the set off of its carried forward business loss against dividend income as claimed by it. The appeal of the Assessee is accordingly, allowed.

21. In the result, appeal of the revenue is dismissed while appeal of the Assessee is allowed.
Order pronounced in the open court on the 18th day of February 2011.

case laws

S. 4 : Income – Mutuality – Interest from Banks

Interest income on investments with banks is not exempt on the principle of mutuality even though the concerned banks are members of the club.

CIT vs. Wellington Gymkhana Club (2010) 46 DTR 22 (Mad.).

S. 4 : Income – Capital or Revenue Receipts – Amount received under incentive scheme

Amount received under incentive scheme for repayment of loans to set up new units is capital receipt.

CIT vs. Kisan Sahkari Chini Mills Ltd. (2010) 328 ITR 27 (All)

S. 4 : Income – Trade advance from foreign buyer:

Assessee received advance of Rs. 9 crores from certain foreign buyers, however he could not export with in one year as stipulated by RBI vide its regulation, notification No. FEMA 23/2000-RB dt. 3-5-2000, and assessee periodically withdrew the amount and used for other business purpose. Assessing Officer treated the said receipt as income and made addition. On appeal CIT(A) deleted the addition. The Tribunal held that on the relevant year liability to pay was existing and foreign party's claim was still enforceable under the law. After getting the approval from RBI the assessee remitted the amount to the buyer through banking channel, therefore, the order passed by the CIT(A) was upheld.

ITO vs. Eurostar Distilleries (P) Ltd. (2010) 41 SOT 434 (Cochin)(TM)

S. 9(1)(i) : Income deemed to accrue or arise in India – Business Connection – Services rendered through Indian subsidiary

Assessee a US company, providing IT enabled services to its clients by assigning or sub contracting execution of the contracts to its wholly owned Indian subsidiary EFI and supplying the relevant software and data base to the later, free of charge, has business connection in India within the meaning of section 9(1)(i) as well as a PE in the form of EFI as per Art. 5 of the Indo-US DTAA, profits attributable to the PE are to be worked out by applying the proportion of Indian assets, including EFI's assets, to the aggregate of global profits and reducing resultant figure by the assessed profits of EFI.

EFunds Corporation vs. Asst. DIT (2010) 45 DTR 345 (Delhi)(Trib.)

S. 9(1)(vi) : Income from supply of `shrink-wrapped' software assessable as `royalty' – A tax-treaty can be unilaterally overridden

Payment made for grant of licence in respect of Copy right by end user is taxable as royalty as per s.9(1)(vi),domestic tax legislation to override treaty provisions in case of irreconcilable conflict.

Microsoft Corporation vs. ITAT (Delhi)

S. 10A(9) : Exemption – Change in share holdings

Even though the number of shares held by the assessee are less than 51% of the total shares issued by the assessee company, the original promoters continue to hold shares of the company carrying not less than 51% of the voting power and thus the ownership of the company was not transferred by any means within the meaning of sub section (9) of section 10A and therefore, the assessee company is right in claiming deduction under section 10A. Expln 1 to section 10A(9), is not retrospective and will apply only to those entities which for the first time got entitled to exemption under section 10A w.e.f. 1st April 2001.

Zycus Infotech (P) Ltd. vs. CIT (2010) 235 CTR 113 / 45 DTR 307 (Bom.)

S. 10B : Exemption – Export Oriented Undertaking – Convertible Foreign Exchange – Investment in equity shares

In order to avail deduction under section 10B sale proceeds must be received in convertible foreign exchange, sale proceed received in convertible foreign exchange means "actual receipt" and not deemed receipt. Amount received by an assessee in form of investment in equity shares in foreign exchange cannot be considered to be received in form of convertible foreign exchange.

ACIT vs. Bodhtree Consulting Ltd. (2010) 41 SOT 230 (Hyd.)

S. 10B : Exemption – Machinery previously used – Take over of undertaking

Assessee having used the machinery which was previously used by another company prior to its transfer and takeover by the assessee, section 10B(9) is attracted to the facts of the case and therefore, assessee is not entitled to exemption under section 10B for the asst year 2002-03 and 2003-04, however, assessee is entitled to exemption for Asst. Year 2004-05 as the provision contained in section 10B(9) did not exist on the statute book in that year.

ITO vs. Heartland Delhi Transportation & Services (P) Ltd. (2010) 45 DTR 239 / 133 TTJ 682 (Del.)(Trib.)

S. 10B : Exemption – Delay in filing return – [S. 139 (1)]

Proviso fourth to section 10B(1), which prohibits deduction if the return is not furnished on or before the due date specified under section 139(1), is directory and not mandatory therefore, relief can be granted by the appellate authority in case, there was genuine and valid reason for the marginal delay in filing of return.

ACIT vs. Dhir Global Industrial (P) Ltd. (2010) 45 DTR 290 / 133 TTJ 580 (Delhi)(Trib.)

S. 10(23C)(vi) : Educational Institutions – Accumulation of Surplus – benefit will not be lost

Merely because an educational institution accumulates income, it does not go out of consideration of section 10(23C)(vi). The exemption can be lost if application of income is for purpose other than education.

Maa Saraswati Educational Trust vs. UOI (2010) 194 Taxman 84 (HP)

S. 10(10C) : Exemption – Voluntary Retirement Scheme – (Rule 2BA)

Claim for exemption under section 10(10C), cannot be denied on the ground that the scheme of voluntary retirement framed by the employer is not in accordance with Rule 2BA.

Pandya Vinodchandra Bhogilal vs. ITO (2010) 45 DTR 105 / 133 TTJ 253 (Ahd.)(Trib.)

S. 11 : Charitable Trust – Exemption – Debenture – Bond – [S. 13(1)(d)]

Bond is covered by the expression "debenture" and therefore, investment in bonds of certain companies by the assessee, a Charitable Trust did not amount to infringement of the provision of section 13(1)(d) and therefore, exemption under section 11 could not be denied on that ground.

DIT vs. Shree Visheswar Nath Memorial Public Charitable Trust (2010) 46 DTR 49 (Del.)(Trib.)

S. 11 : Charitable Trust – Depreciation – (S. 32)

Depreciation is allowable on capital assets from income of charitable trust for determining the quantum of funds which have to be applied for the purpose of the trust in terms of section 11.

CIT vs. Market Committee, Pipli (2010) 45 DTR 381 (P&H)

S. 11 : Charitable Trust – Donations collected in a donation box – Corpus

Donations collected by the assessee, in a donation box in the face of its appeal that the amounts so collected would be used for the construction of a building can be considered as carrying specific directions for being used for construction of building and therefore, it is to be treated as donations toward corpus as such amount did not constitute income for the purpose of section 11/12.

Shree Mahadevi Tirath Sharda Ma Seva Sangh vs. ITO (2010) 133 TTJ 57 (Chd.)(UO)

S. 12AA : Charitable Trust – Registration – Condonation of delay – Advice of Chartered Accountant

Assessee, a Charitable Trust, having acted on the advice of the Chartered accountant which resulted in delay making the application in form 10A, constituted "sufficient cause" for the delay. Delay was rightly condoned by the Tribunal.

CIT vs. Indian Gospel Fellowship Trust (2010) 45 DTR 1 (Mad.)

S. 12AA : Charitable Trust – Registration – Effective Date

CIT having initially granted registration under section 12AA to the assessee w.e.f. 1st April 2007, and later passed an order on an application under section 154, granting registration w.e.f. 28th Feb., 2002, assessee was eligible to claim benefits under section 11/12 for the year under consideration i.e. Asst. Year 2006-07.

Shree Mahadevi Tirath Sharada Ma Seva Sangh vs. ITO (2010) 133 TTJ 57 (Chd.)(UO)

S. 23 : Income from House Property – Annual Value – Notional Interest -Interest free security deposit : Referred to Full Bench:

Whether notional interest on interest free security deposit is to be taken in to consideration to arrive at the notional value of the property in all cases or only in some glaring cases where the security deposit is completely disproportionate to the actual contractual rent or whether even a huge interest free security deposit can be totally ignored while determining the "fair rent" of the property is recommended to be referred to a Full Bench.

CIT vs. Moni Kumar Subba (2010) 45 DTR 25 / 235 CTR 132 (Delhi)

Editorial Note: Matter which was pending before special bench of Mumbai Tribunal in the matter of Trivoli has been withdrawn as the issue is subject of appeal before Bombay High Court.

S. 24(b) : Income from House Property – Interest – Construction of House

Where the assessee filed returns of income for two consecutive years, each categorically stating that the construction of the assessee's residential house was yet to be completed, interest on house loan under section 24(b), could not be allowed.

Ashok Kumar Modi vs. ITO (2010) 45 DTR 158 (Ctk.)(Trib.)

S. 28 : Business Income – Income from Other Sources – Licensing of Business Premises – (S. 56)

For the Asst. Years 1993-94 to 2001-02, the assessments were completed under section 143(3), wherein licence fee was assessed as business income, no fresh facts were discovered in the Asst. Year 2003-04. Hence, the matter set-a-side to the Tribunal to decide considering the above observation.

OceanCity Trading (India) P. Ltd. vs. CIT (2010) 328 ITR 290 (Bom.)

S. 28 : Business Income – Income from Other Sources – Interest on short term deposit with Bank – (S. 56)

Interest earned on short term deposits with bank by assessee tea growing company by investing surplus fund of the business before they were utilised for actual business assessable as business income and not as income from other sources.

Eveready Industries India Ltd. vs. CIT (2010) 235 CTR 263 (Cal.)

S. 30 : Repairs – Lease Premises – Rent, Rates, Taxes repair and insurance for buildings

Expenses incurred in connection with renovation of lease hold premises allowed as revenue expenditure.

Dy. CIT vs. Lazard India (P) Ltd. (2010) 41 SOT 72 (Mum.)

S. 32 : Depreciation – Assets Written Off – Used for Purpose of Business

Actual user of the machinery was not required with respect of discarded machinery and condition for eligibility for depreciation that the machinery being used for the purpose of the business would mean that the discarded machinery was used for the purpose of the business in the earlier years for which depreciation has been allowed.

CIT vs. Yamaha Motor India Pvt. Ltd. (2010) 328 ITR 297 (Delhi)

Editorial Note: SLP of department rejected (2010) 328 ITR (St) 10

S. 32(1)(ii) : Depreciation – Brand Name – Intellectual Property – Scheme of Arrangement

Where assessee company received brand name under a scheme of arrangement under section 391 to 394 of Companies Act 1956, assessee was eligible for depreciation in respect of brand name under section 32(1)(ii) of the Income Tax Act.

KEC International Ltd. vs. Addl. CIT (2010) 41 SOT 43 (Mum.)

S. 32(1)(iia) : Depreciation – Additional – Windmills

Windmills installed for electricity generation which did not increase plant capacity and which was not the core business, additional depreciation is allowable.

CIT vs. Texmo Precision Castings (2010) Taxation 468 (Mad.)

S. 32(2) : Depreciation – Unabsorbed Depreciation – Carry Forward and Set off

The unabsorbed depreciation brought forward as on April 1, 1997 could be set off against the taxable business profit or income under any other head for the Asst. Year 1997-98 and even subsequent years. Short term capital gains for the Asst. Year 1999-2000 can be set off against unabsorbed depreciation brought forward as on April 1, 1997.

CIT vs. Rpil Signalling Systems Ltd. (2010) 328 ITR 283 (Mad.)

Editorial Note: Refer Special Bench Times Guarantee Ltd. (2010) 4 ITR 210 (Mumbai) (Trib.)(SB)

S. 36(1)(iii) : Business Expenditure – Interest on Borrowed Capital – Own ample resources

Merely because assessee had its own ample resources at its disposal could not negate deduction in respect of interest paid on borrowed funds.

CIT vs. Gautam Motors (2010) 194 Taxman 21 (Delhi)

S. 36(1)(vii) : Bad Debts – Money advanced to subsidiary – Business Expenditure – [S. 36(2), 37(1)]

Money advanced to the subsidiary was not a trading debt emerging from trading activity of assessee hence could not be allowed as deduction either under section 36(2) or under section 37(1).

VST Industries Ltd. vs. ACIT (2010) 41 SOT 415 (Hyd.)

S. 37(1) : Business Expenditure – Capital or Revenue – Design and Drawing Fee

Expenditure incurred by the assessee on account of design and drawing fees paid to foreign technician for imparting training to Indian technicians, relates to the process of manufacturing and for a tenure and the documents, designs and specifications which have been supplied by the licensor are only for facilitating the said purpose of manufacturing and therefore constitute revenue expenditure.

CIT vs. Manjal Showa Ltd. (2010) 46 DTR 1 (Del.)

S. 37(1) : Business Expenditure – Capital or Revenue Expenditure – Royalty for acquiring right to remove granites from quarries

Paying royalty for excavating granite from the quarry, the assessee did not acquire any permanent advantage hence the amount paid by the assessee was allowable as revenue expenditure.

CIT vs. Obli Spinning Mills (P) Ltd. (2010) 46 DTR 44 (Mad.)

S. 37(1) : Business Expenditure – Expenditure on Education of Director's Son – Not allowable on facts

As there was no documentary evidence with respect to appointment of trainee was produced before the Tribunal or before the Assessing Officer, expenditure was not allowed.

Echjay Forgings Ltd. vs. ACIT (2010) 328 ITR 286 (Bom.)

S. 40(a)(i) : Business Disallowance – Under Art. 26(3) of India-USA DTAA payments to Non-Residents are equated with payments to Residents & so S. 40(a)(i) disallowance not valid

Art 26(3) of India –US DTAA protects interest of non-resident vis-à-vis residents. Thus payment to residents are equated with payment to non-residents .Thus in light of Art 26(3) ,no disallowance under section 40(a)(i) can be made even in case of payment to non resident .Herbal Life International (2006) 101 ITD 450 (Delhi) followed.

Central Bank of India vs. Dy. CIT (ITAT) (Mum.) Source : www.itatonline.org

S. 40(a)(i) : Business Disallowance – Reimbursement of Expenses – Interest payable outside India

Where the assessee made payment to its parent company in UK which was merely reimbursement of expenses and not in nature of interest–royalty, fees for technical services or other sums chargeable under Act, no disallowance of said payment could be made while computing income under head "profits and gains of business or profession" on the ground that no tax at source had been deducted.

Dy. CIT vs. Lazard India (P) Ltd. (2010) 41 SOT 72 (Mum.)

S. 40(a)(ia) : Business Expenditure – Constitutional Validity – (S. 194C).

The writ petition challenging the constitutional validity of section 40(a)(ia) to disallow the revenue expenditure for not complying with the TDS provisions of section 194C held to be valid.

Tube Investments of India Ltd. vs. ACIT (2010) 218 Taxation 343 (Mad.)

S. 40(a)(ia) : Business Expenditure – Disallowance – Tax Deducted at Source – Truck Owners – (S. 194C)

Considering the legal and factual findings recorded by the CIT(A) regarding there being no liability of the assessee to deduct tax under section 194C from the payments made by it to different truck owners on the ground that each job undertaken by a truck owner was a separate job for the same person, at different rates and terms, hence the different jobs will not turn into single contract and thus there being no contract between the assessee and truck owners, there was no infirmity in the order of CIT(A) deleting the disallowance under section 40(a)(ia).

ITO vs. Indian Road Lines (2010) 45 DTR 49 (Asr.)(Trib.)

S. 40(a)(ia) : Business Expenditure – Disallowance – Tax Deducted at Source – Transportation of Goods – (S. 194C)

Assessee a transport contractor herself having executed whole of the contract for transportation of goods by hiring trucks from various truck owners, it cannot be said that the payments made for hiring of vehicles fall in the category of payment to sub–contractor and therefore, the assessee was not liable to deduct tax at source as per the provision of section 194C for the payments made to the truck owners and the same could not be disallowed under section 40(a)(ia).

Kavita Chug (Mrs) vs. ITO (2010) 45 DTR 146 (Kol.)(Trib.)

S. 40(a)(ia) : Business Expenditure – Disallowance – Payment of tax deduction at source in next year

Assessee having made all payments of TDS in respect of contract payments, interest, professional fees and commission for the Asst. Year 2005-06 after due date and in the financial year 2005-06, corresponding amounts are deductible in computing the income of asst year 2006-07, in view of section 40(a)(ia). Payment of rent has been inserted in section 40(a)(ia) w.e.f. 1st April 2006 and therefore, assessee is entitled to deduct the rental expenditure in computing the income of the relevant Asst. Year i.e. 2005-06, itself, even though payment of TDS was delayed.

Uniword Telecom Ltd. vs. Addl. CIT (2010) 45 DTR 433 (Del.)(Trib.)

S. 40(a)(ia) : Business Expenditure – Reimbursement of Expenses

When there is no element of income and the payment is only as a reimbursement of expenses incurred by the payee, then no disallowance can be made under section 40(a)(ia).

Utility Powertech Ltd. vs. ACIT (2010) TIOL 545 ITAT (Mum.) (BCAJ) (Nov., 2010) P. 22 [150 (2010) 42 B. BCAJ]

S. 40(a)(ia) : Business Expenditure – Accrued Prior to 10-9-2004 -Amendment to section 40(a)(ia) by Finance Act 2010

Amendment to section 40(a)(ia) by the Finance Act, 2010 which extends the time limit for all TDS payable throughout the year has been introduced as curative measure and therefore, would apply to earlier years also.

Golden Stables Life Style Centre Pvt. Ltd. ITA Nos. 5145/Mum/2009 Bench `G' dt. 30-9-2010. (2010) BCAJ Nov., 26 [155 (2010) 42-B.BCAJ]

S. 40(a)(ii) : Business Expenditure – Interest on delayed payment of with holding taxes to US Government – (S. 43B)

Allowability of interest payable on delayed remittances of withholding taxes to US Government, which the assessee had deducted from the payments made to its employees in USA remanded to CIT for fresh consideration.

Mascon Global Ltd. vs. ACIT (2010) 45 DTR 20 (Chennai)(Trib.)(TM)

S. 40A(2) : Business Expenditure – Disallowance – International Taxation – Excessive and Unreasonable Payments – (S. 92)

Import of goods at price higher than for local goods, Assessing Officer comparing figures for subsequent year is not proper, the Assessing Officer was required to compare the price which prevailed in the local market in the same year.

CIT vs. Denso Haryana Pvt. Ltd. (2010) 328 ITR 14 (Delhi)

S. 41(1) : Future Sales-tax Liability is paid, there is no "remission" -Sales tax deferral Scheme

There is no remission in case of payment of future sales tax liability .Two basic ingredients necessary for application of s.41 are, First, the assessee should have obtained an allowance or deduction in respect of any loss, expenditure or trading liability and second, the assessee should have subsequently (i) obtained any amount in respect of such loss or expenditure or (ii) obtained any benefit in respect of such trading liability by way of remission or cessation thereof;

Sulzer India Ltd. vs. Jt. CIT (Mum.)(Trib.)(SB)

S. 43(1) : Depreciation – Actual Cost – Foreign Exchange forward contract – (S. 43A)

Where the foreign exchange contracts were made by the assessee for the purpose of acquiring capital assets and the forward contracts were settled during previous year relevant to the assessment year under appeal, the claim of the assessee to adjust the loss on settlement being legitimate, the said loss needs to be added to the cost of the concerned capital assets as per section 43A, and consequently, depreciation is to be allowed on the enhanced value of the capital assets.

JSW Steel Ltd. vs. ACIT (2010) 46 DTR 41 / 133 TTJ 742 (Bang.)(Trib.)

S. 43B : Deduction – Actual Payment – Unutilized Modvat Credit – Custom duty

Unutilised Modvat credit of earlier years cannot be treated as actual payment for the purpose of section 43B. Custom duty paid and allowed as deduction under section 43B is to be taken in to account in valuation of the closing stock.

CIT vs. Maruti Udyog Limited (2010) 218 Taxation 668 (SC)

S. 44BB : Business of Exploration of Mineral Oils – (S. 9(1)(vii), 44D)

Feasibility study on implementation of cyclic steam stimulation carried out by the non-resident assessee in pursuance of a contract with ONGC was a study substantially and directly connected with the extraction of mineral oil, and therefore, receipt for such services are taxable under section 44BB and not under section 9(1)(vii) r.w.s. 44D.

ONGC as representative assessee of Alberta Research Council vs. Jt. CIT (2010) 46 DTR 21 / 133 TTJ 663 (Del.)(Trib.)

S. 45 : Capital Gains – Business Income – Portfolio Management Scheme – [S. 28(i)]

The Tribunal has found that the lower authorities have taken into consideration only one factor i.e. Volume of transactions and not other factors hence, the matter was set aside to decide a fresh.

Sar Investment (P) Ltd. vs. Dy. CIT (2010) 40 SOT 566 (Ahd.)

S. 45 : Capital Gains – Cost of Acquisition – Tenancy Right – [S. 55(2)]

Assessee was in lawful possession of flat till issue of notice of eviction and statutory tenant after termination of tenancy right. Cost of acquisition of tenancy to be taken at nil.

Praful Chandra R. Shah (Late) vs. ACIT (2010) 5 ITR 598 (Mum.)(Trib.)

S. 45 : Capital Gains – Cost of Acquisition – Surrender of Tenancy Right -Market value of tenancy right

There is an important distinction between asset not having cost of acquisition and asset whose cost of acquisition cannot be determined. Asset sold by the assessee the property which was given to him on surrender of tenancy right. Cost of this asset is the market value of the tenancy right as on the point of time when it was surrendered.

Balmukund P. Acharya vs. ITO (2010) 45 DTR 281 / 133 TTJ 640 (Mum.)(Trib.)

S. 45 : Capital Gains – Undisclosed Income – Sale of Shares – (S. 69)

Assessee having submitted copies of the contract notes, sales bills statement of account and confirmation from the broker to substantiate the sale of shares sold by him, and the Assessing Officer having failed to establish that the assessee has introduced his own unaccounted money, in the shape of the sale proceeds of shares, the impugned income disclosed by the assessee is chargeable to tax as capital gains and can not be treated as income from undisclosed sources.

Baijnath Agrwal vs. ACIT (2010) 133 TTJ 129 (Agra)(TM)

S. 45 : Capital Gains – Income from Undisclosed Sources – Sale of Shares -Contradictory Statement by Broker

Assessee having submitted copies of contract notes, bills, share certificates along with details of demand draft issued from the account of the broker to substantiate the sale of shares made by her and Assessing Officer having failed to establish that the assessee had introduced her own unaccounted money in the shape of sale proceeds of shares, the transaction of sale of shares cannot be treated as non genuine for the reason that the broker made contradictory statements and the assessee was not allowed cross –examination and therefore, the sale consideration declared by the assessee is assessable as capital gain and not as income from undisclosed sources.

ITO vs. Bibi Rani Bansal (Smt) 133 TTJ 394 (Agra)(TM)

S. 50 : Capital Gains – Land – Depreciation – Transfer of Undertaking

Land is not a depreciable asset. Section 50 deals only with the transfer of depreciable assets. Once land forms part of the assets of the undertaking and the transfer is of the entire undertaking as a whole, it is not possible to bifurcate the sale consideration. Sec. 50 applies when depreciable assets alone are transferred.

CIT vs. Coimbatore Lodge (2010) 328 ITR 69 (Mad.)

S. 50B : Capital Gains – Slump Sale – Cost of Acquisition

Assessee had sold entire undertaking with all its assets and liabilities together with licences, permits, approvals, registration, contracts employees and other contingent liabilities for a slump price, provisions of section 50B were applicable.

VSAT Industries Ltd. vs. ACIT (2010) 41 SOT 415 (Hyd.)

S. 52 : Capital Gains – Sale of Shares to members of family

Where there was sale of shares to members of the family, there was no finding that any sum in excess of that declared was realized. Sale consideration can not be estimated by invoking section 52.

CIT vs. I. P. Chaudhari (2010) 328 ITR 7 (Delhi)

S. 54 : Capital Gains – Long term Capital Gains – Profit on sale of property used for purchase of residence house – Interest free deposit

Premises taken on licence under agreement for a period of two terms of eleven months against interest–free deposits, cannot be considered as purchase of residential house, hence, exemption under section 54 is not eligible.

Praful Chandra R. Shah (Late) vs. ACIT (2010) 5 ITR 598 (Mum.)(Trib.)

S. 54F : Capital Gains – Investment in Residential House – Full value of consideration – (S. 50C)

For the purpose of deduction under section 54F full value of consideration shall be the value as specified in the sale deed for the purpose of computation of capital gains. Provision of section 50C can not be applicable as it contains only deeming provision. Full value of sale consideration as mentioned in other provisions of the Act is not governed by the meaning of full value of consideration as contained in section 50C of the Act .

Gyan Chand Batra vs. ITO (2010) 45 DTR 41 / 133 TTJ 482 (JP)(Trib.) / (Tax World) Vol. XLIV P 89 (August, 2010)

S. 54F : Capital Gains – Investment out of sale proceeds of Capital Asset

For claiming exemption from Capital Gain under section 54F, there is no condition that the investment in the new asset should be from the sale consideration of the original asset. As the provisions of section 54F provides an option to the assessee to invest even within the period of one year before the date transfer of original asset, assessee having purchased the house with in a period of one year before the sale of capital asset, was entitled to the relief under section 54F.

CIT vs. R. Srinivasan (2010) 45 DTR 208 (Mad.)

S. 68 : Cash Credits – Share Application Money – Failure to produce Creditor

Substantial evidence was produced by assessee to prove creditworthiness of creditor and genuineness of share application. Mere failure to produce the creditor not material, hence the money can not be regarded as undisclosed income.

CIT vs. Orbital Communication (P) Ltd. (2010) 327 ITR 560 (Delhi)

S. 68 : Cash Credits – Gifts – No relation – No occasion – Gift not genuine

To prove the genuineness of gift, mere identification of gift amount through banking channels is not sufficient ,onus lies on the assessee to prove not only to establish identity of donor, but his capacity to make gift and also the occasion to make the gift. As the Donor refused to attend before the Assessing Officer, addition was justified under section 68.

Asha M. Agarwal vs. ITO (2010) 41 SOT 30 (Mum.)

S. 68 : Cash Credits – Gifts – Donor appeared in person

Donor appeared in person before the Assessing Officer and confirmed making of gift and reason which persuaded him to make gift, he being friend of assessee's father who helped him in past. Donor also proved the source of gift. Addition under section 68 was deleted.

Avnish Kumar Singh vs. ITO (2010) 126 ITD 145 (Agra)(TM)

S. 80IA : Deductions – Profits and Gains from Industrial Undertakings – Infrastructure Undertakings – Payment received for notional treatment

Since the entire receipts whether of actual treatment or notional treatment of BMW (Bio Medical Waste treatment) by Municipal corporation of Greater Mumbai (MCGM), which were flowing from contract entered into by assessee with MCGM and direct relation with eligible enterprise and there was no trace of source of income, without eligible undertaking, it could be said that payment in respect of notional treatment of BMW was derived from eligible undertaking and eligible for deduction.

ITO vs. E. A. Infrastructure Operations (P) Ltd. (2010) 41 SOT 268 (Mum.)

S. 86 : Share of member of an Association of Persons or body of individuals in the income of the association or body – Company member of an AOP – [S. 40(ba)]

There is no bar on a company, which is member of an AOP/BOI, from getting benefits of section 86. The exclusion provided under section 86 by words "other than company or Co-operative society or a society registered under Societies Registration Act, 1860, would be applicable only to an association of persons or body of individuals and not to members thereof.

CIT vs. Ideal Entertainment (P) Ltd. (2010) 194 Taxman 81 (Mad.)

S. 90 : Double Taxation Relief – DTAA – India-UK – Dividend Income -International Taxation

If an assessee i.e. Resident of India, desires to get the tax credit in respect of dividend income from a UK company available as per UK law, then he will be treated at par with resident of UK and amount received by assessee would then be deemed to increase by 1/9th of dividend received from UK company for purpose of taxation under Indian Income Tax Act and tax credit can only be adjusted against his tax liability in India but he cannot claim refund, if any, in case his credit is more than his tax liability.

ACIT vs. Homy N. J. Dady (2010) 41 SOT 239 (Mum.)

S. 90 : Double Taxation Relief – Permanent Establishment – Hiring Dipper Dredger – DTAA – India-Netherlands – (S. 9(1)(i), 195, Art. 5, 6)

Assessee hired a dipper dredger under an agreement from a Dutch company and executed a dredging contract on its own utlising the said dipper dredger, the payment made by the assessee to the Dutch company was nothing but hire charges, and the dipper dredger which was leased to the assessee to be used under its direction, control and supervision can not be construed as PE of the Dutch company and therefore, payment of hire charges made by the assessee to the foreign company is not liable to be taxed in India and assessee was not required to deduct tax at source under section 195.

Dy. DIT vs. Dharti Dredging & Infrastructural Ltd. (2010) 46 DTR 1 / 133 TTJ 692 (Hyd.)(Trib.)

S. 90 : Double Taxation Relief – Permanent Establishment – Income deemed to accrue or arise in India – Business Connection – Services rendered through Indian Subsidiary – DTAA – India-USA – (S. 5(2), 9(1)(i), Art. 5, 7, 27)

Assessee a US company, providing IT enabled services to its clients by assigning or sub contracting execution of the contracts to its wholly owned Indian subsidiary EFI and supplying the relevant software and database to the latter free of charge has business connection in India within the meaning of section 9(1)(i) as well as a PE in the form of EFI as per Art. 5 of the Indo-US DTAA, profits attributable to the PE are to be worked out by applying the proportion of Indian assets, including EFI's assets, to the aggregate of global profits and reducing resultant figure by the assessed profits of EFI.

EFunds Corporation vs. Asst. DIT (2010) 45 DTR 345 (Delhi)(Trib.)

S. 90 : Double Taxation Relief – In absence of "thin capitalization rules", interest paid to shareholders for loans cannot be disallowed despite capital -Structure tax – Planning – [S. 36(1)(iii)]

In absence of "thin capitalization Rule", interest cannot be disallowed by characterizing debt equity .Imposing of such rule on assessee in case where domestic companies are not subject to such rule will violate "non-discrimination" provisions under art 24 (5).

Bexis Kier Dabhaol SA vs. DDIT (Mum.)(Trib.)

S. 92C : Transfer Pricing – Computation – Arm's Length Price – International Taxation

For determining the ALP of international transactions with AEs the TPO should work out the profit disclosed by the assessee on those receipts and compare the result with the comparables of independent cases, and in that exercise the domestic receipts are to be excluded for working out profit level indicator shown by the assessee in respect of the international transactions.

Dy. CIT vs. Startex Net Works (India) (2010) 45 DTR 1 (Del.)(Trib.)

S.92C :Transfer Pricing-

High Court's judgment on transfer pricing in cases not leading to "erosion of tax revenue" nullified Authorities to decide the issue without being influenced by observations made in impugned judgment.

Coca Cola India Inc v ACIT (S C).www.itatonline.org.

S.92C: Transfer Pricing-Trade mark and Brand.

High court judgment on transfer pricing of trade marks and brand licencing nullified .Supreme Court directed TPO to decide matter in accordance with law ,uninfluenced by observation of High Court.

Maruti Suzuki India v ACIT (SC) www.itatonline.org.

S. 92B : Transfer Pricing – Adjustments – Enterprise Level Profits -International Taxation

TNMM does not permit the assessee or the Assessing Officer to compare enterprise level profits and make adjustments; TPO's order is set aside and the matter is restored to the Assessing Officer for fresh adjudication.

DCI vs. Starlite (2010) 45 DTR 65 / 133 TTJ 425 (Mum.)(Trib.)

S. 92C : Transfer Pricing – Question of section 40A(2) not examined as exercise is "revenue-neutral". Transfer Pricing Provisions should be extended to domestic transactions to "reduce litigation".(S. 40A (2).

The assessee did not have any employee other than a company secretary and all administrative services relating to marketing, finance, HR etc were provided by Glaxo Smith Kline Consumer Healthcare Ltd. ("GSKCH") pursuant to an agreement under which the assessee agreed to reimburse the costs incurred by GSKCH for providing the various services plus 5%. The costs towards services provided to the assessee were allocated on the basis suggested by a firm of CAs. The Assessing Officer disallowed a part of the charges reimbursed on the ground that they were excessive and not for business purposes which was upheld by the CIT(A). However, the Tribunal deleted the disallowance on the ground that there was no provision to disallow expenditure on the ground that it was excessive or unreasonable unless the case of the assessee fell within the scope of section 40A(2). (See 290 ITR 35 (Del.) for facts). The department challenged the deletion. HELD dismissing the SLP:

(i) The Authorities below have recorded a concurrent finding that the said two Companies are not related Companies under section 40A(2). As far as this SLP is concerned, no interference is called for as the entire exercise is a revenue neutral exercise. Hence, the SLP stands dismissed. For other years, the authorities must examine whether there is any loss of revenue. If the Authorities find that the exercise is a revenue neutral exercise, then the matter may be decided accordingly;

(ii) The larger issue is whether Transfer Pricing Regulations should be limited to cross-border transactions or whether the Transfer Pricing Regulations be extended to domestic transactions. In domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily will be revenue neutral in nature, except in two circumstances having tax arbitrage such as where one of the related entities is (i) loss making or (ii) liable to pay tax at a lower rate and the profits are shifted to such entity;

(iii) Complications arise in cases where the fair market value is required to be assigned to transactions between related parties under section 40A(2). The CBDT should examine whether Transfer Pricing Regulations can be applied to domestic transactions between related parties under section 40A(2) by making amendments to the Act.

(iv) Though the Court normally does not make recommendations or suggestions, in order to reduce litigation occurring in complicated matters, the question of extending Transfer Pricing regulations to domestic transactions require expeditious consideration by the Ministry of Finance and the CBDT may also consider issuing appropriate instructions in that regard.

CIT vs. Glaxo Smithkline (Asia) (Supreme Court)

S. 115W : Fringe Benefits – Operation of Air transport service – Free and Concessional Tickets – Jurisdiction of Officer to conduct enquiry

Assessee, who was engaged in operation of air transport services was liable to pay fringe benefit tax in respect amount paid to hotels to provide layover to its crew members. Assessee is liable to pay fringe benefit tax in respect of per diem allowances paid to pilots. Assessee is also liable to pay fringe benefit tax in respect of free and concessional tickets provided to its staff.

King Fisher Training & Aviation Services Ltd. vs. ACIT (2010) 41 SOT 279 (Bang.)

S. 115JB : Book Profit – Company – Constitutional Validity – (S. 80IB, 115JA)

Legislature cannot be denied the power to curtail benefits earlier granted, as long as the subject matter of the legislative exercise lies within the domain of the legislative power conferred by the Constitution. Curtailment of the benefit under section 80IB, while enacting section 115JB earlier granted under section 115JA, is valid.

Jaintia Alloys (P) Ltd. vs. UOI (2010) 45 DTR 22 / 235 CTR 201 (Gauhati)

S. 115JB : Company – Book Profit – Interest – Retrospective Amendment – (S 234B.)

Assessee was not liable to pay interest under section 234B on the incremental amount of tax computed under section 115JB which arose due to retrospective amendment in section 115JB requiring book profit to be increased by the provision for deferred tax.

JSB Steel Ltd. vs. ACIT (2010) 46 DTR 41 (Bang.)(Trib.)

S. 127 : Transfer of Case – Reasons – Impugned Order

Impugned order made under sub section (2) of section 127 without reflecting any reasons for transferring the cases from one Assessing Officer to another Assessing Officer cannot be sustained.

Hemang Ashvinkumar Baxi (Dr.) vs. Dy. CIT & Anr. (2010) 45 DTR 38 (Guj.)

S. 127 : Transfer of Case – Reason – Impugned Order

Order under section 127(2) having been quashed and set aside, the transferee officer had no jurisdiction qua the petitioner (assessee) and, therefore, impugned notices under section 153C issued by the said officer cannot be sustained.

Parthasarathy Seshan Iyengar (Dr.) Dy. CIT & Anr. (2010) 45 DTR 40 (Guj.)

S. 127 : Transfer of Case – Without Notice and Reasons

It is mandatory to record reasons for transferring the case, hence, transfer of case without any notice and reasons quashed.

Chaitanya vs. CIT (2010) 328 ITR 208 (Bom.)

S. 142A : Estimation by Valuation Officer – Rejection of Books of Account – (S. 145)

When books of account are found to be correct and complete in all respects and no defects is pointed out therein, then addition on account of difference in cost of construction of a building cannot be made even if a report from DVO is obtained with in the meaning of section 142A.

Rajhans Builders vs. Dy. CIT (2010) 41 SOT 331 (Ahd.)

S. 144 : Assessment – Best Assessment – Service of Notice by affixture, without trying other modes of service – Not valid

The Tribunal has held that there was no evidence that there was any refusal by the assessee to accept service of notice. The Tribunal had categorically held that no other mode was adopted and steps for service of notice were taken about a week before the time was expiring. The service by affixture was not proper service. High Court affirmed the order of Tribunal.

CIT vs. Kisahn Chand (2010) 328 ITR 173 (P&H)

S. 147 : Reassessment –Assessment u/s 143 (1). Reopening on mechanical basis void even where section 143(3) assessment not made

For purpose of reopening of assessment under section 147 ,AO must form and record reason before issuance of notice under section 148 .The reasons so recorded should be clear and unambiguous and must not be vague. There can not be any reopening of assessment merely on the basis of information received without application of mind to the information and forming opinion thereof.

Sarthak Securities vs. ITO (Delhi High Court)

S. 148 : Reassessment – Not furnishing the recorded reasons before passing of the order – Order held to be illegal – Set aside

When a notice is issued under section 148, first the assessee has to file the return of income and then ask for reasons recorded for issue of such notice. Once assessee requests for supply of reasons recorded, the assessing officer bound to supply the same with in reasonable time. On the facts the assessing officer completed the assessment under section 143(3) / 147 without supplying the recorded reasons. As the assessing Officer has not followed the guidelines of the Apex court in GKN Driveshafts (India) Ltd. vs. ITO (2003) 259 ITR 19 (SC), the assessment order said to be invalid and the matter is set aside.

Bhabesh Chandra Panja vs. ITO (2010) 41 SOT 390 (Kol.)(TM)

S. 154 : Rectification – Debatable Issue – Withdrawal of MAT Credit – Interest – (S. 234A, 234B)

Charging interests under section 234B and 234C in rectification proceedings for withdrawal of excess MAT credit is a debatable issue and therefore, it can not be done by invoking the provisions of 154.

CIT vs. Salora International Ltd. (2010) 45 DTR 213 (Del.)

S. 158BE : Search and Seizure – Block Assessment – Limitation – Last Panchnama

In view of Expln. 2 to section 158BE, the period of limitation of two years is to be counted from the date when the last Panchnama was drawn in respect of any warrant of authorization, if there were more than one warrants of authorization. In view of deeming provision, even an authorization which may not be the last authorization would become last authorization if it is executed and if Panchnama in respect is drawn last.

CIT vs. Anil Minda & Ors. (2010) 328 ITR 320 / 45 DTR 121 / 235 CTR 1 (Delhi)

S. 192 : Deduction of Tax at Source – Salary – (S. 271C)

Assessee is not required to deduct tax at source in regard to payments made by foreign company to its employees, as there was no record to show that amount paid by foreign company to its employees was made known to assessee or said amount was also disbursed to employees of foreign company through assessee. The assessee is not liable to pay penalty under section 271C, as there was no violation of section 192(1).

CIT vs. Indo Nissin Foods Ltd. (2010) 194 Taxman 144 (Kar.)

S. 192(3) : Deduction of Tax at Source from Salary – Unequal Deduction of Tax – Interest – (S. 201)

Sub section (3) of section 192 permits the person obliged to deduct tax to make adjustments in case of excess or deficient and also authorizes adjustment even in case of total failure to deduct tax during the financial year and therefore, assessee is not liable to pay interest under section 201(IA) for not deducting tax at source from salary payments in several months, when it has deducted tax in the remaining months.

CIT vs. Enron Expat Services Inc (2010) 45 DTR 154 / 194 Taxman 70 / 235 CTR 198 (Uttarakhand)

S. 194C : Deduction of Tax at Source – Contractor – Sub Contractor – Written contract is not a condition precedent – Hiring of vehicles

When the turnover of the assessee exceeded monetary limit specified under clause (a) or clause (b) of section 44AB, the assessee was liable to deduct tax at source from payments made to sub contractors from vehicles were hired if amount payable exceeds the Rs. 20,000/-, the contract may be writing or oral but liability to pay tax arises when recipient of said amount receives payment in excess of Rs. 20,000/-.

J. Rama (Smt.) vs. CIT (2010) 194 Taxman 37 (Kar.)

S. 194C edcution of Tax at Source – Event Management – Contractual Service – Professional Service – Photography – (S. 194J)

Job awarded by the assessee to other parties in performance of duty as event manager has to be treated as a contractor and not sub–contractor and provisions of section 194(C)(1) is applicable. Art work and photography will also covered under section 194C(1), same will not be treated as professional service.

EMC vs. ITO (2010) 45 DTR 275 (Mum.)(Trib.)

S. 194J : Deduction of Tax at Source – Professional Charges – Salary – Payment to Doctors – (S. 192)

Assessee hospital having engaged the services of doctors on the basis of agreements whereby the doctors are free to treat the patients at the hospital at their own discretion and time, without any supervision and control of the assessee and they are not on the pay roll of PF payments, there is no element of employer and employee relationship and therefore, the doctors are to be treated as consultants and tax has to be deducted under section 194J from payments made to them and not under section 192.

Dy. CIT vs. YashodaSuperSpecialityHospital (2010) 133 TTJ 17 (Hyd.)(UO)

S. 197 : Tax Deduction at Source – Certificate – Double Taxation Avoidance Agreement – India-USA – (S.90)

As per the order of the DCIT, tax was directed to be deducted at 1.5% of the gross receipts for services rendered for earlier assessment year 2008-09 and in the absence of material on record or valid basis, Assessing Officer could not direct deduction of tax @ 15 percent.

Mckinsey & Company, Inc. – United States (Mckinsey US) vs. Union of India & Ors. (2010) 45 DTR 81 (Bom.)

S. 201(IA) : Interest – Deduction of Tax at Source from Salary – Unequal Deduction of Tax – [S. 192(1)]

Sub section (3) of section 192 permits the person obliged to deduct tax to make adjustments in case of excess or deficient and also authorizes adjustment even in case of total failure to deduct tax during the financial year and therefore, assessee is not liable to pay interest under section 201(IA) for not deducting tax at source from salary payments in several months, when it has deducted tax in the remaining months.

CIT vs. Enron Expat Services Inc (2010) 45 DTR 154 / 194 Taxman 70 (Uttarakhand)

S. 226(3) : Recovery – Attachment – Garnishee Proceedings – Fixed Deposits – Fixed deposit is not the property of the assessee – (S. 222, 281B)

Order of attachment of the fixed deposits of the petitioners passed under section 281B and encashment of the fixed deposits after the expiry of the period of bank guarantee, was illegal and unjustified.

Gopal Das Khandelwal & Ors. vs. Union of India & Ors. (2010) 45 DTR 47 / 235 CTR 253 (All)

S. 226(3) : Recovery – Notice of Demand – (S. 156, 220, 222)

Before invoking the provisions of section 220 a demand notice under section 156 is required to be served upon the assessee specifying the amount as well as the place and the person to whom such amount is to be paid and therefore, in the absence of service of a demand notice under section 156 on the assessee, the very foundation of the recovery proceedings stands vitiated and the same cannot be sustained. Impugned notice under section 226(3) served upon the assessee's bankers and recovery proceedings initiated against the assessee are quashed and set aside.

Sarswati Moulding works vs. CIT (2010) 46 DTR 25 (Guj.)

S. 234A : Interest – Assessable as Permanent Establishment (PE) – (S. 234B)

Income of the assessee who are non residents being assessable in the hands of PEs the same cannot be held liable to TDS under section 195 and therefore, assessees are liable to pay interest under section 234A and 234B.

EFunds Corporation vs. ADIT (2010) 45 DTR 345 (Del.)(Trib.)

S. 244A : Refund – Interest – Belated Claim – Stock Option – Tax Deduction at Source on Salary

Tax deducted at source from the salary treating the stock option held to be not taxable as perquisites and refundable to the assessee, the department is directed to consider the claim for interest under section 244A on such refund.

Malliga D. vs. ACIT (2010) 45 DTR 146 (Kar.)

S. 244A : Refund – Interest – TDS Certificates filed in the course of Assessment Proceedings

TDS certificates were filed in the course of assessment proceedings. As the tax was deducted at source at the right time, interest under section 244A could not be denied. Provisions of section 244(2) are not attracted.

CIT vs. Larsen & Toubro Ltd. (2010) 235 CTR 108 (Bom.)

S. 244(IA) : Refund of tax – Accrual of Income – Interest

Interest on refund accrues only when the refund is granted.

K. Devayani Amma (Smt.) vs. Dy. CIT (2010) 328 ITR 10 (Ker.)

S. 245D(1) – Settlement Commission – Interest – (S. 234B, 154, 245J)

Interest under sections 234B can be directed to be charged by the Settlement Commission only up to the order of admission of settlement application under section 245D(1) and not up to the final order of settlement commission under section 245D(4). The commission cannot reopen the concluded proceedings by invoking the proceedings under section 154 of the Act, to levy interest under section 234B that is not charged earlier in the order of settlement particularly in view of section 245I.

Brijlal and Others vs. CIT (2010) 46 DTR 153(SC)

Editorial Note: In the light of the divergent judgements of the Supreme Court in CIT vs. Anjum Ghaswala (2001) 252 ITR 1, CIT vs. Hindustan Bulk Carrier (2003) 259 ITR 449 and CIT vs. Damani Brothers (2003) 259 ITR 475, a reference was made to the Full Bench of the Supreme Court.

S. 253(1) : Appellate Tribunal – Fixing the fees payable to Auditor – [S. 142(2A)]

In the absence of any specific provision empowering the Tribunal to hear appeal against fixation of audit fees payable to special auditors appointed under section 142(2A), appeal filed by the assessee against the order under section 142(2D), is not maintainable.

Sony Mony Electronics Ltd. vs. Dy. CIT (2010) 45 DTR 431 (Mum.)(Trib.)

S. 253(6) : Appellate Tribunal – Appeal Fees

Benefit of "pauper provisions" under 33 of CPC is confined to the underprivileged class of public which does not have means to pay the costs of litigation. Assessee a lawyer, who is practicing before High Court, Debt recovery Tribunal and lower Courts and does not fit in the criterion of an indigent person in Expl. 1 to Rule 1 of order 33 and therefore, she is not entitled to protection of order 33. Appeals are dismissed for want of payment of appeal fees.

Yashshree Yogesh Naik vs. Dy. CIT (2010) 45 DTR 249 / 133 TTJ 534 (Mum.)(Trib.)

S. 254(1) : Appellate Tribunal – Additional Grounds – Departmental Appeal – Contrary to finding of Assessing Officer (Income Tax Appellate Tribunal Rules 11)

Department is not entitled to raise additional grounds contrary to finding of Assessing Officer. The duty of the learned Departmental representative is always confined to support the assessment order, he has widest power to argue on the matter involved in the appeal, but with the limitation that he cannot set up a new case contrary to the finding of the Assessing Officer. If such course is allowed, then it will amount to the learned departmental representative revising the assessment order under the grab of his arguments by usurping the power under section 263, which incidentally lies only in the domain of the commissioner, hence, additional oral ground was refused.

ITO vs. M. M. Textiles (2010) 5 ITR 547 (Mum.)(Trib.)

S. 254(1) : Appellate Tribunal – Additional Evidence

There is no need to make a formal application under rule 29 of the ITAT Rules for admission of the additional evidence. There is no error in the order of Accountant member admitting the additional evidence and sending it to the CIT for examination and decision.

Mascon Global Ltd. vs. ACIT (2010) 45 DTR 20 / 133 TTJ 257 (Chennai)(Trib.)(TM)

S. 254(1) : Appellate Tribunal – Jurisdiction – Finding in respect of other year

Tribunal cannot give a finding in respect of assessment of an year which is not subject matter of an year which is not subject matter of appeal.

Marubeni India P. Ltd. vs. CIT (2010) 328 ITR 306 (Delhi)

S. 254(2) : Appellate Tribunal – Rectification of Mistake – Second Rectification Petition

Once the power for rectification of the earlier order is invoked / exercised and an order is passed, such order merges with the earlier order of the Tribunal and another application for rectification under section 254 (2) can not be entertained.

CIT vs. Panchu Arunachalam (2010) 235 CTR 308 / 45 DTR 368 (Mad.)

S. 254(2) : Appellate Tribunal – Rectification of Mistakes – Direction is expunged – Cost of Trademark

Direction given to the Assessing Officer to assess the Capital Gain on transfer of trademark in question as short term capital gain if the same was registered with in six months being an unworkable direction in as much as the cost thereof has nowhere been determined nor it is determinable, an error has crept in the order of the Tribunal and consequently the said direction is expunged.

Trent Brands vs. ITO (2010) 133 TTJ 70 (Del.)(UO)

Editorial Note:-. Refer Judgment of Tribunal (2010) 127 TTJ 65 (Delhi) (UO).

S. 260A : Appeal – High Court – Power to Review

High court has not only the power but a duty to correct any apparent error in respect of any order passed by it. High Court can entertain the application for review arising out of a judgment passed under section 260A.

D. N. Singh vs. CIT (2010) 235 CTR 177 / 45 DTR 259 (Pat.)(FB)

S. 263 : Revision – Reasons indicated by CIT

As the Tribunal has set aside the order of CIT, without dealing with the reasons indicated by CIT for exercising jurisdiction under section 263, therefore, matter remanded to the Tribunal for fresh decision.

CIT vs. KNR Patel (JV) (2010) 45 DTR 150 (Bom.)

S. 263 : Revision – Non-examination of issue

Non–Examination of issue by Assessing Officer does not per se make assessment order prejudicial to interest of revenue for revision under section 263. On merits Tribunal held that discharge of statutory function by ICAI does not amount to commercial or business activity and eligible for exemption under section 10 (23C (iv) as also section 11 as educational institute.

Institute of Chartered Accountants of India vs. DIT

S. 269C : Acquisition of Immovable Property – Fair Market Value – Comparable Sale Instances

Competent authority having arrived at the fair market value of semi-commercial property in question on the basis of the consideration stated in the sale deed of a residential property and applying the popular perception that the rates of semi-commercial properties are almost twice as much as that of residential properties, without referring to or relying upon any supporting material in this behalf and without looking in to valuation report of the approved valuer as submitted by the purchaser the "reasons to believe" as recorded by the competent authority were manifestly wrong and baseless and therefore, initiation of proceedings for acquisition of the property was illegal.

CIT vs. Green Valley Agro Mills Ltd. (2010) 45 DTR 10 (Del.)

S. 271(1)(c) : Penalty – Concealment – Book Profits – Income Computed less than Book Profits – (S. 115JB)

When total income computed under regular provisions is less than book profits and assessment made under section 115JB, penalty for concealment can not be levied.

S. V. Kalyanam vs. ITO (2010) 327 ITR 477 (Mad.)

S. 271(1)(c) : Penalty – Concealment – Book Profit – (S. 115JB)

When computation of income was made under section 115JB and there was loss under normal provisions, concealment, if any did not lead to tax evasion at all and therefore, penalty under section 271(1)(c) could not be imposed.

CIT vs. Nalwa Sons Investments Ltd. (2010) 235 CTR 209 / 45 DTR 345 (Del.)

S. 271(1)(c) : Penalty – Concealment – Treating the Business Loss as Speculative Loss

Penalty under section 271(1)(c), cannot be leviable, where the addition was made on account of treatment of business loss as speculative loss.

CIT vs. Bhartesh Jain (2010) 235 CTR 220 (Delhi)

S. 271(1)(c) : Penalty – Concealment – Search and Seizure – Revised Return – Explanation 5 to section 271(1)(c) – (S. 132, 153A)

As the assessee has filed the revised return subsequent to search and not disclosed the speculative profit in original return, assessee is not eligible for immunity as per explanation 5 to section 271(1)(c) of the Income tax Act.

Ajit B. Zota vs. ACIT (2010) 40 SOT 543 (Mum.)

S. 271(1)(c) : Penalty – Concealment – Making of a claim which is not sustainable in law – Deduction under section 80HHC – Short Term Capital Loss

A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing of inaccurate particulars regarding income of assessee. When assessee had furnished full details and particulars of its income and it was under bonafide belief regarding allowability of claim penalty could not be levied.

Hindalco Industries Ltd. vs. ACIT (2010) 41 SOT 245 (Mum.)

S. 271D : Penalty – Cash Deposit – Money Lender – Reasonable Cause – (S. 269SS)

Assessee money lender accepting cash deposits in violation of provision of section 269SS, has been deleted considering the nature of business, status of the depositors and necessity from the point of view of the assessee.

P. Mallikharjuna Rao vs. Addl CIT (2010) 45 DTR 8 (Visakha)(Trib.)

S. 281B : Recovery – Attachment – Garnishee Proceedings – Fixed Deposits – Fixed deposit is not the property of the assessee – [S. 222, 226(3)]

Order of attachment of the fixed deposits of the petitioners passed under section 281B and encashment of the fixed deposits after the expiry of the period of bank guarantee, was illegal and unjustified.

Gopal Das Khandelwal & Ors. vs. Union of India & Ors. (2010) 45 DTR 47 / 235 CTR 253 (All.)

Gift Tax

S. 4(1)(a) : Gift Tax Act – Inadequate Consideration – Retirement from Firm – [S. 2(xii), 2 (xxiv)]

When a partner brings in his assets into the partnership firm by way of contribution he continues to have interest in the said asset, and the value thereof mentioned in the books of the partnership firm representing his interest does not truly reflect the market value of such property and therefore, such transfer cannot be treated as a deemed gift under section 4(1)(a) by taking into account the amount received by the partner on retirement from the firm.

CIT & Anr. vs. Jayalakshmamma (Smt.) (2010) 45 DTR 61 / 235 CTR 146 (Kar.)

Wealth tax

S. 2(ea) : Wealth Tax – Asset – Urban Land – Land on which construction not permissible

Land on which construction of a building is not permissible under any law for the time being in force is not an urban land and as such, is not an asset within the meaning of section 2(ea).

Prabhakar Keshav Kunde vs. CIT (2010) 235 CTR 119 / 45 DTR 267 (Bom.)

S. 2(ea) : Wealth Tax – Assets – Commercial Assets

Commercial asset used by an assessee in business of letting out properties cannot be treated as an "asset" for purpose of Wealth Tax.

CWT vs. Sahnkaranarayana Industires & Plantations (P) Ltd. (2010) 194 Taxman 189 (Kar.)

S. 2(m) : Net Wealth – Debt Owned – Loans for Working Capital

Loans obtained for working capital against security of lands, is not debt incurred in relation to lands, hence can not be deducted while computing net wealth. There is marked difference between the two expressions "debt secured on property" and "debt incurred in relation to such property" used in the pre amended provisions of section 2(m)(ii) of the Wealth Tax Act, 1957. It is not necessary that every debt secured on a property is a debt incurred in relation to such property.

Phonix International Ltd. vs. Dy. CWT (2010) 5 ITR 787 (Delhi)(Trib.)

Wealth Tax – Valuation – Immoveable Property – Gross Maintainable Rent -Market Rent – Actual Rent – (Sch. III, Rule 3, 4, 5)

Property in question being subject to Rent Control Act, and the "standard rent" thereof not being higher than the actual rent received which has been assessed by the IT authorities, valuation of property for wealth tax purpose is to be determined only on the basis of the actual rent received.

Jt. CIT vs. Prayasvin B. Patel (2010) 46 DTR 52 (Ahd.)(Trib.)

GENERAL LAW

Cr. PC, 1973 – S. 482, IPC; 1860 – Ss. 406/120-B; Income-tax Act, 1961 – Ss. 192, 200, 206, 271-C, 276-B & 276-BB: Quashing of proceedings relating to TDS – Dispute as to TDS – Appropriate remedy – Income tax – Criminal proceedings – Quashment

Where proceeding is of civil nature which cannot be adjudicated by a criminal court, the High Court would be justified in exercising its inherent jurisdiction and quashing the same. The High Court erred in refusing to exercise its jurisdiction under section 482 and passing a cryptic order without assigning any reasons therefore when complaint did not disclose any offence of criminal nature. In face of assertion made by appellants that deduction towards income tax were made from salaries of all employees liable to pay the same in view of the statutory provisions of the IT Act, appropriate remedy for respondent was to approach authority/officer concerned. Moreover, report of SI had indicated that the matter in issue was civil in nature. Proceedings against appellants were quashed.

Rajeswar Tiwari and Others vs. Nanda Kishore Roy (2010) 8 SCC 442

Income Tax Appellate Tribunal – Appointment of Vice President of the ITAT is by merit-based selection and not seniority. No reservation for OBC

Appointment to post of vice-President has to be made on basis of merit from amongst members by method of selection and not on basis of seniority. No reservation to be applied in case of appointment not by way of direct recruitment.

Sunil Kumar Yadav vs. UOI & B. R. Mittal vs. UOI (CAT)

Income Tax Appellate Tribunal – ITAT President requested to make it compulsory for assessees to file form no 36 when there is change of address instead of merely intimating vide letter – President is requested to amend the form

In case of change of address of assessee, Tribunal to make it mandatory to amend their appeal memo or cross objections and form no 36 to facilitate proper service of notice and avoid passing of ex-parte order.

Jagjivandas Nandlal vs. ITAT (Bombay High Court)

Interpretation of Statute

Explanation below a particular sub-section or a clause is intended to explain that particular sub-section or a clause only. But when Explanation is at the end of the section it is meant to explain the entire section.

DIT (Exemption) vs. Bagri Foundation (2010) 42 DTR 25 (Del.)

Service Tax – Lease – Difference between Operating Lease, Finance Lease & Hire – Purchas-Service tax on leasing- S 65(12, &65 (105)(zm)-Finance Act 1994.

Leasing and hire purchase activities by NBFC's and banks are financial activities, falling within the meaning of term "banking and financial services" the taxable event of "rendering of services" and thus eligible for service tax. Whereas operating lease is lease other than the financial lease, which is eligible for local tax/VAT.

Association of Leasing & Financial Service Companies vs. UOI (2010) 46 DTR 209 (SC)

Editorial Note: The question whether "operating / finance leases" are eligible for depreciation under section 32 is pending before the Special Bench in IndusInd Bank.

Writ – Art. 226 – Alternative Remedy

Where the action of the assessing authority in issuing notice under section 148 was bad in law due to want / lack of jurisdiction then the availability of alternative remedy in form of appeal to the Commissioner of Appeals against the action of the assessing officer could not be a bar to invoke writ jurisdiction of the High Court.

Mihir Textile Ltd. vs. Jt. CIT (2010) 43 DTR 11 (Guj.)

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IT : Payment made to a New Zealand company for rendering liaison & coordinating

IT : Payment made to a New Zealand company for rendering liaison & coordinating services qua DNA testing at USA does not fall within ambit of royalty & FTS

Income-tax : Nature of payment made by assessee to New Zealand company is of liaisoning and coordinating to ensure that blood samples collected by assessee is properly received at US and reports are received in time and as per terms fixed by US Embassy; neither of these services can be termed as services in nature of managerial, technical or consultancy nature; it is also not providing services of technical or other personnel; therefore, it also cannot be said that such services fall within term `fee for technical services.' as contemplated by Article 12 [Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident - Indo - New Zealand DTAA - Article 12 (Royalties & Fees for Technical Services)] - [2011] 10 taxmann.com 123 (Delhi - ITAT)

Income-tax - Penalty [Section 271(1)(c)] : Where Tribunal, holding assessee's ex

Income-tax - Penalty [Section 271(1)(c)] : Where Tribunal, holding assessee's explanations to be reasonable, deleted penalty under section 271(1)(c) - [2011] 9 taxmann.com 268 (Delhi)

Income-tax - Income, accrual of [Section 5] : Interest under section 244(1A) acc

Income-tax - Income, accrual of [Section 5] : Interest under section 244(1A) accrues to assessee only when assessee is found to be eligible for refund of excess tax and it is assessable to tax in assessment year in which such interest is granted to assessee along with refund - [2011] 9 taxmann.com 265 (Ker.)

MAT not for foreign firms having

MAT not for foreign firms having

August, 09th 2010
The purpose behind the introduction of provisions relating to MAT (Minimum Alternate Tax; Section 115JB) was to levy some tax on the "Zero Tax Companies". The government felt a number of companies with huge profits were avoiding payment of income tax by adjusting their profits against allowances permitted under the Income-tax Act. To circumvent this strategy, MAT was introduced.

The MAT is charged on the book profits. It started with 7.5% on book profits, and has increased to 18% on book profits w.e.f. fiscal 2010-11. The provisions relating to MAT are proposed to be carried through in the New Direct Taxes Code.

The issue for consideration is if the provisions of MAT would apply to a foreign company. The Authority for Advance Ruling in an earlier case (234 ITR 335) held MAT is applicable to a foreign company. The argument was there were so many integral and important provisions in Section 115JA (relating to MAT), which cannot apply. This contention did not find favour with the authority. The authority said, MAT applies to every company and there was no reason to presume the Legislature did not intend the provisions to apply to a foreign company.

The considerations weighing for the ruling are as under:

there was no difficulty in preparing accounts in accordance with the Companies Act, 1956;

that the budget speech explains the purpose behind MAT (section 115JA);

that there is a non-obstante clause in section 115JA;

that there is no specific exclusion of `foreign company' under section 115JA;

that the definition of `company' given in section 2(17) of IT Act means a `foreign company'.
However, in a recent case of Timken Company, USA, in the judgment on July 23, the authority has taken a different view. It has been held the provisions of MAT are not designed to be applicable to a foreign company with no physical presence in India.

It was argued on behalf of the foreign company that many foreign companies claim treaty protection under section 90 of the Act and offer their different streams of income like royalty, fees for technical services, dividend, interest etc. for tax at concessional rates (compared to rules under the Act). In some cases, foreign companies also claim exemption from tax in India on the basis of DTAA. Thus, if the proposition that MAT applies to foreign companies is accepted, then in every case, despite treaty protection, tax under MAT will be payable. Section 90 of the Income-tax Act which gives treaty protection to foreign companies cannot be interpreted to be overridden by MAT provisions. If that is not accepted then the treaty protection will be an absurdity.

The Authority concluded that provisions of MAT will not apply to foreign companies by observing as under:

"The applicant's contention is that if due consideration is given to the context in which the word `company' has been used, it can be seen that what is meant is an Indian company. At no place, does the context in which the word `Company' has been used in the section give an indication it would include a foreign company. Various reasons given above are supported by CBDT circulars, Finance Minister's speeches, notes to clause and memorandum attached to the Finance Bill. Hence the definition of `Company' in section 2(17) in the context of section 115JB should be read to exclude foreign company."

The Timken Company's case (supra) is a landmark judgement setting at rest the controversy MAT is not applicable to a foreign company with no presence or PE in India.

Income-tax - Charitable purpose [Section 2(15)] : Where assessee, a union of tru

Income-tax - Charitable purpose [Section 2(15)] : Where assessee, a union of truck operators constituted for facilitating its members to carry on trade of transportation, charged fees from its members before transportation on basis of distance involved and, further, welfare activities adopted by it for truck drivers, cleaners and mechanics of truck owners were in nature of staff welfare activities, as were common in other business organizations which could not be termed for general public utility, it was to be held that assessee was not carrying on activities for charitable purposes. - [2011] 9 taxmann.com 267 (Punj. & Har.)

MAT IN New Direct Tax Code

MAT IN New Direct Tax Code

AUGUST 8, 2010

By Bhawna Gulati

MINIMUM Alternate Tax is the tax paid by the companies even when they have zero or negative income as per the income tax provisions. The companies pay tax on the income calculated as per the provisions of the Income Tax Act. Many a times the incentives and exemptions provided for in the Income Tax Act are used in such a way that the income of the companies come out to be negative or insignificant. Therefore, the presumptive income concept is used in many jurisdictions though the economic basis differs as we move from one country to another. It is pertinent to note here that for the purposes of dividends the company uses book profit which is calculated as per the Companies Act. Because of this difference, there were many companies which had book profits as per their profit and loss account but were not paying any tax because income computed in accordance with the Income Tax Act provisions was either nil or negative or insignificant. Consequently, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. Such companies are often termed as Zero Tax Companies. Therefore, to tackle such companies the concept of Minimum alternate Tax was introduced in the Direct Tax system to ensure that the companies taking advantage of the incentives and exemptions under the Income Tax Act pay a fixed percentage of book profits as minimum alternate tax. This is to ensure that companies having large profits and declaring substantial dividends to shareholders contribute towards the government revenue.

This MAT was calculated as a percentage of book profit. The percentage was changed and revised from time to time to match the changing circumstances.

Existing Provision

As per the present provisions in the Income Tax Act the minimum alternate tax is payable at the rate of 15% of the book profits of the company. Sec 115 JB provides that such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 15%. For calculating the book profits the assessee is required to prepare its profit and loss account in accordance with the provisions of part II and III of Schedule of Companies Act, 1956.

Also the MAT credit is available. Tax paid under section 115JB for A.Y. 2006-07 and any subsequent year would be allowed as a credit from the normal tax payable for any subsequent year in accordance with the provisions contained in section 115JAA for 7 assessment years (upto assessment year 2009-10) and for 10 assessment years from assessment year 2010-11.

Proposal in the Direct Tax Code

The Direct Tax Code (DTC) provided for the computation of MAT on the basis of "value of gross assets" of the company proposing to replace the age old practice of basing the MAT on book profits. It has been proposed in the DTC that the "value of gross assets" will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets. According to the DTC, the MAT payable by the banking companies will be calculated at 0.25% of its gross assets and for other companies the rate is 2% of gross assets. Moreover, there was no provision of deducting liabilities while calculating the value of gross assets and no MAT credit was allowable in the subsequent years. The rationale for the basing the Mat on the value of gross assets seems to be that the investors can expect before hand to earn a specified average rate of return on their assets; hence it provides an incentive for efficiency. The possible rationale can also be attributed to widen the tax base by levying tax on companies not paying tax on account of various incentives.

Though the economic rationale argument of enhancing the efficiency sounds good as it will force the loss making companies to shut down their businesses, it will adversely hit companies which have long gestation period and which start making profits only after few initial years of losses inherent to their very nature. Another category of companies which will be badly hit are capital intensive companies which have high fixed capital asset base. Similarly for companies which are in the process of growth and expansion will have high investment in their assets which will lead to a much higher MAT than their actual income tax liability.

Implementing MAT calculation on the basis of gross value of assets without giving any exemption for a specified number of years to such capital intensive companies is also not in sync with the international best practices. In Argentina, there is allowance for the gestation period. In Mexico too, tax is not levied during the year in which the enterprise was started and the following three years of its operations.

It is notable here that the asset based MAT calculation does not take care of the cascading effect it might produce in the case company having subsidiary companies and in the case of multiple tiers of subsidiaries. Suppose a subsidiary company pays tax on the basis of its gross asset. Now the gross assets of the subsidiary, up to the extent held by holding company, will show as an investment in the books of holding thereby reflecting the same assets and leading to a double taxation on those assets if the holding company also pays MAT based on the value of its gross assets.

Another major anomaly is the definition of the value of gross assets which also include non revenue generating items like capital work in progress, thereby distorting the tax base.

Revised Discussion Paper to Direct Tax Code

Considering the above stated issues and criticism received from the corporate stakeholders, it is proposed in the discussion paper to reinstate Book Profit as the basis of calculating MAT and not the Gross asset value which was proposed in the DTC. This has come as a big relief to the corporate houses engaged in businesses having long gestation periods and also those businesses that require high capital investment.

However what exactly will be the final formulation and way of computation of the MAT provisions in the bill still remains to be seen.