consolidated digest of case laws jan 2011 to sept 2011

Consolidated Digest of Case Laws (Jan‐Sept 2011) http://www.itatonline.org 1

Consolidated Digest of Case Laws (January 2011 to September 2011) (Journals Referred: ACAJ / BCAJ / BLR / CITC / CTR / DTR / ITD / ITR (Trib.) / ITR / SOT / TTJ / TLR / Taxman / Taxation / Tax World, www.itatonline.org) Compiled by: KSA Legal Chambers S. 2 (IA): Agricultural Income‐ Sale of Rubber scrap‐ Scrap generated in Industrial activity. Sale of scrap rubber which is generated in course of extraction of rubber latex from trees can not be brought to Income tax by applying rule 7A because scrap is generated in course of taking yield which is purely an agricultural operation. However ,income from scrap generated in industrial activity of processing latex in to products referred to in rule 7A (1) has to be brought to income tax under rule . CIT v State Farming Corporation Ltd ( 2011) 199 Taxman 371 ( Ker) (High Court). S. 2(IB) : Amalgamation – Subsidiary ‐ Tax Avoidance. Assessing Officer rejected the scheme of Amalgamation with its subsidiary holding that it was a mere device to avoid tax. CIT(A) accepted the scheme. On revenue’s appeal the tribunal held that as the scheme has been sanctioned by High Court and it cannot be held that there was motive to avoid tax, further the shares were issued to outside shareholders by assessee company in terms of scheme sanctioned by High Court and the allotment of shares were done on the basis of valuation report submitted by an independent valuer.( A. Y. 2004‐2005) ACIT vs. TVS Motors Co. Ltd. (2011) 128 ITD 47/36 DTR 89 (Chennai)(Trib) S. 2 (13): Adventure in nature of trade‐Investment in agricultural land. A person makes investment in agricultural land within limits of town panchayats, and agricultural income was shown and declared year after year. Permission was sought to develop lands. No further action, was taken for over 12 years till date of sale, and entire land is sold after its value appreciated ,it would not become adventure in the nature of trade. ITO v Chandar HUF ( 2011) 47 SOT 17 ( Chennai) (Trib). S. 2 (14): Capital asset‐ Agricultural land‐Payment of compensation of certain immovable property.(S. 194LA ). Definition of “agricultural land” as given in section 2 (14) cannot be imported for purpose of payment of compensation on acquisition of certain immovable property as per section 194LA.( A.Y. 2005‐06). ITO TDS v Special land Acquisition Officer ( 2011) 46 SOT 458 ( Mum) ( Trib). S. 2 (14): Capital assets‐ Capital gains‐ Town Panchayat. A Town Panchayat is notified for urban agglomeration, but it is not a municipality. Agricultural lands falling within said town panchayat would not fall within municipality , and hence is not a capital asset as per the definition under section 2 (14) (iii). (A.Y. 2006‐07) ITO v Chander–HUF ( 2011) 47 SOT 17 ( Chennai) (Trib). S. 2(14)(iii) : Agricultural Land in India ‐ Capital Asset – Distance – Measurement. For measurement of distance for the purpose of deciding the character of land, whether agriculture or not, is to be done in terms of the approach by road and not by straight line distance on horizontal plane or as per crow’s flight. Order of Tribunal is affirmed by High Court. (A. Y. 2001‐02) CIT vs. Satinder Pal Singh (2010) 188 Taxman 54 / 229 CTR 82 / 33 DTR 281 (P&H ) (High Court)


S. 2(15): Charitable purpose‐ Production of television and radio programmes‐ Registration ( S. 12A). Production of television and radio programmes for purpose of telecasting and broad casting through assessee’s own network or through one hired by it would not constitute advancement of any object of general public utility with in the meaning of section 2 (15).Application for registration has to be considered with reference to objects of assessee available as on end of previous year during which registration is sought under section 12A. CIT v A.Y. Broad Cast Foundation ( 2011) 199 Taxman 376 ( Ker) (High Court). S. 2(22)(e) : Deemed Dividend ‐ Loans or Advances ‐ Share Holder In order that the first part of cl.(e) of section 2(22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be either to a shareholder, being a beneficial owner holding not less than ten percent of the voting power or to any concern to which such a share holder is a member or a partner and in which he has a substantial interest. Amount received from a company been misappropriated by shareholder, there was no loan or advance. Further, even assuming that it was a dividend, it have to be taxed in the hands of the shareholders and not in the hands of the assessee.(A. Y. 2003‐04) CIT vs. Universal Medicare (P.) Ltd. (2011) 237 CTR 147/324 ITR 263/37 DTR 409/190 Taxman 144 (Bom.)(High Court) S. 2(22)(e): Deemed divifend‐ Deemed dividend is not assessable if recipient not a shareholder. Where assessee is not a shareholder of the paying company, the dividend is not assessable in its hands. The legal fiction in S. 2(22)(e) enlarges the definition of dividend but does not extend to, or broaden the concept of a “shareholder”. Asst. CIT vs. Bhaumik Colour Pvt. Ltd. (2009) 313 ITR 146 (Mum) (AT) (SB) approved in CIT vs. Universal Medicare Pvt. Ltd. (2010) 324 ITR 263 (Bom) & CIT vs. Hotel Hilltop (2009) 313 ITR 116 (Raj.) followed. CIT vs Ankitech Pvt.Ltd( 2011) 57 DTR 345/ 242 CTR 129/ (2011) Tax LR 629 (Delhi) ( High Court). S.2 (22) (e): Deemed dividend‐Security deposit‐Date of deposit. Since on the date on which the security deposit was given by the company to the assessee , the assessee held less than 10 percent beneficial interest in the company , the amount of security deposit can not be treated as deemed dividend under section 2 (22) (e) , merely on the ground that share holding increased to 44% on issue of shares by the company in lieu of security deposit.( A. Y. 1998‐99) CIT v Late C.R.Das ( 2011) 57 DTR 201 ( Delhi) (High Court). S. 2 (22) (e): Deemed dividend‐Loan or advances shareholder‐ Loans in the ordinary course of business was not accepted‐ Allotment of shares of another company. Addition of deemed dividend under section 2 (22) (e) by rejecting the explanation that the payment was made for allotment of shares in another company , was justified since no certificate from the ROC in support of his contention that shares had indeed been allotted to the investing companies was produced. The Court held that findings of the Tribunal are perverse and addition under section 2 (22) (e) was sustainable.( A.Y. 2005‐06). CIT v Sunil Chopra ( 2011) 242 CTR 498 ( Delhi) ( High Court). S. 2(22)(e) : Deemed Dividend – shares held in the name of partners of the firm‐ for purpose of S.2(22)(e) firm is considered as “shareholder” though shares held in names of partners It was held that for s. 2(22)(e), a firm has to be treated as the “shareholder” even though it is not the “registered shareholder”. The first limb of s. 2(22)(e) is attracted if the payment is made by a company by way of advance or loan “to a shareholder, being a person who is the beneficial owner of shares”. While it is correct that the person to


whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a “shareholder” only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of s. 2 (22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of s. 2(22)(e) and lead to absurd results. CIT v National travel Service (Delhi)(High Court). (www.itatonline.org) S. 2(22)(e) : Deemed Dividend ‐ Advance given for the purpose of Business. Assessee, Managing Director having received advances from the company, pursuant to resolution passed by it to enable the assessee to purchase land which was to be developed by the company in order to bifurcate the ownership of land from the development or construction of flats thereon so as to reduce the incidence of stamp duty on the ultimate customers, the transaction was motivated by assessee considerations and commercial expediency, therefore, the advances cannot be treated as deemed dividend.(A. Y. 2006‐2007) ACIT vs. Harsad V. Doshi (2011) 49 DTR 181 / 136 TTJ 351 (Chennai)(Trib.) S. 2(22)(e) : Deemed Dividend – Debenture – Loan ‐ Investment Debenture is a loan account and therefore, debentures subscribed by the assessee shareholder are to be taken in to account for ascertaining his indebtedness to the company vis‐à‐vis the loan or advance taken by him and determining deemed dividend under section 2(22)(e).( A. Y. 2003‐2004) Anil Kumar Agarwal vs. ITO (2011) 51 DTR 251/ 132 ITD 314 (Mum.)(Trib.) S. 2(22)(e) : Deemed Dividend ‐ Advances given to Business Purposes. Assessee, Managing Director, having received advances from the company, pursuant to resolutions passed by it to enable the assessee to purchase land which was to be developed by the company in order to bifurcate the ownership of land from the development or construction of flats thereon so as to reduce the incidence of stamp duty on the ultimate customers, the transaction was motivated by business considerations and commercial expediency and therefore, the advances can not be treated as deemed dividend under section 2(22)(e).(A. Y. 2006‐07) ACIT vs. Harshad V. Doshi (2011) 136 TTJ 351/49 DTR 181 (Chennai)(Trib) S. 2 (22)( e): Deemed Dividend‐Transfer of sum from one company to another. Assessee is a director in two companies holding substantial shareholding in both. Certain sum was transferred from one company to another at instance of assessee. Assessee having substantial credit balance with company, cannot held as loan or deposit nor can be assessed as deemed dividend.( Asst years 2001‐02, 2005‐06). Asst vs. C. Rajini (Smt) ( 2011) 9 ITR ( Trib) 487/ 140 TTJ 218 (Chennai)( Trib). Dy CIT v C. Subba Reddy (HUF) ( 2011 ) 9 ITR (Trib) 487 ( Chennai) (Trib). S. 2 (22) (e): Deemed dividend‐ Loan to a concern in which share holder is a partner‐ Security deposit. Partners of the assessee firm and not the assessee firm being a share holder of the company AG ltd. Amount received by the assessee firm from the company as security deposit can not be regarded as deemed dividend . Even other wise ,the amount received from AG Ltd being security deposits under an agreement between the parties coupled with certain obligations , it can not be regarded to be payment by the company by way of advance or loan and hence , it can not be assessed to tax under section 2 (22) (e).( Assst year 2006‐07). Dy CIT v Atul Engineering Udyog ( 2011) 57 DTR 433 ( Agra) (Trib).


S. 2(24) : Income – Non‐occupancy Charges – Co‐operative Housing Society – Mutuality. The receipts of non‐occupancy charges, transfer fees and voluntary contribution from its members by the co‐operative housing society is not taxable. ITO vs. Grand Paradi CHS Ltd., ITA No. 521/Mum/2010, dt. 27‐08‐2010, ITAT ‘G’, Mumbai Bench, BCAJ pg. 20, Vol. 42‐B, Part 4, January 2011 (Trib.) S. 2(28A) : Interest‐ Discounting of promissory note. Discounting of a promissory note does not involve creation of a debt or existence of a debtor – creditor relationship, the amount of discount cannot be termed as “interest” paid by seller of promissory note with in the meaning of section 2 (28A). ABC International Inc USA ( 2011) 199 Taxman 211/ 241 CTR 289 / 55 DTR 393(AAR). S. 2 (31) (v).Person‐ Association of persons‐ Individual‐Assessment‐ HUF‐ Capital gains.( S.4, 45 ). After the death of sole male member of the family, the only person left in the family was the widow of the deceased and three daughters were already married. The property of the deceased would devolve on the window and three married daughters in equal shares , since the property of the deceased was sold without dividing the same among the assessee and her three married daughters , the capital gains on the sale of the property would be assessable in the hands of the BOI consisting of the assessee and her three married daughters ( Asst Year 2005‐06).. ITO v Shanti Dubey ( 2011) 139 TTJ 502/ 58 DTR 422 ( Jab) (Trib). S. 2(42A) :Short term capital asset‐ Capital Gains ‐ Short term capital loss ‐ Colourable Transaction ‐ Genuine Transaction. In November, 1995 assessee company took over SKB with all its assets and liabilities including rights under contract for using trade mark of Pepsico Inc., USA for certain consideration which was paid through account payee cheques. However, assessee company could not run business of SKB for various reasons including necessity of making further investment, therefore it sold entire shares of SKB vide share purchase agreement dated 23‐12‐1995 at a loss of ` 8.60 crores. Assessing Officer took the view that assessee could have waited for more reasonable time for watching the market and could have invested further amount of ` 9 to 10 crores to revive business of SKB and period of one month was too short time for taking such a major decision regarding disinvestment of shares of SKB. He further held that transaction was of a colourable nature and declined to allow claim of assessee towards short term capital loss. In appeal Commissioner of (Appeals) and Tribunal allowed the appeal of assessee. On appeal to High Court, the High Court up held the order of Tribunal. (A. Y. 1996‐97) CIT vs. Oberoi Hotels (P) Ltd. (2011) 198 Taxman 310 (Cal.)(High Court) S. 2 (47): Transfer‐ Capital gains‐ Possession of property . ( S.45.) Assessee was given possession of property as per sale agreement dated 3‐4‐1999 and assessee also made part payment of the consideration , assets would be deemed to be transferred to assessee on 3‐4‐1999 and since land was sold on 4‐4‐2003 /2‐5‐2003 , it would be a long term capital asset and would be long term capital gains. Hasmukhbhai v Asst CIT ( 2011) 46 SOT 419 ( Ahd) (Trib). Chapter 11.Charge of income tax. S. 4 : Income‐ Capital or Revenue Receipt ‐ Subsidy for setting up Industry.


Subsidy received for setting up agro based industrial unit in backward area was determined with reference to capital investment, is a capital receipt. CIT vs. Siya Ram Garg (HUF) (2011) 49 DTR 126 / 237 CTR 321(P&H)( High Court) S. 4 : Income ‐ Capital or Revenue Receipt – Interest ‐ Pre–commencement. Interest on deposit of margin money for opening of letter for credit for import of machinery at the stage of setting up of industrial unit of the assessee is a capital receipt and the same is to be set off against pre‐operative expenses.(A. Y. 2005‐06) CIT vs. Arihant Threads Ltd. (2011) 49 DTR 251 (P&H)( High Court) S. 4 : Income ‐ Capital or Revenue Receipt – Compensation ‐ Termination from land owner. Compensation received from the land owner on termination of development agreement was the deprivation of potential income and loss of future profits as mentioned in the settlement agreement and not for divesting the assessee of its earning apparatus as restrictive covenant in the said agreement only prohibited the assessee from undertaking a similar project in the vicinity of the existing project without consent of the land owner for the limited duration of three years, and therefore, the compensation was a revenue receipt.(A. Y. 2001‐02) Ansal Properties & Industries Ltd. vs. CIT (2011) 238 CTR 126/196 Tax 45/49 DTR 78 (Del.) (High Court) S. 4 : Income‐Assessment ‐ Law Applicable ‐ Financial Year ‐ Assessment Year ‐ (S. 143) Unless it is made clear in an amendment as to whether it comes in to effect for the assessment year or financial year, normally it is to be deemed that such benefit of the amendment is for the assessment year.(A. Y. 2000‐01) Mukesh C. Patel vs. CIT (2011) 238 CTR 332/51 DTR 62 (Kar.)( High Court) S. 4 : Income ‐ Capital or Revenue ‐ Share of Profit from firm pending dissolution. Profit which is calculated on notional basis by deducting 40% from two years average profit, received by the assessee partner for the period of 234 days when the dissolution of the firm was pending under the directions of the Court is to be treated as revenue receipt.(A. Y. 1995‐96) B. Rachurama Prabhu Estate, Executrix, Smt. Kaveri Bai & Ors. (2011) 52 DTR 122 / 239 CTR 274/ 335 ITR 394 (Kar.)(High Court) S. 4 : Income – Accrual – Interest Income – Banks and Non‐banking Financial Institutions – Non‐performing Assets – Accrued interest to be excluded from income. Credit of accrued interest maybe excluded from the income of Bank and non banking financial institutions, where interest outstanding is attributable to assets characterised as a non‐performing assets under the notification issued by the RBI. The High Court held that mercantile system of accounting recognises only income which is realisable. (A. Y. 1995‐96 to 2000‐01) CIT vs. Coimbatore Lakshmi Inv. and Finance Co. (2011) 331 ITR 229 (Mad.)(High Court) S. 4 :Income – Capital or Revenue – Excess Refund – Interest Subsidy – Capital Receipt. Excise Refund and Interest Subsidy received by the assessee from Government of India in pursuance to a New Industrial Policy of Government which was aimed at acceleration of industrial development and generating employment in the State in public interest were held to be capital receipt in the hands of the assessee. Shree Balaji Alloys & Ors. vs. CIT & Ors. (2011) 51 DTR 217 / 239 CTR 70/ 333 ITR 335 (J&K)(High Court)


S. 4 : Income ‐ Mutuality ‐ Income of Club from Surplus funds ‐Interest from Fixed deposits and Government Securities. Assessee company is running a recreation club for its members the income earned from the members is exempt on the principle of mutuality. Income of the club from FDR’s in banks and Government securities, dividend income and profit on sale of investment is also covered by the doctrine of mutuality and is not taxable. (A. Y. 2003‐04) CIT vs. Delhi Gymkhana Club Ltd. (2011) 53 DTR 330/ 198 Taxman 207(Mag) (Delhi)(High Court) S.4. Income –Interest earned – Performance guarantee. Interest income earned by the assessee on the fixed deposit for performance of guarantee of contract was held to be capital in nature and cannot be assessed as income from other sources. CIT vs. Jaypee DSC Ventures Ltd. (2011) 53 DTR 305 (Del)( High Court). S. 4 : Income ‐ Diversion of at source by overriding Title – Application of Income : Assessee had availed various facilities from Madurai Bank over years, repayment of which was guaranteed by way of change on properties of assessee. As assessee failed to pay dues, bank filed a civil suit. Subsequently, out of settlement was reached at an amount of ` 160 lakhs. Vide Government resolution dt. 14‐12‐1994 and 19‐7‐1995, NSSK was permitted to buy spares, plant and machinery of assessee. It was to pay, on behalf of assessee a sum of ` 160 lakhs to Madhurai Bank towards settlement of amount due. The assessee claimed that as NSSK directly paid Madurai Bank it should be excluded from the sale consideration as that never became the income of the assessee as it stood diverted of overriding title and hence, should be ignored for the purpose of calculating capital gain. The Tribunal held that payment to bank is only application of income not a charge on income. The payment to bank and sale consideration of its assets are entirely two distinct transactions having no relation with each other except for the fact that there was a charge by bank on assets. Hence, amount not deductable from sale consideration. (A. Y. 1996‐97) Shree Changdeo Sugar Mills Ltd. vs. Jt. CIT (2011) 44 SOT 479/ 58 DTR 340/139 TTJ 646 (Mum.)(Trib.) S. 4 : Income ‐ Capital or Revenue Receipt ‐ Compensation for premature termination of joint venture agreement. Consideration received for premature termination of the joint venture agreement constituted revenue receipt.(1999‐2000) Ion Exchange (India) Ltd. vs. ITO (2011) 52 DTR 411/ 140 TTJ 576 (Mum.)(Trib) S.4: Income‐ Capital or revenue‐ Amount received from firm by widow of the partner is a capital receipt . Payment towards recognition of valued services rendered by partner during life time and a sort of relief to distressed family , and that too as per terms of partnership deed, could not be said to have a revenue character in assessee’s hands. Amount received by assessee , after death of her husband from firm ,in which he was a partner , would be a capital receipt. ( A.Y. 2005‐06). Dy CIT v Lakshmi M.Aiyar ( Mrs) ( 2011) 131 ITD 436 ( Mum) (Trib). S.4: Income‐ Interest awarded by High Court‐ Capital receipt ‐ Income wrongly offered for tax – Powers of Commissioner (Appeals). ( S.139, 251). Interest awarded by High Court is a capital receipt and not taxable. Though the amount erroneously offered to tax in the return ,the assessee is entitled to raise plea before Appellate Authorities against the assessment. The Assessing Officer cannot assess an amount which is not taxable under the law, though shown by the assessee in the return.( A.Y.2005‐06)


Sushil Kumar Das v ITO ( 2011) 11 ITR ( Trib) 17 ( Kolkata) (Trib). Scope of total income. S. 5 :Income‐ Accrual ‐ Advance Receipt. Fees received in advance by the assessee from the clients of its beauty and slimming clinics which is attributable to “unexecuted packages” i.e. services are to be rendered in the succeeding year did not accrue in the relevant year.(A. Y. 1997‐98) CIT vs. Dinesh Kumar Goel (2011) 239 CTR 46 / 50 DTR 254/ 331 ITR 10 (Delhi)(High Court) S.5: Income‐ Accrual‐Interest on enhanced compensation of land. Interest on enhanced compensation of land is liable to be taxed once it was received.(Asst years 2000‐01 to 2002‐03) Dy CIT v Gopal Ramnarayan Kasat ( 2011) 240 CTR 266 / 54 DTR 228(Bom) (High Court). S.5 :Income‐ Accrual of income‐Waiver of interest –Method of accounting.( S.145.) Waiver of interest before end of accounting year , interest did not accrue to assessee. (Asst year 1997‐98). Bagoria Udyog v CIT ( 2011) 334 ITR 280 ( Cal) (High Court). S.5. Income – Accrual. Hypothetical income credited by the assessee in the profit and loss account in respect of excise refund based on a Supreme Court decision in case of a third party cannot be said to have accrued to the assessee.( A. Y. 1988‐89) CIT vs. Nuchem Ltd. (2011) 55 DTR 14 (P&H)( High Court). S.5: Income‐ Capital or Receipt‐Collection from buyers. Where assessee is collecting sum from every buyer towards flat owners association, such corpus fund cannot be assesses as income of assessee.( Asst Years 2001‐02 , 2005‐06) Asst v C. Rajini ( Smt) ( 2011) 9 ITR ( Trib) 487 (Chennai)( Trib). Dy CIT v C. Subba Reddy (HUF) ( 2011 ) 9 ITR (Trib) 487 ( Chennai) (Trib). S.5: Income –Accrual‐ Tuition fees received in advance (S. 145.). Assessee in receipt of non –refundable advances from coaching students can be charged to tax only to the extent of receipt which accrued to the assessee as income during the relevant previous year and not the entire receipts. Career Launcher (India) Ltd v Asst CIT ( 2011) 139 TTJ 48/ 131 ITD 414/ 131 ITD 414 (Delhi) (Trib). S. 5. Income‐ Accrual of Income‐ Earnest money‐ Sale of land. Earnest money received for transfer of land . Transaction not taking place in year. Earnest money received not to be treated as income in year under consideration.( Asst year 2004‐05). DY CIT v Shiv Sai Developers ( 2011) 10 ITR 80 (Mumbai ) (Trib). S.5: Income‐ Accrual‐ Dividend recovered‐Right to receive income. Assessee a non banking finance company ,it sold shares which it held as investment. Transfer of names of transferee was not recorded in register of members of company whose shares were transferred by assessee, therefore dividend declared by companies on those shares was paid to assessee . The assessee has shown the


said dividend as under the heading “Excess dividend received refundable” . Assessing Officer treated the same as income of the assessee. The tribunal held that when there is right to receive income can be said to have been accrued and without legally enforceable right there can be no accrual of income. ( A.Y. 2006‐07). Dy CIT v Tata Investment Corporation Ltd ( 2011) 46 SOT 359 / 61 DTR 473( Mum) (Trib). S. 5: Income‐Accrual‐Fixed deposits in banks‐Interest. Assessee society held fixed deposits in banks for a term exceeding more than one year. It had not shown any interest income from said FDs during previous year on ground that income from FDs would be offered to tax on its receipt from bank on maturity on basis of certificate of TDS issued by bank. Assessing Officer added interest at 10% on estimate basis .The Tribunal held that the assessee was not liable to declare interest income accrued but not due to it in relevant assessment year in view of fact that said sum was not acknowledged by bank or by assessee itself. ( A.Y. 2007‐08). Puri District Co‐Op Milk Producers’ Union Ltd v ITO (2011) 132 ITD 127 (Cuttack) (Trib). S. 5(2)(b) : Income – Salary – Non Resident – On board of Ship – [Ss. 9(1)(ii), 15)] Salary earned by non‐resident for services performed during his stay of 225 days outside India working on board on ship which was outside India, did not accrue or arise in India and as such the same was not taxable in India. (A. Y. 2005‐06) DIT (International – Taxation) & Anr. vs. Prahlad Vijendra Rao (2011) 51 DTR 95 / 239 CTR 107 (Karn.)(High Court) S. 6(1) : Residence in India – Non‐resident ‐ Residential Status –Business – Profession. For purpose of Explanation (a) to section 6(1)(c), “employment” include self employment like business or profession taken up by assessee abroad. (A. Y. 1989‐90) CIT vs. O. Abdul Razak (2011)337 ITR 267/ 198 Taxman 1/ 241 CTR 485/56 DTR 133/ 337 ITR 267 (Ker.)(High Court) S. 9 (i). Income deemed to accrue or arise in India –Liaison office‐ DTAA‐India –US. On facts, Liaison office purchasing diamonds for export to HO does not constitute PE under India‐US DTAA and it was covered under explanation 1(b) to section 9(1)(i) of Income Tax Act. ADIT vs. M. Fabrikant & Sons Ltd., dt.28‐01‐2011, A.Y. 1999–2000 to 2002‐03 & 2003 – 2004, BCAJ pg. 42, Vol. 43‐A, Part 2, May 2011.

S.9(i). Income deemed to accrue or arise in India‐Sale of shares by Mauritius Co can be treated as sale by 100% USA parent. Sale of shares of foreign company taxable if object is to acquire the Indian assets ( S.148, 163 ,195.). (i) The argument that s. 163 applies only with respect to income “deemed to accrue or arise” in India u/s 9 and not to income “accruing or arising” is not acceptable. Pursuant to Eli Lily 312 ITR 225 (SC), the income accruing or arising in India to NCWS, USA on transfer of a capital asset situate in India, (shares of Idea Cellular) is deemed to accrue or arise in India to NCWS and can be assessed either in the hands of NCWS or in the hands of the payer as agent of the non‐resident u/s 163; (ii) The argument that the AO having issued a NOC u/s 195(2) permitting Aditya Birla Nuvo to remit the sale proceeds without TDS could not recover the tax from the payer by treating it as agent is not acceptable because the said order was obtained by “suppressing material facts” relating to the circumstances in which the shares of Idea Cellular were issued in the name of AT&T Mauritius. As the payer had obtained the s. 195(2) Certificate by making a representation which was incorrect to its


knowledge, it could not claim that the s. 195(2) Certificate was validly issued. Further, the proceedings u/s 163 & 195 operate in different fields; (iii) The argument that once the AO exercises his option u/s 166 to assess the non‐resident NCWS USA directly by issuing notice u/s 148, the proceedings initiated against the payer must come to an end is not acceptable because there is nothing in the Act to suggest that the option to assess either in the hands of the representative assessee or in the hands of the non‐resident must be exercised at the threshold itself and not at the end of the assessment proceedings. While ordinarily, the AO must not proceed against the representative assessee once proceedings are initiated against the non‐resident, in exceptional cases like the present one where complex issues are involved and the AO is unable to make up his mind on account of suppression of material facts, it is open to the AO to continue with the assessment proceedings against the representative assessee and the non‐resident simultaneously till he decides to assess either of them; (iv) NCWS’ argument that the s. 148 notice is without jurisdiction is not acceptable because the prima facie belief of the AO that the transaction was in fact a transaction for transfer of a capital asset situate in India (shares of Idea Cellular) was with substance. It is open to NCWS to prove to the contrary by placing all material facts in the assessment proceedings; (v) Tata Industries’ argument that no gains are taxable in India as the subject matter of sale were shares of AT&T Mauritius and not the shares of Idea Cellular is not acceptable because prima facie it appears that the transaction for sale of shares of AT&T Mauritius was a “colourable transaction” and was in fact for sale of the shares of Idea Cellular. Adiya Birla Nuvo Limited vs DDIT ( 2011) 200 Taxman 437/ 59 DTR 1/ 242 CTR 561( Bombay) ( High Court) S. 9 (i): Income deemed to accrue or arise in India‐ Business connection‐Activities of liaison office in India.( S. 5 (2) (b )) Since the Indian Office of the non resident assessee –company practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers , it can not be argued that no income accrues or arise in India from the commission , however as the CIT (A) has overstated the role of the Indian Offices in the overall conduct of business , instead of allocation of commission at 30 percent commission income is allocated to the Indian operations at 50 percent.( Asst Years 1999‐2000 to 2005‐06). Linmark International ( Hong Kong) Ltd v Dy CIT ( 2011) 57 DTR 340 ( Delhi)( Trib) S. 9(i): Income deemed to accrue or arise in India‐ Non‐Resident, with “business connection”, taxed only in respect of business operations carried out in India – canvassing agent – not `business connection’, fair fee extinguishes non‐residents liability to tax. (i) The expression ‘business connection’ does not cover mere canvassing for business by an agent in India. It postulates a real and intimate relation between business activity carried on outside India and business activity within India, the relation between the two contributing to the earning of income by the non‐resident in his business activity. The business operations carried out outside India and inside India must have such a relationship as to contribute to business operations as a whole. (ii) The scope of deeming fiction u/s 9 (1)(i) which prima facie appears to be an extension of the classical source rule of taxation is in fact confined to the simpliciter taxability of an income earned in a tax jurisdiction because ‘while the main provision of the deeming fiction seems to be taking a rather aggressive view of the source rule, the Explanations to the deeming fiction considerably narrow down the


scope of the same’ and to that extent there is overlapping of s. 9(1)(i) and s.5(2)(b). Further, while s. 9(1)(i) provides that an income with ‘business connection’ in India is chargeable to tax no matter in which part of the world it accrues or arises, the income which can be subjected to tax in India can never exceed the income attributable to operations carried out in India – by the non‐resident or by the agent. This is made clear by clause (a) of Explanation 1 to s. 9(1)(i) and Explanation 3. The result is that if the agent (“the business connection”) has been compensated with fair remuneration, there cannot be further income of the non‐ resident which can be brought to tax u/s 9(1)(i) r.w.s. 5(2)(b). ADCIT vs Star Cruise India Travel Services Pvt. Ltd. (2011) 59 DTR 418 ( Mumbai)( Trib). www.itatonline.org. S. 9(1) : Income deemed to accrue or arise in India ‐ Finance Act, 2010. Since by Finance Act, 2010, section 9 has been amended with effect from 1‐6‐1976, department was permitted to move to High Court by way of review petition against its judgment in Jindal Thermal Power Co. Ltd. vs. Dy. CIT (2009) 182 Taxman 252 (Kar.) Dy. CIT vs. Jindal Thermal Power Co. Ltd. (2011) 196 Taxman 495 (SC) S. 9(1) : Income deemed to accrue or arise in India ‐ Purchase of Technical know how – Royalty ‐ Permanent Establishment ‐ Business Receipt – International Taxation ‐ Tax Deduction at Source ‐ (S. 195) Purchase of technical know how by foreign company, was business receipt. As there was no permanent establishment in India, the same was not liable to be taxed in India, though the same was treated as ‘royalty’.(A. Y. 1991‐92) Vesil SPA Italy vs. Jt. CIT (2011) 43 SOT 137 (Hyd.)(Trib) S.9(1): Income deemed to accrue or arise in India‐ DTAA‐India‐Netherlands ‐ (Art 12 ) One of the group companies of assessee, located at Netherlands had acquired musical recording rights from other repertoire companies and granted commercial exploitation rights of such musical track in India to “U” Ltd. The assessee received royalty for four years from “U” Ltd. The royalty agreement was approved by Government of India. Further assessee had filed a certificate from tax authority of Netherlands having Jurisdiction over it in which it was certified that assessee was beneficial owner of royalty income received from “U” Ltd, within the meaning of article 12 of DTAA. Thus, the assessee was beneficial owner of royalty and same had to be taxed at rate of 10 percent for all the years.( Asst years (2000‐01 to 2003‐04). Asst DIT v Universal International Music BV ( 2011)45 SOT 219/ 55 DTR 348 (Mum)(Trib). S.9(1): Income deemed to accrue or arise in India‐ Software embedded in off‐shore supply may be taxable even if supply not taxable The assessee, a USA company, entered into two separate contracts with AAI, one for supply of equipment and the other for rendering installation and training services. The AO & CIT(A) held (i) that the two contracts were an “indivisible works contract“, (ii) that as the supply involved embedded software, the income had to be bifurcated between “supply of equipment” and “royalty” in the ratio of 30:70, (iii) that the equipment‐supply profits had accrued on completion of contract and not at the time of transfer of title, (iv) that 50% of the equipment‐supply profits was attributable to the assessee’s PE in India and this was taxable at the global profit rate of 13.4%. On appeal to the Tribunal, HELD: (i) The two contracts constitute one agreement because (a) the essential purpose of both contracts was to set up the ATS, (b) the contract for supply of equipment and software would have been of no consequence without installation and performance services, (c) the dates of payment for the supply contract were connected


with the service contract and (d) it was difficult to segregate the contract from installation/service contract (Ishikawajima‐Harima 288 ITR 408 (SC) referred); (ii) The PE came into existence on clearance of the goods in India because after transfer of title outside India, the possession was handed over to the assessee for safe custody, installation etc. This required storage space and supervision which cannot be said to be preliminary or auxiliary activities in nature as the equipments were required to be installed; (iii) The bifurcation of revenue into supply of equipment and software in the ratio of 30:70 had to be upheld because (a) though the software was embedded in the equipment and supplied as one package for one price, it was permissible to segregate the composite consideration into different components and (b) the assessee had not shown the segregation done by the customs authorities for imposing duty on the equipment and software (Rotem Company 279 ITR 165 (AAR) & Motorola 95 ITD 269 (SB) referred); (iv) In a turnkey contract, in which the assessee is under obligation to supply the equipment and the software and also install them, the 1profit is taxable on completion of each milestone and not at the time of handing over the functioning system to the contracting party. The department’s argument that in a works contract, mere supply of equipment and software is of no consequence till installation and so profits should be taxed at that stage is not correct because even if “turnkey”, the taxable events in the execution of a contract may arise in several stages in several years if the obligations under the contract are distinct ones. The supply profits are consequently not taxable as it accrued on supply outside India; (v) On facts, as the supply of equipment and software constituted a milestone in the contract, the income therefrom arose in the year of shipment which was in an earlier year. It did not accrue or arise in the present year. As the PE came into existence when the equipment was handed over to it by the AAI, the profits from installation contract and services was taxable. Raytheon Company vs. DDIT (ITAT Delhi)(www.itatonline.org) S.9(1): Income deemed to accrue or arise in India‐ Salary to staff at Netherland ( S. 40 (a) (iii), 192). Assessee did not deduct tax at source on salary payments made to staff at Netherlands. Assessing officer invoked the provisions of 40 (a) (iii) , and disallowed the payments made on the ground that the tax was not deducted under section 192.The Tribunal held that since salaries had been paid to non‐residents for services rendered abroad ,provisions of Explanation to section 9 (1) (ii) were not applicable to assessee. Since salary paid to non resident’s for services rendered in Netherlands was not chargeable to tax in India , provisions of section 192 can not be applied hence disallowance made by applying the provisions of section 40(a) (iii) were liable to be deleted. (Asst Year 2003‐04). Dy CIT v Mother Dairy Fruits & Veg (P) Ltd ( 2011) 45 SOT 186 (Delhi ) (Trib). S.9(1): Income deemed to accrue or arise in India‐ Royalty or fee for technical services‐Band width charges paid to foreign companies for data communication. ( S. 40(a) (i), 195). Where the assessee had made payments to service providers such as AT&T or MCI Telecommunications for use of band width provided for down linking signals in United States and it was found that the payments were not in the nature of managerial, consultancy or technical services nor was it for use or right to use industrial , commercial or scientific ,equipment. The payment was not in the nature of royalty or fee for technical services assessee was not liable to deduct tax at source. (Asst Year 2004‐05). Infosys Technologies Ltd v Dy CIT ( 2011) 45 SOT 157 (Bang) (Trib). S.9(1) : Income deemed to accrue and arise in India ‐ Royalty or fee for technical services ‐ For “Equipment Royalty” u/s 9(1)(vi), control of equipment by payer essential


(i) The word “use” in relation to equipment occurring in clause (iva) of Expl to s. 9(1)(vi) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions “use” and “right to use” followed by the word “equipment” indicate that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer “used” the equipment as such. The customer merely made use of the facility, though he did not himself use the equipment. What is contemplated by the word “use” in clause (iva) of Expl 2 to s. 9(1)(vi) is the customer came face to face with the equipment, operated it or controlled its functions in some manner. But if it did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment and there was no scope to invoke clause (iva) in such a case because the element of service predominated (ISRO Satellite 307 ITR 59 (AAR), Dell International 305 ITR 37 (AAR) & Asia Satellite 332 ITR 340 (Del) followed; Frontline Soft 12 DTR 131 (Hyd) held not good law); (ii) On facts, the banner advertisement hosting services did not involve use or right to use by the assessee any industrial, commercial or scientific equipment and no such use was actually granted by Yahoo (Hong Kong) Ltd to the assessee. Uploading and display of banner advertisement on its portal was entirely the responsibility of Yahoo (Hong Kong) and the assessee was only required to provide the banner Ad to Yahoo (Hong Kong) for uploading the same on its portal. The assessee had no right to access the portal of Yahoo (Hong Kong) and there was nothing to show any positive act of utilization or employment of the portal of Yahoo (Hong Kong) by the assess Yahoo India Pvt. Ltd. Vs. DCIT( 2011) 59 DTR 1/ 140 TTJ 195(Mumbai)(Trib).(www.itatonline.org) S.9(1): Income deemed to accrue or arise in India‐ Business income‐ Discounting of promissory note‐DTAA‐ India‐ USA. (Art 7). It was not in dispute that income arising to applicant from discounting promissory note payable in India , is business income taxable in India., However article 7 of DTAA , profits of an enterprise of a contracting State shall be taxable only in State unless enterprise of a contracting state, through a permanent establishment situated therein. It is assumed for the purpose of this Ruling that applicant has no permanent establishment in India ,it has to be ruled that income of applicant from discounting of promissory note would not be taxed in India. Even other wise , discounting of a bill of exchange or promissory note being a purchase of instrument as it were and especially when it discounted without recourse , applicant is not liable to tax in India in view of DTAA between India and USA. ABC International Inc. ( 2011) 199 Taxman 211/ 241 CTR 289 / 55 DTR 393(AAR) S.9(1): Income deemed to accrue or arise in India‐ Royalties and fees for technical services‐ DTAA‐ India‐ USA. ( S. 195.art 12 ). Applicant a wholly owned subsidiary of US company, procured the services of US based personnel who are under the employment of GTE‐OC, and affiliate of its parent company. Personnel secondment agreement specifically provides that the seconded employees shall remain the employees of GTE‐OC and continue to get their salaries from GTE‐OC as long as they remain in its employment. The authority held that (1) Amounts reimbursed by the applicant represent income accruing to GTE –OC (ii) The amounts reimbursed by the applicant are taxable as “ Fees for Included Services (FIS) “under the DTAA and also under the Act. (iii) Fees for Included Services (FIS) is taxable at the rate of 20 percent as provide under article 12 (4) (b) of the DTAA. Accordingly TDS would be deductible as per section 195 Verizon Data Services India (P ) Ltd ( 2011) 199 Taxman 242/ 241 CTR 393/ 56 DTR 81/ 337 ITR 192(AAR).


S. 9(1) : Income deemed to accrue or arise in India ‐ Fees for Technical Services – DTAA ‐ India‐Canada – [S. 115A, 234B, Art. 12(4)] The assessee was a non resident company engaged in the business of providing consultancy for infrastructure projects. It had entered into an agreement with the National High way Authority of India and under the agreement the asseseee was to provide technical drawings and reports to NHAI to enable it to use the technology for its infrastructure projects which was founded by the World Bank. The contention of the assessee was that the fee received from NHAI was to be treated as “fees for included services” as prescribed in article 12(4) of the Double Taxation Avoidance Agreement between India and Canada. In terms of this article, the tax chargeable is at 15%. However the Assessing Officer was of the opinion that fee charged for the aforesaid project did not include “fee for included services”. He accordingly is of the opinion that the income was derived as fee for technical services was chargeable to tax under the provisions of section 9(1)(viii) read with section 115A of the Act. According to this section the tax is chargeable was at 20 percent. The Tribunal accepted the contention of assessee. In appeal the High Court affirmed the view of the Tribunal. The amount received by the assessee was taxable under Article 12 of the Indo‐Candian treaty. The assessee was not liable to pay advance tax and therefore, interest under section 234B was not chargeable. DIT vs. SNC Lalvalin International, Inc. (2011) 332 ITR 314 (Delhi)(High Court) S. 9(1)(i) : Income deemed to accrue in India – No income deemed to arise even if revenue arises due to viewers in India ‐ International Taxation. For income to be taxable under section 9(1)(i), the carrying of operations in India is a sine qua non. It was held that merely because the footprint area included India and programmes were watched by Indian viewers, it did not mean that the assessee was carrying out business operations in India. The transponder used was in orbit and merely because its footprint was on India did not mean that the process had taken place in India. Ishikawaima‐Harima Heavy Industries 288 ITR 408 (SC) followed. It was further observed that the payment by the telecast operators outside India to the assessee cannot be taxed on the basis that the end consumers are in India. Asia Satellite Telecommunication Co. Ltd. vs. DIT (2011) 51 DTR 1 / 238 CTR 233/197 Taxman 263/332 ITR 340(Delhi)(High Court), S. 9(1)(i) : Income deemed to accrue or arise in India ‐ Business Connection ‐ Offshore supply of equipment ‐ International Taxation. Consideration for the offshore supply of equipment by the assessee, a Korean company, to an Indian company cannot be deemed to have accrued or arisen in India as the terms of the agreement stipulated transfer of title / property in the goods as soon as the goods were loaded on the ship at the port of shipment i.e. outside India, and there is no material to show that the accrual of income from this sale was attributable to any operations carried out in India or that the PE of the assessee in India had any role to play in the off shore supply of equipment.(A. Y. 2002‐03) Director of Income Tax vs. LG Cable Ltd. (2011) 237 CTR 438 /50 DTR 1(Delhi)( High Court) Editorial:‐ LG Cable Ltd. vs. Dy. DIT (2008) 119 TTJ 34 (Del.), affirmed. S. 9 (1) (i): Income deemed to accrue or arise in India‐Dependent Agent Permanent Establishment‐ Fees for technical services‐DTAA‐India‐Singapore. ( Art . 5(9 )). The assessee, a Singapore company, rendered repair and maintenance services and supplied spares to customers in India. While the income from repairs was offered to tax as “fees for technical services“, the income from supply of spares was claimed to be not taxable on the ground that it had accrued outside India. The AO, CIT (A) and


Tribunal took the view that the assessee had a “permanent establishment” on the basis that it had a “dependent agent” in India under Article 5(9) of the India‐Singapore DTAA and that the income earned from supplying spare parts was taxable in India. On appeal to the High Court, held that(i) To constitute a “Dependent Agent Permanent Establishment” under Article 5(9) of the DTAA it has to be seen whether the activities of the agent are “devoted wholly or almost wholly on behalf of the assessee“. While the issues as to (a) whether the agent is was prohibited from taking competitive products and (b) whether the assessee exercised extensive control over the agent were relevant, they are not conclusive. It is not correct to say that merely because the agent is prohibited from taking a competitive product means that it is not an agent of independent status. What has to be seen is whether the “activities” of the agent are devoted wholly or almost wholly on behalf of the assessee. If the assessee can show that it was not the sole client of the agent and that activities of the agent were not devoted wholly or almost wholly on behalf of the assessee, there may be no DAPE. The income earned by the agent from other clients and the extent of such income is very relevant to decide whether the criteria stipulated in Article 5(9) is satisfied or not. (Matter remanded for fresh consideration); (ii) While in principle it is correct that if a fair price is paid by the assessee to the agent for the activities of the assessee in India through the DAPE and the said price is taxed in India at the hands of the agent, then no question of taxing the assessee again would arise, this is subject to a Transfer Pricing Analysis being undertaken u/s 92. The Transfer Pricing analysis to determine the “arms length” price has to be done by taking the “Functions, Assets used and Risk involved” (FAR). As this has not been done, the assessee’s argument on “arms length” price is not acceptable (iii) As the commission paid by the agent to the DAPE is not at “arms length“, the estimation that 10% of the profits on sales of spare parts were attributable to the activities carried out by the agent in India and taxable is reasonable. The test is “profits expected to make” and has to be determined bearing in mind the fact that the agent was merely rendering support services and had no authority to negotiate and accept contracts and also assumed limited risk. Rolls Royce Singapore Pvt. Ltd. v ADCIT (Delhi) ( High Court). www.itatonline.org. S. 9(1)(i) : Income deemed to accrue or arise in India ‐ Tax Deduction at Source ‐ Technical Services – International Taxation ‐ (S. 40(a)(i), 194J) Assessee was a dealer for Xerox India Ltd. (XIL), authorized to sell and otherwise, promote latter in specified territories. Apart from sales, assessee was also required to render service support to customers, i.e. purchasers of product of XIL. Assessee claimed that payments made to XIL could not be treated as “fees for technical services”. Tribunal held that the payment in question amounted to fees for technical services hence disallowance made by the lower authorities were justified.(A. Y. 2007‐08) Divya Business Systems (P) Ltd. vs. ACIT (2011) 43 SOT 155/ 138 TTJ 582 (Cochin)(Trib) S.9 (1) (i): Income deemed to accrue or arise in India‐ Foreign agent‐ Commission‐Business connection‐Permanent establishment.( S. 4 (1), 40(a) (ia), 195 ). Where a foreign agent of an Indian exporter operates in his own country and his commission is directly remitted to him . Such commission is not received by him or in his behalf in India , then such agent is not liable to income tax in India on commission received by him. As there was no right to receive income earned in India nor there was any business connection between assessee and ETUK, therefore when income was not chargeable to tax in India under section 4 (1), there was no question of invoking provisions of section 195 hence no disallowance can be made under section 40 (a) (ia).( A.Y. 2007‐08). Dy CIT v Eon Technology ( P) Ltd ( 2011) 46 SOT 323 ( Delhi) (Trib).


S. 9 (1) (i): Income deemed to accrue or arise in India‐Principles on “splitting of turnkey contracts”‐Offshore supply ‐DTAA‐India‐ Korea. (Art.5. (1), 5 (2).) The assessee, a Korean company, entered (together with L&T) into a contract dated 28.2.2006 with ONGC for the “surveys, design, engineering, procurement, installation” etc of a project on turnkey basis. On 24.5.2006, the assessee opened a Project Office which constituted a ‘Permanent Establishment’. The assessee claimed, relying on Ishikawajima‐Harima 288 ITR 408 (SC) & Hyundai Heavy Industries 291 ITR 482 (SC) that the revenue from “offshore supply” and “offshore services” was not assessable to tax in India as no part of it was attributable to the PE. The AO & DRP rejected the claim on the basis that (i) the assessee had actively participated in pre‐bid meetings and the project office was in existence even at the stage of the “kick‐off” meeting, on appeal by the assessee to the Tribunal, The Tribunal held (i) The contract was not divisible into one part for the fabrication of platform and the other for installation & commissioning. Its terms showed that it was a composite contract from surveys of pre‐engineering to start‐up and commissioning of the entire facilities; (ii) The opening of the Project Office was a condition precedent before the commencement of the activity of the contractor. The scope of the Project Office was not restricted either by the assessee or by the RBI. Also, the resolutions of the assessee showed that the Project Office was opened for coordination and execution of project. It was clear that all the activities to be carried out in respect of the contract were to be routed through the Project Office; (iii) Hyundai Heavy Industries 291 ITR 482 (SC) is not applicable because there (a) the project office was to work only as a liaison office and was not authorized to carry on any business activity and (b) the contract was divisible into two parts and so the argument that the PE does not come into existence till the fabrication work is done was accepted; (iv) The argument that if an “installation PE” is to come into existence under Article 5(3), one cannot have regard to the PE under Articles 5(1) & 5(2) is not acceptable. The Project Office constituted a PE under Article 5(1) and an “Installation PE” was not necessary; (v) The onus is on the assessee to show that office did not play a role in the project. On the other hand, the contract proceeds on the basis that the PO played a vital role in the execution of the project; (vi) The attribution to India of profit from off‐shore supply has to be based on material and done based on the extent of activity done by the PO (matter remanded). Samsung Heavy Industries Co. ltd. v ADCIT (Delhi)( Trib). www.itatonline.org. S. 9 (1) (i):Income deemed to accrue or arise in India‐ Business connection‐Offshore supply of equipments‐ Deduction of tax at source.‐Non resident. Non resident company is not liable to tax in India in respect of payments for off shore supply of equipments under the composite contracts for setting up transmission lines and consequently , no tax is required to be deducted at source from the payments made to it for the supply of equipments. Deepak Cables ( India) Ltd ( 2011) 242 CTR 469 ( AAR). S.9(1) (i): Income deemed to accrue or arise in India –Business connection‐ Offshore supply of equipments materials‐ DTAA‐India‐ Korea.( S. 245R (2). Applicant , a Korean company , having entered a separate contract for off shore supply of equipments and materials along with two other contracts for on shore supply and on shore services for various projects in India , and the consideration for the sale is separately specified , it can be separated from the whole, and since the transaction of sale and the transfer of ownership and property in goods took place out side Indian territory , applicant is not liable to tax in respect of off shore supplies. LS Cables Ltd ( 2011) 59 DTR 216/ 337 ITR 35 (AAR).


S.9 (1) (i): Income deemed to accrue or arise in India –Business connection‐ Liaison office of foreign company‐ DTAA‐India‐ USA. (Art. 5, 7 ). Liaison office of the applicant foreign company operating in India carrying on various activitiesit can not be said that the operations of the liaison office are confined to purchase of goods in India for the purpose of export and its income is not covered by Explanation ((b) to section 9(1) (i), even though no product of the applicant is sold in India. The liaison office can be termed as permanent establishment with in the meaning of art 5 .(1) of the Indo‐USA DTAA and cannot be excluded from the definition of Permanent establishment by reason of clause (d) and (e) of art 5 (3) , hence the applicant is liable to tax in India in terms of art 7 (1). Columbia Spots wear Company ( 2011) 337 ITR 407/ 59 DTR 233/ 243 CTR 42( AAR). S. 9(1)(vi) : Income deemed to accrue or arise in India ‐ Copyrighted Software ‐ Non‐Resident – Royalty ‐ Double Taxation Avoidance Agreement ‐ India‐Mauritius – Art. 12 Both the assessee companies did not have permanent establishment in India. The payments received against sale of software could not be treated as income from royalty either under the income tax Act, 1961 or under the terms of the Double Taxation Avoidance Agreement because payments were made for sale of copyrighted articles.(A. Y. 2005‐06) Velankani Maritius Ltd. vs. Dy. CIT (2011) 7 ITR 171 / 42 DTR 193/132 TTJ 124 (Trib.)(Bang.) S. 9(1)(vi) : Income deemed to accrue or arise in India ‐ “Equipment‐Use” Royalty If Payer has no control over equipment – DTAA ‐ India‐UK. [Art. 12(3)(b)] The activity of transmitting raw data to user, processing of the data by such user by using software belonging to assessee and transmission of such data to assessee does not involve “use of any process” so as to constitute royalty under Article 12(3)(a). In order to constitute ‘use of equipment’, the customer should actually have domain or control over the equipments it should be at its disposal. (A. Y. 2004‐05) Standard Chartered Bank vs DDIT (2011) 11 ITR (Trib) 721/ 61 DTR 370 (Mum.)(Trib.) Source: www.itatonline.org S. 9(1) (vi) : Income deemed to accrue or arise in India‐Royalty‐ Income from license of software not assessable as “royalty”. Gracemac not followed; Motorola still good law‐ DTAA‐India‐ Israeli. The assessee, an Israeli company, entered into an agreement with Reliance Infocomm for supply and license of software for RIL’s wireless network in India. The assessee received Rs. 3 crores which it claimed to be “business profits” and not taxable for want of a permanent establishment (PE) in India. The AO took the view that the said sum was assessable as “royalty”. This was reversed by the CIT (A) following Motorola Inc 96 TTJ 1 (Del) (SB). In appeal before the Tribunal, the department argued that in view of Gracemac Corp 42 SOT 550 (Del), the use of software was assessable as “royalty”. The Tribunal dismissing the appeal held that,(i) Under Article 12 (3) of the India‐Israel DTAA, royalty is defined inter alia to mean payments for the “use of” a “copyright” or a “process”. There is a distinction between “use of copyright” and “use of a copyrighted article”. In order to constitute “use of a copyright”, the transferee must enjoy four rights viz: (i) the right to make copies of the software for distribution to the public, (ii) The right to prepare derivative computer programmes based upon the copyrighted programme, (iii) the right to make a public performance of the computer programme and (iv) The right to publicly display the computer programme. If these rights are not enjoyed, there is no “use of a copyright”. The consideration is also not for “use of a process” because what the customer is paying for is not for the “process” but for the “results” achieved by use of the software. It will be a hyper technical approach totally divorced from ground business realities


to hold that the use of software is use of a “process”. (Motorola Inc 96 TTJ 1 (Del) (SB) and Asia Sat 332 ITR 340 (Del) followed. Gracemac Corp 42 SOT 550 (Del) not followed); (ii) It is well settled that a DTAA prevails over the Act where it is more favourable to the assessee. The view taken in Gracemac, relying on Gramophone Co AIR 1984 SC 667, that the Act overrides the treaty provisions where there is irreconcilable conflict is not acceptable because (a) it is obiter dicta, (b) contrary to Azadi Bachao Andolan 263 ITR 706 (SC) and (c) Gramophone Co not applicable to I. T. Act as it dealt with law in which specific enabling clause for treaty override did not exist. (Ram Jethmalani vs UOI also considered). ADIT v TII team Telecom International Pvt. Ltd. (2011) 60 DTR 177/ 140 TTJ 649 ( Mum) (Trib).www.itatonline.org. S. 9(1)(vii) : Income deemed to accrue or arise in India ‐ Fees for Technical Services ‐ Technology advanced in countries ‐ Income Tax Department ‐ Technical Experts ‐ Deduction of tax at source ‐ International Taxation. In cases requiring examination by technical experts, the department ought not to proceed only by the contracts placed before the officers. The department ought to examine technical experts so that the matters could be disposed off expeditiously. In the instant case, a cellular provider under an agreement paid interconnect / access / port charges to BSNL / MTNL, the question whether the cellular provider has rendered technical services and has to deduct tax at source, depended on whether the charges were for technical services and this involved determination of whether any human intervention was involved, which could not be determined without technical assistance. The decision of Delhi High Court in CIT vs. Bharati Cellular Ltd. (2009) 319 ITR 139, set aside and matter remanded to the Assessing Officer with directions. CIT vs. Bharati Celluar Ltd. (2011) 330 ITR 239 (SC) / CIT vs. Hutchison Essar Telecom Ltd. (2011) 330 ITR 239/234 CTR 146/193 Taxman 97/ 44DTR 190 (SC) S. 9(1)(vii) : Income deemed to accrue or arise – Validity challenged ‐ Parliament’s power to make laws with extra ‐ Territorial effect. The constitutional validity of section 9(1)(vii)(b) was challenged by way an appeal to the Supreme Court so as to determine the extent to which laws enacted by Parliament can have extra‐territorial effect under Article 245. The Constitution Bench held that Parliament is constitutionally restricted from enacting legislation with respect to extra‐territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well‐being of, or security of inhabitants of India, and Indians. In all other respects, Parliament may enact legislation with extra‐territorial effect. All that is required is that the connection to India be real or expected to be real, and not illusory or fanciful. Parliament can only make laws for India and any law which has no impact on or nexus with India would be ultra‐vires. GVK Industries Ltd. vs. ITO(2011)332 ITR 130/239CTR 113/197 Taxman 337/52 DTR 1/ 162 Caom Case 574 (SC) 5 Member Bench, S. 9(1) (Vii).Income deemed to accrue or arise in India‐ Fees for technical services. Income received by a US company , by way of fees for technical services could not be deemed to have accrued or arisen in India as the services under the agreement were not rendered with in India even though services received from it may have been utilized by the Indian company in India.( Asst year 1991‐92). Grasim Industries Ltd & Ors v CIT ( 2011) 58 DTR 47 / 242 CTR 166( Bom) (High Court). S. 9(1)(vii) : Income deemed to accrue or arise in India – Royalty ‐ Computer Software ‐ Copyrighted Article ‐ Tax Deduction at Source ‐International Taxation – DTAA ‐ India‐USA – Art. 7 and 12 ‐ (S. 195)


Where the payment is made in respect of the software which is granted on terms of non‐exclusive, perpetual, irrevocable, royalty free worldwide license to use the number of copies of the software enumerated in the agreement solely for internal operation, and not directly accessible to third party could not be considered as a “Royalty” under the Act. As the payment was “business income” of the party receiving the payment, as that non‐resident party did not have a Permanent Establishment in India and thus as per D.T.A.A. the same cannot be taxed in India. The assessee is not liable to deduct tax at source. Dy. DIT vs. Reliance Industries Ltd. (2011) 43 SOT 506 (Mum.)(Trib.) S. 9(1)(vii) : Income deemed to accrue or arise in India ‐ Fees for Technical Services ‐ International Taxation ‐ DTAA ‐ India‐Denmark Amount received by assessee, a Danish shipping company, from its agents in India towards their share of cost of global telecommunication facility provided to the agents to enable them to have access to variety of information regarding tracking of cargo, transportation schedule, etc., to facilitate international shipping business being only reimbursement of cost and not involving any profit element, cannot be considered as fees for technical services.(A. Y. 2001‐02 and 2002‐03) Dampskibsselskabet AF 1912 A/S Akties Iskabet vs. Addl. DIT (2011) 51 DTR 148 (Mum.) (Trib.) S.9(1) (vii).Income deemed to accrue or arise in India‐ Fees for Technical Services‐ Permanent establishment‐ Deduction of tax at source‐ DTAA‐ India‐ Italy‐ ( S. 90, 195, arts 5,7, 13.) Consideration paid to foreign company was only for supervising the erection of machines which can not be said to be a payment for assembly of machines to fall within the exclusion clause of Explanation 2 to section 9 (1) (vii). However , as persons who rendered services were not present in India for the required number of days as envisaged by art 5 (j) of the DTAA read with art 13 (5) ,income was not chargeable to tax in India and there was no obligation to deduct tax at source on such payment. ( Asst Year 2006‐07). Aditya Biral Nuvo Ltd v Asst CIT ( 2011) 56 DTR 100 / 11 ITR 812(Trib) / 61 DTR 343( Mumbai ) (Trib). S.9 (1) (vii).Income deemed to accrue or arise in India‐Fees for technical services‐ Developing tooling‐ validating new process for manufacture‐Deduction of tax at source‐ DTAA‐ India‐ USA.(S. 195, 201, Art 12 (4). Assessee is engaged in the manufacture of steel wheels for commercial vehicles, passenger cars ,utility vehicles , earth moving construction equipment , agricultural tractors and defence vehicles. Assessee developed the new process of manufacturing steel wheels for trucks etc, however it did not have requisite know how for designing the machine capable of manufacturing the product as patented process. Assessee approached the two US Companies which had the required knowledge. Assessee made advance payment in respect of entire services under the agreement were rendered outside India and hence no income chargeable to tax in India. The Tribunal held that in terms of Article 12(4) of India US tax treaty, payment made to US company for ‘developing tooling’ and ‘validating new process for manufacture’ of wheels for commercial vehicles is ‘fees for included services’ Wheels India Ltd. vs ITO, ITA No. 1792/Mds./2006, dt.19‐04‐2011, A.Y. 2005 – 2006, Chennai ITAT, BCAJ pg. 29, Vol. 43‐A, Part 3, June 2011. S.9(1)(vii): Income deemed to accrue or arise in India‐ Deduction of tax at source‐ Payment to non resident‐ Training its personnel‐Fees for technical service‐ Income deemed to accrue or arise in India. ( S, 40 (a) )(i),195. ) Assessee company during relevant assessment year made payment to non resident party for training its personnel or customers to explain proposed buyers salient features of products imported by assessee in India and to impart training to customers to use equipment . The payment made could not


be said to be fees for technical services and not liable for deduction of tax at source. ( Asst Year 2007‐08). Asst CIT v PCI Ltd ( 2011) 46 SOT 183 ( Delhi ) (Trib). S.9 (1) (vii): Income deemed to accrue or arise in India‐ Fees for technical services‐ Deduction of tax at source‐ DTAA‐ India‐ UK. ( 90, 195 ). Services rendered by the UK company to the applicant Indian Company pursuant to the data processing services agreement being in the nature of routine data entry ,application sorting document handing and data capturing services, cannot be said to be managerial or technical services with in the meaning of art 13 of the Indo –UK DTAA or Explanation 2 to section 9 (1) (vii) and therefore , consideration received for such services is not taxable in India and accordingly ,there is no question of withholding tax under section 195. R.R.Donnelley India Out source (P ) Ltd ( 2011) 241 CTR 305 / 199 Taxman 255 / 56 DTR 1(AAR). S.9 (1) (vii): Income deemed to accrue or arise in India‐ Fees for technical services‐ DTAA‐India‐USA. (Art. 12). Assessee running business of Hotel making payments to US based interior Landscaping consultants M. Work done by M is basically inspection of hotel, reviewing of the facilities , comparing the same with M’s standards and suggesting improvements / change wherever required to M standard , which did not amount to technical services and therefore no tax was deductible at source. Similarly , fees paid to UK company A was also for work of design , documentation and did not fall under art 13 of Indo –UK DTAA , likewise, fees paid to Thailand company BD, for rendering services of landscape architectural consultancy was not assessable in India.( A.Y. 2003‐04 to 2005‐06). Asst CIT v Viceroy Hotels Ltd ( 2011) 60 DTR 1 ( Hyd) (Trib). Chapter 111‐ Income which do not form part of total income. S. 10 (22):Exempt incomes‐Educational Institution‐ Purpose of profit. ( S. 11 (1)(a) , 13( 1) (c ), 13 (3). Exemption under section 10 (22) is available only if the assessee is running an educational institution solely for educational purposes and not for purposes of profit : Exemption under section 10 (22) is not allowable to the assessee as its objects include establishing small –scale industries of all kind and to aid and assist the poor , the grief –stricken ,the destitute , and persons and animals suffering from calamities.( Asst years 1983‐84 to 1985‐86). CIT v Gurukul Ghatkeswar Trust ( 2011) 58 DTR 122 ( AP) (High Court). S.10 (23C):Exempt incomes‐Charitable purpose‐ Education‐ Subsidy grant from Government.( S.2.(15).) A grant coming from Government will qualify for exemption from taxation if same has been granted for a particular purpose of public utility or public importance or to alleviate a situation affecting general public and cannot be used for any other purpose. Assessee which is Government company within the meaning of section 617 of Companies Act ,1956 , which is engaged in business of printing, sale of text book and job works relating to printing, etc., the income will be exempt. The activity of assessee were covered by expression “education” as well as “advancement of any other object of general public utility” occurring in definition of “Charitable purpose” under section 2 (15).( Asst year 2005‐06) Bihar State Text Book Publishing Corporation v CIT ( 2011) 199 Taxman 196/ 241 CTR 403 (Patna) (High Court). S.10 (23C)(vi):Educational institutions‐ Registration under Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments, Act, 1987‐ Seminars‐ Symposiums‐ Work shops‐Application of income‐ Advance of money to another educational institutions.


In order to be eligible for exemption, under section 10 (23 C (vi), it is necessary that such institution must exist solely , for educational purposes , and institution should not exist for purpose of profit. Registration under section 43A of A.P. Act is not a condition precedent for seeking approval , Chief commissioner has to examine independently. Object of Society to conduct seminars , symposiums , workshops and invite experts from India and abroad to improve quality of education and to support students to elevate themselves to international standards is incidental and ancillary object to primary objects of carrying on educational activities. Money advanced to another educational institution cannot be treated as application of income solely for the purpose of education . New Noble Education Society v Chief Commissioner ( 2011) 201 Taxman 33 (AP)( High Court). S. 10 (23FB): Exempt incomes‐‐Venture Capital fund‐Income from other sources . It was held that exemption claimed with respect of any income from any VCF prior to 1/4/2008 was exempt as the amendment to s. 10(23FB), which restricted to the exemption to income from investment by VCF, is with effect from 1/4/2008 and is prospective. ITO v Kshitij Capital Fund ( 2011) 131 ITD 290 ( Mumbai ) (Trib). S. 10A : Exempt Incomes ‐ Free Trade Zone ‐ Foreign Trade (Development and Regulation) Act, 1992 ‐ Allocation of Expenses. Where assessee’ entire income is from STP unit and it is governed under a scheme promulgated by section 3(1) of Foreign Trade (Development and Regulation) Act, 1992, it was held by the Tribunal that Foreign Trade (Development and Regulation) Act, 1992, does not contain any provision overriding provisions of Income Tax Act, therefore, the assessee can get the exemption only as per section 10A of the Income Tax Act. Where travel expenses, telecommunication charges, professional charges and professional consultancy charges as reduced from “export turnover” bore no element of profit which would require allocation by apportionment, the said charges would stand to be excluded from computation of “Total Turnover” as well.(A. Y. 2001‐02 to 2004‐2005) Dy. CIT vs. IBS Software Services (P) Ltd. (2011) 129 ITD 21/137 TTJ 54/52 DTR 179 (Cochin)(Trib) S. 10A :Exempt incomes‐ Free Trade Zone ‐ Interest from Bank Deposits ‐ Turnover ‐ Freight Charges. Interest received from bank deposit and other income shall not form part of “profit from business” for the purpose of computation of deduction under section 10A. After substitution of sub section (4) of section 10A by Finance Act, 2001, total turnover for relevant assessment years shall comprise of total turnover of business carried on by eligible “undertaking” only and not total turnover of all units of assessee for the purpose of calculation of deduction under section 10A. For the purpose of calculating deduction under section 10A, export turnover has to be reduced by freight charges, telecommunication charges or insurance charges attributable to delivery of articles or things or computer software outside India or expenses if any incurred in foreign exchange, in providing technical services out side India. Commission charges that are deducted from export turnover should also be deducted from total turnover.(A. Y.2003‐2006) Miracle Software Systems India (P) Ltd. vs. ACIT (2011) 44 SOT 203/ 59 DTR 333/ 140 TTJ 703 (Visakhapatanam)(Trib) S. 10A : Exempt incomes‐– Free Trade Zone ‐Deduction ‐ Interest on Bank ‐ STP Unit ‐ Total Turnover. Interest on bank deposit exemption under section 10A, is not eligible. When the amount to be proportioned did not include the unrealized sale proceeds, the same would also be included in the total turnover under section 10A. When assessee excluded travel expenses telecommunication charges and professional consultancy charges in the computation of “export turnover”, the same has to be reduced from the figure of ‘total turnover”, for the purpose of section 10A.( A. Y. 2001‐02 to 2004‐2005)


Dy. CIT vs. IBS Software Services (P) Ltd. (2011) 137 TTJ 54 / 52 DTR 179/ 129 ITD 21 (Coch.)(Trib.) S. 10A: Exempt incomes‐ Free Trade Zone‐Adjustment of loss against taxable profit of other unit.‐ Export turn over. From Assessment year 2001‐02 section 10A is no longer an exemption provision and it allows only deduction from total income , loss from 10A unit has to be adjusted against taxable profit of other unit after deduction under section 10A has been allowed in respect of eligible units. Assessee had incurred data line cost being telecommunication charges in respect of its unit and same was included in export turnover for purpose of deduction under section 10A. Assessing Officer excluded the data line cost from export turnover. Since expenses incurred on development of software in India could not be considered as expenses attributable to delivery of computer soft ware out side India , such expenses could not be excluded from export turn over.( Asst Year 2006‐07). Capgemini India ( P) Ltd v Addl CIT ( 2011) 46 SOT 195 ( Mumbai) (Trib). S.10B:Exempt incomes‐‐Export oriented undertaking‐Actual export. Assessee hundred percent export oriented undertaking (EOU),which has commenced production prior to 1st April 1994, exemption under section 10B was allowable even if its export was less than seventy five percent as under the pre amended provisions , the benefit was available by mere obtaining a certificate of EOU under the IDR Act. (Asst Year 1999‐2000) CIT v Baehal Software Ltd (2011) 240 CTR 316 (Kar) (High Court). S.10B: Exemption‐EOU‐ Job work done by sister concern. Assessee, an EOU, approved by NEPZ authorities , being engaged in manufacture of articles and exporting the same cannot be denied exemption under section 10B only because , it was getting some job work done from its sister concern. ( A.Y. 2003‐04). CIT v Continental Engines Ltd ( 2011) 60 DTR 40 ( Delhi)( High Court). S. 10B : Exempt incomes‐– Deduction – Export ‐ Change of Ownership of Unit ‐ Reconstruction of existing Unit. Firm converted in to company, change of ownership of unit not a reconstruction hence, deduction under section 10B is available.(A. Y. 2007‐08) ITO vs. Veto Electropowers (2011) 8 ITR 76 /56 DTR 313/ (Tax World) Feb., 2011 P. 66 (Jaipur)(Trib.) S. 10B : Exempt incomes – Export Oriented Undertaking – Export Turnover. Expenses incurred in connection with development of software by the employees at foreign branch should not be excluded from the export turnover for computing deduction under the section 10B. (A. Y. 2003‐04) Zylog Systems Ltd. vs. ITO (2011) 128 ITD 105 / 135 TTJ 0129 / 7 ITR 348 / 49 DTR 1 (Chennai)(SB)(Trib.) S. 10B : Exempt incomes‐‐ Export Oriented Undertaking – Option –Declaration. If an assessee files a declaration to avail option of not claiming deduction under section 10B, then provisions of section would not be applicable for any relevant assessment year. Filing of declaration is mandatory and time limit is directory. (A. Y. 2003‐04) Wipro BPO Solutions Ltd. vs. Dy. CIT (2011) 44 SOT 353 (Bang.)(Trib.) S. 10B :Exempt incomes‐ Computation‐ Transaction with related concern.(S.80IA (10).


Assessee engaged in manufacturing of precious and semi precious stones . GP rate assessed was much higher as compared to another concern i.e. V.R. Exports. Assessing Officer clubbed the turnover of both the concerns and determined the average GP rate after considering the direct expenses and reduced deduction under section 10B. The Tribunal held that since there is no business between the assessee and VR Exports, provisions of section 80IA (10) are not applicable and net profit rate of the two concerns cannot be apportioned in the ratio of turnover of both concerns. (Asst year 2005‐06). ITO v Kanchan Tara Exports ( 2011) 138 TTJ 592 ( JP) (Trib). S. 10B:Exempt incomes‐ Deduction‐Splitting up or reconstruction of existing business – Lease of undertaking. Assessee company claimed the deduction under section 10B on the basis of the lease arrangement between the assessee company and the predecessor , the tribunal held that such claim of benefit under section 10 B for the balance unexpired period was not allowable because the claim was not based on the establishment of new industrial undertaking. ( Asst Years 2006‐07 & 2007‐08). Synergies Casting Ltd v Dy CIT ( 2011) 57 DTR 503 ( Hyd) (Trib). S.10B:Exempt incomes‐ Deduction‐Export of computer software‐ Back office operation‐Computation‐ Transaction with related concerns. ( S. 80IA (10). Activities of software programming carried on by the assessee company to render quality and testing assurance services to foreign clients and transmitting the same through internet are in the nature of back office operations covered by CBDT Notification no 890 (E) dt 26 th September , 2000 issued for the purpose of Explanation 2 to section 10B and therefore , assessee company registered as a 100 percent EOU with STPI is entitled to deduction under section 10B. The assessee company had raised the bills for the services rendered by it in consonance with the terms of agreement settled between it and its clients from time to time and STPI having certified that such services , it can not be said that profits shown by the assessee are on the higher side and therefore , profits of the assessee company could not be reworked by applying the provisions of section 80IA (10) for the purpose of allowing exemption under section 10B.( Asst years 2005‐06 to 2007‐08). Bebo Techlogies (P) Ltd v JCIT ( 2011) 57 DTR 402 ( Chd) (Trib). S. 10B(6) : Exempt incomes‐ – Depreciation – Unabsorbed ‐ Carry forward and set off Unabsorbed depreciation of earlier assessment years in which no deduction was claimed under section 10B is available for set off against other taxable income of the subsequent assessment years.(A. Y. 2002‐05) Patspin India Ltd. vs. Dy. CIT (2011) 51 DTR 57 / 129 ITD 35 / 136 TTJ 377 (Cochin)(Trib.)(TM) S.10B (6)(ii): Exempt incomes‐‐ Depreciation‐ Unabsorbed‐ Carry forward and set off‐Exempted income ( ‐Income from other sources.(S.32(2),56,72(2) ). Assessee being entitled to deduction under section 10B up to asst year 2005‐06, provisions of section 10B (6) are not applicable in the relevant asst year ie 2004‐05 and therefore unabsorbed depreciation brought forward from asst year prior to asst year 2000‐01 can be set off against business income or against any other head of income including income from other sources.(Asst year 2004‐05) Dy CIT v Akay Falvours & Aromatics (P) Ltd ( 2011) 55 DTR 1/ 130 ITD 219 (Coch) (TM) (Trib). S. 10(10CC) : Exempt incomes‐ – Perquisite ‐ Tax borne by Employer.


Tax paid by employer in respect of salary paid to employees would constitute a non‐monetary perquisite eligible for exemption under section 10(10CC).(A. Y. 2004‐2005) Transocean Discoverer vs. ACIT (2011) 44 SOT 248 (Delhi)(Trib) S. 10(20) : Exempt incomes‐– Local Authority – Notified Area – Surat – Municipality. The assessee was a notified area in Surat for industrial development. It had been notified by the State Government under Gujarat Industrial Development, 1962. The assessee had been entrusted with the work of collection of tax under a notification issued by Gujarat Municipality Act, 1963. On the facts of the present case, the assessee was regarded as a ‘municipality’ under section 10(20) and therefore its income was exempt under the said section. (A. Y. 2003‐04) ITO vs. Sachin Notified Area (2011) 43 SOT 411 / 7 ITR 699 / 132 TTJ 610 / 42 DTR 478 (Ahd.)(Trib.) S. 10(23C)(vi) : Exempt incomes‐– Educational Institutional. The assumption that for exemption there should not be any surplus and if it is otherwise the institution society exists for profit and not charity is not justified. Thus, exemption cannot be rejected merely because there is a surplus. Vanita Vishram Trust 327 ITR 121 (Bom.), Maa Saraswati Trust 194 TM 84 (HP) and Pinegrove International Charitable Trust 327 ITR 73 (P&H) followed). St. Lawrence Educational Society vs. CIT(2011) 130 ITD 439 (Delhi)(High Court) S. 11 :Exempt incomes‐ Charitable Trust ‐ Application of Income – Depreciation. Depreciation claim is nothing but application of income, hence, depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust.(A. Y. 2006‐07) CIT vs. Tinny Tonts Education Society (2011) 330 ITR 21 (P&H)(High Court) S. 11 :Exempt incomes‐ Charitable Trust – Exemption ‐ Set off of loss. The excess of application of the current year / Past year can be set off against the income of subsequent / current year. Raghuvanshi Charitable Trust and others vs. DIT (2011) 221 Taxation 250 (Delhi)(High Court) S.11.Exempt incomes‐ Charitable Trust‐ Application of income‐ Legal expenses to defend member of society in contempt proceedings. ( S 12, 37(1 )). Legal expenses incurred by the assessee Society to defend its member in contempt of Court Proceedings cannot be said to be for promoting the objects of the association nor for the benefit of the association , therefore , could not be allowed as deduction. (Asst years 2004‐05 , 2005‐06 and 2006‐07 ). CIT v IAS Officers Association ( 2011) 56 DTR 239 ( Kar) (High Court). S. 11:Exempt incomes‐ Charitable trust‐ Property sub let. In order to carry out the charitable activity of the trust in effective manner if the property of the trust is sub – let and rental income is received thereon the exemption under section 11 cannot be denied by the assessing officer invoking provisions of section 11 (4A) of the Act.(A. Y. 1991‐92) Director of Income tax (Exemption) vs. Sahu Jain Trust (2011) 56 DTR 402 (Cal) (High Court). S. 12A :Exempt incomes‐ Charitable Trust – Registration – Genuineness of Trust. Registration under section 12A of the Act cannot be denied to a trust which is newly formed on the ground that it


had not commenced any activity. While granting registration under section 12A of the Act only the objects of the trust is to be examined to ascertain the genuineness of the trust. (A. Y. 2004‐05) DIT (E) vs. Meenakshi Amma Endowment Trust (2011) 50 DTR 243 (Kar.)(High Court) S. 12A :Exempt incomes‐ Charitable Trust – Religious Trust – Cancellation of Registration – Exemption – [S. 10(23C)] Rejection of application under section 10(23C)(vi) cannot be a reason to cancel registration under section 12A. Sunbeam English School Society vs. CIT (2011) 129 ITD 299/ 56 DTR 52 (All)(Trib.) S. 12A :Exempt incomes‐ Charitable Purpose – Registration ‐ Activity of giving micro finance and earning Interest – [S. 2 (15), 11] Where an assessee is registered under section 25 of Companies Act, 1956, it in itself shows that the company intends to apply its profit in promoting charity. And where the object of the assessee states that it shall promote micro finance services to poor person and help them arise out of poverty. Mere surplus from such micro finance service cannot by itself be a ground to say that no charitable purpose exists. Followed Thanthi Trust 247 ITR 785 (SC) and Agricultural produce and market committee 291 ITR 419 (Bom.) Dish India Micro Credit vs. CIT (ITAT ‐ Delhi) Source: www.itatonline.org S. 12A:Exempt incomes‐ Charitable Trust ‐ Registration as Public Trust not necessary for S.12A “Charity” registration. Registration as a Public Trust is not a condition precedent for grant of registration u/s. 12A. There is no requirement in the Income‐tax Act that the institution constituted for advancement of charity, must be registered as a turst under the Public Trusts Act. Agriculture Produce and Market Committee 291 ITR 419 (Bom) & Disha India Micro Credit (Del.), followed. Grameen Initiative for Women v DIT (E), (ITAT) (Mumbai) (www.itatonline.org) S. 12A.Exempt incomes‐ Charitable purpose‐ Stock exchange‐ benefit to individual stock broker or members or employees – no exemption granted u/s. 11. When a stock exchange carries out any activity for sole benefit of its members or ex members or employees or ex employees or their dependents and not for benefit of general public which is distinguished from class or community consisting of its members , ex members , employees or ex employees or their dependents and connections , it would not be entitled for exemption under section 11.Members of exchange being integral part of constitution of exchange who are interested persons as per provisions of section 13 (1) (c ), they are precluded from taking any undue advantages from assessee exchange. Assessee being registered under section 12A , benefit of assessee –exchange would be for public at large and not for benefit of individual stock brokers or members of Governing body of stock exchange . Since the assessee incurred expenditure for benefit of its members and subsidiary company only, provisions of section 13 (1) ( C ) read with section 13 (2) (b ) and 13 (3) (cc ) was applicable to fact of case and consequently , assessee was not entitled for exemption under section 11.( Asst years 2001‐02 to 2006‐07). Hyderabad Stock Exchange Ltd v Asst Director of Income Tax ( 2011) 46 SOT 1 ( Hyd) (Trib). S. 12A.Exempt incomes‐Charitable Trust‐ Registration of Trust .( S. 80G) Application for renewal of exemption certificate rejected for the reason that changes made in object clause of trust without following the required procedure, hence the trust became invalid. The Tribunal


observed that only one addition was made in the object clause, and even that remained charitable and did not cause any detriment to original object. There was no statutory requirement of intimating the changes except the one mentioned in the Form 10A, and even there was no time limit. Held that revenue was not justified in refusing to renew exemption certificate. Mehta Jivraj Makandas & Parekh Govindaji Kalyanji Modh Vanik Vidyarthi Public Trust vs. DIT(E), ITA No. 2212/Mum/2010, dt. 11‐03‐2011, `G’ Bench, Mumbai ITAT, BCAJ pg. 32, Vol. 43‐A, Part 1, April 2011. S.12A: Exemption‐ Charitable purpose‐Charitable or religious‐ Registration‐ Propagation of Vedas. Assessee trust formed for propagation of Vedas was entitled to registration under section 12A, in status of religious and charitable trust.( A.Y. 2008‐09). Kasyapa Veda Research Foundation v CIT ( 2011) 1 31 ITD 370 ( Cochin) (Trib). S. 12A: Exemption‐ Charitable purpose‐Deduction‐ Donation‐ Requirement of form no 10A. (S.80G) In instant case trust had been registered as a charitable institution under section 12A vide order dated 27‐11‐1975. Subsequently, in view of the order dated 17‐3‐ 1994 of the Charity Officer under section 50A (1) of the BPT Act ,objects of the Trust were amended . The Case of the revenue was that objects of trust could not be amended without the approval of the High Court. It was also argued that the changes in the objects of trust was not intimated to the department as provided in the Form no 10A. The assessee contended that the when the change in the object clause approved by the Charity commissioner under section 50A(1) approval of High Court is not required. Requirement of intimation of changes to department was provided only in Form no 10A , which was not a statutory requirement and in case the assessee had intimated the said change to department later on. Even the amended objects remained charitable and had not caused any detriment to original objects. The Tribunal held that the assessee trust continued to be eligible for registration under section 12A and thus ,impugned order of DIT (E) rejecting for renewal of approval under section 80G could not be sustained. Mehata Jivraj Makandas & Parekh Govindji Kalyani Modh Vanik Vidyarthi Public Trust v Director of Income –tax ( 2011) 131 ITD 462 ( Mum) (Trib). S. 12AA:Exempt incomes‐ Charitable Trust‐Registration granted under section 12A can not be withdrawn in section 12AA(3). Assessee trust got registration under 12A in December 1974 and on that basis got exemption of income tax for the Asst years 1996‐97 to 2005‐06. DIT (Exemptions) denied exemption and cancelled registration under section 12AA(3) with effect from assessment year 2002‐03.The court held that registration granted under section 12A in December 1974 to assessee could not be withdrawn. (Asst years 2002‐03 to 2006 ‐07) Director of Income Tax (Exemption) v Mool Chand Khairaiti Ram Trust (2011) 199 Taxman 1/ 58 DTR 254 (Delhi) (High Court). Chapter 1V –Computation of total income. S. 14A : Business Expenditure –Disallowance‐ Exempt Income ‐ Borrowed Funds – Interest ‐ Disallowance of Interest on borrowings on ground that the assessee ought not to have used own funds for tax ‐ Free Investments invalid. It was held by Hon’ble High Court that the assessee has sufficiently explained that a majority of the investment in the tax‐free security was made before the borrowing. The assessee had demonstrated that it had other sources of investment and that no part of the borrowed fund could be stated to have been diverted to earn tax free income. As borrowed funds were not used for earning tax‐free income, applying section 14A was not justified.


CIT vs. Gujarat Power Corporation Ltd. (Gujarat High Court) Source: www.itatonline.org S. 14A : Business Expenditure – Disallowance ‐ Exempt Income ‐ Apportionment of Expenses ‐ Rule 8D ‐ Pre Asst. Year 2008‐09. For pre Asst. Year 2008‐09, the assessee earned tax free dividend income from investments in units, bonds, shares, etc. The assessee did not maintain separate books of account for tax free securities but claimed that the same had been invested from its own funds and no part of the interest paid by the assessee on its borrowings together with the administrative expenses could be disallowed. Assessing Officer took the view that the interest paid on borrowings and administrative expenses could be disallowed under section 14A. On appeal, the Tribunal held that as no rule had been made prescribed for computing the disallowance no disallowance under section 14A could be made. On appeal by the department, the Court held that in the absence of any precise formula for proportionate disallowance, no disallowance is called for in respect of administrative cost attributable to earning of tax free income until Rule 8D came in to force. CIT vs. Catholic Syriyan Bank Ltd. & Ors. (2011) 237 CTR 164 / 49 DTR 57 (Ker.)(High Court) Editorial:‐ Godrej & Boyce Mfg Co Ltd (2010)328 ITR 81 (Bom.) Dhanalakshmi Bank (2007) 12 SOT 625 (Coch.) S. 14A : Business Expenditure – Disallownce‐ Exempt Income ‐ Despite Proviso to S. 14A, disallowance can be made for earlier years. The protection of proviso to section 14A w.r.t. A.Y. 2001‐02 & earlier years was inserted w.e.f. 11/05/2001. Thus, where order of CIT under section 263 was passed earlier i.e. on 29/12/1999, the protection under the proviso is to available (A. Y. 1995‐96). Mahesh G. Shetty & Ors. (2011) 51 DTR 104/238 CTR 440 (Kar.)High Court) S.14A:Business expenditure‐Disallowance‐ Exempt income‐ Interest on borrowed capital‐ Direction of Tribunal. During the course of assessment proceedings , the Assessing Officer made a query in respect of disallowance under section 14A of the Income tax Act ,however no disallowance was made . Revenue had not challenged the non applicability of section 14A. Tribunal gave direction to consider applicability of section 14A. The direction of Tribunal was quashed. Topstar Mercantile P. Ltd v Asst CIT ( 2011) 334 ITR 374 (Bom) (High Court). S.14A: Business expenditure‐ Exempted income‐Investment in tax free income. If the investment in tax free income yielding securities is made from interest free funds , no disallowance can be made under section 14A.(A.Y. 2001‐02). CIT v LubiSummersibles Ltd ( ACAJ Vol 35 Part 5 August‐2011 P. 319)( Guj) (High Court) S. 14A : Business Expenditure – Disallowance – Exempt Income – No expenditure incurred for earning the exempted income. When no expenditure is incurred for earning exempted income disallowance under section 14A cannot be made. ACIT vs. Pradip N. Desai, ITA No. 2488/AHD/2008 A.Y. 2005‐06 Bench ‘A’ dt. 28/12/2010, Ahmedabad Chartered Accountants Journal, Vol. 34 Part 10 January 2011, Pg. 478(Trib) S. 14A : Business Expenditure –Disallowance‐ Exempt Income ‐ Appellate Tribunal – Power ‐ Applicability of provision of section 14A for the first time before Tribunal – [S. 254(1)] Issue of disallowance under section 14A, cannot be raised for the first time before the Tribunal where the provision of section 14A, was not invoked against the assessee by the Assessing Officer while making


disallowance of interest expenditure under section 36(1)(iii) and CIT(A) also at no stage considered the application of section 14A.(A. Y. 2003‐04) ACIT vs. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193/ 128 ITD 146 (Mum.)(Trib.) S. 14A : Business Expenditure –Disallowance‐ Exempt Income – Apportionment of Expenditure. Assessee made investment for earning tax free income from mix funds and it is not possible to ascertain as to whether the investment in tax free was out of assessee’s own funds and the Assessing having not established the nexus between the borrowed funds and investment in tax free funds disallowance on pro rata basis was not proper. Dy. CIT vs. Maharashtra Seamless Ltd. (2011) 52 DTR 5 (Delhi)(Trib.) S. 14A : Business Expenditure – Disallwance‐Exempt Income ‐ Interest on Borrowed Funds used to buy shares for trading purposes. In case of assessee, engaged in trading and investment of shares and received tax‐free dividend income of in A.Y. 2004‐05. It was held by Tribunal that Rule 8D does not apply prior to A.Y. 2008‐09 (Godrej & Boyce Mfg. Co. Ltd. (2010) 328 ITR 81 (Bom.) followed). It was further observed that the expression “in relation to” in section 14A means dominant and immediate connection or nexus with the exempt income. In order to disallow expenditure under section 14A, there must be a live nexus between the expenditure incurred and the tax‐free income. Disallowance cannot be made on presumptions and estimation by the Assessing Officer. When it is possible to determine the actual expenditure “in relation to” the exempt income or where no expenditure is incurred “in relation to” the exempt income, the principle of apportionment embedded in section 14A has no application. Yatish Trading Co. Pvt. Ltd. vs. ACIT (ITAT Mumbai)(Trib) Source: www.itatonline.org S. 14A :Business Expenditure –Disallowance‐ Exempt Income ‐ Disallowance cannot be made for “depreciation” It was held that section 14A permits a disallowance of “expenditure incurred by the assessee” and not of “allowance admissible” to him. There is a distinction between “expenditure” and “allowance”. The expression “expenditure” does not include allowances such as depreciation allowance. Accordingly, depreciation cannot be the subject matter of disallowance under section 14A (ratio of Nectar Beverages 314 ITR 314 (SC) followed); Similarly, it was further held that the deduction under section 80D is not expenditure for earning tax‐free income but is a permissible deduction from gross total income under Chapter VIA. Hoshang D. Nanavati vs. ACIT (ITAT Mumbai)(Trib) Source: www.itatonline.org S. 14A : Business Expenditure –Disallowance‐ Exempt Income – ‐Interest on borrowings on ground that assessee ought to have repaid borrowings instead of investing in tax‐free investments invalid. Where borrowed funds were utilized for business purposes and investment in shares is made out of own funds, then disallowance under section 14A of interest on borrowed fund was not permissible. CIT vs. Hero Cycles Ltd. 323 ITR 518 (P&H) (A. Y. 2005‐06) Godrej Industries Ltd. vs. Dy. CIT (Mum.)(Trib.) Source: www.itatonline.org

S. 14A : Business Expenditure –Disallowance‐ Exempt Income – Separate Books. The assessee is maintaining separate books of account for the purpose of business. The tax‐free investments are in his personal capacity. As the Assessing Officer has not disallowed any expenditure of personal nature out of the business income, the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. Accordingly, the estimation of expenditure of ` 20,000 out of business expenditure as being incurred for earning tax free income is


not acceptable. (A. Y. 2005‐06) Pawan Kumar Parmeshwarlal vs. ACIT, ITA No. 530/Mum/2009, dt. 11‐1‐2011, ITAT Mumbai ‘C’ Bench, BCAJ pg. 27, Vol. 42‐B, Part 5, February 2011 (Trib.) S. 14A :‐ Business Expenditure –Disallowance‐ Exempt income‐ No disallowance if assessee has no tax‐free income‐ S. 14A uses the words “for the purpose of computing the total income under this Chapter ……. expenditure incurred in relation to income which does not form part of the total income under this Act”. Thus for the applicability of s. 14A there must be (a) taxable income and (b) tax‐free income. If either one is absent, s. 14A has no applicability. If there is no claim for tax‐free income, there cannot be any disallowance u/s 14A . If the transaction of lending monies between the assessee and the AE is in foreign currency and the transaction is an international transaction, it has to be evaluated by applying the commercial principles applicable to international transaction. Siva Industries & Holdings Ltd. vs ACIT(ITAT )(Chennai) (www.itatonline.org) Editorial ‐ Walfort Share and Stock Brokers 326 ITR 1 (SC), Godrej & Boyce 328 ITR 81 (Bom) & Winsome Textile 319 ITR 204 (P&H) referred ( A. Y. 2006‐07) S. 14A: Business expenditure‐ Exempted income‐Investment‐ Dividend income. For the applicability of section 14A there must be (i) income which is taxable under the Act, for the relevant assessment year and (2) there should also be income which does not form part of total income under the Act during relevant assessment year. If either one is absent, then section 14A has no applicability.( A.Y. 2006‐07). Siva Industries & Holdings Ltd v Asst CIT ( 2011) 59 DTR 182( Chennai) (Trib). S. 14A: Business expenditure‐ Exempted income‐ Old investments‐Own funds. Investments in shares were made by the assessee from own funds , no disallowances were made in earlier years. No disallowance can be made for the relevant year. ( A.Y. 2005‐06). G.D. Metsteel (P) Ltd v Asst CIT ( 2011) 47 SOT 62 ( Mum) (Trib). S. 14A : Business Expenditure – Exempted Income –No nexus between investment in tax‐free securities and borrowed funds. – No disallowance to made –Disallowance under section 14A cannot exceed exempt income. In AY 2007‐08, the assessee received dividend of in respect of investment in shares made in earlier years. No investments were made during the year. It was claimed that the investment in the earlier years was made out of reserves & surplus and that there was no expenditure incurred during the year to earn the dividend. The AO held that as in the earlier years, the assessee had borrowed funds, s. 14A applied. It was held that if there is no nexus between borrowed funds and investments made in purchase of shares, disallowance u/s 14A is not warranted.( A.Y.2007‐08). ACIT v Punjab state Coop & Mktg (Chandigarh)(Trib)(www.itatonline.org) S. 14A : Business Expenditure – Rule 8D to be applied only after showing how assessee’s method is incorrect It is a pre‐requisite that before invoking Rule 8D, the AO must record his satisfaction on how the assessee’s calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax‐free income. Without discharging the onus, the AO is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptions DCIT v Jindal Photo Limited (Delhi)( Trib) (www.itatonline.org)


S. 15: Salaries – Chargeable‐Perquisites‐Tax paid by employer in respect of salary.( S.17, rule 3). Tax paid by employer in respect of salary paid to expatriate employees is salary under rule 3 of the Income tax Rules , 1962 , for purpose of computing value of perquisites in respect of rent free accommodation provided to said employees. ( A.Ys. 1996‐97 to 1998‐99 ). Mitsubishi Corporation v CIT ( 2011) 200 Taxman 372/ 337 ITR 498 ( Delhi) ( High Court). S.15: Salaries‐ Profits in lieu of salary‐Tips collected and paid to employees. ( S.2 (24), 17 (1)(iv), 17(3) ). Payment of banquet and restaurant tips to the employees of assessee in its capacity as employer constitutes salary with in the meaning of section 15 read with section 17 (3) .( A.Ys. 19999‐2000 to 2005‐06). CIT v ITC Ltd ( 2011) 59 DTR 312/ 243 CTR 114 ( Delhi) (High Court). S.17(2) (iiia):Perquisites‐ Employees stock option‐Equity warrant certificates. Warrant issued in February 1999 and assesse exercising option in April 1999. Perquisites arise and taxable in financial year 1999‐2000 relevant to assessment year 2000‐2001. Date of exercise of option is date of acquisition of shares and not date of certificate. (A.Y. 2000‐01). Dy CIT v Vijay Gopal Jindal ( 2011) 11 ITR 451 (Delhi) (Trib). C‐Income from house property. S. 22 : Income from House Property – Ownership ‐ Building constructed on land taken on lease and let out ‐ Deemed Owner – [S. 23, 27(iii)] Assessee having constructed the building on land taken on lease from NDMC, which is owner, further in view of the provisions of section 27(iii) it is the sub licensee who would be “deemed owner” of those premises which the sub licenses transferred to the occupiers and those occupiers are paying rent/ license fee to the sub‐licensees and assessee only collected interest free security deposits from sub licensees and no rent, therefore, provisions of section 23 are not applicable. (A. Y. 1999‐2000) CIT vs. C. J. International Hotels Ltd. (2011) 53 DTR 92 (Delhi)(High Court)

S. 22 : Income from House Property ‐ Business Income – Sub‐let of Property ‐ [S. 28(i)]

Where the assessee was engaged in business of manufacturing and sale of food items acquired property on lease for a long period and in turn sub let the same, the income therefrom, was held to be taxable under the head income from house property and not business income as letting out property was not its business activity. Further the letting out was not temporary arrangement. (A. Y. 2003‐04) Sheetal Khurana Foods P. Ltd. vs. ITAT (2011) 51 DTR 129 (P&H)(High Court) S. 22: Income from House property‐ Business Income‐ Rental income ( S. 28 (i). Assessee letting out flats in a multi storeyed complex . Assessee was nether in possession of the property nor doing any business there . Income was rightly taxes as income from house property. CIT v Sran Holdings (P) Ltd ( 2011) 57 DTR 82 (Pat) (High Court). S. 22: Income from house property‐Compensation. Where the assessee was assessed to tax under the head income from house property with respect to notional income of rent deemed to have earned by the assessee after the expiry of lease period, year after year. Thereafter, the compensation actually received by the assessee from the lessee under a


settlement agreement, for the occupation of the leased premise after lease period cannot be taxed under a different head than income from house property. Jasmine Commercials Ltd. vs. CIT (2011) 56 DTR 159/ 200 Taxman 338 (Cal)( High Court). S. 22:Income from House Property – Ownership. Where the builder had received full consideration against the sale of shops and flat the annual value of the property cannot be assessed in the hands of the builder even though the sale deed of the shops and flat were not registered. CIT vs. Babu Khan Builders & Ors. (2011) 55 DTR 329 (AP)( High Court). S. 22: Income from House property‐ Business income‐ Business of construction and development of residential –Commercial unit. [ ( S. 28 (i). ] In case where assessee who is engaged in constructions and development of residential/commercial units and where there was no material on record to show that leasing of residential/commercial units was one of the principal objects of the company and that lease rent received by it was from exploitation of property by way of complex activities, the rent income derived as owner of property will be assessed as `Income from House Property’. Roma Builders (P) Ltd v JCIT ( 2011) 131 ITD 91 ( Mumbai) (Trib). S. 22: Income from house property‐ Annual value‐ Second property‐Rent control Act. Assessee having two self occupied properties. In case of the second property, relevant provisions of the Rent control Act were applicable. The Assessing Officer is bound to determine the standard rent of the premises in accordance with provisions of Act. However ,where the standard rent has not been determined by the rent control authority , the Assessing Officer is duty bound to do the excise him self and determine the standard rent as per the provisions of the relevant Rent Control Act. Jayantibhai Meghibhai v Addl CIT (ACAJ Vol 35 Part 5. August 2011 P. 320) (Ahd) ( Trib) S. 23: Income from house property‐ Annual Letting value‐ Maintenance and other charges. Maintenance and other charges are deductible from rent while calculating annual letting value. ( Asst years 1996‐97‐200‐01 ). CIT v R.J.Wood P. Ltd ( 2011) 334 ITR 358 (Delhi) (High Court) S. 23: Income from house property‐ Annual value‐ Property let out – Licencee‐ Sub let Higher value‐Tax Planning transaction not “Sham” if parties assessed‐ Double taxation. The assessee let out its premises to Minicon pursuant to a leave and license agreement. Minicon thereafter let out the said premises to various third parties. One director was common between the assessee and Minicon. It was held that save and except the fact that one of the directors of the assessee company was also a director in Minicon, there is nothing on record to show that the transaction between the assessee and Minicon is a sham transaction. Accordingly, the decision of the Tribunal that the amounts received by Minicon on account of letting out the premises is liable to be assessed in the hands of the assessee on the ground that the transaction between the assessee and Minicon is a sham and bogus transaction cannot be accepted. Akshay Textile Trading 304 ITR 401 (Bom) followed Sahney Kirwood Pvt. Ltd vs ACIT ( Bombay ) (High Court) www.itatonline.org


S. 23: Income from house property‐Annual value‐ Interest free deposit. Interest free security deposit taken by assessee highly disproportionate to monthly rent charged . This being the device to circumvent liability to income tax , notional interest on security deposit to be treated as income from house property.( A.Y.1995‐96). CIT v K. Streetlite Electric Corporation ( 2011) 336 ITR 348 ( P &H) (High Court). S. 23(1) (a) : Income from House Property – Annual Value – Notional Rent ‐ Interest Free Deposit For applying provisions of section 23(1)(a) of the Act, municipal valuation / ratable value should be the determining factor. Since the rent received by the assessee was more than the sum for which the property might reasonably be expected to be let from year to year, the actual rent received should be the annual value of the property under section 23(1)(b) of the Act. Notional interest on interest – free security deposit/rent received in advance should not be added to the same. Dy. CIT vs. Reclamation Realty India Pvt. Ltd., ITA No. 1411/Mum. 2007, dt. 26‐11‐2010, ITAT ‘D’ Bench, BCAJ pg. 25, Vol. 42‐B, Part 5, February 2011 / Source: www.itatonline.org (Trib.) S. 23(1)(a) : Income from House Property ‐ Annual Value ‐ Notional Interest – Deposit ‐ Municipal Ratable Value ‐ For Annual Value under section 23, notional interest on deposit not includible. Municipal value is ordinarily ALV for section 23 though Assessing Officer entitled to depart for sufficient cause. S. 23(1)(a) requires determination of the “fair rent” being “the sum for which the property might reasonably be expected to let from year to year”. If on inquiry Assessing Officer finds that the actual rent received is less than the “fair/market rent” because the assessee has received abnormally high interest free security deposit, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be taken as determinative factor to arrive at the “fair rent”. The ALV fixed by the Municipal Authorities can be the basis of adopting the ALV for purposes of section 23. Also in determining the reasonable/fair rent, extraneous circumstances may inflate/deflate the “fair rent”. CIT vs. Moni Kumar Subba (2011)333 ITR 38/ 199 Taxman 301 (Delhi) (High Court)(FB) Editorial:‐ Refer Dy. CIT vs. Reclamation Reality India Pvt. Ltd. (ITAT Mumbai) Source: www.itatonline.org(Trib) S. 23(1)(a) : Income from House Property –Annual value‐‐ Not bound by standard rent, rateble value & can adjust if interest‐free deposit reason for low actual rent. It was held that for purpose of determining the ALV under section 23(1)(a) the Assessing Officer has to determine the fair / reasonable rent expected to be fetched by the property. Various factors must be considered by Assessing Officer. Therefore, Notional Interest on interest free security cannot be considered as determinative factor to arrive at fair sent. In the instant case, the matter was remanded back as no inquiry was made by Assessing Officer to determine fair rent under section 23(1)(a). (A. Y. 1992‐93, 1993‐94) Tivoli Investment and Trading Co. P. ltd. vs. ACIT(2011)130 ITD 521/ 58 DTR 84/139 TTJ 520 (Mum.)(Trib.) S.24. Income from house property‐Deduction‐Brokerage. Brokerage paid was not an admissible expenditure under sec. 24 (Asst Year 1997‐98) Aravali Engineers P .lTD v CIT ( 2011) 335 ITR 508 ( P& H).( High Court). S. 24: Income from house property‐Deduction‐Interest on Loans raised for repayment of original loan‐ Maintenance charges‐Lift‐ Lighting – Sweeping Charges. ( S. 22, 23 ). Loan raised for repayment of original loan taken to purchase house property partakes the character of original loan and therefore interest paid on such subsequent loan is deductible under section 24 from


the rental income of property. Charges paid to the society for the facilities of generator, lift , lighting etc were deductible from the gross rent received by the assessee.( Asst Year 2004‐05). CIT v Sunil Kumar Agarwal ( 2011) 139 TTJ 49 (Luck ) (UO) (Trib). S. 24 (1) (iv).Income from house property‐ Deduction‐Annual charge. Remuneration payable to Shebaits by the assessee deity does not amount to annual charge on the property and thus , no deduction under section 24 (1) (iv) is permissible.( Asst year 1997‐98). Estate of Sree Sree Raddha Kishan Jew v CIT & Anr (2011) 58 DTR 131 ( Cal) (High Court). 25B: Income from house property‐ Arrears of rent.( S. 23.). Arrears of rent received in subsequent year cannot be spread over previous years , it is taxable in the year of receipt.( Asst years 1996‐97 ‐2000‐01 ). CIT v R.J.Wood P. Ltd ( 2011) 334 ITR 358 ( Delhi) (High Court). S. 26: Income from house property‐Co‐owner‐ Assessment. Quantification of annual value of co‐owned property in course of assessment of AOP consisting of co‐owners is not a condition precedent for taxability of individual share of such income in hands of co‐owners.( A.Y. 2002‐03). Sujeer Properties (AOP) v ITO ( 2011) 131 ITD 377 (Mum) (Trib). D. Profits and gains of business or profession. S. 28(i) :Business income‐ Capital gains – Shares PMS fee, even if NAV based, is deductible in computing PMS capital gains – (S. 48) In computing capital gains u/s 48, payments are deductible in two ways, one by taking full value of consideration net of such payments and the other by deducting the same as “expenditure incurred wholly and exclusively in connection with the transfer”. The expression “full value of consideration” contemplates additions and deductions from the apparent value. It means the “real and effective consideration”, which can be arrived at only after allowing the deductible expenditure. The PMS fee, on profit sharing basis, was for the twin purposes of acquisition and sale of the securities. The fact that bifurcation between the two is not possible is not relevant. Accounting Standard 13 (Accounting for Investments) issued by ICAI provides that brokerage, fees and duties have to added to the cost of investments. (AY : 2004 ‐05 to 2006‐07) (CIT v Shakuntala Kantilal (1991) 190 ITR 56 (Bom) followed); Devendra Kothari (2011) 50 DTR 369 (Mum) (Trib) not followed) KRA Holding & Trading P. Ltd. v DCIT (2011) 46 SOT 19 (ITAT ) (Pun) (www.itatonline.org) S. 28(i) : Business Income – Capital gains ‐ Tests to determine whether shares gains assessable as STCG or business profits: The Supreme Court vide order dated 15.11.2010 dismissed the Department’s Special Leave Petition against the judgment of the Bombay High Court in CIT vs. Gopal Purohit (2010) 228 CTR 582 (Bom) . CIT vs Gopal Purohit (2011) 334 ITR 308 (St.) (SC) S. 28(1) : Business Loss ‐ Speculative Loss ‐ Sale and purchase of Units of UTI ‐ (S. 43(5), 70, 73) Assessee tea plantation company purchased units of UTI on cum dividend basis shortly before declaration of dividend and sold the same at a lower price. i.e. ex‐dividend immediately after receiving the dividend. Transaction of purchase and sale of units when done as a business in a speculative manner, the loss therefrom could be set off only against profit arising in speculation business. Assessee claimed set off of loss from speculation business


against income from tea plantation which is not admissible due to the prohibition contained in section 73(1), however, in view of the Supreme Court decision in Appollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC) assessee’s claim was sustainable. CIT vs. Periakaramalai Tea & Produce Co. Ltd. (2011) 51 DTR 186/195 Taxman 185 (Ker.)(High Court) S. 28(i): Business income‐ Income from other sources‐ Interest income. (S. 56.) The tribunal has given finding that the borrowings , made by the assessee, were very much part and parcel of assessee’s investment in acquiring the ship. Even the RBI ‘s permission was obtained for the same and interest earned from the unutilised portion of the said borrowing will constitute business income. CIT v Varun Shipping Co Ltd ( 2011) 334 ITR 263 (Bom) (High Court). Editorial‐ The Supreme court has granted special leave to the department to appeal against this judgment. ( 2010) 325 ITR (ST) 5(Bom). S. 28 (i): Business income‐Rent from Leave and License of office premises taxable as “business profits” Applying the test laid down in Universal Plast Ltd 237 ITR 454 (SC) as to when income from property is assessable as “business profits” and as “income from house property”. It was held that rental income has to be assessed as “business profits” because (i) all assets of the business were not rented out by the assessee and it continued the main business of dealing in scientific apparatus etc, (ii) the property was being used for the Regional Office and was let out by way of exploitation of business assets for making profit, (iii) the assessee had not sold away the properties or abandoned its business activities. The transaction was a “commercial venture” taken in order to exploit business assets and for receiving higher income from commercial assets. The Scientific Instrument co. Ltd. v CIT (All)(High Court).www.itatonline.org. S. 28(i) : Business Loss ‐ Bad Debt ‐ Claim for “Business loss” maintainable ‐ Website Development Expense is not Capital Expenditure – [S. 37(1)] The assessee, engaged in investment activities, advanced ` 27.97 lakhs for development of a website. As the advance was not recoverable, the assessee wrote off the amount and claimed it as a “bad debt” even though the conditions of section 36(1)(vii) & 36(2) were not satisfied. The Assessing Officer rejected the claim though the CIT(A) allowed it. On appeal by the department to the Tribunal, HELD: (i) Though the claim as a ‘bad debt’ is not allowable, the assessee is entitled under Rule 27 to support the CIT(A)’s order on the ground that the amount should be allowed as a ‘business loss’. The subject‐matter of an appeal should be understood not in a narrow and unrealistic manner but should be so comprehended as to encompass the entire controversy between the parties which is to be adjudicated upon by the Tribunal. Such a claim can be considered provided no new facts are needed (Edward Keventer 123 ITR 200 (Del.) & Gilbert & Barker 111 ITR 529 (Bom.) followed); (ii) On merits, the department’s argument that the amounts paid for development of websites cannot be allowed as business loss because if the websites had been successfully put up, the expenditure would have been capital expenditure is not acceptable. because (a) as the expenditure was abortive, no capital asset has in fact been acquired and (b) even if the website had materialized, it does not result in an advantage of an enduring nature or in the capital field as it is only for the day‐to‐day running of the business and provision of information. Dy. CIT vs. Edelweiss Capital Ltd. (ITAT ‐ Mumbai) Source: www.itatonline.org S. 28 (i) Business income‐ Capital gains‐ Investment in shares‐Despite borrowing, shares gain can be STCG & not business profits.


The fact that the assessee borrowed for the purpose of buying shares is not conclusive that the assessee intended to do business in shares and not merely invest in them if the interest is capitalized as cost of the shares & not claimed as a revenue expenditure (Shanmugam 120 ITD 469 (Pune) followed). The fact of borrowing cannot be held against the assessee if there are other predominating factors in favour. Also as the assessee has own funds, it can be presumed that the shares were bought out of those funds. (Asst years 2005‐06 & 2006‐07) Mahendra C. Shah vs Addl CIT( 2011) 58 DTR 242/ 140 TTJ 16 ( Mumbai)(Trib) Editorial : CIT vs. Gopal Purohit (2010) 228 CTR 582 (Bom). S.L.P. rejected (2011) 334 ITR 308 (St.) S. 28(i) : Business Income – Computation ‐ Cost of land contributed by partner to the firm ‐ (S. 4) In computing the profits and gains of the firm on the sale of property in question, the value of the plot brought by one of the partners by way of capital contribution should be taken as per amount declared in revised returns as valuation of land in question which was accepted by the wealth tax authorities and not at value which was earlier shown in the books.(A. Y. 1972‐73 to 1979‐1980) Hansallaya Properties vs. CIT (2011) 49 DTR 231/196 Taxman 496 (Delhi)(High Court) S. 28(i) : Business Income ‐ Development Rights – Retirement ‐ Value of flats to be allotted latter Assessee, a builder having constituted a partnership firm with four others by contributing his development rights in a plot and retired from the firm within 11 days. The Tribunal held that the firm is not genuine and entire consideration received was taxable as business income. Value of flats to be allotted to be treated as consideration received, though the flats are to be allotted in future.(A. Y. 2004‐05) ACIT vs. Dilip S. Hate (2011) 49 DTR 49 / 136 TTJ 40/ 131 ITD 348 (Mum.)(Trib.) S. 28(i) : Business Income ‐ Capital Gains ‐ Investment in Shares ‐ (S. 45) Activity of frequent buying and selling of shares over a short span of period has to be treated as adventure in the nature of trade. The assessee had made only 37 transactions in 35 scripts. In the preceding year the Assessing Officer has accepted the short term gains and long term gains as investment. The Tribunal held that the principle of resjudicata cannot be applied to Income Tax proceedings and each assessment year is independent. The Tribunal also held that the treatment in the books of an assessee is not conclusive.(A. Y. 2005‐06) Harsha N. Mehta (Smt.) vs. Dy. CIT (2011) 43 SOT 332 (Mum.)(Trib) S. 28(i) :Business income‐ Professional Income ‐ AIR Information. In the absence of contrary material brought by the Revenue authorities, that the assessee had received professional fees more than what has been declared by him, no addition should be made by the Assessing Officer on account of non furnishing of partywise details of professional fees received during the year and non–reconciliation of professional fees received with AIR information. S. Ganesh vs. ACIT (2011) TIOL 87 ITAT‐Mum. 701 / (2011) 42‐B. BCAJ (March P. 33)(Trib) S. 28(i) : Business Income ‐ Capital Gains ‐ Transactions in Shares ‐ Volume and frequency of the transactions ‐ (S. 45). Where the assessee had carried out about 800 transactions in shares of more than 200 listed companies with borrowed funds and the purchases and sale of shares was the only activity of the assessee with a very short holdings period, and substantial time was devoted for such activity, in a regular and systematic manner, the profit from such transactions was rightly treated as business profit as against short‐term capital gains claimed by the assessee.(A. Y. 2004‐05)


Jayshree Pradip Shah vs. ACIT (2011) 51 DTR 344 / 131 ITD 326(Mum.)(Trib.) . S. 28(i) : Business Income ‐ Capital Gains – Volume ‐ Despite Large number of transactions in shares, profit assessable as Capital Gains ‐ (S. 45). Where assessee is a HUF and offers income from sale of shares as short term capital gain, the fact that the assessee has transacted in 158 shares should not be the sole criterion to come to the conclusion that assessee is a trader in shares. Following circumstances to be considered while assessing such income as capital gain. These are whether (a) the assessee was holding the shares in its books as an investor, (b) the assessee have any office or administration set up, (c) the shares were acquired out of own funds and family funds and not through borrowing, (d) there was not a single instance where the assessee had squared‐up transactions on the same day without taking delivery of the shares, (e) In the previous and subsequent assessment years, the Assessing Officer had vide scrutiny assessments treated the assessee as an investor. Nagindas P. Sheth (HUF) vs. ACIT (ITAT Mumbai)(Trib) Source: www.itatonline.org S. 28(i) : Business Income ‐ Capital Gains ‐ Investment in Shares – Investor – Trader ‐ Large volume in shares ot deciding factor to hold assessee trader ‐ (S. 45). The income of an assessee who has invested in shares to be assessed as capital gain if the following conditions are satisfied. If (a) The assessee was a good timer of purchase and sale of shares thereby substantially increasing his gains in the stock market, (b) The large turnover was because of bulk purchases and sales in a scrip. There were very few transactions of purchase and sale, as the assessee was purchasing in block of a particular share in large volume. Accordingly, large volume cannot be a deciding factor to hold as a trader, (c) the assessee was not a broker or sub‐broker and did not have any office establishment, (d) The assessee did not do any speculative activity nor indulge in any sales without delivery, (e) The shares were shown as capital assets in the books of account, (f) The assessee had not pledged any shares with any financial institutions, nor borrowed any funds. Ramesh Babu Rao vs. ACIT (ITAT–Mumbai)(Trib) Source : www.itatonline.org S. 28(i) : Business Income ‐ Capital Gains ‐ Transaction in Shares ‐ Share Broker ‐ Two separate accounts; (S. 45) Assessee is a broker as well as investor. It has maintained the investment portfolio separately income of which was liable to be taxed as capital gains, as intention in respect of this was to hold the investment as investment only and shown as such in the books of accounts. Income thereon was shown and treated as capital gains in successive assessments. Income to be assessed as capital gains.(A. Y. 2005‐06) ACIT vs. Bulls & Bears Portfolios Ltd. (2011) 137 TTJ 741 (Delhi)(Trib.) S. 28 (i) : Business Income ‐ Capital Gains ‐ Investment in Shares – Income treated as STCG – Rule of consistency applied ; (S. 45). Though in case of transaction of large volumes, magnitude, frequency, continuity, regularity, the ratio between purchase & sale of shares are treated as income from business, but is in certain circumstances, income from such transactions is treated as STCG as a reason of Rule of consistency propounded by Bombay High Court in Gopal Purohit 228 CTR 582 (Bom.), which is squarely applicable. (A. Y. 2006‐07) Shantilal M. Jain vs. ACIT (Mum.)(Trib.) Source: www.itatonline.org S. 28(i) : Business Income ‐ Capital Gains ‐ Gains arising from PMS transactions ‐ Not business profits. Transactions carried out via PMS are in nature of transactions meant for Wealth maximization & not encashing profits on appreciation in value of shares. In case where assessee is engaged in systematic activity of holding of portfolio through PMS manager, it cannot be said that main object of holding the portfolio is to make profit by


sale of shares. The high number of transactions are misleading as these are computer split transactions and not independent transactions. Hence, gains arising out of PMS transaction has to be assessed as Capital Gain and not business income. (A. Y. 2006‐07) ITO vs. Radha Birju Patel (Mum.)(Trib.) Source: www.itatonline.org S. 28(i) : Business Income‐ Income from Other Sources – Interest from Partnership Firm When a specific provision has been enshrined in the Act and the income is taxable under the head “Profits & Gains of Business or Profession”, then there is no question of treating the same as income from other sources. (A. Y. 2003‐04) ACIT vs. Delite Enterprises P. Ltd. (2011) 135 TTJ 663 / 128 ITD 146 / 50 DTR 193 (Mum.)(Trib.) S.28(i): Business income‐ Adventure in the nature of trade‐Purchasing land under acquisition by Government‐Interest on compensation‐Income from other sources. (S. 2(13), (2(14), 56.) Compensation received on purchasing land notified for Acquisition by the Government, not held as capital asset was liable to be taxed as business income, as such transaction fall under definition of “adventure in the nature of trade” u/s. 2(13). Interest on compensation on compulsory acquisition of land is taxable as business income and not as income from other sources. Dy CIT v Gopal Ramnarayan Kasat ( 2011) 240 CTR 266 / 54 DTR 228 (Bom) (High Court). S.28 (i): Business income‐ Subsidy –To meet the part of expenditure incurred‐ Revenue nature. Subsidy received by Government to meet the part of the expenditure to be incurred for rectification and improvement of power line damaged due to cyclone will be revenue in nature.( Asst year 1987‐88). Dy CIT v A.P. State Electricity Board ( 2011) 130 ITD 1/ 138 TTJ 425 (Hyd) (TM ) (Trib). S. 28(i ): Business income‐ Valuation of closing stock‐Firm dissolved – Business taken over by another concern ‐ S. 45 (4). Where assessee firm was dissolved and its closing stock was taken over by another concern , same had to be valued in profit and loss account itself on date of dissolution on market price and excess of market price of closing stock over its book value had to be assessed as business profits of assessee firm.( Asst year 1992‐93). Asst CIT v Goel Udyog ( 2011) 45 SOT 444( Delhi) (Trib). S. 28(i) Business Income ‐ Property Rental assessable as “business profits” if commercial activities carried out Merely because income is attached to immovable property, it cannot be the sole factor for assessment of such income as income from property. Primary object of the assessee while exploiting the property has to be considered . If the main intention is to exploit the immovable property by way of complex commercial activities, the income is assessable as business income. (Asst. Year : 2006‐07) ITOI vs Shanaya Enterprises (Mumbai) (ITAT) (www.itatonline.org) Editorial‐Sultan Brothers (1964) 51 ITR 353 (SC) explained as not being in conflict with Shambhu Investments (2003) 263 ITR 143 (SC). S. 28 (i) :Business income‐ Capital gains‐ ‐Shares PMS transaction gains are STCG and not business profits.( S. 45.) (i) Given the definitions of the term “business” and “capital asset” in s. 2(13) & 2(14), shares, if held for more than 12 months, will be a long‐term capital asset, inspite of continued and systematic dealings;


(ii) On facts, as the assessee had engaged a portfolio manager to look after its’ investments and all decisions to buy and sell were taken by the portfolio manager and not by the asessee, the assessee cannot be called a “dealer”; (iii) The object of the PMS was to maximize the value of the portfolio. It was “wealth maximization” and not “profit maximization”; (iv) In the balance sheet, the shares were valued at cost and not at lower of cost or market value; ARA Trading & Investment Pvt. Ltd. vs DCIT (2011) 47 SOT 172(Pune)(ITAT) www.itatonline.org. S. 28(i) : Business Income ‐ Method of Accounting – Enhanced Rate ‐ Sale of Flat ‐ (S. 4, 145) Assessing Officer having not brought any material on record to prove that the assessee has sold the flats at a price higher than the price recorded in the books of account, addition made by the assessing officer by enhancing the selling rates cannot be sustained.(A. Y. 1998 to 2000) ACIT vs. Dharti Estate (2011) 51 DTR 28 / 129 ITD 1 / 136 TTJ 263 (Mum.)(Trib.)(TM) S. 28(iv) : Business Income ‐ Benefit or Perquisite ‐ Waiver of Loan – [S. 2(24), 41(1)] Loan received for the purpose of acquiring capital assets did not constitute a trading liability and hence neither section 28(iv) nor section 41(1) has application where loan waived by the bank.(A. Y. 2001‐02) Iskraemeco Regent Ltd. vs. CIT (2011) 237 CTR 239 / 49 DTR 185 / 237 CTR 239(Mad.)(High Court) S. 28(iv) : Business Income –Benefit or Perquisite‐ Benefit arising out of Business ‐ Bank Loan ‐ Waiver of loan by Bank – [S. 41(1)] The assessee was not trading in money transactions. A grant of loan by a bank cannot be termed a trading transaction nor construed to be in the course of business. Indisputably, the assessee obtained the loan for the purpose of investing in capital assets. A part of this loan with interest was waived under agreement between the parties. The amount referable to the loans obtained by the assessee towards the purchase of its capital asset could not constitute a trading receipt. Therefore, the facts were totally different from the facts in CIT vs. T. V. Sundaram Itengar and Sons Ltd. (1996) 222 ITR 344 (SC).(A. Y. 2001‐02) Iskaraemeco Regent Ltd. vs. CIT (2011) 331 ITR 317/ 196 Tax 103/49 DTR 185 (Mad.)(High Court) S. 28(iv) : Business Income – Benefit or Perquisite‐Waiver of loan – Capital or Revenue Receipt ‐ Depends on whether loan was used for Capital or Revenue purposes It was held that income from waiver of loan depends on the purpose for which loan is taken. In case the loan was taken for acquiring a capital asset, the waiver thereof would not amount to any income exigible to tax under section 28(iv) or 41(1). Whereas, if the loan was taken for a trading purpose and was treated as such from the very beginning in the books of account, its waiver would result in income more so when it was transferred to the P&L A/c in view of Sundaram Iyengar 222 ITR 344 (SC). Logitronics Pvt. Ltd. vs. CIT(2011) 53 DTR 50 (Del)(High Court) S. 28 (iv). Business income‐Benefit or Perquiste‐ Waiver of loan. Waiver of loan taken by assessee for business activity , assessable as business income. (Asst year 2004‐05). CIT v Jubilant Securities P. Ltd ( 2011) 333 ITR 386 /59 DTR 172( Delhi)( High Court). S. 28(iv): Remission of loan liability‐ ( S. 41(1). The tribunal held that since loan received was utilized for acquiring capital assets , the amount remitted was not taxable under section 41 (1). As it was remission of liability section 28(iv) was also not applicable.


Terra Agro Technologies vs. ACIT, ITA No.1503/Mds./2010, Dt.09‐06‐2011, A.Y.2004‐05, BCAJ September 2011, pg. 23, Vol. 43‐A, Part 6 S. 28(v) : Business Income ‐ Income from Other Sources ‐ Interest from Partnership Firm ‐ (S . 56) When there is a specific provision for treating interest and salary, etc. earned by a partner of from a firm as taxable under the head “Profits and gains or business or profession” there is no question of categorizing it under the residual head of income.(A. Y. 2003‐04) ACIT vs. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193 (Mum.)(Trib.) S. 28(va) : Business Income ‐ Capital or Revenue ‐ Non–compete compensation ‐ Prior to Asst. Year 2002‐03. Section 28(va) inserted w.e.f. A.Y. 2002‐03, non‐compete compensation is a capital receipt(S.4 ). The payment received as a non competition fee under a negative covenant was always treated as a capital receipt till AY 2003‐04. There is a dichotomy between receipt of compensation received for loss of agency, which is treated as revenue receipt and receipt of compensation attributable to negative / restrictive covenant which is treated as capital receipt. It should be noted that it is only by section 28(va) inserted by Finance Act 2002 w.e.f. 1/4/2003, which is amendatory and not clarificatory that the said capital receipt is now made taxable. (A. Y. 1997‐98) Guffin Chem P. Ltd. vs. CIT (2011) 239 CTR 225/52 DTR 289/ 332 ITR 602/198 Taxman 78(SC).(Supreme Court) S. 28(va) : Business Income –Capital or revenue‐ Share Transfer Agreement – Non‐compete covenant – No transfer of controlling interest. It was held that a Share Transfer Agreement is merely agreement for sale of shares and is a non‐compete covenant. It does not in any manner refer to transfer of any controlling interest. Thus, the amount assessable as business income. (A. Y. 2006‐07) ACIT vs. R.K.B.K. Fiscal Services Ltd.(2011) 52 DTR 29 (Trib) (Kol), S. 28(vi) : Business Income ‐ Keyman Insurance Policy – [S. 10(10D)] Amount received on maturity of keyman insurance policy is liable to be taxed in hands of assessee for the Asst. Year 2005‐06 in view of clarificatory amendment, by the Finance (No. 2) Act, 1996, w.e.f. 1st Oct., 1996, though policy was taken earlier.(A. Y. 2005‐06) Binjrajka Steel Tubes Ltd. vs. ACIT (2011) 50 DTR 89 / 136 TTJ 113/130 ITD46 (Hyd.)(Trib.) S. 31 (1): Repairs and insurance of machinery‐Plant and furniture. ( S. 37 (1).). Expenditure consisted of dismantling, cleaning and inspection of various parts ,repairs and replacement of worn out parts , geometrical alignments of machines , painting of machines , overhauling and repair of power transmission unit and replacement of electric panel. Expenditure was on account of current repairs for which deduction would be allowable under section 31 (1) as well as under section 37.( A.Ys. 2005‐06‐2006‐07) Bharat Gears Ltd v CIT ( 2011) 201 Taxman 86/ 337 ITR 368 / 337 ITR 368( Delhi) (High Court). S. 32 : Depreciation ‐ Non user of Asset ‐ Block of Assets The assessee claimed depreciation under section 32 in respect of the assets at its Bhopal unit which was closed for six years. The claim was on the basis that (1) despite closure of the unit there was a “passive user” of the asset were part of the “Block of assets”, depreciation could not be disallowed. Assessing Officer and CIT(A) rejected the claim. Tribunal upheld the claim. On appeal to High Court, the Court held that despite non‐user of assets, depreciation is allowable, if it is part of “Block of assets”.


CIT vs. Oswal Agro Mills Ltd.(2011) 50 DTR 305/238 CTR 113/ 197 Taxman 25 (Delhi)( High Court) S. 32 : Depreciation ‐ Asset used by the firm belong to partner ‐ Insurance on building Assessee is not entitled to depreciation on factory building owned by it but used in business of firm in which assessee was partner. Insurance charges paid on said building also not allowable.(A. Y. 2005‐2006) Karan Raghav Export (P) Ltd. vs. CIT (2011) 196 Taxman 504/ 49 DTR 327 (Delhi)(High Court) S. 32 : Depreciation – Approach Road – Inside Factory – Building Approach road constructed by the assessee inside its factory premises should be treated as part of building as such, depreciation has to be allowed on the same. CIT vs. Sunshine Glass Indus P. Ltd. (2011) 49 DTR 31 (Raj.)(High Court) S. 32 : Depreciation – Fluctuation in Foreign Exchange – To be allowed on outstanding liability though no amount was paid during the year. The Assessing Officer partly disallowed the claim for depreciation calculation on the basis of increased value of assets of the assessee on account of fluctuation of foreign exchange rates. The CIT(A) held that the assessee is following mercantile system of accounting and allowed the claim on the balance outstanding liability. The High Court and Tribunal affirmed the same and also referred to the judgments in the case of CIT vs. Woodward Governor India P. Ltd. 312 ITR 254 and ONGC vs. 322 ITR 180, wherein it was held that increase and decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of fluctuation in rate of exchange. (A. Y. 1998‐99) CIT vs. National Hydroelectric Power Corpn. Ltd. (2011) 332 ITR 322 (P&H)(High Court) S. 32 : Depreciation – Assets in the name of Managing Director Depreciation under section 32 was allowable to the assessee company on the assets which were purchased in the name of the managing director of the assessee company and his wife but, used exclusively for the assessee’s business. (A. Y. 2004‐05) CIT vs. Metalman Auto P. Ltd. (2011) 52 DTR 385/ 336 ITR 434 (P&H)(High Court) S.32: Depreciation‐ Leasing of vehicles‐ Higher rate of depreciation. Assessee company engaged in business of leasing of motor vehicles etc to its clients is not entitled to higher rate of depreciation. The basic requirement for being entitled to depreciation at higher rate of 50 percentage under Entry No 111 (2) (ii) of Appendix –I to Income Tax Rules is user of vehicles in business of transportation or business of hire.( Asst years 1989‐90‐1992‐93). Bhatwati Appliances v ITO ( 2011) 199 Taxman 131 (Guj) (High Court). S. 32. Depreciation‐ Rate – UPS at 60%. Depreciation is allowable on UPS @ 60% CIT v Orient Ceramics & Industries Ltd ( 2011) 56 DTR 397 ( Delhi) (High Court). S. 32: Depreciation – Actual Cost . Where the assessee paid custom duty under protest on imported machinery, the assessee would be entitle to add the same to the cost of the plant and machinery for computing depreciation thereon CIT vs. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Del)( High Court).


S. 32: Depreciation –UPS. 60%. Depreciation is allowable at the rate of sixty percent (60 %) on U.P.S. CIT vs. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Del)(High Court). S. 32: Depreciation – User of asset –Kept ready for production. Where the plant and machinery were kept ready for production, the assessee would be entitle to claim depreciation under the provisions of section 32 of the Act even though such plant and machinery were not actually put to use by the assessee during the year.(A. Y. 1995‐96) CIT vs. Shahbad Co – operative Sugar Mill Ltd. (2011) 56 DTR 414 (P&H)(High Court). S. 32: Depreciation – Poultry shed. Poultry shed is a building and not a ‘plant’, as such not eligible for higher rate depreciation as applicable to plant and machinery.(A. Y. 1991‐92 & 92‐93) Padmavathi Hatcheries (P) Ltd. & Ors. (2011) 55 DTR 105 (AP)( High Court) S.32: Depreciation ‐‐ intangible asset ‐‐ goodwill ‐‐ depreciation allowable . The assessee had purchased a hospital with its land, building, equipment, staff, name, trademark and goodwill as a going concern. Under the sale deed the value of the goodwill included the name of the hospital, its logo and trademark was 2 crores. The AO disallowed the depreciation on the goodwill on the ground that it was not covered under section 32(1)(ii). The CIT(A) and tribunal held in favour of the Department. On appeal to the High Court by the assessee, the High Court while allowing the appeal held that though goodwill is not specifically mentioned in section 32(1)(ii) of the Income‐Tax Act, depreciation is allowable not only on tangible assets covered by clause (i) of section 32(1), but also on the intangible assets specifically enumerated in clause (ii) and such other business or commercial rights similar to the items specifically covered there in. The High Court held that, by transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was a retention of continued trust of the patients who were patients of the previous owner. The amount paid for the goodwill for ensuring retention and continued business in the hospital, it was one acquiring a business and commercial rights and the same was comparable with trademark, franchise, copyright etc., the High Court held that goodwill was covered by the provisions of section 32(1)(ii) entitling the assessee for depreciation.( AY2004‐05). B. Raveendran Pillai v. CIT [2011] 332 ITR 531 (Ker)( High Court). S. 32: Depreciation‐ Sale and lease back‐.Despite Tax Avoidance, 100% Depreciation on Sale & Lease Back Allowable. The assessee purchased equipment from the Haryana State Electricity Board (“HSEB”) which was already installed at the Board’s Thermal Power Station at Faridabad and immediately leased the equipment back to the HSEB. The assessee claimed 100% depreciation on the said equipment. The AO disallowed depreciation on the ground that the transaction was not one of purchase and lease but was a pure financial and loan transaction. The Hon’ble High Court held dismissing the dept. appeal that (i) The real intention of the parties in entering into the sale and lease agreement has to be gathered from the words in the agreement in a tangible and in an objective manner and not upon a hypothetical assessment of the supposed motive of the assessee to avoid tax. (Industrial Development Corporation


of Orissa 268 ITR 130 (Ori), Rajasthan State Electricity Board 204 CTR 415 (Raj) and Gujarat Gas Company 308 ITR 243 (Guj) followed); (ii) In order to deny the claim of depreciation, it would have to be held that the transaction was not genuine and that the same was a subterfuge. Merely because an assessee gets a commercial advantage because of the factoring in of a tax benefit, it cannot be said that the transaction is not genuine. There is no finding or evidence to indicate that the transaction was not genuine. The observations of Chinappa Reddy, J in McDowell is not good law in view of UOI vs. Azadi Bachao Andolan 263 ITR 706 (SC) where it was held that “tax planning may be legitimate provided it is within the framework of law”; (iii) The observations in Asea Brown Boveri Ltd with regard to the nature of a financial lease are not of much use to the revenue in view of the factual backdrop that the transaction has been found to be genuine. Once it is established that the ownership of the equipment is that of the assessee, it is clear that the assessee is entitled to claim depreciation. CIT vs Cosmo Films Ltd( 2011) 59 DTR 153/200 Taxman 384 ( Delhi) ( High Court). S. 32: Depreciation‐ Gas Cylinder‐ Rate‐ Mounted on a chassis of a truck‐Appendix‐1. Liquefied gas cylinder mounted on the chassis of the truck is for all purposes as a gas cylinder including valves and regulators as defined in Appendix 1 item III (ii) F (4) of the income tax Rules and therefore depreciation at 100 percent was allowable , instead of 40 percent applicable to transport vehicles. CIT v Anatha Gas Suppliers ( 2011) 59 DTR 116 / 242 CTR 488( AP) (FB) (High Court). S. 32 : Depreciation‐ Unabsorbed‐ Carry forward and set off. Provisions of section 32 (2) as amended w.e.f. 1st April ,1997 permit set off of brought forward unabsorbed depreciation firstly against the business profits and then against income under any other head in Asst Year 1997‐98 and subsequent assessment years for a period of eight years ,therefore unabsorbed depreciation for the period up to assessment year 1996‐97 could be brought forward and set off against income chargeable under the head income from other sources. ( A.ys 1989 to 2002‐03). CIT v Kirti Resorts ( P ) Ltd ( 2011) 60 DTR 138 /243 CTR 340( HP) (High Court). S. 32 : Depreciation – Rate – Hardware ‐ Computer Assessee engaged in printing business, used certain hardware for execution of printing process, said hardware could not be categorized as ‘computer’ and would not be eligible for higher depreciation. It is only where machine is being used essentially and predominantly for computing capability and where it is not being harnessed for other specialized industrial uses, be it mechanical, electric or electronic (or a composite thereof) activity that it could be called as a computer. (A.Y. 2005‐06) S. T. Reddiar & Sons vs. Dy. CIT (2011) 129 ITD 475 / 135 TTJ 480 / 49 DTR 326 (Cochin)(Trib.) S. 32 : Depreciation ‐ Actual Cost ‐ Registered Valuation Report ‐ Slump Sale [S. 43(1)] It was held by Hon’ble Mumbai Tribunal that where cost of fixed assets was adopted by assessee on basis of registered valuer’s report and there was no evidence of transaction a collusive one, or to reduce tax liability and there being no clause for payment of goodwill, the assessee was entitled to depreciation on actual cost shown in the books of accounts. (A. Y. 2000‐01) Dy. CIT vs. Lafarge India Ltd. (2011) 9 ITR 118 (Mum.)(Trib.) S. 32: Depreciation‐ Toll Road‐ Business of setting up of infrastructural facilities.


Assessee was entitled to depreciation on toll road which is constructed on “Build –own –operate –transfer” basis (Asst years 2003 & 2004‐05). Gujarat Road & Infrastructure Co Ltd v CIT ( 2011) 56 DTR 73 (Ahd) (Trib). S. 32 : Depreciation‐ Block of assets‐ Sale of assets‐ Closure of one manufacturing activities . ( S. 50). Assessee having closed down its manufacturing activities in one of Unit and sold all the assets of that unit except motor vehicles and software , block of assets viz, building and plant and machinery , ceased to exist and thereafter these assets neither belonged to the assessee nor were used for the purpose its business and therefore , assessee is not entitled to depreciation thereon . ( Asst years 2005‐06 and 2006‐07). Sony India (P) Ltd v Addl CIT ( 2011) 56 DTR 156 ( Delhi) (Trib). S. 32: Depreciation‐ Goodwill‐ Commercial rights‐ Commercial benefits. Where the assessee has made the excess payment over and above the cost of intangible assets and that excess payment was claimed to have been made against goodwill , only the portion of goodwill representing cost of acquisition of the commercial rights shall be eligible for depreciation and not the portion relating to acquiring commercial benefits. On the facts Tribunal directed the Assessing Officer to divide the entire cost of goodwill in two parts and 50 percent of the cost of the goodwill be treated as a cost of acquisition of the commercial rights and allow the depreciation thereon at a prescribed rate. ( Asst years 2005‐06 & 2006‐07). Jeypore Sugar Company Ltd v Asst CIT ( 2011) 56 DTR 229 ( Visakha) (Trib). S. 32 : Depreciation‐ Computer peripherals‐ Printers – Scanners‐ servers‐ UPS. Computer peripherals such as printers scanners , servers , UPS etc , form integral part of computer system on which higher depreciation of 60% is allowable.( Asst Year 2005‐06). ITO v Omni Globe Information Technologies India (P) Ltd ( 2011) 131 ITD 280 / 141 TTJ 86 ( Delhi) (Trib). S. 32 : Depreciation‐ Trust – Cost of asset allowed as Application of income. Claim of depreciation by assessee trust in respect of assets , cost of which had been claimed as an application of income towards its objects , would amount to double deduction which is prohibited by law. ( Asst year 2006‐07). Dy Director of Income tax ( Exemption) v Adi Sankara Trust ( 2011) 46 SOT 230 ( Coch) (Trib). S. 32: Depreciation‐ Building‐ Landscaping expenses‐ Hotel‐Storage tank. Since the assessee is in Hotel business its building is not merely a structure of four walls but includes all such things as are necessary to give the building better look and is a matter of attraction for the customers, therefore Landscaping done by assessee in its hotel is to be treated as “building” and depreciation is allowable. Payments made by assessee to NDMC for unauthorized occupation , construction of diesel storage tanks and fire fighting tanks and covering sanitary lines without approval in respect of the hotel acquired by it from the Central Government formed part of purchase consideration as these payments were made to perfect the title of the assessee in the property and the amount being capitalized the assessee is entitled for depreciation.( A.Ys 2003‐04 to 2007‐08) Dy CIT v Hotel Excelsior Ltd (2011) 60 DTR 450/141 TTJ 248 (Delhi)( Trib). S. 32(1)(ii) : Depreciation – Ownership ‐ Hire Purchase Hirer of an asset under hire purchase agreement is entitled to depreciation in view of the CBDT Circular No. 9 dt 23‐3‐1943 (C & P Vol. 10. P. 537 ‐538 4th Edition). (A. Y. 1995‐96)


CIT vs. Kaveri Engineering Industries (2011) 53 DTR 102 (Mad.)(High Court) S. 32(1) (ii): Depreciation‐ User for business‐ New aircraft ready for the use. Assessee obtained delivery of the new aircraft purchased by it in the later half of the relevant previous year and got the same insured, it was held that the aircraft was made ready to use in business , hence depreciation was allowable.(Asst year 1996‐97) CIT v E.I.H. Ltd. ( 2011) 54 DTR 249 ( Cal) (High Court). S. 32 (1) (ii): Depreciation‐Discontinuance of business. Assessee company did not do any hotel business after its hotel building was washed away in floods in September, 1995. However, assessee company being a juristic entity incorporated under the Companies Act, did not cease to exist. Since it has to fulfill its obligations imposed by Companies Act till it is would up some, staff has to be maintained. Therefore, once the assessee company is in existence, it is entitled to depreciation though it has discontinued its business.( A.Ys 1998‐99 to 2002‐03). CIT v Kirti Resorts (P) Ltd ( 2011) 60 DTR 138/243 CTR 341 (HP) (High Court). S. 32(1)(ii) : Depreciation ‐ Block of Assets – Ownership ‐ Purchase of shares with right to occupy premises. The assessee made total payment of ` 4.44 crores to WRPL which has been divided in to two parts viz. consideration for shares at ` 2.76 crores and non–refundable construction of ` 1.67 crores. Both these payments are aimed at acquiring, using and occupying the property. But for the purchase of shares it is not permissible to became member. The assessee is entitled to depreciation on the entire consideration.(A. Y. 2000‐2001) SRI Adhikari Brothers Television Networks Ltd. vs. ACIT (2011) 52 DTR 295/ 130 ITD 439 (Mum.)(Trib.) S. 32(1)(ii) : Depreciation – Website. In view of the amendment of Appendix I w.e.f. Asst. Year 2003‐04 allowing depreciation @ 60 percent on software, depreciation is allowable on expenditure for development of website @ 60 percent. (A.Y. 2003‐04 & 05) Dy. CIT vs. C. M. Y. K. Printech Ltd. (2011) 53 DTR 59 (Delhi)(Trib.) S. 32(1)(ii) : Depreciation ‐ Intangible Assets – Goodwill. Depreciation is allowable on specified intangible assets like, license or any other business or commercial rights of similar nature and not on Goodwill.(A. Y. 2002 to 2005) Osram India (P) Ltd. vs. Dy. CIT (2011) 51 DTR 297/137 TTJ 749 (Delhi)(Trib.) S. 32 (1(ii) : Depreciation‐Non compete fee. Non compete fee is not in the nature of knowhow, patents copy right , trade marks , licenses or franchises within the meaning of section 32 (1) (ii), depreciation is not allowable. Sharp Business Systems ( India) Ltd v Dy CIT ( 2011) 59 DTR 385 ( Delhi) (Trib). S.32(2): Depreciation‐ Unabsorbed‐ Carry forward and set off‐Exempted income ‐Income from other sources. S.10B (6), 56, 72 (2) Assessee being entitled to deduction under section 10B upto A.Y. 2005‐06, provisions of section 10B (6) are not applicable in the relevant A.Y. ie 2004‐05 and therefore unabsorbed depreciation brought forward from assessment years prior to A.Y. 2000‐01 can be set off against business income or against any other head of income including income from other sources.(Asst year 2004‐05)


Dy CIT v Akay Falvours & Aromatics (P) Ltd ( 2011) 55 DTR 1 / 130 ITD 41 (Coch) (TM ) (Trib). S. 35 (1) (iv ): Expenditure on scientific research‐ Chapter VI‐A deduction ‐ S. 80B (5) , 80 HH, 80I. Deduction under section 35 (1) (iv) read with section 35 ( 2) has to be first allowed in computing of business income as a whole and thereafter deductions under section 80 HH and 80I have to be granted only from net income attributable to the eligible industrial unit. CIT v Duroflex Coir Industries ( P ) Ltd ( 2011) 55 DTR 133 ( Ker) (High Court). S. 35(1)(iv) : Expenditure on Scientific research ‐ Business Expenditure ‐ Capital Expenditure ‐ Development of software. Business of the assessee being development of software for its clients and not solely research and development, any expenditure in doing so cannot itself fall within the parameters of section 35(1)(iv) and cannot be allowed as deduction under that section.(A. Y. 2002‐03) 3i Infotech Ltd. vs. Dy. CIT (2011) 51 DTR 385 / 136 TTJ 641 (Mum (Trib.) S. 35D:Amortisation of certain preliminary expenses‐ Business expenditure‐ ‐Public issue expenses. Assessee company was incorporated in 1976, hence public issue expenses relating to assessment year 1995‐96 could not be claimed under section 35D.(Asst years 1999‐2000 and 2001‐02). CIT v Shasun Chemicals & Drugs Ltd ( 2011) 199 Taxman 107 (Mad) (High Court). S. 35DDA.Amortisation of expenditure in case of amalgamation or demerger‐Business expenditure‐Payment to employees on voluntary retirement‐ (S. 10(10C), 37 (1).) Section 35DDA would be attracted only when payment has been made to an employee in connection with his voluntary retirement , in accordance with the scheme or schemes of voluntary retirement. Since the payment reduces the burden on the assessee relatable to subsequent years , the legislature inserted this section in order to allow only 1/5 of total sum paid by the assessee to its employees . This amount in the hands of the employee has been exempted under section 10 (10C) to the extent of Rs 5 Lakhs.. Provisions of section 35DD were not attracted in the matter of VRS compensation paid to the retiring employees as the conditions of Rule 2BA were not met and the said expenditure is allowable under section 37 (1). ( Asst year 2003‐04) DY CIT v Warner Lambert ( India ) (P ) Ltd ( 2011) 56 DTR 121 (Mumbi) (Trib). S. 35DDA ‐ Amortisation of expenditure in case of amalgamation or demerger ‐Business expenditure‐Scheme floated by the assessee giving option to the employees of one unit. ( S.10(10C), read with rule 2BA). The scheme floated by the assessee giving option to the employees of one unit to leave its employment without any qualifying condition regarding age or length of service against payment of compensation is to be treated as VRS though it is not conformity with Rule 2BA and assessee is entitled to deduction of one fifth of the expenditure incurred on the payments under then scheme in accordance with the provisions of section 35DDA.( Asst years 2005‐06 & 2006‐07). Sony India (P) Ltd v Addl CIT ( 2011) 56 DTR 156 ( Delhi) (Trib). S. 36(1)(ii) – Business Expenditure –Bonus or commission‐ Section bars tax avoidance scheme of paying commission instead of dividend. (i) The argument that s. 36(1)(ii) is applicable only to employees who are not shareholders is not acceptable because payment of dividend to shareholders is not compulsory. S. 36(1)(ii) applies to all employees including


shareholder employees though the disallowability is restricted to partners and shareholders because it is only in those cases that payment can be said to be in lieu of profit or dividend; (ii) The argument that as no dividend was “payable”, s. 36(1)(ii) does not apply is not acceptable because the word “payable” does not mean that dividend should be statutorily or legally payable. Since payment of dividend is discretionary and not compulsory, any such construction will lead to absurd results. The word “payable” means that dividend would have been declared by any reasonable management on the facts and circumstances of the case considering the profitability and other relevant factors and become payable to shareholders. If a reasonable conclusion can be drawn that the dividend ought to have been paid and that instead of paying dividend, commission was paid, s. 36(1)(ii) would be attracted; (iii) On facts, there is no evidence to show that the directors had rendered any extra services for payment of huge commission in addition to services rendered as an employee for which salary was paid. Further, though the turnover and the profit was exceptionally high as compared to the earlier years, this was because of the stock market boom. The assessee being a share broker gets commission on sale/purchase of shares by investors/traders and its income is assured irrespective of whether the investor/ trader loses or gains in the transaction. The steady rise in performance was due to improved market conditions and not because of any extra service rendered by the directors. Also, no dividend was declared even though any reasonable management would have declared at least about 20% dividend in the years when there were substantial profits; (iv) The device adopted by the assessee was obviously with the intention to avoid payment of full taxes. There is obvious tax avoidance. S. 36(1)(ii) is intended to prevent escape from taxation by describing the payment as bonus or commission when in fact it should have reached the shareholders as profit or dividend (Loyal Motor 14 ITR 647 (Bom) referred) Dalal Broacha Stock Broking Pvt Ltd vs. ACIT (2001) 10 ITR 357(Trib) / 131 ITD 36/ 59 DTR 41/140 TTJ 129(Mumbai) ( SB)( Trib). S. 36(1)(iii) : Business Expenditure ‐ Interest on borrowed capital ‐ to settle loan liability of sister concern Interest on loan obtained by assessee to settle liability of its sister concern, to retain business premises of assessee the same is allowable.(A. Y. 1997‐98) CIT vs. Neelkanth Synthetics and Chemicals P. Ltd. (2011) 330 ITR 463 (Bom.)(High Court) S. 36(1)(iii) : Business Expenditure ‐ Interest on borrowed capital ‐ Interest and Penalty under Sales Tax Act Interest paid on funds borrowed for interest and penalty under Sales Tax Act for belated payment allowable as business expenditure. Revenue appeal was dismissed as no substantial question of law. CIT vs. International Fisheries Ltd. (2011) 220 Taxation 11 (Bom.)(High Court) S. 36(1)(iii) : Business Expenditure – Interest on borrowed capital. Where the assessee was having sufficient non‐interest bearing fund by way of share capital and reserves and there was no nexus between the borrowings of the assessee and advances made by it, no disallowance under section 36(1)(iii) of the Act was called for. (A. Y. 2001‐02, 2003‐04, 2004‐05) CIT vs. Bharti Televenture Ltd. (2011) 51 DTR 98 (Del.)(High Court) S. 36(1) (iii): Business expenditure‐ Interest on borrowed capital‐Investment in sister concern‐Shares of subsidiary‐ Control over the company.


Investment made by the assessee company out of bank overdraft in the shares of its subsidiary company to have control over that company being an integral part of its business ,interest paid by the assessee which is attributable to said borrowings is allowable as deduction under section 36 (1) (iii). CIT v Phil Corporation (2011) 61 DTR 15/ 244 CTR 226 (Bom) (High Court). S. 36 (1) (vii): Business expenditure‐ Bad debts‐ Non financial company‐ Bank Guarantee. Assessee being a non banking financial company ,its activity of giving guarantee on behalf of another company was part of its money lending business and ,therefore the security amount adjusted by the bank against the dues of the said company following default on the part of the latter which has became irrecoverable is allowable as bad debt.( Asst Years 1998‐99, 1999‐2000 & 2003‐04). CIT v Tulpi Star Hotels Ltd ( 2011) 57 DTR 210 ( Delhi) (High Court). S. 36(1)(iii) : Business Expenditure ‐ Interest on borrowed capital ‐Investment as capital in partnership firm Interest paid on borrowed amount invested in as capital of partnership firm, interest expenditure allowable under section 36(1)(iii) and no disallowance can be made under section 14A. ACIT vs. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193/ 128 ITD 146 (Mum.)(Trib.) S. 36 (1) (iii): Business expenditure‐ Interest on borrowed capital‐Advance to sister concern‐ Mutual accommodations‐ Commercial expediency. When there is mutual accommodation by both parties in terms and lending and borrowing from each other, the assessees claim of commercial expedient has to be accepted. (Asst year 2004‐05). Ramkishin Textiles P. Ltd v ITO ( 2011) 9 ITR (Trib) 321 (Mumbai) (Trib). S. 36 (1) (vii):Business expenditure‐ Bad Debts – Write off in the books. Where the assessee had written off certain debts as bad in its books of accounts, there is no further requirement to prove that the debts was a trade debt or the fact that it is irrecoverable.(A. Y. 1996‐97 & 98‐99) CIT & Anr. vs. Krone Communication Ltd. (2011) 53 DTR 120 (Kar)( High Court). S. 36 (1)(vii) : Business expenditure‐Bad debts –Alternative claim‐ If “bad debt” not allowable u/s 36(1)(vii), claim for deduction u/s 37(1) can be raised for first time even before High Court .. – S.. 37 (1). If loss of debt does not come within S. 36(1)(vii), a claim can be made u/s. 37(1). Merely because claim was made under one provision of Act and not under another provision, it does not debar the assessee from claiming deduction u/s. 37(1) even if it was not raised before lower authorities. Mohan Meakin Limited vs CIT (2011) 59 DTR 401(Delhi) ( High Court). www.itatonline.org. S. 36 (1)(vii):Business expenditure‐ Bad debts‐ Business loss‐If Not ‘Bad Debt’, ‘Business Loss’ claim sans specific ground invalid ( S. 28 (i).Rule 27 ) Before the Tribunal, the assessee raised a ground only on “bad debt” (and not “business loss”). At the hearing, it conceded the claim for “bad debt” and pressed for the claim for “business loss”. The Tribunal held that the claim regarding “business loss” cannot be entertained because, though the CIT(A) has dealt with the issue, there is no specific ground. The claim is also not maintainable under Rule 27 since that applies only to a Respondent in the appeal. (Asst year 2003‐04). Manori Properties Pvt. Ltd. vs ITO ( Mumbai)( Trib) www.itatonline.org.


Editorial : A contra view, in the same fact‐situation, was taken in Mohan Meakin vs. DCIT (Delhi High Court) www.itatonline.org. The High Court held that if grant of relief on another ground is justified, the Tribunal would be under a duty to grant that relief. S. 36 (1) (vii): Business expenditure‐ Bad debts ‐ Assessee only to write it off as bad debt‐ Not required to prove that debts had became bad. A mere write‐off of bad debt was sufficient under section 36 (1)(vii) and that it was not necessary for the assessee to establish that debt had actually become bad. The law settled by the Supreme Court was binding on all including the Assessing Officer , under article 141 of the Constitution of India. (T.R.F. Ltd v CIT (2010) 323 ITR 397 (SC). ( Asst year 2005 ‐06). Assst. CIT v Safe Enterprises ( 2011) 9 ITR ( Trib) 553 (Mumbai )(Trib). S.36 (2) (i).Business expenditure‐ Bad debts: Share broker‐ entire amount of debt need not be taken into account. In the present case following the Special Bench decision in the case of Shreyas Morakhia { 40 SOT 432}, it was held that in order to satisfy the conditions stipulated in section 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. This principle applies to a share broker. The amount receivable on account of brokerage is a part of debt receivable by the share broker from his client against purchase of shares and once such brokerage is credited to the profit and loss account and taken into account in computing his income, the condition stipulated in section 36(2) (i) of the Act gets satisfied. The bad debt therefore claimed by the broker was allowed.( A.Y.2003‐2004.) DCIT v IIT Investrust Ltd ( 2011) 45 SOT 1( Mumbai) (Trib). S. 37(1) : Business Expenditure ‐ Capital or Revenue Expenditure ‐ Study report. Consultancy charges paid for obtaining study reports in Bitumen is revenue expenditure. CIT vs. Shell Bitumen India (P) Ltd. (2011) 221 Taxation 44 (Delhi)(High Court) S. 37(1) : Business Expenditure ‐ Capital or Revenue Expenditure ‐Expenditure on setting up new sugar units ‐ Expansion of Business. Expenses incurred by assessee, a sugar manufacturer, by way of salaries, wages, bonus, provident fund contribution, workmen welfare expenses, power, fuel and water, manufacture expenses rent for office building, etc. on setting up new sugar units were expenses for the purpose of manufacture of sugar in respective factories and therefore, the same are allowable as revenue expenditure.(A. Y. 1992 – 93) CIT vs. Sakhti Sugars Ltd. (2011) 237 CTR 51/ 194 Tax 91/ 45 DTR 134 (Mad.)(High Court) S. 37(1) : Business Expenditure ‐ Replacement of Moulds ‐ Revenue Expenditure Replacement of moulds did not result in creation of new capital asset or benefit of enduring nature, mere fact that moulds were used in production process could not be conclusive as to the nature of expenditure, hence, expenditure on replacement of moulds was revenue expenditure. CIT vs. Malerkotla Steels & Alloys (P.) Ltd. (2011) 237 CTR 201 / 49 DTR 1 (P&H)(High Court) S. 37(1) : Business Expenditure ‐ Share of profit from firm ‐ Exempt Income ‐ Interest on Capital Borrowed ‐ [S. 10 (2A)]


Interest expenditure incurred on amount borrowed for purpose of contributing funds in form of capital in partnership firm can be allowed against interest income received from partnership firm on credit balance of capital.(A. Y. 2005‐06) Karan Raghav Export (P) Ltd. vs. CIT (2011) 196 Taxman 504/49 DTR 327 (Delhi)(High Court) S. 37(1) : Business Expenditure ‐ Capital or Revenue ‐ Expenditure on production of film for advertisement. Expenditure incurred by assessee on production of films by way of advertisement for promoting marketing of products manufactured by it being in respect of ongoing business of assessee is allowable as revenue expenditure. CIT vs. Geoffrey Manners & Co. Ltd. (2011) 238 CTR 49/(2009)315 ITR 134/(2009)180 Tax 87/(2009)19 DTR 249 (Bom.)(High Court) S. 37(1) : Business Expenditure ‐ Expenditure on Foreign Education of managing director’s son – Allowable. Amount spent towards educational expenses of a student, in which the assessee is carrying on its business was allowable expenditure under section 37(1) notwithstanding the fact that the student was son of managing director. (A. Y. 1997 to 1999) CIT vs. Ras Information Technologies (P) Ltd. (2011) 238 CTR 76/50 DTR 93 (Kar.)(High Court) S. 37(1) : Business Expenditure ‐ Capital or Revenue Expenditure ‐ Voluntary Retirement Scheme ‐ (S. 35DDA) Even for the period prior to the introduction of section 35DDA, w.e.f. 1st April, 2001, the assessee was entitled to claim deduction of expenditure incurred under VRS only in a phased manner; however, in view of consistent views of various High Courts, the assessee had to be allowed deduction of entire expenditure, as revenue expenditure in respect of Asst. Year 1999‐2000 CIT vs. O.E.N. India Ltd. (2011) 238 CTR 340/196 Tax 131/49 DTR 94 (Ker.)(High Court) S. 37(1) : Business Expenditure – Part of larger machines. Where parts of larger machines are purchased by the assessee, expenditure on such parts is allowable as ‘revenue expenditure. (A. Y. 2001‐02 to 2004‐05) CIT vs. Modi Industries Ltd. (2011) 197 Taxman 76 (Del.)(High Court) S. 37(1) : Business Expenditure – Warranty. Provision for warranty claim made by the assessee based on a scientific method and worked on the average of earlier year’s warranty settlement claims was held to be allowable business expenditure. (A. Y. 1999‐2000, 2000‐01, 2001‐02, 2002‐03, 2003‐04, 2004‐05) CIT vs. Luk India P. Ltd. (2011) 52 DTR 117 (Mad.)(High Court) S. 37(1) : Business Expenditure – Ad hoc Expenditure. Ad hoc expenditure out of cartage, labour and sealing expenses cannot be made by the assessing authority when similar expenses are allowed in totality by Appellate Authority in earlier years. (A. Y. 1992‐93) Friends Clearing Agency P. Ltd. vs. CIT (2011) 49 DTR 297 / 237 CTR 464 (Del.)(High Court) S. 37(1) : Business Expenditure – Contingent Liability – Suit filed by Bank. Interest payable to the bank on the loan with respect to which the bank had filed suit for recovery cannot be disallowed treating the same as contingent liability merely for the reason that the bank had not shown the


accrued interest in its books. (A. Y. 1992‐93) Friends Clearing Agency P. Ltd. vs. CIT (2011) 49 DTR 297 / 237 CTR 464 (Del.)(High Court) S. 37(1) : Business Expenditure – Real Estate Business – Income from House Property – Brokerage – Commission. Where the assessee derived income from real estate business and also income from house property, the assessee is claim for deduction of brokerage and commission cannot be disallowed against the business income on the ground that the assessee is not entitled to any further deduction other than those provided under section 24 of the Act. (A. Y. 2003‐04) Mukti Properties P. Ltd. vs. CIT (2011) 50 DTR 273 / 238 CTR 174 (Cal.)(High Court) S. 37(1) : Business Expenditure – Convertible Debentures – Capital or Revenue Expenditure. Expenses incurred on the issue of convertible debentures has to be treated as Revenue expenditure. (A. Y. 1993‐94) CIT vs. ITC Hotels Ltd. (2011) 238 CTR 447 / 32 DTR 215 / 190 Taxman 430/ 334 ITR 109 (Kar.)(High Court) S. 37(1) : Business Expenditure – Expenses towards retrenchment of workers on closure of a unit – Allowable The assessee carried manufacturing from various units and they were interdependent and unity of control between the units established by the existence of common management, a common business organization, administration and fund. The closure of one unit did not involve the closure of the business. Therefore, the expenses towards retrenchment of workers was therefore an allowable deduction within the meaning of section 37(1) since there was no closure of business. (Asst. Year 2001‐02). CIT vs. Pfizer Ltd. (2011) 330 ITR 62/42 DTR 32/233 CTR 521 (Bom.)(High Court) S. 37(1) : Business Expenditure – Closure of one branch – Amortisation of expenses – Claim of unabsorbed expenditure claimed in the year the branch was closed – Allowable in the year the branch is closed The assessee had incurred expenditure for opening branches, the cost of which were to be amortised by spreading it over 10 years in equal instalments. One branch was closed, the assessee claimed the unabsorbed expenditure of the closed branch. The High Court held that the business of the assessee continue after the closure of the branch, and the deduction of amortised expenditure need not wait after the closure of the branch. (A. Y. 2003‐04) Victoria Gold Gallery vs. CIT (2011) 330 ITR 330 (Ker.)(High Court) S. 37(1) : Business Expenditure ‐ Capital or Revenue ‐ Feasibility Study ‐ Study Abandoned ‐ Revenue Expenditure Feasibility studies conducted by the assessee for the existing business with a common administration and common fund and the studies were abandoned without creating any new asset, therefore, expenses were of revenue expenditure. CIT vs. Priya Village Road Shows Ltd. (2011) 332 ITR 594 (Delhi)(High Court) S. 37(1): Business expenditure‐Capital or revenue‐ Expenditure on abandoned expansion plans. The assessee had incurred expenditure on engaging services of consultants for improving operational efficiencies inextricably linked to the existing business. The project was abandoned, with no new asset to be created. The expenditure held to be revenue expenditure. ( Asst year 2000‐2001) Indo Rama Synthetics India Ltd v. CIT (2011) 333 ITR 18 (Delhi) (High Court). Editorial: SLP rejected (2010) 328 ITR (St) 9 (SC).


S. 37 (1): Business expenditure‐Professional’s heart surgery expense not deductible‐ Not allowable as repair expenses. (s. 31). Expenditure incurred on heart operation was not deductible u/s. 31 as also 37(1) because of following reasons: 1) Heart cannot be considered plant as it did not have any mention in assessee’s balance sheet under assets and its cost of acquisition could not be determined. 2) Deduction u/s. 37(1) cannot be granted as the expenditure incurred does not have any immediate or direct nexus between the expenses incurred on surgery and his efficiency in the professional field per se. 3) Before expenses on repair of plant are admitted as a deduction , plant would necessarily have to be reflected as an asset in books of account. ( Asst Year 1983‐84). Shanti Bhushan vs CIT (2011) 199 Taxman 181/ 57 DTR 233/ 333 ITR 26 / 242 CTR 375(Delhi) ( High Court). S.37 (1): Business expenditure‐ Payment to bank as guarantor‐ Loan of subsidiary company‐ Surety. As per the development agreement the assessee was obliged to convey marketable title to the purchasers of the flats to be built on a property. Assessee paid money to the bank as surety to discharge the loan obtained by its sister concern so as to secure release of the aforesaid property which was mortgaged with the bank. The payment was to avoid breach of terms of the development agreement. The said payment is allowable as business expenditure.( Asst Year 1993‐94). CIT v Rudra Industrail Commercial Corporation ( 2011) 55 DTR 5 ( Kar) (High Court). S. 37 (1): Business expenditure‐ Tractor Charges‐ Assessee requesting the AO to issue summons‐ Addition without issuing summons – Not valid.( S. 131.). Assessee made payments of tractor charges to parties partly in cheque and partly in cash. Assessee requested the assessing officer to summon person to whom cash payments were made. Assessing officer made addition without summoning person. The court held that addition was not proper. CIT v Brij Pal Sharma ( 2011) 333 ITR 229 (P &H ) (High Court) S. 37(1). Business expenditure‐Capital or revenue‐Expenditure on glow sign board. Expenditure on glow sign boards is allowable as revenue expenditure. CIT v Orient Ceramics & Industries Ltd ( 2011) 56 DTR 397 ( Delhi) (High Court). S. 37 (1) Business expenditure‐ Key man insurance premium. ( S. 10 (10D). Assessee is a Chartered Accountant had debited an amount of Rs 50 Lakhs towards Keyman Insurance Premium , which was taken in one of the his employee who was the head of the financial consultancy division and looking after the financial consultancy for corporate finance. The appeal of the assessee was allowed by the Tribunal. On appeal by the revenue the Court held that it is the prerogative of the businessman to consider and decide as to which of the employees is important for the business and it is for him to take life insurance policy for such an employee keeping in mind various factors and circumstances.. The High Court confirmed the order of Tribunal. CIT v Kamlesh M. Solanki – Tax appeal no 2421 of 2009 dt 26‐4‐2011 ( ACAJ Vol 35 part 03 June 2011 P. 165 ( Guj) (High Court). S. 37 (1): Business expenditure—Foreign studies of person appointed as trainee in company‐ Son of president.


Fact that trainee happens to be son of President does not make the expenditure personal in nature. Since son of President was appointed by resolution and an agreement as been entered into, that the trainee after completion of the education from abroad will be obliged to resume service in the company as a technical executive at least for ten years. Expenses incurred on foreign studies of person appointed as trainee in company are business expenditure. Gournitye Tea & Industries Ltd v CIT ( 2011) Tax LR 315 ( Cal ) (High Court). S.37 (I). Business expenditure‐Foreign Travelling expenditure of Managing Director and his wife‐ Authorised by resolution. When the board of directors of the assessee had thought it fit to spend on foreign tour of the accompanying wife of the managing director for commercial expediency for reasons reflected in its resolution , it was not with in the province of the income tax authority to disallow such expenditure. There was resolution of company authorizing foreign travel of managing director and his wife for business purposes. The Court applied the ratio of CIT v Walchand and co P.Ltd ( 1967) 65 ITR 381 (SC). However , as there was no resolution authorizing the wife of the deputy managing director, the expenditure on such travel were rightly disallowed.(A. Y. 200‐01) J.K.Industries Ltd v CIT ( 2011) 335 ITR 170 ( Cal) (High Court). S. 37 (1):Business Expenditure‐ Parties found non existence after three years‐ Expenditure can not be disallowed. Where the assessee took care to purchase materials for his business by way of account payee cheque from third party and subsequently the parties do not appear before the assessing authorities as they had discontinued their business, the assessee’s claim of genuine business expenditure cannot be disallowed for their non existence after three years of transactions.( A. Y. 1998‐99) Diagnostics vs. CIT (2011) 56 DTR 317 (Cal)( High Court). S. 37 (1): Business Expenditure – Capital or Revenue – Glow sign board. Expenditure incurred by the assessee on glow signboard was held to be an allowable business expenditure. CIT vs. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Del)( High Court). S. 37(1): Business Expenditure –Company‐Personal use. In case of Company there cannot be disallowance of car expense for personal use of car.(A. Y. 1988‐89) CIT vs. Nuchem Ltd. (2011) 55 DTR 14 (P&H)( High Court) S; 37(1). Business Loss‐Abandoned project‐ Capital asset. Amount paid as advance for acquisition of a capital asset for a project which was abandoned, did not qualify for deduction as a business loss since the amount spent was in relation to acquisition of a capital asset. CIT v. Southern Gas Ltd. {2011} 198 Taxman 165 (Ker.) (Mag.)( High Court). S. 37(1). Business Expenditure‐ Expenses prohibited on account of being illegal. Where the assessee paid sums to local goons and the police for maintenance of law & order, it was held that such expenditure being prohibited by law, did not qualify for deduction.( A. Y. 1992‐93)


CIT v. Swaminathan {2011} 198 Taxman 140 (Kar.) (Mag.)( High Court). S.37 (1 ): Business expenditure – assessee requesting AO to summon person – addition without summoning – not proper. In the instant case the assessee had a paid a sum in cash and cheque, being tractor charges to D. During the assessment proceeding the assessee had made a mention of his inability to produce D for verification of the transaction, but had also requested the AO to issue summons to the D, so as to enable the AO to determine for himself the veracity of the assessee claim. The AO, however made the additions without issuing summons to D. The CIT(A) and ITAT both ruled in favour of the assessee. On appeal to the High Court, the High Court while deciding the issue in favour of the assessee held that the CIT(A) and ITAT had given a finding that the AO had made additions without any material whatsoever, and the AO could have enforced the presence of D especially since a substantial part of the payments were made by the assessee by banking channels. CIT v. Grij Pal Sharma [2011] 333 ITR 229 (P&H)( High Court). S. 37 (1). Business expenditure‐ capital or revenue‐ ERP Software Package Allowable As Revenue Expenditure. The assessee, engaged in manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products, incurred expenditure of Rs. 23 lakhs on purchase of “Enterprises Resources Planning (ERP) package”. The AO treated the expenditure as capital in nature. The Tribunal applied the functional test laid down by the Special Bench (presumably Amway India Enterprise vs. CIT 111 ITD 112 (Del)) and held that the expenditure was allowable as a deduction on the basis that the software facilitated the assessee’s trading operations or enabling the management to conduct the assessee’s business more efficiently or more profitably but it is not in the nature of profit making apparatus. The department filed an appeal before the High Court. HELD dismissing the appeal: “In our view, no fault can be found in the aforesaid order of ITAT holding that software expenditure was allowable as revenue expenditure.” CIT vs Raychem RPG LTd. (Bombay) ( High Court). www.itatonline.org. S. 37 (1): Business Expenditure‐Education expenses of son of managing director for higher education. Where assessee being a consulting agency in manufacturing and engineering industry entered into an agreement with son of Managing Director , agreeing to spend money on higher education in USA on terms that the son of Managing Director would work with assessee company after completion of the course. Such Money spent by an assessee either in sponsoring a student or towards educational expenses of a student in a discipline , in which assessee is carrying on its business , is a valid expenditure and is entitled to deduction. ( A.Ys. 1997‐98 and 1998‐99). CIT v Ras Information Technologies ( P) Ltd ( 2011) 200 Taxman 305 ( Kar) (High Court). S.37 (1): Business expenditure‐ Royalty. Payment of royalty by assessee company to its US based holding company which has been incurred wholly and exclusively for the purpose of business of the assessee is allowable as business expenditure.( A.Y.1999‐2000 to 2001‐02). CIT v Oracle India (P) Ltd ( 2011) 59 DTR 222/ 243 CTR 103 (Delhi) (High Court). S.37 (1): Business expenditure‐ Demolition of structure‐ Capital or revenue. Amount spent by assessee on demolition of structure which had caught fire and major repair of premises during the period when the business was in existence are admissible as revenue expenditure. ( A.Y. 1995‐96 ).


CIT v Bhupindera Flour Mills ( P) Ltd ( 2011) 59 DTR 307 ( P &H). S. 37 (1):Business expenditure‐Capital or revenue‐ Reconditioning of machinery. Assessee incurred huge expenditure on total reconditioning and overhauling of machinery . Since reconditioning had resulted in imparting useful life to hitherto old and unfit machinery and thus , resulting in a benefit of enduring nature expenditure was capital in nature.( A.Y.1994‐95). Bharat Geras Ltd v CIT ( 2011) 201 Taxman 86 / 337 ITR 368( Delhi) (High Court). S. 37 (1): Business expenditure‐ Ransom money‐While kidnapping is an offense, paying ransom is not; Bar in Explanation 1 to s. 37(1) not attracted. Where payment is made by assessee as a ransom to secure the release of a kidnapped director, it was held that such a payment is not prohibited. The Explanation of s. 37(1) provides that expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business. It has to be seen whether the expenditure is incurred for any purpose which is an offence or prohibited by law. Accordingly, the Explanation of to s. 37 (1) is not applicable and the ransom is deductible as business expenditure. CIT v Khemchand Motilal Jain Tobaco Products (P) LTD (2011) 243 CTR 270 / 60 DTR 113 (MP) (High Court). www.itatonline.org. S. 37(1) : Business Expenditure ‐ Corporate Guarantee – Subsidiary ‐ One time settlement with Bank Giving corporate guarantee was not only one of the objects of the assessee company but the same was given for its subsidiary company and it was in the interest of the assessee company and hence, the commercially expedient decision, hence, one time settlement with bank was allowable as business loss.(A. Y. 2004‐05) ACIT vs. W. C. Industries (India) Ltd. (2011) 128 ITD 98 / 40 DTR 106 (Chennai)(Trib) S. 37(1) : Business Expenditure ‐ Keyman Insurance – Hospital ‐ Consultancy Fees ‐ Software Maintenance. Keyman Insurance premium paid by the Company on the lives of Chief cardiac surgeon, chairman, and managing director of company was qualified as deduction under section 37(1). Consultancy fees paid for maintenance of software were to be allowed as revenue expenditure.(A. Y. 2005‐06) Escort Heart Institute & Research Center Ltd. vs. ACIT (2011) 128 ITD 108 (Delhi)(Trib) S.37 (1) : Business expenditure‐ Capital or Revenue‐Rectification and improvement of power line‐ Revenue expenditure. Expenditure incurred by assessee on rectification and improvement of power line was a revenue expenditure , even if ,it was spent out of subsidy amount received from Government.( Asst year 1987‐88). Dy CIT v A.P.State Electricity Board ( 2011) 130 ITD 1/ 138 TTJ 425 (Hyd) (TM) (Trib). S.37(1): Business expenditure‐ Company‐ Disallowance‐ Vehicles and telephone expenses of Directors. There is no personal usage by the company ,hence no disallowance can be made on account of personal use of the vehicles /telephone by the directors /officials of the company.(Asst year 2004‐05). Ramkishin Textiles P. Ltd v ITO ( 2011) 9 ITR (Trib) 321 (Mumbai) (Trib). S. 37 (1). Business expenditure‐ Capital or revenue‐ Royalty for use of logo. Payment made by the assessee for non exclusive user of logo based on turnover and not lump sum payment is allowable as revenue expenditure. ( Asst year 2006‐07).


Asst CIT v Shriram Transport Finance Co Ltd ( 2011) 9 ITR ( Trib) 543 (Chennai) (Trib). S.37 (1): Business expenditure‐Service charges to Government‐ Service charges paid to Government as per directives of State Government allowable as deduction.( Asst Year 1998‐99 ). Dy CIT v Travancore Titanium Products Ltd ( 2011) 130 ITD 161/ 138 TTJ 276 ( Cochin ) (TM ) (Trib). S. 37(i) : Business Expenditure – Repair of Lease Building – Foreign Travelling expenses of Chief Editor and staff – Allowable. The assessee company was engaged in the business of printing and publication of various periodicals. The assessee company took on lease a building and got repaired an empty derelict hall, which was converted into a recreation room and was used by the assessee’s staff. The assessee company claimed a deduction of the same and the same was allowed under section 37(1) of the Act on the ground that the assessee had not acquired a capital asset but put up a construction of building only for the purpose of business. The foreign travel expenses claimed by the assessee also for the travelling of the Chief Editor, Assistant Editor and other staff was also allowed as a business expenditure as the same was necessitated to grow business of the assessee’s magazines, periodicals, etc.(A. Y. 2005‐06 & 07) ACIT vs. M. M. Publications (2011) 43 SOT 59 (Cochin)(Trib.) S. 37(1) ‐ Business Expenditure ‐ Licence Fee ‐ Parent Company Licence fee paid by the assessee–company to its parent company under technical assistance agreement is allowable business expenditure.( A. Y. 2005‐06) Dy. CIT vs. Nestle India Ltd. (2011) 7 ITR 758 (Delhi)(Trib.) S. 37(1) : Business Expenditure ‐ Capital or Revenue ‐ Expenses on Development – Upgradation of computer software – Depreciation ‐ (S. 32). Assessee engaged in the business of development of computer software having followed the method of accounting whereby it is treating the expenditure on development of computer software as part of work in progress during the period of development and capitalization the same when the software attains technically feasibility and is ready for sale, the expenditure incurred on development, upgradation of software products has to be treated as capital expenditure, however, depreciation would be allowable thereon in the year of capitalization.(A. Y. 2002‐03) 3i Infotech Ltd. vs. Dy. CIT (2011) 51 DTR 385 / 136 TTJ 641 (Mum (Trib.) S. 37(1) : Business Expenditure ‐ Litigation Expenses ‐ Criminal Proceedings against an actor in his individual capacity. The assessee an actor incurred expenditure in defending himself against criminal proceedings which arose out of the film shooting. The Tribunal held that the criminal proceedings were filed against the individual, this has nothing to do with the assessee’s profession. The expenditure was purely of a personnel nature and not allowable.(A. Y. 2003‐04 and 2004‐05) Dy. CIT vs. Salman Khan (2011) 8 ITR 150 / 52 DTR 137 / 137 TTJ 15 /130 ITD81 (Mum.)(Trib.) S. 37(1) : Business Expenditure ‐ Capital or Revenue ‐ Entrance fees to a Club ‐ Corporate Membership.


Entrance fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprises and accordingly CIT (A) was justified in deleting the disallowances of entrances fee made by the Assessing Officer.(A. Y. 2004‐2005) Dy. CIT vs. Bank of America Securities (India) (P) Ltd. (2011) 136 TTJ 441 (Mum.)(Trib) S. 37 (1): Business expenditure‐ Secret Commission for providing contract Secret commission paid by the assessee to directors of the company giving construction contract to the assessee can not be allowed as expenditure in view of Explanation 1 to section 37(1).( Asst years 1983‐84 & 1984‐85). J.K.Panthaki & Co v ITO ( 2011) 57 DTR 233/ 139 TTJ 337 ( Bang) (Trib). S.37(1):Business expenditure‐ Capital or Revenue Expenditure‐Entrance fee to a club, for membership of its director. The company had taken membership in the name of the director of the assessee company and none of the executives of the company appeared to have been made members of the club. The expenditure incurred for club membership was disallowed on the ground that the assessee failed to produce any evidence and prove that the benefit of membership was utilized wholly or exclusively for the purpose of business. New India Exclusions (P) Ltd V/s. Asst C.I.T. ( 2011) 46 SOT 14 (Mum) (URO) S. 37(1) : Business Expenditure – Payment of Compensation. Payment made by the assessee to close family members for getting vacant and peaceful possession of premises was held capital expenditure as there was no dispute going on between the parties to show that the payment was necessary for taking peaceful possession. ( A. Y. 2003‐04) ITO vs. Pritam Juice (2011) 138 TTJ 294 (Mum.( Trib). S. 37 (1): Business expenditure‐ Capital or revenue‐ Convertible debentures. Expenditure in connection with issue of 4 percent fully convertible debentures which were later converted into equity shares of the assessee company was of revenue nature. ( A.Y. 2005‐06). Havells India Ltd v Addl CIT ( 2011) 59 DTR 118 / 140 TTJ 283 / 47 sot 61 (Delhi) (Trib). S. 37 (1): Business expenditure‐ Capital or revenue expenditure‐ Pre operative expenses‐ Expansion of existing business. Where there is complete interlacing and intermixing of the funds of the assessee ,in all its units , besides there being a common management assessee is justified in claiming pre –operative expenses incurred for new project as deductible as revenue expenditure.( A.Y. 2005‐06). Havells India Ltd v Addl CIT (2011) 59 DTR 118 / 140 TTJ 283 / 47 SOT 61 (Delhi) (Trib). S. 37 (1): Business expenditure‐ Royalty paid to foreign associated enterprise. Royalty paid to foreign associated enterprise under foreign technology collaboration agreement is allowable as revenue expenditure. ( A.Y. 2005‐06). Cabot India Ltd v Dy CIT ( 2011) 46 SOT 402 ( Mum) (Trib). S. 37 (1): Business expenditure‐ Capital or revenue‐ Non –compete fees‐Deferred revenue expenditure.


Expenditure incurred by the assessee to ward off the competition for a period of seven years during which any company could have set up its products and reputation in the market , expenditure can not be allowed as revenue expenditure. As non –compete fee is held to be capital expenditure , claim for treating it as revenue expenditure entitled to deduction for seven years is also not allowable. ( A.Y.2001‐02). Sharp Business Systems ( India) Ltd v Dy CIT ( 2011) 59 DTR 385 ( Delhi ) (Trib). S. 37 (1): Business expenditure‐ Capital or revenue‐ Expenditure on software. Expenses incurred by the assessee for obtaining license to use software are to be treated as revenue expenditure.(A.Ys 2003‐04, 2004‐05 & 2006‐07) ST Microelectronics (P) Ltd v CIT ( 2011) 61 DTR 1 (Delhi) ( Trib). S. 40(a)(i) : Amounts not deductible – Non‐Resident ‐ Tax Deduction at Source ‐ Technician outside India ‐ (S. 195) Payment made outside India for services rendered by non‐residence technicians outside India no disallowance can be made as provisions of section 195 is not applicable. CIT vs. International Creative Foods (P.) Ltd. (2011) 49 DTR 150 (Ker.)(High Court) S. 40(a)(i) : Amounts not deductible ‐ Business Expenditure – Non‐resident –Tax deduction at source‐ Software. The assessee had purchased a software from M and sold in the Indian market. The assessee acted as a dealer .This could not be termed as royalty, therefore section 40 (a)(i) had no application. CIT vs. Dynamic Vertical Software India P. Ltd (2011) 332 ITR 222 (Delhi)(High Court) S. 40(a)(i) : Amounts not deductible –Non resident‐ Interest ‐ Branch of foreign Bank – Head office ‐ Tax deduction at source ‐ Permanent Establishment ‐ (S. 195) It was held that as regards taxability in the hands of the HO & obligation for TDS under section 195, the same was not chargeable to tax in the hands of the HO. The PE being assessable as separate legal entity pursuant to provisions of DTAA there is no obligation to deduct tax under section 195 and consequently no disallowance under section 40(a)(i) can be made in the hands of the branch. Interest paid by a branch. Thus, interest paid by a branch of a Foreign entity to its HO is deductible in the hands of the branch. Such interest is not taxable in the HO’s hands ABN AMRO Bank NV vs. CIT(2011) 57 DTR 85/ 241 CTR 552 (Calcutta High Court) . Editorial: Betts Hartley Huett (1979) 116 ITR 425 (Cal.) distinguished Hyundai Heavy Industries (2007) 291 ITR 482 (SC) & Morgan Stanley (2007) 292 ITR 416 (SC) followed S.40(a) (i): Amounts not deductible‐Business expenditure‐ Discounting charges‐ Export sales bill‐ Deduction of tax at source‐Interest. [ S.2 (28A) , 195 ] Discounting charges paid by assessee to a foreign company for discounting export sale bills is not “interest” as defined in section 2 (28A), since foreign company has no permanent establishment in India, it was not liable to tax in respect of discounting charges and therefore , assessee was under no obligation to deduct tax at source under section 195 and the discounting charges could not be disallowed under section 40 (a) (i).( Asst years 2004‐05 & 2005‐06 ). CIT v Cargill Global Trading (I) (P) Ltd (2011) 241 CTR 443 / 56 DTR 188 / 199 Taxman 320 (Delhi) (High Court). S. 40 (a) (i): Amounts not deductible‐ Business expenditure‐ Deduction of tax at source‐ Royalty‐ Paid or deducted. As per the proviso to section 40 (a) (i), deduction for royalty could be allowed in the year in which TDS was either paid or deducted under Chapter XVII –B; where as tax was deducted in Asst year 1995‐96 but payment was made


in the next assessment year i.e. 1996‐97 , assessee was not entitled to claim the same as deduction in Asst Year 1996‐97 but could be claimed in asst year 1995‐96, only. ( Asst Year 1996‐97 ). CIT v Whirpool of India Ltd ( 2011) 56 DTR 65/ 242 CTR 245 ( Delhi ) (High Court). S. 40(a)(i) : Amounts not Deductible – Business Expenditure – Payment of Commission – Disallowance‐ Non resident‐ Deduction of tax at source. (S. 195) Tax is not deductible under section 195 with regard to payment of commission to foreign agent in view of Circular No. 23 of 1969 and Circular No. 786 of 2000. The payment cannot be disallowed under section 40(a)(i) as Circular No. 7 of 2009 had no retrospective effect. (A. Y. 2007‐08) Dy. CIT vs. Sanjiv Gupta (2011) 135 TTJ 641 / 50 DTR 225 (Luck.)(Trib.) S. 40 (a) (i): Amounts not deductible‐ Fees for technical services‐ Deduction of tax at source‐ Non resident.( S. 9 (1) (vii)(b) , 195 ). In order to fall with in the exception of section 9 (1) (vii) (b), the technical services for which , the fees have been paid ,ought to have been utilized by resident in a business outside India or for the purpose of making or earning any income from any source outside India. Assessee having established that the testing and certification services provided by it by CSA were utilized only for export activity , section 9(1) (vii) (b) being not attracted , section 40 (a) (i) could not be invoked. ( A.Y. 2005‐06). Havells India Ltd v Addl CIT ( 2011) 59 DTR 118 140 TTj 28 3 / 47 SOT 61 (Delhi) (Trib). S. 40 (a) (i). Amounts not deductible‐ Deduction of tax at source‐ Non –resident‐A Fee for “user of name” and “accreditation” not taxable as “royalty”. ( S.195 ). The assessee, engaged in manufacture of tooth paste etc paid Rs 11,71,826 as “accreditation panel fees” to British Dental Health Foundation UK without deduction of tax at source. The AO disallowed the sum u/s 40(a)(i) on the ground that the sum was taxable as “royalty” and tax had not been deducted at source u/s 195(1). The CIT(A) deleted the disallowance. Before the Tribunal, the department argued that since the assessee derived valuable advantage from the accreditation by BDHF and use the same as a marketing tool, the amount constituted “royalty”. The Tribunal dismissing the appeal held that ,(i) The obligation to deduct tax u/s 195(1) arises only if the payment is chargeable to tax in the hands of non‐resident recipient. If the recipient of the income is not chargeable to tax, the vicarious liability on the payer is ineffectual. As the AO had not established how the recipient was liable to pay tax, he was in error in disallowing u/s 40(a)(i) (GE India Technology Center 327 ITR 456 (SC) followed; (ii) On merits, though the accreditation fees permitted the assessee the use of name of British Dental Health Foundation, it did not constitute “royalty” under Article 13 of the India‐UK DTAA because it did not allow the accredited product to use, or have a right to use, a trademark, nor any information concerning industrial, commercial or scientific experience so as to fall within the definition of the term. ACIT v Anchor Health and Beauty Care Pvt. Ltd. (Mum) (Trib) www.itatonline.org. S. 40 (a) (i): Amounts not deductible‐Deduction of tax at source‐ Non resident‐A Fee for “user of name” and “accreditation” not taxable as “royalty”.(S.195) The assessee, engaged in manufacture of tooth paste etc paid Rs 11,71,826 as “accreditation panel fees” to British Dental Health Foundation UK without deduction of tax at source. The AO disallowed the sum u/s 40(a)(i) on the ground that the sum was taxable as “royalty” and tax had not been deducted at source u/s 195(1). The CIT(A) deleted the disallowance. Before the Tribunal, the department argued that since the assessee derived valuable


advantage from the accreditation by BDHF and used the same as a marketing tool, the amount constituted “royalty”. HELD dismissing the appeal: (i) The obligation to deduct tax u/s 195(1) arises only if the payment is chargeable to tax in the hands of non‐resident recipient. If the recipient of the income is not chargeable to tax, the vicarious liability on the payer is ineffectual. As the AO had not established how the recipient was liable to pay tax, he was in error in disallowing u/s 40(a)(i) . (ii) On merits, though the accreditation fees permitted the assessee the use of name of British Dental Health Foundation, it did not constitute “royalty” under Article 13 of the India‐UK DTAA because it did not allow the accredited product to use, or have a right to use, a trademark, nor any information concerning industrial, commercial or scientific experience so as to fall within the definition of the term. The purpose of the accreditation by a reputed body was to give certain comfort level to the end users of the product and to constitute the USP of the product. The term “royalty” cannot be construed as per its normal connotations in business parlance but has to be construed as per the definition in Article 13. The amount constituted “business profits” and as the recipient did not have a PE in India, it was not taxable in India. ACIT v Anchor Health and Beauty Care Pvt. Ltd. (Mum) (Trib). www.itatonline.org. S. 40(a)(iii) : Amounts not Deductible ‐ Salary payable outside India –Non resident‐Dedcution of tax at source‐ DTAA ‐ India‐Netherlands. (S. 5, 9) Employees were non‐residents who rendered services outside India and also received salaries outside India, salaries paid to them were not liable to tax in India hence provisions of section 40(a)(iii) were not applicable. (A. Y. 2002‐03) Mother Dairy Fruit, Vegetable (P) Ltd. vs. CIT (2011) 198 Taxman 33 / 240 CTR 40/ 53 DTR 70 (Delhi)(High Court) S.40 (a) (iii). Amounts not deductible‐Tax deduction at source‐Income deemed to accrue or arise in India‐ Salary to staff at Netherland ( S.9, 192). Assessee did not deduct tax at source on salary payments made to staff at Netherlands. Assessing officer invoked the provisions of 40 (a) (iii) , and disallowed the payments made on the ground that the tax was not deducted under section 192.The Tribunal held that since salaries had been paid to non‐residents for services rendered abroad ,provisions of Explanation to section 9 (1) (ii) were not applicable to assessee. Since salary paid to non resident’s for services rendered in Netherlands was not chargeable to tax in India , provisions of section 192 can not be applied hence disallowance made by applying the provisions of section 40(a) (iii) were liable to be deleted. (Asst Year 2003‐04). Dy CIT v Mother Dairy Fruits & Veg (P) Ltd ( 2011) 45 SOT 186/ 60 DTR 220/ 141 TTJ 97 (Delhi ) (Trib). S. 40(a)(ia) : Amounts not deductible ‐ Payments by firm to partners – Sub‐contract ‐ Tax Deduction at Source. (S. 194C) Partners of the assessee firm having executed the transportation, contracts undertaken by the firm by using their own trucks and the assessee having acted as an agent in routing the payments to partners, it cannot be held that there was a separate contract between the firm and the partners and, therefore, such payments could not be disallowed under section 40(a)(ia) on the ground that tax was not deducted at source under section 194C. (A. Y. 2006‐07) CIT vs. Grewal Brothers (2011) 54 DTR 99 (P&H)(High Court) S. 40(a)(ia) : Amounts not Deductible ‐ Deduction of Tax at Source – Contractor –Sub‐contractor ‐ Labour Charges. (S. 194C)


It was noted from records that a small friction of total expenditure was in form of labour charges, and as such, it was difficult to say that contract was for supply of labour or work and would rather be categorized as one for purchase of goods, though some labour work stood performed. As it was not a case of contract for service or labour, provision of section 194C cannot be applicable consequently disallowance was deleted. (A. Y. 2005‐06) S. T. Reddiar & Sons vs. Dy. CIT (2011) 129 ITD 475 / 135 TTJ 480 / 49 DTR 326 (Coch.)(Trib.) S. 40(a)(ia) : Amounts not Deductible – Business Expenditure –Dedcution of tax at source‐ Payment for Goods & Labour Charges. Disallowance cannot be made under section 40(a)(ia) on account of non‐deduction of tax at source in respect of estimated labour charges which is a small fraction of the total expenditure in respect of goods purchased. (A. Y. 2005‐06) S. T. Reddiar & Sons vs. Dy. CIT (2011) 129 ITD 475 / 135 TTJ 480 / 49 DTR 326 (Coch.)(Trib.) S. 40(a)(ia) : Amounts not deductible ‐ Tax deduction at source – Contractor – Amendment – Clarificatory ‐ Tax deducted deposited before due date of filing of return Provisions of section 40(a)(ia), as amended by the Finance Act, 2010, w.e.f. 1‐4‐2010, which was been inserted by the Finance (No. 2) Act, 2004, w.e.f 1‐4‐2005 to section 40 of the Act is remedial in nature, designed to eliminate unintended hardship to the tax payers and which made the provision unworkable or unjust in a specific situation and is clarificatory in nature and, therefore, has to be treated as retrospective with effect from 1st April 2005, the date on which section 40(a)(ia) has been inserted by the Finance Act (No. 2) Act, 2004.(A. Y. 2005‐06) Kanubhai Ramji Makwana vs. ITO (2011) 49 DTR 70 / 135 TTJ 364 (Ahd.)(Trib.) S. 40(a)(ia) : Amounts not deductible ‐ Tax deduction at source ‐ Interest Commission – Sub‐contractor ‐ Freight Charges Assessee deducted the tax at source and paid to Government beyond date stipulated in section 200 but before the due date of filing of his return of income for the year under consideration. Finance Act 2010 had made amendments to provisions of section 40(a)(ia) as per which if tax has been deducted in relevant previous year and same has been paid on or before due date of filing of return of income for said previous year as specified in section 139(1), corresponding amount from which tax has been deducted shall be allowed as deduction. Said amendment was remedial / curative in nature, it would apply respectively with effect from 1‐4‐2005.(A. Y. 2006‐07) Bansal Parivahan (India) (P) Ltd. vs. ITO (2011) 43 SOT 619/53 DTR 40/137 TTJ 319/ 9 ITR 565(Trib) (Mum.)(Trib.) S. 40 (a)(ia).Amounts not deductible‐ Business expenditure‐ Payment to truck operators without deduction TDS‐ Deduction of tax at source. (S. 194C.) Assessee operating trailer lorries disbursing freight charges amounting to Rs 46,70,365 to 16 parties without deducting TDS as specified in section 194C . Assessee was liable to deduct tax at source . Amendment to sub section (3) of section 194C made through Finance Act 2005, where by second and third provisions were added to it w.e.f 1st June, 2005 has no retrospective effect . The Tribunal held that the Assessing Officer was justified in making disallowance under section 40 (a) (ia).( Asst Year 2005‐06). ITO v M.Sankar ( 2011) 138 TTJ 690/ 55 DTR 289 ( Chennai) (Trib) S. 40 (a)(ia).Amounts not deductible‐ Deduction of tax at source‐ Franchisee agreement‐ Sharing of profits. (S. 194C)


Franchisee agreement did not stipulate payment to be made to the licence for any work done on behalf of the assessee and it was merely a case of running a study centre and to apportion profits thereof between the assessee and the licence and therefore provisions of section 194C were not applicable and no disallowance under section 40 (a) (ia) can be made.( Asst years 2005‐06, 2006‐07). Career Launcher ( India) Ltd v Asst CIT ( 2011) 139 TTJ 48/ 56 DTR 10 (Delhi) (Trib). S. 40(a) (ia). Amounts not deductible‐Payment of contractors‐ Deduction of tax at source‐ Form no 15‐I ‐ (S.194C) Once assessee has obtained Form no 15 –I from the sub contractors , he is not liable to deduct tax from the payments made to sub contractors and no disallowance can be made under section 40 (a) (ia) . Belated furnishing of form No 15J to the CIT is an act posterior in time to payments made under to sub contractor and therefore this can not itself undo the eligibility of exemption created by second proviso to section 194 C (3) (i) by virtue of submission of Form no 15 ‐I by the sub contractors.( Asst Year 2006‐07) Valibhai Khanbhai Mankad v Dy CIT ( 2011) 56 DTR 89 / 46 SOT 469( Ahd ) (Trib). S. 40 (a) (ia) Amounts not deductible‐ Payment to contractor‐ Dedcution of tax at source‐ ( S. 194C). Section 40 (a) (ia) applies even in respect of amount paid and not merely payable to the contractors and therefore CIT (A) was justified in confirming disallowances under section 40 (a) (ia) as the assessee had failed to deduct tax under section 194C.( Asst year 2007‐08). Dy CIT v Ashika Broking Ltd ( 2011) 56 DTR 417 ( Kol) (Trib). S. 40(a) (ia): Amounts not deductible‐ Payments to Indian Agents of foreign shipping lines‐Deduction of tax at source‐ ( S.194C.) Transportation of goods by railways does not fall with in the ambit of “work” with in the meaning of section 194C and therefore , there was no obligation on the assessee to deduct tax at source under section 194C from the payments made to Indian agents of foreign shipping lines for inland haulage of goods by railways and accordingly , no disallowance can be made under section 40 (a) (ia)( Asst year 2006‐07). Airtech (P) L td v Dy CIT ( 2011) 57 DTR 169 (DelhI) (Trib). S. 40 (a) (ia): Amounts not deductible –Payment to contractors‐ Section is applicable in respect of amount paid and payable. Assessee contended that the section 40 (a) (ia) is not applicable in case where sum has been paid as the section refers the “sums payable” . The Tribunal held that section is applicable in respect of amount paid also hence the assessee failed to deduct the tax under section 194 C , disallowance was justified.( Asst Year 2007‐08) Dy CIT v Ashika Stock Broking Ltd ( 2011) 139 TTJ 192 ( Kol) (Trib). Editorial – Contrary View was taken by Jaipur Bench in Jaipur Vidyut Vitran Nigam Ltd v Dy CIT ( 2009) 123 TTJ 88 8 (JP) (Trib). S.40(a) (ia):Amounts not deductible‐‐Payable to a contractor or sub contractor‐Adjustment of Refund‐ Deduction of tax at source. Irrespective of fact that an assessee is entitled to claim refund of excess tax paid or get adjusted against tax liability under provisions of Act, assessee can not with hold TDS deducted from payment made to a contractor so as to adjust same against excess taxes paid earlier and if an assessee does so then provisions of section 40(a) (ia) are attracted in respect of payment so made. ( Asst Year 2005‐06).


HCC Pati Joint Venture v Asst CIT ( 2011) 46 SOT 263 ( Mumbai) (Trib). S. 40(a) (ia): Amounts not deductible ‐ Interest payment additional cost‐ Tax deduction at source. ( S 194A). When the amount of interest paid has been considered to be part of the purchase price and not interest under section 194A, such payment cannot be disallowed under section 40a(ia). ( Asst year 2005‐06) . Parag Manshuklal shah v ITO ‐ ITA no 2075 /Ahd/ 2008 CO no 120/Ahd /2008 Bench A dt. 30‐6‐2011. ACAJ Vol 35 –Part 3. June 2011 P.166 S. 40(a)(ia): Amounts not deductible‐ Fees for technical services‐ Deduction of tax at source‐ Non resident‐ DTAA‐ India‐ UK.( S. 9 (1) (vii)(b) , 195, art s 13 &15 ) By amendment in the Finance Act ,2007 ,the legislature inserted the Explanation with retrospective effect from 1 st June ,1976 to section 9 (2) and it was impossible for the assessee to deduct tax in the financial year 2003‐04 1 st April ,2003 to 31 st March 2004 , when the obligation to deduct TDS was not on the assessee during that period disallowance was not sustainable. Assessee acted bona fide in conformity with the provisions of Act .( A.Y. 2004‐05). Sterling Abbraive Ltd v Asst CIT ( 2011) 140 TTJ 68 ( Ahd) (Trib). S. 40(a)(ia): Amounts not deductible‐Deduction of tax at source‐ Deposited before due date of filing of return‐ Amendment by FA 2010 is not retrospective. The Finance Act, 2010 amended s. 40(a)(ia) w.r.e.f 1.4.2010 to provide that no disallowance would be made if the TDS was deposited on or before the due date for filing the return. The assessee claimed that the said amendment was “remedial and curative in nature” and applicable from AY 2005‐06. The Special Bench, held that, the amendment to s. 40(a)(ia) by the FA 2010 was made retrospectively applicable only from AY 2010‐11 and not earlier. It is nowhere stated that the amendment is curative or declaratory in nature nor is such an intention discernible. A provision giving relief cannot be regarded as retrospective only because the original provision caused hardship to the assessee. S. 40(a)(i) caused “intended difficulty” with the object of discouraging non‐compliance with the TDS provisions. A partial relaxation in its rigor, inserted with prospective effect, cannot be treated as “retrospective“. Bharati Shipyard ltd. v DCIT (2011) 132 ITD 253/ 61 DTR 41/ 11 ITR (Trib) 599/ 141 TTJ 129 ( Mum) (SB) (Trib). (www.itatonline.org.) S. 40 (a) (ia): Expenses or payments not deductible‐ Interest‐ Form no 15G. Depositors having submitted form no 15G to the assessee well in time ,interest paid to them without deduction of tax at source cannot be disallowed under section 40(a)(ia) simply because the said forms could not be submitted to the AO the with in the time stipulated in the Act , once the same were available to the AO while framing the assessment. ( A.Y. 2006‐07). Shyam Sunder Kailash Chand v ITO ( 2011) 60 DTR 270 (Jaipur) (Trib). S. 40(a) (ia).Expenses or payments not deductible‐ Commission‐ Non‐resident‐Agent‐ Service rendered out side India. ( S. 9 (1) (i), 195). Commission paid to non resident agent for services rendered out side India not being chargeable to tax in India could not be disallowed under section 40(a) (ia). (A.Ys 2001‐02 to 2004‐05). Dy CIT v Devi’ s Laboratories Ltd ( 2011) 60 DTR 210 /140 TTJ 746. ( Hyd) (Trib) /


S. 40A(2) : Expenses or Payments not deductible – Excessive or unreasonable – Same rate of tax – Disallowance not justified Where assessee purchased from its subsidiary material at prices higher than the market rate for assured supply, there was no question of diversion of funds since both the assessee and the subsidiary were subjected to the same rate of tax, hence there was no warrant for addition by invoking section 40A(2). (A. Y. 1985‐86) CIT vs. V. S. Dempo & Co. P. Ltd. (2011) 196 Taxman 193/61 DTR 74/244 CTR 102/ 336 ITR 209 (Bom.)(High Court) S. 40A (2) (b): Expenses or payments not deductible‐Technical know –how –Parent Company.( S.92). Once it is found that having n regard to the nature , quantum and quality assurance aspects of technical know how and other services provided to the assessee by the parent/ foreign company , compensation paid in the form of royalty / consideration can not be treated as excessive or unreasonable . Tribunal was justified in deleting the addition made by AO by relying upon section 40A (2) (b) and section 92. ( Asst Year 1997‐98). CIT v Nestle India Ltd ( 2011) 57 DTR 65/ 337 ITR 103 ( Del) (High Court). S. 40A(3) : Expenses or Payments not deductible ‐ Block Assessment ‐ GP – Estimated ‐ (S. 158BC) Section 40A(3) applies to block proceedings. It is not accepted that the provisions of block assessment are special, and that they are a complete Code and the other provisions cannot apply. Suresh Gupta 297 ITR 322 (SC) & M. G. Pictures 185 CTR 185 (Mad.) followed; Cargo Clearing Agency 218 CTR 541 (Guj.) not followed. The argument that if income is assessed by estimation on GP rate, no other disallowance can be made is not of universal application. If expenditure which is legally not permissible has been taken into account that can certainly be disallowed even where income is estimated. CIT vs. Sai Metal Works (High Court ‐ P&H) Source: www.itatonline.org S. 40A(3) : Expenses or payments not deductible ‐ Business Expenditure – Disallowance ‐ Payment to Government ‐ (Rule 6DD) Cash payments made by the assessee to the State Government who granted the contract to collect royalty on behalf of the Government cannot be disallowed under section 40A(3) in view of Rule 6DD(b).(A. Y. 2005‐06) CIT vs. Kalyan Prasad Gupta (2011) 51 DTR 191 (Raj.)(High Court) S. 40A(3) : Expenses or payments not Deductible – Disallowance – Cash payments for telephone cards, recharge coupons, etc. by distributor to cellular service provider. Assessee distributor does not make any 'purchasers’ either of goods or services on the acceptance of delivery of telephone cards, recharge coupons or other service products of the cellular service provider and, therefore, no disallowance can be made by applying section 40A(3) irrespective of the mode of payment. (A. Y. 2006‐07) S. Rahumathulla vs. ACIT (2011) 49 DTR 115 / 135 TTJ 720 / 127 ITD 440 (Coch.)(Trib.) S: 40A (3):Business disallowance‐ Rejection of books of account.( S.145). Assessing Officer having rejected the books of account and applied the net profit rate for the purpose of computing income, no disallowance could be made under section 40A (3).(A.Y. 2002‐03). ITO v Sadhwani Brothers ( 2011) 58 DTR 368 ( JP) (Trib) S. 40A (3): Amounts not deductible‐ Block Assessment‐ Profit estimated. (S.158BB).


Provisions of section 40A (3) cannot be invoked in block assessment with respect to the purchases found as per seized material and unrecorded in the regular books of account , especially , when the profit from the unrecorded transactions has been estimated and declared. Kirti Foods Ltd v Asst CIT ( 2011) 60 DTR 96 (Pune ) (Trib). S. 40A(9): Amounts not deductible ‐ No disallowance for statutory corps as their Service Regulations have “force of law” The assessee, a corporation setup under a State Act, made a contribution of Rs.16.77 lakhs, in its capacity as employer and as per the service regulations, to the “MSW Karmachari Welfare Fund”. The AO & CIT (A) took the view that the payment to a “fund“, was hit by s. 40A (9) and not allowable as a deduction. The Tribunal allowing the appeal held that ,S. 40A(9) provides that no deduction shall be allowed in respect of “any sum paid by the assessee as an employer … as contribution to any fund … except where such sum is so paid … as required by or under any other law for the time being in force“. In the case of statutory corporations, the regulations providing for the terms and conditions of employment and conditions of service have the force of law. Consequently, the service regulations framed by the assessee by which it agreed to make payment to the Fund carried statutory force and fell within the expression “as required by or under any other law” for purposes of s. 40A(9). (U. P. Warehousing Corporation 1980 3 SCC 459 followed) Maharashtra state warehousing corporation v ACIT ( Pune)( Trib). www.itatonline,org. S. 40A (9): Amounts not deductible‐ Bonus to employees‐ Actual payment. (S.43B). Section 40A (9), is an overriding section to 43B, therefore payment of bonus payable to employees to an employee’s bonus trust would be hit by section 40A(9), even if such payment was made to comply with the provisions of section 43B. ( Asst Year 1999‐2000 and 2001‐02). CIT v Shasun Chemicals & Drugs Ltd ( 2011) 199 Taxman 107 (Mad) (High Court). S. 40A (9): Amounts not deductible‐ Corporation‐ State Act‐Contribution‐ For statutory corps as their Service Regulations have “force of law”‐ The assessee, a corporation set up under a State Act, made a contribution of Rs. 16.77 lakhs, in its capacity as employer and as per the service regulations, to the “MSW Karmachari Welfare Fund”. The AO & CIT (A) took the view that the payment, being to a “fund“, was hit by s. 40A (9) and not allowable as a deduction. In the appeal to the Tribunal, the assessee claimed that its service regulations had the “force of law” and s. 40A (9) did not apply. HELD allowing the appeal: S. 40A(9) provides that no deduction shall be allowed in respect of “any sum paid by the assessee as an employer … as contribution to any fund … except where such sum is so paid … as required by or under any other law for the time being in force“. In the case of statutory corporations, the regulations providing for the terms and conditions of employment and conditions of service have the force of law. There is no distinction in principle between a person directly under the employment of the Government and a person under the employment of a statutory corporation. Consequently, the service regulations framed by the assessee by which it agreed to make payment to the Fund carried statutory force and fell within the expression “as required by or under any other law” for purposes of s. 40A(9). Maharashtra state Warehousing Corporation v ACIT ( Pune)( Trib). www.itatonline.org. S.40(b) (i):Amounts not deductible‐Salary to working partner‐HUF‐ Karta. Salary paid to working partner even though as Karta of HUF , is received as individual and as working partner ,hence allowable as deduction while computing income of firm.( A.Y. 2005‐06). CIT v Jugal Kishor & Sons ( 2011) Tax. L.R. 550 ( All) (High Court).


S. 40(b)(v) : Amounts not deductible ‐ Firm – Remuneration ‐ Not Working Partner Where remuneration is paid to a partner who is not a working partner, remuneration payable to him even in accordance with the deed of partnership is not allowable under the provisions of section 40(b) of the Act.(A. Y. 1999‐2000 to 2004‐2005) Reliable Surface Coatings vs. ACIT (2011) 7 ITR 183 (Ahd.)(Trib.) S. 40(b)(v) : Amounts not deductible – Partnership ‐ Remuneration to Partners ‐ CBDT Circular, which specifies that for section 40(b)(v), the partnership deed should specify the remuneration, is invalid. Section 40(b)(v) allows a deduction of payment of remuneration to a working partner if it authorized by the partnership deed and not in excess of the limits. Section 40(b)(v) does not lay‐down any condition that the partnership deed should fix the remuneration or the method of quantifying remuneration. Accordingly, CBDT Circular No. 739 dated 25.3.1996 which requires that either the amount of remuneration payable to each individual should be fixed in the agreement or the partnership agreement deed should lay down the manner of quantifying such remuneration goes beyond section 40(b)(v). The CBDT cannot issue a circular which goes against the provisions of the Act. The CBDT can only clarify issues but cannot insert terms and conditions which are not part of the main statute. A partnership deed which provides that the remuneration would be as per the provisions of the Act meaning thereby that the remuneration would not exceed the maximum remuneration provided in the Act is valid and deduction is admissible. Durga Dass Devki Nandan vs. ITO(2011) 241 CTR 180(HP)( High Court). S. 41 (1).Profits chargeable to tax‐Income‐ Business income‐ Remission of liability. Investment company has taken loan and invested in long term shares. As there was no communication and claim for many years by lenders and unsecured loan written back . No deduction was claimed in respect of loan . Amount written back cannot be assessed as business income under section 41 (1).( Asst year 2004‐05). Logitronics P. Ltd v CIT ( 2011) 333 ITR 386 ( Delhi) (High Court.) CIT v Jubilant Securities P. Ltd ( 2011) 333 ITR 386/ 59 DTR 172 ( Delhi)( High Court). S. 41(1):Profits chargeable to tax‐Income‐ Business Income – Unclaimed insurance premium. Unclaimed insurance premium credited to profit and loss account which was the amount collected by the assessee from the hirers as insurance premium as unclaimed balance becomes income of the assessee and liable to be tax as business income.( A. Y. 1997‐98 & 2003‐04) Motor General Finance Ltd. vs. CIT (2011) 53 DTR 273/ 199 Taxman 51 (Del)( High Court) S. 41(1) : Profits chargeable to tax – Depreciation ‐ Balancing Charge ‐Benefit or Perquisite – [S. 28(iv), 41(2)] Where the cost of assets purchased by the assessee in earlier year was reduced by the seller on settlement of dispute, benefit of depreciation obtained by the assessee in the earlier years cannot be termed as an allowance or expenditure claimed by the assessee in the earlier years to warrant invocation of provisions of section 41(1), or 41(2). However, Assessing Officer is directed to bring back to tax, the amount of depreciation granted to the assessee in the earlier years on the alleged excess amount of ` 2 crores under section 28(iv) and redetermine the closing WDV of the block assets in the year under consideration.(A. Y. 2005‐06) Binjarjka Steel Tubes Ltd. vs. ACIT (2011) 50 DTR 89 / 136 TTJ 113 (Hyd.)(Trib.) S. 41(1) : Profits Chargeable to Tax ‐ Business Income ‐ Liability outstanding more than three years.


There is no rule that liability outstanding for more than three years need not be paid and the same becomes income of the assessee. In the absence of any specific information in the possession of the AO that the amounts outstanding for more than three years were no longer payable by the assessee, same could not be treated as deemed income under section 41(1). (A. Y. 2003‐04 & 05) Dy. CIT vs. C. M. Y. K. Printech Ltd. (2011) 53 DTR 59 (Delhi)(Trib.) S. 41(1) : Profits Chargeable to Tax – Business Income – Remission or Cessation of Liability. Where the amount ceased to be payable in the books by showing nil balance and the assessee had claimed the deduction of same amount in earlier year, the provisions of section 41(1) were rightly attracted. (A. Y. 2004‐05 to 2006‐07) ITO vs. E. A. Infrastructure Operations P. Ltd. (2011) 135 TTJ 239 / 41 SOT 269 / 48 DTR 200 (Mum.)(Trib.) S.41 (1):Profits chargeable to tax‐Income‐ Capital or revenue receipt – Waiver loan.(S.(2 (24),28(iv)) Principal amount of loan, which is taken for the purpose of business or trading activity, on its waiver by the creditor, would constitute income chargeable to tax; however, if the loan is utilized for the purpose of acquiring any capital asset, the same, on its waiver, would not constitute income chargeable to tax either under s. 41(1) or s. 28(iv) or s. 2(24).(A. Y. 2006‐07) Dy. CIT vs. Logitronics (P) Ltd.(2011) 53 DTR73 (Del) (Trib). S. 41 (1):Profits Chargeable to tax‐Income‐Remission or cessation of trading liability‐Outstanding Credit. For treating amount of outstanding credit as taxable under section 41 (1) ,there has to be a positive act on part of creditor in current year which would provide benefit to assessee by way of remission; merely because certain amount is outstanding for number of years will not be a case for holding that there is a cessation or remission. The Tribunal dismissed the appeal of revenue.( Asst year 2007‐08). ITO v Bhavesh Prints ( P) Ltd ( 2011) 46 SOT 268 ( Ahd) (Trib). S. 41 (1):Profits chargeable to tax‐Income‐Liabilities outstanding more than three years. Out standing liabilities of the assessee can not be said to have ceased to exist merely because the relevant accounts have become non operational or period of three years have expired and , therefore such liabilities can not be charged to tax by invoking the provisions of section 41(1) , more so when the assessee has not written back such liabilities in its profit and loss account.( A.Ys 2003‐05 to 2007‐08). Dy CIT v Hotel Excelsior Ltd ( 2011) 60 DTR 450/141 TTJ 448 ( Delhi) (Trib). S.43 (i) ‐ Actual cost ‐ Depreciation‐ Assets acquired from franchisees –Valuation on the basis of valuation report – [S. 32, 43(6)] Assessee company engaged in the business of manufacture of soft drinks acquired manufacturing assets and other assets, land and building of its franchisees on the basis of valuation done by the approved valuer. Assessing Officer increased the value of land by 50 % on estimated basis and value of bottles and crates was reduced by 50% and plant and machinery by 25%. The Court held that Tribunal was justified in direction the Assessing Officer to accept the valuation of assets acquired by the assessee from five vendor companies on the basis of report of the registered valuer when there was no basis to discard the valuation report.( Asst Year 1996‐97). CIT v Pepsico India Holdings (P) Ltd ( 2011) 56 DTR 137 (Delhi) (High Court). S. 43(1): Actual cost‐Depreciation‐ Custom duty paid under protest. (S. 32 ).


Assessee is entitled to add the disputed customs duty paid by it under protest on the imported machinery to the cost of plant and machinery and depreciation thereon. CIT v Orient Ceramics & Industries Ltd ( 2011) 56 DTR 397 ( Delhi) (High Court). S. 43 (5): Speculative transaction‐Derivative.‐Future contracts for purchase / sale of securities. Losses incurred from the Exchange traded derivative transactions carried on by the assessee during relevant assessment year are speculative transactions covered under section 43 (5) of the Act and the loss incurred in those transactions are liable to be treated as speculative loss. Section 43 (5) is not restricted to contracts which are capable of performance by actual delivery , and therefore , fact that futures contracts settled otherwise than by actual delivery cannot be a ground to hold that futures contracts are not speculative transactions under section 43 (5). Clause (d) inserted in proviso to section 43 (5) with effect from 1‐4‐2006 is prospective in nature and ,therefore , transactions covered under clause (d) are deemed not be speculative transactions only with effect from 1‐4‐2006. ( Asst year 2003‐04). CIT v Bharat R.Ruia ( HUF)( 2011) 199 Taxman 265/ 241 CTR 1(2011) vol 113 (3) Bom. L.R. 1499. S. 43(5). Speculative transaction‐ loss‐ Set off of loss –Property income. ( S.73) Loss from speculative transaction can not be set off against income from property.( Asst year 1997‐98). Aravali Engineers P.Ltd v CIT ( 2011) 335 ITR 508 ( P & H).( High Court). S. 43 (5); Speculative transaction‐ Post s. 43(5) amendment, pre‐A.Y. 2006‐07 derivatives “speculation” losses have to be treated as “non‐speculation” business losses for purposes of set‐off. (i) When an assessee suffers a loss in business, speculative or non‐speculative, he has a statutory right to carry forward the unabsorbed loss and set it off against profits and gains from the same business for the next year. The true nature of the loss has to be determined in the year of set‐off. A finding as to the character of the loss reached in the year of incurring the loss is not binding in the year of set‐off of the loss, even though the assessment may have reached finality. As such dual characterization is permissible (Manmohan Das 59 ITR 699 (SC) & Western India Oil Distributing Ltd 126 ITR 497 (Bom) followed); (ii) Though, as held in CIT vs. Bharat Ruia, derivatives transactions, prior to the amendment to s. 43(5) w.e.f. AY 2006‐07, are “speculative transactions” and the losses suffered therefrom are “speculative losses”, the question whether they are eligible for set‐off has to be determined as per the law prevailing in the year of set‐off. As in the year of set‐off, derivatives transactions are not, pursuant to the amendment to s. 43(5), treated as “speculative transactions”, the losses incurred prior to the amendment have to be treated as normal business losses and are eligible for set‐off against all business income in accordance with s. 72 (Shreegopal Purohit 33 SOT 1 distinguished); (iii) Also, the question whether the assessment order is erroneous or not has to be determined as per the then prevailing law and as it was then held that the amendment to s. 43(5) was clarificatory and that derivative transactions were not speculative transactions, the order was not erroneous (G.M. Stainless Steel 263 ITR 255 (SC) followed)( Asst year 2006‐07) Gajendra Kumar T Agarwal vs ITO ( 2011) BCAJ July P.33.Vol 43A Part 4.( Mumbai)( Trib). www.itatonline.org. S. 43 (5): Speculative transaction‐ Derivatives‐ Foreign institutional investors ( S. 115AD). Transactions in derivatives , both index based and individual share based , are to be considered as speculative transactions with in the meaning of section 43 (5) and they can not be treated as normal


business or non speculative transactions. Section 43 (5) has no application to FIIs in respect of securities as defined in Explanation to section 115AD, income from sale of securities to be considered as short term or long term gains. ( Asst Year 2004‐05). LG Asian Plus Ltd v Asst CIT ( 2011) 46 SOT 159 / 140 TTJ 668 ( Mum) (Trib). S. 43 (5) : Speculative Transaction‐ Derivatives. Derivative transactions carried out form 1‐4‐2005 to 25‐1‐2006 through stock exchanges , which were recognised by notification issued by CBDT on 25‐1‐2006 , would be eligible for being treated as non speculative transactions with in the meaning of clause ( d) of proviso to section 43 (5) . ( Asst year 2006‐07). Asst CIT v Hiren Jaswantrai Shah ( 2011) 46 SOT 276 ( Ahd ) (Trib). S. 43 (6) (c )(i) (B).Depreciation‐ Computation‐ Block of assets – Apparent consideration‐ Not Fair market value.( S. 2 (14),32 ). The expression “moneys payable” according to Explanation 4 to section 43 (6) shall have the meaning as is in the Explanation below sub section 4 of section 41. Therefore ,the written down value of all the assets falling with in the block of assets at the beginning of the previous year has to be adjusted by the amount at which the assets is actually sold and not the fair value of the asset that is sold. CIT v Cable corporation of India Ltd ( 2011) 336 ITR 56/ 120 Taxman 339 ( Bom) (High Court). S. 43B :Business expenditure‐ Deductions ‐ Actual Payment ‐ Sales Tax – Extended filing of Return. (S. 139) Where time for filing of return is extended in terms of proviso to section 139(1) , it automatically means extension of due date for purpose of section 43B, thus, Sales Tax paid within extended time for filing return cannot be disallowed under section 43B. (A. Y. 1988‐89) CIT vs. Narendra Anand (2011) 198 Taxman 51/ 55 DTR 193 (Delhi)(High Court) S.43B:Business expenditure‐Deduction on actual payment‐ Contribution to Employees’ State Insurance. Omission of the second proviso and the amendment of the first proviso to section 43B by the Finance Act, 2003 , where by payment made by the employer towards contribution to provident fund, employees’ State insurance , gratuity , superannuation and other welfare funds would operate retrospectively from April 1, 1998 onwards . The payment made for ESI contributions could not be disallowed. ( Asst year 1998‐99). CIT v Rai Agro Industries Ltd ( 2011) 334 ITR 122 ( P& H) (High Court). S.43B : Business expenditure‐ Deduction on actual payment‐Excise duty paid in advance. Assessing officer holding that deduction can be claimed only on removal of goods from factories . High Court held that the assessee is entitled to deduction in respect of excise duty paid in advance.( Asst year 1989‐90). CIT v Modipon Ltd (NO 2). ( 2011) 334 ITR 106 ( Delhi) (High Court). S. 43B‐ Business Expenditure –Actual payment .‐Licence fee. License fees payable under the Abkari Act for grant of right/ privilege to sell liquor if not paid within the period specified in section 43 B of the Act cannot be disallowed, as the same is consideration payable to the Government only for grant of right / privilege to sell liquor and not in the nature of any tax, duty, cess or fees as provided in section 43 B (a) of the Act.( 1999‐2000) CIT v. G. Soman (2011) 53 DTR 220 (Ker)( High Court). S. 43B: Business disallowance‐ Actual payment‐ Bonus to employees‐ Before due date of filing of return.


Bonus payment made before due date of filing of return no disallowance can be made. ( A.Y. 2005‐06). G.D.Metsteel ( P) Ltd v Asst CIT ( 2011) 47 SOT 62 ( Mum) (Trib). S. 44BB : Business of Exploration, etc. of Mineral Oils – Computation of profits of foreign companies. Applicant has entered into a contract with ONGC and Cairn Energy to conduct seismic survey and data acquisition activities. It has specialization for identifying the surface of the ocean for tapping gas and oil reserves ‐ AAR observed that unless a seismic survey is taken, it is difficult to locate the ocean surface with oil and gas reserves. Drilling and other examinations are ancillary for this purpose and hence activities of the applicant fit into description of said section demanding computation of its income in accordance with this provision Global Geophysical Services Ltd., Cayman Islands ‐ AAR No 873/2010 dt. 15‐3‐2011 (AAR) S.44BB: Business of exploration of mineral oil‐ Non‐Resident ‐ (S. 9(1)(vii), S. 44DA) Revenues earned by the applicant , a UK company ,under seismic data acquisition and processing contracts in India are taxable under section 44BB. OHAM Ltd ( 2011) 241 CTR 327 / 55 DTR 413/ 335 ITR 423(AAR) S. 44BB – Business expenditure – Non deduction of TDS – (S.40(a)(ia), 195) Since payment to non‐resident is covered under the special regime of section 44BB, withholding of appropriate tax by payer without approaching the A.O. does not lead to any violation of withholding tax provisions, expenses cannot be disallowed u/s 40(a)(ia) on the ground of short deduction of tax. Frontier Offshore Exploration (India) Ltd. vs. DCIT, ITA No. 200/Mds./2009, A.Y. 2004 – 2005, dt.04‐02‐2011, ITAT, BCAJ pg. 35, Vol. 43‐A, Part 1, April 2011. S. 44BB: Business of exploration, etc. of mineral oils Applicant, incorporated in Norway provides geophysical services to oil and gas exploration industry and is awarded contract by Cairn Energy Pvt. Limited (Cairn), India to conduct seismic surveys and provide onshore seismic data acquisition and other associated services. Revenue contends that services extended by the applicant fall under Explanation 2 of section 9(1)(vii) and not under S.44BB as the applicant is not undertaking a mining or like project but is undertaken by someone else and certain technical services are rendered by the applicant to the business enterprise that takes up the project. AAR held that S. 44BB will apply relying on its ruling in Geofizyka Torun Sp.zo.o, in AAR/813 of 2009 where it was held that if all the services that are in the nature of technical services within the meaning of Explanation 2 to section 9(1)(vii) are to be computed in accordance with 44DA, very little purpose will be served by incorporating special provision in 44BB for computing the profits in relation to the services connected with the exploration and extraction of mineral oils. V Bergen Oilfield Services AS, Norway ‐ AAR No 857/2009 dt.16.05.2011(AAR). S. 44BB: Business of exploration, etc. of mineral oils‐Non resident‐ ( S.9(1)(vii) , 44DA ). Applicant, incorporated in Singapore has entered into a time charter vessels hiring agreement for provision of its offshore service vessels to Transocean Offshore International Ventures Ltd. (TOIVL) in India who in turn is providing various offshore drilling and support services to ONGC. Being a time charter agreement, the entire operation, navigation and management of the vessel provided on hire is under the exclusive command and control of the applicant though the vessel is operated and services are rendered as requested by TOIVL. AAR observed that for the purposes of section 44BB of the Act, the vessels provided are covered under the definition of “plant”. The consideration received for


supply of “plant” i.e. the vessels on hire when used in the prospecting for or extraction or production of oil and gas is covered under the special provision for computing profits and gains under said section. AAR further held that said section will apply relying on its ruling in Geofizyka Torun Sp.zo.o, in AAR/813 of 2009 where it had held that if all the services that are in the nature of technical services within the meaning of Explanation 2 to section 9(1)(vii) are to be computed in accordance with 44DA, very little purpose will be served by incorporating special provision in 44BB for computing the profits in relation to the services connected with the exploration and extraction of mineral oils. Bourbon Offshore Asia Pte. Ltd, Singapore ( 2011) 242 CTR 225 / 58 DTR 155/ 200 Taxman 408( AAR). S.44BB: Business of exploration of mineral oil‐ Technical services‐ Royalties‐Non resident‐Mobilization and demobilization revenues. S. 9 (1) (vii), 44 DA). Applicant, a foreign company, having entered in to a contract with another foreign company whereby it is providing seismic vessels and seismic crew at the area of operations to carry out 2D geophysical survey offshore India, it is engaged in the business of providing services or facilities in connection with extraction or production of oil and therefore , revenues earned by the applicant under the said contract are taxable in accordance with section 44BB, neither section 9 (1) (vii) nor section 44DA was applicable. Entire mobilization and demobilization revenues received by the applicant in respect of seismic data acquisition and or processing activities is taxable in India under section 44BB at an effective rate of 4.223 percent. Western International Ltd( 2011) 242 CTR 634( AAR). S. 44BB: Business of exploration of mineral oil‐ Technical services‐ Royalties‐Non resident‐ DTAA‐ India‐ Norway‐ Service tax‐Finance Act ,1994. S.68 (S.90, Art 23, 24 ). Activities of providing sea logistics services viz‐transportation of cargo, material and personnel required at the rig, by the applicant , to ONGC are not technical services and thus ,the income derived by the applicant from the said activities is out of the purview of section 9 (1) (vii) and is liable to be taxed under section 44BB. Applicant company having shifted its managerial control to Norway in January , 2010 , it is liable to be taxed in India in terms of article 23 of the DTAA between India and Norway w.e.f. 1st Jan 2010 . Service tax said to be included in the consideration received by the applicant from ONGC has to go into computation while calculating the consideration for the services or facilities under section 44BB or art 23 (4) of the DTAA. Siem Offshore ( 2011) 242 CTR 625 /337 ITR 207(AAR). S. 44BB:Business of exploration of mineral oil‐Royalties –Fees for technical services‐DTAA‐India‐ Norway. Service of conducting seismic surveys and providing onshore seismic data acquisition and other associated services are taxable under special provision .Entire receipts are subjects to deeming provision under section 44BB, income can not be split. Bergen Oilfield Services AS, Norway ( 2011) 337 ITR 167 ( AAR). S. 44BBB : Foreign Companies ‐ Civil Construction ‐ Turnkey Projects. Contract awarded to the applicant, a Japanese company, for erection of steam turbines, turbo generators and auxiliary equipments / heaters to execute a power project in India by an Indian Company being separate and machineries for the same project to the holding company of the applicant, the contract awarded to the applicant fits in to the description given in section 44BBB and therefore, it is eligible for presumptive taxation under section 44BBB. Toshiba Plant Systems & Services Corporation, In Re (2011) 52 DTR 155 / 198 Taxman 26(AAR)


S. 44C : Non‐residents – Head office expenditure. Any expenditure to fall in consideration Zone of deductibility under the Act, whether under section 44C or under general, must have been incurred for purpose of business of Indian branch. If expenses are shared / allocated / apportioned / non‐exclusive head office expenses, then they will find their residence in overall limit under section 44C, on the other hand exclusive expenses incurred by head office for Indian branch shall be distinctly considered under general provisions of Act. (A. Y. 2002‐03) Addl. Director of Income Tax vs. Bank of Bahrain & Kuwait (2011) 44 SOT 693 (Mum.)(Trib.) E.‐ Capital gains. S. 45 : Capital Gains ‐ Sale of lease hold land with incomplete building – Short Term – [S. 2(29B), 2(42B)] Capital Gain arising to the assessee on the sale of lease hold land with incomplete building is to be bifurcated into gain arising out of sale of leasehold interest in land and sale of building. In the absence of perversity in the finding of the Tribunal estimating the value of the building at ` 2.15 crores as against the construction cost of ` 1.85 crore, the gain arising on the sale of land is to be treated as a long term capital gain where as the gain of ` 30 lakhs arising on the sale of incomplete building is to be treated as short term capital gain.(A. Y. 1996‐97) CIT vs. Hindustan Hotels Ltd. (2011) 237 CTR 32 / 49 DTR 17/ 199 Taxman 127 (Bom.)(High Court) S. 45 : Capital Gains ‐ Transfer of Goodwill ‐ Sale of Entire Business Sale of entire business, including all assets and liabilities, as a going concern, not possible to bifurcate consideration received on account of transfer. Transfer does not give rise to capital gains.(A. Y. 1985‐86) ACIT vs. Patel Specific Family Trust (2011) 330 ITR 397 (Guj.)(High Court) S. 45 : Capital Gains ‐ Business Income ‐ Sale of Shares ‐ Loan Borrowed ‐ Interest Paid ‐ Capital Gains – [S. 28(iv)] It was held that a capital investment and resale does not lose its capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment [Sutlej Cotton Mills Supply Agency Ltd 100 ITR 706 (SC)] followed. Merely because shares are purchased by taking loan at high interest does not mean gains are taxable as business profits. CIT vs. Niraj Amidhar Surti (Gujarat High Court) Source: www.itatonline.org S. 45: Capital gains‐Compensation for giving up the right to specific performance‐ ( S. 48 ). Compensation received for giving up the right to specific performance of an agreement to sell , constitutes capital gain chargeable to tax , however deduction is allowable as per section 48.( Asst year 1998‐99). CIT v H. Anil Kumar ( 2011) 56 DTR 384 / 242 CTR 537( Kar) (High Court). S. 45 ‐ Capital gains ‐ Capital asset ‐ Deduction of tax at source ‐ Non Resident ‐ Corporate Veil can be lifted to tax sale – (S.2 (14), 195) The assessee, a company based in Cyprus, bought shares (100% together with another company) of a UK company called Finsider International, from another UK company. Finsider, UK, held 51% shares of Sesa Goa Ltd, India. The AO took the view that the 51% shares in Sesa Goa held by Finsider, UK, constituted a capital asset u/s 2(14) and that the transfer of the shares of Finsider amounted to a transfer of the said 51% shares of Sesa Goa and that the assessee was liable to deduct tax at source u/s 195 when it bought the shares of Finsider, UK. He accordingly issued a show‐cause notice u/s 201 seeking to treat the assessee as a defaulter. The assessee filed a Writ Petition to challenge the notice on the ground that as one non‐resident had sold shares of a foreign


company to another non‐resident, there was no liability under Indian law. HELD not accepting the assessee’s contention: What is under challenge is only the show‐cause notice issued u/s 195 … it may be necessary for the fact finding authority to lift the corporate veil to look into the real nature of transaction to ascertain virtual facts. It is also to be ascertained whether the assessee, as a majority shareholder, enjoys the power by way of interest and capital gains in the assets of Sesa Goa and whether transfer of shares in the case on hand includes indirect transfer of assets and interest in Sesa Goa. Ricter Holding Ltd. vs ADIT (Karnataka) ( High Court). www.itatonline.org. S.45: Capital gains‐ Trade marks , brands , copyright and goodwill‐ Business income . (S. 28 (va), 55). Trade marks brands, copyright and goodwill constitute of business and are profit earning apparatus. Assessee was owner of brand name of journals which were also registered /indexed with Indian National Scientific Documentation Centre (INSDOC). Assessee company entered in to a “specified Assets Transfer Agreement” with one CMP for sale of all its rights titles and interest in specified assets of its health care journals and communication business. In consideration the assessee received certain amount from CMP which it showed as income from long term capital gains in its return. Assessing Officer , however held that amount received by assessee taxable as income from business under section 28(va). High Court held that the consideration received would be computed as capital gains.( Asst year 2006‐07) CIT v Mediworld Publications (P) Ltd ( 2011) 200 Taxman 1/ 337 ITR 178 ( Delhi )( High Court). S. 45: Capital Gains –Compensation‐ Specific performance. Compensation received by the assessee for giving up the right to specific performance of an agreement to sell was held to be a capital asset chargeable to capital gain tax.( A. Y. 1998‐99) CIT & Anr. v. H. Anil Kumar (2011) 56 DTR 384 (Kar)( High Court). S. 45: Capital Gains – Investment in shares‐ High volume and short holding period ‐ Gains to be considered as short term capital gains.( s. 28) In the instant case the Tribunal recorded the finding that in a number of cases the assessee had held the LTCG shares for more than 10 years and that the purchase and sale of shares within a period of one year had been offered as STCG. The same was accepted in the preceding assessment year. It was held that it is open to an assessee to trade in the shares and also to invest in shares. When shares are held as investment, the income arising on sale of those shares is assessable as LTCG/STCG. Accordingly, the decision of the Tribunal in holding that the income arising on sale of shares held as investment were liable to be assessed as LTCG/STCG cannot be faulted. CIT v Naishadh V. Vachharajani (Bombay High Court). (www.itatonline.org) S. 45: Capital gains‐Shares‐ Purchase and sale –Short time. Mere fact that the shares were sold in a short span of time of acquisition due to steep and unanticipated rise in stock market does not mean that the intention was not to hold them for long period of time or deal in them . Profit on sale of shares with in short span of 7 to 10 months held to be capital gains and not as business income.( A.Y.2005‐06). CIT v Consolidated Finvest and Holding Ltd (2011) 337 ITR 264 (Delhi) (High Court). S. 45 : Capital Gains ‐ Business Income – Shares ‐ Despite high volume & short holding period ‐ Shares Gain is STCG – [S. 28(iv)]


The assessee offered income by way of Long Term Capital Gain, Short Term Capital Gain, speculative profit and profit from future trading. In such a case, where shares are held for several years and so assessee had acted as investor and not trader, the said the gain shall be assessable as long term capital gain. In similar manner where there is no intra‐day trading, shares are held for period of 2 to 5 months and there are no borrowings, the same shall be assessed as Long Term Capital Gain. ACIT vs. Naishadh V. Vachharajani ( Mumi)(Trib):‐ www.itatonline.org S. 45 : Capital Gains ‐ Agricultural Land ‐ Beyond Municipal Limits – [S. 2 (14)(iii)] Sale of agricultural land situated beyond 8 Km from municipal limits of the village having a population of less than 10,000 persons is not liable to capital gains tax. ACIT vs. Ashok Kumar Agarwal (2011) Tax World Feb. P. No. 112 (Jaipur)(Trib.) S. 45 : Capital Gains ‐ Conversion of units of UTI in to tax free bonds ‐ Transfer – [S. 2(47)] Assessee claimed capital loss on account of conversion of units of UTI into tax free bonds. The Tribunal held that in the instant case was a simple case of conversion of one asset into another and there was no transfer of asset within the meaning of section 2(47) hence the Assessing officer rightly rejected the claim. (A. Y. 2004‐05) ACIT vs. ABC Bearings Ltd. (2011) 44 SOT 338 (Mumbai)(Trib) S. 45 : Capital Gains ‐ Consent by Landowner – TDR ‐ Compensation paid to members – [S. 2(24)] Mere grant of consent by the land owner to the developer to construct by consuming TDR purchased by the developer from the third party does not amount to transfer of land or any rights therein. Amount of compensation paid by the developer to the members of the society cannot be taxed in the hands of the society. Raj Ratan Palace Co‐Operative Hsg. Ltd. vs. Dy. CIT ITA No. 674/Mum/2004 Bench “B” dated 25‐2‐2011 (Asst. Year 1997‐98) (2011) 43A‐BCAJ–April 33(Trib) S. 45 : Capital Gains ‐ Transfer of Development Right (TDR) ‐ TDR has no cost of acquisition, amount received not taxable. (S. 48) Transferable Development Rights (TDR) granted by the Development Control Regulations for Greater Mumbai, 1991, qualifying for equivalent Floor Space Index (FSI) have no cost of acquisition and so sale thereof does not give rise to taxable capital gains (Jethalal D. Mehta vs. DCIT 2 SOT 422 (Mum) followed). (A. Y. 1997‐98) ITO vs. Hemandas J. Pariyani (Mum.)(Trib.) Source: www.itatonline.org S. 45 : Capital Gains – License ‐ No Cost of Acquisition ‐ Not liable to Capital Gain Tax. In the absence of any cost of acquisition for acquiring the license, consideration received for transferring such license not liable to capital gain. (A. Y. 1996‐97) Shree Changdeo Sugar Mills Ltd. vs. Jt. CIT (2011) 44 SOT 479 (Mum.)(Trib.) S. 45: Capital Gains‐ Deduction‐ Shares PMS fee, even if NAV based, is deductible in computing PMS capital gains. (i) In computing capital gains u/s 48, payments are deductible in two ways, one by taking full value of consideration net of such payments and the other by deducting the same as “expenditure incurred wholly and exclusively in connection with the transfer”. The expression “full value of consideration” contemplates additions and deductions from the apparent value. It means the “real and effective consideration“, which can be arrived at only after allowing the deductible expenditure (CIT v Shakuntala Kantilal 190 ITR 56 (Bom) followed);


(ii) The PMS fee, on profit sharing basis, was for the twin purposes of acquisition and sale of the securities. The fact that bifurcation between the two is not possible is not relevant. The department’s argument that fee should be share‐specific is absurd because fees for shares transactions is never share specific but is volume based; (iii) Accounting Standard 13 (Accounting for Investments) issued by ICAI provides that brokerage, fees and duties have to added to the cost of investments. The assessee’s method of accounting is to proportionately load the PMS fees on the opening portfolio and investments made during the year which means that no deduction is claimed for the fees on the unsold investments; (iv) Devendra Kothari 50 DTR 369 (Mum) cannot be followed because (i) it unfortunately did not refer to the ‘read down’ interpretation of s. 48 as laid down in Shakuntala Kantilal and (ii) on facts, the claim there was on the entire turnover on global basis and not restricted to only investments. KRA Holding & Trading Pvt. Ltd. vs DCIT (Pune )(ITAT) www.itatonline.org S. 45: Capital gains‐ Transfer‐ Assignment or release of interest by retiring partner in favour of continuing partner. S. 2(47). 47 (ii). The continuing partners agreed to pay to the retiring partner for assigning or release of interest by retiring partner in favour continuing partners, transaction would amount to a transfer within the meaning of section 2 (47).If the retiring partner is paid something over and above sum standing to credit of his capital account ,there would be a capital gain chargeable to tax. In view of amendment carried out by Finance Act ,1987 by omitting section 47 (ii) ,profits or gains arising from transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as firm’s income in previous year in which transfer took place and for purposes of computation of capital gains , fair market value of consideration received or accruing as a result of transfer. ( Asst year 2007‐08). Sudhkar M. Shetty v Asst CIT ( 2011) 130 ITR 197 (Mum) (Trib). S.45: Capital gains ‐ Short term capital gains ‐ Market value. Assessee acquired 10 percent of share holding in company at par value in exchange for shares in two companies also at par. Mauritius Company acquired 45 percent of share holdings in same company at premium . There was no proof that transactions were linked in same chain. There was no proof that market value of shares at time of purchase by assessee was higher than price paid by him. Additions made by the assessing officer by taking price paid by Mauritius company as market value was deleted.( Asst year 2004‐05). Athappan Nandakumar v ITO ( 2011) 9 ITR (Trib) 436 (Chennai) (Trib). S. 45: Capital gains‐ Transfer‐Part performance of contract‐ Assessee company purchased a piece of agricultural land on 20‐11‐1999 . It entered in to an agreement for sale of said land with “K “ on 5‐9‐2002 and similarly executed a power of attorney in favour of “M” a , representative of “K” .authorising him to cultivate said land and to sell agricultural produce grown on it . The said power of attorney was registered before sub –registrar on 21‐11‐2002 . Sale consideration had been paid to assessee through cheque prior to 5‐9‐2002 . Assessee claimed that transfer of land got completed on 21‐11‐2002 and therefore , capital gains arising on sale of land was to be assessed as long term capital gains . However the assessing officer took date of execution of power of attorney and agreement to sell . ie. 5‐9‐2002, to be date of transfer and assessed capital gains as short term capital gains .The Tribunal held that , once a document is registered , its effective from date ,when it was executed, therefore ,power of attorney ,event though registered on 21‐11‐2002 , could be effective with the effect from 5‐9‐2002 and as such ,it could be held that possession of land


had been given on 5‐9‐2002 when the power of attorney was executed, therefore , all ingredients as are required to be complied with for applicability of section 53A Of 1882 Act were satisfied in instant case on 5‐9‐2002 and accordingly it was to be held that transfer of land had duly taken place on 5‐9‐2002 ,itself and , therefore order of assessing Officer assessing the same as short term capital gain was up held.( Asst Year 2003‐04). V. Ram Chandra Construction ( P ) Ltd v Asst CIT ( 2011) 131 ITD 71/ 59 DTR 249/ 140 TTJ 521 ( Agra) (TM ) (Trib). S. 45: Capital gains‐ Business income – Shares‐Even gains on shares held for 30 days & less is STCG & not business profits. [ S. 28 (i) ] To decide whether a capital gain is short term or long term, it was held that holding period is one of the criteria. The principles that have to be applied are (a) the intention of the assessee at the time of purchase, (b) whether borrowed funds were used, (c) the frequency of purchase and sales, (d) the treatment in the books etc. No single criteria is conclusive and an overall view has to be taken (Associated Industrial Development 82 ITR 586 (SC) & Holck Larsen 160 ITR 67 (SC) followed); Hitesh Satishcandra Doshi vs JCIT (2011) 58 DTR 258/ 140 TTJ 32/ 46 SOT 336/140 TTJ 32( Mumbai) (Trib). S. 45. Capital loss‐Loss on pro‐rata reduction of share capital is “Notional”. In absence of consideration, capital gains provisions do not apply The assessee invested Rs.24.84 crores in equity shares of Times Guarantee Ltd. Pursuant to a scheme of reduction u/s 100 of the Companies Act, the face value of Times Guarantee shares was first reduced to Rs. 5 from Rs. 10 and thereafter two equity shares of Rs.5 each were consolidated into one equity share of Rs.10. The result was that the assessee’s investment was reduced to Rs.12.42 crores. The assessee, claimed that the reduction in face value was a “transfer” and that it had suffered a long‐term capital loss of Rs.22.21 crores after indexation. The AO disallowed the claim on the ground that (i) there was no “transfer” and (ii) there was no “consideration” and the machinery provisions of s. 48 cannot apply. The issue was referred to the Special Bench. Held by the majority (i) First the face value of each share was reduced from Rs. 10 to Rs. 5 and then two shares of Rs. 5 each were consolidated into one share of Rs. 10 each. If the argument is that earlier shares were replaced or substituted by new shares, then there is no “transfer” but it is merely a case of substitution of one kind of share with another kind of share (ii) Assuming that a reduction of shares in the manner done by the assessee amounts to a “transfer”, s. 45 is not attracted because there is no “consideration” received by the assessee for the transfer. Unless and until a particular transaction leads to “computation” of capital gains or loss as contemplated by s. 45 & 48, it cannot attract capital gain tax. On facts, the assessee had not received any consideration for reduction of share capital. While the number of shares held by the assessee has reduced to 50%, nothing had moved from the side of the company to the assessee. (iii) Further, by the reduction, the assessee’s rights had not been extinguished because it continued to hold the same percentage in the holding of Times Guarentee as it did before the reduction. There was no change in the intrinsic value of his shares and even his rights vis‐à‐vis other shareholders as well as vis‐à‐vis company remained the same. The concept of capital gains has to be understood as in the commercial world and there was no loss that can be said to have actually accrued to the shareholder as a result of reduction in the share capital. Also, there would be no change even in the cost of acquisition of shares by virtue of s. 55(v). Minority view is that,


(i) On the point of “transfer”, a reduction of share capital u/s 100 of the Companies Act can take place either by paying excess capital to the shareholders or by cancelling lost capital. While the first method amounts to a “transfer” the other method (adopted by the assessee) results in an “extinguishment of rights” in the shares which is also a “transfer” .Consequently, a reduction of capital by cancellation of shares results in a “transfer”; (ii) On the point that a capital loss cannot be computed if there is no consideration, while it is true that the failure of the computation provisions results in a failure of the charging provisions . there is a distinction between a case where the computation provision is incapable of ascertainment and a case where it is ascertained as zero or Nil. In the present case, the consideration received by the assessee was Nil. It was not a case where the consideration was incapable of ascertainment; (iii) On the point that there is no “loss”, the argument that as with the reduction of capital, there is a corresponding increase in the net worth per share and the assessee’s interest in TGL remains unaffected on an overall basis is not acceptable because after the reduction, the assessee is left with lesser number of shares. The fact that the book value has increased has no effect. An increase or decrease in the market value of shares is of no consequence if the shares are held as investment; (iv) the apprehension that the assessee would derive a double advantage by claiming the loss now and the entire cost at the time of sale is unfounded because (a) the assessee’s books shows the investments at the reduced amount and (b) u/s 55(2)(iv)(v), the cost of acquisition of the remaining consolidated shares will be the reduced amount. Bennett Coleman & Co. Ltd. v ACIT (Mum)(Special Bench)(Trib) www.itatonline.org. S. 45 : Capital Gains ‐ PMS Fees not deductible against capital gains ‐ Despite dissenting orders, reference to Special Bench not necessary Whether an earlier order should be followed or a reference to the Special Bench be made depends on whether the Bench is satisfied or not about the correctness of the earlier order and not on the view point of the aggrieved party. It is only when a subsequent Bench finds itself unable to endorse the earlier view that it may make reference for the constitution of the Special Bench. The aggrieved party cannot compel the later Bench to either take a contrary view or make a reference for the constitution of the Special Bench. Homi K. Bhabha v ITO (Mum)( Trib)(www.itatonline.org) S. 45 : Capital Gains Tax – India‐Mauritius – DTAA [Article 13(4)] Applicant is a company incorporated in Mauritius and was issued a Tax Residence Certificate by the Mauritius Tax Authorities. It realized capital gains from sale of shares in Indian company ‐ AAR observed that in the case of Azadi Bachao Andolan 263 ITR 706, the Honorable Supreme Court has held that the certificate of residence issued by Mauritius Revenue Authority constitutes a valid and sufficient evidence of residential status under DTAA. Also, CBDT in Circular No. 682 dated 30.03.1994 has further clarified that under the DTAA, a resident of Mauritius having income from alienation of shares of Indian company shall be liable to tax only in Mauritius. In the case of E*Trade Mauritius, AAR No. 862 of 2009, and, the Delhi ITAT in the case of Saraswati Holding Corporation, 2009‐TIOL‐529‐ITAT‐DEL, held the view that the gains arising out of alienation of shares of an Indian Company to a company who is a resident of Mauritius is liable to tax only in Mauritius in terms of Article 13(4) of the DTAA. Hence ruled that on the facts presented by the applicant and in the light of legal position discussed, the applicant is not liable to pay capital gains tax in India in respect of the transfer of shares. D. B. Zwirn Mauritius Trading No. 3 Ltd., Mauritius (2011) 333ITR 32/ 240 CTR 1 (AAR) S.45: Capital gains‐ Transfer of shares‐Wholly owned subsidiary‐Without consideration( S. 48, 92, 92C, 195).


Transfer of shares to subsidiary company without consideration , would not attract liability to tax under section 45 read with section 48 , as the consideration is inapplicable on the date of transfer , as no income is chargeable to tax ,provisions of section 195 or provisions of sections 92 to 92 F would not apply. Good Year Tire & Rubber Co, IN RE. ( 2011) 240 CTR 209/ 54 DTR 281/ 334 ITR 69 (AAR). S. 45: Capital gains‐ Transfer of shares to wholly owned subsidiary‐Transaction not regarded as transfer – (S. 47 (iii), S. 92 to 92f, 139). Transfer of shares of wholly owned Indian subsidiary by the applicant a US company to another group company based in Singapore without consideration being a gift is not taxable under the provisions of section 45 , in the absence any income accruing from the transfer of shares , provisions of section 92 to 92F relating to transfer pricing are not applicable , however applicant is under obligation to file return under section 139. Deere & Company, In re ( 2011) 56 DTR 242 / 337 ITR 277(AAR). S.45 (2). Capital gains‐ Computation‐Cost of inflation index‐ Conversion of immovable property in to stock in trade. ( S 48.) Assessee firm converted its immoveable property in 1987‐88 into stock in trade and developed by entering into an agreement with developer. Revenue did not treat the said arrangement as a transfer at that stage. Capital gains arising on sale of flats and registration of deeds in 1992‐93 is to be computed by applying the cost of inflation index as applicable to Asst year 1992‐93 and not that applicable in 1987‐88. ( Asst year 1993‐94). CIT v Rudra Industrial Commercial Corporation (2011) 55 DTR 5 (Kar) (High Court). S. 45(2) : Capital Gains ‐ Capital Asset – Stock‐in‐trade ‐ Valuation When a partnership firm is dissolved and the erstwhile partner receives stock, it is a capital asset in his hands. When that asset is introduced into a business as stock, it gets converted into stock‐in‐trade. The value of this stock will have to be the market value on the date of introduction. The same principle would apply if the assessee used her share of the stock obtained from the dissolved firm in the new business Madu Rani Mehra vs. CIT (Delhi High Court) Source: www.itatonline.org S. 45(4) : Capital Gains ‐ Assets taken over by partners on dissolution of firm by Court Order – [S. 2(14), 2(47), 45(1)] Outgoing partners of the firm having received amount towards their respective shares in the net assets of the firm from a group of three partners who took over the business in an auction following dissolution of the firm, as per order of Court, the capital gains arising on transfer of the assets of the erstwhile firm were taxable in the hands of such outgoing partners.(A. Y. 1995‐96) B. Raghurama Prabhu Estate, Executraix Smt. M. Kaveri Bai & Ors. vs. Jt. CIT (2011) 52 DTR 122 / 239 CTR 274 (Kar.)(High Court) S. 45(4) : Capital Gains – Transfer – Dissolution – Otherwise – [S. 2(47)] Land was transferred in the name of the partners by book entries, the assessee contended that as no registration is done, the immoveable property was not legally transferred and also contended that as there was no dissolution, section 45(4) cannot be applied. The Tribunal held that the provision of section 45(4) were applicable. The word “otherwise” covers the transfer other than the dissolution also.(A. Y. 2001‐2002) New Gujarat Tin Printing Works vs. ITO (2011) 128 ITD 182 / 136 TTJ 64 (Ahd.)(Trib) S. 45(4) : Capital Gains – Transfer – Retirement of Partner.


The assessee which was a partnership firm consisted of two partners. The business of the partnership firm was that of builders, developers, contractors and real estate consultants. The assessee firm commenced the business and development of the project and all the costs incurred in connection with the same were shown as work‐in‐progress. One of the partners of the firm died and his legal heirs decided to continue the business with the other partner. The legal heirs also retired from the firm and the existing partner took over the assets and liabilities of the firm. This transfer was held as a transfer under the provisions of section 45(4) of the Act and the matter was remanded back to the Assessing Officer for computation of capital gains in hands of the assessee. (A. Y. 2005‐06) ITO vs. Om Namah Shivay Builders & Developers (2011) 43 SOT 397/ 138 TTJ 49 (Mum.)(Trib.) S. 45(4) : Capital Gains – Transfer of asset to partner by book entry – Registration. [S. 2(47)] If a transaction falls within the ambit of the definition of transfer under the section 2(47) then irrespective of the fact as to whether the transaction is a transfer within the Transfer of Property Act, 1881 or not, the resultant income accrued is chargeable to tax under the provisions of section 45(4). (A. Y. 2001‐02) New Gujarat Tin Printing Works vs. ITO (2011) 128 ITD 182 / 136 TTJ 64 / 50 DTR 289 (Ahd.)(Trib.) S. 45(5) : Capital Gains – Enhanced Compensation. Enhanced compensation along with interest thereon is assessable entirely in the year in which it is received. (A. Y. 1999‐2000 to 2002‐03) Dy. CIT vs. Ajay Sharma (2011) 135 TTJ 222 / 49 DTR 65/ 140 TTJ j 388 (Del.)(Trib.) S.47(iv): Capital gains ‐ Capital loss‐ Transfer of business and work in progress‐100 percent subsidiary. Assessee transferred business and work in progress to hundred percent subsidiary, which is Indian Company. In view of provisions of section 47 (iv), capital gains on such transfer of capital asset was not chargeable to tax. At the same time loss arising on transfer of business assets would also not be allowed as deduction. (Asst year 2003‐04). Dy CIT v Mother Dairy Fruits & Veg (P) Ltd ( 2011) 45 SOT 186 (Delhi) (Trib). S. 48: Capital gains‐ Cost of acquisition‐Land Acquired by succession from ex‐Ruler ‐ Cost of acquisition of previous owner not ascertainable‐ Cost of acquisition to be taken market value. (S. 49, 55(2), 55( 3). For the assessment years 1997‐78 and 1979‐80 , the assessee sold plots of land for consideration. The assessee contended that the previous owner was an ex ruler of Pepsu State and since the asset was acquired under the instrument of annexation its cost of acquisition could not be ascertained and that capital gains tax was not attracted . The Assessing Officer assessed the capital gains taking the market value as on January 1, 1954 or January 1, 1964 as the cost of acquisition depending on the dates specified under section 55 (2) of the as applicable to the assessment year. On appeal the Tribunal following the judgment of B.C. Srinivasa Setty ( 1981) 128 ITR 294 (sc), accepted the contention of assessee. On reference the High Court held that the contention that the value was inapplicable being ascertained , was not tenable . It was not the case of the assessee that the land had no market value at all on the date of acquisition . Even where the cost of acquisition of capital asset cannot be ascertained but the asset has a market value , capital gains tax will be attracted by taking the cost of acquisition to be fair market value as on January 1, 1954 or on a date statutorily specified or at the option by assessee , market value on the date of acquisition .( Asst years 1977‐78 , 1979‐80). CIT v Raja Malwinder Singh ( 2011) 334 ITR 48 / 56 DTR 366/ 241 CTR 520( P &H) (FB) (High Court). S. 48. Capital gains‐ Cost of acquisition‐ Sale of original and bonus share. (S.55 (2) (b).


Capital gains on sale of original and bonus shares have to be computed by spreading the cost of acquisition of original shares over the original shares and the bonus shares. ( Asst year 1990‐91). M.B. & CO Ltd v Asst CIT ( 2011) 55 DTR 76 / 337 ITR 29 (Mad) (High Court). S. 48: Capital Gains – Rectifying the defect in title. Amount incurred by the assessee for rectifying the defect in title to the property and removing encumbrance on the property were held to be amount spent in connection with the transfer of the property and allowable as deduction while computing capital gain. V. Lakshmi Reddy vs. ITO (2011) 55 DTR 241 (Mad)( High Court). S. 48 : Capital Gains ‐ Cost of Acquisition ‐ Indexed Cost ‐ Date of Allotment Letter ‐ Stamp Duty – Interest ‐ Processing Charges ‐ (S. 45). Stamp duty, interest, processing fee, development charges, fire fighting charges, generator charges, etc. paid to the builder form part of cost of acquisition incurred by the assessee for acquiring the ownership of the flat and therefore, assessee is entitled to deduction of all aforesaid payments under section 48(ii) on computation of capital gain on the sale of flat. Assessee is also entitled to indexation from 1995, when he started making the payment to builder and received the allotment letter and not from the date of conveyance deed in 2001.(A. Y. 2007‐08) Praveen Gupta vs. ACIT (2011) 52 DTR 334 (Delhi)(Trib.) S. 48: Capital gains‐Computation‐ Fair market value. Provision contained in section 48 regarding computation of capital gains contemplates ascertainment of full value of consideration received or accruing as a result of transfer capital asset , said provision does not contain words to effect “ fair market value” etc. Where there was no evidence on record that transferees were related to directors of assessee company and that assessee had received amount more than stated consideration , income was to be computed by Assessing Officer on basis of consideration actually received. ( Asst Year 2006‐07). Dy CIT v Jindal Equipment Leasing & Consultancy Services Ltd ( 2011) 131 ITD 263 ( Delhi) ( Trib). S. 48: Capital gains‐ Fees paid for Portfolio Management services‐ Cost of acquisition‐Diversion of income. Fees paid by assessee for PMS was not inextricably linked with particular instance of purchase and sale of shares and securities and sale of shares and securities so as to treat the same as expenditure incurred wholly and exclusively in connection with cost of acquisition, improvement, of shares and securities so as to be eligible for deduction in computing capital gains under section 48. Payment of fees by assessee for PMS did not amount to diversion of income by an overriding title ( A.Y. 2004‐05) Devendra Motilal Kothari v Dy CIT ( 2011) 132 ITD 173 ( Mum) (Trib). S. 48: Capital gains‐ Computation‐ Indexation‐ Preference shares. Once shares are specifically covered by indexation of costs ,and unless there is a specific exclusion clause for “preference shares” ,it can not be open to Assessing Officer to decline indexation benefits to preference shares.( A.Y. 2005‐06). G.D. Metsteel (P) Ltd v Asst CIT ( 2011) 47 SOT 62 ( Mum) (Trib). S. 48 : Capital Gains – Non‐resident – Indexation – DTAA ‐ India‐Canada – Shares ‐ (S. 90, Art. 24)


Denial of the benefit of the second proviso to section 48 to a non resident assessee while computing capital gains from the sale of shares would not amount to discriminatory treatment in terms of Art. 24 of the DTAA with Canada. Transworld Garnet Company Ltd., In Re. (2011) 239 CTR 152 / 52 DTR 161 (AAR) S. 49 : Cost with reference to certain mode of Acquisition ‐ Capital Gains ‐ Family Arrangement ‐ Company Assets – HUF – Director ‐ (S. 45) Assessees are Directors in a company AG. By way of family arrangement half of the land owned by company came to the share of the present assessees and other half went to the share of another family group. Assessees sold their share of land for an amount of ` 2.9 crores. Assessees computed the capital gains by applying the provision of section 49(1). The Assessing Officer held that assets in question are not the property of HUF but it was owned by company AG and there was no distribution of its assets, because there was no liquidation of the company. Consequently, the said capital asset continued to be owned by AG and did not became the property of the assessees hands therefore section 49(1) would not apply. The Court directed the Assessing Officer to compute the capital gains in the said company and give credit of taxes paid by assessee. CIT vs. Shashi Charla (2011) 51 DTR 232 / CIT vs. Atul Charla / Baldev Charla / Jyoti Chrala (2011) 51 DTR 232/(2010)195 Taxman 148/ 243 CTR 394(Delhi High Court) S. 49 : Cost with reference to certain mode of Acquisition – Capital Gains – Family Arrangement – Company Assets – HUF – Director – (S. 45) Assessees are Directors in a company AG. By way of family arrangement half of the land owned by company came to the share of the present assessees and other half went to the share of another family group. Assessees sold their share of land for an amount of ` 2.9 crores. Assessees computed the capital gains by applying the provision of section 49(1). The Assessing Officer held that assets in question are not the property of HUF but it was owned by company AG and there was no distribution of its assets, because there was no liquidation of the company. Consequently, the said capital asset continued to be owned by AG and did not became the property of the assessees and therefore section 49(1) would not apply. The Court directed the Assessing Officer to compute the capital gains in the said company and give credit of taxes paid by assessee. CIT vs. Shashi Charla (2011) 51 DTR 232 (Delhi) / CIT vs. Atul Charla / Baldev Charla / Jyoti Charla (2011) 51 DTR 232 (Delhi) (High Court) S. 49(1) – Cost with reference to certain mode of Acquisition ‐ Capital gains ‐ Cost of acquisition – S.50C Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred. Section 50C applies to a capital asset being ‘land or building or both’ and not to ‘any right in land or building or both’. Leasehold rights in plot of land is not ‘land or building or both’ and hence section 50C does not apply to leasehold rights. Anil G. Puranik vs. ITO, ITA No. 3051/Mum/2010, dt.13‐05‐2011, `A’ Bench, A.Y. 2006 – 2007, Mumbai ITAT, BCAJ pg. 27, Vol. 43‐A, Part 3, June 2011. S. 50 : Capital Gains ‐ Depreciable Assets ‐ Transfer of Undertakings ‐ Tangible and Intangible Assets ‐ (S. 45). In the case of transfer of entire business undertaking, section 50 has application as far as tangible assets are concerned, assessee having transferred its entire marketing undertaking consisting of both tangible and intangible assets to another company, Assessing Officer is directed to apportion and / or segregate the amount of


consideration received by the assessee by way of transfer of tangible assets out of the total consideration for assessment under the head capital gains under section 45, read with section 50.(A. Y. 96‐97) Kwality Ice Creams (India) Ltd. vs. CIT (2011) 52 DTR 366 /198 Taxman 65/ 336 ITR 100 (Cal.)(High Court) S. 50 : Capital Gains – Depreciable Assets ‐ Loss ‐ Carry Forward and Set off of brought forward business loss Income assessed by the assessee in the relevant year on sale of factory building, plant and machinery although not taxable as profits and gains of business or profession is an income in the nature of business though assessed as capital gains under section 50 and therefore, assessee is entitled to set off of brought forward business losses against the said capital gains.(. A. Y. 2005‐06) Digital Electronics Ltd. vs. Addl. CIT (2011) 49 DTR 484/135 TTJ 419 (Mum.)(Trib.) Editorial:‐ See J. K. Chemicals Ltd. vs. ACIT, ITA No. 8206/Bom/1089 and 8618/Bom/89 Bench ‘A’ dt. 1‐11‐1993, Sri Padmavathi Srinivasa Cotton Ginning Factory vs. Dy. CIT (2009) 29 DTR 1 (Visakha)(Trib.) S. 50 : Capital Gains ‐ Depreciable Assets ‐ Block of Assets. Section 50(1)(iii) does not make a distinction between block of assets of one unit and block of assets of another unit, even if they are independent units. Even if new asset is not used for the purpose of business, its cost will have to be deducted from full value of consideration received or accruing on transfer of block of assets, while computing short term capital gains.(A. Y. 1989‐90) Dy. CIT vs. Ansal Properties & Infrastructure Ltd. (2011) 44 SOT 236/ 60 DTR 294/ 141 TTJ 257 (Delhi)(Trib) S. 50 : Capital Gains ‐ Depreciable Assets – Indexation. Assessee claimed depreciation on capital asset (flat) for two years as it was used as office premises which was allowed. Flat was the only asset in the block of assets. No depreciation was claimed for latter years as the flat was not used for the purposes of business but leased on rent. Assessing Officer and CIT(A) held that the as the flat being only asset in the block of assets the capital gains is assessable as short term capital gains. On appeal the Tribunal held that the moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent, it ceased to be a business asset. The Tribunal directed the Assessing Officer to allow benefit of indexation as claimed by the assessee treating the sale as long term capital asset. Prabodh Investment & Trading Company Pvt. Ltd. vs. ITO, ITA No. 6557/Mum/2008 Bench ‘C’ dt. 28‐2‐2011 (2011) 43–A BCAJ ‐ April P. 34(Trib) S. 50 : Capital Gains ‐ Depreciable Assets ‐ Block of Assets. [S. 2(11)] If any capital asset on which depreciation has been allowed under Income Tax Act 1961, or Indian Income Tax Act 1922, and which otherwise qualifies to form a part of block of assets as on 1‐4‐1988, special provisions contained in section 50 shall apply on transfer of such asset. Therefore, as regards plant and machinery assessee was allowed depreciation upto 1984, they constituted block of assets hence, provision of section 50 would be applicable. (A. Y. 1996‐97) Shree Changdeo Sugar Mills Ltd. vs. Jt. CIT (2011) 44 SOT 479 (Mum.)(Trib.) S. 50 : Capital Gains – Depreciable Assets. Provisions of section 50 are not attracted in a case whereon the asset transferred depreciation was neither claimed nor allowed. Divine Construction Co. vs. ACIT(2011) 138 TTJ 72 (Mum) (Trib.)


S. 50: Capital gains‐ Depreciable assets‐ ‐Income include loss‐ Sale of entire assets of manufacturing Unit. On the sale of entire assets of manufacturing unit , case of assessee falls with in the ambit of section 50 because the word “income” includes within in the ambit the “loss” , Assessing Officer is directed to hear the assessee and compute the loss as provided in section 50 (2).( Asst years 2005‐06 and 2006‐07) Sony India (P) Ltd v Addl CIT ( 2011) 56 DTR 156/ 141 TTJ 432 ( Delhi) (Trib). S. 50. Capital gains – Depreciable asset ‐ Long term Capital gains arising on transfer of a capital asset (Flat) on which depreciation was allowed for two years but thereafter the assessee stopped claiming deprecation and also gave the flat on rent is chargeable as long term capital gains after allowing the benefit of indexation. Prabodh Investment & Trading Company Pvt. Ltd., ITA No. 6557/Mum/2008, dt.28‐02‐2011, A.Y. 2004 – 2005, `C’ Bench, Mumbai ITAT, BCAJ pg. 24, Vol. 43‐A, Part 1, April 2011. S. 50: Capita gains‐ Capita loss‐Depreciable assets‐ Set off of brought forward long term capital loss.( S. 74 ). Prescriptions of section 50 are to be extended only up to the stage of computation of capital gains and therefore , capital gain resulting from transfer of depreciable assets which were held for a period of more than three years would retain the character of long term capital gain for all other provisions and consequently qualify for set off against brought forward loss from long term capital assets.( Asst year 2005‐06). Manali Investments v Asst CIT ( 2011) 139 TTJ 411 ( Mumbai) ( Trib). S. 50B. Capital gains‐ Slump sale – Depreciation‐ Block of assets ( S. 2(11), 32, 43 (6) (i)(C ) In the case of slump sale , depreciation has to be allowed on the assets sold in slump sale up to date of transfer and allowable depreciation has to be computed for all years after 1st April 1998, for computing value of assets to be reduced from block of assets irrespective of the fact whether in the books the assessee had charged depreciation or not. ( Asst Year 2003—04). DY CIT v Warner Lambert ( India ) (P ) Ltd ( 2011) 56 DTR 121 (Mumbai) (Trib). S. 50B : Capital Gains ‐ Sale of entire business as going concern ‐ Slump Sale ‐ (S. 45). Assessee having transferred the assets and liabilities pertaining to its business as one whole unit as a going concern for a lump sum consideration without assigning any separate value to land, building / structure, plant and machinery, office equipment, furniture and fixtures and vehicles, the sale was a slump sale and therefore, the same is not exigible to tax under the head “Capital Gains”.(A. Y. 2002‐03) CIT vs. Chemical Industries Consulting Bureau (2011) 51 DTR 283 (Karn.)(High Court) S. 50B : Capital Gains ‐ Depreciable Assets ‐ Slump Sale. (S. 2(42C), 45, 50) Sale of an industrial undertaking as a whole which includes land building, machinery, equipments, etc. as a going concern with all the assets and liabilities, was assessable under section 50B treating the transaction as a “slump sale” and not under section 50 as a sale of depreciable assets. (A. Y. 2003‐04) CIT vs. Accelerated Freeze Drying Co. Ltd. (2011) 53 DTR 44 / 198 Taxman 18 / 240 CTR 90/ (2011) Tax.L.R.448 (Ker.)(High Court) S. 50B : Capital gains‐ Slump Sale ‐ Capital Gains ‐ Transfer of Undertaking ‐ Non money consideration ‐ Cost of Acquisition not determinable – (S. 2(42C), 45)


In order to constitute a “slump sale” under section 2(42C), the transfer must be as a result of a “sale” i.e. for a money consideration and not by way of an “Exchange”. The difference between a sale and an exchange is this that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter. The presence of money consideration is an essential element in a transaction of sale. As the undertaking was transferred in consideration of shares & bonds, it was a case of “exchange” and not “sale” and so section 2(42C) and section 50B cannot apply. As regards taxability under section 45 & 48, the “capital asset” which was transferred was the “entire undertaking” and not individual assets and liabilities forming part of the undertaking. In the absence of a cost/date of acquisition, the computation & charging provisions of section 45 fail and the transaction cannot be assessed (Premier Auto 264 ITR 193 (Bom.) distinguished) Bharat Bijilee Limited vs. ACIT (Mum.)(Trib))www.itatonline.org. S.50B: Capital gains‐ Slump sale‐Sale of undertaking‐ Notional depreciation. (S. 43 (6)(c)(i)(c)). When assessee transferred its entire assets by way of slump sale , depreciation for earlier assessment year which was not claimed by it cannot be notionally allowed in computing the capital gains under section 50B , provisions of sections 43(6)(c)(i)(c) (b) have no application where the entire assets forming part of block are sold by way of slump sale.( Asst Year 2001‐02) Dharmpal Satyapal Ltd v Dy CIT ( 2011) 138 TTJ 74 (Del) (Trib). S. 50C : Capital Gains ‐ Depreciable Assets ‐ Stamp Valuation ‐ Applies to Depreciable Assets. (S. 2(11), 48, 50) There are two deeming fictions created in section 50 and section 50C for computing capital gains on building. While section 50 modifies the “cost of acquisition” for purposes of section 48, section 50C modifies the term “full value of the consideration received or accruing as a result of transfer of the capital asset”. The two deeming fictions operate in different fields and there is no conflict between them. As section 50C was inserted to prevent assessee’s indulging in under‐valuation, there is no logic why it should not be applied to a depreciable building. ITO vs. United Marine Academy (2011) 138 TTJ 129/ 9 ITR (Trib) 639/ 130 ITD 113(Mum.)(SB)(Trib.) S. 50C : Capital Gains ‐ Stamp Duty Valuation ‐ Does not apply to transfer of “leasehold rights” as it is not “land or building” Section 50C is a deeming provision which extends only to a capital asset which is “land or building or both”. A deeming provision cannot be extended beyond the purpose for which it is enacted. If a capital asset cannot be described as “land or building or both”, section 50C cannot apply. A lease right in a plot of land is neither “land or building or both”. The distinction between a capital asset being “land or building or both” and any “right in land or building or both” is well recognized. “Land or building’ is distinct from “any right in land or building”. Consequently, section 50C does not apply to leasehold rights. (A. Y. 2006‐07) Atul G. Puranik vs. ITO( 2011) 58 DTR 208/11 ITR(Trib) 120/ 141 TTJ 69/ 132 ITD 499 (Mum.)(Trib) S. 50C : Capital Gains ‐ Stamp Valuation ‐ Full value of Consideration – Transfer ‐ Granting Development Rights for demolition and reconstruction of building results in “transfer of land & building”. [S. 2 (47), (45)] Where there is transfer of existing land & building which was demolished by builder for fresh construction and documents were registered in such cases there involves a “transfer of land / FSI in case of grant of development right. Thus, it does include cost of acquisition. Chairanjeev Lal Khanna vs ITO (Mum.)(Trib.) Source: www.itatonline.org S. 50C : Capital Gains ‐ Full Value of Consideration ‐ Stamp Valuation ‐ Ownership of Land ‐ (S. 45)


Assessee purchased certain land through her father in law who was her power of attorney holder. Subsequently, assessee sold said land again through her father in law. The assessing officer applied the provisions of section 50C. On appeal Commissioner (Appeals) held that since assessee’s own name did not appear in revenue records as owner of land, provisions of section 50C did not apply. On further appeal to Tribunal, the Tribunal held that in order to apply provisions of section 50C, it is not necessary that assessee should be direct owner of property. The Tribunal confirmed the view of Assessing Officer. (A. Y. 2003‐04) ITO vs. Sushma Gupta (Smt.) (2011) 44 SOT 568 (Delhi)(Trib) S.50C: Capital gains‐ Stamp valuation officer – District Valuation Officer. (DVO). The DVO determined fair market value at Rs 46.48 lakhs , which is lower than the value for the purpose of stamp duty at Rs 1.18 Crores. As per the provisions of section 50C (2) the capital gains is required to be computed by considering the fair market value of the property which was at Rs 46,48,781 as the full value of the consideration received or accruing to the assessee as a result of the transfer of capital asset. Assessing Officer cannot disregard the value determined by the DVO under section 50 ( C) (2) read with 16A of the wealth tax Act and proceed to compute long term capital gain in accordance with the value determined by stamp valuation authority.( Asst year 2005‐06). Bharati Jayesh Sangani v ITO ( 2011) 55 DTR 212 (Mumbai)(Trib). S. 50C: Capital gains‐ Stamp valuation‐ Reference to valuation. Assessing Officer can refer for valuation of capital assets to valuation officer under section 50C if he finds that consideration received is less than value adopted by stamp valuation authority for purpose of stamp duty.( Asst year 2006‐07). ITO v Chandrakant R. Patel ( 2011) 13 ITD 1 ( Ahd)( Trib). S.50C. Capital gains – special provision for full value consideration‐ Value adopted by AO. The assessee pointed out strong reasons that sale consideration is less than value determined for stamp duty, such cases have to be referred to DVO and in such cases sale consideration which has been deemed to be value adopted for stamp duty purposes as per main provisions, would be value adopted by DVO. As such the matter when once referred to the DVO, the valuation given by the DVO had to be adopted as deemed consideration (A.Y. 2006‐2007) Nandita Khosla (Mrs) v. I.T. O. (2011) 46 SOT 90 (Mumbai) (Trib). S. 50C : Capital gains – Computation – valuation by stamp valuation authority vis‐à‐vis DVO.

AO cannot disregard the value determined by the DVO under s. 50C(2) r.w.s 16A of WT Act, and proceed to compute long term capital gain in accordance with the value determined by stamp valuation authority.( A. Y. 2005‐06) Bharti Jayesh Sanghani (Smt) vs. ITO.(2011) 55 DTR212 (Mum) (Trib) S.50C : Capital gains‐ special provision for full value consideration‐ May‐Valuation by stamp authority. If stamp valuation adopted by stamp authority is disputed before Assessing Officer , then Assessing Officer is bound to refer matter to DVO for determining fair market value of property. The term “may” used in sub section (2) of section 50C is to be read as “shall” .( Asst year 2004‐05). Manjula Singhal v ITO ( 2011) 46 SOT 149 ( Jodh) ( Trib). S.50C: Capital gains‐Stamp valuation‐Power of Assessing Officer.


Once document is with stamp authority , value adopted by stamp duty authority is to be considered as value of asset for purpose of clause (b) of section 50C. Assessing Officer can not substitute value which the stamp authority ought to have adopted for purpose of stamp duty.( A.Y. 2004‐05). Hasmukhbhai v Asst CIT ( 2011) 46 SOT 419 ( Ahd) (Trib). S.50C:Capital gains‐ Development rights‐Transfer‐ Valuation‐ Transfer of property Act, S. 53A.( S.2 (47) (v),45). Provisions of section 50C were applicable to transfer of development rights in the property. Once the assessee handed over the possession of the property to the developer against payment then the property deemed to have been transferred as per deeming provisions of section 2 (47) (v).Not making changes in municipality records is not relevant. Valuation officer has valued much less than the stamp authority, hence there the valuation has to be accepted. Arif Akhatar Hussain v ITO ( 2011) 59 DTR 307 ( Mum) (Trib). S. 54 : Capital Gains – Exemption ‐ Investment in two houses Assessee was not entitled to exemption in respect of two independent residential houses situated at different locations.(A. Y. 2005‐06) Pawan Arya vs. CIT (2011) 237 CTR 210 / 49 DTR 123/ 200 Taxman 66 (P&H)(High Court) S. 54 : Capital Gains ‐ Profit on sale of property used for residence ‐ Exemption is available to multiple sales & purchases of residential houses ‐ (S. 45). Though section 54 refers to capital gains arising from “transfer of a residential house”, it does not provide that the exemption is available only in relation to one house. If an assessee has sold multiple houses, then the exemption under section 54 is available in respect of all houses if the other conditions are fulfilled. If more than one house is sold and more than one house is bought, a corresponding exemption under section 54 is available. However, the exemption is not available on an aggregate basis but has to be computed considering each sale and the corresponding purchase adopting a combination beneficial to the assessee. The decision of the Special Bench in ITO vs. Sushila Jhaveri (2007) 292 ITR (AT) 1 is distinguishable. Rajesh Keshav Pillai vs. ITO (2011) 44 SOT 617/ 60 DTR 402/ 60 DTR 402/141 TTJ 183 (Trib)( Mum) S. 54B : Capital Gains ‐ Investment in Agricultural purposes ‐ Assesses name ‐ Name of wife and other relations. Deduction under section 54B of the Act will be admissible only in respect of investment made in the purchase of a new asset in his own name, however, deduction shall not be available in respect of the amount invested in the purchase of new asset in the name of wife and other relations. ITO vs. Rameshwar Sharma (2011) Tax World Feb., P. 114 (Jaipur)(Trib) S. 54EC : Capital Gains ‐ Investment in certain bonds ‐ Cheque issued within six months – Cleared after six months For the purpose of computation of LTCG in case of NABARD bonds which were not specified asset as on 1/4/2006 and investment was not within 6 months of transfer, the law has to be read as it stood on the date of transfer of capital asset. Thus, section 54EC relief is available even though cheque was encashed and bonds were allotted later. Kumarpal Amrutlal Doshi vs. Dy. CIT (ITAT ‐ Mumbai) Source: www.itatonline.org(Trib) S. 54EC: Capital gains Deduction allowable before set‐off of brought‐forward loss.


While s. 54EC is an exemption provision which exempts capital gains and takes them outside the purview of chargeable “capital gains”, s. 74 deals with the carry forward and set off of loss under the head “capital gains”. The stage at which set off of carried forward long term capital loss is to be given is subsequent to the stage at which income under the head capital gains is computed and deduction u/s 54EC is to be given in the course of the latter. Accordingly, s. 54EC deduction has to be given before set‐off of losses. The Tata Power Co. Ltd. vs. ACIT ((Mumbai) ( ITAT). www.itatonline.org. S. 54EC: Capital Gains ‐ Exemption – Date of payment ‐ considered date of delivery/investment. The Tribunal held that since the assessee had delivered the cheque to NABARD by 09‐02‐2006, the date of payment would be the date of delivery of the cheque. The date when the cheque was encashed by NABARD cannot be said to be the date of investment. Kumar Amrutlal Doshi v. DCIT, ITA No. 1523/Mum/2010, dt. 09‐02‐2011, A.Y. 2006 – 2007, `G’ Bench, Mumbai ITAT,BCAJ pg. 31, Vol. 43‐A, Part 1, April 2011 S. 54F : Capital Gains – Exemption in case of investment in Residential House – Deposit in Capital Gain Scheme. [S. 45(3)] Where assessee had earned capital gains by virtue of section 45(3) i.e. on account of introducing capital asset in a partnership firm by way of capital contribution, the assessee could not claim benefit of section 54F by constructing a new house if he had not deposited the sale proceeds in capital gains scheme account. Further since the assessee had utilized borrowed amount to construct new property he was debarred from claiming benefit under section 54F. (A. Y. 1995‐96) CIT vs. V. R. Desai (2011) 197 Taxman 52 (Ker.)(High Court) S. 54F. Capital gains‐ Investment in house Property sale proceeds from out of transfer of an asset other than a residential house acquisition of property prior to transfer of asset – deduction allowed. The assessee purchased a residential house and within one year of such purchase, sold his insurance survey business and claimed deduction u/s. 54F against the purchase of residential house. The Assessing Officer rejected the same on the ground that the property was not purchased out of sale consideration of the transferred asset. It was held that the assessee was entitled to the deduction u/s. 54F since the section itself provides for acquisition of property prior to transfer of asset. CIT v. R. Srinivasan {2011} 198 Taxman 26 (Mad.) (Mag.)( High Court). S. 54F : Capital Gains – Exemption – Purchase of new house vis‐à‐vis deposit under Capital Gains accounts scheme. Assessee having deposited the sale proceeds of property in his bank account under the capital gains account scheme within the prescribed period and purchased a new property by availing of a loan which was paid out of the same bank account, he has complied with the provisions of Capital Gains Accounts Scheme and, therefore, assessee is entitled to exemption under section 54F. (A. Y. 2006‐07) P. Thirumoorthy vs. ITO (2011) 49 DTR 91 / 135 TTJ 75 (UOI)(Chennai)(Trib.) S. 54F : Capital Gains – Exemption – Investment in residential house ‐ Time Limit Where the assessee had purchased a flat after one year of sale of original asset and constructed a new house within three years of sale of original asset proviso (ii) to section 54F was not attracted and assessee was entitled to exemption under section 54F in respect of new house constructed by him.(A. Y. 2006‐07) P. R. Kulkarni & Sons (HUF) vs. Addl. CIT (2011) 49 DTR 442/135 TTJ 630 (Bang.)(Trib.)


S. 54F(1)(a) : Capital Gains – Exemption ‐ Stamp Duty Valuation ‐ (S. 45, 50C) Capital gains arising from the transfer of any long term capital asset for the purpose of section 54F has to be worked out applying section 48 without imposing section 50C into it, when sale consideration was shown at ` 20,00,000/‐ stamp duty valuation was ` 36,00,000/‐ and the assessee invested in new house ` 24,00,000/‐ including ` 20,00,000/‐ sale consideration, he could claim exemption under section 54F only of ` 18,06,494/‐ and not entire ` 36,00,000/‐.(A. Y. 2005‐06) Gauli Mahadevappa vs. ITO (2011) 49 DTR 207 / 128 ITD 15 (Bang.)(Trib.) Editorial:‐ Gyan Chand Batra vs. ITO (2010) 133 TTJ 482 / 45 DTR 41 (Jaipur)(Trib.) Tribunal has taken different view. S. 54F(4) : Capital Gains – Exemption ‐ Deposit in Savings Bank Account Where the assessee had deposited sale proceeds in normal savings account as against scheme specified by Central Government through notification in official Gazette as per section 54F(4), it violated provisions of section 54F(4), hence, not eligible for exemption.(A. Y. 1996‐97) Thakorlal Harkishandas Intwala vs. ITO (2011) 43 SOT 347 (Ahd.)(Trib) S. 55(2) (b ): Capital gains‐ Cost of acquisition‐ Fair market value‐ 1‐4‐1981. Fair market value of land at Rs 330 per square yard as on Ist April ,1981 adopted by the Tribunal in view of sale of land by Investment Trust on 1st June ,1981 and other comparable sale instances in the same area which is not shown to be erroneous the same has to be accepted as against Rs 60‐ per square yard adopted by the Assessing Officer. ( A.Y. 1995‐96 ). CIT v Bhupindera Flour Mills ( P) Ltd ( 2011) 59 DTR 307 ( P &H) (High Court) S. 55(2)(b). Capital gains ‐ Cost of acquisition ( S.2(22B), 50C ). Cost of acquisition of the property u/s 55(2)(b)(i) will be its fair market value as on 01‐04‐1981 as determined by the registered valuer and not the circle rate. Pyare Mohan Mathur HUF vs ITO, ITA No. 471/Agra/2009, dt.21‐04‐2011, A.Y. 2005 – 2006, Agra ITAT, BCAJ pg. 28, Vol. 43‐A, Part 3, June 2011. S.55A: Capital gains‐ Reference to valuation Officer‐Fair market value‐ ( S.48 ) Section 55A, is meant only to ascertain fair market value of a capital asset but not meant to determine full value of consideration received as result of transfer and therefore it has its own limitation for its operation. Since section 48 do not prescribe determination of capital gain on fair market value it is out of ambit of reference prescribed under section 55A.( Asst Year 2006‐07). ITO v Chandrakant R.Patel ( 2011) 131 ITD 1 (Ahd) (Trib). S. 56: Income from Other source‐Fixed deposit placed with Bank as performance guarantee. Fixed deposit placed with Bank as performance guarantee as condition for being awarded contract work . Interest on fixed deposits not assessable as income from other sources.( Asst Year 2003‐04). CIT v Jaypee Dsc Ventures Ltd (2011) 335 ITR 132 ( Delhi) (High Court) F.‐Income from other sources. S. 56(2)(v) : Income form Other Sources ‐ Gifts received by minor sons ‐ Maternal Uncle ‐ (S.64)


Section 56(2)(v), read with Explanation speaks of relationship between the donor and donee and not deemed assessee, maternal uncle of the assessee who made gifts of ` 5 Lakhs to two minor sons of the assessee is not a “relative” of the donees with in the meaning of explanation to section 56(2)(v) and therefore, the impugned sum is chargeable to tax in the hands of the assessee under the provisions of section 56 read with section 64.(A. Y. 2005‐06) ACIT vs. Lucky Pamnani (2011) 49 DTR 501 / 135 TTJ 607/ 129 ITD 489 (Mum.)(Trib.) S. 56 (2)(v)‐ Income from other sources amount received and repaid as loan Amount received and repaid as a loan cannot come within the ambit of section 56(2)(v). CIT v. Saranapal Singh (HUF) {2011} 198 Taxman 202 (P & H.) (Mag.)(High Court). S. 56(2)(v) : Income from other sources‐Amount received by legal heir for abstaining form contesting the will of deceased. Assessee , a legal heir of deceased having received a compromise amount under a settlement with the legatee for agreeing to the Court granting probate in respect of the last will of the deceased and withdrawing his caveat against grant of probate , the abstinence of the assessee from contesting the will constituted the consideration for payment and ,therefore the provisions of section 56 (2 ) (v ) are not attracted and the amount received by the assessee can not be treated as income under section 56( 2) (v). ( Asst Year 2006‐07). Purvez A. Poonawala v ITO ( 2011) 138 TTJ 773/ 55 DTR 297 (Mumbai ) (Trib). S. 56(2)(v) : Income from other sources – Gift received from HUF – Exempt – HUF is a “relative” u/s 56(2)(v), (vi) & (vii) Where assessee receives gift from HUF it was held that though the definition of the term “relative” does not specifically include a Hindu Undivided Family, a ‘HUF” constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these persons fall in the definition of “relative”, an HUF is ‘a group of relatives’. As a gift from a “relative” is exempt, a gift from a ‘group of relatives’ is also exempt since the singular will include the plural;(A. Y. 2005‐06) Vineetkumar Raghavjibhai Bhalodia vs ITO (2011) 46 SOT 97/ 58 DTR 412/ 140 TTJ 58(Rajkot)( Trib). S. 56(2)(viia) : Income from other sources‐Receipt of shares without consideration‐ Shares of quoted company.( S. 92 to 92F). Applicant is to receive contribution of shares of GIL without consideration. GIL is a company in which public are substantially interested and its shares are listed on BSE , therefore no income is liable to tax within the meaning of section 56 (2) (viia). Consequently ,provisions of sections 92 to 92 F are not applicable. Good Year Tire & Rubber CO IN RE. (2011) 240 CTR 209/54 DTR 281 (AAR). S. 57(iii) : Income from Other Sources ‐ Deductions ‐ Interest – Assessing Officer can lift veil & determine legal effect but cannot ignore legal effect on ground of “substance” It is held by the Larger Bench that under section 57(iii), expenditure laid out or expended wholly or exclusively for the purpose of making or earning income is deductible. It is the purpose of the expenditure that is relevant but the purpose need not be fulfilled. R. P. Moody 115 ITR 519 (SC) followed. The assessee must act bona fide & show nexus between the advancing of funds and his business interest. The dominant purpose for making the investment must be to earn income & to ascertain the purpose the Assessing Officer may lift the veil (Swapna Roy 233 CTR 10 (All) & Punjab Stainless 324 ITR 396 (Del.) followed);


It was also held that legal effect of a transaction cannot be displaced by probing into the “substance of the transaction”. Thus, the exercise of jurisdiction cannot be stretched to hold a roving enquiry or deep probe.(A. Y. 1986‐87) CIT vs. Rockman Cycles Industries Pvt. Ltd. (2011) 331 ITR 401 / 51 DTR 169 / 238 CTR 363 (P&H)(High Court) S. 57(iii) :Deductions‐ Income from Other Sources – Fixed Deposit in Banks. Where the assessee borrowed funds from bank and invested the same in Fixed Deposits (‘F.D’) and earned more interest on the F.D. than the interest payable on the borrowed funds taking advantage of Export Import policy of the Government interest paid on the borrowing was held to be allowable as deduction under section 57(iii) of the Act from the interest earned on F.D as there was direct nexus between the interest earned and interest paid by the assessee. (A. Y. 2005‐06 & 07) CIT vs. Taj International Jewellers (2011) 50 DTR 348 (Del.)(High Court) Chapter VI. ‐Aggregation of income and set off or Carry forward of loss. S. 68 : Cash Credits ‐ Share Application Money ‐ Satisfactory explanation as to the ‘nature of the source’ The Hon’ble High Court held that in order to provide satisfactory explanation as to the “nature and source” of a sum found credited in his books, the initial burden is on the assessee. The assessee is required to prove (a) Identity of the shareholder; (b) Genuineness of transaction; and (c) credit worthiness of shareholders; CIT vs. Oasis Hospitalities Pvt. Ltd( 2011) 198 Taxman 247(Delhi)(HighCourt) . S. 68: Cash Credits‐ Work in progress.‐ Partners capital account.‐Burden of proof.. WIP in a construction project transferred by a contractor firm to the Assessee firm and credited to the Capital Accounts of partner. Such credit could not be treated as Cash Credit since the transactions are genuine and identity of parties are established. CIT Vs. S. K. Banerjee J.V. Transport Plaza (2011) 241 CTR 152 / 335 ITR 563 (Bom) (High Court). S. 68: Cash Credits – Share application. Where the assesse had provided to the assessing authority the name, age, address, date of filing the share application and number of shares applied by each shareholder, addition under section 68 of the Act cannot be made.( 2000‐01 & 2002‐03) CIT vs. STL Extrusion (P) Ltd. (2011) 53 DTR 97 (MP)( High Court) S. 68: Cash Credits ‐ Gifts ‐ Relation – Occasion ‐ Unexplained investments.(S.69). Where the donors who had made the gifts to the assessee having appeared before the Assessing Officer , submitted affidavit on oath confirming the gifts made by them , citing their old relations with the assessee and proved their capacity to make gifts , said gifts could not be treated as non genuine simply because there was no occasion for making the gifts or there was no blood relation between the donors and the donee or that the gifts were made by donors by taking loans. The order of Tribunal deleting the addition was confirmed.( A.Y.2003‐04). CIT v Mayawati (MS).( 2011) 59 DTR 177 / 201/ Taxman 1/ 243 CTR 9 (Delhi) (High Court). Editorial‐ Delhi Tribunal in Mayawati ( 2010) 48 DTR 233 (Delhi) (Trib) was affirmed. S. 68: Cash Credit‐ Share application money‐ Identity of shareholders.


Assessee having established identity of shareholders , addition under section 68 could not be made on the ground that assessee failed to explain the source of credit . Department was free to proceed against shareholders in accordance with law. (A.Y. 1992‐93). Hindustan Links & Resins Ltd v Dy CIT (2011) 60 DTR 18 (Guj)( High Court). S. 68 : Cash Credits – Gift. Assessee has filed address of both the donors, however, revenue authorities did not examine them in person before making addition, further the revenue authorities failed to bring any evidence on record showing that amount received by assessee from donors was actually her own undisclosed income. Addition confirmed by the CIT(A) was deleted.(A. Y. 2002‐03) Amita Devi (Smt) vs. ACIT (2011) 129 ITD 72/ 53 DTR 214 (Gau.)(TM) (Trib) S. 68 : Cash Credits – Gift. Assessee received the gift by way of cheques which have been confirmed by the donors in their affidavits and disclosed in their respective returns, the same could not be treated as non genuine.(A. Y. 2004‐05) Dy. CIT vs. Vishwanath Prasad Gupta (2011) 52 DTR 346/130 ITD 73/ 57 DTR 89/ 139 TTJ 257 (Jab.)(Trib.)(TM) (Trib) S. 68 : Cash Credits ‐ Share Application Money. Assessee had established identity of each of share holder, and also proved that each of them was income tax assessee and share application money credited to their accounts was duly reflected in their income tax returns and balance sheets, hence, the order of Commissioner (Appeals) deleting the addition was confirmed. (A. Y. 2005‐06) Dy. CIT vs. Dolphine Marbles (P) Ltd. (2011) 129 ITD 163/ 139 TTJ 129 (JB)(TM)(Trib.) S. 68 : Cash Credits‐ Gifts. Assessee received gift of ` 1 lakh from ten individuals. It was noted from the records that donors had deposited monies in their bank account on same day or one day prior to making of gifts through account payee cheques. It was observed that , personal withdrawals of donors for their house hold expenses were petty and it did not support status of donors to gift of ` 1 lakh, besides none of donors was relative of assessee, in view of the facts gifts received by the assessee confirmed as cash credits. (A. Y.2001‐02) Arvind Kumar Mohani vs. ITO (2011) 129 ITD 117 / 54 DTR 33/ 138 TTJ 403(JB)(TM)(Trib.) S. 68 : Cash Credits – Gift – Failure to produce Donors. No addition could be made simply rejecting explanation and evidences filed on record in support of the gift without any scrutiny about the confirmation and without bringing any conclusive evidence brought on record merely on the plea that the assessee failed to produce donors for examination. (A. Y. 2006‐07) P. R. Kulkarni & Sons (HUF) vs. Addl. CIT (2011) 135 TTJ 630 (Bang.)(Trib.) S.68: Cash credits‐ Existence of books of account. Where the assessee had not maintained books of account, there was no legal scope to invoke provisions of section 68. Existence of books of account by assessee is a condition precedent for making addition under section 68. Madhu Raitani v Asst CIT ( 2011) 45 SOT 231 ( Gau) (TM ) (Trib). S. 68: Cash Credits‐Share Application money‐


Assessee company having filed letters of the share applicant companies written to the Asstt CIT confirming that they had applied for shares in the assessee company giving details of drafts , copies of acknowledgment of returns , certificates of incorporation and balance sheets of the said companies where in investment made in the assessee company is shown , it has discharged the onus which lay upon it under section 68 establishing the identity and credit worthiness of each share holder. The Tribunal held that addition can not be made under section 68.( Asst year 2005‐06). Dy CIT v Dolphine Marbles (P) LTD ( 2011) 57 DTR 58 ( Jab) (TM ) (Trib). S. 68: Cash Credits ‐ Confirmation ‐ Satisfaction of AO – to be based on proper appreciation of materials and surrounding circumstances available on record. Assessee had filed confirmation and copy of bank statement as well as cash book . It could be said that assessee had proved genuineness of loan and no addition could be made under section 68 of the Income Tax Act. Opinion of Assessing Officer for not accepting explanation offered by assessee under section 68 as not satisfactory. It must be based on proper appreciation of material and other surrounding circumstances available on record and Assessing Officer can not reject each and every explanation of assessee. ( Asst Year 2000‐01) Umesh Electricals v Asst CIT ( 2011) 131 ITD 127/ 60 DTR 385/ 141 TTJ 288 ( Agra ) (TM ) (Trib). S. 69 : Unexplained Investments – Difference in statement of value of stock furnished to bank and entries in books of accounts addition justified Where the stock statement of hypothecated goods furnished bank was at variance with stock recorded in books of accounts. It was held that addition was justified as the assessee neither denied statement made to bank nor furnished valid explanation of discrepancy.(A. Y. 1995‐96) B. T. Steels Ltd. vs. CIT (2011) 196 Taxman 362 /(2010) 328 ITR 471 /(2011) 196 Tax 362/(2010) 47 DTR 227(P&H)(High Court) S. 69 : Unexplained Investments – Income from Undisclosed Sources ‐ Genuineness of Sale of Shares ‐ (S. 54F) Purchase and sale of shares said to have been made by the assessee being the solitary transaction in shares by him allegedly made through a broker who is not registered with the stock exchange and concerned company as well as the said broker having denied the transaction, Assessing Officer was justified in not accepting the said transaction as genuine by applying the test of human probabilities and treating the impugned amount as income from undisclosed sources.(A. Y. 1997‐98) CIT vs. Hakumat Rai (2011) 237 CTR 513/49 DTR 266 (P&H)(High Court) S.69: Income from undisclosed sources‐Addition –Set off on account of intangible. If the intangible additions are made as undisclosed income during survey for earlier assessment years , while considering the assessment of subsequent assessment year and making addition of unexplained investment in stock , the assessing Officer should consider the question of set off of the intangible addition made in appeal.( Asst Year 1997‐98). Blaram Saha v CIT ( 2011) 56 DTR 209 (Cal) (High Court). S. 69: Unexplained investments‐ Search and seizure‐ Jewellery‐ CBDT Circular. The court held that the CBDT circular had been issued for the purpose of non seizure on the basis of recognized customs prevailing in Hindu Society , and unless the revenue showed anything to the contrary , it could safely be presumed that source to extent as stated in Circular no 1916 stands explained , accordingly the order of Tribunal deleting the addition was confirmed.


CIT v Ratanlal Vyaparilal Jain ( 2011) 199 Taxman 90 ( Guj) ( Mag) (High Court). S.69: Income from undisclosed source‐ Statement in the course of search‐Retraction [ S. 132 (4) ] Merely on the basis of statement made under section 132 (4),in respect of loans , addition under section 69 as income from undisclosed source can not be made when the said statement was retracted and evidence to show the genuineness of loan was filed. The court also referred the Circular of CBDT No F.NO.286/2/2003 IT (Inv) dt 10th March 2003. (A.Y.1994‐95) M. Naranan & Bros v Asst CIT (2011)60 DTR 233 ( Mad) (High Court). S. 69 : Unexplained Investments ‐ AIR Information ‐ Second owner of the Units of Mutual funds. Addition on account of unexplained investment cannot be made in the hands of the assessee on the basis of AIR information, when the assessee was only the second owner of the units of mutual funds and the identity of the first owner was established and they are assessed to tax. S. Ganesh vs. ACIT (2011) TIOL 87 ITAT‐Mum. 701 / (2011) 42‐B. BCAJ (March P. 33)(Trib) S. 69A : Unexplained Money – Claim for redemption fine – Deduction not allowed It was held that section 69A does not provide for any deduction, thus claim for redemption fine is not admissible. Adjudication, confiscation and later redemption fine does not affect the assessment in case of seized articles under section 69A. (A. Y. 1989‐90) P. Sonam vs. CIT, Ernakulam (2011) 196 Taxman 335 (Ker.)(High Court) S.69A: Unexplained money‐Statement of third party‐ Survey. No incriminating material was found during search proceedings . Merely on the basis of statement of third party no addition can be made. CIT v Concorde Capital Management Co Ltd ( 2011) 334 ITR 346 ( Delhi) (High Court). S.69A: Unexplained money‐ Sale proceeds of shares. Where the shares sold by the assessee were received by the assessee in her demat account on July 3, 2003 transferred from another client and were not those shares stated to be purchased by the assessee on June 17, 2002. The credit in demat account of the assessee on July 3, 2003 remaining unexplained and hence addition was justified. (A.Y. 2004‐05). Kusum Lata ( Smt) v Asst CIT ( 2011) 10 ITR 737 ( Trib) ( Delhi) (Trib). S.69A: Unexplained money‐ Gift – Onus on assessee to prove – Occasion . When assessee received the gift onus is on him not only to establish identity of person making gift but also his capacity to make such gift and he is also required to demonstrate, what kind of relationship or what kind of love and affection donor has for assesse and to explain circumstances in which gift were made. ( A.Y. 2001‐02). Sushil Kumar Mohanani v ITO ( 2011) 131 ITD 237 ( Jab)( TM ) (Trib). S. 69B :Amounts of Investments not fully disclosed in books of account – Undisclosed Income. Addition under section 69B of the Act alleging undisclosed investment cannot be made merely on the basis of District Valuation Officer’s (D.V.O.) report when the books of accounts of the assessee are not rejected nor any incriminating material was found during the search to suggest that assessee had made any payment over and above the consideration mentioned in the return. CIT vs. Bajrang Lal Bansal (2011) 51 DTR 287/ 241 CTR 64 (Del.)(High Court)


S.69B: Amounts of Investments not fully disclosed in books of account ‐ Income from undisclosed sources‐ Reference to DVO‐ Block assessment‐ Search and seizure.( S. 142A). Proviso to section 142A has no retrospective effect , assessment by Assessing Officer and appeal by CIT (A) having been decided prior to 30th Sept , 2004 , it was not open to the Assessing Officer to order valuation of property by DVO. CIT v Naveen Gera ( 2011) 56 DTR 170 ( Delhi) (High Court). S. 71: losses‐ Set off from one head against income from another‐ Capital loss‐ Capital gains. Assessee sold certain shares of Company “A” and claimed capital loss. Assessing Officer disallowed loss holding that assessee sold shares so as to claim set off this loss against capital gains arising on sale of land. Tribunal held that since shares were duly transferred and recorded in books of account and further ,assessee also explained the circumstances in which he sold shares , capital loss on sale of shares can not be disallowed.( A.Y.2004‐05). Hasmukhbhai M. Patel v Asst CIT ( 2011) 46 SOT 419 ( Ahd) (Trib). S.72: Carry forward and set off of business loss—Exempted income.( S. 10B (6), 10B (8).) Where the assessee had forfeited the claim under section 10B because they were de‐bonded by the Development Commissioner and hence in the Income return filed for the Asst year 1999‐2000 deduction under section 10B was not claimed , the tribunal held that technically non compliance of section 10B (8) should not deprive the assessee from claiming the benefit of carry forward of business loss computed for that year ( Asst Year 1999‐2000). CIT v Torry Harris Sea Foods ( P) Ltd ( 2011) 55 DTR 239 ( Ker) (High Court). S.72: Carry forward and set off of business losses‐ Hotel business ‐ agreement with another company for running hotels ‐‐ disputes ‐‐ hotel business run by court receiver ‐‐ no cessation of business ‐‐ brought forward losses: The assessee was in the business of running hotels and for that purpose had entered into an agreement with another company to run the same. Disputes arose between the assessee and the company, the court pending adjudication of dispute appointed a court receiver to run the hotel business of the assessee. The dispute was decided by the court and the possession of the hotel was handed over to the assessee, the assessee ran the hotel business on its own. The Hon’ble High Court held that there was no cessation of business by the assessee, as the business was managed by the court receiver, who was none other than its own directors, and the business and assets were also never divested with the receiver, and therefore the assessee was entitled to carry forward and set off losses and depreciation relating to earlier years( AY 1990‐91) CIT v. Dencomar Hotels (Goa) Ltd. [2011] 332 ITR 441 (Bom) (High Court). S. 72 : Carry forward and set off of Business Loss ‐ Dividend Income ‐ Shares held for business. Under section 72(1)(i), the brought forward business loss can be set‐off against “the profits and gains of any business or profession carried on” by the assessee. Section 72(1)(i) does not use the word “assessable under the ‘head‘ profits & gains of business”. The answer to the question as to whether the securities formed part of the trading assets of the business and the income there from was income from the business has to be decided on commercial principles and not on the basis of the classification of ‘heads of income’ in section 14. Though for the purpose of computation of the income, dividends are assessable under the head “Other Sources”, it does not cease to be part of the income from business if the securities are part of the trading assets. Accordingly, the


assessee is eligible for set‐off of dividend income as against business loss (Cocanada Radhaswmi Bank 57 ITR 306 (SC) & New India Investment 130 ITR 778 (Cal.) followed). Gangan Trading Co. Ltd. vs. Dy. CIT ( Mum) (Trib) Source:‐ www.itatonline.org S. 73 : Losses in Speculation Business ‐ Delivery based loss on shares also Speculation Loss It is held that the Explanation to section 73 creates a fiction that the loss suffered by certain companies from the business of purchase & sale of shares shall be deemed to be speculation loss. The definition of speculative transaction in section 43(5) not applicable to Explanation to section 73. The CBDT Circular dated 24.7.1976 cannot be treated as guide for interpretation of section 73 when the provision is very clear and free from any ambiguity.(A. Y. 1994‐95) Paharpur Cooling Towers Ltd. vs. ACIT(2011) 52 DTR 41/239 CTR 394(Cal)(High Court) Editorial:‐ Refer Paharpur Cooling Towers Ltd. vs. Dy. CIT (2003) 85 ITD 745 (Kol.) S. 73 : Losses in Speculation Business – Speculative Loss. Where the Company amended its memorandum and articles of association so as to enable it to make money lending as its main business, the loss on account of sale and purchase of shares was allowed to be adjusted against other business income as the assessee’s case fell under exception clause of section 73 of the Act. (A. Y. 1997‐98) CIT vs. Front Line Securities Ltd. (2011) 50 DTR 337 (Del.)(High Court) S. 73: Losses in speculation business‐ Explanation‐ Grant of loans. When in respect of the assessment of the assessee of the for Asst years 1998‐99,1996‐97 and 1995‐96 , the Tribunal specifically held that the principal business of the assessee was grant of loans ,the assessee comes within the exception to the Explanation under section 73 , and therefore the Tribunal was not justified in holding that the business loss was to be treated as speculation loss.( Asst Year 1997‐98). PCBL Industries Ltd v CIT ( 2011) 58 DTR 25 ( Cal) (High Court). S. 73 : Losses in Speculative Business ‐ Loss in share dealings – Speculative Transactions – [S. 43(5)] Badla charges claimed by the assessee company were rightly treated to be speculative loss in view of Explanation to section 73, since entire share trading activity was deemed to be speculative, provisions of Explanation to section 73 being deeming provisions, section 43(5) cannot override section 73.(A. Y. 2001‐02) Dartmour Holdings (P) Ltd. vs. ITO (2011) 51 DTR 321/136 TTJ 432 (Mum.)(Trib.) S.73:Losses in speculative business‐ Speculation loss‐Shares valuation of closing Stock‐ Trading in shares‐ Investment‐ Capital gains.‐ Company. Loss from valuation of closing stock cannot be excluded while determining the loss from share trading business , therefore , Explanation to section 73 is applicable even to the loss arising from the valuation of closing stock of shares. If the shares are held by the assessee company as investment and not as stock in trade, the second condition of Explanation to section 73 Viz . business of purchase and sale of shares is not satisfied and therefore , capital gain arising from the sale of shares held as investment is not hit by Explanation to section 73. (Asst year 2001‐02). Krishna Lakshmi Multi Trade (P) Ltd v Asst CIT ( 2011) 55 DTR 167 / 138 TTJ 623 ( Ahd) (Trib).


S. 79 : Carry forward and set off losses in the case of certain companies‐– Merger ‐ Change in Share Holdings. Due to merger of IIPL holding 98% shares of assessee company with the assessee company, the share holders of the IIPL were allotted shares but there was no change in the management which continued to be with persons of the family who were having the control and management of the IIPL as well as of the assessee company and therefore, provisions of section 79 were not violated and the assessee was entitled to carry forward of loss.(A. Y. 2004‐2005‐06) Dy. CIT vs. Select Holiday Resorts (P) Ltd. (2011) 52 DTR 14/ 138 TTJ 304 (Delhi)(Trib.) Chapter V1A. ‐ Dedcutions to be made in computing total income. S. 80 :Submission of return for losses – Carry Forward ‐ Belated filing of return. [S. 139(3)] Assessee is not entitled to carry forward the business loss if the return is not filed within the prescribed time limit under section 139(1). Assessing the income by the Assessing Officer will not mandate to carry forward the loss. (A. Y. 1999‐2000) Joginder Paul (HUF) vs. CIT (2011) 239 CTR 566 (P&H)(High Court) S.80: Submission of return for losses ‐ Carry forward of unabsorbed depreciation (S.32 (2), 139(3). Period of limitation for filing loss return not applicable for carrying forward of unabsorbed depreciation. Section 80 and 139 (3) apply to business loss and not to unabsorbed depreciation governed under section 32 (2).( Asst years 2001‐01 , 2001‐02 ). CIT v Govind Nagar Sugar Ltd ( 2011) 334 ITR 13/ 56 DTR 35 ( Delhi) (High Court). S. 80HH :Deduction‐ Process of ship breaking activity, whether “production” of “newgoods” – Words and Phrases – “Manufacture” and “Production”, scope of. In view of Explanation 2 added to section 10(15(iv)(c), usance interest paid for purchase of imported ship for ship breaking is exempt from payment of income tax. Distinct articles emerge in process of ship breaking. Process of ship breaking is akin to “production”. Assessee entitled to benefit of sections 80‐HH and 80‐I. “Manufacture” and “Production” are distinct terms. Reiterated, “production” has a wider connotation than “manufacture”. “Production” takes in bringing into existence new goods by a process which may or may not amount to “manufacture”. It also includes bye‐products, intermediate products and residual products which emerge in course of manufacture of goods. Vijay Ship Breaking Corporation and Others vs. CIT (2010) 10 SCC 39(SC) S. 80HHC : Deduction – Export ‐ Profits of Business ‐ Interest on Deposits ‐ Inter‐corporate Deposits Finding of the authorities below that interest income received by the assessee company on bank deposits and inter‐corporate deposits is a part of business profit not having been shown to be perverse, the same cannot be excluded from the business profit while calculating the deduction under section 80HHC. CIT vs. Sociendade De Fomento Industrial Ltd. (2011) 237 CTR 141 / 49 DTR 161 (Bom.)(High Court) S. 80HHC : Deduction – Export – Receipts ‐ Freight – Insurance ‐ Packing Charges ‐ Sales Tax set off 90% of receipts from freight and insurance, packing charges, sales tax set off and gross service income was be excluded from the profits of the business in terms of explanation (baa) to section 80HHC of the Income Tax Act.(A. Y. 2003‐04) CIT vs. Dresser Rand India P. Ltd (2011) 330 ITR 453 (Bom.)(High Court)


Editorial:‐ Refer, CIT vs. Dresser Rand India Pvt. Ltd. (2010) 323 ITR 429 (Bom.). In Pfizer Ltd. (2010) 233 CTR 521 / (2011) 330 ITR 62 (Bom.) distinguished. S. 80HHC : Deduction – Export – Separate Books – Profits of all Business For the purpose of 80HHC of the Act, even though the assessee had maintained separate books for each business, deduction under section 80HHC is to be computed on the basis of profit derived from all these business. (A. Y. 2003‐04) G. J. Fernandez vs. ACIT (2011) 52 DTR 345 (Kar.)(High Court) S. 80HHC : Deduction – Export ‐ Fluctuation in Foreign Exchange ‐ Export turnover. Surplus realization due to fluctuation in foreign exchange rates is part and parcel of the export turnover for the purpose of section 80HHC. Raghunath Exports (P) Ltd. vs. CIT (2011) 240 CTR 79 (Cal.)(High Court) S. 80HHC:Deduction –Export‐Composite services. Professional charges received by the assessee for procuring order and rendering composite services are to be reduced while computing deduction under section 80 HHC of the Act as the same do not form part of export sales proceeds.( A. Y. 2001‐02) Anil Dang vs. ITO (2011) 55 DTR 349 (Kar)( High Court). S. 80HHC : Deduction – Export‐– Interest on Loan given to employees‐ Business income. Interest earned on loans given to employees is to be treated as part of business income for the purpose of computation of deduction under section 80HHC. Kirloskar Ebara Pumps vs. Dy. CIT (2011) 138 TTJ 211 (Pune)(Trib). S. 80HHD: Deduction‐ Shopping commission‐ Foreign tourists. Assessee was receiving the commission, from shopkeepers and not in foreign exchange from the tourists directly. Assessee was not eligible for deduction under section 80HHD. CIT v Le Passage to India Tour and Travels (P ) Ltd ( 2011) 57 DTR 98/ 241 CTR 535 (Del) / 335 ITR 69 (High Court). S. 80HHD: Deduction‐Interest‐ Tour operator‐ Foreign tourists‐ Income derived. Interest earned by assessee tour operator by making deposits of advances received from foreign tourists can not be said to have been derived from the services provided to foreign tourists and ,therefore , such interest income did not qualify for benefit of section 80HHD , more so as it was received from banks in India in Indian currency and not in foreign exchange . Lotus Trans Travels (P) Ltd v CIT ( 2011) 241 CTR 530 ( Del) (High Court). S. 80HHE : Deduction – Export ‐ Computer Software – Non‐resident ‐ Discrimination Clause ‐ DTAA As per Article 26(2) of India‐USA DTAA Taxation of a PE of a USA resident shall not be less favorable than the taxation of a resident enterprise carrying on the same activities. Thus exemptions and deductions available to Indian enterprises would also be granted to the US enterprises if they are carrying on the same activities. Therefore, assessee was entitled to section 80HHE deduction as admissible to a resident assessee (Automated Securities Clearance Inc. vs. ITO 118 TTJ 619 (Pune) reversed; Metchem Canada Inc. vs. Dy. CIT 99 TTJ 702 (Mum.) referred to);


Further where the provisions contained in the DTAA are capable of clear and unambiguous interpretation, it is not necessary to refer to the commentary on the OECD Model Convention, the US Technical Explanation or decisions of any foreign jurisdiction (CIT vs. PVAL Kulandagan Chettiar 267 ITR 654 (SC) followed). (A. Y. 2002‐03 to 2004‐05) Rajeev Sureshbhai Gajwani vs. ACIT(2011) 52 DTR 201/ 129 ITD 145(AHD)(SB)(Trib) S. 80HHE : Deduction ‐ Export of Computer Software ‐ Form 10CCAF ‐ Export turnover retained abroad. Benefit of deduction under section 80HHE cannot be denied to the assessee simply because the income certified for deduction is nil in form no 10CCAF for the reason that the computation of total income as per return was loss. Assessee is entitled to deduction under section 80 HHE on the amount of export turnover retained abroad to the extent of its outstanding dues to that company and the amount retained by assessee’s foreign branch in respect of expenses incurred by it on behalf of assessee provided there is nexus between the outstanding payable / expenditure incurred abroad and the business of export which has yielded the income.(A. Y. 2002‐03) 3i Infotech Ltd. vs. Dy. CIT (2011) 51 DTR 385 / 136 TTJ 641 (Mum (Trib.) S. 80HHF : Deduction – Export ‐ Export Turnover. Claim of the assessee that the meaning of “total turnover” in clause (j) of Explanation to section 80 HHF should be restricted only to the export turnover of the business of exports and not the entire business is not sustainable. While computing deduction under section 80 HHF by multiplying “export turnover” with the “profits of the business” as divided by the total turnover of the business.(A. Y. 2000‐2001) SRI Adikari Brothers Television Networks Ltd. vs. ACIT (2011) 52 DTR 295 (Mum.)(Trib.) S. 80I: Deductions‐ Profits and gains from Industrial undertakings‐ Reconstruction of business. Where assessee firm was formed by reconstruction of a business already in existence as a sole proprietary concern, it did not fulfil condition laid down in section 80I (2) (i) and therefore , it was not entitled to deduction under section 80I. In order to claim deduction under section 80I an Industrial undertakings has to fulfil all four clauses under section 80I (2) , and if it does not fulfil even one clause thereof , deduction is not allowable.( Asst Year 1992‐93). Asst CIT v Goel Udyog ( 2011) 45 SOT 444 ( Delhi ) (Trib) S.80IA: Deductions‐Manufacture –Production‐Coating with oxides of noble metals on titanium metal electrode / anode. Coating with oxide of noble metals on titanium metal electrode / anode bringing about in its character and use for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is manufacture or production of article or thing within the meaning of section 80 IA and entitled to deduction.( Asst year 1994‐95). Titanor Components Ltd v CIT ( 2011) 55 DTR 157 ( Delhi) (High Court). S. 80IA: Deductions‐ Profits and gains derived from Industrial undertaking‐ Transport subsidy. Source of transport subsidy is not the business of the assessee but the scheme framed by the Central Government and therefore ,’transport subsidy’ received from the Government by the assessee cannot be included in profits derived from the industrial undertaking and is not eligible for deduction under section 80 IA. CIT v Maharani Packaging (P) Ltd ( 2011) 55 DTR 340 (HP) ( High court). S. 80 IA. Deductions – Transport subsidy‐Industrial undertaking.


Transport subsidy received by the assessee under the scheme framed by the Central Government cannot be profits derived from the industrial undertaking and is not eligible for deduction under section 80 IA of the Act CIT vs. Maharani Packaging (P) Ltd. (2011) 55 DTR 340 (HP)( High Court). S.80IA: Deduction‐Profits and gains derived from industrial undertaking‐ Liquidated damages‐ Interest on delayed payment. Interest on delayed payment of sale amount is eligible for deduction under section 80IA , further , during the course of the business the assessee receives / pay liquidated damages for not honouring a contract for sale of products and therefore, such income is directly derived from the industrial undertaking, thus eligible for deduction under section 80IA. ( A.Y. 2000‐01). CIT v Prakash Oils Ltd ( 2011) 58 DTR 279 ( MP) ( High Court). S.80IA: Deduction‐Industrial undertaking – Developing, operating and maintaining industrial park‐Withdrawal of approval‐ Writ maintainable. (Art 226). As per the scheme, what was required to be done by the petitioner was to provide for infrastructural facilities before last date envisaged under the scheme. There after there was no obligation on the part of the petitioner to ensure that industrial units on such plots must also come into existence and commence their production activities , therefore impugned show cause notice for withdrawal of approval of assessee’s Industrial Park was quashed and the CBDT was directed to notify the same. Ordinarily Courts do not encourage litigation at the show cause notice state but where the show cause notice is based on premise which is legally not sustainable, writ petition held to be maintainable. Ganesh Housing Corporation Ltd v Padam Singh Under secretary( 2011) 61 DTR 1 (Guj) ( High Court). S. 80IA : Deductions ‐ Industrial Undertaking in Infrastructure Development ‐ Absorption of loss in earlier year, section 80‐IA unit loss to be set‐off against section 80‐IA profits It was held that deduction under section 80‐IA has to be computed after deduction of the notional brought forward losses and depreciation of business even though they have been allowed set off against other income in earlier years as concluded by the ITAT Special Bench judgement in ACIT vs. Gold Mine Shares & Finance (P) Ltd. 113 ITD 209 (Ahd.)(SB) against the assessee. Hyderabad Chemical Supplies Ltd. vs. ACIT(2011) 53 DTR 371 (Hyd.)(Trib). S. 80 IA: Deduction‐ Profits and gains derived from industrial undertaking‐ Initial year‐Substantial expansion‐ Take over of existing units. ( 80 IB ). Conditions as laid down for claiming deduction under section 80IA /80IB are to be complied within the initial year and not in all the assessment years in which the assessee is eligible for deduction. Once the assessee has complied with the conditions as laid down in sections 80IA / 80IB in the initial year, expansion or extension of the existing unit by acquiring assets of another units in a subsequent year does not disentitle the assessee to claim deduction under sections 80IA/80IB in respect of increased profit due to such expansion or extension of industrial undertaking.( A.Ys. 2004‐05& 2005‐06). Aqua Plumbing (P) Ltd v Asst CIT ( 2011) 59 DTR 22 / 46 SOT 366( Agra) (Trib). S. 80IA:Deduction‐ Industrial undertaking‐ Generation and supply of power‐Deemed generation of power. Assessee entered into agreement for supply of power. Agreement providing that if power not required, compensation charges to be paid. Amount received for deemed generation of power is entitled to deduction


under section 80IA as the compensation has direct nexus with the business of generation of power. (A.Y.2004‐05). Magnum Power Generation Ltd v Dy CIT ( 2011) 11 ITR 493 (Delhi)( Trib). S. 80IA(4): Deductions‐Infrastructure development‐ Industrial undertakings‐ Deduction available even to contractor who merely develops but does not operate & maintain the infrastructure facility. Relying on the judgement of the Larger Bench in B. T. Patil & Sons 126 TTJ 577 (Mum), the assessee’s claim for deduction u/s 80‐IA(4) was denied by the Tribunal on the ground that the assessee was only a contractor and had not complied with all the conditions specified in sub‐clauses (a), (b) & (c) of clause (i) of s. 80‐IA(4). The order was recalled pursuant to the assessee’s MA claiming that the judgement of the Bombay High Court in ABG Heavy Industries Ltd 322 ITR 323 covered the issue in its favour. HELD deciding the issue afresh: The contractor who merely develops but does not operate or maintain the infrastructure facility is eligible for deduction u/s. 80IA(4). Harmonious reading of s. 80‐IA(4) led to the conclusion that the deduction was available to an assessee who (i) develops or (ii) operates and maintains or (iii) develops, operates and maintains the infrastructure facility. The 2001 amendment made it clear that the three conditions of development, operation and maintenance were not intended to be cumulative in nature. A developer who is only developing the infrastructure facility cannot be expected to fulfill the condition in sub‐clause (c) which is an impossibility and requiring it to be fulfilled will be an absurdity. (B.T.Patil & Sons Belgaum vs. ACIT 126 TTJ 577 (Mum) impliedly held not good law). Laxmi Civil Engineering Pvt. Ltd. vs ACIT ( Pune)( Trib). www.itatonline.org. S.80IA (4) (iii): Deductions‐Income from developing ,operating or maintaining industrial park. Assessee having constructed multistoried buildings for the purpose of developing infrastructure facilities as approved by the Ministry of Industry and Commerce and leased out to five /four floors to some tenants who are carrying on their diverse operations as functionally independent units, each floor could be taken as independent unit, and deduction under section 80 IA (4) (iii) could not be denied on the ground that all the floors of the same building occupied by same tenant cannot be construed as one unit and that it was not operating five units in asst year 2007‐08 and four units in the next year as stipulated in the approval granted by the said Ministry. Once the projects are approved and notifications are made by the appropriate authorities the approval and notification run back to the date of commencement of the activities and therefore, deduction under section 80IA (4)(iii) cannot be declined on the ground that the assessee has started functioning even before the formal order of approval and notification.( Asst Year 2007‐08 & 2008‐09 ). Primal Projects (P) Ltd v Dy CIT ( 2011) 139 TTJ 233 ( Bang) (Trib) / 56 DTR 291 S. 80IA(4)(iv) : Deductions ‐ Income from Generation of Power ‐ Captive consumption of electricity Assessee is entitled to deduction under section 80IA in respect of notional income from generation of electricity which was captively consumed by itself. Tamil Nadu Petro Products Ltd. vs. ACIT (2011) 51 DTR 67/ 238 CTR 454 (Mad.)(High Court) S. 80IA(8) : Deductions – Industrial Undertaking ‐ Tariff fixed by MERC for sale of power does not reflect “market value” It is held that under section 80‐IA(8), the transfer of goods from an eligible business to a non‐eligible business is required to be taken at “market value”. But the tariff determined by MERC is based on the concepts of ‘clear profits’ and ‘reasonable return’ and does not reflect the “market value” of the electricity. Further, the tariff is


fixed for both activities of generation and distribution of power and may not reflect the true rates with regard to only the activity of generation. Thus, even after the fixation of tariff by MERC, the profits from the business of generation of power has to be worked out on the basis of the price paid to the outside party for purchase of power. Reliance Infrastructure Ltd. vs. ACIT (Mum.)(Trib.) Source : www.itatonline.org S. 80IB : Deduction ‐ Industrial Undertakings – Interest ‐ Miscellaneous Income Interest on deposits would not be allowable towards the deduction under section 80IB. Miscellaneous income (reversal of LD charges), the matter was remanded to the Tribunal for fresh consideration.(A. Y. 2002‐03) CIT vs. Dresser Rand India P. Ltd (2011) 330 ITR 453 (Bom.)(High Court) S. 80IB : Deduction ‐ Industrial Undertakings ‐ Manufacture or Production – Job work ‐ Compound Rubber ‐ Interest from Customers ‐ Belated Payments ‐ Business Income Production of compound rubber on job work for the tyre manufacturing companies by the assessee amounts to “production of an article or thing” qualifying for deduction under section 80IB. There is nothing in section 80IB to indicate that article or thing produced or manufactured should be final product in itself. If the interest is assessable as business income then only it qualifies for deduction under section 80IB as profit earned. In the absence of relevant details of the interest received by the assessee from the customers for belated payment of job work charges matter remanded to the Assessing Officer for reconsideration. Midas Polymer Compounds (P) Ltd. vs. ACIT (2011) 237 CTR 401 / 331 ITR 68 / 50 DTR 139 (Ker.)(FB)(High Court) S. 80IB : Deduction ‐ Industrial Undertakings ‐ Central Excise Duty Refund ‐ Transport and Interest Subsidy. Central Excise Duty refund has inextricable link with manufacturing activity hence eligible for deduction under section 80IB, however, transport and interest subsidies have no direct nexus with the business of industrial undertaking hence not eligible for deduction under section 80IB. CIT vs. Meghalaya Steels Ltd. (2011) 221 Taxation 79 / 332 ITR 91/55 DTR 27/ 241 CTR 384 (Gauhati)(High Court) S.80IB: Deduction‐ Small scale industrial undertaking‐Not claiming the relief in initial year cannot be the bar for claiming in later years. Registration of an Industrial undertaking as a small scale industrial undertaking under Industries (Development and Regulations) Act , 1951 , is not a condition precedent for treating the same as a small –scale industrial undertaking and it is sufficient if it fulfills the eligibility criteria for being regarded as a small scale industrial undertaking for the purposes of said Act. Assessee cannot be deprived the benefit of section 80IB merely because he has not claimed such benefit in the initial year in which he was eligible to claim the benefit.(Asst year 2004‐05). Praveen Soni v CIT ( 2011) 54 DTR 334/ 241 CTR 542 (Delhi) (High Court). S.80IB:Dedcution‐Manufacture or production‐ Converting raw fish into finished fish. Process involved in converting raw fish into tinned fish did not amount to manufacture and therefore assessee was not entitled to deduction under section 80 IB. (Asst year 2004‐05). CIT v Gitwako Farma (I) (P) Ltd( 2011) 241 CTR 449/ 55 DTR 124 (Delhi) (High Court). S.80 IB: Deduction‐Profits and gains derived from industrial undertakings‐ Sale of scrap‐ Manufacture‐ Labour charges.


Activity of forging which involves heat treatment of material to produce automobile parts is “manufacture “ and therefore , labour charges and job work charges earned by the assessee for doing the job of forging for customers are gains derived from industrial undertakings and the same are entitled for deduction under section 80IB. Sale of scrap which generated in the process of manufacturing activity and proximate there to constitute gains derived from Industrial undertaking for the purpose of computing deduction under section 80IB.(A. Y. 2004‐05) CIT v Sadhu Forgings Ltd ( 2011) 57 DTR 194/242 CTR 158 ( Delhi) (High Court). S.80IB. Deduction‐ Profits of undertaking‐Job work‐ Miscellaneous receipts. Deduction u/s. 80‐IB is allowable on profits of job work and also on miscellaneous receipts, rebate/discounts and balances written off‐. CIT v. Metalman Auto P. Ltd. {2011} 199 Taxman 149 (P & H.) (Mag.)( High Court). S.80 IB: Deduction‐Manufacture‐ Production‐ Assembling of different parts of windmill. Different parts of windmill when assembled get transformed in to an ultimate product which is commercially known as a “windmill” which amounts to manufacture or production with the meaning of section 80 IB (2) (iii).( A.Y.2005‐06). CIT v Chiranjeevi Wind Energy Ltd ( 2011) 243 CTR 195 ( Mad) (High Court). S. 80IB : Deduction ‐ Industrial Undertaking ‐ Derived from Payments Disallowed – [S. 40(a)(ia)] Payments disallowed under section 40(a)(ia), has to be treated as part of “profits and gains of business or profession” and therefore, the same qualifies for deduction under section 80IB.(A. Y. 2002 ‐03 to 2006‐07) ITO vs. Computer Force (2011) 136 TTJ 221/128 ITD 116/49 DTR 298 (Ahd.)(Trib) 80‐IB : Deduction – Industrial Undertakings – Interest ‐ Miscellaneous Income. Interest on deposits would not be allowable towards the deduction under section 80‐IB as the same is treated as miscellaneous income. (reversal of LD charges). The matter was remanded to the Tribunal for fresh consideration. (A. Y. 2003‐04) CIT vs. Dresser Rand India P. Ltd (2011) 330 ITR 453 (Bom.)(High Court) S. 80‐IB : Deduction – Manufacture or Production – Manufacture need not be final product – Rubber compound used in tyre manufacturing. To avail benefit under section 80‐IB, product manufactured need not be a final product, it could be saleable intermediate product, as in the present case a rubber compound used in the manufacture of tyres, which was manufactured by processing rubber with chemicals, oil, etc., and the same was inferred by the High Court as manufacture for the purposes of section 80‐IB. Midas Polymer Compounds P. Ltd. vs. ACIT (2011) 331 ITR 68 / 237 CTR 401 / 50 DTR 139 (Ker.)(FB)(High Court) S. 80‐IB : Deduction – Industrial Undertakings – Derived from –Rebate – Discounts – Labour job receipts. Labour job receipts, miscellaneous income consisting of rebate and discounts and balance written off. etc., were held to be incomes ‘derived from’ industrial undertaking eligible for deduction under section 80‐IB of the Act. (A. Y. 2004‐05) CIT vs. Metalman Auto P. Ltd. (2011) 52 DTR 385 (P&H)(High Court) S. 80‐IB : Deduction – Industrial Undertakings – Job Work. Amount received on account of job work is not a result of manufacturing or producing article or thing and


therefore, the assessee is not entitled to claim deduction under section 80‐IA and 80‐IB of the Act.(A. Y. 2000‐2001) Friends Castings P. Ltd. vs. CIT (2011) 50 DTR 61 (P&H)(High Court) S. 80‐IB : Deduction – Export – After Deduction under section 80‐IA(S. 80HHC) Deduction under section 80HHC of the Act is to be allowed after reducing the amount of deduction allowable under section 80‐IA of the Act. Friends Castings P. Ltd. vs. CIT (2011) 50 DTR 61 (P&H)(High Court) Editorial:‐ Refer Bombay High Court in the case of CIT vs. Associated Capsules Pvt. Ltd, (2011) 332 ITR 42(Bom) S. 80‐IB : Deduction – Manufacture or Production – Job Work –Knitted Fabrics. Where the assessee is engaged in the business of manufacture and sale of knitted fabrics and garments was held to be eligible for deduction under section 80‐IB of the Act in respect of job work done by it for others. (A. Y. 2004‐05) CIT vs. Vallabh Yarns P. Ltd. (2011) 51 DTR 236 (P&H)(High Court) S. 8OIB : Deduction ‐ Industrial Undertakings ‐ Excise Refund –Subsidy ‐ Despite Liberty India, Excise Refund Eligible for section 80IB. Following Delhi High Court decision in CIT vs. Dharampal Premchand (2009) 317 ITR 353, it was held that excise duty refund was eligible under section 80‐IB on the ground that (a) there was a direct nexus between the refund of excise duty and the undertaking and (b) if the proper accounting methodology was followed for the payment and refund of excise duty, the net effect on the P&L A/c was nil. Also, the refund of excise duty is the assessee’s own money coming back and is not income at all. ( A. Y. 2007‐08) J. K. Aluminium Co. vs ITO (Delhi)(Trib.) Source: www.itatonline.org S. 80IB : Deduction – Processing of Seeds – Manufacture. Processing of seeds by the assessee which is bought from the agriculturists, does not result in manufacturing of any new article or thing, therefore the assessee is not eligible to claim deduction under section 80‐IB. (A. Y. 2002‐03 to 2004‐05) ITO vs. Daftri Agro (2011) 135 TTJ 729 / 50 DTR 215/ 130 ITD 496 (Hyd.)(Trib.) S.80IB : Deduction‐Manufacture‐Production‐ Water purification system‐Out sourcing‐ Twenty or more workers. Assessee himself is making the final product ie. ,water purification system , it can not be said that he is not engaged in manufacture merely because , some material is readily purchased from the market and some raw material is got manufactured by outsourcing , assessee having employed twenty or more workers during the major part of the year , there is substantial compliance of the condition of employment of minimum number of workers and ,therefore assessee is entitled for deduction under section 80IB , more so when similar deduction has been allowed in the preceding years.( A.Y. 2001‐02). P.L.Patel v ITO (2011) 60 DTR 53 ( Mum) (Trib). S.80IB: Deduction‐Profits and gains from Industrial undertakings other than infrastructure development undertakings‐ Job work charges‐Apportionment of receipts. Assessee –HUF was engaged in manufacturing of moulds for ball pens and, supplying same to ball pen manufacturing concerns. It also provided services to buyers by way of repair and maintenance of moulds sold to them and charged job work charges ,which included receipt on account of sale of spare parts and repair and


maintenance charges. The Tribunal held that income earned by assessee could not be from repairs and maintenance charges could not be equated at par with income from manufacturing and hence not eligible deduction in terms of section 80IB. Since in the absence of record of assessee it was not possible to decide how much was for repairs and how much for was job charges it was estimated at 50% of receipt as job work charges on which the assessee would entitled deduction under section 80IB and balance 50% as receipt on account of repair and maintenance charges on which the assessee would not be entitled to get deduction under section 80IB .( A.Y.2005‐06). Dy CIT v Rajesh kr. Drolia ( 2011) 132 ITD 23/ 12 ITR (Trib)1/ (Kolkata)( SB) (Trib). S. 80IB(2) : Deduction ‐ Industrial Undertaking – Reconstruction ‐ New Unit Assessee having set up a new unit after closing the old unit at a new place for manufacturing new type of telephone instruments by employing new technology in a newly constructed business premises and making substantial investment in plant and machinery, it is not a case of splitting up of old business and therefore claim for under section 80IB could not be disallowed on the ground that the assessee has merely shifted its business from one place to another and not started a new business.(A. Y. 2002‐03) ITO vs. Computer Force (2011) 136 TTJ 221/128 ITD 116/49 DTr 298 (Ahd.)(Trib) S. 80IB(10) : Deduction ‐ Housing Project ‐ Disallowance on account of non‐payment of tax deduction at source ‐ (S. 80AB, 40(a)(ia), 29) Where the Assessing Officer makes additions to income of assessee under section 40(a)(ia), for non‐compliance of tax deduction at source, such additional income also should be considered for the purpose of allowing deduction under section 80IB(10) as per section 80AB, read with section 29.(A. Y. 2006‐07) S. B. Builders & Developers vs. ITO (2011) 50 DTR 299 /136 TTJ 420/ 45 SOT 335(Mum.)(Trib.) S. 80IB(10) : Deduction ‐ Housing Project ‐ Date of Completion Tribunal held that what is crucial is not the date of issue of letter by local authority, but date mentioned in the letter certifying completion of the project. Therefore, it rejected the contention of the revenue to the effect that the date of completion shall be taken as the date on which the certificate is physically issued by the local authority. D. K. Construction vs. ITO (2011) BCAJ Feb., 24 (ITAT ‐ Indore) (572) (2011) 42 B. BCAJ) (Trib) S. 80IB(10) : Deduction ‐ Housing Project ‐ Pre A. Y. 05‐06, a project approved as “housing project” by local authority eligible for deduction under section 80‐IB(10) irrespective of extent of commercial user Where the legislature has provided that the deduction under section 80IB(10) is available to all housing projects approved by a local authority, the result is that even projects with commercial user approved as a “housing project” are eligible for deduction. Thus, the Tribunal was justified in confirming the deduction only to projects having commercial area upto 10% of BUA. If the project is approved as a “housing project” deduction under section 80‐IB(10) is allowable irrespective of the commercial area. It was further held that the insertion of clause (d) to section 80‐IB(10) w.e.f. 1.4.2005 to deny section 80‐IB(10) deduction to projects having commercial user beyond the prescribed limits is not retrospective.(A. Y. 2003‐04) CIT vs. Brahma Associates (2011)333 ITR 289/ 51 DTR 298/239 CTR 301/2011 VOL 113 (2) Bom.L.R.0995/ (Bombay High Court), www.itatonline.org S. 80IB(10) : Deduction – Housing Project – Joint Development Agreement ‐ Owners of land


Assessee developer had entered into joint development agreement with owners of land for construction of residential flats consisting of four wings in consideration of giving 49% of the constructed area to land owners and all other conditions of section 80IB(10) having been found to be fulfilled, deduction under section 80IB(10) could not be denied.(A. Y. 2005‐06 to 2007‐08) Mudhit Madanlal Gupta vs. ACIT (2011) 51 DTR 217 (Mum.)(Trib.) S.80IB (10): Deduction‐ Housing Project‐Property developer‐ Owner‐ Car parking area. Assessee a property developer paying full consideration to land owner and building housing project, all work in connection with project done by assessee, assessee is considered as de facto owner of land , assessee is entitled to deduction under section 80IB (10). Car parking area not to be included in reckoning permissible area of residential area. ( Asst Years 2001‐02 , 2005‐06) Asst v C. Rajini (Smt) ( 2011) 9 ITR ( Trib) 487 (Chennai)( Trib). S.80IB (10): Deduction‐ Housing project‐ Built up area of two units exceeded 1500 square feet‐ Assessee not entitled for deduction. The assessing officer conducted spot enquiry and physical inspection revealed that individual residential unit measuring less than 1500 sq feet in built up area on paper was never meant to be sold as such but was always to be sold together with adjoining unit. The built up area of the two units exceeded 1500 sq feet . Assessee had only one electricity meter for two adjacent flats . All 104 units have been sold to adjoining pairs to 52 families and the buyers have been shown either same persons or husband and wife and only one entity was shown in the broucher for two flats . The Tribunal held that CIT (A) was justified in confirming the order of Assessing Officer refusing to grant deduction under section 80IB (10). (Asst year 2003‐04). Thistle Properties (P) Ltd v Asst CIT ( 2011) 55 DTR 81 / 138 TTJ 538 (Mumbai) (Trib). S.80IB (10). Deduction‐ Housing Project‐Commercial area‐ Projects commenced prior to 1‐4‐2005‐ Restriction of 5% is not applicable. The tribunal noted that the assessee’s project had commenced prior to 1‐4‐2005 . It also noted that in the case of Brahma Associates ,the High Court has held that the amendment to section 80IB is prospective in operation . Since the assessesse’ s project had commenced in December 2003 ,the Tribunal held that amendment to section 80IB (10) w.e.f Assessment Year 2005‐06 , restricting the commercial area to 5 % is not applicable to projects commenced prior to 1‐4‐2005.( Asst Year 2005‐06). ITO vs. Chheda Construction Co., ITA No. 2764/Mum/2009, dt.27‐04‐2011, `C’ Bench, A.Y. 2005 – 2006, Mumbai ITAT, BCAJ pg. 29, Vol. 43‐A, Part 3, June 2011. S. 80IB(10) : Deduction – Pro‐rata basis ‐ Housing project ‐ Residential buildings ‐ Area exceeding 1500 square feet. Whether deduction should be allowed in the case of flats having build up area not exceeding 1500 sq ft, even though some of the flats were exceeding 1500 sq ft. On reference to third member , the third member held that in view of order passed by Calcutta High Court in CIT v Bengal Ambuja Housing Development Ltd (IT Appeal no 458 of 2006 dated 5‐1‐2007 ) , assessee was entitled to deduction under section 80 IB (10) in respect of flats having built up area not exceeding 1500 square feet and not entitled for deduction in respect of those flats having their built up area exceeding 1500 square feet. The third member also held that in view of CIT v Brahma Associates ( 2011)197 Taxman 459 (Bom) (High Court) , finding of Vice president on the issue of fixing limit of 10 percent cap does not hold good. ( A.Ys. 2005‐06 & 2006‐07). Sanghvi & Doshi Enterprise v ITO ( 2011) 131 ITD 151/ 60 DTR 306 ( Chennai) (TM ) (Trib).


S.80IB (10): Deduction‐ Housing project‐Completion of entire project. For claiming deduction under section 80IB , it is not necessary for assessee to compute entire project and even on partial completion of project , assessee would be eligible for deduction under section 80IB.( A.Y. 2005‐06). Nagarjuna Homes v ITO (2011) 46 SOT 287 (Hyd) (Trib). S. 80IB(10) : Deduction ‐ Housing Project ‐ Development Agreement ‐ Not Owner ‐ Commencement Certificate. Deduction under section 80IB(10) can not be denied on the ground that the assessee is not the owner of the property which he undertakes to develop, nor can it be denied on the ground that development agreement is not registered. Merely because the commencement was obtained prior to 1‐10‐1998, it does not mean that the assessee has commenced the development and construction of the project unless the assessee has taken some effective steps on the site. (A. Y. 2003‐04 and 2004‐2005) Essem Capital Markets Ltd. vs. ITO (2011) TIOL 196 ITAT –Mum. 171‐(2011) 43A – BCAJ (May . P 31) S. 80‐IB(10) : Deduction – Housing Project – Date of Completion. Tribunal held that what is crucial is not the date of issue of letter by local authority, but date mentioned in the letter certifying completion of the project. Therefore, it rejected the contention of the revenue to the effect that the date of completion shall be taken as the date on which the certificate is physically issued by the local authority. D. K. Construction vs. ITO, ITA No. 243/Ind/2010, dt. 6‐12‐2010, ITAT Indore Bench, BCAJ p. 24, Vol. 42‐B, Part 5, February 2011. (Trib.) S.80IB(10):Deduction‐Housing project‐ Commercial area 8.8%. Commercial area of the residential plus commercial project did not exceed 8.8% of total area, further, deduction is eligible to housing project approved by the local authority as such or as “residential plus commercial project” having residential as well as commercial units to the extent permitted under the DC Rules .Assessee is entitled to deduction under section 80 IB (10).( A.Y.2004‐05). Bhumiraj Homes Ltd v Dy CIT ( 2011) 60 DTR 65 ( Mum) (Trib). S. 80IB (10): Deduction‐Housing project‐ Sale of pair of flats in the name of family members exceeding 1000 square feet‐ Amendment with effect from 1‐4‐2010 is prospective in nature. Under pre amended section as long as a residential unit has less than specified area , is as per duly approved plans and is capable of being used for residential purposes on stand alone basis , deduction under section 80IB (10), can not be declined in respect of same merely because end user , by buying more than one such unit in name of family members has merged those residential units in to a larger residential unit of a size which is in excess of specified size. Amendment ,made to section 80IB (10) with effect from 1‐4‐2010, is prospective in nature.( A.Y. 2004‐05). Emgeen Holdings (P) Ltd v Dy CIT ( 2011) 47 SOT 98 ( Mum) (Trib). S.80P: Deduction‐ Co‐operative Society‐ Income. Income received by a co operative bank from deposits , whether or not they are made to discharge of a statutory obligation or otherwise , being income from banking business would be eligible for exemption under section 80 P. CIT v Andhra Pradesh State Co operative Bank Ltd (2011) 200 Taxman 220 /60 DTR 281 (AP) (High Court).


S.80P:Dedcution‐ Co‐Operative Society‐Interest‐.Exempted income. (S.14A). Deduction under section 80 P (2) (d) is available after deducting the expenditure incurred in earning the income.( A.Y. 2002‐03). Punjab State Co‐Operative Milk Producers Federation Ltd v CIT (2011) 336 ITR 495 (P&H) (High Court). Chapter VIII.‐Rebates and Reliefs S. 88E : Rebate ‐ Securities Transaction Tax – [S. 40(a)(ib)] Disallowance of deduction for securities transaction tax under section 40(a)(ib) could not deprive the assessee of rebate under section 88E.(A. Y. 2006‐07) ITO vs. Chunilal T. Mehata (2011) 7 ITR 50 (Kol.)(Trib.) Chapter 1X. ‐ Double taxation Relief. S.90: Double Taxation Relief‐ liaison office. Liaison office of a South Korean company carrying on activities of identifying the buyers, negotiating with them, procuring purchase orders, forwarding the same to head office in Korea, following up with the customer for realisation of payments and offering after sales services was held to be a Permanent Establishment (P.E.) and the profits earned in India through this liaison office are taxable in India as per Article 5 of the DTAA between India and South Korea (A. Y. 2001‐02 to 2006‐07) Jebon Corporation India Liaison Officer vs. CIT (Int. Taxation) & Anr. (2011) 55 DTR 113 (Kar)( High Court). S. 90 : Double Taxation Relief – Royalty – DTAA ‐ India‐Singapore ‐ (Art. 12) Assessee, a Singaporean company, which is engaged in providing international telecommunication connectivity services, the amount received by it from Indian customers is for use of “process” besides for use of or right to use industrial, commercial or scientific equipment and therefore, payments made by Indian customers to the assessee company are royalty with in the meaning of Art. 12(3) of the Indo–Singapore DTAA. (A. Y. 2002‐03 & 2003‐04). Verizon Communications Singapore PTE Ltd. vs. ITO (2011) 54 DTR 65/ 45 SOT 263 (Chennai)(Trib.) S. 90 : Double Taxation Relief – DTAA ‐ India‐Australia ‐ Interest on Tax Refund not “effectively connected” with PE. [Art. 11(4)] Under Article 11(4) of the DTAA, interest from indebtedness “effectively connected” with a PE of the recipient is taxable under Article 7 and not under Article 11. The payment of tax was the responsibility of the foreign company and the fact that it was discharged by way of TDS did not establish effective connection of the indebtedness with the PE. In order to be “effectively connected”, it is not necessary that the interest income has to be necessarily business income in nature. Even interest assessable under “other sources” can qualify. (Asst year 2003‐04 ) ACIT vs. Clough Engineering Ltd.(2011) 138 TTJ 385/ 9 ITR 618(Trib) / 55 DTR 34/ 130 ITD 137 (Delhi)(SB)(Trib.) S.90: Double taxation Relief‐ Liaison office‐ DTAA‐ India‐ South Korea. (Art 5.). Liaison office of South Korean company carrying on commercial activities of identifying the buyers, negotiating with the buyers, agreeing to the price ,procuring purchase orders and forwarding the same to the head office and the follow up activities relating to realization of payments from customers and offering after sales support is


a PE as defined under art 5 of the DTAA between India and South Korea and therefore ,the business profits earned in India through this liaison office are taxable in India. ( Asst years 2001‐02 to 2006‐07). Jebon Corporation India Liaison Office v CIT ( 2011) 55 DTR 113 ( Kar) (High Court). S.90: Double taxation relief‐ Interest on income tax refund‐ India‐ German –DTAA . ‐ Art 11, 8 (3). Interest on income tax refund is chargeable to tax under art 11 of Indo –German DTAA , Authorities below were justified in rejecting the contention of the assessee for its inclusion in art 8 (3) as only interest on funds which are connected with the operation of ships or aircrafts is covered with in the ambit of art 8 (3). ( Asst year 2004‐05). Hapag Lloyd Container Line GMBH v Asst Director ( 2011) 56 DTR 185/ 131 ITD 122 / 141 TTJ 169 (Mumbai ) (Trib). S.90: Double taxation Relief‐Royalty‐ DTAA‐ India‐ Sri lanka.(art , 7, 12 ). Applicant , a Sri Lankan company having undertaken a contract for dredging from an Indian company and granted non transferrable and non exclusive right to the Indian company to use its proprietary software as part of the agreement in order to transfer the scientific experience in hydrology possessed by the applicant without transfer of intellectual property rights in the software and therefore , consideration received by the applicant falls under the term “royalties” and is liable to tax under art 12 of the DTAA between India and Sri Lanka and not under art 7 thereof. Lanka Hydraulic Institute Ltd ( 2011) 241 CTR 314 / 199 Taxman 232/ 56 DTR 11(AAR). S. 91 : Double Taxation Relief ‐ Countries with no agreement exists ‐ Federal Taxes ‐ Foreign State – DTAA ‐ Tax Credit The view that State taxes cannot be allowed as a deduction and also cannot be taken into account for giving credit is incongruous and results in a contradiction. While section 91 allows credit for Federal & State Taxes, the DTAA allows credit only for Federal Taxes. The result is that the section 91 is more beneficial to the assessee & by virtue of section 90(2) it must prevail over the DTAA. Though section 91 applies only to a case where there is no DTAA, a literal interpretation will result in a situation where an assessee will be worse off as a result of the provisions of the DTAA which is not permissible under the Act. Section 91 must consequently be treated as general in application and must prevail where the DTAA is not more beneficial to the assessee. Accordingly, even an assessee covered by the scope of the DTAA will be eligible for credit of State taxes under section 91 despite the DTAA not providing for the same. Tata Sons Ltd. vs. Dy. CIT (2011) 9 ITR 154 (Trib) (Mum) Chapter X. ‐ Special provisions relating to avoidance of tax. S. 92: Avoidance of tax‐ Transfer Pricing‐Royalty‐ Deductibility of expenses. Section 92 does not apply in respect of “payments of royalty etc which are not the part of regular business carried on between a resident and Non resident.( A. Y. 1997‐98 & 1998‐99) CIT v Nestle India Ltd ( 2011) 57 DTR 65 ( Del) (High Court). S. 92: Avoidance of tax‐ Transfer Pricing‐International transaction‐Arm’s length Price‐ Debit balances A continuing debit balance in the account of the Associated Enterprise by itself does not amount to an international transaction under section 92B in respect of which arm’s length price adjustment can be made. Even assuming that the continuing debit balances of AEs can be treated as “International Transactions” the right course of applying the CUP method would have been by comparing this not charging of interest with other cases in which other enterprises have charged the interest , in respect of over dues in respect of similar business


transactions, with independent enterprises. As no exercise has been carried out addition was deleted.( Asst year 2004‐05). Nimbus Communications Ltd v Asst CIT ( 2011) 43 SOT 695/ 55 DTR 163/ 139 TTJ 214 (Mumbai ) (Trib). S. 92A : Avoidance of Tax ‐ Transfer Pricing – Associated Enterprises – De facto control of an unrelated party ‐ unrelated parties also considered “associated enterprises”. If one enterprise controls the decision making of the other or if the decision making of two or more enterprises are controlled by same person, these enterprises are required to be treated as ‘associated enterprises’. Though the expression used in the statute is ‘participation in control or management or capital’, essentially all these three ingredients refer to de facto control on decision making. The argument, based on Quark Systems 38 SOT 307 (SB), that exceptionally high and low profit making comparables are required to be excluded from the list of TNMM comparables is not acceptable. Merely because an assessee has made high profit or high loss is not sufficient ground for exclusion if there is no lack of functional comparability. While there is some merit in excluding comparables at the top end of the range and at the bottom end of the range as done in the US Transfer Pricing Regulations, this cannot be adopted as a practice in the absence of any provisions to this effect in the Indian TP regulations. (Benefit of +/‐ 5% adjustment as directed in UE Trade Corporation 44 SOT 457 to be given); The adjustment made by the TPO with regard to the advertisement expenditure incurred by the assessee was without jurisdiction because the AO had not made any reference on this issue to the TPO. As the reference to the TPO is transaction specific and not enterprise specific, the TPO Officer has no power to go into a matter which has not been referred to him by the AO. Even the CBDT Instructions are clear on this (3i Infotech Ltd 136 TTJ 641 followed)( A.Y.2006‐07). Diageo India Pvt. Ltd v ACIT (2011) 47 SOT 252 (Mum) (Trib) S. 92C : Avoidance of Tax ‐ Transfer Pricing – Computation ‐ Arm’s Length Price ‐ Opportunity of being heard ‐ (S. 144C) Order was passed by TPO without granting extension of time sought by the petitioner for furnishing more documents and giving an opportunity of personal hearing to it and also documents were not consider which were already on record in their right perspective the impugned order was set aside and TPO was directed to pass an order and also personnel hearing.(A. Y. 2007‐08) Toyota Kirloskar Motor (P) Ltd. vs. Addl. CIT (2011) 52 DTR 393 (Kar.)(High Court) S.92C: Avoidance of tax‐ Transfer pricing‐Royalty‐ Business expenditure. Payment of royalty by assessee company to its US based holding company is not hit by the provisions of section 92 in the absence of any comparable case on record to determine the ordinary profit in similar business and the price fixed has been accepted as ALP by the TPO. Payment of royalty being a business expenditure which is incurred wholly and exclusively for the purpose of business of the assessee ,it is to be allowed as business expenditure.( A.Y. 1999‐2000 TO 2001‐02) CIT v Oracle India (P) Ltd ( 2011) 59 DTR 222 (Delhi) (High Court). S.92C: Avoidance of tax‐ Transfer pricing‐Computation‐Selection of comparables. Held that in the absence of any perversity in the finding of the Tribunal in the selection of a different set of comparables for determination of ALP and recomputation of ratio of operating profit/total cost at 21.97% as against 35.26% adopted by TPO, no interference is warranted. The High court further upheld the decision of the


Tribunal of allowing depreciation on administrative assets for determining the operating profits while computing the ALP. (A.Y.2005‐06). CIT v Rakhra Technologies ( P) Ltd ( 2011) 243 CTR 505/ 60 DTR 159 (P &H) (High Court). S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation ‐ Determination of ALP of slump sale For purpose of transfer pricing in order to determine the ALP in the absence of other identical transactions, the valuation by a registered valuer is the most appropriate means under CUP method. However, as the valuation report filed by the assessee is not reliable, the only option is to adopt the value of the assets sold as per the company law or income‐tax WDV. In the sale of a going concern, factors like profitability of the branch office, goodwill, and various other commercial and technical aspects will have a bearing on the ALP. Inter Asia Electronics Inc vs. ADIT (ITAT ‐ Bangalore) www.itatonline.org(Trib) S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation ‐ +/‐ 5% Variation only if more than one price determined The benefit of +/‐ 5% variation as per the Proviso to section 92C(2) is available only if more than one price is determined. It does not apply where only one price has been determined. CBDT Circular No.12 dated 23.8.2001 provides that “the AO shall not make any adjustment to the arm’s length price determined by the taxpayer if such price is unto 5% less or unto 5% more than the price determined by the AO”. Circular was issued considering practical difficulties. As the Circular never came into operation thus, Circular No. 12 is otiose and cannot be relied upon. ACIT vs. Essar Steel Ltd. (Trib)(ITAT ‐ Vizag) Source: www.itatonline.org S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation ‐ Super normal profit co must be excluded from comparable The assessee, engaged in providing software development services reported an OP/Cost Margin of 14.96%. The TPO worked out the average of arithmetic mean of ALP (OP/OC) of 42 comparables at 24.91% and directed that an adjustment of ` 10.40 crores be made. In its objections to the DRP, the assessee claimed that the comparables included three companies which were “super‐normal profit making” and that these should be excluded. It was claimed that if the said companies were excluded, the arithmetic mean of OP/OC of the comparables was 17.15% which was within the +/‐ 5% range permitted by section 92(C)(2). The TPO rejected the contention on the ground that one company was listed and audited and showing consistent growth at the same level and there was no abnormality and that the other company’s information was not listed in the database. The third “abnormal” company was not dealt with by the TPO. The DRP dismissed the objections of the assessee by a “very cursory and laconic order”. On appeal by the assessee, HELD allowing the appeal: (i) The TPO rejected the assessee’s contention with regard to inclusion of the three super‐normal profit companies without any cogent reason. It is undisputed that the three companies have shown super‐normal profits as compared to other comparables. Their exclusion from the list of comparable is quite correct. After excluding the three companies the arithmetic mean of the comparables falls within the +‐5% range permitted by section 92(C)(2); (ii) Despite the voluminous submissions and paper book filed, the DRP passed a very cursory & laconic order without going into the details of the submissions which is quite contrary to the mandate of s. 144C. Adobe Systems India Pvt. Ltd. vs. ACIT(2011) 44 SOT 49/ 138 TTJ 122 (Delhi)(Trib.)(UOR), S. 92C : Avoidance of Tax ‐ Transfer Pricing – Computation ‐ Arm’s Length Price ‐ Choice of Method ‐ International Taxation


Choice of method of determination of ALP is not an unaffected choice on the part of the tax payer and this choice has to be exercised on the touch stone of principles governing selection of most appropriate method set out in section 92C(1), where the Assessing Officer finds that selection of most appropriate method is not correct, he has the powers as well as corresponding duty to select the most appropriate method and compute the ALP by applying that method.(A. Y. 2002‐03 to 2004‐05) Serdia Pharmaceuticals (India) (P) Ltd. vs. ACIT (2011) 50 DTR 98 / 136 TTJ 129 (Mum.)(Trib.) S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation ‐ Selection of Comparables ‐ (S. 144C) Unless the functional profiles of assessee company are examined minutely and detail. It is very difficult to say that the assessee is engaged in the business of software development as decided by TPO and not in the business of rendering support in respect of engineering designs and drawings as claimed by the assessee. Further DRP has neither examined assessee’s contention nor passed speaking and reasoned order. Matter is remanded back to the file of the AO / TPO for fresh adjudication.(A. Y. 2006‐07) Bechtel India (P) Ltd. vs. Dy. CIT (2011) 136 TTJ 212/50 DTR 206/ 46 SOT 429 (Delhi)(Trib.) S. 92C : Avoidance of Tax ‐ Transfer Pricing – Computation ‐ Arm’s Length Price ‐ International Taxation. Where the finding of CIT(A) is based on net profit margin of the assessee company worked out by him at 6.97% on the basis of operating profits/sales, which was within +/‐ 5 % range of ALP, there is no reason to interfere in the order of CIT(A).( A. Y. 2002‐03 to 2004‐05) Osram India (P) Ltd. vs. Dy. CIT (2011) 51 DTR 297 (Delhi)(Trib.) S. 92C : Avoidance of Tax ‐ Transfer Pricing – External comparables. Assessee company having provided same software related services to AE’s and unrelated parties, it was not required to make segmental reporting or disclose separate financial information in respect of transactions entered into with AE’s and non AEs as per the guidelines provided under AS‐17 and therefore, ALP in respect of international transactions undertaken by the assessee with AEs was rightly determined on the basis of international comparison of profit earned from the international transactions with AEs and profit earned from international transactions with unrelated parties and not by recourse to external comparables.(A. Y. 2006‐07) Birlasoft (India) Ltd. vs. Dy. CIT (2011) 51 DTR 353/ 136 TTJ 505/ 46 SOT 437 (Delhi)(Trib.) S. 92C : Avoidance of Tax ‐ Transfer Pricing – Computation ‐ Arm’s Length Price – Jurisdiction ‐ International Taxation. Though the deputation of three employees by the assessee to its US subsidiary without consideration is covered by the definition of “international transaction” under section 92B (1), it was not necessary for the Assessing Officer to determine the ALP of the said transaction as there would be erosion of tax base of India if the assessee charges the cost of deputation of employees in as much as assessee is remunerating the subsidiary on the cost–plus basis for the services and entire revenue accrues to the assessee. Jurisdiction of TPO is restricted to the transactions referred by the Assessing Officer under section 92CA(1) and therefore, TPO cannot determine the ALP in relation to an international transaction not referred to him by the Assessing Officer under section 92CA(1), further, since the conditions laid down in section 92C(3) were not satisfied the impugned addition cannot also be sustained on the premise that the Assessing Officer as determined the ALP on the basis of material or information or document in his possession.(A. Y. 2002‐03) 3i Infotech Ltd. vs. Dy. CIT (2011) 51 DTR 385 / 136 TTJ 641/ 129 ITD 422 (Mum) (Trib.) S. 92C : Avoidance of Tax ‐ Transfer Pricing – Computation ‐ Arm’s Length Price.


Assessee company entered into international transactions with Byk which comprised of export of intermediates and clinical trial services. Assessing Officer made reference to TPO in order to find out whether international transactions were at arm’s length price or not. In regard to clinical trial services performed by assessee–company for Byk, TPO after examining various aspects, concluded that mark up of 5% over cost was not as per arm’s length price and same should be 17.4% on basis of comparable cost. On appeal Commissioner (Appeals) concluded that 5% mark up as returned by assessee was fully justified. On appeal by revenue the Tribunal noticed that in course of providing clinical trial service, major part of research activities was carried out by “Byk” itself and function of assessee was only to collect data from various hospitals and transmit same to “Byk” for which it was suitably reimbursed by mark–up of 5% over cost. It was also noted that profits of assessee were exempt under section 10B and thus, company was in no way benefited by charging 5% mark–up as against 17.4% fixed by TPO. The Tribunal held that on facts there was no infirmity in impugned order passed by Commissioner (Appeals) and the same was upheld.(A. Y. 2002‐03 to 2003‐04) ITO vs. Zydus Altanta Health Care (P) Ltd. (2011) 44 SOT 132 (Mum.)(Trib) S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ Bad Debts Written off ‐ International Transactions ‐ (S. 10B). Bad debts written off cannot be factor to determine the arm’s length price of any international transaction. The Transfer Pricing Officer had exceeded his limits in following a method not authorized under the Act or Rules.(A. Y. 2002‐03‐04) C. A. Computer Associates P. Ltd. vs. Dy. CIT (2011) 8 ITR 142 (Mum.)(Trib.) S. 92C : Avoidance of Tax – Transfer Pricing ‐ Arm’s Length Price ‐ Report of the TPO is not binding on the Assessing Officer. Proviso substituted w.e.f. 1st October 2009, operate only form Asst. Year 2009‐10. The report of the TPO is not binding on the Assessing Officer. Assessing Officer can refer the matter to the TPO for determination ALP of an International taxation transaction or he may determine it on his own. AO can determine the price of imports of his own. New proviso to section 92C(2) came in to operation from asst year 2009‐10 and therefore, did not apply to asst year 2003‐04, further, where only one price is determined in the matter of ALP, the option of five percent under proviso to section 92C(2) is not available to the assessee. (A. Y. 2003‐04) ACIT vs. UE Trade Corporation (India) Ltd. (2011) 136 TTJ 297/50 DTR 379/45 SOT 197 (Del.)(Trib) S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation ‐ Arm’s Length Price – [Rule 10B(1)(e)] Under Chapter X of the Income Tax Act, 1961, the determination of the arm’s length price of an international transaction has to be only at the transaction level or at a class of transactions. The law does not permit determination of the arm’s length price of international transactions, by comparing margins at entry level or by taking overall industry level averages. The matter was set aside.(A. Y. 2002‐03) Dy. CIT vs. Ankit Diamonds (2011) 8 ITR 487 (Mum.)(Trib.) S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation ‐ If ALP determined by arithmetical mean, 5% deduction allowable. In determining the arms’ length price for transfer pricing purposes in respect of international transactions relating to ‘procurement Support Services’, it was held that pursuant to the First proviso to section 92C(2) (pre‐amendment by Finance (No. 2) Act, 2009 w.e.f. 1.10.09) which provides that “where more than one price is determined by the most appropriate method, the arms length price shall be taken to be the arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean of an amount not exceeding five per cent of such arithmetical mean” it is clear that the assessee has an option when there is


arithmetical mean involved while computing the ‘arm’s length price’ and it happens only if more than one price is determined by the most appropriate method. The First Proviso becomes operational where more than one comparable price is determined. The assessee at his option can make claim of deduction out of the arithmetic mean not exceeding 5%. All the judicial pronouncements (SAP Labs 6 ITR 81 (Bang.)(Trib.), Sony 315 ITR (AT) 150 (Del.), UE Trade Corp (Del.), Essar Steel (Vizag.) & Perot Systems 130 TTJ 685 (Del.) are uniform in making the proposition that where arithmetic mean is involved, the assessee obtains the eligibility for claim of deduction out of such arithmetic mean. Cummins India Limited vs. Dy. CIT (ITAT Pune) Source: www.itatonline.org(Trib) S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation ‐ Prior Years’ data cannot ordinarily be relied upon to justify ALP. Non‐operating income & expenditure should be excluded while comparing. It was held that the assessee has to adopt the data available for the TP study at the time of filing of the return. The OECD guidelines are not of binding nature and even the Proviso to Rule 10B(4) provides that any subsequent year data cannot be considered. The contemporaneous data of relevant financial year is to be used for making the comparable analysis for arriving at the ALP unless it is proved otherwise. For arriving at the net margin of operating income, only operating income and operating expenses for the relevant business activity of the assessee has to be taken into consideration. Other income, such as dividend income, profit on sale of assets, donations as well as non‐operating expenses which are included in the operating incomes of other comparable companies should be excluded as it effects the net margin of the operating profits of the comparables. Working capital adjustments also have to be considered while arriving at the operating net margins. Also the assessee is entitled to a standard deduction of 5% as provided under proviso to section 92C(2) before making adjustments of the transfer price. (Schefenacker Motherson 123 TTJ 509 (Del.) and SAP Labs 6 ITR 81 (Bang.)(Trib.) followed) TNT India Limited vs. ACIT (2011) 45 SOT 471/ 61 DTR 81 (Bang.)(Trib.) Source: www.itatonline.org(Trib) S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation. ‐ For TNMM, interest on surplus and abnormal costs to be excluded Where interest on surplus funds is assessed as “business income”, it has to be excluded in computing the ‘operating profits’ because if it is included, one is computing the “return on investment” which is an inappropriate profit level indicator for a service provider. As the PLI is the Operating Margin on Cost, neither the interest income nor interest expenses is a relevant factor. The essential element is the cost incurred for the operating activity which has to be taken into account. In computing the ALP, abnormal expenses which are not of a routine nature as well as those of a personal nature have to be excluded. The assessee has to demonstrate “exact details, exhibiting the risk born by the comparable vis‐à‐vis the risk in running the assessee’s business” (Sony India 114 ITD 448 (Del) where a 20% adjustment was permitted distinguished). The benefit of +/‐ 5% adjustment is not a ‘standard universal deduction’. This option is available only when assessee is computing the ALP and not when the AO/TPO is computing the ALP. Marubeni India Private Ltd. vs. ACIT (ITAT Delhi)(Trib),Source : www.itatonline.org S. 92(C) : Avoidance of Tax ‐ Transfer Pricing – Method ‐ CUP Method –TNMM The assessee sold automobile wipers to its associated enterprise and claimed that as per the “Comparable Uncontrolled Price” (CUP) method, the transactions were at arms’ length basis. The TPO rejected the CUP method on the basis that the comparability of controlled and uncontrolled transactions was not established with certain degree of reasonableness and accuracy and that the conditions prevailing in the market were not established to be identical. The TPO adopted the TNMM and directed that an adjustment be made by adopting the mean profit of comparables. This was confirmed by the DRP. On appeal, HELD: (i) Under section 92C read with Rule 10B, the most appropriate method has to be applied for determination

of arm’s length price. In principle, the CUP method (the traditional transaction method) is preferable to


the other methods because all other things being equal, the CUP and traditional transactional methods lead to more reliable results vis‐à‐vis the results obtained by applying transaction profit method (UCB India 121 ITD 131 and Serdia Pharmaceuticals followed);

(ii) For the CUP method, the focus is on the market in which the products are sold by the assessee and any unique feature of the market in which assessee is situated is of no importance in relative terms. As the goods were sold by the assessee as well as the competitive Chinese manufacturers in the USA market, the market conditions in the territory of sale were the same. The buyer in the USA market will be more concerned with quality and price rather than economic conditions prevailing in China and India (SNF (Australia) Pty. Ltd. vs. COT (2010) FCA 635 referred to);

(iii) As regards the comparability of the products the assessee has to provide the sale data of the AE in terms of sale price of Chinese and assessee’s goods in the USA market and quantitative data of purchase of Chinese and Indian wipers by the AE and the terms of payment and the Assessing Officer shall compute the arm’s length price using this data on CUP method.

Clear Plus India Pvt. Ltd. vs. Dy. CIT (ITAT ‐ Delhi)(Trib) Source: www.itatonline.org S. 92C : Avoidance of Tax ‐ Transfer Pricing – Loss‐making and super‐profit companies are not comparable ‐ International Taxation. When loss making companies have been taken out from the list of comparables by the TPO, Zenith Infotech Ltd. which showed super profits should also be excluded. The fact that assessee has himself included in the list of comparables initially, cannot act as estoppel, particularly in light of the fact that the Assessing Officer had only chosen the companies which are showing profits and had rejected the other companies which showed loss (Quark System vs. Dy. CIT 38 SOT 307 (SB) followed). (A. Y. 2006‐07) Sapient Corporation Pvt. Ltd. vs. Dy. CIT (Delhi) (Trib.) Source: www.itatonline.org S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ International Taxation. Low T/O companies are not comparable. Only operational profits to be considered for comparison (i) The assessee’s argument that comparables with a turnover less than 20% of the assessee’s turnover should be considered is not acceptable because it is a universal fact that there are lot of differences between large businesses and small businesses operating in the same field. In the case of small business, economies of scale are not available and they are generally less profitable. The fact that such companies were considered comparable in an earlier year is not conclusive for want of facts of that year and also because there is no res judicata; (ii) The argument that segmental results of a company engaged in diverse activities should be considered is also not acceptable because it is a common experience that in many such results certain expenditures, particularly relating to interest and head office, are generally not allocated. When direct comparables are available, there is no need to consider segmented results; (iii) In principle, should be only the operating profit of the comparables considered. Items like interest income, rent, dividend, penalty collected, rent deposits returned back, foreign exchange fluctuations and profit on sale of assets do not form part of the operational income because these items have nothing to do with the main operations of the assessee. Insurance charges would depend on the nature of insurance charges. If the insurance charges were on account of loss of some parcel or courier against which courier has made a payment of compensation then such charges would constitute operational income. (A. Y. 2006‐07). See Also Adobe Systems India (ITAT Delhi) (super‐normal profit companies to be excluded) & Marubeni India (ITAT Delhi) (interest on surplus & abnormal costs to be excluded) DHL Express (India) Pvt. Ltd. vs. ACIT(2011) 46 SOT 379(Mum)(Trib).


S. 92 C. Avoidance of tax‐ Transfer Pricing principles on use of multi‐year data, turnover filter, risk adjustment & +/‐ 5% adjustment (i) If the Transactional Net Margin Method (“TNMM”) is adopted, the comparison has to be made between the net margin realised from the operation of the uncontrolled parties’ transaction and net margin derived by the assessee on similar international transactions. The comparison should be between the net margins on transaction basis and not at enterprise level; (ii) U/s 92CA(3), the TPO is entitled to consider material in public domain which, though not available to the assessee at the time of the TP study, is relevant for the financial year; (iii) Ordinarily only the data pertaining to the financial year of the transaction can be considered. The proviso to Rule 10B (4) which permits the use of data relating to other than the financial year in which the international transaction has been entered into; being not more than two years prior to such financial year does not mean that one can insist on the use of multi‐year data but it has a limited role only when the data of earlier years reveal facts which could have influenced on determination of the TP in relation to the transaction being compared. As the assessee has not made out a case that taking the data for only the current financial year will not present the correct and fair financial result of the comparables, the claim for multi‐year data cannot be entertained; (iv) While in principle, comparables having an abnormal difference of turnover and distorted operating profits have to be excluded for determining the ALP, the claim that as the assessee revenue is about Rs. 20 crores, comparables having more than 50 crores and less than 5 crores of turnover should be excluded is not acceptable because no specific fact has been brought on record to show that due to the difference in turnover the comparables become non‐comparables. It is accepted economic principle and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive. Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself; (v) The argument that an adjustment should be made for difference in function and risk level is not acceptable because the assessee has not brought on record how such functional difference and risk has influenced the result of the comparables with quantified data. Further, the +/‐5% adjustment as the 2nd Proviso to s. 92C is intended to adjust for such differences; (vi) The department’s argument that the amendment by FA 2009 w.e.f. 1.10.2009 to the 2nd Proviso to s. 92C with regard to the +/‐5% variation from the arithmetic mean of the ALP is clarificatory and procedural and so retrospective is not correct. Symantec software Solutions Pvt. Ltd. vs ACIT (Mumbai)(Trib). www.itatonline.org. S. 92C. Avoidance of tax‐Transfer Pricing principles on use of multi‐year data, adjustment to operating profits & +/‐ 5% adjustment. (i) The rejection of comparables on the ground of non‐availability of current year’s financial data is proper because under Rule 10B(4), only the current year’s financial data is relevant for determination of ALP except where it is shown that the data of the earlier two years reveals facts which could have an influence on the determination of the transfer price; (ii) A selected comparable should be functionally comparable. A company which is majorly dealing in other segments cannot be accepted as functionally comparable; (iii) There is no principle of law that if only one comparable remains, the entire exercise would fail; (iv) The argument that expenses incurred prior to the commencement of manufacturing activity hence should be excluded from operating expenses under Rule 10B(1)(e)(i) is not acceptable because operational expenses is that


which is incurred to earn that income. Expenses with nexus with revenue have to be considered as operational expenses and cannot be excluded only on the ground that the date of occurrence of the revenue is later and expenses have been incurred prior to that; (v) The assessee’s argument that the margins have to be recomputed after claiming adjustment of capacity utilization is not acceptable. Under the TNMM, the net profit margin actually realized has to be considered and there is no room for any assumption for taking the profit margin. It is not permissible to deviate from the book results on the ground of capacity utilization. Under Rule 10B(3)(ii), there cannot be any deviation in the net profit shown in the books of account and the adjustment, if any, can be made to the same to eliminate the material affects to such differences to the extent of these adjustments are reasonably accurate. As no credible and accurate information with regard to capacity utilization was furnished, adjustment was not allowable; (vi) The Proviso to s. 92C which gives the assessee the option to adjust the ALP by +/‐ 5% is applicable only where more than one price is determined by the most appropriate method. In a case where only one price is determined by the most appropriate method, the benefit of +/‐ 5% is not available to the assessee. ( Asst year 2006‐07). Haworth (India)Pvt. Ltd. vs DCIT ( 2011) 131 ITD 215/58 DTR 36/ 11 ITR 757(Trib)( Delhi) (Trib) . www.itatonline.org. S. 92C. Avoidance of tax ‐ Transfer Pricing – Loss / High – Profit cost need not per se be excluded. The assessee rendered three services to its AE and while it received a mark‐up for “application of technical development services” and “promoting the licensing of technology”, it did not receive any mark‐up for “application research”. The argument that the three activities should be aggregated to determine the ALP is not acceptable because the entire benefit of the “application research” was retained by the AE and not shared with the assessee and so there was no justification for not compensating the assessee; While in principle, it is correct that if loss making units are excluded, abnormal profit making units should also be excluded, on facts, the TPO had rightly rejected the loss making companies as not being comparable. In principle, neither loss making units nor high profit making units can be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits. Exxon Mobil Company India Pvt. Ltd. vs. DCIT (ITAT) (Mum) (www.itatonline.org). S. 92C: Avoidance of tax‐ Transfer Pricing‐Comparison‐Quality – Size. Without ascertaining the quality and size of precious stones as sold to Associated Enterprise as compared to other enterprises, the Assessing Officer could not have made any adjustment on account of quality, and therefore, the addition made by Assessing officer on account of ALP was liable to be deleted.(Assst Year 2005‐56). ITO v Kanchan Tara Exports ( 2011) 138 TTJ 592 (JP) (Trib). S.92C. Avoidance of tax‐ Transfer Pricing‐Net margin‐ Adjusted book profits. While determining arm’s length price, it is profit as per books of account that has to be considered for computing net margin of assessee and not adjusted book profits. ( Asst Year 2006‐07). Geodis Overseas (P) Ltd v Dy CIT ( 2011) 45 SOT 375/ 57 DTR 191 (Delhi )(Trib). S.92C: Avoidance of tax‐ Transfer Pricing‐Selection of comparable‐ (S.10B(1) (e). The AO had accepted the license fees for the month of February and March , 2003 to be at arm’s length . However the steep increase given from the beginning of the year with retrospective effect has not been accepted .CIT (A) has accepted the computation made by the assessee, based on the comparable as well as department has accepted the method of computation for the asst year 2004‐05. The Tribunal restored the


matter to the file of AO for re working of the transfer pricing adjustments using TNMM on the basis of facts and figures available for asst year 2003‐04 in respect of the comparable selected by the assessee.( Asst Year 2003‐04) Asst CIT v NCG Net work (India ) (P ) Ltd ( 2011) 56 DTR 1 (Mumbai) (Trib). S.92C: Avoidance of tax‐ Transfer Pricing‐Computation of arm’s length price‐ Provision for import duty. Provision for import duty made by the assessee which has been reversed in the immediately succeeding year being merely a book entry , is to be excluded for working out the operating profit ratio for computation of ALP (Asst year 2005‐06 & 2006‐07).. Sony India (P) Ltd v Addl CIT ( 2011) 56 DTR 156 ( Delhi) (Trib). S. 92C: Avoidance of Tax‐ Transfer Pricing‐Computation‐Expenses of personal nature‐Compensation – Interest Income on investment‐ ‐benefit of 5 %. In computing ALP , expenses in the nature of abnormal items or personal nature are to be excluded from operating cost. Where the assessee had failed to bring any evidence on record to show that there exists any difference in the risk profile of the comparable companies vis –a vis the assessee , no benefit of adjustment to be given to assessee in determination of ALP. Benefit of 5 percent provided in the proviso to section 92 C (2) is available only when assessee is computing the ALP and not when the AO/TPO is computing the ALP. Interest income on investment should be excluded from operating income while working out ALP. When , by virtue of closing down certain branches , assessee has reduced the cost of AE and if such a closure has a direct link with the international transaction and compensation received for such a closure can not be excluded from operating expenses.( Asst years 2002‐03, 2003‐04) Marubeni India (P ) Ltd v Addl . CIT ( 2011) 56 DTR 252 (Delhi) (Trib). S. 92C. Avoidance of Tax‐ Transfer Pricing – Computation‐Comparable‐ Adjustment. Transfer Pricing Officer having excluded the loss making companies from the list of comparables in the transfer pricing analysis , one company which showed the super profits is also to be excluded as it is engaged in software product company. Where as the assessee is engaged in rendering soft ware development services in OP/TC of the assessee is with the safe harbour range of + 5 percent , no adjustment is warranted on account of difference in ALP of the international transaction. (Asst Year 2006‐07). Sapient Corporation ( P) Ltd v Dy CIT ( 2011) 56 DTR 465 ( Delhi ) (Trib). S.92C: Avoidance of tax‐ Transfer pricing‐Computation –Selection of comparables and maintenance of documents.( Rule 10D). Each transaction of sale made by the assessee to its AE in UK being a separate transaction and there being no subsisting agreement between the assessee and the AE from beginning in 1996 , proviso to rule 10(4) is not applicable to the facts of the case and therefore , assessee was required to maintain documents as per rule 10D . Cases relied upon by the TPO not being comparable cases, matter is restored to the AO to obtain data of comparable cases so as to come to an informed decision as to whether the price charged by the assessee from its AE is arm’s length or not.(A.Y. 2006‐07 ). Airtech (P) Ltd v Dy CIT ( 2011) 57 DTR 169 (DelhI) (Trib). S. 92C: Avoidance of tax – Transfer Pricing –Comparables‐ Domestic‐ External. Assessee having cited six comparables , TPO /AO was not justified in rejecting the same and applying domestic transactions of the assessee when the AO/TPO has accepted said six external comparables in


the subsequent assessment year and there is similarity of facts in both the years , further the assessee is entitled to economic adjustments in the circumstances of under capacity utilization of the company , matter is set a side for examining the issue de novo. ( Asst Year 2006‐07) Bringtons Carpets Asia (P ) Ltd v Dy CIT ( 2011) 57 DTR 121 ( Pune ) (Trib). S. 92C: Avoidance of tax‐ Transfer Pricing‐Computation‐ Arm’s Length Price‐ One price determined‐ Concession prescribed in proviso. The Hon’ble Tribunal held that, where there was shortage of price in respect of transactions entered with AE vis‐à‐vis NAE the AO was right in rejecting the contention that price need not be disturbed as one declared by assessee was less than 5% variation in transaction with AE and NAE relying on CBDT circular No.12 dated 23/8/2011. The Tribunal further observed that Proviso, for which Circular no 12 was issued had never come in to operation and hence question of administration of said proviso to section 92 C (2) did not arise at all. Subsequent amendment brought in Finance Act , 2002 , said circular had became otiose therefore the assessee could not place reliance on circular no 12 and for relevant year under consideration only proviso to section 92C (2) as amended by Finance Act , 2002 was applicable. Since in the instant case, only one price had been determined under “most appropriate method” assessee was not entitled to concession , as prescribed in proviso to section 92C(2), hence the order of Assessing Officer was confirmed. ( Asst year 2004‐05). Asst CIT v Essar Steel Ltd ( 2011) 131 ITD 22 ( Visakh) (Trib). S. 92C:Avoidance of tax‐ Transfer pricing‐ International transaction‐ Comparable‐ Financial information‐ Bad debt. ( S. 36 (1) (vii)) TPO can use financial information available at the time of assessment , though it was not available at the time of study. It is impossible to have a perfect comparable without any difference or variation regarding turnover , risk profile and functional differences and therefore , legislature has provided a margin of +5% while determining the ALP ; therefore , when assessee is having such benefit of choice /option provided by second proviso to section 92(C ) (2) , no separate adjustment is required on account of risk and functional differences .Further ,amendment in second proviso to section 92 C (2) is not retrospective but is prospective from day from which this amendment is effected . i.e. 1‐10‐2009.There is no difference between first and second limb of proviso to section 92 C (2) as far as right of assessee to challenge determined price concerned: Second limb only allows marginal relief to an assessee at his option to take ALP not exceeding 5 percent of arithmetic mean and therefore , benefit of second limb of proviso to section 92C (2) is available to all assessees irrespective of fact that price of international transaction disclosed by them exceeds margin provided in said proviso. During the year assessee had written off certain amount as bad debt , which represented excess commission charged by it from its foreign associated enterprise and claimed deduction of same, the tribunal held that it is irrelevant for purpose of determining arm’s length price for international transaction whether actual price charged by an assessee in relation to international transaction is less or excessive and therefore , deduction of bad debt was not allowable.( A. Y. 2004‐05) Symantec Software Solutions (P) Ltd v Asst CIT ( 2011) 46 SOT 48 (Mumbai) (Trib) S.92C: Avoidance of tax‐ Transfer Pricing‐ Arm’ s length price‐Transfer Pricing‐Selection of comparables. Exact nature of the business needs to be taken in to consideration vis –a –vis the nature of business activity carried on by other parties so as to ascertain whether the said parties can be selected as


comparable cases for transfer pricing analysis ; Four companies included by the assessee company , there was no justifiable reason to select the same as comparables; however , exclusion of companies showing supernormal profits as compared to other comparable is fully justified.( Asst Year 2004‐05). Teva India (P) Ltd v Dy CIT ( 2011) 57 DTR 212 ( Trib) (MumbI). S.92C:Avoidance of tax‐ Transfer Pricing‐Computation‐ of arm’s length price‐ Adjustment of 5% to single price determined by the assessee. Adjustment of 5 % is not applicable if a single price is determined by the assessee . Circular no 12 dated 23‐8‐2001 does not apply to the case under consideration as the price variation is more than 5 % .( Asst Year 2004‐05). ADP (P ) ltd v Dy CIT ( 2011) 57 DTR 310 ( Hyd) ( Trib) . S.. 92C:Avoidance of Tax‐ Transfer Pricing‐Comparable. In view of the fact that annual reports / data base extracts of three companies which were selected as comparable cases were not available earlier in the public domain and having regard to the fact that these documents are essential for determining ALP , these additional evidences are admitted for consideration : TPO is directed to make a fresh transfer pricing order by taking in to account database of said companies now submitted and also to decide as to whether all the comparables selected by the assessee are proper comparables for the purpose of determining ALP after considering the relevant parameters.( Asst year 2005‐06). Asst CIT v NIT Ltd ( 2011) 57 DTR 334 ( Del) (Trib). S. 92C: Avoidance of Tax‐ Transfer Pricing‐Computation – Arm’s length price‐ 5% variation in ALP. When assessee showed the price charged was with in 5 % variation of ALP , no addition was required to be made.( Asst Year 2006‐07) Capgemini India ( P) Ltd v Addl CIT ( 2011) 46 SOT 195 ( Mumbai) (Trib). S. 92C.:Avoidance of tax‐ Transfer Pricing: Important Principles on comparability & +/‐5% adjustment stated. (i) The expression “shall” in Rule 10B(4) makes it clear that it is mandatory to use the current year data first and if any circumstances reveal an influence on the determination of ALP in relation to the transaction being compared than other data for period not more than two years prior to such financial year may be used. If the current year’s data of comparables is not available at the time of filing the ROI a fresh search of comparables during the transfer pricing proceedings is permissible; (ii) The +/‐5% tolerance band in s. 92C is not a standard deduction. If the arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it exceeds the said tolerance band, ALP adjustment is not required to be computed after allowing the deduction at 5%. That means, actual working is to be taken for determining the ALP without giving deduction of 5%; (iii) The transfer pricing rules apply when one of the parties to the transaction is a non‐resident, even if the transaction takes place within India. There is no need to find out the legislative intent behind the transfer pricing provision when the provisions were unambiguous. The existence of actual cross border transactions or motive to shift profits outside India or to evade taxes is not a pre‐condition for transfer pricing provisions to apply. DCIT vs Deloitte Consulting India Pvt. Limited (2011) 61 DTR 101 (Hyd)( Trib). www.itatonline.org.


S. 92C: Avoidance of tax‐Transfer Pricing: Disallowance of costs on ground that AE also benefited not permissible. (i) A continuing debit balance per se, in the account of the associated enterprises, does not amount to an international transaction u/s 92B in respect of which ALP adjustments can be made. It is a result of international transaction. The factum of payment has to be considered vis‐à‐vis terms of payment set out in the transaction arrangement, and not in isolation with the commercial terms on which transaction in respect of which payment is delayed. (Nimbus Communications followed); (ii) U/s 92B(1), the apportionment of cost is permissible only where there exists a “mutual agreement or arrangement” between two or more Associated Enterprises for apportionment of cost incurred in connection with a benefit, service or facility provided to any one or more of such Enterprises. In the absence of such an agreement to share the costs incurred on the McKinsey study, the costs cannot be apportioned. The bare allegation that the AE’s had received “specific and identifiable benefits” is not sufficient to justify apportionment. Further, even assuming that the AEs were liable to compensate the assessee, the TPO ought to have determined the ALP of such “international transaction” after taking into consideration all the rights obtained and obligations incurred by the two entities, including the advantages obtained by the AEs. He ought to have identified comparables and recorded a finding that the consultancy charges were higher than what a similarly situated and comparable independent domestic entity would have incurred. Patni Computer Systems Ltd. DCIT(2011) 60DTR 113/ 141 TTJ 190 ( Pune)( Trib). www.itatonline.org. S.92C.: Avoidance of tax‐ Transfer Pricing: CBDT’s view that +/‐5% variation amendment applies to pending proceedings incorrect. In respect of AY 2006‐07, the assessee entered into international transaction with its associate enterprises for a sum of Rs. 14.33 crores. The TPO applied the TNMM and determined the ALP at Rs. 15.08 crores and made an adjustment of Rs. 75 lakhs. The assessee claimed that as the said adjustment was within +/‐5% of the ALP, no adjustment could be made under the proviso to s. 92C(2) as it stood pre‐amendment by the F (No. 2) Act, 2009. The Department relied on Circular No.F.142/13/2010‐SO (TPL) dated 30.9.2010 (Corrigendum) where the view was expressed that as the amendment came into effect from 1.10.2009, it would apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer on or after such date. HELD disagreeing with the Department’s contention: While the Finance (No.2) Act, 2009 provides that the substituted Proviso shall come into effect on 1.10.2009 and applies in respect of AY 2009‐10 & subsequent years, the Explanatory Notes to the Finance (No.2) Act, 2009 issued vide Circular No.5/2010 dated 3.6.2010 incorrectly states that the amendment comes into effect on 1.4.2009. In the Corrigendum, it is stated that the amendment shall apply to proceedings pending before the TPO on or after 1.10.2009. It is difficult to accept the argument of the Department that retrospective or prospective applicability of a provision should be decided in the manner explained by the CBDT. A procedural provision resulting in creating a new disability or which imposes a new duty in respect of transactions already completed cannot be applied retrospectively. As the amended Proviso brings about a substantial change in the relief available to an assessee, it cannot be treated as being retrospective in nature. Kuber Tobacco Products 117 ITD 273 (Del) (SB) & Ekta Promoters 113 ITD 719 (Del) (SB) followed iPolicy Network Pvt. Ltd. vs ITO(2011) 59 DTR 209 ( Delhi)( Trib). www.itatonline.org. S. 92C : Avoidance of Tax ‐ Transfer Pricing ‐ Despite FAR matching, Loss Co to be excluded.


From the list of comparables provided by the assessee (after excluding persistent loss‐making companies), the TPO rejected some other loss‐making companies & determined the ALP applying the TNMM and made an adjustment of Rs. 2.28 crores. The Tribunal dismissing the appeal held that : Merely because a company is showing losses, it does not lose its status of comparable if the other criteria depict its status as a comparable because the declaration of loss is an incident of business which is at par with profit. The FAR Analysis of a company indicated the avowed objective of the company and the tools that it sought to employ to achieve that objective but it was the financial result which decided whether that company has been successfully in achieving the objective or not. The TPO held that if the assessee’s contention based on FAR analysis only is accepted then the process of choosing comparable will not proceed beyond the matching of FAR. All types of other tests i.e. data base screening, quality and quantitative screening or use of diagnostic with ratios will be rendered meaningless and unnecessary. Comparablity has been taken into consideration by the assessee on the basis of FAR analysis and “other aspects” have not been considered. TPO had looked into “other aspects” also. Yum Restaurants(India) Pvt. Ltd (ITAT Delhi). www.itatonline.org. S.92C:Avoidance of tax‐ Transfer pricing – Computation‐CUP method‐ TNMM. TPO having computed the ALP by applying CUP method as against TNMM adopted by the assessee and rejecting the objections raised by the assessee on the ground that all those objections were considered by the TPO in earlier years. The assessee having raised various submissions before the Tribunal which need verification at the level of the AO/TPO matter restored for fresh verification as per law.( A.Y. 2006‐07). Fulford ( India ) Ltd v Dy CIT ( 2011) 59 DTR 106/140 TTJ 183 ( Mumbai) (Trib). S.92C:Avoidance of tax‐ Transfer pricing‐ Computation‐ Cup method. Where no data was available in respect of uncontrolled transactions which were similar to transactions of assessee with its foreign associated enterprise, CUP method could not be considered as most appropriate method to determine arm’s length price of royalty by assessee to its AE for technology collaboration. Tribunal set a side matter to the file of Assessing Officer with direction to do the exercise of determining the arm’s length price by applying the most appropriate method .( A.Y. 2005‐06) Cabot India Ltd v Dy CIT ( 2011) 46 SOT 402 / 61 DTR 408( Mum) (Trib). S.92C: Avoidance of tax‐ Transfer pricing –Interest on loan granted by assessee to AE. In case of grant of loan by assessee to its foreign subsidiary in foreign currency out of its own funds . For determining ALP ,it is the international LIBOR rate that would apply and not the domestic prime lending rate , and assessee charging interest at a rate higher than the labor rate , no addition can be made on this count.( A.Y. 2006‐07) Siva Industries & Holdings Ltd v Asst CIT ( 2011) 59 DTR 182( Chennai) (Trib). S. 92C:Avoidance of tax‐Transfer Pricing & “Cost Contribution Agreements”: Law Explained – Commercial wisdom not to be questioned The assessee entered into a ‘cost contribution agreement’ with its parent company pursuant to which it paid a sum of Rs. 10.55 crores as its share of the costs. The TPO, AO & DRP disallowed the expenditure. On appeal by the assessee, the Tribunal held that(i) The TPO was not entitled to determine the ALP under the cost contribution agreement at “Nil” on the basis that the assessee did not need the services at all. How an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. The TPO went beyond his powers in questioning the commercial wisdom of the


assessee’s decision to take benefit of its parent company’s expertise. Further, the TPO’s argument that the assessee did not benefit from the services is irrelevant because whether there is benefit or not has no bearing on the ALP of the services. The fact that similar services may have been granted in the past on gratuitous basis is also irrelevant in determining the ALP. The argument that no evidence of services having been rendered was produced is not acceptable because the assessee did produce voluminous evidence before the DRP which was not dealt with. The DRP ought to have dealt with the material and given reasons. Matter remanded to the AO to determine actual rendering of services (Vodafone Essar Ltd vs. DRP 240 CTR 263 (Del) followed); (ii) A cost contribution arrangement has to be consistent with the arm’s length principle. The assessee’s share of overall contribution to costs must be consistent with the benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. (iii) The disallowance of payment under the ‘cost contribution agreement’ u/s 37(1) & 40A(2) is not justified because the payment did not involve mark‐up and was at arms length price. The services were for furtherance of the assessee’s business interests; (iv) The disallowance of payment u/s 40(a)(i) for want of TDS is not justified because the payment was not taxable in the AE’s hands under Article 5 & 12 of the India‐USA DTAA as the AE did not have a PE and the services did not constitute “fees for included services”. (GE India Technology Centre 327 ITR 456 (SC) followed); (v) The TPO’s argument that in charging for the services rendered to the AE, a 10% discount could not be given is not acceptable. Discount is a normal occurrence even in independent business situations. The material factor is whether the 10% discount is an arm’s length discount and there is nothing on record to suggest that it is not so. Dresser‐Rand India Pvt.Ltd. v ACIT(2011) 61 DTR 137/ 141 TTJ 385/ 61 DTR 265 (Mum) (Trib). www.itatonline.org. S. 92C : Avoidance of Tax ‐ Transfer Pricing‐ Sale of IPRs ‐ Important Principles of Law Explained. There is nothing in s.92CA that requires the AO to first form a “considered opinion” before making a reference to the TPO. It is sufficient if he forms a prima facie opinion that it is necessary and expedient to make such a reference. The making of the reference is a step in the collection of material for making the assessment and does not visit the assessee with civil consequences. There is a safeguard of seeking prior approval of the CIT. Moreover, by virtue of CBDT’s Instruction No.3 of 2003 dated 20.5.2003 it is mandatory for the AO to refer cases with aggregate value of international transactions more than Rs.5 crores to the TPO The argument that the “Excess Earning Method” adopted by the TPO is not a prescribed method is not acceptable. A sale of IPR is not a routine transaction involving regular purchase and sale. There are no comparables available. The “Excess Earning Method” is an established method of valuation which is upheld by the U.S Courts in the context of software products. The “Excess Earning Method” method supplements the CUP method and is used to arrive at the CUP price i.e. the price at which the assessee would have sold in an uncontrolled condition. Tally Solutions Pvt. Ltd. v DCIT (Bang) (Trib)(www.itatonline.org) S. 92C : Avoidance of Tax ‐ Transfer Pricing – Principles of “Comparable Uncontrolled Transaction” explained. Under Rule 10B(1)(e)(ii), “the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base. The term “uncontrolled transaction” is defined in Rule 10A(a) to mean “a transaction between enterprises other than associate enterprises, whether resident or non‐resident”. The result is that in applying the TNMM, the net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions require that a case should not only be comparable but also have uncontrolled transactions. These twin conditions need to be cumulatively satisfied. If a case is only comparable but has controlled transactions or vice‐versa, it falls outside the ambit of the list of comparable cases;


The fact whether the comparable has a higher or lower profit rate has not been prescribed as a determinative factor to make a case incomparable. This is because profit is not a factor in itself, but a consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B (2) read with sub‐rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables; DCIT v BP India Service Pvt. Ltd.(Mum)(Trib) (www.itatonline.org) S. 92C : Avoidance of Tax ‐ Transfer Pricing – Methods of computing ALP ‐ Important Principles of Cost Plus, CUP & TNMM Explained The assessee, engaged in the business of manufacture and export of studded diamond and gold jewellery, imported & exported diamonds and exported jewellery to associated enterprises. For transfer pricing purposes, the ALP of the imported & exported diamonds was evaluated using the “Comparable Uncontrolled Price” (CUP) method while the exports of jewellery was evaluated using the “Cost Plus Method” (CPM). The TPO & AO rejected both methods on the ground that adequate material to support it was not available and instead adopted the TNMM and made an adjustment. On appeal, the CIT(A) upheld the adoption of CPM on the imports & exports of diamonds on the ground that total cost details were maintained and the average margin earned from AE transactions was higher than that earned from non AE transactions. However, he did not deal with the ALV on export of jewellery. On appeal by the department, HELD reversing the CIT(A): (i) As regards the CPM, it had not been correctly applied. The application of CPM provides for (a) ascertaining the direct and indirect costs of property transferred, or services rendered, to the AE; (b) ascertaining the normal mark up of profit over aggregate of costs in respect of similar property or services to unrelated enterprises and (c) adjusting the normal mark up for differences, if any, in the material factors such as risk profile, credit period etc. While the benchmark gross profit can be set by taking into account several transactions with unrelated enterprise on a ‘global basis’, the benchmark cannot be applied on a global basis but has to be on a transaction basis. Eg. if the benchmark GP is 20% and the assessee charges a mark‐up of 2% in one transaction with AE and 38% in another transaction with the AE, both transactions, will meet the ALP test resulting in an incongruity. On facts, while the normal mark up has been computed at 16.31%, and the average of mark up on sales to AEs has been taken at 17.08% and all AE transactions taken to be at ALP, there are individual instances which are less than the benchmark. This is not the correct way to apply the CPM. Also, the costs of inputs have not been verified and it is not shown that the terms of sale to the AEs and all other relevant factors are materially similar to the transactions with independent enterprises. Also, the CPM has been applied by comparing gross profit on sales, whereas the method requires comparison of mark up on costs on transactions with AEs vis‐à‐vis mark up on costs on transactions with non AEs (matter remanded to CIT (A) for de novo consideration); (ii) As regards the CUP for import & export of diamonds (which was not decided by the CIT (A)), the assessee ought to have produced evidence to show that the transactions are at prevailing market prices; (iii) As regards the TNMM, International transactions with AEs have three significant areas of impact on the overall profitability i.e. sales of finished goods to AEs, sales of raw materials to AEs and purchase of raw materials of AEs), and if the ALP cannot be reasonably determined by CUP or any other direct method (i.e. CPM and RPM) in respect of even one of these areas, the application of TNMM or other indirect method ( i.e. profit split method) is inevitable. On a conceptual note, when ALP of the transactions with AEs cannot be reasonably ascertained, the profit earned by the assessee entering into these transactions is to be estimated, and that is precisely what TNMM does. When TNMM is applied in the context of sales of finished goods to AEs, it is this figure which is taken as variable figure and it bears the impact of higher margins, and when TNMM is applied in the context of purchases of raw materials from AEs, it is the figure of purchases of raw material from AEs which is taken as


variable figure and it bears the impact of higher margins. Beyond that, the cause of invoking TNMM does not make much material difference (point whether TNMM has to be applied to the transactions and not on overall profits left open); (iv) The argument, relying on Indo American Jewellery Ltd 41 SOT 1, that no ALP adjustment can be made as the assessee enjoys s. 10A tax benefits and has no “motive” to avoid tax is not acceptable because those observations are “obiter dicta” without binding force and in view of Aztech Software 107 ITD SB 141 where it was held that tax avoidance motives need not be shown before invoking transfer pricing provisions. ACIT v Tara Ultimo Private Limited (Mum)(Trib) (www.itatonline.org) S.92C : Avoidance of tax‐ Transfer pricing‐Computation‐Data‐Selection of comparable‐5% Adjustments. The expression “shall” has been used in rule 10B (4) which makes it abundantly clear that only current year data of an uncontrolled transaction is to be used for the purpose of comparability while examining the international transactions with AE s , unless the case is covered by the proviso i.e. if the data of preceding two years reveals facts which could have an influence on the determination of transfer price. Assessee company being engaged in producing semiconductor integrated circuits is a complex product requiring skilled workforce. TPO was justified in treating it as high end service provider for the purpose of selection of comparables. The fact that the assessee’s role is only 2 to 3 percent of the overall operations performed by the group is not at all relevant for deciding whether it is high end performer or low end performer. Assessee having submitted a TP report every year by using different filters for selecting comparables are commensurate to the result declared by it . TPO was justified in rejecting the same and selecting new comparables by applying quantitative as well as qualitative filters. Tolerance band provided in the proviso to section 92C(2) is not to be construed as a standard deduction. If the arithmetic mean of comparables falls with in range of said tolerance band , no adjustment is required , if it exceeds then the ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5 percent.( A.Ys 2003‐04 , 2004‐05, 2006‐07) ST Microelectronics (p) Ltd v CIT ( 2011) 61 DTR 1 ( Trib) ( Delhi). S. 92CA : Avoidance of Tax ‐ Transfer Pricing – Computation – Arm’s Length Price ‐ Reimbursement of Expenses ‐ International Taxation Payment received by the assessee company from its AE / parent company was in the nature of reimbursement of incentives paid to the employees of the assessee and it did not have any element of income and therefore, no adjustment could be made in the computation of ALP by notionally imputing a mark up on that amount, more so when no such adjustment has been made in the earlier or subsequent years wherein also similar incentives were paid and the facts were identical.(A. Y. 2006‐07) Aricent Technologies (Holdings) Ltd. vs. Dy. CIT (2011) 51 DTR 17/137 TTJ 209 (Delhi)(Trib.) S. 92CA :Avoidance of tax‐ Transfer Pricing – Computation ‐ Arm’s Length Price ‐International Taxation – Adjustment. On a reference under section 92CA(1), TPO can suggest adjustment only in respect of the international transactions entered in to by the assessee with AEs which are referred to him for computation of ALP by the Assessing Officer. TPO cannot suo motu take cognizance of any other international transaction for suggesting adjustment in the ALP. (A. Y. 2006‐07) Amadeus India (P) Ltd. vs. ACIT (2011) 52 DTR 378 (Delhi)(Trib.) S. 92CA :Avoidance of tax‐ Transfer Pricing – Computation ‐ Arm’s Length Price –Trader ‐ Resale Method.


Assessee engaged in business of import of rough diamonds and selling same in local markets without value addition to goods, resale price method is most appropriate method for determining ALP with respect to AE transaction. If comparables cited by assessee were not found appropriate, fresh comparables could be searched, but method adopted was not to be rejected. Matter was set aside to Assessing Officer for disposal afresh after finding appropriate comparable and adopting resale price method. (A. Y. 2004‐05) Star Diamond Group vs. Dy. CIT (2011) 44 SOT 532 (Mum.)(Trib.) S. 92CA : Avoidance of Tax – Transfer Pricing – Collaboration Agreement – Capital or Revenue – International Taxation. TPO is not concerned, nor is he competent to decide as to whether the payment under collaboration agreement was capital or revenue and on the facts and circumstances, reference to the TPO for determining 'arm's length price' may not be necessary. Honda Siel Cars India Ltd. vs. ACIT (2011) 129 ITD 200 (Delhi)(Trib.) S. 92(C)(2) : Avoidance of Tax ‐ Transfer Pricing – Computation ‐ Arm’s Length Price ‐ International Taxation Where only one price has been determined under “most appropriate method” for evaluation of ALP, the question of application of proviso to section 92C(2) does not arise, therefore, assessee was not entitled to the concession of 5 percent as prescribed in the said proviso.(A. Y. 2004‐05) ACIT vs. Essar Steel Ltd. (2011) 51 DTR 177 / 136 TTJ 470 (Visakha)(Trib.) S.94:Avoidance of tax‐Transaction in securities‐Tax free dividend‐Loss on sale of units. (S. 10(33). Assessee had purchased certain units of UTI from P on 29‐5‐1989 at rate of Rs 14.75 per unit, at the same time assessee entered in to an irrecoverable commitment to sell back those units to P at rate of Rs 13 per unit on 31‐7‐1989. The assessee received dividend at the rate of 18 percent on those units. The assessee incurred loss. The assessing officer disallowed the loss holding that the same was predetermined. The High court held that even if it was assumed that transaction was a pre planned one, there was nothing to impeach genuineness of transaction and therefore, assessee was entitled to claim the loss on said transaction. (A.Y. 1990‐91) Evereaday Industries Ltd v CIT ( 2011) 201 Taxman 278 ( Cal) (High Court). S. 94(7) : Avoidance of Tax ‐ Transaction in Securities ‐ Capital Loss ‐ Redemption of Units. When units have been redeemed by assessee, same would constitute transfer for the purpose of section 94(7) and short term capital loss to the extent of dividend is not allowable. CIT(A) was justified in applying the provisions of section 94(7) and setting off dividend income of ` 97,90 628 of Asst Year 2002‐03 against the short term capital loss of ` 1,06,03,428 of the Asst. Year 2003‐04. Administrator of Estate of Late E. F. Dinshaw vs. ITO (2011) 52 DTR 23 /128 ITD365 (Mum.)(Trib.) S.94 (7). Avoidance of tax‐ Transaction insecurities‐Conditions. Entries and treatment in the assessee’s books of account is not relevant. Loss on valuation has no place in section 94 (7).Amendment in section 94 (7) , brought by the Finance Act , 2004 should be applied prospectively is not sustainable.( Asst year 2005‐06) Ashok Kumar Damani v Addl CIT ( 2011) 138 TTJ 45 / 130 ITD 287 (Mumbai) (Trib). S. 112 (1): Capital gains‐ Computation –Non resident‐ Sale of shares‐ Proviso. ( S. 48).


Operation of the proviso to section 112 (1), is confined to assets not covered by the first proviso to section 48 and the assets specified in the proviso to section 112 (1) itself ,therefore , a non resident is not eligible to avail the benefit of lower rate of tax of 10 percent on the capital gains on the sale of shares. (S. 48). Cairn U.K.Holdings Ltd IN RE( 2011) 59 DTR 121/ 242 CTR 449 (AAR). Chapter XII.‐ Determination of tax in certain special cases. S. 115A : Capital Gains ‐ Sale of Shares in Indian Company – DTAA ‐ India‐Ma uritius ‐ International Taxation [S. 90, Art. 13(4)] Article 13(4) of DTAA confers the power of taxation of capital gains derived by a resident of a contracting State from the alienation of specified property only in the State of residence, therefore, the applicant, a Mauritian company, is not liable to pay tax in India on the capital gains arising on transfer of shares of an Indian company to another Mauritius based company. D. B. Zwirn Mauritius Trading No. 3 Ltd., In Re (2011) 333ITR 32/ 240 CTR 1 (AAR) S. 115A : Capital Gains ‐ Transfer of Shares of Indian Company to Swiss Companies – DTAA ‐ India‐Netherland [S. 90, 92, Art. 13(5)] Capital Gains earned by a Dutch company, on transfer of shares of an Indian company to Swiss companies are covered by Art. 13(5) of the Indo‐Netherlands DTAA and therefore, it is taxable only in Netherlands and not in India hence transfer pricing provisions are not attracted as the transaction of shares is between non resident companies. Vnu International B. V. In Re (2011) 240 CTR 12 /198 Taxman 454/ 334 ITR 56(AAR) S. 115AD:Foreign Institutional Investors‐ Capital gains‐ Business income‐ Investment in securities.( S, 43 (5 )). Foreign institutional investors (FIIs) can only make investment in securities in country’s capital market and they can not undertake trade in them .Income arising to a FII from transfer of securities falls within ambit of section 115AD , as per which income arising from transfer of such securities is held to be falling under head ‘ capital gains’, it can not be considered as ‘ business income’ whether speculative or non speculative . Section 43(5) has no application to FIIs in respect of securities as defined in Explanation to section 115AD , income from sale of securities is to be considered as short term or long term capital gains. ( Asst Year 2004‐05). LG Asian Plus Ltd v Asst DIT (International Taxation)( 2011) 46 SOT 159 ( Mumbai) (Trib). S. 115 F: Capital gains‐Foreign exchange assets‐Bonus shares eligible for s. 115F relief if original shares acquired in foreign currency. The assessee, a NRI, purchased shares in foreign currency. On the sale of bonus shares, the assessee claimed relief u/s 115F. The department’s objection that the assessee has received bonus shares without investing any convertible foreign exchange is not correct because as the original shares were acquired by investing convertible foreign exchange, it cannot be said that the bonus shares were acquired without taking into consideration the original shares. In accordance with Dalmia Investment 52 ITR 567 (SC) the cost of acquisition of the original shares is closely interlinked with the bonus shares. Once bonus shares are issued, the averaging out formula has to be followed with regard to all shares. Accordingly, bonus shares are covered by s. 115C(b) and eligible for benefit u/s 115F. Sanjay Gala vs ITO (2011) 46 SOT 482 (Mumbai)( Trib). www.itatonline.org.


S.115F: Capital gains‐ Foreign exchange assets‐Non resident‐Bonus shares. The assessee acquired the original shares by investing in convertible foreign exchange and therefore ,it can not be said that the bonus shares are acquired in isolation without taking in to consideration the original shares acquired by the assessee. Therefore bonus shares were held to be covered by section 115C (b) of the Act and the same are eligible for benefit under section 115F. ( A.Y. 2006‐07). Sanjay Gala vs. ITO, ITA No.2989/Mum/2008, Dt.15‐07‐2011, A.Y.2005‐06, BCAJ September 2011, pg. 20, Vol. 43‐A, Part 6 S.115H: Non –residents‐Interest on investment made out of foreign funds‐Concessional rate. Where assessee received interest on investment made out of foreign funds which was chargeable to tax at concessional rate under section 115H , said special treatment could not be extended to interest on interest re‐deposited with original sum. ( A.Y. 1996‐97 ). M. Manohar ( Dr ) v Asst CIT ( 2011) 201 Taxman 106 ( Mad) (High Court). S.115H:Non –resident‐ Income from foreign exchange asset.‐Coverable foreign exchange (S. 115E.). If the original source of the deposit is convertible foreign exchange ,the transfer of such foreign exchange asset , namely from one bank to another will not affect its identity as a foreign exchange asset , assessee was entitled to concessional rate of tax on the interest earned from NRNR deposits under section 115H read with section 115E. CIT v M. C. George (2011) 60 DTR 166/243CTR 404 (Ker) (High Court). Chapter XIIB. ‐ Special provisions relating to ceratin companies. S. 115J : Company ‐ Book Profit ‐ Zero Tax Companies For the Asst. Year 1988‐89, there was no provision in section 115J to compute book profit as per account prepared in a particular manner and therefore, it was open to assessee to compute book profit either on basis of profit and loss account prepared under provisions of part II and part III of schedule VI of Companies Act, or as per annual accounts placed before AGM. However, after insertion of sub‐section (1A) in section 115J from assessment year 1990‐91, accounts for the purpose of book profit have to be prepared as per Part II and Part III of Schedule VI of Companies Act.(A. Y. 1988‐89) Dy. CIT vs. Anagram Finance Ltd. (2011) 43 SOT 433 (Mum.)(Trib) S. 115JA : Company ‐ Book Profits – Export ‐ Set off of carried forward business loss and unabsorbed business loss ‐ Negative Income ‐ (S. 80AB, 80AB(5), 80HHC, 115JB) The Court held that the assessee is entitled to deduction under section 80HHC computed in accordance with sub‐section (3)(3A) of 80HHC because assessment under section 115JB is only an alternative scheme of assessment and what is clear from clause (iv) of the Explanation there to is that even in the alternative scheme of assessment under section 115JB, the assessee is entitled to deduction of export profit under section 80HHC. In other words, the export profit eligible for deduction under section 80HHC is allowable under both schemes of assessment. The restriction contained in section 80AB or section 80B(5) cannot be applied in as much as carried forward business loss or depreciation should not be first set off leaving the gross total income at nil, which would disentitle the assessee for deduction under other provisions of Chapter VIA‐C, which includes section 80HHC also. There is no provision in section 80HHC to determine the export profit with reference the profit and loss account maintained under companies Act, Therefore, the assessee would be entitled to deduction of export profit under section 80HHC and the relief is to be granted in terms of sub‐section (3) and 3(A) of that section.


CIT vs. Packworth Udyog Ltd. (2011) 331 ITR 416 (Ker.)(FB) / 51 DTR 251/198 Taxman 10/239 CTR 24 (Ker)(FB)/ Kerala Chemicals and Proteins Ltd. (2011) 331 ITR 416/239 CTR24 (Ker.)(FB) / 51 DTR 251/198 Taxman 10 (Ker)(FB)/ G.T.N. Industries Ltd. (2011) 331 ITR 416/239 CTR 24 /198 Taxman 10(Ker.)(FB) /331 ITR 416/ 51 DTR 251/231 CTR 24/198 Taxman 10 (Ker)(FB)(High Court) S. 115JA : Company ‐ Book Profits ‐ Advance Tax ‐ Interest is payable on failure to pay advance tax in respect of tax payable under section 115JA ‐ (S. 115JB, 234B) Section 115J / 115JA are special provisions. For purposes of advance tax the evaluation of current income and the determination of the assessed income had to be made in terms of the statutory scheme comprising section 115J/115JA. Hence, levying of interest was inescapable. The assessee was bound to pay advance tax under the scheme of the Act. Section 234B is clear that it applies to all companies. There is no exclusion of section 115J/115JA in the levy of interest under section 234B (Kwality Biscuits Ltd vs. CIT 243 ITR 519 (Kar.) (SLP dismissed in 284 ITR 434) considered Jt. CIT vs. Rolta India Ltd. (2011) 237 CTR 329 / 49 DTR 346/330 ITR 470/196 Taxman 594/ 2 SCC 408 (SC) S. 115JA : Book Profits ‐ Minimum Alternative Tax ‐ MAT Credit to be set off before computing Advance‐tax shortfall and liability for section 234B, 234C interest ‐ (S. 234B, 234C) The scheme of section 115JA(1) and 115JAA shows that right to set‐off the tax credit follows as a matter of course once the conditions of section 115JAA are fulfilled. The grant of credit is not dependent upon determination by the Assessing Officer except that the ultimate amount of tax credit to be allowed depends upon the determination of total income for the first assessment year. Thus, the assessee is entitled to take into account the set off while estimating its liability to pay advance tax. The amendment to Explanation 1 to section 234B by FA 2006 w.e.f. 1.4.2007 to provide that MAT credit under section 115JAA shall be excluded while calculating advance‐tax liability is to remove the immense hardship that would result if this was not done; The fact that the Form & Rules provided for set off of MAT credit balance after computation of interest under section 234B is irrelevant because it is directly contrary to a plain reading of section 115JAA(4).(A. Y. 1998‐99 to 2000‐2001) CIT vs. Tulsyan NEC Ltd. (2011) 330 ITR 226 / 49 DTR 129 (SC) S.115JA: Book profit‐ Company‐Brought forward business loss.( S. 154). In order to allow deduction of brought forward business loss or unabsorbed depreciation in the computation of book profit under section 115JA , both should be available as per the accounts of the assessee . Since nothing is left after setting off brought forward business loss up to 1994‐95 against profit , assessee was not entitled to any relief under clause (b) of Explanation (iii) of section 115JA for assessment year 1997‐98 .Rectification order passed under section 154 held to be valid. ( A.Y.1997‐98). CIT v Carbon & Chemicals India Ltd ( 2011) 59 DTR 396 ( Ker) (High Court). S. 115JB : Company ‐ Book Profits – Computation ‐ Reduction of net profit by amount withdrawn from revaluation reserve ‐ Amount withdrawn from revaluation reserve & credited to P&L A/c. cannot be reduced from book profit even if in year of creation of reserve, the P&L A/c was not debited Where the assessee had revalued its fixed assets in the year and in the relevant year an amount representing differential depreciation was transferred out of the said revaluation reserve and credited to the P&L account the amount transferred from the revaluation reserve to the P&L account could not be reduced for computation of book profits in the earlier year when it was created.(A. Y. 2001‐02) Indo Rama Synthetics (I) Ltd. vs. CIT (2011) 330 ITR 363 / 237 CTR 217 / 49 DTR 241/ 2 SCC 1168 (SC)


S. 115JB : Company – Book Profits – Provision for Gratuity. Provision for approved gratuity is ascertained liability and cannot be added back while computing the book profit under section 115JB. (A. Y. 2004‐05) ITO vs. Jones Lang Lasalle Property Consultants (India) (P) Ltd. (2011) 135 TTJ 94 (Delhi)(Trib.) S.115JB: Company‐Book profits‐ Undertaking –Special categories.(S. 80IC.) Section 115JB will apply to an assessee being a company , even if it is entitled to deductions mentioned in section 80IC. Sidcul Industrial Association v State of Uttarakhand .( 2011) 199 Taxman 75 (Uttarakhand) ( High Court). S. 115JB:Company‐ Book profits‐ Minimum alternative tax‐ Provision for diminution in value. Reflection of amount of provision for diminution in value of investment separately on liability side of balance sheet or by way of reduction from figure of investment on asset side of balance sheet is totally alien for computing book profit and only requirement is that if any provision for diminution in value of any asset has been debited to profit and loss account same will automatically stand added to amount of net profit for working out book profit .Therefore, once provision is made for diminution in value of any asset , same has to be added for computing book profit, regardless of fact whether or not there is any balance value of asset. ( Asst Year 2004‐05). ITO v TCFC Finance Ltd ( 2011) 131 ITD 103 / 11 ITR (Trib) 153( Mumbai) (Trib). S. 115JB: Company‐ Book Profits –MAT‐ Revaluation of assets. The amount on account of revaluation of assets sold and taken to the balance sheet as revaluation reserved cannot be added to book profits. ITO vs. Galaxy Saws P. Ltd., ( 2011) 132 ITD 236 (Mum) (Trib)BCAJ pg. 40, Vol. 43‐A, Part 2, May 2011. S.115JB: Company‐Book profits‐ Minimum alternative tax‐ Capital gains‐ Exemption . ( S. 54EC.). Profit on sale of assets credited to profit and loss account cannot be excluded in computing book profit under section 115JB even though capital gain arising from sale of that asset is not subject to tax under normal provisions of Act by virtue of provisions of section 54EC. ( A.Y. 2005‐06). Technicarts ( P) Ltd v ITO ( 2011) 46 SOT 294 ( Mum) (Trib). Chapter XIIH. ‐ Income tax on fringe benefits S. 115WB : Fringe Benefits ‐ Rent for Car Parking Area – Revision ‐ (S. 263) In the present case it was held that the essential facilities attached to a rented building had to be treated as part of building itself and therefore, rent or license fee paid for such facilities should be treated as forming part of rent. It was further held that in view of the above, the rent paid for car parking area did not fall under category of ‘running, maintenance and repair expenses of car’ and thus assessee was not liable to pay fringe benefit tax on the said amount.(A. Y. 2006‐07) Hewlett Packard India Sales (P.) Ltd. vs. CIT (2011) 43 SOT 124 (Bang.)(Trib) S. 119:Instructions to subordinate authorities‐ CBDT‐Circulars‐ Administrative relief‐. Benevolent circulars providing administrative relief to the assessee have to be given effect to even if they are issued subsequent to the decision of an authority under the Act.( A. Y. 1995‐96 & 1996‐97)


Chhabil Dass Agarwal vs. UOI (2011) 56 DTR 19 (Sikkim)( High Court). S.119: Circulars‐ Binding nature‐Conflict in law laid down by High Court or Supreme Court. If a circular is in conflict with the law laid down by High Courts or Supreme court ,the revenue authorities while acting quasi judicially , should ignore such circular in discharge of their quasi judicial functions.(A.Y.1998‐99) Bhartia Industries Ltd v CIT (2011) 243 CTR 328/ 60 DTR 121 (Cal) (High Court). Chapter XII. ‐ C. Powers. S. 132 : Search and Seizure ‐ Warrant of Authorisation ‐ Joint Names ‐ Block Assessment ‐ (S. 158BC) A warrant of authorization must be issued individually. If it is not issued individually, then the assessment cannot be made in individual capacity. Warrant of authorization issued in joint names of husband and wife. Individual assessment on wife alone not valid.(A. Y. 1995 to 2001) CIT vs. Vandana Verma (Smt.) 330 ITR 533/ (2009)227 CTR 388/(2009) 31 DTR 214/(2010) 186 Tax 88 (All)(High Court) S. 132: Search and Seizure‐ Validity‐Information‐ Writ Petition – Dismissed on ground of delay On the facts the court upheld the validity of search on the ground that the Assessing Officer gathered the information about undisclosed income. Apart from that the Writ petition was filed after two years hence the petition was dismissed on ground of laches. Section 131(1A) ,operates in a different field than section 132, while section 131(1A) ,occupies field before issuing search and seizure warrant , section 132 comes into play thereafter. Assuming the power is invoked it will not any way affect the validity of search and seizure operation. V.S. Chauhan ( Dr ) v Director of Income Tax ( 2011) 200 Taxman 413 ( All) (High Court). S. 132 : Search and Seizure ‐ Warrant of Authorisation ‐ Common Search Warrant ‐ Validity Common search warrant specifying names and addresses of persons residing at different places, held to be valid.(A. Y. 2005‐06) Embassy Classic P. Ltd & Another vs. ACIT (2011) 7 ITR 287 (Bang.)(Trib.) S. 132 : Search and Seizure – Warrant of Authorisation – Common Search Warrant – Validity. Common search warrant specifying names and addresses of persons residing at different places, held to be valid. (A. Y. 2005‐06) Embassy Classic P. Ltd. & Another vs. ACIT (2011) 7 ITR 287 (Bang.)(Trib.) S. 132: Search and Seizure. If Search & Seizure action violates “human rights”, officers personally liable to pay compensation The income‐tax department conducted search and seizure operations u/s 132 at the premises of the assessee when interrogation & recording of statement was conducted for more than 30 hours and till the odd hours of the night without any break or interval. The assessee filed a complaint alleging violation of human rights. HELD upholding the plea: The Commission is of the view that the members of the raiding party may take their own time to conclude the search & seizure operations but such operations must be carried out keeping in view the basic human rights of the Individual. They have no right to cause physical and mental torture to him. If the officer‐in‐charge of the Interrogation/recording of statements wanted to continue with the process he should have stopped the same at the proper time and resumed it next morning. But continuing the process without any break or interval at odd hours up to 3:30 AM, forcing the applicant and/ or his family members to remain awake when it is time to sleep


was torturous act which and cannot be countenanced in a civilised society. It was violative of their rights relating to dignity of the individual and therefore violative of human rights. Even die‐hard criminal offenders have certain human rights which cannot be taken away. The applicant’s position was not worse than that. In the opinion of the Commission, the Income Tax Department should ensure that the search & seizure operations at large in future are carried out without violating one’s basic human rights. Rajendra Singh (Bihar Human Rights Commission). www.itatonline.org. S. 132(1) : Search and Seizure – Authorisation ‐ Warrant in joint names ‐Validity What is required to be stated in search warrant is precise details about the assessee and the persons to be searched which contained in the warrants issued in these cases. The warrants authorizing search of a group of concerns by a warrant issued under section 132 is valid. Jose Cyriac vs. CIT (2011) 238 CTR 207 / 50 DTR 292 (Ker.)(High Court) S. 132B:Application of seized or retained assets‐ Delay in payment of refund‐ Interest. Delay in paying refund interest payable under section 132B.( A. Y. 1995‐96) Vishwanath Khanna v UOI ( 2011) 335 ITR 548/ 244 CTR 208 ( Delhi ) (High Court). S. 133A : Survey – Statement – Disclosure – Retraction ‐ Addition Addition cannot be made solely on the basis of statement recorded during survey in absence of any corroborative evidence and supporting material in case wherein it has been retracted. ACIT vs. Prabhu Dayal Kanojia (2011) Tax World Vol. XLV Part‐1. Page 23. (January, 11)(Trib) S. 133A : Survey ‐ Unexplained Investment ‐ Reports of Facts ‐ Explanation and Reconciliation ‐ (S. 69) The reports of facts collected at time of survey are always subject to explanation and reconciliation by assessee which can be explained either at the time of survey or after survey before Assessing Officer at the time of assessment, therefore, merely on the basis of that some differences were found at the time of survey in stock addition cannot be made automatic.(A. Y. 2005‐06) Chawala Brothers (P) Ltd. vs. ACIT (2011) 43 SOT 651 (Mum.)(Trib.) S. 133A : Survey – Statement – Disclosure – Retraction – Addition. Addition cannot be made solely on the basis of statement recorded during survey in absence of any corroborative evidence and supporting material in case wherein it has been retracted. ACIT vs. Prabhu Dayal Kanojia (2011) Tax World Vol. XLV Part‐1 Page 23. (January, 11)(Trib.) Cahpter XIV. Procedure for assessment. S. 139 : Return ‐ Revised Return ‐ Amalgamation of Companies – BIFR ‐ Unabsorbed Business Loss ‐ Sick Company ‐ The Sick Industrial Companies (Special Provisions) Act, 1985 ‐ (S. 72A, 80) BIFR can specify date from which its scheme becomes effective. Amalgamation in January 1994, Scheme sanctioned by BIFR with effect from February 1, 1992. The assessee filed revised return on 31‐3‐1994, claiming unabsorbed business loss of sick company. Return held to be valid. Special provisions of the Act has overriding effect over Income Tax Act.(A. Y. 1992‐93) CIT vs. J. K. Corporation Ltd. (2011) 331 ITR 303/239 CTR 196 (Cal.)(High Court) S. 139(1) : Return ‐ Foreign Company – DTAA ‐ India‐Netherland


A foreign company, which is liable to be taxed in India by virtue of section 5(2) is required to file its return under section 139 notwithstanding that it is not liable to pay tax in India due to provisions of DTAA. Vnu International B. V. In Re (2011) 240 CTR 12 (AAR) S. 139 (5): Revised return‐ Intimation .( S. 143 (1)(a)). An intimation under section 143 (1) (a) of the Act cannot be equated with an assessment framed under section 143 (3) of the Act and the Assessing Officer cannot refuse to process the revised return and modify the intimation in accordance with section 143 (1B) of the Act.( Asst year 1995‐96). CIT v Himagiri Foods Limited ( 2011) 333 ITR 508 ( Delhi) (High Court). S. 140 : Return ‐ Not signed by Managing Director ‐ Curable Defects ‐ (S. 292B) Return of Company not signed by Managing Director but by person authorized by Board resolution, defects curable under section 292B.(A. Y. 2001‐02 and 2002‐03) Hind Samachar Ltd. vs. UOI (2011) 330 ITR 266/(2008) 217 CTR 637/ 169 Tax 302/5 DTR 88 (P&H)(High Court) S. 142A:Estimate by Valuation Officer in certain cases‐Reference to District Valuation Officer. Where the assessment is framed by the assessing officer and the appeal is decided by the CIT (A) prior to 30.09.2004 it is not open to the assessing officer to order valuation of property by District Valuation Officer (DVO) as the provision of section 142 A are not retrospective. CIT vs. Naveen Gera (2011) 56 DTR 170 (Del) (High Court). S. 142(2A) : Assessment – Special Audit – No evidence that Assessing Officer had found accounts complex – Order for Special Audit not valid. No record that the Assessing Officer had considered the accounts and found them to be complex, and in the absence of recording with regards to the complexities of accounts on which he had formed an opinion with regards to the complexities of accounts order passed under section 142(2A) for special audit was held to be not valid. (A. Y. 2005‐06) Farmsons Fashion Pvt. Ltd. vs. Dy. CIT (2011) 332 ITR 115/ 55 DTR 364 (Guj.)(High Court) S. 143 :Assessment‐ Opportunity for cross examination‐Entire order cannot be set aside. Where an order had been passed by the Assessing officer without granting the assessee an opportunity to cross examine and the assessee preferred a writ petition. The Apex court held that the High Court ought not to have set a side the order of assessment but to have only granted the assessee an opportunity to cross examine the witness. (Asst year 2004‐05). ITO v M. Pirai Choodi ( 2011) 334 ITR 262 ( SC). Editorial‐ Decision of madras High Court in M.Pirai Choodi v ITO ( 2008) 302 ITR 40( Mad) , set a side. S.143 (2) ‐Assessment‐ Notice . Where notice u/s. 143(2) was served upon the assessee after a period of 12 months from the end of the month in which the return was filed, it was held that the proceedings in pursuance of such notice was invalid and liable to be quashed. DCIT V/s. Maxima Systems Ltd. {2011} 198 Taxman 192 (Guj.) Mag.)( High Court). S. 143(2) : Assessment – Validity – Service of Notice. In the absence of service of notice under section 143(2) or if the notice is served after the statutory time limit


under section 143(2) then the assessment in such circumstances is invalid. (A. Y. 2004‐05 to 2006‐07) CIT vs. Mayawati (Ms.) (2011) 135 TTJ 167 (Delhi)(Trib.) Kiran Bansal (Mrs.) vs. ACIT (2011) 135 TTJ 676 (Delhi)(Trib.) S. 143 (2): Assessment‐ Validity of notice‐Not pressed before CIT (A)‐ Cannot press the ground after gap of five years. Assessee contended that it did not receive notice issued under section 143 (2), Assessee’s representative attended and assessee has not raised the issue of service of notice before the Assessing Officer. The ground was taken before the CIT (A) and the same was not pressed. The Tribunal held that the assessee cannot press the ground after gap of five years.( Asst year 2003‐04). Thistle Properties (P) Ltd v Asst CIT ( 2011) 55 DTR 81 (Mumbai ) (Trib). S.143 (2): Assessment‐ Search and Seizure‐ Notice. ( S. 153A). While making an assessment under section 153A service of notice under section 143 (2), within the prescribed time is mandatory. In the absence of service of such notice , the Assessing Officer cannot make the addition in the income of the assessee and the Assessing Officer is bound to accept the income as returned by the assessee. (Asst year 2001‐02) Narendra Singh v ITO ( 2011) 138 TTJ 615 (Agra ) (Trib) S. 143 (3): Assessment‐Opportunity to Cross‐examine. The AO passed the order without granting an opportunity to cross‐examine. The High Court set aside the assessment order in the writ petition. Held, the High Court ought not to have set aside the assessment order but should have granted the assessee an opportunity to cross‐examine the witness.( A. Y. 2004‐05) ITO v. M. Pirai Choodi [2011] 334 ITR 262 (SC) S. 143(3) : Assessment ‐ Ad hoc Disallowance ‐ Business Expenditure Ad hoc disallowance without any basis out of carriage, labour and sealing expenses cannot be sustained particularly when the Tribunal has allowed similar expenses in totality in an earlier year.(A. Y. 1992‐93) Friends Clearing Agency (P) Ltd. vs. CIT (2011) 237 CTR 464/ 49 DTR 297 (Delhi)(High Court) S. 143(3) : Assessment – Additions – Opportunity of Cross Examination – Natural Justice. Where addition had been made on the basis of a statement of party, behind the assessee’s back and without providing any opportunity to cross‐examine the party despite being asked for by the assessee, it was held that the matter was to be remanded back to the Assessing Officer for disposal afresh. (A. Y. 1998‐99) Ashok Lalwani vs. ITO (2011) 196 Taxman 82 (Delhi)(Mag.)(High Court) S. 143(3) : Assessment – Notice by Affixture – Assessment held to be invalid. Where notice for assessment had been given only a week prior to the expiry of the limitation period by way of affixture and neither was any other mode of service adopted nor was it shown that the assessee had refused to accept service, it was held that the notice was invalid and consequently the assessment was struck down. (A. Y. 1969‐70) CIT vs. Kishan Chand (2011) 196 Taxman 88 (P&H)(Mag.)(High Court) S. 143(3)‐ Assessment‐ Additions.


Where the assessee himself offered Rs. 20 Lacs as income purportedly on account of deficit in stocks but apart from the assessee’s offer, there was no other material pointing towards such deficit, it was held that addition was not justified. CIT V/s. C. Jayantilal {2011} 199 Taxman 34 (Mad.) (Mag.)( High (Court). S.143 (3): Assessment‐ Order giving effect to order of Tribunal‐ Scope‐ Binding nature of order of Tribunal. ( S.237, 254 (1)) While giving effect to the appellate order, the Assessing Officer cannot travel beyond the order of Tribunal. Assessing Officer being a quasi judicial authority and subordinate to the Tribunal is bound by the decision of the Tribunal. ( A.Y.2001‐02). Lopmudra Mishra v Asst CIT ( 2011) 59 DTR 257 ( Orissa) (High Court). S. 143(3) : Assessment – Addition ‐ Adhoc Addition ‐ Self made vouchers Adhoc disallowance cannot be made simply holding that self made vouchers cannot be taken as correct and proved, unless some of such vouchers are proved as bogus or fake. ITO vs. Bajrang Trading Company (2011) Tax World Vol. XLV Part‐1 Page 33 (January, 11)(Trib) S. 144C : Dispute Resolution Panel ‐ Act to expectations & not have perfunctory approach The DRP, is an authority created under a statute and conferred with the powers, which has the obligation to act as a body living to the expectations which the law mandates. It was held that section 144C empowers the Dispute Resolution Panel (DRP) to issue directions to the Assessing Officer and cannot be treated as totally redundant or absolutely inefficacious remedy to the assessee. Thus, no assessee can have any kind of apprehension that the approach to the DRP is perfunctory. Ericsson AB vs. ADIT (Delhi High Court) Source: www.itatonline.org S. 144C : Dispute Resolution Panel ‐ Transfer Pricing ‐ Order cannot be passed if no transfer pricing adjustments made by TPO ‐ (S. 92CA) Where no transfer pricing adjustments had been made by the TPO, the assessee was not an “eligible assessee” and the Assessing Officer had no jurisdiction to pass the draft assessment order.(A. Y. 2006‐07) Pankaj Extraction Ltd. vs. ACIT ( 2011) 198 Taxman 6/ 56 DTR 32/ 241 CTR 390(Guj)( High Court) S. 144C: Dispute resolution panel‐ Transfer Pricing‐ Jurisdictional CIT should not be part of DRP to avoid likelihood of bias‐ Reassessment ( S.147.). Where DIT‐II was exercising supervisory functions over the AO, the real likelihood of “official bias” cannot be ruled out. Even if the officer is impartial and there is no personal bias or malice, nonetheless, a right minded person would think that in the circumstances, there could be a likelihood of bias on his part. In that event, the officer should not sit and adjudicate upon the matter. He should recuse himself. This follows from the principle that justice must not only be done but seen to be done. In order to ensure that no person should think that there is a real likelihood of bias on the part of the officer concerned, the CBDT is directed to ensure that a jurisdictional Commissioner is not nominated as a member of the DRP under Rule 3 (2) of the Rules. By doing this, the principle that justice must not only be done but seen to be done would be ensured. Nonetheless the constitutional validity of S. 144C and R.3(2) of the Rules was upheld. Hyundai Heavy Industries Ltd. vs UOI(2011) 60 DTR 145/ 243 CTR 313/(2011) Tax L.R.744. (Uttarakhand) (High Court) www.itatonline.org.


S. 144C: Disputes Resolution panel‐ Direction. Direction given by the Dispute Resolution Panel to the Assessing Officer to reconsider petitioner’s claim for deduction under section 10A after verifying the income from engineering and design services and examining whether the same qualified for deduction or not giving liberty to Assessing Officer to decide the issue , after hearing the petitioner,is not violative of sub section (5) and (8) of section 144C.(A.Y.2006‐07). GE India Technology Centre (P) Ltd v DY CIT ( 2011) 242 CTR 462 / 60 DTR 322( Kar) ( High Court). S. 144C : Dispute Resolution Panel ‐ Transfer Pricing ‐ Speaking Order Where the Dispute Resolution Panel has brushed a side assessee’s submissions without even a whisper of the assessee’s objections against draft assessment order, and passed a laconic non‐speaking order, the matter is remitted to the files of Dispute Resolution Panel for speaking order.(A. Y. 2006‐07) GAP International Sourcing India (P) Ltd. vs. Dy. CIT (2011) 49 DTR 313/ 9 ITR 129 (Trib.)(Delhi) S. 144C. Dispute Resolution Panel – Transfer pricing‐ Speaking order. (S.92C.). Where order of DRP is a non speaking order, same cannot withstand test of law. ( Asst Year 2006‐07). Geodis Ovearseas (P) Ltd v Dy CIT ( 2011) 45 SOT 375 (Delhi) (Trib). S. 145 : Method of Accounting – Accounting Standard – Advance received in current year for service to be rendered is subsequent year – Income accrued in subsequent year. Accounting standard provides that income accrues only if the corresponding service has to be rendered during the same relevant year. In an event where amount received in advance for a service is to be performed in subsequent year, the advance could not be taken as income in the year of receipt. (A. Y. 1992‐98) CIT vs. Dinesh Kumar Goel (2011) 331 ITR 10 (Delhi)(High Court) S. 145. Method of accounting‐Accounts – Valuation of unquoted Govt. securities – basis of RBI guidelines. Sustainable method of valuation. In case where the securities are not quoted in market, market price is not known under these circumstances Valuation done by assessee of the unquoted Government securities on the basis of Reserve Bank of India guidelines was held to be a sustainable method of valuation.(A. Y. 1994‐95) CIT vs. The Lord Krishna Bank Ltd. (2011) 55 DTR 277 (Ker)( High Court) S. 145 : Method of Accounting ‐ Valuation of Stock ‐ Completion of Contract Method ‐ Work in progress Assessee having followed percentage completion method consistently which has been accepted in earlier as well as in subsequent years valuation of closing work in progress made by it at historical cost cannot be disturbed particularly when the categorical findings of the CIT(A) highlighting that the assessee has not deviated from the guidelines issued by the ICICI under AS‐7 has not been challenged by the revenue. Addition made by the Assessing Officer by reworking the closing work in progress at current rates rightly deleted.(A. Y. 1998‐1999, 1999‐2000) ACIT vs. Dharti Estate (2011) 51 DTR 28 / 129 ITD 1 / 136 TTJ 263 (Mum.)(Trib.)(TM) S. 145: Method of accounting‐ Estimation of profits‐ Survey‐Rejection of books of accounts. For the relevant assessment year the assessee filed the nil income. In the course of survey the Assessing Officer found that there was certain unaccounted stock . The Assessing Officer rejected the books of account under section 145 (3) and estimated the net profit and also sales. He also made separate addition were made in respect of unaccounted stock under section 69 as well as disallowances and additions in respect of excess wastages etc.


The direction given to the Commissioner ( Appeals) to work out the net profit by applying a rate as had been in the immediately preceding assessment year .( A.Y. 2001‐02). Asst CIT v Ratan Industries (P) Ltd ( 2011) 131 ITD 195 ( Agra) (TM ) (Trib). S. 145 : Method of Accounting ‐ Despite s. 209(3) of the Co’s Act, company can follow cash system for tax purposes As per Sec. 209(3) of the Co’s Act, a company is obliged to follow the mercantile system and that is its’ “regular method” for purposes of s. 145. It was held that the assessee has regularly employed the cash system of accounting in recording its day to day business transactions. It is not a case where the assessee has been maintaining its accounts of day to day business under the mercantile system of accounting and thereafter prepares accounts in accordance with cash system of accounting for income tax purposes. Section 209(3) of the Companies Act, 1956 does not override s. 145 of the Income‐tax Act. There was also no valid basis for the AO’s action in rejecting the books of account and system of accounting followed by the assessee. Further, since the department has accepted the assessee’s system for the past several years, the principles of consistency apply and there should be finality and certainty in litigation in the absence of fresh facts to show that the assessee’s system of accounting is arbitrary or perverse. DCIT v Stup consultants Pvt. Ltd. (Mum)( Trib)(www.itatonline.org) S. 145A:Method of Accounting‐ Accounts‐ Valuation of closing stock‐Excise duty. Excise duty on sugar manufactured but not sold is not to be included in the value of closing stock. In respect of excisable goods manufactured and lying in stock excise duty liability would get crystallized on date of clearance of goods and not on date of manufacture and therefore ,till date of clearance of excisable goods, assessee cannot be said to have incurred excise duty liability ( Asst year 2001‐02). CIT v Loknete Balasaheb Desai S..S.K.Ltd ( 2011) 200 Taxman 238/59 DTR 169/ 243 CTR 181 ( Bom)( High Court). S. 145 (3):Method of accounting‐ Assessment‐ Account – Rejection of Books. Where discrepancy in stock found during the survey was negligible and no other incriminating documents or material was found. The Hon’ble High Court confirmed the order of the Tribunal, that merely on because the assessee had not maintained stock register book of accounts maintained by the assessee in the ordinary course of business cannot be rejected.(A. Y. 1999‐2000) CIT vs. Bindals Apparels (2011) 56 DTR 202 (Del)( High Court) S. 147: Reassessment‐Exempted income‐Despite bar in Proviso to s. 14A, s. 147 reopening for earlier years valid. ( S.14A.) For AY 2000‐01, the assessee filed a return on 30.11.2000. As s. 14A was inserted subsequently by FA 2001 (w.r.e.f 1.4.62) and was tabled in Parliament on 28.2.2001, the assessee did not make any disallowance u/s 14A. The AO also did not make a disallowance in the s. 143 (3) order passed on 7.3.2003. After the expiry of 4 years, the AO sought to reopen the assessment to make a disallowance u/s 14A. The assessee challenged the reopening on the ground that (i) under the Proviso to s. 14A, a reopening u/s 147 for AY 2001‐02 & earlier years was not permissible, (ii) as s. 14A was not on the statute when the ROI was filed, there was no failure to disclose & (iii) as the AO had also sought to rectify u/s 154, he could not reopen u/s 147. The High Court (197 TM 415) dismissed the Writ Petition inter alia on the ground that “the Proviso to s. 14A bars reassessment but not original assessment on the basis of the retrospective amendment. Though the ROI was filed before s. 14A was enacted, the assessment order was


passed subsequently. The AO ought to have applied s. 14A and his failure has resulted in escapement of income. The object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality“. On appeal by the assessee to the Supreme Court, HELD dismissing the SLP: In our view, the re‐opening of assessment is fully justified on the facts and circumstances of the case. However, on the merits of the case, it would be open to the assessee to raise all contentions with regard to the amount of Rs.98.46 lakhs being offered for tax as well as it’s contention on Section 14A of the Income Tax Act, 1961. Honda Siel Power Products Ltd vs DCIT ( SC) .www.itatonline.org. S. 147 : Reassessment – Scope ‐ Items unconnected with escapement for which notice was issued ‐ (S. 148) If in the course of reassessment, it comes to the notice of the Assessing Officer that any item or items other than the item of escaped income for which original assessment was reopened, have also escaped assessment, he is bound to assess such items of income also in the course of reassessment.(A. Y. 2001 to 2003) CIT vs. Best Wood Industries & Saw Mills (2011) 237 CTR 404 / 331 ITR 63 / 50 DTR 143 (Ker.)(FB)(High Court) S. 147 : Reassessment ‐ Full and True Disclosure ‐ After Four Years –Deduction ‐ Captive Power Plant ‐ Expansion of Project ‐ (S. 80IA, 80IB) Assessee having claimed deduction under section 80IA, in respect of the profits made by its captive power plant disclosing the computation of profits and explaining the break up thereof and disclosed the basis on which it was claimed deduction under section 80IB, in respect of the refinery expansion project and lube unit, it cannot be said that there was a failure on the part of the assessee to disclose fully all material facts necessary for the assessment and therefore reopening of assessment beyond the period of four years from the end of the relevant year was not justified.(A. Y. 2002‐2003) Hindustan Petroleum Corporation Ltd. vs. Dy. CIT (2011) 238 CTR 28/(2010) 328 ITR 534/(2010)192 Tax 178/(2010) 42 DTR 262 (Bom.)(High Court) S. 147 : Reassessment ‐ Full and true disclosure ‐ After four years ‐ Change of Opinion Assessing Officer having reopened the assessment on the sole basis that the system of accounting adopted by the assessee which has been accepted while framing the original assessment is not appropriate, without making any allegation that there was non–disclosure of material facts by the assessee at that time of original assessment, It is a case of mere change of opinion and therefore, reopening of assessment after expiry of four years from the end of the relevant assessment years was not valid.(A. Y. 1995‐96 and 1997‐98) CIT vs. Manish Ajmera (2011) 51 DTR 117 (Raj.)(High Court) S. 147 : Reassessment ‐ Reopening For A.Y. 2000‐01 valid despite Proviso to section 14A ‐ Material facts must be disclosed during assessment proceedings The Proviso to section 14A bars reassessment but not original assessment on the basis of the retrospective amendment. The object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality. It is the duty of the assessee to bring to the notice of the Assessing Officer particular items in the books of account or portions of documents which are relevant. Material facts are those facts which if taken into accounts they would have an adverse affect on assessee by the higher assessment of income than the one actually made. (Consolidated Photo 281 ITR 394 (Del.) followed);


Accordingly, the fact that there were section 154 proceedings is not a bar to the section 147 proceedings. It was further held that the scope of section 154 & 147 / 148 are different and it cannot be said as a general principle that if notice under section 154 is issued, then notice under section 147 / 148 is barred or prohibited (Hindustan Unilever Ltd. 325 ITR 102 (Bom.) distinguished).(A. Y. 2000‐2001) Honda Siel Power Products Ltd. vs. Dy. CIT( 2011) 197 Taxman415 (Delhi). (Delhi High Court) S. 147 : Reassessment ‐ Reason to Believe ‐ Subsequent Supreme Court Decision – [S. 10(29)] Judgment of the Supreme Court holding that exemption under section 10(29) is available only to that part of income which is derived from letting of godowns or warehouses and not the income derived from other sources constituted a valid basis for reopening the assessments. The Tribunal having not touched upon the question as to whether or not this very issue was discussed in the original assessment to the assessee that it was a case of change of opinion, order of Tribunal is set aside and the matter is remitted back to the Tribunal for fresh consideration only on this aspect.(A. Y. 1995‐96 and 1997‐98) Central Warehousing Corporation vs. ACIT (2011) 51 DTR 198 (Delhi High Court) S. 147 : Reassessment ‐ Beyond four years ‐ No failure on the part of assessee ‐ Bad Debts. Allowance of bad debt was specifically raised in the original assessment proceedings and on receiving explanation from assessee the claim of assessee was allowed, reassessment held to be invalid.(A. Y. 2004‐05) Yash Raj Films P. Ltd. vs. ACIT (2011) 332 ITR 428 (Bom.)(High Court) S. 147 : Reassessment ‐ Compensation on Acquisition of Land – Enhancement by Supreme Court. Initiation of the reassessment proceedings in respect of escaped income due to acquisition of petitioner’s land was not vitiated as Assessing Officer had reasons to believe that the income chargeable to tax had escaped assessment.(A. Y. 1989‐90 to 1994‐1995 and 1998‐99) Maya Rastogi (Smt) vs. CIT (2011) 52 DTR 237 (All)(High Court) S. 147 : Reassessment ‐ Change of Opinion ‐ Income subject matter of block assessment ‐ (S. 158BC) Once the Assessing Officer proceeds to make block assessment under section 158BC based on materials gathered during search under section 132, he cannot proceed to make reassessment under section 147 on the basis of the same material, after block assessment is cancelled by the first appellate authority. Assessing Officer has no jurisdiction to assess the very same amount, which was considered and given up while making block assessment.(A. Y. 1992‐93) CIT vs. C. Sivanandan (2011) 52 DTR 428 (Ker.)(High Court) S. 147 : Reassessment – Change of Opinion – Investment – Business Income. Where assessment was completed holding that the income from conversion of equity share from stock‐in‐trade to investment was business income. Reassessment proceedings initiated merely by taking view that income should taxed under the head short term capital gain amounted to a mere change of opinion as such liable to be quashed. (A. Y. 2005‐06) Ritu Investment P. Ltd. vs. CIT (2011) 51 DTR 162 (Del.)(High Court) S. 147 : Reassessment – Search and Seizure – Same Material – Block Assessment held to be invalid. (S. 158BC) Once materials are gathered during the search proceedings under section 132 of the Act it is up to the Assessing Officer to make either block assessment under sections 158BC or assessment under section 147 of the Act


whichever he finds appropriate. However, once the assessing officer proceeds to make assessment under section 158BC which is cancelled by the appellate authority. The Assessing Officer cannot proceed to make assessment under section 147 of the Act on the basis of the same material. (A. Y. 1992‐93) CIT vs. C. Sivanandan (2011) 52 DTR 428 (Ker.)(High Court) S. 147 : Reassessment – Change of Opinion. Change of opinion leading to ‘reason to believe’ – opinion formed on a claim at the time of framing original assessment cannot be changed subsequently on the same set of materials available in record. In the absence of any substantive additional materials, it will amount to change of opinion; therefore, re‐opening of assessment is bad‐in‐law. (A. Y. 1995‐96) Gujarat Power Corporation Ltd. vs. Dy. CIT (2011) 238 CTR 91 (Guj.)(High Court) S. 147 : Reassessment – Compensation on Acquisition of Land – Enhancement by Supreme Court. Initiation of the reassessment proceedings in respect of escaped income due to acquisition of petitioner’s land was not vitiated as Assessing Officer had reasons to believe that the income chargeable to tax had escaped assessment. (1989‐90 to 1994‐95 & 1998‐99) Maya Rastogi (Smt) vs. CIT (2011) 52 DTR 237 (All)(High Court) S. 147 : Reassessment – Change of Opinion – Income subject matter of block assessment. (S. 158BC) Once the Assessing Officer proceeds to make block assessment under section 158BC based on materials gathered during search under section 132, he cannot proceed to make reassessment under section 147 on the basis of the same material, after block assessment is cancelled by the first Appellate Authority. Assessing Officer has no jurisdiction to assess the very same amount, which was considered and given up while making block assessment. (A. Y. 1992‐93) CIT vs. C. Sivanandan (2011) 52 DTR 428 (Ker.)(High Court) S. 147 : Reassessment – CBDT by Notification withdrew approval for deduction to the assessee with respect to the deduction of donation under section 35(1)(ii) – assessment re‐opened – Notification quashed – Reasons for reopening does not survive. (S. 35, 148) The assessee was granted deduction for donation to an institute which was approved under section 35(1)(ii). CBDT withdrew the approval to the institution, on the basis of which the assessee assessment was reopened. Subsequently the notification was quashed by the Allahabad High Court, the High Court held that reasons for reopening the assessment under section 147/148 does not survive. Ultra Marine Air Aids (P) Ltd. vs. ACIT (2011) 332 ITR 273 (Delhi)(High Court) S.147: Reassessment‐Full and true disclosure‐ Beyond four years‐ EOU. (S.10B). When there was no failure to disclose fully and truly all material facts by assessee, presumption on the part of the AO that the assessee has failed to achieve 82 percent value addition in order to be treated as hundred percent EOU required for availing deduction under section 10B was incorrect and reopening of the assessment beyond four years was bad in law.(Asst Year 2003‐04). Jayant Agro Chemicals Ltd v ITO ( 2011) 241 CTR 242 / 55 DTR 361(Bom) (High Court). S. 147 : Reassessment‐‐If assessee does not ask for s. 147 reasons & object to reopening, ITAT cannot remand to AO & give assessee another opportunity.


While the AO is required to record reasons, Law does not mandate the AO to suo moto supply the reasons to the assessee. It is for the assessee to demand the reasons and raise objections to the reopening which the AO is required to dispose of by passing a speaking order. As the assessee did not ask for the reasons and instead participated in the reassessment proceedings, the Tribunal could not have restored the matter back to the file of the AO and give another opportunity to the assessee to raise objections to the “reasons to believe” recorded by the AO. It is trite that what cannot be done directly, it is not allowed indirectly as well. This novel and ingenuousness method adopted by the Tribunal in setting aside the reassessment orders on merits cannot be accepted. However, also held that as the assessee had challenged the validity of reassessment before the CIT(A), it ought to have been provided with the reasons and so the matter was remitted for supply of reasons. CIT vs Safetag International India Pvt. Ltd. (Delhi)(High Court) www.itatonline.org. S. 147: Reassessment ‐ If AO does not assess income for which reasons were recorded u/s 147, he cannot assess other income u/s 147. Though Explanation 3 to s. 147 inserted by the F.A. 2009 w.e.f 1.4.1989 permits the AO to assess or reassess income which has escaped assessment even if the recorded reasons have not been recorded with regard to such items, it is essential that the items in respect of which the reasons had been recorded are assessed. If the AO accepts that the items for which reasons are recorded have not escaped assessment, it means he had no “reasons to believe that income has escaped assessment” and the issue of the notice becomes invalid. If so, he has no jurisdiction to assess any other income. (Jet Airways 331 ITR 236 (Bom) followed). Ranbaxy Laboratories Ltd. vs CIT (2011) 60 DTR 77(Delhi) ( High Court). www.itatonline.org. S. 147 : Reassessment – Despite “Wrong Claim”, reopening invalid if failure to disclose not alleged. It is necessary for the AO to first state that there is a failure to disclose fully and truly all material facts. If he does not record such a failure he would not be entitled to proceed u/s 147.There is a well known difference between a wrong claim made by an assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts. Titanor Components Limited vs ACIT(2011) 60 DTR 273 (Bombay (High court At Goa). www.itatonline.org. Editorial‐Hindustan Lever( 2004) 268 ITR 332 (Bom) followed). S. 147: Reassessment – Reason to believe –Supreme Court. Decision of Supreme Court forming the law from the very beginning of the existence of provision forms the material belief on escapement and therefore, becomes a valid reason to reopen.( A. Y. 2005‐06 & 2006‐07) Kartikeya International Vs. CIT(2011) 241 CTR 489 (All)( High Court). S. 147: Reassessment ‐ change of opinion. On the claim of 80‐IB, the Assessee had furnished all the informations during assessment proceeding regarding the alleged manufacturing process involved on the basis of which the assessment was concluded by the Assessing Officer. On the same set of facts and materials, the Assessing Officer cannot take a different view by t aking recourse to Sec. 147 which will amount to change of opinion.( A. Y. 1998‐99 to 2001‐02) Anrit fees Ltd. Vs. CIT (2011) 239 CTR 82 (Cal)( High Court).


S. 147: Reassessment –After four years‐ Internal auditor. Notice issued after expiry of four years from the end of the relevant assessment year merely based on the report of the internal auditors was held to be bad in law when all the particulars were duly disclosed by the Appellant during the original assessment proceedings under section 143 (3) of the Act.( 1997‐98) CIT vs. Simbhaoli Sugar Mills Ltd. (2011) 55 DTR 233 (Del)( High Court). S. 147: Reassessment – After four years‐Exemption. Notice issued under section 148 of the Act to reassess the income of the assessee after expiry of four (4) years was held to be bad in law where the assessee had duly disclosed all the fact relating to sale of shares, working of capital gain and exemption claimed under section 54 F of the Act in his return of income and in the course of original assessment proceedings under section 143 (3) of the Act.( A. Y. 1996‐97) Vikram Kothari (HUF) vs. State of Uttar Pardesh & Ors. (2011) 56 DTR 43 (All)( High court). S. 147:Reassessment – Merger‐Deduction‐ With in four years.( S. 80HHC, 80I, 80IA ). Where the assessing officer after due application of his mind allowed the assessee’s claim of deduction under section 80 HHC, 80 I and 80 IA of the Act after some modification, for which assessee preferred an appeal before the appellate authority. Reopening the assessment within four (4) years on the ground that deduction under section 80 HHC, 80 I and 80 IB of the Act was excessive was held to be bad in law for the reason that the assessment order has merged with the order of the CIT (A) and had no independent existence.(1996‐97) United Phosphorus Ltd. vs. Addl. CIT (2011) 56 DTR 193 (Guj)( High Court). S. 147: Reassessment‐Full and true disclosure‐ Notice after expiry of four years‐ Change in Shareholding. ( S.79). Assessing officer reopened the assessment only on the ground that there is a change in the share holding more than 51 %in the assessment year 2001‐02 in which the loss was incurred and therefore the loss incurred in the assessment year 2001‐02 cannot be allowed to be set off in the assessment year 2003‐04. The court held that the effective shareholding of Ned Bank Nihilent Technologies (P) Ltd in the assessee company has gone down below 51% having been specifically brought to the notice of the Assessing Officer by the assessee ,there was no failure to disclose fully and truly all material facts necessary for the purpose of assessment and reassessment proceedings could not be initiated after four yeas.( A.Y.2003‐04) Nihilent Technologies (P) Ltd v Dy CIT ( 2011) 59 DTR 281/243 CTR 77 ( Bom) (High Court) S.147: Reassessment‐Valuation of closing stock (S. 145A ). Assessee had not included CST and excise duty paid on closing stock ,while making its valuation thereby claimed excess loss. The Court held that the Assessing Officer had sufficient reason to form belief that income of assessee had escaped assessment, hence reassessment held to be valid.( A.Y. 2000‐2001 , 2001‐02). Ginni Filaments Ltd v CIT ( 2011) T ax .L.R. 538 ( All) (High Court). S. 147: Reassessment‐ Notice‐ Validity‐Status‐HUF ( S. 292B ). Assessee and also his counsel through their respective letters having submitted that return which had already filed in the capacity of HUF may be treated to have been filed in pursuance to the notice issued under section 148. The said notice issued by the Assessing Officer without specifying the status of the assessee did not render the proceedings invalid , as the said defect stood cured by operation of section 292B.( A.Ys 1976‐77 to 1978‐79)


CIT v Rajbir Singh ( 2011) 59 DTR 285/ 243 CTR 185 (P&H) (High Court). S.147: Reassessment‐Notice‐Validity‐Service (S. 292B, 292BB ). Assessee having filed return stating that the same is filed in response to notice under section 148 and no objection was raised before the Assessing Officer regarding validity of service of notice under section 148, in view of section 292BB it cannot be contended that there was valid service of notice. Section 292BB is applicable to alI proceedings pending on 1st April ,2008. CIT v Panchvati Motors (P) Ltd ( 2011) 59 DTR 289 /243 CTR 189(P& H)( High Court). S. 147 : Reassessment ‐ Non issue of Notice ‐ [S. 143(2)] It is mandatory not merely procedural for the Assessing Officer to issue notice under section 143(2). If the notice is not served within the prescribed period, the assessment order is invalid (Pawan Gupta 318 ITR 322 (Del.), Hotel Blue Moon 321 ITR 362 (SC) & C. Palaniappan 284 ITR 257 (Mad.) followed). UKT Software Technologies vs. ITO (ITAT ‐ Delhi) Source: www.itatonline.org(Trib) S. 147 : Reassessment ‐ Reason to Believe ‐ Finding of Subsequent Year ‐ (S. 148) Information obtained in the assessment of a subsequent assessment year can be a good to initiate proceedings under section 147/148. Disallowance of interest expenditure made in assessment of subsequent assessment year on the basis that the interest free advances constituted prima facie material for the Assessing Officer to form a reasonable belief that certain income had escaped assessment in the present year.(A. Y. 1999 ‐2000) Maruti Civil Works vs. ITO (2011) 51 DTR 257 (Pune)(Trib.) S. 147 : Reassessment ‐ Beyond four years ‐ Revaluation of Assets ‐ (S. 45, 50) Assessee firm having duly disclosed the fact of revaluation of assets, creation of self generated asset. Viz., goodwill and also that the difference between the cost and revalued amount of the assets has been transferred to partners’ capital accounts and the same was followed by dissolution of firm, all primary facts stood disclosed by the assessee in the original assessment proceedings itself and therefore, assessment could not be reopened after expiry of four years from the end of the relevant assessment year on the ground that difference between WDV of the assets and the value thereof after revaluation is taxable under the provisions of section 45 read with section 50 which has escaped assessment.(A. Y. 1986‐87) Industrial Lining vs. Dy. CIT (2011) 52 DTR 233/ 45 SOT 60 (Ahd.) (TM) (Trib.) S. 147 : Reassessment – Assessment under section 143(1) – Within four years – Reasons to believe – Not valid. [S. 143(1)] Original assessment order was made under section 143(1) and the re opening of the assessment was initiated within a period of 4 years, it was still necessary that there should be reasons to believe that income had escaped assessment and such reasons are subject to judicial scrutiny. There essentially have to be valid reasons to believe that income has escaped assessment and these reasons on standalone basis must be considered appropriate for arriving at the conclusion arrived at by the officer recording the reasons. In view of the above the initiation of reassessment proceedings in the instant case by the Assessing Officer was held bad in law and the proceedings were quashed. (A. Y. 2001‐02) Pirojsha Godrej Foundation vs. Asst. Director of Income‐tax (2011) 44 SOT 24 (Mum.)(URO)(Trib.) S. 147: Reassessment‐Settlement commission‐ (S.254D(4).)


Settlement Commission having already accepted the undisclosed income as shown by the assessee which covered all the issues arising out of the seized papers including rental income , order under section 245 (D) (4) was passed . In the absence of any new document or material to come to a different conclusion than that was accepted by the Department, assessments of the relevant period could not be reopened by the AO by taking a different view regarding assessability of rental income.(Asst years 2004‐05 to 2006‐07). Jamula Shyam Sundar Rao (HUF) v Asst CIT ( 2011) 138 TTJ 602 (Ctk.)(Trib). S. 147 : Reassessment‐ Rectification pending – (S.154) When proceedings under section 154 were pending on the same issue and not concluded , parallel proceedings under section 147 initiated by the Assessing Officer are invalid ab inito , especially when except the return and its enclosures , no other material or information was in the possession of the assessing Officer.( Asst year 2004‐05) Mahinder Freight Carriers v Dy CIT ( 2011) 56 dtr 247 (Mumbai ) (Trib). S. 147 : Reassessment‐ Block assessment. Block assessment framed under chapter XIV – B of the Act can be reopened under section 147 of the Act.( A. Y. 1995‐96) CIT & Anr. vs. Rinku Chakraborthy (2011) 56 DTR 227/ 242 CTR 425( Kar)(High Court) S.147: Reassessment‐Reason to believe‐Development agreement‐Capital gains.( S.148 ). Assessee entered in to development agreement on 17‐9‐2004, on a consideration of Rs 4 crores. As the developer failed to pay the agreed consideration, of Rs 30 lakhs before 31‐10‐1994 , the assessee terminated the agreement .Thereafter issuing the cheques for Rs 30 lakhs on 30‐6‐2005, the development agreement was restored. In view of further default on the part of developer, on 19‐5‐2010 , the development agreement was once again terminated .The developer has filed the suit before Bombay High Court , which was ultimately settled on 2‐5‐2011 , where in the consideration was enhanced from 4 crore to 7.5.crores . It was ordered the possession of the property to the developer on 2‐5‐2011.In the mean while the Assessing Officer issued notice under section 148 dated 25‐3‐2010 , proposing to tax the capital gain tax arising from development agreement in the Asst year 2005‐06 . In a petition filed by the assessee the Honourable Bombay, High court allowed the petition and quashed the notice issued under section 148. Amar R.Shanbag v ITO ( WP NO 552 of 2011 dt 18‐7‐2011 ( 593 ( 2011) 43A BCAJ‐ August –p 29.) S. 147: Reassessment‐Double taxation avoidance‐ India‐ Malaysia. ( S.90). Assessee having permanent establishment in Malaysia . Income earned in Malaysia is taxable there under the provisions of Double taxation Avoidance Agreement between India and Malaysia. No Tax actually levied because amount had not been brought in to Malaysia . The Amount not taxable in India. Reassessment proceedings to tax amount in India not valid . There is no Rule that assessee should pay tax in at least one jurisdiction to be eligible for relief. ( Asst Years 2001‐01 to 2002‐03 and 2005‐06 ). Sivagami Holdings P. Ltd v Asst CIT ( 2011) 10 ITR 48(Chennai) Trib). S. 147: Reassessment‐ Reason to believe‐ Change of opinion‐ With in period of Four years. Once an assessment has been completed under section 143 (3) after raising a query on a particular issue and accepting assessee’s reply to the query. Assessing Officer has no jurisdiction to reopen the assessment merely because the issue in question is not specifically adverted in the assessment order ,


unless there tangible material before the Assessing Officer to come to the conclusion that there is escapement of income.( Asst Year 1998‐99). Asst CIT v Rolta India Ltd ( 2011) 57 DTR 370 / 139 TTJ 385/ 132 ITD 98(Mumbai) ( TM ) (Trib). S.147: Reassessment‐ Income from house property‐Co‐owner‐ Assessment. ( s. 22). Scheme of the Act does not envisage that annual value of co owned property , upon being determined in assessment of AOP , is to be divided amongst co‐owners in pre determined ratio. in hands of AOP was wholly academic infructuous . Quantification of annual value of co‐owned property in course of assessment of AOP consisting of co‐owners is not a condition precedent for taxability of individual share of such income in hands of co‐owners. The very initiation of reassessment proceedings in hands of AOP of co owners was unsustainable by law.( A.Y. 2002‐03). Sujeer Properties (AOP) v ITO ( 2011) 131 ITD 377 (Mum) (Trib). S.147: Reassessment‐ Issue is subject matter of appeal‐Tribunal.( S.148 ). Once an issue is subject matter of appeal before Tribunal , issuance of notice of reassessment on said ground has to be considered bad in law. ( A.Y. 2000‐01). Chika Overseas (P) Ltd v ITO ( 2011) 131 ITD 471 (Mum) (Trib). S. 147: Reassessment‐ Additions not made on the basis of reopening‐ Reassessment bad in law. ( S. 148 ). If no addition is made on the basis of recording of reasons, the reassessment is bad in law. ( A.Y. 2000‐01). ITO v Bidbhanjan Investment & Trading CO (P ) Ltd ( 2011) 59 DTR 345 ( Mum) (Trib). S. 147: Reassessment‐Valuation of property‐ Inspectors report. Merely because the stamp valuation authority has adopted certain valuation for payment of stamp duty on the property purchased by the assessee, the same cannot be the basis to conclude that assessee’s income has escaped assessment ,particularly when no tangible material has been brought on record to suggest escapement of income except the inspector’s report which could not be relied upon to ascertain the market value of property, hence reassessment quashed by the CIT (A) was up held.(A.Y.2005‐06). ITO v Shiv Shakti Build Home ( P) Ltd ( 2011) 141 TTJ 123 ( Jodhpur) ( Trib). S. 147: Reassessment : Assessing Officer raised specific and pointed queries in s. 143(3) assessment, ‐ AO cannot be said to have formed any opinion if explicit opinion not recorded. The question of change of opinion arises when the AO forms an opinion and decides not to make an addition and holds that the assessee is correct. Here, though the AO had asked specific and pointed queries there was no discussion, ground or reason why addition was not made in‐spite of the assessee’s failure to furnish conformation and details to that extent. The argument that when the assessment order does not record any explicit opinion on the aspects now sought to be examined, it must be presumed that those aspects were present to the mind of the AO and had been held in favour of the assessee is too far‐fetched a proposition to merit acceptance The term “failure” on the part of the assessee is not restricted only to the income‐tax return but extends also to the assessment proceedings. If the assessee does not disclose or furnish to the AO complete and correct information and details it is required and under an obligation to disclose, there is a failure on its part. Dalmia Pvt. Ltd. v CIT(Delhi) (High Court)(www.itatonline.org) S. 147: Reassessment‐ Housing project. ( S.80 IB (10).


As the reassessment proceedings are aimed at taxing the income which has escaped assessment , these cannot be taken as a tool for putting the assessee in a better position than in which it was before such proceedings.( A.Y.2004‐05). Bhumiraj Homes Ltd v Dy CIT ( 2011) 60 DTR 65 ( Mum) (Trib). S. 148: Reassessment‐ Transfer pricing –Jurisdiction‐ Writ petition.(S, 92C, Art 226 of the constitution. Honourable court observed that as fundamental facts have to established ,the assessee ought not to have filed the writ petition. Accordingly the assessee relegated to proceedings pending before Authorities. ( Judgment of High Court ( Coca Coala India Inc v Asst CIT ( 2009) 309 ITR 194 ( P&H). Coca Cola India Inc v Adddl CIT ( 2011) 336 ITR 1 ( SC). S. 148 : Reassessment ‐ Sanction of Commissioner ‐ Application of Mind ‐ (S. 151) A material fact which is not in existence right up to the time of assessment cannot possibly be disclosed. Therefore, a fact which comes into existence subsequent to the making of the assessment cannot be a material fact within the purview of section 147. The duty to disclose material facts necessarily postulates existence of a thing or material. If a material is not in existence or if a material is such of which the assessee had no knowledge there would be no duty to disclose such material (Tirath Ram Ahuja (HUF) 306 ITR 173 (Del.) followed); The Central India Electric Supply Co. Ltd. vs. ITO(2011) 51 DTR 51 (Delhi High Court) S.148: Reassessment‐Validity –Notice‐Amendment‐ Finance Act ,2006. (S. 143 (2), 153(2).). As per Finance Act , 2006 , with retrospective effect from 1st Oct. 1991, all such notices which have been served under sub (2) of section 143 , after expiry of 12 months, have been saved. Thus, notices under sub section (2) of section 143, in respect of return furnished during the period commencing from 1st day of October, 1991 and ending on 30th Sept, 2005 , have been saved provided such a notice is issued before the expiry of time – limit for making the assessment or reassessment as specified in sub section 2 (of section 153, hence reassessment held to be valid. (Asst years 2000 ‐01 to 2002‐03) Dy CIT v Gopal Ramnarayan Kasat ( 2011) 240 CTR 266/54 DTR 228 (Bom) (High Court). S. 148: Reassessment‐ Notice‐Limitation‐ Meaning of “issue”. ( S.149). Notice for the assessment year 2003‐04 was signed on 31‐3‐2010 and sent to speed post centre on 7‐4‐2010.The court held that date of issue would be date on which notice was handed over for service to proper officer ,hence notice was barred by limitation. Kanubhai M Patel (HUF ) v Hiren Bhatt or his successors to Office and others (2011) 334 ITR 25 (Guj) (High Court). S. 148: Reassessment‐ Notice‐ Old address‐ Participates in assessment proceedings. ( S.149, 292BB.). When assessee does not raise objection regarding non issue of notice and appears before the Assessing officer and assessing officer gives copy of notice under section 148, Assessee participates in the assessment proceedings. The service of notice even at the old address of the assessee constitutes service of notice with in ambit of section 148. What is contemplated under section 149 is the issue of notice under section 148 and not the service thereof on the assessee and the service of notice under section 148 is only required before assessment , reassessment or recomputation. (Asst. year 1999‐2000). CIT v Three Dee Exim ( P) Ltd. ( 2011) 55 DTR 147 ( Delhi) (High Court). S. 148 : Reassessment – Notice ‐ AO entitled to drop notice issued under section 154 & issue notice under section 148 ‐ (S. 154)


Though the principle of constructive res judicata was made applicable by the Madras High Court in EID Parry 216 ITR 489 (Mad.) that the Assessing Officer having initiated rectification proceedings under section 154 should stick to the same only and cannot drop that and proceed under section 147 is not acceptable. But the fact that the Assessing Officer invoked section 154 and dropped it does not affect the validity of re‐assessment under section 147. CIT vs. India Sea Foods(2011) 54 DTR 223(Ker)(High Court)) S. 148: Reassessment‐ Notice‐ “issued” in time, date of handing over by AO to post office to be seen.( S.148 ). For purposes of s. 149, the expression “notice shall be issued” means that the notice should go out of the hands of the AO. Merely signing the notices on a particular date cannot be equated with “issuance of notice” as contemplated u/s 149. The date of issue would be the date on which the same was handed over for service to the proper officer, which in the present case would be the date on which the notices was actually handed over to the post office for the purpose of booking for the purpose of effecting service on the assessee. Till the point of time the envelopes are properly stamped with adequate value of postal stamps, it cannot be stated that the process of issue is complete. Kanubhai M. Patel HUF vs Hiren Bhatt( Guj) (High Court). www.itatonline.org. S. 148 : Reassessment – Non‐supply of ‘Reasons for Reopening’ within the limitation period time ‐ Reopening void Where the notice has been issued within the said period of six years but the reasons have not been furnished within that period is hit by the bar of limitation because the issuance of the notice and the communication and furnishing of reasons go hand‐in‐hand. A notice under section 148 without the communication of the reasons therefore is meaningless inasmuch as the Assessing Officer is bound to furnish the reasons within a reasonable time. The expression ‘within a reasonable period of time’ as used in GKN Driveshafts 259 ITR 19 (SC) cannot be stretched to such an extent that it extends even beyond the six years stipulated in section 149. Balwant Rai Wadhwa vs. ITO (Delhi)(Trib.) Source: www.itatonline.org S. 148 : Reassessment ‐ Service of Notice ‐ Second Notice ‐ Validity of Assessment ‐ Limitation from first notice It was held that first notice sent by speed post as permitted by section 282 is presumed to have been duly served upon the assessee and was valid. As the first section 148 notice was valid and reassessment proceedings were pending, the second section 148 notice is not an irregularity but a nullity. (Ranchhodas Karsandas 26 ITR 105 (SC) and Jai Dev Jain 227 ITR 301 (Raj.) followed. Thus, the limitation period reckoned with reference to the first notice. Sanjay Kumar Garg vs. ACIT (ITAT ‐ Delhi) Source: www.itatonline.org(Trib) S. 148. Reassessment‐ Service of notice‐ Service of notice on chartered accountant. (S 282.) Service of notice under section 148 on a chartered accountant who was not empowered to receive such notice on behalf of the assessee company or any other person who was not authorised to receive was not a valid service of notice on the assessee , more so when it was not shown that the assessee was keeping out of way for the purpose of avoiding service of notice or that there was any other reason that the notice could not be served on the assessee in the ordinary way and therefore , assessment completed pursuant to said notice was bad in law. ( Asst year 1999‐2000). Harsingar Gutkha (P ) Ltd v Dy CIT ( 2011) 138 TTJ 318 (lucknow) (Trib). S. 148: Reassessment‐ Sanction to issue notice‐ Chief commissioner – Commissioner‐ After four years. ( S.151.)


Original assessment was completed under section 143 (3) on 29‐1‐2001.Subsequently , Assessing Officer who of rank of Assistant Commissioner (ACIT) initiated proceedings under section 147 vide notice dated 24‐3‐2005 issued under section 148 , after obtaining approval from Joint Commissioner ( JCIT). As proceedings under section 147 were initiated after 4 years from relevant assessment year , assessee objected to jurisdiction of Assessing Officer in issuing notice under section 148 on ground that Assessing Officer had not obtained sanction of Chief Commissioner (CCIT) or Commissioner (CCIT).In view of Shashi Kant Garg (Dr) v CIT ( 2006) 285 ITR 158 (All) , objection raised by assessee was to be up held and consequently ,impugned notice was quashed. ( Asst Year 1998‐99). ITO v Bhavesh Kumar ( 2011) 131 ITD 1 / 59 DTR 145/ 140 TTJ 257(Agra) (TM ) (Trib). S.149: Reassessment‐ Time limit – Issuance of notice. ( S.148.) Section 149 only requires issuance of notice under section 148 , within limitation period and it can be served on proper person subsequently, i.e. after expiry of limitation period.( Asst year 1998‐99). ITO v Sikandar Lal Jain ( 2011) 45 SOT 113 (Agra ) (TM ) (Trib). S. 150: Reassessment‐ Limitation‐ Finding or Direction. (S.149.). Assessment having not been reopened to give effect to the order of the CIT (A). According to the Assessing Officer because of giving effect to the order made by the CIT (A) , will result in to escapement of income . The court held that section 150 did not apply. As there was no failure on the part of assessee to disclose fully and truly all material facts , reassessment is clearly time barred.( A.Y. 1988‐89). Harsiddh Specific Family Trust v JCIT ( 2011) 58 DTR 149 ( Guj) (High Court). S.150:Reassessment‐ Finding‐ Direction‐Limitation . ( S.149 ). Since no findings or directions had been given in assessment year 1992‐93 to tax the receipt in question in assessment year 1994‐95 under appeal which is also inherently impossible in view of the findings that it is capital receipt ,provisions of section 150 would apply in the case of the assessee and reopening of the assessment made after a period of six years from the end of the assessment year was clearly time barred.( A.Y. 1994‐95). Vadilal Dairy International Ltd v Asst CIT ( 2011) 140 TTJ 371 ( Ahd) (Trib). S. 150: Reassessment‐ Power of Appellate authority. Section 150 does not enable or require an appellate authority to give any directions for reopening of assessment, but it deals with a situation in which a reassessment is to be initiated to give effect to finding or direction of appellate authority or Court.( A.Y. 2002‐03). Sujeer Properties (AOP) v ITO ( 2011) 131 ITD 377 (Mum) (Trib). S. 151 : Reassessment – Sanction – Limitation. In cases covered under section 151, the notice is to be issued by the Assessing Officer and the only requirement is that the Jt. CIT should be satisfied on the reasons recorded by the Assessing Officer. There was no satisfaction of the Jt. CIT for the Asst. Year 1989‐90 to 1994‐95, hence, notices for these years are invalid.(A. Y. 1989‐90 to 1994‐95 and 1998‐99) Maya Rastogi (Smt.) vs. CIT (2011) 52 DTR 237 (All)(High Court) S. 151 : Reassessment – Sanction for issue of notice – Application of Mind. (S. 148) Merely affixing a ‘yes’ stamp and signing underneath suggested that the decision was taken by the Board in a mechanical manner as such, the same was not a sufficient compliance under section 151 of the Act. (A. Y. 1965‐66)


Central India Electric Supply Co. Ltd. vs. ITO (2011) 51 DTR 51 (Del.)(High Court) S. 153A : Search and Seizure ‐ Special Procedure for Assessment ‐ On Money Payment – Company ‐ Director Merely on the basis of entry in seized material not supported by corroborative evidence, and contradictions in statement of purchaser of property, additions made in the hands of company on substantive basis and addition in the hands of Director on protective basis was deleted.(A. Y. 2005‐06) Embassy Classic P. Ltd & Another vs. ACIT (2011) 7 ITR 287 (Bang.)(Trib.) S. 153A :Search and Seizure‐ Assessment – Search and Seizure – Validity vis‐à‐vis absence of notice under section 143(2) – Service of notice prior to issue of notice for filing of return. [S. 143(2)] Compliance of the provisions of section 143(2) can happen only after the receipt of return or documents as specified under section 142(1)(ii), hence, issue of notice under section 143(2) prior to such stage does not serve any purpose, hence, redundant; as no notice under section 143(2) was served on the assessee after the filing of return, the assessment proceedings are quashed as null and void. ACIT vs. G. M. Infrastructure (2011) 49 DTR 151 (Ind.)(Trib.) S. 153A : Search and Seizure – Special Procedure for Assessment – On Money Payment – Company – Director. Merely on the basis of entry in seized material not supported by corroborative evidence, and contradictions in statement of purchaser of property, additions made in the hands of company on substantive basis and addition in the hands of Director on protective basis was deleted. (A. Y. 2005‐06) Embassy Classic P. Ltd & Another vs. ACIT (2011) 7 ITR 287 (Bang.)(Trib.) S. 153A: Search and Seizure ‐ Assessment in case of search or requisition. Once the warrant of authorization or requisition is issued and search is conducted, Panchanama is drawn, all the relevant six assessment years would get reopened irrespective of any incriminating material is found or not in respect of any particular assessment year falling within the relevant six assessment years.( 2002‐03 to 2005‐06) Mansukh Kanjibhai Shah (Dr) v. Asstt. CIT (2011) 129 ITD 376 (Ahd)( Trib). S. 153A: Search and Seizure‐Abatement‐Assessment pending. Only the assessments pending before the Assessing Officer for completion shall abate and under section 153A the issues decided in the assessment can not be reconsidered and readjudicated unless there is some fresh material found during the course of search in relation to such points. ( Asst Years 2003‐04 to 2005‐06 & 2007‐08 ). Guruprerana Enterprises v Asst CIT ( 2011) 57 DTR 465 ( Mumbai) (Trib). S. 153C: Search and seizure‐Assessment in case of any other person ‐ Assessment sans “speaking” & “incriminating” documents void.( S. 132.) For purpose of attracting S. 153C, the document seized must not only be a ‘speaking one’, but also prima facie ‘incriminating one’. The documents cannot be said “incriminating one”, merely because it contains the notings of entries which are already recorded in books of accounts or is subjected to scrutiny of Assessing officer in the past in regular assessment u/s. 143(3) of the Act. Sinhgad Technical Education Society vs ACIT(2011) 57 DTR 241 / 140 TTJ 233(Pune)(Trib). S. 153C: Search and Seizure‐ Assessment‐ Computation of undisclosed income‐ Cash Credit.


Where the assessee has proved identity of the person the genuineness of the transaction as well as the capacity of the lenders and departmental authorities have not found any falsity in the evidences no addition could be made under section 68. ( Asst Years 2003‐04 to 2005‐06 & 2007‐08 ). Guruprerana Enterprises v Asst CIT ( 2011) 57 DTR 465 ( Mumbai) (Trib). S. 153(2A) : Assessment – Limitation ‐ Some of the additions set aside ‐ Fresh Assessment. [S. 153(3)(ii)] When several additions have been made by the Assessing Officer and the appellate authority sets a side one or more of the issues to the file of the Assessing Officer, that situation would not give rise to a “fresh assessment” and in that cases section 153(3)(ii) would apply and not section 153(2A). S. M. Dalvi vs. ACIT (2011) 53 DTR 105 (Mum.)(Trib.) S. 154 : Rectification of Mistake – Intimation u/s 143(1)(a) cannot be rectified after order passed u/s 143(3) Rectification order under section 154 cannot be passed to rectify an intimation given under section 143(1)(a) after final assessment order under section 143(3) is passed.(A. Y. 1994‐95) Tamil Nadu Magnesite Ltd. vs. CIT, Coimbatore (2011) 196 Taxman 271 (Mad.)(High Court) S. 154 : Rectification of Mistake – Setting aside of Assessment. Where assessment order passed under section 143(3)/147 has been set aside, consequential order under section 154 has also to be set aside (A.Y. 1997‐98). CIT vs. DCM Financial Services Ltd. (2011) 196 Taxman 439 (Delhi)(High Court) S. 154: Rectification of mistakes‐ Apparent from records‐Overlooking statutory provision. Overlooking of statutory provision is clearly a mistake on record and , on that basis , rectification under section 154 is clearly admissible. ( A.Y. 1985‐86). CIT v Steel Strips Ltd ( 2011) 200 Taxman 368 ( Punj & Har) (High Court). S. 154: Rectification of mistakes‐Apparent from records‐ Salaries‐ Perquisites‐Tax paid by employer‐ Merger. ( S. 15, 17 ). While computing assessee’s original assessment , Assessing Officer did not include tax payment by employer to exchequer on behalf of employee as part of salary for computing value of rent free accommodation perquisite under rule 3 . On appeal , Tribunal quashed of Assessing Officer for financial years 1995‐96 to 1997‐98, after grossing up income under section 195A and directed Assessing Officer to recomputed tax liability for said financial years. Order giving effect was also passed. However thereafter , Assessing Officer rectified assessment under section 154 by recomputing value of perquisite in rest of rent free accommodation after including tax element in gross salary. Assessee challenged the order on the ground that the issue being debatable and original order being merged with the order of Tribunal the Assessing Officer did not have jurisdiction to rectify the mistake under section 154.High Court held that when an earlier occasion ,Tribunal had not at all considered aforesaid issue , doctrine of merger would not be applicable in instant case. When jurisdictional Court and other Courts had held at relevant time that income tax paid by employer on behalf of employee is part of salary , issue could not be said to be debatable and therefore , there was legal error apparent from record which was rightly corrected by Assessing Officer under section 154. Mitsubishi Corporation v CIT ( 2011) 200 Taxman 372/ 337 ITR 498 ( Delhi ) (High court). S. 154: Rectification of Mistake‐ Subsequent decision of Supreme Court.( S. 10 (10C ).


In view of subsequent judgment of the Supreme Court setting a side the judgment of the High Court, ,the assessees are entitled to exemption under section 10 (10C), and therefore Assessing Officer is directed to rectify the assessment order to allow exemption under section 10(10C) K.R.Alagappan & Ors v Asst CIT ( 2011) 59 DTR 295/ 243 CTR 85 (Mad) (High Court). S.154: Rectification of mistakes‐ Book profit‐Not considering the statutory provision. ( S. 115JA). When original assessment is completed without reference to the statutory provision and in clear violation of the same , such assessment could be rectified under section 154.In order to allow deduction of brought forward business loss or unabsorbed depreciation in the computation of book profit under section 115JA , both should be available as per the accounts of the assessee . Since nothing is left after setting off brought forward business loss up to 1994‐95 against profit , assessee was not entitled to any relief under clause (b) of Explanation (iii) of section 115JA for assessment year 1997‐98. (A.Y.1997‐98). CIT v Carbon & Chemicals India Ltd ( 2011) 59 DTR 396 ( Ker) (High Court). S. 154(7) : Rectification of Mistake ‐ Notice of Demand ‐ Limitation Order under section 154 purported to have been passed on 24th January 2000, and the consequential calculation of tax payable in Form No. ITNS ‐150 having been served on the assessee on 24th May 2005 and 6th June, 2005, respectively i.e. After expiry of limitation under section 154(7), it cannot be accepted that the order was in fact passed on 24th January 2000, especially when no notice of demand was issued and no recovery proceedings were initiated.(A. Y. 1995‐96) V. B. Desai Financial Services Ltd. vs. Dy. CIT (2011) 51 DTR 205/137 TTJ 338 (Mum.)(Trib.) Chapter XIVB.‐ Special procedure for assessment of search cases. S. 158BA : Block Assessment –Search and Seizure‐ Assessment of Undisclosed Income – Stock It was noticed on verification that there was no noting or computation to show that there was deficit of physical stock at time of search when compared to book stock. It was also noted that basic variables of computing stock position themselves were estimates assumed by the Assessing Officer. Also the partner who had initially deposed before the revenue authorities against the assessee firm, did not turn up for cross examination and thus the evidentiary value built on statement of the said person collapsed. In view of the above facts, the impugned addition made by the authorities were held not sustainable. (A. Y. 1989‐90 to 1998‐99) Sunrise Sales Corporation vs. Dy. CIT (2011) 43 SOT 16 (Bang.)(URO)(Trib.) S. 158B(b) : Block Assessment ‐ Search and Seizure ‐ Computation of Undisclosed Income ‐ Belated filing of Return ‐ Disclosure of Income – [S. 132(4)] If the search under section 132 takes place after the due date of filing of normal return and no return is filed by that time, and the assessee is not able to demonstrate that he had disclosed his income to the department before the date of search in the some manner or the other, filing of return thereafter under section 139(4) would be of no consequence for the applicability of Chapter XIV–B and the income of the assessee is to be treated as undisclosed.(A. Y. 1999‐2000) CIT vs. A. T. Invofin India (P) Ltd. (2011) 237 CTR 360 / 49 DTR 141 (Delhi)(High Court) S. 158BB : Block Assessment‐Search and Seizure ‐‐ Computation of Undisclosed Income ‐ Belated Return – Surrender of Income ‐ Gift from NRI.


Income declared in a belated return after search could not be treated as disclosed income. Assessee being unable to give any valid explanation for the alleged gift received from NRI, having surrender the amount as unexplained income, Tribunal was not justified in treating the gifts as explained simply because the same were disclosed in the regular return. CIT vs. Ashwani Trehan (2011) 239 CTR 10 (P&H)(High Court) S.158BB: Block Assessment‐ Search and Seizure‐Undisclosed income‐ Some evidence must be found in the course of search. Block assessment can be made in respect of undisclosed income which is recovered as a result of evidence found during the course of search and not as a result of other documents or material which came to possession of Assessing Officer subsequent to conclusion of search operation unless and until such evidence recovered during course of search .It is apparent that some evidence is to be found as a result of operation and it is only thereafter that remaining part of provisions come in to play. Krishna Terine (P) Ltd v Asst CIT( 2011) 130 ITD 411 (Ahd) (Trib). S. 158BC : Block Assessment –Search and Seizure‐ Protective Assessment be framed ‐ (S. 158BD) The Assessing Officer in absence of any specific power under the Act, has power to make protective assessment in case of regular as well as block assessment under certain circumstances Lalji Haridas vs. ITO 43 ITR 387 (SC) followed. CIT vs. Mahindra Finlease Pvt. Ltd. (Delhi High Court) Source: www.itatonline.org S. 158BC : Block Assessment ‐ Search and Seizure – Depreciation ‐(S. 158BH) Section 158BH, makes all other provisions applicable to the assessment under. Chapter XIV‐B, unless it is otherwise provided for, therefore even in block assessment, the Assessing Officer must allow the claim of the assessee for the depreciation which is legally permitted under the provisions of the Act.(A. Y. 19997‐98 and 2003‐04) CIT vs. C. Sabira (Smt.) (2011) 237 CTR 477 (2010) 40 DTR 153 (Ker.)(High Court) S. 158BC : Block Assessment ‐ Search and Seizure ‐ Computation of Undisclosed Income ‐ Set off of excess income Assessee is not entitled to set off of excess income disclosed in a particular year falling within the block period against the undisclosed income of subsequent year falling within the same block period. CIT vs. Kamala Devi Jain (2011) 51 DTR 70 / 238 CTR 328 (Guj.)(High Court) S. 158BC : Block Assessment – Search and Seizure – Material not found. Where no evidence/material was found in the course of search or any information relating to any undisclosed income earned by the assessee, block assessment framed by the Assessing Officer making addition of the undisclosed income merely on the basis of third party statement was held to be bad and set aside. (A. Y. 1986‐87 to 1996‐97) CIT vs. T. Sivaprabhaskar (2011) 50 DTR 329 (Mad.)(High Court) S. 158BC : Block Assessment –Search and Seizure‐ Service of Notice. In the absence of any material or evidence to prima facie show that the alleged notice under section 158BC was actually sent to the assessee, it cannot be presumed, in the absence of acknowledgement of the said notice, that


might have been served upon the assessee and therefore, the proceedings initiated by the Assessing Officer under section 158BC as well as block assessment are null and void initio.(A. Y. 1995 to 99 and 1989 to 2000) ACIT vs. Lakshmi Industries (2011) 135 TTJ 112 /(2010)48 DTR 54/(2011) 7 ITR 495 (Chennai)(Trib) S. 158BC: Block Assessment‐ Search and Seizure‐ Notice under section 158BD‐ Statement of persons. ( 158BD.). In the absence of any search warrant in the name of the assessee and search against him ,the provisions of section 158BC in the hands of the assessee without issuing any notice under section 158BD , only on the basis of statements of three persons that the money recovered from them belonging to the assessee was held to be illegal. Anil Kumar Chadha (Guddu ) v Dy CIT ( 2011) 138 TTJ 574 / 132 ITD 330(All) (Trib). S. 158BC: Block assessment‐Search and Seizure‐Warrant of authorization‐ Joint names‐ Assessment in the name of Individual is not invalid. Warrant of authorization issued in the names of three companies including assessee , separated only by a comma without the word “and” between the names of the companies is a common warrant in the case of said three companies and not a warrant in the joint names of three companies and therefore ,the block assessment order framed in the individual name of the assessee company is not in valid. Radan Multimedia ltd v Dy CIT ( 2011) 58 DTR 129 (Mumbai) ( Trib). S.158BC:Block assessment‐Transactions which are subject matter of regular assessment‐ Can not be treated as undisclosed income‐ Depreciation‐ Finance charges. Assessee having disclosed all the transactions relating to its claim for depreciation on plant and machinery as well as payment of finance charges by filing all details in the return filed prior to the date of search which has been subject matter of enquiry in a regular assessment and all the machineries having been physically found at the time of survey as well as search at the business premises of the assessee , depreciation and finance charges could not be disallowed and treated as undisclosed income in the block assessment in the absence of detection of any material as a result of search. Radan Multimedia ltd v Dy CIT ( 2011) 58 DTR 129 (Mumbai) ( Trib). S. 158BD :Block Assessment ‐Search and Seizure – Undisclosed income of any other person‐‐ Statement Recorded Proceedings initiated against the assessee under section 158BD on the basis of statement recorded during search are not valid as statement is neither document nor asset; further, initiation of proceedings under section 158BD by the Assessing Officer against the assessees without recording the requisite satisfaction was illegal. CIT vs. Late Raj Pal Bhatia (2011) 49 DTR 9 / 237 CTR 1 (Delhi)(High Court) S. 158BD : Block Assessment ‐ Search and Seizure ‐ Undisclosed Income of any other person ‐ Recording of Satisfaction Assessing Officer of searched person, having nowhere recorded any satisfaction that the assessees’ income of the relevant block period had escaped assessment nor forwarded the records of the case to the assessees’, Assessing Officer proceedings under section 158BD against the assessee were rightly set aside. CIT vs. Sunil Bhala (2011) 238 CTR 18 / 50 DTR 238 (Delhi)(High Court) S. 158BD : Block Assessment – Search and Seizure –Undisclosed income of any other person‐ Notice –


Jurisdiction. Where the assessee had not raised the plea that the Assessing Officer had no jurisdiction over him within one month from the date on which he was served notice under section 158BD of the Act, the assessment proceedings cannot be held to be invalid for want of jurisdiction in view of section 124(3) of the Act. (A. Y. 1997‐98 to 2003‐04) CIT vs. Kapil Jain (2011) 50 DTR 342 (Del.)(High Court) S. 158BD: Block assessment‐ Seaech and Seizure‐Undisclosed income of any other person‐ order void if referring AO’s “satisfaction” not recorded. Mere mention of the word ‘satisfaction’ in the order / note will not meet the requirement of the concept of satisfaction as used in S. 158BD. The Assessing officer must reach a clear conclusion that good ground exists for the Assessing officer of the third person to initiate proceedings as material before him shows or would establish “undisclosed income” of third person. Manish Maheshwari vs. ACIT (2007) 289 ITR 341 (SC) followed. CIT vs Radhey Shyam Bansal (2011) 337 ITR 217/ 243 CTR 375(Delhi) ( High Court).www.itatonline.org. S. 158BD; Block Assessment‐ Search and Seizure‐Undisclosed income of any other person‐Recording of satisfaction‐Prior to handing over of documents. As no satisfaction has been recorded by the Assessing officer of the person with respect to whom the search was made, prior to handing over the documents to the Assessing Officer of petitioner, the impugned notice under section 158BD is liable to be quashed. Chandrakantbhai Amratlal Thakkar v Dy CIT ( 2011) 55 DTR 249 / 337 ITR 258(Guj). (High Court). S.158BD:Block Assessment‐Third person‐ Office note‐Presumption.( S. 292C). If any material is found during search and seizure indicating undisclosed income of third person , further investigation is not necessary. Presumption under section 292C is applicable. Office note of Assessing Officer regarding undisclosed income of third person is valid for proceedings under section 158BD of the Income Tax Act. CIT v Mukta Metal Works ( 2011) 336 ITR 555 (P& H) (High Court). S. 158BD :Block Assessment‐ Search and Seizure –Undisclosed income of any other person‐ Block Assessment ‐ Judicious Satisfaction ‐ Recorded in Block assessment of person searched. (S. 158BC) Satisfaction recorded under section 158BD before initiation of block assessment proceedings of the person searched does not satisfy the requirement of law; further, so called satisfaction recorded by the Assessing Officer in the order sheet without even stating that undisclosed income pertaining to the assessees has been detected from the seized record of the persons searched was not in accordance with the provisions of section 158BD, therefore the block assessments of the assessees under section 158BD are not valid. ACIT vs. Mukta Goenka (Smt.) (2011) 53 DTR 1 / 129 ITD 201 (Jab.)(TM)(Trib.) S.158BD: Block Assessment‐ Search and seizure‐Undisclosed income of any other person‐ Recording of satisfaction‐Before completion of assessment of person searched. (S. 158BC.). Recording of satisfaction for taking action against any other person under section 158BD has to be between initiation proceedings under section 158BC and before completion of block assessment under section 158BC in case of person searched. Notice issued beyond period prescribed was bad in law. CIT v Praveen Fabrics (P) Ltd ( 2011) 198 Taxman 463 (Punj &Har) (High Court).


Editorial‐ View of Delhi Special Bench in Manoj Aggrawal v Dy CIT ( 2008) 113 ITD 377 (Delhi) (SB ) (Trib), affirmed. S.158BD: Block assessment‐ Search and Seizure‐ Assessment of third person‐Action under section 158BD must be taken before completion of search assessment of searched person . ( S. 158BC). Action under section 158BD must be taken before completion of assessment of searched person. Block assessment under section 158BC , was completed on 30‐3‐2005 . Satisfaction under section 158BD recorded on 15‐7‐2005 . The court held proceedings held to be not valid.( Block Period1998 to 2003) CIT v Mridula, Prop Dhruv Fabrics ( 2011) 335 ITR 266 ( P &H) (High Court) Editorial. Refer Manoj Aggarwal vs. DCIT (2008) 113 ITD 377 (Del)(SB) / 117 TTJ 145 / 11 DTR 1. S:158BD‐Block assessment‐ Search and seizure‐ Assessment of undisclosed income of other person. The assessment of the person put to search was completed on 28‐2‐2005 and proceedings u/s. 158BD were initiated on 02‐12‐2006 by issue of notice. The satisfaction u/s. 158BD was recorded 31‐03‐2006. Since the satisfaction u/s. 158BD was recorded after the completion of proceedings u/s. 158BC, it was held that proceedings u/s. 158BD are time‐barred‐ CIT v. Parveen Fabrics P. Ltd. {2011} 198 Taxman 463 (P & H.)( High Court).. S. 158BE : Block Assessment – Limitation ‐ Search and Seizure ‐ Last Panchanamas ‐ Prohibitory Order. [S. 132(3)] Panchanamas drawn on 27th and 28th March 2003 in respect of residential and business premises of the petitioner being the last panchnamas the date of the same is the date of conclusion of the search for reckoning the time limit of two years for completion of the search and not 17th and 14th June 2003, on which dates prohibitory orders under section 132(3) were lifted though time period of 60 days already expired on 27th May, 2003 and therefore, the impugned assessment order passed on 30th June 2005, was barred by limitation. (A. Y. 1997‐98 to 2003‐04) Rakesh Sarin vs. Dy. CIT (2011) 240 CTR 56 (Mad.)(High Court) S. 158BE : Block Assessment ‐ Search and Seizure – Limitation ‐ Service of non‐signed copy of Assessment Order. (S. 292B) On the facts it was established that draft assessment was approved by the CIT under section 158BG on 23rd May, 1997 and that the assessment was finalized by the Assessing Officer on 27th May, 1997 i.e. before expiry of limitation on 31st May, 1997. The copy of the assessment order first sent to the assessee on 30th May, 1997 along with signed notice of demand did not contain the signature of the Assessing Officer did not invalidate the assessment which was validly completed within the period of limitation. (Block period April 1986 ‐ May 1996) CIT vs. T. O. Abraham & Co. (2011) 54 DTR 105 (Ker.)(High Court) S. 158BFA: Interest‐ Tax paid after due date of filing of return‐ Credit. While calculating interest under section 158BFA (1) , credit can not be allowed for the tax paid by the assessee on various dates after the due date of filing of return. Kirti Foods Ltd v Asst CIT ( 2011) 60 DTR 96 (Pune) (Trib). S, 158BH‐Block Assessment –Search and Seizure‐ Disallowance – Rule 6DD. ( S. 40(A)(3). While computing the income of the Appellant under chapter XIV – B of the Act if the assessee fails to bring his case within the ambit of exceptional circumstance as provided in rule 6 DD of the Income tax Rules, 1962 expenditure can be disallowed invoking provisions of section 40 A (3) of the Act.( Block Period 1990 to 2000)


CIT vs. Sai Metal Works (2011) 54 DTR 327 (P&H)( High Court). Chapter XV. ‐ Liability in special cases. A‐ legal representatives. S.159: legal representatives‐Notice on dead person‐ Assessee‐ Reassessment. (2 (7), 148.). Assessing officer issued the notice under section 148 in the name of assessee who already expired. The tribunal held that notice was not valid hence proceedings initiated under section 147 was quashed.(Asst year 1998‐99). ITO v Sikandar Lal Jain ( 2011) 45 SOT 113 (Agra) (TM ) (Trib). S. 159(2) :Legal representatives‐ Assessment ‐ Dead Person ‐ Search and Seizure Assessment cannot be framed on a dead person, where the assessee had already died on 2nd Feb., 1990 and the search was conducted thereafter on 13th Sept., 1990, section 159(2) was not attracted and no assessment could be framed on a dead person. Therefore addition made under section 69B was liable to be deleted. Late Smt. Laxmibai Karanpuria Through L/H Rajendra Karanapuria vs. ACIT (2011) 135 TTJ 123 / 49 DTR 59/ 130 ITD 40 (Ind.)(Trib.) M. –Private companies. S.161: Representative Assessee‐No liability for unconnected income.( S. 163 ). The whole of the share capital of Genpact India, an Indian company, was held by a Mauritius company. The whole of the share capital of the Mauritius company was in turn held by General Electric Co, USA. The Mauritius company “gifted” the shares of Genpact India to another Mauritius company, whose shares were then ultimately sold to a Luxembourg company. The AO claimed that the transaction of transfer of shares of Genpact India had resulted in capital gains to General Electric, USA, and so he issued a notice u/s 163 proposing to treat Genpact India as an “agent” of General Electric and to assess it as a “representative assessee”. This was challenged by a Writ Petition. Upholding the challenge the court held that, the mere fact that a person is an agent or is to be treated as an agent u/s 163 and is assessable as “representative assessee” does not automatically mean that he is liable to pay taxes on behalf of the non‐resident. U/s 161, a representative assessee is liable only “as regards the income in respect of which he is a representative assessee“. This means that there must be some connection or concern between the representative assessee and the income. On facts, even assuming that Genpact India was the “agent” and so “representative assessee” of General Electric, there was no connection between Genpact India and the capital gains alleged to have arisen to General Electric (from the sale of shares of Genpact India). Consequently, the s. 163 proceedings seeking to assess Genpact India for the capital gains of General Electric were without jurisdiction. General Electric Co v DDIT (2011) 243 CTR 417/ 60 DTR 297( Delhi) ( High Court)www.itatonline.org. S. 179 : Liabilities of Director of private company – Tax contemplated under section 179 does not include interest and penalty. While deciding, if the nomenclature ‘tax’ would include other components such as penalty as well as interest, the High Court placed reliance on the judgement in the case of Soma Sundarams Ltd. vs. CIT 116 ITR 620, which had held that the Court has decidedly stated that the component ‘income tax’ does not include payment of penalty as well as interest. H. Ebrahim and Others vs. Dy. CIT (2011) 332 ITR 122 (Karn.)(High Court) Chapter XVI. ‐ Special provisions applicable to firms.


S. 184 : Firm – Assessment – Certified copy to be filed every year – Mandatory. Section 184 provides that the assessee firms should file copy of ruling partnership deed certified by all the partners along with return of income, the requirement is mandatory, otherwise the assessee can only be treated as AOP. The fact that assessee has been treated as firm in earlier years will not be sufficient. (A. Y. 1993‐94 & 95) Bhaskar and Co. vs. CIT (2011) 331 ITR 90 (Ker.)(High Court) Chapter XVII.‐ Collection and recovery of tax. B. –Dedcution at Source. S.192: Deduction of tax at source – Salary ‐ Amounts not deductible‐Income deemed to accrue or arise in India‐ Salary to staff at Netherland [S.9,40 (a) (iii)]. Where salaries had been paid to non‐residents for services rendered abroad, provisions of Explanation to section 9 (1) (ii) were not applicable to assessee. Since salary paid to non resident’s for services rendered in Netherlands was not chargeable to tax in India , provisions of section 192 cannot be applied hence disallowance made by applying the provisions of section 40(a) (iii) were liable to be deleted. (Asst Year 2003‐04). CIT v Mother Dairy Fruits & Veg (P) Ltd ( 2011) 45 SOT 186 (Delhi) (Trib). S. 194A : Deduction of Tax at Source –Interest other than interest on securities‐ Compensation – Interest – Limit to be worked separately. Where the Motor Accident Claim Tribunal apportionated the compensation amount and interest payable to each claimants. The interest income of each of the claimant is to be taken into account separately for applying the limit prescribed under section 194A(3)(ix) for the purpose of deducting tax at source under section 194 A of the Act. National Insurance Co. Ltd. vs. Smt. Draupadibai & Ors. (2011) 50 DTR 282 (MP)(High Court) S. 194A: Deduction of tax at source‐ Interest other than interest on securities‐ Interest on compensation by Motor Accident Claims Tribunal. If the amount of interest on compensation awarded by Motor Accident Claims Tribunal payable to the claimant in particular financial year does not exceed fifty thousand rupees then the person responsible for payment is not required to deduct tax at source under section 194A. Interest Awarded has to be spread over in number of years from the date of filing of claim petition till the due of payment. United India Insurance Co Ltd v Ramanlal & Ors ( 2011) 56 DTR 407 (MP) (High Court). S. 194C : Deduction of Tax at Source –Payments to contractors and sub contractors‐ Amounts not Deductible ‐Payments by firm to Partners – Sub‐Contract. [S. 40(a)(ia)] Partners of the assessee firm having executed the transportation, contracts undertaken by the firm by using their own trucks and the assessee having acted as an agent in routing the payments to partners, it cannot be held that there was a separate contract between the firm and the partners and, therefore such payments could not be disallowed under section 40(a)(ia) on the ground that tax was not deducted at source under section 194C. (A. Y. 2006‐07) CIT vs. Grewal Brothers (2011) 54 DTR 99 (P&H)(High Court) S. 194 C: Deduction of tax at source‐ Payment to contractors and sub contractors‐ ‐Contractual payment –Freight charges‐ Disallowance u/s. 40(a)(ia).


In the absence of any oral or written agreement for payment of any freight charges to truck owners, it does not become a case u/s. 40(a)(ia) r.w.s. 194C. Therefore, the disallowance made is not sustainable.( A. Y. 2006‐07) CIT vs. Bhagwati Steels (2011) 241 CTR 480 (P&H)( High Court). S. 194C : Deduction of tax at Source ‐Payments to contractors and sub contractors‐ ‐ Printing Material ‐ Payments to contractor Payment made for purchase of printed packing material to suppliers, no work involving skill or secrecy, it being sale, section 194C is not attracted.(A. Y. 2004‐05 and 2005‐06) ITO vs. Mother Dairy Food Processing Ltd. (2011) 7 ITR 16 (Delhi)(Trib.) S. 194C : Deduction of tax at Source ‐ Payments to contractors and sub contractors‐ Shipping Agent ‐ Carriage of Goods ‐Technical Services – Payments to Contractors ‐ (S. 194J) Payment made for carriage of goods from the customer’s trailers to the vessel in the case of export and vice versa in the case of import of goods are covered by section 194C rather than section 194J which cannot be applied.(A.Y. 2004‐05) ACIT vs. Merchant Shipping Services (P) Ltd. (2011) 49 DTR 97/129 ITD 109/8 ITR (Trib) 1. (Mum.)(Trib.) S. 194C : Deduction of Tax at Source ‐ Payments to contractors and sub contractors ‐ Contractor and Sub‐contractor – [S. 40(a)(ia)] Where the transporters are hired by the vendors of the goods, who directly made supplies to the factory of the assessee and charged the amount of transportation separately in their bill to the assessee, provisions of section 194C are not applicable, hence, amount paid cannot be disallowed by applying the provisions of section 40(a)(ia). Chang Hing Tannery vs. Dy. CIT / (2011) 42‐B‐BCAJ March P. 32(Kol)(Trib) S. 194C : Deduction of Tax at Source‐ Payments to contractors and sub contractors ‐ Society engaged in Charitable Activities ‐ (S. 40(a)(ia), 194J). For non‐deduction of tax at source from paying the payments made towards advertisement expenses, the Assessing Officer disallowed the sum of ` 5.10 lacs and taxed the same as business income. Before the Tribunal the assessee contended that since its income is not chargeable under section 26 to section 44AD under the head “Business income” the provisions of section 40(a)(ia) were not applicable. The Tribunal relying on the decision in the case of ITO vs. Sangat Bhai Pheru Sikh Education Society (ITA Nos. 201 to 203/ASR/2004 dt. 31‐3‐2006 and CIT vs. India Magnum Fund (2002) 74 TTJ 620 (Mumbai) accepted the contention and allowed the appeal of assessee. Baba Farid Vidyak Society vs. ACIT, ITA No. 180/ASR/2010 Asst. Year 2006‐07 dt. 31‐1‐2011 (2011) 43 A BCAJ April P. 34 (Trib) S. 194C.: Deduction of tax at source‐ Payments to contractors and sub contractors ‐Payment to truck operators without deduction TDS‐ Deduction of tax at source‐ Second and third proviso to section 194C (3) w.e.f. 1st June 2005 is not retrospective. ( S. 40 (a) (ia).). Assessee operating trailer lorries disbursing freight charges amounting to Rs 46,70,365 to 16 parties without deducting TDS as specified in section 194C . Assessee was liable to deduct tax at source . Amendment to sub section (3) of section 194C made through Finance Act 2005, where by second and third provisions were added to it w.e.f Ist June ,2005 has no retrospective effect . The Tribunal held that the Assessing Officer was justified in making disallowance under section 40 (a) (ia).( Asst Year 2005‐06). ITO v M.Sankar ( 2011) 138 TTJ 690 ( Chennai) (Trib).


S. 194C.Dedcution of tax at source‐ Payments to contractors and sub contractors‐ Franchisee agreement‐ Sharing of profits. (S. 40 (a) (ia). Franchisee agreement did not stipulate payment to be made to the licence for any work done on behalf of the assessee and it was merely a case of running a study centre and to apportion profits thereof between the assessee and the licence and therefore provisions of section 194C were not applicable and no disallowance under section 40 (a) (ia) can be made.( Asst years 2005‐06, 2006‐07). Career Launcher ( India) Ltd v Asst CIT ( 2011) 139 TTJ 48 / 56 DTR 10(Delhi) (Trib). S. 194D : Deduction of tax at Source ‐ Insurance Commission. Assessee, a general insurance company, entered in to an arrangement with one B for facultative reinsurance. As per said arrangement, assessee was liable to pay certain percentage of premium as reinsurance inward commission to B. Assessee was receiving only net premium on reinsurance from B. Profit commission, if any, was shared between assessee and B in certain percentage. Assessing Officer held that assessee was liable to deduct tax on reinsurance commission paid to B under section 194D. The Tribunal held that provisions of section 194D were not applicable to payment of reinsurance commission made by assessee to B.(A. Y. 2005‐06 and 2008‐09) Tata AIG General Insurance Co. Ltd. vs. ITO (2011) 43 SOT 215/ 55 DTR 254/ 140 TTJ 319 (Mum.)(Trib) S. 194E :Dedcution of tax at source‐ Payments to non‐resident sports men or sports associations ‐ (S. 115BBA) Once income accrues to a non resident sports man or sports association on fulfillment of the condition as mentioned in section 115BBA, then the statutory obligation of the payer under section 194E comes into play irrespective of taxability thereof, payments including guarantee money made by the assessee a committee formed by three host members of World Cup Cricket, 1996 for the purpose of conducting the tournament to ICC as well as to cricket control boards / associations of member countries of ICC in relation to matches played in India were liable to TDS under section 194E read with section 115BBA.(A. Y. 1995‐96) PILCOM vs. CIT (2011) 51 DTR 147/238 CTR 387/ 335 ITR 147/ 243 CTR 511 (Cal.)(High Court) S.194 E: Deduction of tax at source‐Payments to non resident sportsman or sports association‐ Umpires‐ Match referees are neither sports men nor are they on resident sports association or institution ( S. 115BBA ). Amounts paid to foreign team for participation in match in India in any shape , either as prize money or as administrative expenses , is income deemed to have accrued in India and is taxable under section 115BBA and thus , section 194E is attracted. However ,payments made to umpires or match referees do not come with in purview of section 115BBA because umpires and match referee are nether sportsmen (including an athletic) nor are they non resident sports association or institution so as to attract provisions contained in section 115BBA and therefore , liability to deduct tax at source under section 194E does not arise.( Asst Year 1996‐97). Indcom v CIT ( 2011) 200 Taxman 40/ 58 DTR 1 / 335 ITR 485/ 242 CTR 337( Cal) (High Court). S. 194H : Deduction of Tax at Source – Commission or Brokerage. Agents of Airline companies are permitted to sell tickets at any rate between fixed minimum commercial price and published price. Difference between commercial price and published price neither commission nor brokerage tax need not be deducted under section 194H. CIT vs. Qatar Airways (2011) 332 ITR 253 (Bom.)(High Court)


S. 194H: Deduction of tax at source‐ Commission or Brokerage‐‐ Discount. Where agreement between assessee and distributor was on principal to principal basis payments made by the assessee to the distributor were incentives and discounts and not commission , there was no need to deduct tax under section 194H on such payments.( Asst year 2004‐05). CIT v Jai Drinks ( P) Ltd ( 2011) 57 DTR 261/ 242 CTR 505 ( Delhi ) (High Court). S. 194H: Deduction of tax at source‐ Commission‐Brokerage‐ Discount. Assessee company was engaged in business of providing cellular mobile telephone services under brand name ‘Airtel’ , provided the services through its distributors/franchisees who kept sufficient stock of rechargeable coupons and starter packs with them. After selling the Sim cards and prepaid coupons to retailers , franchisees were to make payment of sale proceeds to assessee after deducting the discount. The court held that receipt of discount by franchisee was in real sense, commission paid to franchisees and same would attract provisions of section 194 H. Bharati Cellular Ltd v Asst CIT ( 2011) 200 Taxman 254 ( Cal) (High Court). S. 194H : Deduction of tax at Source – Commission or Brokerage Transaction between assessee and concessionaries, principal to principal. Payments to concessionaries for sale of milk products being not commission, tax not deductible.(A. Y. 2004‐05 and 2005‐06) ITO vs. Mother Dairy Food Processing Ltd. (2011) 7 ITR 16 (Delhi)(Trib.) S. 194H : Deduction of Tax at Source ‐ Commission or Brokerage ‐ Booking of Domestic and International Airline Tickets – [S. 40(a)(ia)] The transaction in question were not transactions between principal and agent but those transactions were between principal and principal. In order to bring services or transactions within expression “Commission” and “Brokerage” under section 194H, element of agency must be present. When the discount allowed / given by the assessee to the intermediaries was also allowed to passenger directly who booked the tickets with the assessee and the assessee was recording the transaction in its books of account on net amount of the invoice, then it was not a case of commission or brokerage paid or payable by the assessee to the intermediaries, hence, the provisions of section 194H were not applicable therefore no disallowance can be made under section 40(a)(ia).(A. Y. 2006‐07) ITL Tours and Travels (P) Ltd. vs. ITO (2011) 44 SOT 277 (Mum.) (Trib) S. 194H: Deduction of tax at source‐ Commission‐Brokerage‐ Discount. The assessee mobile phone service provider to the distributors in the course of selling SIM cards and recharge coupons under prepaid scheme against advance payment received from the distributors. Section 194H is applicable.( A.Y. 2007‐08 & 2008‐09). ITO v Vodafone Essar Cellular Ltd ( 2011) 59 DTR 75/ 141 TTJ 401 ( Chennai) (Trib). S. 194 I : Deduction of tax at source‐ Rent‐ Hire of Machinery‐( S. 194C. Amendment of section 194I to include rent for hire of machinery w.e.f. 1‐6‐2007 Assessee paying hire charges for Millers and Rollers for laying Roads , there is no liability to deduct tax at source in accounting year relevant to assessment year 2005‐06 . Operation of machinery by owner of Machinery not a case of composit contract for labour and hire of machinery.. Section 194I of the Act came to provide for deduction of tax at source in respect of machinery /equipment with effect from June 1 ,


2007 , and the relevant assessment year was 2005‐06 , there was no scope to disallow the expenditure applying the provisions of section 40 (a) (ia). ( Asst Year 2005‐06 ). CIT v D.Rathinam ( 2011) 335 ITR 101 / 55 DTR 382( Mad ) (High Court). S. 194I : Deduction of Tax at Source – Rent ‐ Mobile Service Provider. Payment by assessee to other mobile telephone service providers for national roaming facility is not for use of equipment. The assessee was mere a facilitator between its subscriber and other service provider, facilitating a roaming call to be made by the subscriber. The payment of roaming charges by the assessee to other service providers could not be considered as rent within the meaning of Explanation (i) below section 194‐I, therefore there was no liability on the part of the assessee to deduct tax at source. (A. Y. 2007‐08, 2008‐09, 2009‐10) Vodafone Essar Ltd. vs. Dy. CIT (2011) 9 ITR 182 (Mum.)(Trib.) S. 194I : Deduction of Tax at Source – Rent ‐ Fixed charges for hire of vehicles not “rent” for section 194I – TDS ‐ Provisions under section 194C applicable. (S. 194C) Where cars were owned and maintained by the contractor and all expenditure was borne by contractor, the contract was for “carriage of passengers” for which a fixed amount was paid. Pursuant to definition of “work” as per section 194C, it was observed that, the payment of vehicle hire charges fell within the scope of section 194C and was not “rent” for section 194I. (A. Y. 2009‐10) Ahmedabad Urban Devlopment Authority vs. ACIT (Ahmedabad) (Trib.) ACAJ March 2011. P. 623 / Source: www.itatonline.org S. 194J : Deduction of Tax at Source – Fees for professional or technical services‐ Mobile Service Provider ‐ Technical Services. Considering the importance of issue whether payment made by mobile service provider for roaming facility is for technical service, the matter was remanded back to the assessing officer in the light of observation made by the Supreme Court in CIT vs. Bharti Celluar Ltd. (2011) 330 ITR 239 (SC). (A. Y. 2007‐08, 2008‐09, 2009‐10) Vodafone Essar Ltd. vs. Dy. CIT (2011) 9 ITR 182 / 135 TTJ 385 (Mum.)(Trib.) S. 194LA: Payment of compensation on acquisition of certain immoveable property‐Deduction of tax at source‐ Agricultural land.( S. 2(14).) When land itself was agricultural land though it may not be used for agricultural purpose but unless and until same was used for non agricultural purpose , it had to be treated as agricultural land for purpose of section 194LA, therefore Special Land Acquisition Officer was not required to deduct tax at source from amount of compensation paid for acquisition of land .Definition of “agricultural land” as given in section 2 (14) cannot be imported for purpose of section 194LA.( A.Y. 2005‐06). ITO ,TDS v Special land Acquisition Officer ( 2011) 46 SOT 458 ( Mum) ( Trib). S.195:Dedcution of tax at source‐ Other sums‐ Discounting charges‐ Export sales bill‐ Deduction of tax at source‐Interest. S.2(28A) , 40(a)(i) Discounting charges paid by assessee to a foreign company for discounting export sale bills is not “interest” as defined in section 2 (28A), since foreign company has no permanent establishment in India, it was not liable to tax in respect of discounting charges and therefore , assessee was under no obligation to deduct tax at source under section 195 and the discounting charges could not be disallowed under section 40 (a) (i).( Asst years 2004‐05 & 2005‐06 ).


CIT v Cargill Global Trading (I) (P ) Ltd ( 2011) 241 CTR 443/ 56 DTR 188 (Delhi) (High Court). S. 195 – Deduction of Tax at source –Other sums‐ sale of shares of Foreign Co by Non‐Resident to Non‐Resident attracts Indian tax ‐AO to first record finding and decide “preliminary issue” Where one non resident had sold shares of a foreign company to another and show cause notice was issued u/s 195 , in view of the judgement of the Supreme Court in Vodafone International vs. UOI 221 CTR 617 it was held that the interest of the assessee is safeguarded by directing that the AO shall record a finding on the preliminary issue relating to jurisdictional fact (as to whether the overseas transaction attracts Indian tax at all). If the assessee is aggrieved by the finding, it is entitled to challenge the same by a Writ Petition. Richter Holding Ltd. vs ADIT(IT) (Karnataka)(High Court). WWW.itatonlin.org. Editorial ‐See also Vodafone International Holdings B.V. vs. UOI 329 ITR 126 (Bom) on the same point S.195: Deduction of tax at source‐ Other sums‐ Income deemed to accrue or arise in India‐ Royalty or fee for technical services‐Band width charges paid to foreign companies for data communication. (S.9, 40(a) (i)) Assessing officer held that assessee was required to deduct tax at source in respect of payments made to AT& T and MCI Telecommunications were covered under section 195. Where payments are made to service providers such as AT&T or MCI Telecommunications for use of band width provided for down linking signals in United States and such payments are not in the nature of managerial , consultancy or technical services nor for use or right to use industrial, commercial or scientific, equipment. Then the said payment are not in the nature of royalty or fee for technical services assessee and thus not liable to deduct tax at source.( Asst Year 2004‐05). Infosys Technologies Ltd v Dy CIT ( 2011) 45 SOT 157 (Bang) (Trib). S. 195: Deduction of tax at source‐Non –Other sums‐Resident‐ Commission paid out side India‐ Fees for technical services‐ DTAA‐ India‐ Russia.( S. 9 (1) (i), 40 (a) (ia),. Art 7 ,13). Commission was paid out side India for services rendered out side India , tax was not deductible at source. The definition of “fees for technical services” in article 13 of the Double taxation Avoidance Agreement does not include managerial service . Hence the definition of the technical services as given in the Double Taxation Avoidance Agreement is to be applied and it was beneficial . Hence the sales commission in respect of parties situated in the U.K. could not have been subjected to tax at source because it was business profits and not fees for technical services . More over the , non residents had not made available technical knowledge or experience . Hence clause 13 of the Double Taxation Avoidance Agreement between India and the U.K was not applicable. ( Asst years 2007‐08 to 2010‐ 2010‐ 11). Asst CIT v Modern Insulator Ltd ( 2011) 10 ITR 147 ( Jaipur) (Trib). S.195: Deduction of tax at source‐ Other sums‐Payment to non resident‐ Training its personnel‐Fees for technical service‐ Income deemed to accrue or arise in India. ( S.9 ). Assessee company during relevant assessment year made payment to non resident party for training its personnel or customers to explain proposed buyers salient features of products imported by assessee in India and to impart training to customers to use equipment . The payment made could not be said to be fees for technical services and not liable for deduction of tax at source. ( Asst Year 2007‐08). Asst CIT v PCI Ltd ( 2011) 46 SOT 183 ( Delhi ) (Trib).


S. 195: Deduction of tax at source‐ Other sums‐Remittances of sale proceeds of shares by bank – UAE resident‐ DTAA‐ India‐ UAE.( S. 201, 201 (1A), Article 13 (3). Abu Dahbi Commercial Bank,(ADCB) was engaged in the business of banking and operated through branch in India. ADCB made remittances to individuals being UAE residents , in respect of sale proceeds of shares which resulted in short term capital gain in India. Remittance was made without deducting tax at source. AO treated the ADCB as an assessee in default , under section 201 and also levied interest under section 201(IA).On appeal CIT (A) held that though ADCB could be regarded as payer under section 204 , there was no with holding tax obligation due to availability of treaty benefit. The tribunal held that Liability to deduct tax on remittance , does not arise as bank is only acting as an authorized dealer in transferring the funds on behalf of the share broker in absence of liability to deduct tax , the bank could not be treated as an assessee in default. ITO v Abu Dhabi Commercial Bank ( 2011) TII 103 ITAT –Mum‐ITNL dated 12‐5‐2011 ( 591 ( 2011) 43‐A BCAJ –August P. 27.( Mumbai) (Trib). S. 195: Other sums‐ Payments to non residents‐Deduction of tax at source‐ Income deemed to accrue or arise in India‐ Foreign agent‐ Commission‐Business connection‐Permanent establishment.( S. 4 (1), 40(a) (ia), 195 ). A foreign agent of an Indian exporter operates in his own country and his commission is directly remitted to him. Such commission is not received by him or in his behalf in India, and such agent is not liable to income tax in India on commission received by him. As there was no right to receive income earned in India nor there was any business connection between assessee and ETUK, therefore when income was not chargeable to tax in India under section 4 (1), there was no question of invoking provisions of section 195 hence no disallowance can be made under section 40 (a) (ia).( A.Y. 2007‐08). Dy CIT v Eon Technology ( P) Ltd ( 2011) 46 SOT 323 ( Delhi) (Trib). S.195:Other sums‐ Payments to non residents‐ Deduction of tax at source‐ Off the Shelf Software ‐Fee for user of software taxable as “Royalty”‐ DTAA‐ India‐ Switzerland.( S.9 (1) (vi), 201 ). While the license to use the “shrink wrapped” or “off the shelf” software does not involve transfer of intellectual property, it constitutes “royalty” u/s 9(1)(vi) and Article 12(3) of the DTAA because it is for “the use of and the right to use of intellectual property such as copyright of a literary, artistic or scientific work or any patent, trade mark, design or model, plan etc“. Thus, the consideration received by Oracle for use of its software constitutes “royalty” and the assessee ought to have deducted tax at source. ING Vysya Bank Ltd v DDCIT (2011) 61 DTR 401( Bang) (Trib). www.itatonline.org. S. 195: Deduction of tax at source‐ Other sums‐Non –Resident‐ Data Processing Services‐ Services involving routine data entry ,application sorting , document handling and data capturing service not involving use of sophisticated technology . Services rendered non managerial , technical or consultancy service . Fees based on invoice from non resident . Not Fees for technical services . Not taxable in India. R.R.Donnelley India Out source P. Ltd ( 2011) 335 ITR 122 ( AAR). S.195: Deduction of tax at source –Other sums‐ Non‐resident ‐ Capital gains‐ Transfer of shares‐Wholly owned subsidiary ‐ Without consideration (S.45, 48, 92, 92C, 195). Transfer of shares to subsidiary company without consideration, would not attract liability to tax under section 45 read with section 48. As the consideration is inapplicable on the date of transfer , as no income is chargeable to tax ,provisions of section 195 or provisions of sections 92 to 92 F would not apply.


Good Year Tire & Rubber Co, IN RE. ( 2011) 240 CTR 209 /54 DTR 281/ 334 ITR 69 (AAR). S. 195(2) : Deduction of Tax at Source –Other sums‐ Non‐Resident ‐ Assessee in Default ‐ Certificate not withdrawn, assessee not in Default ‐ (S. 201) The assessee made payment of “daily allowance” to a Japanese company on account of the stay of Japanese engineers without deduction of tax at source. The Assessing Officer held that the payment was assessable to tax as “fees for technical services” and that the assessee was liable under section 201 for failure to deduct tax at source. It was held that the Assessing Officer had issued a certificate under section 195(2) authorizing the remittance without deduction of tax at source. As this certificate was not cancelled under section 195(4), the assessee was not required to deduct tax at source and could not be treated as assessee in default. The issue whether the payments were taxable or not need not be gone into CIT vs. Swaraj Mazda Ltd. (P&H) Source: www.itatonline.org (High Court) S. 199 : Credit for Tax Deducted – Refund ‐ (S. 203) Assessee, from whose payments taxes have been deducted at source and who is also in receipt of the appropriate certificates in accordance with the scheme of the Act, must get credit admissible under section 199 uninfluenced by any refund of TDS subsequently granted to the tax deductor.(A. Y. 2002‐03) Lucent Technologies GRL LLC vs. Dy. Director of IT (2011) 136 TTJ 291/ 45 SOT 311 (Mum.)(Trib) S.199: Deduction of tax at source‐Credit for tax deducted . Credit for TDS ,under section 199 is to be allowed in year in which corresponding income is assessable to tax.( Asst Year 2006‐07). ITO v Shri Anupallavi Finance & Investments ( 2011) 131 ITD 205 ( Chennai) (Trib). S. 201 :Consequences of failure to deduct or pay‐‐ Assessee in default ‐ Payment to non resident – [S. 163, 195(2), 201(IA)] The Assessing Officer asked the assessee to deduct the tax and remit the amount. The assessee approached the Court of Appeal in London for permission to deduct the tax at source from the award amount. Pending the stay the Court directed the assessee to remit the amount to escrow account maintained in names of both the parties. The entire amount was remitted as by court order. Indian tax authorities sought to proceed holding assessee in default under section 201(1)(IA). The Tribunal held that assessee could not be held to be assessee in default in terms of section 201(1) and 201(IA), as it was a case of impossibility of performance, and hence assessee would be released from obligation to deduct tax at source.(A. Y. 2001‐02) National Aviation Co. of India vs. Dy. CIT (2011) 43 SOT 362/ 137 TTJ 662 (Mum.)(Trib) S. 201 : Consequences of failure to deduct or pay ‐ Assessee in Default – Limitation ‐ ‐ Tax duly paid by payee Maximum time limit for initiating and completing the proceedings under section 201(1) has to be at par with the time limit available for initiating and completing the assessment / reassessment of the payee; impugned order under section 201(1) passed by the Assessing Officer with in the period of six years from the end of the relevant assessment year is not time barred. Person responsible for deduction tax cannot be treated as an assessee in default in respect of tax under section 201(1) if the payee has paid the tax directly. (A. Y. 2004‐05) ACIT vs. Merchant Shipping Services (P) Ltd. (2011) 49 DTR 97/135 TTj 589 (Mum.)(Trib.) S. 201 .Consequences of failure to deduct or pay ‐Assessee in default‐‐ Burden of Proof. (S. 194I)


When assessee provided permanent account numbers of payees and confirmation from some of them. It is the duty of the assessing officer to verify payment of tax by payees. Treating the assessee as in default placing burden of proof wholly on it was not reasonable. (A. Y. 2007‐08, 2008‐09, 2009‐10) Vodafone Essar Ltd. vs. Dy. CIT (2011) 9 ITR 182 / 135 TTJ 385 (Mum.)(Trib.) S. 201 (1) Consequences of failure to deduct or pay ‐ Assessee in default‐ ‐Payee showing the sale consideration. ( S. 195, 201 IA.). Once the payee acknowledges the receipt of the sale consideration , filed the return assessing the said amounts in his hands and paid tax , which is accepted by the department , the payer ceases to be assessee in default .( Asst year 2004‐05). CIT v Intel Tech India ( P) Ltd ( 2011) 55 DTR 173 ( Kar) (High Court). S. 201(1): Consequences of failure to deduct or pay ‐ Assessee in default‐ ‐‐Demand notice ( S. 156,195,200, 201 (IA). Where section 201(1) is attracted there is no need of giving any demand notice under section 156 , and if any such notice is given the same should be held to be redundant. Provisions of section 195, 200 and 201 , when conjointly read , deal with a liability which at no point of time , depends on passing any order under the Act but is attracted immediately upon the happening of the default mentioned therein ,ie, failure to deduct tax or failure to credit the sum as required by section 200. As soon as such failure occurs liability arises automatically and there is no further requirement of computation or reassessment or service of notice of demand under section 156. (Asst year 1995‐96). Pilcom v CIT ( 2011) 55 DTR 209 ( Cal) (High Court). S. 201(1) : Consequences of failure to deduct or pay ‐ Assessee in Default ‐‐ Time Limit. Time limit for treating deductor as in default, is maximum time limit available for initiating and completing reassessment. On the facts as the order passed by the Assessing Officer was within six years from the end of the relevant assessment year, the order passed by the Assessing Officer was not time barred.(A. Y. 2004‐05) ACIT vs. Merchant Shipping Services (2011) 8 ITR 1 (Mum.)(Trib.) D.Collection and recovery. S.201 (IA): Interest‐ Deduction of tax at source‐ Assessee in default ‐ Profits in lieu of salary‐Tips collected and paid to employees. ( S.2 (24),15 17 (1)(iv), 17(3) ), 192, 201, 273B). Payment of banquet and restaurant tips to the employees of assessee in its capacity as employer constitutes salary within the meaning of section 15 read with section 17 (3) .Assessee is considered as assessee in default for non deduction of tax at source on account of banquet and restaurant tips collected by its employees and was liable to interest under section 201 (IA). In the given circumstances no under section 201 could be charged , however levy of interest under section 201 (IA), is neither treated as penalty nor has the said provision been included in section 273B to make reasonableness of the cause for the failure to deduct a relevant consideration , hence there is no question of waiver of such interest on the basis that default was not intentional or any other basis.( A.Ys. 19999‐2000 to 2005‐06 ). CIT v ITC Ltd ( 2011) 59 DTR 312 ( Delhi) (High Court). S. 201(IA):Interest – Deduction of tax at source‐ Payment by cheque‐ Delay by collecting bank. Assessee having deposited the TDS for June 2008 , vide pay order dated 4 th July 2008,in the authorized bank and the latter having collected the same on 7 th July ,2008 , which was the due date for payment of said TDS ,it cannot


be said that there was a default on the part of the assessee simply because the amount was credited to the Central Government by the bank on 8th July 2008 , and therefore ,interest under section 201 (IA) was not chargeable.( A.Y. 2009‐10). ICIC I Bank Ltd v Dy CIT ( 2011) 58 DTR 284 ( Lucknow) ( Trib). S. 220 :When tax payable and when assessee deemed in default‐ Recovery – Stay ‐ Appellate Tribunal – [S. 254(1)] Assessing Officer and CIT(A) has disallowed the expenses under section 40(a)(ia), mainly relying on the decision of Karnataka High Court which now stands overruled by the Supreme Court and liquidity being not favourable, the entire demand is stayed till the disposal of assessee’s appeal by the Tribunal or for a period of six months which ever is earlier.(A. Y. 2007‐08) Softcell Technologies Ltd. vs. Additional CIT (2011) 49 DTR 129/135 TTJ 249 (Mum.)(Trib.) S. 222 : Certificate to Tax Recovery Officer – Writ ‐ Sale of Immoveable Property ‐ Beneficiaries of Trust ‐ Rule 11, Schedule II ‐ (Article 226) Petition filed by two beneficiaries of a trust challenging the attachment and proclamation of sale of properties belonging to the trust for recovery of tax dues of their deceased father without arraying the third beneficiary either as petitioner or as a party respondent cannot be entertained since the impugned order has became final and conclusive as regards 1/3rd undivided interest of the third beneficiary and no inconsistent order can be passed by the Court in the same lis. Petitioners have an alternative remedy of appeal against the impugned order passed by the respondent authorities rejecting their objections under rule 11 of Schedule II and therefore ,petition filed by two petitioners (beneficiaries of a trust) challenging the attachment and proclamation of sale of properties belonging to the trust for recovery of tax due is dismissed in limine.(A. Y. 1992‐93) Sagar Sharma & Anr. vs. Addl. CIT (2011)336 ITR 611/ 52 DTR 89 / 239 CTR 169 (Bom.)(High Court) S. 226 :Other modes of recovery‐Collection and Recover of Tax – Liability of HUF for individuals Defaults – HUF not liable – Partner in Firm. The assessee was a partner of a firm and karta of a HUF. The High Court held that just because the assessee is karta of HUF, the family properties could not be subject matter of recovery proceedings in respect of tax due from firm. ITO vs. Tippala China Appa Rao (2011) 331 ITR 248 (AP)(High Court) S.226: Other modes of recovery ‐Collection and Recovery of tax‐Attachment of property‐HUF‐ Liability of sons tax arrears of father. Father having joined as a partner of a firm in his individual capacity and not representing the joint family ,only his 1/5 th share in the joint family property alone was liable to be proceeded against for realization of tax arrears and not the four –fifth share of the sons , members undivided family , for recovery of the income tax arrears of father. (Asst years 1971‐72 & 1972‐73) ITO v Tippala China Appa Rao & Ors ( 2011) 240 CTR 298 /54 DTR 260(AP) (High Court). S. 226 (3): Other modes of recovery ‐Collection and Recovery of tax‐ Stay – Garnishee proceedings‐ Application pending‐ Reasoned order. Though application has been filed by petitioner under section 220 (6) , no order was passed and therefore notice under section 226 (3) can not be acted upon . Revenue was directed to decide the application under section 220


(6) without taking any steps under section 226 (3). As the Commissioner has not passed a reasoned order the order passed by the Commissioner was set a side and Court directed to pass a speaking order. ( Asst year 2004‐05) Dagny De souza (Smt) v ITO ( 2011) 56 DTR 263/ 198 Taxman 205/ 242 CTR 176 ( Bom) (High Court). S. 226 (3) Other modes of recovery ‐Collection and Recovery of tax‐ Assessing Officer is directed to pay costs for “recovery harassment”. The AO’s order of attaching the bank account of the assessee even before the service of the CIT(A)’s order was wrong in view of (a) the CBDT’s letter dated 25.3.2004 advising that penalties u/s 271‐D & 271‐E for violation of s. 269‐SS & 269‐T should not be indiscriminately imposed without considering s. 273‐B, (b) the CCIT’s direction that demand arising out of penalties imposed u/s 271‐D & 271‐E should be stayed in cases of co‐operative credit societies, (c) UOI v/s Raja Mohammed Amir Mohammed AIR 2005 SC 4383 where concern was expressed over dangerous attitude developing amongst Executive resulting in institutional damage & (d) KEC International Ltd 251 ITR 158 (Bom) where it was held that generally coercive measures may not be adopted during the period provided by the Statute to go in appeal. Accordingly, the assessee was unnecessarily subjected to harassment by the actions of the lower authorities. It is thus a fit case for imposing costs u/s 254(2B) on the Revenue to compensate the harassment caused by the officers of the Revenue at fault. Shramjivi Nagari Sahakari Pat Sanstha vs ACIT (ITAT Pune) www.itatonline.org F.Interest chargeable in certain cases. S. 234B : Interest ‐ Advance tax – Company – MAT – (S. 115JA, 115JB, 234C) In view of specific provisions in section 115JA and 115JB, to the effect that all other provisions of the Act, shall apply to the MAT company, interest under sections 234A, 234B is payable on failure to pay advance tax in respect of tax payable under sections 115JA, 115JB. Jt. CIT vs. Rolta India Ltd. (2011) 237 CTR 329 / 49 DTR 346/330 ITR 470/196 Taxman 594/ 2 SCC 408 (SC) S. 234B : Interest ‐ Advance Tax ‐ Tax Deduction at Source ‐ Salary ‐ (S. 191, 192, 195) Advance tax is not payable on the salary of an employee in as much as the obligation to deduct tax a t source is upon the employer under section 192, upon failure on the part of the employer to deduct at source, the assessee (employee) only becomes liable to pay the tax directly under section 191 and does not become liable to pay interest under section 234B. Director of IT vs. Maersk Co. Ltd., as Agent of Henning Skov (2011) 54 DTR 41 /198 Taxman 518/240 CTR 218(FB)(Uttarakhand)(High Court) S.234B: Interest‐ Advance Tax‐Difficulty faced while computing interest can be the ground for not to levy of interest.‐ Enhanced compensation. The difficulties faced by the assessee while computing advance tax can not defeat the liability to pay advance tax. As compensation was liable to be taxed as business income , the assessee is liable to pay interest.( Asst years 2000‐01 to 2002‐03). Dy CIT v Gopal Ramnarayan Kasat ( 2011) 240 CTR 266 / 54 DTR 228 (Bom) (High Court). S. 234B: Interest‐ Advance tax‐ Capital gains‐(S. 47 (v), 139 (9), 292B ).


Assessee claiming exemption in respect of capital gains on sale of shares to holding company. Return found defective and assessee filed corrected return . By that time holding company was no longer holding company . The court held that no default at time of payment of advance tax. Interest for default not chargeable. ( Asst year 1991‐92). Prime Securities Ltd v Asst CIT ( 2011) 333 ITR 464/ 59 DTR 251/ 243 CTR 229 ( Bom) (High Court). S. 234B: Interest‐ Advance tax‐Minimum alternative tax‐ Set off. ( S. 115JAA, 234C). Minimum alternative credit in terms of section 115JAA has to be set off against tax payable before calculating interest under section 234B, 234C. CIT v Deccan Creations ( P) Ltd ( 2011) 55 DTR 206 ( Kar) (High Court). S. 234B: Interest for default in payment of advance tax‐‐Search and seizure‐Retention of seized Asserts.( S. 234C.). Assets seized were released on deposit of money. Assessing Officer failing to accede to request of assessee and adjust advance tax against deposits . Interest under section 234B and 234C for default in payment of advance tax can not be levied.( A. Y. 1995‐96) Vishwanath Khanna v UOI ( 2011) 335 ITR 548 ( Delhi)( High Court). S. 234D: Interest on excess refund‐‐ Chargeability. Section 234D is applicable only from Ist June , 2003 and therefore , no interest under that section could be levied from earlier date.( Asst Year 1999‐2000). CIT v Faunc India Ltd ( 2011) 57 DTR 340 ( Kar) (High Court). S. 234D : Interest on Excess Refund – Asst. Year 2003‐04. Section 234D was brought under statute book from the assessment year 2004‐05 the Assessing Officer was not to levy the interest under section 234D.(A. Y. 2002‐03 and 2003‐04) C.A. Computer Associates P. Ltd. vs. Dy. CIT (2011) 8 ITR 142 (Mum.)(Trib.) Chapter XIX. – Refunds . S. 244A :Interest on refunds ‐ Refund of tax adjusted out of seized amount. In respect of refund of tax recovered by the authorities by way of adjustment out of the amount seized from the assessee–trust, sub–cl. (b) of section 244A is attracted and accordingly, interest under section 244A is payable to the assessee on such refund.(A. Y. 2004‐05) CIT vs. Islamic Academy Education (2011) 52 DTR 69 (Kar.)(High Court) S. 244A. Interest on refunds‐ Interest‐MAT Credit. From the tax payable by assessee under section 115JA ,MAT credits is to be adjusted first ,then what becomes refundable after adjustment of MAT credit is excess advance tax , paid by assessee and on such refundable advance tax interest under section 244A has to be calculated and paid.( Asst Year 1988‐99). CIT v Bharat Aluminium Co Ltd ( 2011) 200 Taxman 57/58 DTR 113/ 242 CTR 366 ( Delhi) (High Court). S. 244A : Interest on Refunds – (S. 201) Interest under section 244A(1)(b) is allowable and should be granted on refund of tax paid in pursuance of an order under section 201 of the Act.


Reliance Infrastructure Ltd. vs. Dy. CIT, ITA No. 7509/Mum/2010, dt. 28‐01‐2011, ITAT Mumbai ‘D’ Bench, BCAJ p. 37, Vol. 42‐B, Part 6, March 2011 (Trib.) S. 244A.: Interest on refunds‐ Self assessment tax. An assessee is entitled to interest on excess payment of self assessment tax in terms of section 244A (1) (b) , from date of payment of such amount up to date on which refund is actually granted . ( Asst year 2007‐ 08) . Asst Director of Income tax v Royal Bank of Scotland N.V. ( 2011) 130 ITD 305/ 138 TTJ 698 (Kol) (Trib). Chapter‐ X1XB.‐ Advance Rulings. S. 245R: Procedure on receipt of application‐Advance Rulings‐ Procedure‐ Jurisdiction. Section 245R is an integrated section not only dealing with admission of an application but also its final disposal .AAR can independently consider nature of transaction put forward in context of proviso (iii) to section 245 R (2) because said proviso gives jurisdiction to Authority to test transaction projected before it in order to find out whether it is designed prima facie for avoidance of income tax. ABC International Inc ( 2011) 199 Taxman 211/ 241 CTR 289 / 55 DTR 393( AAR). S. 245S. Authority for Advance Rulings‐Precedent‐ Binding nature. An advance ruling under the Act is confined to the facts and law projected in the application leading to the ruling and is binding only on the party and the revenue. Cairn U.K.Holdings Ltd IN RE( 2011) 59 DTR 121 / 242 CTR 449(AAR). Chapter XX.‐ Appeals and Revision.

A. Appeals to the Depity Commissioner ( Appeals) and Commissioner ( Appeals). S. 246A: Appealable orders‐ ‐Commissioner (Appeals)‐ Recovery of tax‐ Sale in recovery proceedings‐ Limitation from the date of service of order. Tax recovery officer confirming sale in recovery proceedings Schedule II, RR, 63, 65, 86 is not conclusive, appeal maintainable. For computing limitation the date of order to be construed to mean date of knowledge of order. Vijay Kumar Ruia v CIT ( 2011) 334 ITR 38/ 57 DTR 300 / 242 CTR 292/ Tax L.R. 553(All) (High Court). S. 246A: Appeal – Commissioner of Income tax ( Appeals)‐ Power‐ Direction. Proceedings for assessment of an assessee cannot be based on directions issued by another co‐ordinate Tribunal or even a higher forum , if that was not the subject matter before it. That would be an exercise without jurisdiction. Power of commissioner ( Appeals) , directing to tax certain amounts in hands of a third party, held to be not valid. ( A.Y. 2006‐07). CIT v Krishi Utpadan Mandi Samiti ( 2011) 336 ITR 77/ 200 Taxman 362 ( All) (High Court). S. 246A.: Appealable orders‐ ‐‐ Commissioner ( Appeals)‐ Appealable orders‐ Shipping‐ Non ‐Resident. ( S. 172 (4). Order determining amount of tax under section 172 (4) is appellable. ITO v MSC Agency ( India) P.Ltd ( 2011) 9 ITR ( Trib) 425 (Chennai). S. 246A (1)(a ): Appeal – Commissioner ( Appeals)‐ Withholding tax ( S. 90, 91 ). Question of not allowing relief in respect of withholding tax under section 90/91 has direct effect of reducing refund or enhancing amount of tax payable , such an issue is squarely covered with in ambit of section 246A (1)


(a). ‘Amount of tax determined’ as per section 246A(1) (a) encompasses not only determination of amount of tax on total income but also any other thing which has an effect of reducing or enhancing total amount of tax payable by assessee.( A.Y. 2006‐07). Capgemini Business Services ( India) Ltd v Dy CIT ( 2011) 131 ITD 396 ( Mum) (Trib). S. 249(4)(a) :Form of appeal and limitation‐‐ Commissioner(Appeals) ‐ Admitted Tax – Limitation ‐ Refund of earlier years Commissioner(Appeals), dismissed the appeal on the ground that the assessee has not paid the admitted tax. The assessee contended that in the earlier years the assessee had made excess payments of tax and it was entitled refunds, and further the bank account was also attached. The assessee made payments afterwards. The Tribunal set aside the order of Commissioner of (Appeals) and directed him to decide on merit.(A. Y. 2007‐08) Endeavour Industries Ltd. vs. Dy. CIT (2011) 43 SOT 322/55 DTR 128 (Hyd.)(Trib) S. 249(4) : Form of appeal and limitation‐ ‐‐ Commissioner(Appeals) ‐ Admitted Tax If the appeal is filed without the payment of tax on returned income but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and appeal has to be decided on merit.(A. Y. 2007‐08) Bhumiraj Constructions vs. Addl. CIT (2011) 49 DTR 195/135 TTJ 357/ 131 ITD 406 (Mum.)(Trib.) S. 249 (4). Form of appeal and limitation‐ Commissioner of income tax (Appeals)‐ Admitted tax‐ Refund of earlier year. Assessee paid the tax after filing an appeal. Assessee was also entitled to refund of earlier year and the Bank account was also attached. Rejection of appeal for nonpayment of admitted tax was not justified.( Asst year 2007‐08). Endeavour Industries Ltd v Dy CIT ( 2011) 55 DTR 128 ( Hyd) (Trib). S. 250 :Procedure in appeal‐– Commissioner(Appeals) ‐ Additional Evidence. Rule 46A. Commissioner (Appeals) had recorded the reasons for admission of additional evidence, further, as per Rule 46(A)(3) he had also given an opportunity to Assessing Officer to state his objections, if any to admission of additional evidence and though Assessing Officer had raised objection to admission of additional evidence, yet he had not stated anything about veracity of additional evidence filed by assessee, Tribunal held that the Commissioner(Appeals) had not violated provisions of Rule 46A, and therefore, the order of Commissioner(Appeals) up held. Dy. CIT vs. Dolphine Marbles (P) Ltd. (2011) 129 ITD 163 (JB) (TM) (Trib.) S. 250 (4) Procedure in appeal – Commissioner ( Appeals)‐ Additional evidence. ( Rule 46A). Assessing Officer never directed the assessee company to produce any evidence to prove the genuineness of share holdings by the subscribing companies nor expressed any doubts regarding the genuineness of share holdings of these companies prior treating the assessee’s capital as unexplained CIT (A) correctly admitted the additional evidence produced before him and there is no question of giving an opportunity to the AO to examine the additional evidence. ( Asst Year 2005‐06). Dy CIT v Dolphine Marbles (P) lTD ( 2011) 57 DTR 58 ( Jab) (TM ) (Trib). S. 250(5) : Procedure in appeal‐ – Commissioner (Appeals) – Powers ‐ Validity of Assessment ‐ Second round of appeal ‐ Search and Seizure


Assessee having not chosen to challenge the validity of assessments on the allegation of defect or irregularity in the warrant issued either before the Assessing Officer or in the first round of appeals and raised the contention after remand before the CIT(A) for the first time, is not permissible. Jose Cyriac vs. CIT (2011) 238 CTR 207 / 50 DTR 292 (Ker.)(High Court) S. 250(6) : Procedure in appeal‐ Commissioner (Appeals)‐Reasoned Order – Point for Determination. An order passed by CIT(A) without mentioning point of determination as also without giving any reason for decision while dismissing the appeal is violative of section 250(6) of the Act and cannot be sustained. Rang Rasayan Agencies vs. ITO, ITA No. 917/Ahd./2009, dt. 18‐01‐2011, ITAT ‘C’ Bench, Ahmedabad, BCAJ p. 25, Vol. 42‐B, Part 5, February 2011 (Trib.) S. 251 :Powers of the Commissioner ( Appeals)– Additional Evidence – Rule. 46A : Income Tax Rules, 1962. When the assessee files additional evidence before the CIT(A) it is not necessary that the CIT(A) must remand the matter to the Assessing Officer, it depends on the nature of the evidence. The CIT(A) in appropriate case without prejudice to either parties can look into the evidence itself. (A. Y. 2001‐02) CIT vs. Jind Co‐operative Sugar Mills Ltd. (2011) 51 DTR 121/ 335 ITR 43 (P&H)(High Court) S. 251 : Powers of the Commissioner ( Appeals) – Omission to claim in the return. Mere omission of the assessee to claim exemption under section 10(35) in the return of income could not debar the assessee from making the claim before the first Appellate Authority during the appellate proceedings. (A. Y. 2004‐05) CIT vs. Metalman Auto P. Ltd. (2011) 52 DTR 385 (P&H)(High Court) S.251 : Appeal‐ Commissioner ( Appeals)‐Powers – No Jurisdiction to determine tax liability of third party : Powers of appellate authority is normally co –extensive with that of original authority. It would not be open to appellate authority to exercise a jurisdiction which Assessing Officer did not have. Assessee claimed to be charitable institution, in its assessment. Assessing Officer held that amount transferred by assessee to Mandi Parishad as development cess and administrative expenditure were for non charitable purpose and ,therefore , were added in assessee’s income. On appeal Commissioner ( Appeals) held that both amounts could not be assessed in hands of assessee, but in hands of Parishad .He observed that amount transferred to Mandi Parishad was not credited to “ Cess Fund” ( Central Mandi Fund) . Accordingly he directed Assessing Officer to make a reference to Assessing Officer of Mandi Parishad to make remedial measures, if necessary, in relevant assessment years to tax relevant receipts in hands of Mandi Parishad .The court held that it is not open to another quasi judicial authority to give direction to determine tax liability of third party. Accordingly observations made by Commissioner (Appeals) were without jurisdiction. CIT v Krishi Utpadan Mandi Samiti ( 2011) 336 ITR 77 / 200 Taxman 362 ( All) (High Court). S. 251 (1) (c):Powers of the Commissioner ( Appeals)‐New claim‐Non filing of revised return‐ Power of CIT (A). When the assessee , during the course of assessment claimed the cost of acquisition of the capital asset as per the valuation report stating the fair market value as on Ist April 1981, the Assessing Officer should have entertained the said claim and CIT (A) also erred in not considering the claim , which is a legally permissible claim. (Asst Year 2005‐06). Gopi S. Shivnani ( Mrs)v ITO ( 2011) 139 TTJ 308 (Mumbai) (Trib).


S. 253 (1): Appeal to the Appellate Tribunal‐ ‐ Power‐ Penalty. ( S. 246A (1) (q) , 271FA ). Income tax Appellate Tribunal has no power to entertain the appeal against the order passed under section 271FA ie delay in filing information.. An appeal against the order passed under section 271FA can be preferred before the CIT (A) .( A. Y. 2005‐06 to 2008‐09) Sub Registrar Nakoar v Director of Income tax ( 2011) 57 DTR 497 ( Asr) (Trib). S. 253 (1): Appeal – Tribunal‐ Maintainability‐ Penalty ( S. 246A(1)(q), 271FA). Tribunal has no power to entertain the appeal against the order passed under section 271FA. Appeal against the order passed under section 271FA can be appealed under section 246A (1) (q) before Commissioner(Appeals). ( A.Y. 2005‐06). Sub‐Registrar , Nakoar v Dy CIT ( 2011) 139 TTJ 734 ( Asr) (Trib). S. 253(6)(c) :Appeals to the Appellate Tribunal ‐ Fees ‐ Income Determined ‐ Order under Section 154. Order passed under section 143(1), assessed income is ` 13,06,780/‐. Appeal filed against order under section 154. Total income determined at more than ` 2 lakhs fee payable shall be one percent of assessed income subject to a maximum of ` 10,000/‐. The Tribunal held that fee rate dependent on total income determined.(A. Y. 2002‐03) M. M. Bagwan and Brothers vs. ACIT (2011) 7 ITR 298 (Bang.)(Trib.) S. 254(1) :Orders of Appellate Tribunal ‐ Cross Objection ‐ Dismissal of Revenue Appeal ‐ Adjudication Revenue filing appeal and the assessee filing cross objection before the Tribunal. Tribunal dismissed the revenue’s appeal and not adjudicated the assesses cross objection. The Court held that the cross objection to be decided. Ram Ji Dass & Co. vs. CIT (2011) 220 Taxation 90 (P&H)(High Court) S. 254(1) : Orders of Appellate Tribunal ‐‐ Duty of Tribunal ‐ Reasoned Order. A judicial order must be supported by sufficient reasons for coming to the conclusion. Failure to record reason would violate the principles of natural justice and is against the basic concept of fairness and transparency, therefore, orders passed by the CIT(A) and the Tribunal suffer from violation of principles of natural justice can not be sustained.(A. Y. 2001‐02) Iskraremeco Regent Ltd. vs. CIT (2011) 237 CTR 239 / 49 DTR 185 (Mad.)(High Court) S. 254(1) : Orders of Appellate Tribunal ‐ Additional Grounds – Factual Plea – Rule 11 : Income Tax Appellate Tribunal Rule, 1963. Where the Revenue had not contested / urged before the lower appellate authority or as an additional ground before the Tribunal nor the Assessing Officer had taken such stand in his assessment order. The Tribunal was held to have committed an error in allowing the Revenue to raise such new factual plea for the first time before it at the stage of argument and adjudicating upon such plea. Meghji Girdhar (HUF) vs. CIT (2011) 52 DTR 397 (MP)(High Court) S. 254(1) : Orders of Appellate Tribunal ‐– Duty of Tribunal – Reasoned Order. A judicial order must be supported by sufficient reasons for coming to the conclusion. Failure to record reason would violate the principles of natural justice and is against the basic concept of fairness and transparency, therefore, orders passed by the CIT(A) and the Tribunal suffer from violation of principles of natural justice cannot be sustained. (A. Y. 2001‐02) Iskraremeco Regent Ltd. vs. CIT (2011) 237 CTR 239 / 49 DTR 185 (Mad.)(High Court)


S. 254(1) : Orders of Appellate Tribunal ‐ – Additional Ground – Issue of Notice. Assessee cannot be allowed to raise the plea as to whether the notice under section 143(2) was validly served on it for the first time before the Tribunal.(A. Y. 1997‐98) Aravali Engineers P. Ltd. vs. CIT & Anr. (2011) 49 DTR 68/237 CTR 312 (P&H)(High Court) S.254(1): Orders of Appellate Tribunal ‐ Natural justice‐Administrative law‐Opportunity for filing paper book. The Tribunal had decided the Departmental appeal against the assessee without waiting for the paper book containing the relevant documents promised to be filed by the Department. The Department appeal was allowed. The High court remitted the matter back to the Tribunal to decide the matter a fresh. Krishan Kumar Sethi v CIT ( 2011) 333 ITR 16 (Delhi) (High Court) S. 254(1) : Orders of Appellate Tribunal‐ Duty. The assessee had raised a specific ground challenging the jurisdiction of the assessing officer on framing the assessment order beyond limitation before the CIT (A) and succeeded before him in appeal. The Tribunal was held not justified in deciding the issue on merits and reversing the order of the CIT (A) without deciding the issue on jurisdiction under section 147 of the Act.( A. Y. 1990‐91) Kumudam Printers (P) Ltd. vs. CIT (2011) 56 DTR 61 (Mad)( High Court). S.254(1): Appellate Tribunal‐ Order giving effect to order of Tribunal‐ Scope‐ Binding nature of order of Tribunal‐ Assessment. ( S.143 (3), 237 ) While giving to the effect to the appellate order Assessing Officer cannot travel beyond the order of Tribunal and assessee the prize money as income from other sources. Assessing Officer being a quasi judicial authority and subordinate to the Tribunal is bound by the decision of the Tribunal. The assessee is entitled to refund of advance tax collected with interest as per law. ( A.Y.2001‐02). Lopamudra Misra( Miss) v Asst CIT ( 2011) 59 DTR 257/ 243 CTR 66/ 337 ITR 92 ( Orissa) (High Court). S. 254 (1): Appellate Tribunal‐ Duty‐ Additional evidence – Report of Forensic & S Scientific Laboratory The revenue has filed the report of the Forensic Science Laboratory was a relevant material and so was affidavit of the searched person . The additional evidence was necessary for just decision of the matter. The Tribunal was not justified in declining to consider the additional evidence comprising the opinion of the laboratory of the Government examiner and also the affidavit of the author of the diary, as the documents had a direct bearing on the issue. CIT v Mukta Metal Works ( 2011) 336 ITR 555 ( P&H)( High Court). S. 254(1) : Orders of Appellate Tribunal ‐Power ‐ Applicability of provision of section 14A for the first time before Tribunal ‐ (S. 14A) Issue of disallowance under section 14A, cannot be raised for the first time before the Tribunal where the provision of section 14A, was not invoked against the assessee by the Assessing Officer while making disallowance of interest expenditure under section 36(1)(iii) and CIT(A ) also at no stage considered the application of section 14A. ACIT vs. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193 (Mum.)(Trib) S. 254(1) : Orders of Appellate Tribunal ‐ – Recovery ‐ Stay ‐ (S. 220)


Besides considerations like existence of strong prima facie case, financial constraints of the applicant are important, even if not sole or qualifying consideration in entertaining a stay application, and therefore stay granted to the assessee subject to certain conditions.(A. Y. 2006‐07) KEC International Ltd. vs. Addl. CIT (2011) 136 TTJ 60/ 49 DTR 428 (Mum.)(Trib) S. 254(1) : Orders of Appellate Tribunal ‐ – Precedent ‐ Decision of Co‐ordinate Bench When the issue is already covered by an earlier order of Tribunal, that too in assesse’s own case, a co‐ordinate bench of Tribunal should not differ the earlier decision of the bench simply for the reason that a contrary view is possible.(A. Y. 2001‐02 to 2004‐2005) Patspin India Ltd. vs. Dy. CIT (2011) 51 DTR 57 / 129 ITD 35 / 136 TTJ 377 (Cochin)(Trib.)(TM) S. 254 (1). Orders of Appellate Tribunal ‐‐CBDT Circular on monetary limits for filing appeals applies to pending appeals. As per Instruction No. 3 of 2011 dated 09.02.2011 appeal before Tribunal can be filed where the tax effect exceeds the monetary limit of Rs. 3 lakhs. However, considering the similar situation where tax limits were modified by the CBDT Instruction No. 5 of 2008 the jurisdictional High Court in Madhukar K. Inamdar (HUF) 318 ITR 149 held that the circular will be applicable to the cases pending before the court either for admission or for final disposal. In view of the order of the jurisdictional High Court we hold that Instruction No. 3 dated 09.02.2011 is applicable for the appeal preferred by the Revenue. ITO vs Laxmi Jewel Pvt.( 2011) BCAJ July P. 33 Vol 43A.Part 4. ( Mumbai) (ITAT) www.itatonline.org S. 254(1) :Orders of Appellate Tribunal – Stay ‐ Direct Stay Application to Tribunal Maintainable ‐ Not necessary that lower authorities must be approached first ( S. 220) It is settled law that a Direct Stay Application filed before the Tribunal is maintainable and it is not the requirement of the law that assessee should necessarily approach the CIT before approaching the Tribunal for grant of stay. In deciding a stay application, the following aspects have to be considered: (i) liquidity of the funds of the assessee to clear the tax arrears out of own funds at the relevant point of time based on the assessee’s financial status at the time of the stay petition hearing; (ii) creditworthiness of the assessee to outsource the funds to clear the departmental dues; (iii) prima facie views on the likely decision of the Tribunal on the issues raised in the appeal; (iv) departmental urgencies in matters of collection and recovery; (v) guarantees provided by the assessee to safe guard the interest of the revenue etc.(A. Y. 2006‐07) Honeywell Automation India Ltd. vs. Dy. CIT(2011) 54 DTR 265/ 138 TTJ 373 (Pune) S. 254(1) Orders of Appellate Tribunal – Power – Stay ‐ Despite Third Proviso to section 254(2A), Tribunal has power to extend stay beyond 365 days if delay not attributable to assessee(Sec. 220,245) The Third Proviso to section 254(2A), as amended w.e.f. 1.10.2008, provides that if the appeal filed by the assessee is not disposed off within the period of stay granted by the Tribunal (which cannot exceed 365 days), the order of stay shall stand vacated even if the delay in disposing of the appeal is not attributable to the assessee. The assessee filed a stay application requesting stay of demand for penalty of ` 369 crores. On the expiry of 365 days of stay, the assessee asked for extension of stay relying on the Tribunal’s order in Ronak Industries where, stay had been granted beyond 365 days relying on the judgement of the Bombay High Court in Narang Overseas 295 ITR 22 (Bom.). As it was felt by the Tribunal that the reliance in Ronak Industries and Narang Overseas was misplaced in view of the amendment to the Third proviso to section 254(2A) w.e.f. 1.10.2008, the question whether the Tribunal had jurisdiction to extend stay beyond 365 days referred to the Special Bench. HELD by the Special Bench:


(i) In Ronak Industries, the Tribunal held, relying on Narang Industries, that the Tribunal has the power to extend stay beyond 365 days. This decision of the Tribunal was challenged by the department in the Bombay High Court by specifically raising a question as to the applicability of the Third Proviso to section 254(2A) as amended w.e.f 1.10.2008. The High Court, vide order dated 22.10.2010, dismissed the department’s appeal. As such, the Tribunal’s order holding that there was power to extend stay even after 365 days stood affirmed; (ii) The department’s argument that the High Court’s order in Ronak Industries should be treated as per incuriam on the ground that the amendment made by the FA 2008 was not considered by it is not acceptable because (a) In Narang Overseas (rendered prior to the amendment) a wider view was taken as regards the power to grant stay, (b) In the appeal filed by the department in Ronak Industries a specific question with regard to the effect of the Third Proviso was raised and so it cannot be said that the High Court had not taken cognizance of the amendment, (c) the Tribunal cannot ignore a High Court’s decision on the ground that a provision of law was not considered by the High Court and (d) the fact that there is no discussion in the High Court’s order in Ronak Industries does not mean that does not lay down any ratio decidendi; (iii) However, the recovery of the arrears by the Assessing Officer on the expiry of 365 days of stay cannot be ordered to be refunded because on the date of recovery the stay had expired and the application for extension was pending before the Special Bench. The Assessing Officer’s act was bona fide and as the recovery was by adjustment of refunds, it was not a “coercive measure” (RPG Enterprises 251 ITR (AT) 20 (Mum) & other cases holding that the Assessing Officer must refund taxes collected during the pendency of a stay application distinguished).(A. Y. 2000 to 2002‐03) Tata Communication Ltd. vs. ACIT (2011) 130 ITD 19/54 DTR 274/ 138 TTJ 259 (Mum)(SB) S. 254(1 ):Orders of Appellate Tribunal ‐ Even issues “sub‐judice” before High Court can be heard by Tribunal. The objection to the Special Bench hearing the issue only on the ground that the High Court has admitted the appeal is not acceptable for two reasons. Firstly, the mere fact that a superior authority is seized of an issue identical to the one before the lower authority does not create any impediment on the powers of the lower authority in disposing off the matters involving such issue as per prevailing law. If the suggestion is accepted, there would be chaos and the entire working of the Tribunal will come to standstill. Secondly, the Special Bench was constituted at the assessee’s request because it then wanted an “escape route” from a potential adverse view. The assessee cannot now argue that the Special Bench be deconstituted. Such “vacillating stand” cannot be approved. DCIT vs Summit Securities Limited (2011) 59 DTR 313 8 ITR (Trib) 88/ 132 ITD 1( Mumbai) ( SB)( Trib) . www.itatonlne.org. S. 254 (1) :Orders of Appellate Tribunal‐ Additional evidence‐ Data of comparables‐ Annual reports. In view of the fact that annual reports / data base extracts of three companies which were selected as comparable cases were not available earlier in the public domain and having regard to the fact that these documents are essential for determining ALP , these additional evidences are admitted for consideration.( Asst Year 2005‐06). Asst CIT v NIT ltd ( 2011) 57 DTR 334 ( Delhi) (Trib). S. 254 (1) : Appellate Tribunal‐ Powers‐ Assessment‐ New claim‐ Without revised return. Assessee has raised new claim before the Assessing Officer with regard to doctrine of mutuality without filing revised return under section 139. Assessing officer has not entertained the claim following the judgment of Apex court in Goetze (India) Ltd v CIT (2006) 284 ITR 323 (SC), which was confirmed by CIT (A). On further appeal, the


Tribunal held that as the issue required proper verification of facts and relevant facts are not available on record nor in the assessment proceedings it could not be admitted . If this ground was admitted, it had to go back to the Assessing Officer to verify the facts and adjudicate the claim of assessee would be against the spirit of the Supreme Court Judgment. Therefore , the claim of assessee with regard to doctrine of mutuality could not be entertained at this stage. ( A.Y. 2004‐05). Jay Bharat Co‐operative Society Ltd v ITO ( 2011) 10 ITR 717 ( Trib) (Mumbai). Editorial – Refer ( Mumbai ) and Delhi ( High Court) – CIT v Jai Parabolic Springs Ltd (2008) 306 ITR 42 (Delhi) & CIT vs. Ramco International (2009) 221 CTR 491 (P & H) S. 254(1) : Appellate Tribunal‐Powers‐ Contempt‐CIT‐DR’s “false & frivolous” submissions constitute “criminal contempt” & justify recovery of costs from salary. In the department’s appeal, the assessee raised a preliminary objection that the notice u/s 143(2) was not issued within the prescribed period of 12 months. The AO accepted that the s. 143(2) notice had not been issued in time. Accordingly, the Tribunal, relying on Hotel Blue Moon 321 ITR 362 (SC), dismissed the department’s appeal without going into the merits of the appeal. Thereafter, the CIT‐DR addressed two letters to the Hon’ble Members in which it made certain allegation against the bench . It was also alleged that the letter was sent by post as the Bench clerk had refused to accept the letter. The letters were treated as a MA by the Tribunal and heard. Thereafter, the CIT‐DR filed a letter of apology clarifying that it was not his intention to “hurt the sentiments” of the Members though he did not appear personally before the Bench. The Tribunal dealing meticulously with each assertion made by the CIT‐DR and terming them as “frivolous and untrue“ and held that : “We are of the view that the conduct of the learned CIT(A) in addressing correspondence to the Hon’ble Members in respect of an appeal which has been heard and under consideration for passing orders is improper. It is an attempt to interfere with the due course of any judicial proceeding and tends to interfere with or obstructs or tends to obstruct the administration of justice and as such would be “Criminal contempt” within the meaning of the Contempt of Courts Act, 1971. The allegations made in the letters dated 23.3.2010 and 24.3.2010 are serious enough to warrant an action seeking protection of the Hon’ble High Court in exercise of its powers to punish for contempt of the sub‐ordinate Courts and Tribunals. In our opinion, there cannot be a fitter case for imposition of exemplary costs on the learned Departmental Representative, who in our view, is responsible for such a M.A. and for wasting the time of the Tribunal by raising frivolous arguments and making blatantly false submissions. The cost should have to be recovered from the salary of the delinquent employee, who is responsible for such actions and entry made in his service record on the adverse comments made against the D.R. by the Tribunal. We however refrain from doing so in the hope that such indiscretion would not be repeated in future and also in view of the letter of apology filed by the D.R.” Commissioner (Departmental representative) v Simoni Gems ( Mum) ( Trib). www.itatonline.org. S. 254 (1): Appeal‐ Tribunal‐ Precedent‐ Decision of Co –ordinate Bench. A Co‐Ordinate Bench decision , which is admittedly contrary to earlier precedents on the issue from other Co‐ordinate Benches , does not bind the subsequent Co‐ordinate Benches. ( A.Y. 2006‐07). Additional Director of IT (International taxation) v TII Team Telecom International ( P) Ltd ( 2011) 60 DTR 177 / 140 TTJ 649( Mum) (Trib). S. 254(2) : Orders of Appellate Tribunal ‐‐ Rectification of Mistake – Review. While exercising the power of rectification under section 254(2), Tribunal can recall its order in entirety if it is satisfied that prejudice has resulted to the party which is attributable to the Tribunal’s mistake, error or omission


and which error is a manifest error and it has nothing to do with the doctrine or concept of inherent power of review.(A. Y. 2000‐2001 to 2005‐06) Lachman Dass Bhatia Hingwala (P) Ltd. vs. ACIT (2011) 237 CTR 117 / 330 ITR 243/ (2011) Tax LR 101 (Del.)(FB) S. 254 (2). Orders of Appellate Tribunal ‐‐ Rectification of mistakes‐ Business loss ( S. 28.) Loss was allowed for earlier and subsequent year . Appellate Tribunal refused the rectify the order . The Apex court remanded the matter to Tribunal for consideration afresh in light of CIT v Woodward Governor India P.Ltd ( 2009)312 ITR 254 (SC).( Asst year 1998‐99). Perfetti Van Melle India (P) Ltd v CIT ( 2011) 334 ITR 259 (SC). S. 254(2) : Orders of Appellate Tribunal ‐‐ Rectification of Mistake ‐ Power to Review ‐ Additional Evidence Once the Tribunal has disposed the appeal on merits, it cannot review its order and therefore, miscellaneous application filed by the assessee seeking modification of the order of Tribunal so as to admit more additional evidence than that permitted by the order was rightly rejected by the Tribunal.(A. Y. 1998‐99) Indrakumar Patodia vs. ITO (2011) 51 DTR 183 / 238 CTR 437 (Bom.)(High Court) S.254(2): Orders of Appellate Tribunal‐ Rectification of Mistakes – orders not cited‐ Tribunal entitled to do “own research” and rely on non‐cited cases. Reliance and reference to reasons stated in another decision cannot be regarded as a mistake apparent from the record. It is not unusual or abnormal for Judges or adjudicators to refer and rely upon judgements / decisions after making their own research. Geofin Investment (P) Ltd. vs. CIT (Delhi) (High Court). S. 254 (2): Orders of Appellate Tribunal‐ Rectification of mistakes‐ Admission by counsel. Tribunal recording admission by counsel for assessee , assessee filing application denying admission , application should be considered on merits.( Asst year 1997‐98 ). Bagoria Udyog v CIT ( 2011) 334 ITR 320 / 60 DTR 386( Cal) (High Court). S. 254(2) : Orders of Appellate Tribunal ‐ Rectification of Mistake ‐ Merger On the facts of the case, the High Court had reversed the order passed by the Tribunal holding that since the assessee had paid arm’s length remuneration for services of its Indian agent, no further profits could be attributed to foreign enterprises in India under Article 7(1) of DTAA. In such cases the application filed by the revenue under section 254 read with section 9 & 90 of the Income‐tax Act, 1961 Article 7 of DTAA between India and Singapore was rendered infructuous as the impugned order of Tribunal had already merged with the order passed by High Court & Tribunal had no jurisdiction to modify its earlier order. The revenue’s application was therefore dismissed.(A. Y. 1999‐2000) Dy. Director of IT vs. SET Satellite (Singapore) Pte Ltd. (2011) 43 SOT 1 (Mum.)(URO)(Trib) S. 254(2) : Orders of Appellate Tribunal ‐ Rectification of Mistake ‐ Mistake in order passed under section 254(2), cannot be rectified The miscellaneous application filed by the assessee against earlier order passed under section 254(2) is not maintainable only course open to the assessee is to file an appeal against the said order.(A. Y. 1995‐96) Padma Prakash (HUF) vs. ITO (2011) 51 DTR 1 / 136 TTJ 257 / 8 ITR 135/ 131 ITD 121 (Delhi)(Trib.)(SB) / S. 254(2) : Orders of Appellate Tribunal – Powers –Rectification of mistakes‐ Stay.


Power of Tribunal to pass an order of stay is not confined to a case where an appeal is pending before Tribunal, but also extends to any proceedings relating to an appeal pending before it. Application under section 254(2) is maintainable against order passed by Tribunal granting stay.(A. Y. 2007‐08 and 2009‐2010) ITO vs. Vodafone Essar Ltd. (2011) 44 SOT 304/54 DTR 253/ 138 TTJ 284 (Mum.)(Trib) S. 254(2) Orderrs of Appellate Tribunal – Rectification of Mistakes – ITAT Rule 34 – Rectifiable Order – Pronouncement. Order pronounced at the conclusion of hearing, though not passed in writing, constitute an order of the Tribunal and the same could be rectified under section 254(2).(A. Y. 1999‐2000 to 2004‐05) ITO vs. V. Meenakshi (Smt.) (2011) 128 ITD 1 / (2010) 128 TTJ 619 / 36 DTR 42 (Chennai)(TM)(Trib.) S. 254 (2) :Orders of Appellate Tribunal‐Second rectification application‐ Power. The Tribunal has no power to adjudicate upon subsequent application filed under section 254 (2) . Only course permissible to assessee in such a case is to file an appeal against that order .( Asst year 1995‐96). Shri Padma Prakash (HUF) v ITO ( 2011) 131 ITD 121 (DelhI ) (SB) (Trib). S. 254(2A) :Orders of Appellate Tribunal – Power – Stay – Extension of Period. The Tribunal has power to extend period of stay beyond three hundred and sixty five days under the provisions of section 254 (2A) of the Income Tax Act 1961.(A. Y. 2003‐04) CIT vs. Ronuk Industries Ltd. (2011) 333 ITR 99/ 240 CTR 265/54 DTR 291 (Bom.)(High Court) S. 255: Appeal‐ Tribunal‐ Abatement‐Legal heirs on record‐ Rule 26 ITAT Rules—CPC 1908, order 22, r, 4. Though Rule 26 of the ITAT Rules 1963, provides for bringing legal heirs of deceased on record , no time limit has been prescribed under that rule , and provisions of order 22 rule 4 of the CPC, 1908 have to be applied . Revenue having failed to bring the legal heirs of deceased assessee on record , in spite of giving reasonable opportunity the appeal of revenue was dismissed.( A.Ys. 1999‐2000 to 2002‐03 ). ITO v Myeni Raghava Rao ( 2011) 139 TTJ 740 / 131 ITD 321( Visakhapatnam) ( Trib) S. 255(4) :Orders of Appellate Tribunal‐ Third member‐ Jurisdiction‐Scope. Jurisdiction of the third member is limited to the issue in the question referred to him and he is not supposed to investigate new facts beyond the scope of the question referred to him. (Asst Year 2004‐05). Dy CIT v Akay Flavours & Aromatics (P) Ltd ( 2011) 55 DTR 1 /130 ITD 41 /138 TTJ 513 (Coch)( TM ) (Trib). CC‐Appeals to High Court. S. 260A : Appeal ‐ High Court ‐ Substantial Question of Law ‐ Cash Credit ‐ (S. 68) It is manifest from a bare reading of section 260A of the Income Tax Act, 1961, that an appeal to High Court from a decision of the Tribunal lies only when a substantial question of law is involved, and where the High Court comes to the conclusion that a substantial question of law arises from the order of Tribunal, it is mandatory that such questions must be formulated. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and / or while arriving at the said finding, relevant evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread. On the facts the Tribunal has given a finding that the assessee has failed to prove the source of cash credit satisfactorily hence, the no question of law arise from the order.(A. Y. 1983‐84)


Vijay Kumar Talwar vs. CIT (2011) 330 ITR 1/ 1 SCC 673 (SC) S. 260A – Appeal ‐ High Court – condonation of delay – Long Delay due to procedural reasons in filing Dept appeals cannot be condoned The SLP challenging the order of the Bombay High Court declining to condone delay of 656 days in filing the appeal was dismissed on the basis that several facts such as non traceability of case records, procedural formalities involved in the Department and the papers are to be processed through different officers in rank for their comments, approval etc. and then the preparation of the draft of appeal memo, paper book and the administrative difficulties such as shortage of staff does not make sufficient cause for condonation of delay . CIT v Indian Hotels Co. Ltd. (Supreme Court) (www.itatonline.org) S. 260A: Appeal – High Court‐Condonation of Delay. The department delayed in filing appeal in the matter involving huge stakes. The High Court dismissed the appeal. Held, considering the amount of tax involved, the High Court ought to have decided the appeal before it on the merits. The matter was remanded to the High Court to decide de novo in accordance with law. CIT v. West Bengal Infrastructure Development Finance Corp. Ltd. [2011] 334 ITR 269(SC) S. 260A: Appeal –High Court‐Limit of 10 laks‐CBDT’s low tax effect circular not applicable to matters having “cascading effect”. The High Court, relying on CBDT’s Instruction No. 3/2011 dated 9‐2‐2011, dismissed the department’s appeal as not maintainable on the ground that the tax effect was less than Rs. 10 lakhs. The department filed a SLP in the Supreme Court. The Apex court allowing the petition held that, Liberty is given to the Department to move the High Court pointing out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. There are cases under the Income – Tax Act, 1961, in which a common principle may be involved in subsequent group of matters or large number of matters. The High Court shall not apply the Circular ipso facto. For that purpose, liberty was granted to the Department to move the High Court in two weeks. CIT v Surya Herbal Ltd (2011) 60 DTR 165 / 243 CTR 327/ 243 CTR 327(SC). www,itatonline.org. S. 260A : Appeal ‐ High Court ‐ Power of Review Section 35G(9) of the Central Excise Act (= s. 260A (7) of the IT Act) provides that “the provisions of Civil Procedure Code, 1908 relating to appeals to the High Court shall as far as may be apply in the case of appeals under this Section”. Given that only the provisions of the CPC relating to “appeals” are made applicable and not those relating to “review”, the High Court had to consider whether the provisions of section 114 and Order XLVII of the Civil Procedure Code which confer power on the High Court to review its judgments apply to appeals filed under the Excise Act. The assessee and the department were agreed that the High Court had that power. HELD accepting the claim: (i) The High Court is a Court of record as envisaged in Article 215 of the Constitution and has inherent powers to correct the record. As the High Court has plenary jurisdiction, it has inherent power of review to prevent miscarriage of justice or to correct grave and palpable errors committed by it. CCE vs. Hongo India (236) ELT 417 (SC) & D.N. Singh vs. CIT 325 ITR 349 (Pat)(FB) followed; (ii) In dealing with matters under a special enactment, the practice and procedure of the ordinary Court will apply if the special enactment refers to and adopts the practice and procedure to be followed by the ordinary Court. Accordingly, all provisions of the CPC apply to appeals under the Excise Act;


(iii) Section 35G(9) does not restrict the jurisdiction of the High Court to only the provisions of the CPC relating to appeal. Section 35G(9) is enacted out of abundant caution to provide that in respect of matters not dealt with by the special enactment, the provisions of the CPC shall apply. Even if section 35G(9) were not there, the ordinary law of the court have to be applied in the absence of anything contrary in the special law; (iv) One of the grounds of review is an error apparent on the face of the record. Where a statute is amended retrospectively, a judgment applying the un amended law constitutes an error apparent on the face of record and can be reviewed. VIP Industries Ltd. vs. CCE Source: www.itatonline.org(Bombay High Court) S. 260A : Appeal –High Court‐ Monetary Limit ‐ CBDT Circular ‐ Filing Appeals ‐ Pending Appeals The Department filed an appeal in the year 2008 where the tax effect was less than ` 10 lakhs. The question arose whether in view of Instruction No. 3/2011 Dated 9‐2‐2011 the appeal was maintainable. HELD dismissing the appeal: In view of CIT vs. P. S. Jain & Co (included in file) which followed Pithwa Engineering 276 ITR 519 (Bom.) & Ashok Patel 317 ITR 386 (MP) and where it was held that the CBDT Circular imposing limits on the filing of appeals by the department applied to pending appeals, Instruction No. 3/2011 Dated 9‐2‐2011 also applied to pending appeals and as the tax effect was less than ` 10 lakhs, the appeal was not maintainable. CIT vs. Delhi Race Club Ltd./ Source: www.itatonline.org (Delhi High Court) S. 260A : Appeal –High Court‐ Monetary Limit ‐ CBDT Circular ‐ Pending Appeal Circular dated 15.5.2008 laying down monetary limit controls the filing of the appeals and not their hearing. Appeals filed as per applicable limit at the time of filing cannot be governed by circular applicable at the time of hearing. The object of the Circular u/s 268A is only to govern monetary limit for filing of the appeals. There is no scope for reading the circular as being applicable to pending appeals. [Abhinav Gupta 41 DTR 129 (P&H) (FB) reversed] CIT vs. Varinder Construction Co. (2011) 51 DTR 290/239 CTR 1/198 Taxman 42/331 ITR 449 (P&H) (FB)(High Court) S; 260A‐ Appeal –High Court‐Monetory limit‐ Instruction of Board No. 3/2001. F. No. 279/Misc 142/2007 – ITJ / Dt. 9th February, 2011.( 2011) 332 ITR 1 (ST). www.itatonline.org Appeal before Appellate Tribunal ` 3,00,000. Appeal u/s 260A before High Court ` 10,00,000. Appeal before Supreme Court. ` 25,00,000. Appeal appeal filed on or after 9th February, 2011. Reference to case laws Bombay High Court. CWT vs. Executors of late D. T. Udeshi (1991) 189 ITR 319 (Bom.)(High Court) CIT vs. Camco Colour Co. (2002) 254 ITR 565/173 CTR 255/122 Tax 226 (Bom.) (High Court) CIT vs. Pithwa Engg Works (2005) 276 ITR 519/ 197 CTR 655 (Bom.) (High Court) CIT vs. Zeob Topiwalla (2006) 284 ITR 379/199 CTR 656 (Bom.) (High Court) CIT vs. Madhukar K. Inamdar (HUF) (2009) 318 ITR 149(2010) 229 CTR 77/(2009) 185 Tax 101/27 DTR 132 (Bom.) (High Court) CIT vs Vitessee Trading Ltd (2011) 331 ITR 433(Bom) S. 260A : Appeal ‐ High Court – Notice ‐ Paper Publication ‐ Proper mode. Income Tax Department having failed to serve notice on the assessee company (Respondent) other than by way of paper publication at the admission of the appeal, CIT is directed to set right the defect in the presentation of the appeal. Income Tax Department is deprecated for wasting public money by resorting to service of notice by


paper publication as a matter of routine thereby incurring considerable unnecessary expenditure on cost of advertisement. CIT vs. Happy Farms & Resorts Ltd. (2011) 51 DTR 334 (Karn.)(High Court) S. 260A: Appeal – High Court‐Question of Law . Where though the appeal was admitted on the question, as to whether the Dy. Director of Inspection has power to make reference to the Valuation Officer under section 131 (1A) of the Act. The Hon’ble High Court dismissed the appeal of the revenue holding that the question did not arise for consideration of the High Court, as non of the lower authorities recorded the finding that the Dy. Director of Inspection was having no power to make reference to Valuation Officer.( A. Y. 1998‐99) I.T.O. vs. Hotel Shyama (2011) 56 DTR 174 (MP)( High Court). S. 260A:Appeal –High Court‐ Abatement of Appeal. If the assessee dies, the question of abatement of appeal filed under section 260 A of the Act would not arise. Further, the Hon’ble High Court condoned delay of 523 day in filing the application for bringing the legal heirs on record by the Revenue, rejecting the objection taken by the assessee under Order 22 of Civil Procedure Code, which provides that, if there is delay in bringing legal heirs on record the proceedings abates does not apply to an appeal filed under section 260 A of the Act. CIT & Anr. vs. V. Rukmini (Smt)s By LR’s (2011) 53 DTR 30 (Kar)( High Court). S. 260A: Appeal‐High Court‐ Small tax effect‐ Below 2 lakhs‐ Appeal before Tribunal. ( S. 253 (2).) In cases where tax effect is below Rs 2,00,000, Revenue can not file appeal contrary to the terms of circular which is binding on the department.( A.Y. 1997‐98 & 1998‐99) CIT v Mangilal Jain ( 2011) 58 DTR 20 ( MP) (High Court). S. 260A: Appeal‐ High Court‐ Plea not raised before Tribunal. Plea not raised before Tribunal , cannot be raised for first time before High Court. CIT v Vijay Enterprises( 2011) 59 DTR 98/ ( 2011)Tax .L.R.497.9(A.P) (High Court). S. 260A: Appeal –High Court‐ Single appeal to High Court‐Court fee is payable in respect of each appeal . One appeal in respect of common order is maintainable however Court fee will be payable in respect of each appeal .( A.Y. 2006‐07). Director Income tax (International) vTransocean Offshore International Ventures Ltd and others.( 2011) 336 ITR 637 (Uttarakhand ) (High Court). E.Revision by the Commissioner. S. 263 : Revision of orders prejudicial to revenue ‐ CIT not permitted to change view & revise under section 263 without changed circumstances It was held that as the department had examined the fundamental nature of the transaction in the earlier years and its nature remained unchanged, the department could not have changed its view as regards the nature of the transaction by dubbing it as erroneous. The department is not entitled to re‐open an assessment based on a fresh inference of transactions accepted by the revenue for several preceding years on the pretext of dubbing them as erroneous. Associated Food Products 280 ITR 377 (MP), Sirpur Paper Mills Ltd 114 ITR 404 (AP) & CIT vs. Gopal Purohit 228 CTR 582 (Bom.) followed. CIT vs. Escorts Ltd. (2011) 51 DTR 321 (Delhi)( High Court)


S. 263 : Revision of Orders prejudicial to Revenue – Depreciation – Goodwill ‐ (S. 32) Assessing Officer allowed depreciation on goodwill treating the same as intangible asset. Commissioner revised the order, the Tribunal quashed the order of revision. High Court confirmed the order of Tribunal. The Court held that where two views are possible and the assessing officer accepting one view which is plausible one, not appropriate to exercise power under section 263.(A. Y. 2001‐02 to 2003‐04) CIT vs. Hindustan Coca Cola Beverages P. Ltd (2011) 331 ITR 192 / 238 CTR 1 (Delhi)(High Court) Editorial:‐ Refer Hindustan Coca Cola Beverages (P) Ltd. vs. Dy. CIT (2010) 132 TTJ 602 (Delhi) S. 263 : Revision of orders prejudicial to Revenue ‐ Exempted Income ‐ Proviso to section 14A ‐ Law on the passing of the order under section 263 has to be considered ‐ (S. 14A) Proviso to section 14A did not apply to the facts of the case as on date of orders of CIT under section 263 (29th December 1999), said proviso was not even existence, CIT was justified in revising the order of Assessing Officer and in directing him to compute the interest payable on such sum which has been invested in the partnership firm (Which was erroneously allowed by him earlier) and disallow those portions which can be attributable towards investment in partnership.(1995‐96) Mahesh G. Shetty & Ors. vs. CIT (2011) 51 DTR 104 (Kar.)(High Court) S. 263 : Revision Orders Prejudicial to Revenue – Export – Deduction. (S. 80HHC) Where the Assessing Officer had allowed deduction under section 80HHC of the Act without excluding the certain receipts as mentioned in Explanation (baa) to section 80HHC of the Act. CIT was held to be justified in invoking jurisdiction under section 263 of the Act and setting aside the assessment order passed by the Assessing Officer under section 143(3) of the Act, as there was a prima facie error committed by the Assessing Officer while framing assessment under section 143(3) of the Act. (A. Y. 1995‐96‐97) CIT vs. N.C. John & Sons P. Ltd. (2011) 51 DTR 142 (Ker.)(High Court) S. 263: Revision of orders prejudicial to revenue – effect order not passed within “reasonable time” ‐ order becomes “infructuous” Even if there is no period of limitation prescribed u/s153 (3)(ii) to give effect to s. 263 orders, the AO is required to pass the order within a “reasonable period”. Non‐specification of period of limitation does not mean that the AO can wait for indefinite period before passing the consequential order. CIT vs Goyal M. G. Cases Pvt. Ltd.((2011)Tax world August 2011 P. 41.) (Delhi ) (High Court).www.itatonline.org S. 263: Revision of orders prejudicial to revenue‐ Block Assessment‐ Documents seized. In the block assessment order the assessing Officer made an addition of Rs 90 Lakhs on the basis of the documents seized from the premises of Viswas R. Bhoir . The said addition was deleted by the Tribunal and the appeal is pending before the Bombay High court. In the mean time the CIT passed a revision order under section 263 on 16‐0‐ 2005 , directing the Assessing Officer to consider the tax implication of page nos 1 to 13 of bundle no 12seized from the residence of Viswas R.Bhoir. The Tribunal held that once taxability under both the documents has been considered by the Assessing Officer and the CIT (A), it is not open to CIT to invoke the jurisdiction under section 263 . On appeal to the High Court , the High Court confirmed the order of Tribunal CIT v Mukesh J .Upadhyaya ( Bom) ( High Court) (. ITA no 428 of 2010 dated 13‐6‐2011.(594 ( 2011) 43A‐ BCAJ – August –P. 30).


S. 263 : Revision of orders prejudicial to revenue – Penalty ‐ Two Views The Assessing Officer dropped the penalty proposal holding that appeal against the quantum is pending before the High Court. The Commissioner of Income Tax revised the order. The Tribunal held that the view of Assessing Officer cannot be held to be erroneous in dropping penalty proceedings. The Assessing Officer can impose penalty even after appeal is determined by High Court. Two view possible hence revision was held to be not valid.(A. Y. 2004‐05) V. K. Natesan (2011) 128 ITD 81 / 49 DTR 233 / 135 TTJ 257 (Cochin)(TM)(Trib) S. 263 : Revision of orders prejudicial to revenue ‐ Show cause Notice ‐ Reasons not stated in show‐cause notice ‐ Order invalid. If a ground of revision is not mentioned in the show‐cause notice, it cannot be made the basis of the order for the reason that the assessee would have had no opportunity to meet the point (Maxpack Investments 13 SOT 67 (Del.), G. K. Kabra 211 ITR 336 (AP) & Jagadhri Electric Supply 140 ITR 490 (P&H) followed); Synergy Enterpreneur Solutions Pvt. Ltd. vs. Dy. CIT (ITAT Mumbai) Source: www.itatonline.org (Trib) S. 263 : Revision of orders prejudicial to revenue – Block Assessment – Time Limit – (Ss. 158BC, 158BE) Provisions of section 263 are applicable to the Block Assessment. In such cases question of restriction under section 158BE as regards time‐limit completion of fresh assessment does not arise. In such cases by virtue of section 156BH limitation as laid down in section 153(2A) would be applicable. Bhartiben M. Kelawala (Smt.) vs. CIT (2011) 128 ITD 468 / 135 TTJ 455 (Ahd.)(Trib.)/Amita Devi Sanganeria (Smt.) vs. ACIT (2011) 129 ITD 72/53 DTR 214 (Gau.)(TM)(Trib.) Chapter XXC. Purcahse by Central Government of immoveable properties in certain cases of transfer. S. 263: Revision of orders prejudicial to revenue – Jurisdiction‐Power of CIT – Absence of notice under s. 143(2) vis‐à‐vis limitation for completion of assessment. When the assessment for asst. year 1987‐88 was completed under S. 143(1)(a) and notice under s. 143(2) had not been issued and time for completing asst. under s. 143(3) expired on 31st March 1990, CIT could not direct asst. under S. 143(3) by his revision order under S. 263 dated 22nd March, 1991, the order was held to be contrary to provisions of S. 143(2), 143(3) and 153(1) (a). V. Narayanan vs. Dy. CIT(2011) 53 DTR188 (Chennai) ( T M) (Trib) S. 269UA(f)(i) : Purchase of immoveable property by Central Government ‐ Lease for 9 years ‐ Renewable at the option for a further period of 9 years Lease for 9 years renewable at option of lessee for a further period of 9 years, amounts to lease for more than 12 years. Parties obliged to submit Form No. 37–I, within 15 days of draft agreement. Govind Impex P. Ltd & Others vs. Appropriate Authority (2011) 330 ITR 10/ 1 SSC 529/(2011) Tax LR 1 (SC) Chapter XXI.‐ Penalties imposable. S. 271(1)(c) : Penalty – Concealment ‐ Revised Return ‐ After Survey ‐ Voluntary Revised return filed disclosing additional income as a consequence of follow‐up proceedings taken by Deputy Director of Income Tax in respect of purchasers hence revised return cannot be said to be voluntary, hence, levy of penalty was justified.(A. Y. 1985‐86 and 1987‐88) LMP Precision Engg. Co. Ltd. vs. Dy. CIT (2011) 330 ITR 93 /(2009) 223 CTR 301/ 183 Tax 12/ 20 DTR 294 (Guj.)(High Court)


S. 271(1)(c) : Penalty – Concealment – Disclosure of all facts – No Penalty for Concealment. In penalty proceedings, it is incumbent on the Tribunal to examine independently, the evidence and material on record for the purpose of judging whether penalty proceedings are justified on account of concealment of income or furnishing of inaccurate particulars thereof. If the assessee has disclosed all the facts, then just because the department does not agree with the legal stand taken by the assessee, the same would not result into penalty. (A. Y. 1995‐96) Devsons P. Ltd. vs. CIT (2011) 196 Taxman 21 (Delhi)(High Court) S. 271(1)(c) : Penalty – Concealment – Revised Return. Where the revised return was filed by the assessee within the time limit prescribed under section 139(5) of the Act and there was nothing to suggest that the assessee had filed revised return with the knowledge that the department had detected such additional income. Penalty under section 271(1)(c) of the Act was not leviable as there was no willful and deliberate suppression of income. (A. Y. 2005‐06) CIT vs. R. Gopalakrishnan (Dr.) (2011) 50 DTR 345 (Mad.)(High Court) S. 271(1)(c) : Penalty – Concealment – Withdrawal of Claim. Where the assessee withdraw its claim of deduction under section 80‐IA of the Act by filing revised return under section 139(5) of the Act immediately, after it received notice under section 154 of the Act proposing to withdraw deduction under section 80‐IA of the Act for earlier year. Penalty under section 271(1)(c) of the Act was held to be not leviable as the claim under section 80‐IA was made under a bona fide believe which was rectified later on by the assessee by filing revised return. (A. Y. 2001‐02) CIT vs. Backbone Enterprises (2011) 50 DTR 321 (Guj.)(High Court) S. 271(1)(c) : Penalty – Concealment – Where surrender of income is not voluntary – Levy of penalty justified. In the instant case the assessee has surrendered his income after the Assessing Officer had made substantial progress in the investigation and the assessee had also not co‐operated with the enquiry. The High Court held that such surrender cannot held to be voluntary nor made bona fide, so as to avoid penalty. The High Court relied on the decision in the case of Bhairav Lal Verma vs. Union of India 230 ITR 855, where the meaning of word ‘voluntary’ in the context of waiver provisions under section 273A was discussed.(A. Y. 2004‐05) CIT vs. Rakesh Suri (2011) 331 ITR 458 (All)(High Court) S. 271(1) (c). Penalty‐ Concealment‐ Despite detection in survey, Concealment penalty cannot be levied if income was offered in return filed. (S.133A). Penalty u/s. 271(1)(c)can be levied only if Assessing officer ‘during the course of proceedings’ is satisfied that there is ‘concealment’ or ‘furnishing if inaccurate particulars’. Where assessee offers detected income in the return, there was neither concealment nor furnishing of inaccurate particulars. Thus penalty u/s. 271(1)(c) cannot be levied. CIT vs SAS Pharmaceutical (2011) 60 DTR 258(Delhi)( High Court). www.itatonline.org. S. 271 (1) (c ): Penalty ‐ Concealment‐Valuation of closing stock‐ Explanation 1. Valuation of stock on account of deterioration of old stock and the same has not been accepted by the Revenue , penalty under section 271 (1) (c ) is not leviable, in the absence of any finding that the claim of the assessee was false or that it fudged the books of account.( Asst year 1987‐88). CIT v H.P.State Forest Corporation Ltd ( 2001) 56 DTR 113 (HP ) (High Court)


S. 271 (1) (c ). Penalty‐ Concealment‐ Failure to file return‐ Explanation 3. For the purpose of invoking the provisions of Expln. 3 to section 271 (1), the conditions enumerated therein are required to be to be satisfied cumulatively : Assessing Officer having issued a notice under section 148 to the petitioner with in the period specified under section 153 (1), the third condition , namely , the notice under section 142 (1) or 148 should have been issued with in the period specified under sub section (1) or of section 153 is clearly not satisfied and therefore , the failure on the part of the petitioner to furnish return with in the specified period can not be deemed to be concealment with in the meaning of Explanation 3 to section 271 (I ) (c), and penalty under section 271 (1) (c ) could not be levied.( Asst Year 1994‐95). Chhaganlal Suteriya v ITO ( 2011) 58 DTR 89/ 242 CTR 528 ( Guj).( High Court). S. 271 (1) (c ).Penalty‐ Concealment‐ Immunity under Explanation 5‐Disloure under section 132 (4). Unaccounted stock surrendered by assessee in the statement recorded under section 132 (4), on the date of search is covered by ‘other valuable articles or things’ and therefore , the conditions enumerated under explanation 5 to section 271 (1) (c ) , were fulfilled and penalty under section 271 (1) (c ) is not leviable.( A Y 1989‐90). CIT v Bhandari Silk Store ( 2011) 242 CTR 443 ( P &H) (High Court). S. 271 (1) ( c ) : Penalty‐ Concealment –Search and Seizure‐ Explanation 5. Income offered after detection consequent to search operations was rightly treated as concealed income, therefore ,penalty under section 271 (1) (c ) , was rightly levied ; in the circumstances , Explanation 5 was not attracted.( A.Ys. 1982‐83 & 1983‐84). D.K.B.& Co v Dy CIT ( 2011) 58 DTR 299 /243 CTR 198( Ker) ( High Court). S. 271 (1) (c ):Penalty‐Concealment‐ Search and seizure‐ Disclosure‐ Due date of filing of return‐Explanation 5. ( S. 132 (4). Assessee made disclosure under section 132 (4), and paid the tax. Time for filing of return has not expired . Penalty can not be imposed.( A.Y. 1989‐ 90. CIT v Bhandari Silk Store ( 2011) 337 ITR 153 ( P& H) (High Court). S. 271 (1)(c ) : Penalty –Concealment‐‐No penalty can be levied without Assessing officers finding on “Inaccurate Particulars”. Where there is no finding by the AO that the assessee furnished inaccurate particulars and that its explanation was not bonafide ,the imposition of penalty u/s 271(1)(c) was a “complete non‐starter”. A mere erroneous claim made by an assessee, though under a bonafide belief that, it was a claim which was maintainable in law cannot lead to an imposition of penalty. The claim for deduction was made in a bona fide manner and the information with respect to the claims was provided in the return and documents appended thereto. Accordingly, there is no furnishing of “inaccurate particulars”. Making of an incorrect claim for expenditure does not constitute furnishing of inaccurate particulars of income CIT v Mahanagar Telphone Nigam Ltd (Delhi) (High Court) (www.itatonline.org) S. 271(1)(c ): Penalty – Concealment‐Furnishing Inaccurate Particulars ‐ Despite disclosure of conversion of stock into investment and acceptance by the Assessing Officer claim that gains is Long term capital gain penalty is leviable.


The assessee owned a plot of land which in the earlier years was treated as “stock‐in‐trade”. In the year of sale, the assessee converted the stock into “investment” and offered the gains as Long term capital gain . Penalty u/s 271(1)(c ) was levied. It was held that though the Assessing Officer accepted the conversion, the assessee’s claim that the gains was a LTCG amounted to furnishing inaccurate particulars of income. The issue was not debatable as held by the Tribunal. When the order of the AO in quantum proceedings was sustained by all successive authorities and the High Court also dismissed the appeal at the admission stage, albeit after admitting the same, it cannot be said that the issue was debatable. CIT v Splender Construction(Delhi) (High Court). (www.itatonline.org) S. 271(1)(c) : Penalty – Concealment ‐ Two set of books of accounts. In the present case, the assessee was maintaining two sets of books; one was meant for showing to Income Tax Authorities and the other for himself. In the second set, he was recording sales and certain expenses on the basis of these documentary evidence, addition had been made which had been confirmed up to the Tribunal. Thus it was not the case of simplicitor estimation of the income by disbelieving the books of account or other details submitted by the assessee during the course of assessment proceedings. In the present case the department was able to lay its hands on the documentary evidence exhibiting the conduct of assessee for avoiding tax and carrying out the business activity out of the regular books. In the above circumstances penalty under section 271(1)(c) of the Act, which was confirmed by the commissioner (A) was upheld.(A. Y. 1985‐86 and 1990‐91) Shyam Behari vs. ACIT (2011) 43 SOT 129 (Delhi)(Trib) S. 271(1)(c ) : Penalty – Concealment – Return filed after survey . The assessee disclosed the income in the Return filed after survey. The Tribunal held that what is punishable under section 271(1)(c) is actual concealment of income in the Return of income and not merely an attempt to make concealment. If the assessee rectifies it itself and declares the correct income in valid return of income and does not file return by concealing the income then such act is not punishable under section 271(1)(c). Hence, penalty under section 271(1)(c) cannot be levied. Sadhbav Builders vs. ITO, ITA No. 1418/Ahd/2008, A.Y. 2002‐03 Bench ‘D’ dt. 21/1/2011, Ahmedabad Chartered Accountants Journal, Vol. 34 Part 10 January 2011, Pg. 480 S. 271(1)(c) : Penalty‐ Concealment ‐ Admission by High Court ‐ Mere admission of Appeal by High Court sufficient to disbar section 271(1)(c) penalty. In quantum proceedings, the Tribunal upheld the addition of three items of income. The assessee filed an appeal to the High Court which was admitted. The Assessing Officer levied penalty under section 271(1)(c) in respect of the said three items. The penalty was upheld by the CIT(A). On appeal to the Tribunal, HELD allowing the appeal: When the High Court admits substantial question of law on an addition, it becomes apparent that the addition is certainly debatable. In such circumstances penalty cannot be levied under section 271(1)(c). The admission of substantial question of law by the High Court lends credence to the bona fides of the assessee in claiming deduction. Once it turns out that the claim of the assessee could have been considered for deduction as per a person properly instructed in law and is not completely debarred at all, the mere fact of confirmation of disallowance would not per se lead to the imposition of penalty. Nayan Builders & Developers Pvt. Ltd. vs. ITO(2011) 43A BCAJ, May Pg. 37(Trib.) Editorial:‐ Refer ‐ Rupam Mercantile Ltd. vs. Dy. CIT (2004) 91 ITD 237 (Ahd.)(TM) (Trib) S. 271(1)(c) : Penalty – Concealment ‐ Book Profit ‐ Despite Concealment, no section 271(1)(c) penalty if section 115JB book profits assessed. (S. 115JB)


Pursuant to a search under section 132 and the detection of incriminating documents, the assessee offered additional income. The Assessing Officer computed the income under the normal provisions and levied penalty under section 271(1)(c) for concealment of income. However, as the book profits computed under section 115JB was higher, the assessee was assessed under section 115JB. The assessee’s appeal against the levy of penalty under section 271(1)(c) was rejected by the CIT(A). However, on appeal to the Tribunal, HELD: It was held by Hon’ble Mumbai Tribunal that, the concealment of income had its repercussions only when the assessment was done under the normal procedure. If the assessment as per the normal procedure was not acted upon and it was the deemed income assessed u/s 115JB which became the basis of assessment, the concealment had no role to play and was totally irrelevant. The concealment did not lead to tax evasion at all. (A. Y. 2005‐06) Ruchi Strips & Alloys Ltd. vs. Dy. CIT BCAJ p. 39, Vol. 42‐B, Part 6, March 2011 (Trib.) (Mum.) Source: www.itatonline.org S. 271(1)(c) : Penalty – Concealment ‐ Failure to Voluntarily apply section 50C does not attract penalty under section 271(1)(c). (S. 50C) No penalty under section 271(1)(c) can be levied where assessee agreed to the addition made under section 50C as the fact that assessee agreed to addition is not conclusive proof that the sale consideration as per agreement is not correct or accurate. The addition made purely on the basis of deeming provisions of section 50C. (A. Y. 2006‐07). Renu Hingorani vs. ACIT BCAJ p. 38, Vol. 42‐B, Part 6, March 2011 (Trib.) (Mum.) www.itatonline.org S. 271(1)(c) : Penalty – Concealment ‐ Mere making of claim not sustainable in law not sufficient for levy of penalty. Mere making of a claim which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars. The assessee in the present case had made a bona fide claim and hence following the Apex Court’s decision in the case of Reliance Petro Products Pvt. Ltd., it was held that penalty under section 271(1)(c) of the Act was not leviable. (A. Y. 2006‐07) Walter Saldhana vs. Dy. CIT (2011) 44 SOT 26 (Mum.)(Trib.) S. 271(1)(c) : Penalty – Concealment – Valuation by Stamp Authorities. Penalty under section 271(1)(c) is not leviable on addition arising under section 50C as per valuation by stamp authorities. Renu Hingorani vs. ACIT, BCAJ p. 38, Vol. 42‐B, Part 6, March 2011 (Trib.) S. 271(1)(c) : Penalty – Concealment – Book Profit – Total Income less than Book Profit. Assessee returning income based on book profits. Pursuant to search action additional income declared. Total income as per normal provisions of the Act less than the book profit. Penalty cannot be imposed. Ruchi Strips & Alloys Ltd. vs. Dy. CIT, BCAJ p. 39, Vol. 42‐B, Part 6, March 2011 (Trib.) S. 271 (1) (c) : Penalty – Concealment‐ Additional income after survey ‐ Revised return. Assessee having declared additional income following survey under section 133A and further enhanced the same filing a revised return despite the fact that no incriminating material was found either during the survey action or during the post survey enquiries and the AO having accepted the revised return without pointing out any inaccuracy therein or making any further addition ,penalty under section 271(1)(c) was not leviable, more so as the


additional income is not free from dispute as far as its ownership and the year of incidence of tax is concerned.( Asst years 2002‐03 & 2003‐04). Dilip Yeshwant OAK v Asst CIT ( 2011) 55 DTR 113 / 138 TTJ 559 (Pune) (Trib). S. 271(1)(c); Penalty‐ Concealment‐ Failure to disallow u/s 14A there cannot be penalty. As there is no allegation by the AO that there was collusion between the auditor and the assessee to ignore s. 14A, it cannot be said that the explanation was not bona fide. Further, as Rule 8D was not enacted at the time, segregation of expenditure relatable to tax‐free income would be disputable and lead to bona fide difference in opinion. So, penalty u/s 271(1)(c) cannot be levied (Asst year 2005‐06). DCIT vs Nalwa Investment Ltd. (Mumbai)(Trib) . www.itatonline.org. S. 271 (1) (c ). Penalty – Concealment‐Surrender of income during survey.( S. 133A. ) – No penalty leviable Where A O has not brought on record any material to show that the additional income surrendered by the assessee during survey under section 133A was concealed income or that explanation was false , penalty under section 271 (1) (c ) is not leviable. ( Asst year 2006‐07). Dy CIT v Bhanwar Lal Mahendra Kunar Soni ( 2011) 138 TTJ 381 (JD ) (Trib). S. 271 (1) (c ): Penalty‐ Concealment‐Non genuine gift claimed as capital gains‐Transfer of tenancy right. In the return of income the assessee declared of Rs 17 lakhs as long term capital gains arising from transfer of tenancy right and paid tax @ 20% applicable to long term capital gains. Claim of assessee was that amount paid for receiving the gift was from the cash received on surrender of tenancy right . Assessing officer held that as there was no supporting evidence the amount was assessed as income from undisclosed sources. The Tribunal held that as tax sought to be evaded is very clear as the tax rate applicable on the impugned receipt of Rs.17 lakhs is 30 % being income from undisclosed sources, whereas the assessee has paid 20% claiming the same to be capital gain on transfer of tenancy right, provisions of Explanation 1 are not applicable to the instant case as tax sought to be evaded was because of the lower rate of tax paid and not because of any addition to the income and, therefore, penalty is imposable under the main provisions of s.271(1)(c). Harish P.Mashruwala v Asst CIT ( 2011) 139 TTJ 563 ( Mumbai ) (SB ) (Trib). S. 271 (1) (c ): Penalty‐ Concealment‐ Survey‐ Surrender of additional income. Assessee having surrendered additional income following detection of certain discrepancies in the documents found during the survey proceedings at its premises despite filing an explanation and AO proceeded to assess the said income on the basis of the surrender made by the assessee Penalty under section 271 (1) (C ) is not leviable.( Asst Year 2005‐06). Ajay Sangari & Company v Additional CIT ( 2011) 57 DTR 397 ( Chd) (Trib). S. 271 (1) (c ). Penalty‐ Concealment‐AO reprimanded for harassing the assessee by wrongly levying penalty. In the instant case, the assessment order supplied by AO to assessee did not contain any direction for initiation of penalty though assessment order filed by dept. with memo of appeal had a reference to issue of notice u/s. 271(1)(c ). The Tribunal considering the case fit for awarding cost u/s. 254(2B) of the Act, held that they were inclined to record over here that AO should have confined himself in making


just and proper assessment only, as per the provisions of the law and harassment of assessee, which is not permitted under the statute should have been avoided at all cost. ITO vs Audyogik Tantra Shikshan ( Pune)( Trib).www.itatonline.org. S. 271 (1) (c ): Penalty‐ Concealment‐ Revised return – Additional income‐Explanation 2. Additional income offered by way of revised return and accepted by Assessing Officer cannot be said to be an addition so as to attract Explanation 2 to section 271 (1 ) (c ).( AY 2004‐05). SVC Projects ( P) Ltd v JCIT ( 2011) 58 DTR 433/ 140 TTJ 79 / 132 ITD 11 ( Visakha) ( Trib). S. 271 (1) (c ): Penalty – Concealment‐ Fees paid for ROC for increasing authorized share capital. Assessee having claimed deduction of fees paid to the ROC for increasing authorized share capital contrary to the ruling of the Supreme Court , the claim is ex facie wrong and cannot be accepted as a bona fide claim as the circumstances in which the auditors committed the error of treating the same as revenue expenditure have not been explained and , therefore , levy of penalty under section 271 (1) (c ) is justified. ( A.Y. 2006‐07). Trinity Touch (P) Ltd v ITO ( 2011) 59 DTR 195/ 140 TTJ 309 ( Delhi) (Trib). S. 271 (1) (c ): Penalty‐ Concealment‐Despite disclosure, legal opinion, favourable CIT(A) order & High Court appeal on merits, s. 271(1)(c) penalty leviable if issue not “debatable” in Tribunal’s view. The assessee, a firm of Chartered Accountants, was one of the “associate members” of Deloitte Haskins & Sells pursuant to which it was entitled to practice in that name. Deloitte desired to merge all the associate members into one firm. As this was not acceptable to the assessee, it withdrew from the membership and received consideration of Rs. 1.15 crores from Deloitte. The said amount was credited to the partners’ capital accounts & claimed to be a non‐taxable capital receipt by the assessee. The AO rejected the claim though the CIT (A) accepted it on the ground that it had “great force“. The Tribunal reversed the CIT (A). The AO levied s. 271(1)(c) penalty which the CIT(A) deleted. On appeal by the department to the Tribunal, the assessee argued that penalty was not leviable because (i) there was a disclosure of the facts in the computation & the balance sheet, (ii) the opinion of 3 tax experts had been taken, (iii) the issue was debatable & (iv) the assessee’s appeal on the merits had been admitted by the High Court. HELD allowing the appeal: (i) S. 271(1)(c) imposes “strict civil liability“. (ii) The fact that the legal opinions were not furnished during the assessment proceedings (but were furnished only during the CIT(A) penalty proceedings) indicates that the assessee realized the ineffectiveness of these opinions and still ventured into making the non‐allowable claim; (iii) Though there was disclosure in the computation and balance sheet, in order to minimize disclosure, the assessee took the “smart route” of directly crediting the receipt in the capital accounts of partners to evade tax; (iv) The fact that a substantial question of law on the merits was admitted by High Court does not mean penalty is not leviable (Rupam Mercantiles 91 ITD 237 (Ahd) (TM) not followed); ACIT v Khanna & Annadhanam ( Delhi) (Trib).www.itatonline.org. S. 271 (1) (C ): Penalty‐ Concealment‐ Transfer pricing‐No penalty under Expl 7 to s. 271(1)(c) for dispute regarding ALP method. The assessee adopted the TNMM to determine the ALP in respect of the broking transactions entered into with its affiliates. The AO & TPO held that the assessee ought to have adopted the CUP method and made an adjustment of Rs. 1.10 crores. This was accepted by the assessee. The AO levied penalty under Explanation 1 to s. 271(1)(c) on the ground that the assessee had filed inaccurate particulars of income. This was deleted by the CIT (A). On appeal by the department to the Tribunal, the Tribunal dismissing the appeal held that, Explanation 1 to s. 271(1)(c) does not


apply to transfer pricing adjustments. Penalty for transfer pricing adjustments is governed by Explanation 7 to s. 271(1)(c). Under Explanation 7 to s. 271(1)(c), the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of s. 92 C in “good faith” and with “due diligence”. The assessee adopted the TNMM and no fault was found with the computation of ALP as per that method. Instead, the method was rejected on the ground that CUP method was applicable. It is a contentious issue whether any priority in the methods of determining ALPs exists. So, when TNMM is rejected, without any specific reasons for inapplicability of the TNMM and simply on the ground that a direct method is more appropriate to the fact situation, it is not a fit case for imposition of penalty. DCIT v RBS Equities India Ltd.(2011) 60 DTR 273 / 141 TTJ 58( Mum) (Trib). www.itatonline.org. S. 271 (1) (c ):Penalty‐ Concealment‐Carry forward loss shown at a wrong figure‐Mistake of consultant‐ Disallowance of deduction under section 80G. Carry forward loss shown at a wrong figure due to mistake of tax consultant would not attract penalty under section 271 (1) (c ), as the correct figure was available with Assessing Officer from the assessment of earlier years and the mistake was rectified on being pointed out before finalization of assessment. Recognition to donee trust under section 80G being available earlier, there was bona fide belief to claim deduction under section 80G hence there was no case for levying penalty under section 271 (1) (c). (A.Y.2004‐05) Asst CIT v A.H.Wheeler& Co (P) Ltd ( 2011) 60 DTR 25 ( All) (Trib). S. 271B :Failure to get accounts audited‐ Penalty – Project Completion Method – Advance received cannot be treated as sale. When the assessee was following the project completion method of accounting, the advances received against booking of flats could not be treated as sale proceeds/turnover/gross receipts. Thus penalty under section 271B is deleted. Siroya Developers vs. Dy. CIT, ITA No. 600/Mum/2010, dt.12‐1‐2011, ITAT Mumbai ‘I’ Bench, BCAJ p. 38, Vol. 42‐B, Part 6, March 2011 (Trib.) S. 271BA: Penalty‐Failure to furnish transfer pricing report under section 92E.‐Reasonable cause.( S 273B). Assessee has not obtained the audit report as required under section 92E due to failure of auditor to advice who has audited the accounts under section 44AB of the Act, however filed the same immediately when he came to know that he was required to file such report in Form no 3 CEB before completion of assessments for the relevant years , as there was bonafide reason for not obtaining the report in form no 3CEB in time and it was venial and technical default, penalty cannot be attracted. Ravi Kumar Rawat v ITO ( 2011) 138 TTJ 254 (Jaipur ) (Trib). S. 271C:Penalty for failure to deduct tax at source‐Failure to deduct tax attract penalty and also imprisonment. – ( S.192, 200, 206, 271C, 276B and 276BB , S. 482 of CrPC. Where the materials show that the proceeding is of a civil nature and cannot be adjudicated by the criminal court or, if it is an abuse of the process of the court, the High Court would be well within its power to exercise its inherent jurisdiction and quash the same. – In view of the provisions of the Income‐tax Act and the assertion of the appellants that deductions were being made for all the persons liable to pay tax in terms of the Income‐tax Act, the proper remedy for the respondents was to approach the authority/officer concerned and not by filing a complaint. Rajeswar Tiwari and Ors. v. Nanada Kishore Roy( 2010) 8 SCC 442/ [2011] 333 ITR 534 / 59 DTR 75/242 CTR 476/200 Taxman 139 (SC)


S. 271C : Penalty for failure to deduct tax at source ‐ Mala fide intention ‐ Deliberate defiance of law ‐ No penalty for tax deduction at source breach if no “mala fide intention” or “deliberate defiance” of law ‐ (S. 194C, 194I, 194J, 201). It was held that the fact that the assessee has not disputed the quantum is not a good ground for imposition of penalty unless and until material is brought on record to the effect that assessee deliberately defied the provisions (Anwar Ali 76 ITR 696 (SC) referred). Further, it was also observed that levy of penalty under section 271C is not automatic. (Woodward Governor India 253 ITR 745 (Del.) followed). If no malafide intentions of any kind are attributed to the assessee for deducting tax under one provision of law than other, thus no penalty could be levied. CIT vs. Cadbury India Ltd. (2001) 55 DTR 318 (Delhi) (High Court). S. 271C : Penalty ‐ Failure to Deduction Tax at Source – Limitation – [S. 201(1)] The Tribunal has quashed the order passed by the DCIT (TDS) under section 201(1) and 201(IA), on the ground that initiation of proceedings was beyond a period of six years and hence was barred by limitation. The Tribunal in penalty appeal held that penalty under section 271C cannot be levied if the order under section 201(1) is barred by limitation. (A. Y. 2000‐01 to 2002‐03). ACIT vs. American School of Bombay Education Trust (2011) TIOL 209 ITAT–Mum. (172) (2011) 43A BCAJ, May P. 32 (Trib.) S. 272A(2)(c) : Penalty‐ Failure to file TDS return‐Statement‐ Quarterly Return. Failure to file quarterly return penalty is not leviable. Clause ( c ) of section 272 A (2 ) relates to return / statement under section 133 , 206 and 206C , which are unrelated to TDS , therefore ,penalty under section 272 A (2 ) (C ) is not leviable for non submission of quarterly returns for TDS. Porwal Creative Vision (P ) Ltd v Addl CIT ( 2011) 139 TTJ 1/ 55 DTR 241. (Mumbai ) (Trib). S. 275(1)(a) : Penalty – Concealment‐Bar of limitation on imposition ‐ limitation period not curbed by Proviso., The period of six months provided for imposition of penalty u/s 275(1)(a) starts running after the successive appeals from an assessment order have been finally decided by the CIT(A) or the ITAT. The proviso to s. 275(1)(a) extends the period for imposing penalty from six months to one year of the receipt of the CIT (A)’s order after 1.6.2003. The proviso carves out an exception from the main section inasmuch as in cases where no appeal is filed before the ITAT the AO must impose penalty within a period of one year of the date of receipt of the CIT (A)’s order. A proviso is merely a subsidiary to the main section and must be construed harmoniously with the main provision. The proviso to s. 275(1)(a) does not nullify the availability to the AO of the period of limitation of six months from the end of the month when the order of the ITAT is received. CIT v. Mohir Investment & Trading Co. (Delhi) (High Court) (www.itatonline.org) S. 276B: Offences and Prosecution‐Compounding of offences‐ Guidelines‐Technical offences. Under the guidelines of September 30, 1994 , technical offences could be compounded by the Chief Commissioner or Director General on certain conditions. The court held that compounding is not possible after filing of complaint. (A.Y. 1982‐83). Anil Batra v Chief CIT ( 2011) 337 ITR 251 ( Delhi) (High Court). Chapter XXII.‐ Offences and Procecutions


S. 276C :Wilful attempt to evade tax‐ Prosecution – Penalty set aside – No Prosecution. Where penalty is set aside in appeal by the Tribunal which was confirmed by the High Court, holding that the non disclosure of the items of income was purely due to mistake on the part of the assessee. In the light of the decision of the Court it cannot be said that the assessee has made a wilful attempt to evade taxes, therefore, assessee cannot be prosecuted for alleged offence under section 276C of the Act. (A. Y. 1989‐90) N. S. Babu vs. CIT (2011) 50 DTR 27 (Ker.)(High Court) S.276C: Offences and Prosecution ‐Proof of signing of return by accused.( S. 277, 278 ). Accused partner of the assessee firm not having raised any objection at any point of time that the return did not bear his signature or that it was not filed by him and paid the penalty levied in the assessment , the accused could not be acquitted of the offences under sections 276C, 277 AND 278 on the ground that the prosecution has not been able to prove that the return was signed by the accused partner : the impugned orders are set a side and the judgment of conviction passed by the Chief Magistrate is restored. ITO v Mangat Ram Norata Ram Narwana and another ( 2011) 336 ITR 624/ 57 DTR 257 / 242 CTR 113/ 200 Taxman 432/(SC). S. 282: Service of notice‐Received by assessee‐ Service on counsel authorized to receive all documents.( S 288, Income Tax (Appellate Tribunal) Rules ,1963 . R 35,Code of Civil Procedure Code , O.3. r 3. ). The assessee’s counsel who duly authorized to receive all documents on behalf of the assessee, received the certified copy of the order of the Tribunal , which was passed it on to another counsel of the assessee from whom the assessee collected the certified copy of order . On appeal to the High Court with an application for condonation of delay , in filing the appeal , contending that certified copy of the order of Tribunal was not served on the assessee by the office of the Tribunal in accordance with rule 35 of the Income Tax ( Appellate Tribunal) Rules , 1963 .The court held that the phrase “ received by the assessee” means received by assessee either him self or through his authorized agent. The counsel was empowered to accept the copy of the order of the Tribunal and hence the service on him was valid service for purposes of calculation of limitation for filing an appeal . Thus the appeal filed by the assessee was barred by limitation.( A.Y. 1997‐98). Sultanpur Kshetriya Grmin Bank v JCIT ( 2011) 336 ITR 156 ( All) (High Court). S.288 (2): Authorised Representative‐ Need not be a registered Income Tax practitioner. Under rule 49 (a) , of the Income tax Rules ,1962 , an authorized income tax practitioner means any authorized representative as defined in clause (v) or clause (vi) or clause (vii) of section (2) of section 288 of the Income tax Act , 1961, for appearing before the Tribunal. It can not be read to mean that an authorized representative as defined in sub –section (2) has to get him self registered as an authorized income tax practitioner. Section 288 (2) does not say that the authorized representative shall also be an authorized income tax practitioner registered under rule 54 and 55 of the Rules .The right given in this respect by the Act can not be diluted by the Rules nor can it be restricted , by specifying a procedure for registration. The right given to an assessee to appoint a qualified authorized representative can not be denied. Vidya Sikshaa Educational and Charitable Trust v CIT ( 2011) 11 ITR ( Trib) 236 ( Chennai) (Trib). Chapter XXII.‐ Miscellaneous . S. 2 (5A): Chargeable interest‐ Financial company‐Business of hire purchase and leasing.


High Court has not examined whether the transactions entered into by the assessee constituted financial transactions so as to attract the provisions of the 1974 Act , apart from the fact that the issues covered a wide spectrum, the impugned order is set a side and matter restored back for fresh adjudication. Motor & General Finance Ltd v CIT ( 2011) 242 CTR 472 ( SC). Editorial.‐ CIT v Motor and General Finance Ltd ( 2010) 236 CTR 487/ 48 DTR 118 ( Delhi) (High Court ) set a side. S. 2 (5): Chargeable interest‐Interest on loans and advances‐ Bills discounting. ( S. 2 (7),5 , 6,). Sections 5 and 6 of the Interest Act, specifically exclude the interest accruing or arising to a credit institution on loans and advances made to other credit institutions from the purview of chargeable interest and, therefore, interest received by the assessee on loans and advances made under the bills rediscounting scheme from different banking companies to which Banking Regulation Act 1949, applies, does not form part of chargeable interest. (A.Y. 1992‐93). National Insurance Co Ltd v CIT ( 2011) 58 DTR 137 ( Cal) (High Court). International decisions. Software License income is assessable as “Royalty” International Business Machines Corporation & IBM World Trade Corporation (IBM), both US companies, entered into a “Software License Agreement” with IBM Australia, an Australian company, under which they granted the latter “the non‐exclusive rights (i) to license and distribute copies of IBM Programs for their ultimate use by customers, (ii) to use such IBM Programs in revenue producing activities, (iii) to use such IBM Programs internally, (iv) to make or have made copies for the purposes described above, for distribution to affiliated companies etc“. In consideration, IBM Australia agreed to pay IBM a fee of 40% of the revenue billed for each copy of an IBM program distributed to a third party. IBM Australia initially withheld tax on the payments on the basis that it constituted “royalty” under Article 12(4) of the Australia‐USA DTAA though it later sought a refund on the basis that the whole payment was not royalty which was rejected by the Department. IBM filed an application for a declaration that the whole of the amounts received was not assessable as “royalty“. HELD dismissing the application: (i) Under Article 12(4) of the Treaty, “royalty” is defined to mean “consideration for…the right to use any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right” (Article 12(4)(a)(i)) or “…. the supply of technical … or commercial knowledge or information” or for “the supply of any assistance of an ancillary and subsidiary nature” to enable the application of the rights referred to in Article 12(4)(a)(i) or the knowledge/information referred to in Article 12(4)(b)(i) (Article 12(4)(b)(ii)); (ii) On facts, the argument that the SLA is in essence a distributorship agreement for the marketing of IBM computer programs and that the IP licenses granted to IBMA is only to enable it to carry on the function of a distributor is not acceptable. The SLA is not a distribution agreement which confers distribution rights independently of the grant of IP rights. There is no reference in the SLA to the payments being for the exercise of general distributorship rights. Rather, the payments are described as being for the acquisition of the stated IP rights. The detail of the SLA concerns the definition of IP and IP rights. There is no such detail with respect to distribution rights. The rights/content granted by the SLA are, in each case, rights/content of a kind contemplated by Article 12(4) and so the whole of the consideration is assessable as “royalty”. International Business Machines Corp v comm. Of taxation (Federal Court of Australia). www.itatonline.org. S. 282. Service of notice ‐ Reassessment – Service of notice on chartered accountant. ( S 148.) Service of notice under section 148 on a chartered accountant who was not empowered to receive such notice on behalf of the assessee company or any other person who was not authorised to receive was not a valid


service of notice on the assessee , more so when it was not shown that the assessee was keeping out of way for the purpose of avoiding service of notice or that there was any other reason that the notice could not be served on the assessee in the ordinary way and therefore , assessment completed pursuant to said notice was bad in law. ( Asst year 1999‐2000). Harsingar Gutkha (P ) Ltd v Dy CIT ( 2011) 138 TTJ 318 (lucknow ) (Trib). WEALTH TAX S. 2(ea)(3) : Wealth Tax – Asset – House ‐ Business Centre ‐ (S. 7 Schedule III, R. 3, 5 & 8). Premises in a business centre cannot be said to be a house within the meaning of cl. (3) of section 2(ea). The assessee had given the premises on lease under an agreement which had all the covenants that are usually found to be included in a lease and it cannot be said that the agreement was for a licence and therefore, it cannot be said that he was in occupation of the property for the purpose of a business or profession carried on by him so as to exclude it from the definition of the term “asset”.(A. Y. 1997‐98 and 1998‐99) Cravatex Ltd. vs. Addl. CIT (2011) 52 DTR 123 (Mum.)(Trib.) S. 2(ea) : Wealth Tax Act – Asset – Ware House – Purpose of Business. In a case where the assessee owns a warehouse which is let out on rental basis and the same is not used by the assessee for the purposes of its business but is used by the tenant for its business, the warehouse is to be excluded as an asset in view of Section 2(ea)(i)(5) of the Act. Dy. CIT vs. Hind Ceramics Pvt. Ltd., WTA No. 42 & 43/Kol.2010, dt.07‐01‐2011, ITAT Kolkata ‘B’ Bench, BCAJ pg. 27, Vol. 42‐B, Part 5, February 2011 (Trib.) S. 2(m) : Wealth – Tax ‐ Net Wealth ‐ Debt Owed ‐ Security Deposit Security deposit received against the lease of chargeable property, is debt owed, that deposit invested in securities exempt from wealth tax is not relevant. Debt deductible net wealth.(A.Y. 1986‐87 and 1988‐89) Miss Denna J. Jeejeebhoy vs. WTO (2011) 330 ITR 149 / (2009) 222 CTR 202/180 Tax 586/ 18 DTR 273(Bom.)(High Court) S. 2(m) : Wealth Tax ‐ Net Wealth ‐ Belonging to Assessee – Assets ‐ Contraband Article. Gold given on trust by the assessee to some persons which has neither returned by them nor recovered by the police is to be treated as lost once civil remedy has became time barred and it is not to be included in the net wealth of the assessee. Gold alleged given by assessee to third parties which was recovered from third parties and has been delivered to Gold control authority by an order of the Court, same being a contraband article, cannot be said to be assets belonging to the assessee on the relevant valuation dates and therefore, it is not includible in its net wealth. Meghji Girdhar (HUF) vs. CWT (2011) 52 DTR 397 / 239 CTR 411 (MP)(High Court) S. 16(4) : Wealth Tax – Reassessment – Amalgamation ‐ Notice issued to non existing person is void ‐ Reopening Notice issued to Amalgamating Co. Void & not saved by section 292B (S. 17, 42C Income Tax ‐ S. 292B). The law is well settled that the jurisdiction to reopen a proceeding depends upon issue of a valid notice. If the notice is not properly issued, the proceedings are ultra vires. A notice issued on a non‐existent person is void. The fact that the assessee has filed a return in response to the notice makes no difference. Section 42C (S. 292B) does not save the defect in the notice. The defect goes to the root of the jurisdiction to reopen the proceedings. L. K. Agencies Pvt. Ltd. vs. WTO (Calcutta)( High Court) Source: www.itatonline.org)


S. 17. Reassessment‐ Notice to a person who is not in existence‐ Amalgamated company‐ Reasons .(S.42C.). Notice under section 17 issued to a person who is not in existence at the time of issuing such notice is not valid .Fact that the assessee (Amalgamated company) subsequently filed its return with the objection that notice in the name of amalgamating company is invalid cannot cure the defects which go to the root of the jurisdiction to reopen the proceedings. Reason for initiation of reopening proceedings need not be known to the assessee by reflecting the same in the notice. L.K. Agencies ( P) Ltd v CWT (2011) 55 DTR 138 ( Cal) (High Court). S.17: Reassessment – Wealth – tax Act, 1957 –Reasons‐ Notice. Reasons for initiation of reopening proceedings need not be made known to the assessee by reflecting the same in the notice issued under section 17 of the Wealth tax Act, 1957. I.K. Agencies (P) Ltd. vs. CWT (2011) 55 DTR 138 (Cal)(High Court). S.17.Reassessment –Non existing person‐ Wealth – tax Act, 1957. Reassessment notice under section 17 of the Wealth tax Act issued in the name of a person who is not in existence at the time when the notice was issued, notice issued on such non existing person was held to be invalid and such defect which goes to the root of the jurisdiction to reopen the proceedings cannot be cured. I.K. Agencies (P) Ltd. vs. CWT (2011) 55 DTR 138 (Cal)(High Court). Natural Justice : Adjudication – Duty of Disclosure ‐ Extent and Scope ‐ Foreign Exchange The documents which the appellants wanted were documents upon which no reliance was placed by the authority for setting the law in to motion. The demand for supply of all documents in possession of the authority was based on vague, indefinite and irrelevant grounds. The appellants were not sure whether they were asking for copies of documents in the possession of the adjudicating authority or in the possession of the authorized officer who lodged the complaint. The only object in making such demand was to obstruct the proceedings. Kanwar Natwar Singh vs. Director of Enforcement (2011) 330 ITR 374 (SC)(2010) 160 Comp Cas 301 (SC)./ Kanwar Jagat Singh vs. Director of Enforcement (2011) 330 ITR 374 (SC)(2010) 160 Comp Cas 301 (SC). Interpretation – Precedent ‐ Contextual Interpretation A judgment cannot be read like a statute. Courts should not place reliance on decision without discussing factual situation involved in the said decision and how it would apply to the facts involved in the subsequent case. A ratio laid down by a higher forum should not be taken out context and construed like a statute.(A. Y. 2001‐02) Iskrareco Regent Ltd. vs. CIT (2011) 237 CTR 239 / 49 DTR 185 (Mad.)(High Court) Companies Act ‐ Merger S. 391 : Companies Act – Merger – Demerger ‐ Sanction of Court ‐ Tax Avoidance – Gift. Proposed scheme of arrangement which contemplates transfer of passive infrastructure assets of the petitioner and other group companies to another group company without any consideration and thereafter amalgamation / merger of the transferee company with another company is explicitly a scheme of tax avoidance as it is devised to artificially deplete the taxable profits of the transferor companies apart from evading tax on capital gains by showing the transfer as gift and therefore, the proposed scheme cannot be sanctioned under 391 of the Companies Act, 1956. Vodafone Essar Gujarat Ltd., In Re (2011) 52 DTR 293/ 239 CTR 229 (Guj.)(High Court)


Appeal‐ Condonation of Delay ‐ Substantial Justice – Appeal ‐ Unless mala fides are writ large, delay should be condoned. Matters should be disposed of on merits and not technicalities. Justice can be done only when the matter is fought on merits and in accordance with law rather than to dispose it of on such technicalities and that too at the threshold. Unless malafides are writ large on the conduct of the party, generally as a normal rule, delay should be condoned. Improvement Trust vs. Ujagar Singh (2010) 6 SSC 786 / (2010) 6 Scale 173 (Supreme Court) Appeal‐Condonation of delay – Departmental SLP Dismissed The department filed a SLP challenging the order of the Bombay High Court declining to condone delay of 656 days in filing the appeal. The delay was explained as having been caused by “several facts such as non traceability of case records, procedural formalities involved in the Department and the papers are to be processed through different officers in rank for their comments, approval etc. and then the preparation of the draft of appeal memo, paper book and the administrative difficulties such as shortage of staff“. HELD dismissing the SLP: In our opinion, the said explanation does not make out a sufficient cause for condonation of delay in filing the appeal before the High Court. In that view of the matter, we do not find any ground to interfere with the impugned judgment. The Special Leave Petition is dismissed on the ground of delay as well as on merits. CIT vs Indian Hotels Co. Ltd. (Supreme Court) (www.itatonline.org) S. 35B :Offences and Prosecution‐ Willful failure to file return‐ Sanction‐Criminal procedure Code S. 245(1). ( S. 35O ). Sanction authority has sanctioned the prosecution, without application of mind ,there was no evidence that default was willful. The Court held that prosecution was not valid.( A.Y. 1993‐94). J. Jayalaitha v Asst CIT ( 2011) 337 ITR 1 /60 DTR 169/ 243 CTR 467( Mad) (High Court). Finance Act ,1983‐ Wealth tax‐ Valuation‐Land‐Urban land Ceiling Act‐Schedule III. Assessee’s land was declared as surplus under ULCRA but possession was not taken over by authorities and in view of section 3 and 4 of repealed Act, 1999 ,the assessee continued to be owner of the land and its value was includible in net wealth. Land being subject to ULCRA , the same has to be valued taking in to consideration restriction under ULCRA. ( A.Ys 1984‐85 to 1989‐90, 1991‐92 & 1992‐93). CWT v Chemsford Club Ltd ( 2011) 243 CTR 89 ( Delhi) (High Court) GENERAL Transfer Pricing ‐ Australian Tax Office Ruling on Transfer Pricing Implications The Australian Taxation Office has issued a ‘Taxation Ruling’ dated 9.2.2011 in which it has discussed the application of the transfer pricing provisions to business restructuring by multinational enterprises. The Ruling considers situations where such transfers occur between MNE members to implement changes in the MNE’s existing business arrangements or operations. Common examples are product supply chain restructurings involving conversion of a distributor into a sales agency arrangement or of a manufacturer into a provider of manufacturing services. Business restructurings also commonly involve the transfer of the ownership and management of intangibles such as patents, trademarks and brand names. The Ruling explains the following process for setting or reviewing transfer pricing Step 1: Characterize the international dealings between the associated enterprises in the context of the taxpayer’s business Step 2: Select the most appropriate transfer pricing methodology or methodologies Step 3: Apply the most appropriate method and determine an arm’s length outcome


The Ruling refers extensively to the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines)”. The Ruling also gives practical examples to explain the transfer pricing law. Source: www.itatonline.org Appeal ‐ Inter Departmental Litigation ‐ Public Sector Undertakings ‐ Clearance from Committee on Disputes ‐ Supreme Court recalls law requiring PSUs to obtain COD approval Larger Bench of Supreme Court recalled its order laid down in ONGC vs. CCE 104 CTR (SC) 31 and ONGC vs. CIDCO (2007) 7 SCC 39, that no litigation could be proceeded with in the absence of COD approval in case of dispute between Government and PSUs. It was held that the mechanism was set up with a laudatory object. However, the mechanism has led to delay in filing of civil appeals causing loss of revenue. Thus, in view of the said circumstances it was decided by Larger Bench to recall the directions of this Court. Electronics Corporation of India Ltd. vs. UOI / CCE vs. Bharat Petroleum Corpn. Ltd. (2011) 51 DTR 193 / 238 CTR 353/332 ITR 58 (SC) (5 Member Bench) / Source: www.itatonline.org Interpretation ‐ Binding Precedent ‐ Subsequent Decision of smaller Bench of Supreme Court ‐ Article 149 of the Constitution of India. If subsequent decision of smaller Bench of Supreme Court interpreting decision of larger Bench of Supreme Court is placed before a High Court, latter is bound to follow subsequent decision by smaller Bench which interprets decision of Larger Bench because that is interpretation of larger Bench of Supreme Court and High Court cannot make a different interpretation than one made by subsequent decision of Supreme Court which is binding upon it. (A. Y. 1996‐97) CIT vs. Oberoi Hotels (P) Ltd. (2011) 198 Taxman 310 / 59 DTR 272(Cal.)(High Court) Transfer Pricing – Holding and Subsidiary Co. ‐ Canada Court Ruling – “Implicit support” by holding company to subsidiary to be considered in determining “arms length” price In determining the arms length price, all economically relevant factors (including the “implicit support” that the subsidiary enjoys from the holding company) have to be considered. The explicit guarantee by the holding company also has a value to the subsidiary. The “yield method” can be adopted which requires a comparison between the credit rating which an arm’s length party, in the same circumstances as the assessee, would have obtained and the credit rating which would have been obtained without the explicit guarantee. The Queen vs. General Electric Capital Canada Inc. Source: www.itatonline.org Precedent‐Advance Rulings – Binding nature‐Binding on others. The Andhra Pradesh High Court held that the Advance Ruling Authorities order under section 67(4)(11) was binding not only on the applicant but also similar situated other dealers. Tirupati Chemicals, Vijaywada & Anr. vs. Dy. Commercial Tax Officer (2011) 52 APSTJ P. 48 (AP)(High Court) Contempt of Courts Act 1971 ‐ Malicious Imputations against Judicial Officer ‐ Apology tendered not accepted ‐ (S. 6) The contemner has made wild allegations against the judicial officer, when contempt proceedings were initiated he tendered apology. The Hon’ble Court refuse to accept the apology. Before discussing the facts the Hon’ble Court referred the observation of Apex Court in M. R. Parashar vs. Dr. Farooq Abdullah AIR 1984 SC 615 which reads as under. “The Judges cannot defend themselves. They need due protection of law from unfounded attacks on their character. Law of Contempt is one such laws. We would like to remind those who criticise the Judiciary


that it has no form from which to defend itself. The legislature can act in defence of itself from the floor of the House. It enjoys privileges which are beyond reach of law. The executive is all powerful and ample resources and media at its command to explain its actions and, if need be, to counter attack. Those, who attack the judiciary must remember that they are attacking the institution which is indispensable for the survival of the rule of law but which has no means of defending it self‐‐‐. The sword of Justice is in the hands of Goddess of Justice, not in the hands of mortal judges. Therefore, Judges must receive the due protection of law from unfounded attacks on their character”. Accordingly the Hon’ble Court held that benefit of section 6 of the Contempt Courts Act 1971 may not be given to the contemner as the allegations imputed against the judicial Officer were not in good faith. High Court on its own motion vs. Dnyandev Tulshiram Jadhav and State of Maharashtra (2011) Vol 113 920 Bom. L.R. 1145 (April) Note:‐ Refer Contempt of Court. www.itat.online.org Precedent‐ Binding nature‐ Non Jurisdictional High Court‐ Tribunal. In the absence of any contrary view , decisions of non jurisdictional High Court have to be followed by the Tribunal . It is not permissible for the authorities below to ignore the decision of the higher forum on pretext that an appeal is filed in the Supreme Court, which is pending or that steps are to be taken to file an appeal (Asst year 2007‐08). Addl CIT v Royal Bank of Scotland N.V. ( 2011)130 ITD 305/ 138 TTJ 698 (Kol) (Trib). Bias‐Question of “bias” in judicial function must be seen from “reasonable man’s” perspective. To decide whether there is “bias”, the “real likelihood test” has to be adopted. In each case, the Court has to consider whether a fair minded and informed person, having considered all the facts would reasonably apprehend that the Judge would not act impartially. To put it differently, the test would be whether a reasonably intelligent man fully apprised of all the facts would have a serious apprehension of bias. In deciding the question of bias one has to take into consideration human probabilities and ordinary course of human conduct; P. D. Dinakaran, Justice v Hon’ble Judges Inquiry committee (supreme court) www. Itatonline.org. Black Money‐DTAA Does Not Protect Tax Evaders. SIT Formed To Probe Black Money. We are convinced that the said agreement, by itself, does not proscribe the disclosure of the relevant documents and details of the same, including the names of various bank account holders in Liechtenstein. The “information” that is referred to in Article 26 is that which is “necessary for carrying out the purposes of this agreement”, i.e. the Indo‐German DTAA. Therefore, the information sought does not fall within the ambit of this provision. It is disingenuous for the Union of India, under these circumstances, to repeatedly claim that it is unable to reveal the documents and names as sought by the Petitioners on the ground that the same is proscribed by the said agreement. It is for the Union of India, and the courts, in appropriate proceedings, to determine whether such information concerns matters that are covered by the double taxation agreement or not. Ram Jethmalani vs UOI( 2011) 200 Taxman 171 (SC) (www.itatonline.org) Appeal‐ CBDT directed to formulate uniform policy with strict parameters on appeal filing. It is high time when the Central Board of Direct and Indirect Taxes comes out with a uniform policy, laying down strict parameters for the guidance of the field staff for deciding whether or not an appeal in a particular case is to be filed. We are constrained to observe that the existing guidelines are followed more in breach, resulting in avoidable allegations of malafides etc on the part of the officers concerned. CCE vs Doaba Steel Rolling Mills ( SC) . www.itatonline.org.


Prosecution‐FERA, 1973 – Ss. 8, 9, 50, 51 and 56 – Adjudication proceedings and criminal proceedings can be initiated simultaneously and independent of each other – finding in the adjudication proceeding is not binding in the criminal proceeding – adjudication proceedings does not attract the provisions of Art. 20(2) of the Constitution or S. 300 of the CrPC – if the exoneration in the adjudication proceeding is on the merit, a criminal prosecution on the same facts cannot be allowed to continue Standard Chartered Bank v. Directorate of Enforcement [2006] 130 Comp Cas 341 (SC) distinguished. Radheshyam Kejriwal v. State of West Bengal and Anr. [2011] 333 ITR 58 / (266) ELT 294 (SC) Interpretation of Taxing statutes‐ Term not defined under income tax act – definition in different acts and meaning common parlance to be taken The High Court held that though specific provisions are made in respect of investment in bonds of financial corporation state or central govt. that would not mean that one has to give restrictive meaning to the term debenture more particularly when the term is not defined under the Act. The principle of interpretation is that in the absence of any definition given to a particular term in a statute, the meaning which is to be given to the term is the meaning in which it is understood in common parlance. DIT v. Shree Visheshwar Nath Memorial Public Charitable Trust [2011] 333 ITR 248 (Delhi) (High Court). Precedent‐ Dismissal of appeal by Supreme Court. Though the appeal is dismissed by Supreme Court in one line order, High Court’s order stand merged and operates as binding precedent. Binani Industries Ltd v CIT ( 2011 ) Tax LR. 343 ( Cal ) (High Court). General Anti Avoidance Rule (GAAR) Law Explained The assessee, a Canadian Co controlled by its sole director Peter Cohen, earned capital gain of $7.7M from the transfer of property. Another company named “Rcongold Systems Inc” which was controlled by the assessee issued 8,000 voting “common shares” for a consideration of $8M to the assessee. Thereafter, Rcongold issued 80,000 Class “E” non‐voting preferred shares with a redemption price of $100 each to the shareholders (the assessee) by way of dividend. The redemption price of the Class “E” non‐voting preferred shares was identical to the fair market value (“FMV”) of the common shares. The said 8,000 “common shares” of Rcongold were sold by the assessee to “the Peter Cohen Trust” for an amount of $65, which resulted in the assessee reporting a capital loss of $7.9 M. The assessee’s claim to set‐off the said capital loss of $7.9M against the capital gain of $7.9M was denied by the AO on the ground that the scheme was one for “tax avoidance” and hit by the “General Anti Avoidance Rule” (“GAAR”) in s. 245 of the Canadian Income‐tax Act. HELD upholding the stand of the AO: (i) For the GAAR in s. 245 to apply, three aspects have to be satisfied (a) the assessee must obtain a “tax benefit” from a “transaction” or “series of transactions”, (b) the transaction(s) must be an “avoidance transaction” in the sense of not having been “arranged primarily for bona fide purposes other than to obtain the tax benefit” and (c) the avoidance transaction(s) must be abusive of the provisions of the Act, the burden being on the AO to establish the abuse; (ii) On facts, all three requirements were satisfied because


(1) there were a “series of transactions” comprising of (a) the incorporation of Rcongold, (b) the subscription for shares of Rcongold by the assessee, (c) the declaration of a stock dividend by Rcongold, (d) the creation of the trust and (d) the sale by the assessee of shares of Rcongold to the trust and there was a “tax benefit” as a result of the transactions; (2) the primary purpose of each transaction in the series was the avoidance of tax. While the incorporation of Rcongold and the issuance by it of common shares were not avoidance transactions in and of themselves, they were necessary steps taken in furtherance of the scheme. The primary purpose of the entire series of transactions was to obtain a tax benefit and so the entire series of transactions is an avoidance transaction; (3) The transactions amounted to “abusive tax avoidance” because they sought to defeat the underlying rationale of the capital loss provisions in the Act. The assessee sought to create an “artificial capital loss” without incurring any “real economic loss”. Triad Getsco Ltd vs H. M. the Queen (Canada Tax Court). www.itatonline.org. Dependent Agent Permanent Establishment: Tests to determine Agent’s right to bind, & dependence on, principal The assessee, a company registered in the Netherlands but resident in Ireland for tax purposes appointed Dell AS, a Norwegian company, as its “commissionaire” for sales to customers in Norway. Dell AS entered into agreements in its own name and its acts (under the commission agreement and Commission Act) did not bind the principal. The assessee claimed that it was not taxable in Norway in respect of the products sold through Dell AS on the ground that Dell AS was not its “Dependent Agent Permanent Establishment” (DAPE) under Article 5(5) of the Norway‐Ireland DTAA on the ground that (a) the agent had no authority to enter into contracts “in the name of the assessee” and legally bind the assessee and (b) the agent was not a “dependent” agent. However, the income‐tax department took the view that Dell AS constituted a PE under Article 5(5) of the DTAA and that 60 percent of Dell Products’ net profit on sales in Norway was attributable to the PE. This was confirmed by the Oslo District Court. On appeal by the assessee to the Court of Appeal, HELD dismissing the appeal: (i) Under Article 5(5) of the DTAA, an agent is considered a permanent establishment for the principal if two conditions are fulfilled (i) the agent must be “dependent” on the principal and (ii) the agent must have the right to conclude contracts “in the name of” the principal. The question whether the agent has the authority to conclude contracts on behalf of the enterprise has to be considered, not from a literal sense whether the contracts are “in the name of the enterprise”, but from a functional sense whether the agent “in reality” binds the principal. The objective of Article 5 (5) is to protect the principle of source taxation, i.e. that the tax shall be due to the country where the revenue was created. This principle would be disregarded if only the commission relationship was considered despite the financial and legal attachment between the agent and the principal being strong. To ask if Dell AS “in reality” binds Dell Products is in accordance with the functional interpretation of Article 5 (5). The “substance” must prevail over the form. The fact that a commissionaire under the Commissionaire Act and the commission agreement does not bind the principal through his sales is not enough to rule out that a permanent establishment does not exist (Vienna Convention, OECD Model Convention Commentary, Commentaries by Klaus Vogel & ArvidSkaar considered, decision of the French SAT in Zimmer that as the commissionaire did not bind the principal, it was not a PE despite dependence on the principal not followed); (ii) On facts, Dell Products was “in reality” bound by the contracts concluded by Dell AS because (a) all sales were made under the trademark “Dell”; (b) the sales were made on standard / approved conditions laid down by Dell


Products; (c) in practice, all of the agent’s agreements were honoured by the principal and (d) there were no instances where the agent’s sales have not been accepted by the principal; (iii) The question whether the agent is “dependent” on the principal has to be decided on the application of various tests such as the degree of instruction and control. On facts, Dell AS was “dependent” on Dell Products because (a) Dell AS was only allowed to sell permitted products on conditions of prices and guarantees determined by Dell Products, (b) there was an overlap of board members in the two companies and a board member of Dell Products was the general manager of Dell AS, (c) due to the integrated accounting system of the Dell companies Dell Products had full insight to the finances of Dell AS, (d) under the commission agreement, Dell Products had access to Dell AS’ premises, (e) Dell AS sold goods as a commissionaire only on behalf of Dell Products though it had the theoretical right to sell for others; (f) all business of Dell AS was done under the trademark Dell, its letterheads, agreements and advertisements had the logo “Dell”. Dell AS was thus “branded” identically as the rest of the Dell Group, but without owning the brand. All these facts made Dell AS fully dependent on the principal. Without the commission agreement, Dell AS may as well close down its operations. The fact that the agent acted independently in matters of staff hire, purchase and lease of assets and premises, etc was irrelevant because the “big picture” showed Dell AS to be dependent on Dell Products; (iv) The determination of profits “attributable” to the PE has to be done as if the agent was “independent” of the principal. On the methods to be used, Article 7(2) of the DTAA provides for the “direct method” of allocating all costs and revenue between the HO and the PE while Article 7(4) provides for the “indirect method” of allocating only the net profits using keys such as sales, revenues, expenses, number of employees, capital structure or a combination of these factors. In Norway, the “indirect method” is in practice. This is practical because the accounts do not permit individual items of income and expenditure to be identified for allocation purposes and also because it gives a result which is in accordance with the arm’s length principle. While under Article 7(2), a two‐step procedure has to be adopted by first determining a commercial remuneration for Dell AS and then a commercial profit for other functions performed by the PE, under Article 7(4) it is sufficient that the result to a reasonable degree corresponds to the arm’s length principle and requires that the PE should be allocated revenues in accordance with its functions, risk and assets used. On facts, the value creation occurred through sales made by Dell AS and it was “the major value driver”. Dell Products’ functions and contribution to the value creation was limited compared to the activity of Dell AS. Consequently, allocating 60% of Dell Products’ profits from sales in Norway to the PE was reasonable (over & above the assessment of commission in the agent’s hands). Dell Products vs Tax East (Norway Court of Appeal) www.itatonline.org Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non‐commercial use) without express written permission of itatonline.org.