consolidated digest of case laws jan 2013 may 2013

ConsolidatedDigestofCaseLaws(Jan2013toMay2013)http://www.itatonline.org

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CONSOLIDATEDDIGESTOFCASELAWS(JANUARY2013TOMAY2013(Journals Referred: ACAJ/AIR/AIFTPJ/BCAJ/BLR/IT Review//Comp Cas/CTR/CCH/DTR /E.L.T./GSTR /ITD /ITR /ITR (Trib) /JT /SOT /SCC /TTJ /Tax LR/Taxman/Tax World/ VST/www.itatonline.org)S.2(1A):AgriculturalIncomeAssesseefilingletterexplainingownershipofagriculturallandpurchasedin 198687 and disclosing capital gains on sale thereof in subsequent yearSeized material notsuggestinginflationofagriculturalincomeIncomenottobetreatedasincomefromothersources.[S.153A]

TheAssessingOfficermadeanadditiononthegroundthatnoagricultural landswererecorded inthebalancesheetandtheassesseehadnotshownanydocumentaryevidence insupportofhisclaim.Heaccordingly treated the incomeclaimedasnotagricultural incomebutas income fromothersources.Before the Commissioner (Appeals) the assessee contended that complete details of agriculturalholdingswerefiledbeforetheAssessingOfficerandthathehadalsoofferedcapitalgainstotaxonsaleof agricultural lands in the financial year200506,whichwas acceptedby theAssessingOfficer.TheCommissioner(Appeals)heldthatthissortofadditioncouldnotbemade inanassessmentcompletedundersection153AwithoutanyreferencetotheseizedmaterialandthatitwasalsonotthecaseoftheAssessing Officer that the seized material, if any, suggested inflation of agricultural income. TheCommissioner (Appeals) treated the income as agricultural income and not as income from othersources as the assessee had filed a letter explaining that the ownership of the agricultural landpurchasedintheyear198687bywayofproperevidenceandtherequirementofusingmaterialbeingfoundduringthecourseofsearchoperationwasnotofanyrelevanceandthatitwasnotthecaseoftheAssessingOfficerthattheseizedmaterial, ifany,suggested inflationofagricultural income.Onappeal:Held,thattheorderoftheCommissioner(Appeals)wascorrect.(A.Ys.20022003to20082009)

ACITv.MirMazharuddin(2013)22ITR314(Hyd.)(Trib.)

S.2(14):CapitalassetRuralagriculturallandDistanceof5Kmisheldtobecapitalassetandliabletobeassessedascapitalgain.TheCentralGovernmenthaspublishedanotificationdated611994 contemplating that theareauptoadistanceof5kmfromthemunicipallimitsofPanchkulainalldirectionsshallnotbean agricultural land. Since the impugned land fell outside the 5 km limit, itwas held to becapitalAsset.The expression 'Municipality' in section 2(14) of theAct is verywide. It is notrestricted to aMunicipality constituted under the relevantMunicipal Laws such asHaryanaMunicipalAct,butitwouldincludeanyotherareaknownbyanyothername.Subclause(a)ofclause (iii) of section 2 (14) deals with an area which falls within the jurisdiction of aMunicipality,whereas clause (b)enable theCentralGovernment todeclareanarea situatedwithin8kmsfromthe local limitsofanyMunicipalityreferredto inclause(a)tonotifyhavingregardtoextentandscopeforurbanizationofthatarea.TheNotificationdated611994takesinto its ambit an area within 5 kms of the Municipality in the expression 'capital asset'.


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Therefore, the urban area developed by the Authority forms part of a Municipality. Theexpression 'byanyothername'appearing in item(a)ofclause(iii)ofSection2(14)hastobereadejusdem generiswith the earlier expressions i.e. municipal corporation, notified areacommittee, townarea committee, town committee. Inviewof theabove, it isheld that theland, subjectmatterofacquisition, isacapitalasset fallingwithin the scopeofclause (iii)ofsection2(14).(AY200405)CITv.RaniTaraDevi(Smt.)(2013)214Taxman321/85DTR374/258CTR225(P&H)(HC.)S.2(14):CapitalassetPersonaleffectInheritedassetsSaleconsiderationisnotliabletocapitalgaintax.(S.45)Assessee sold certain items such as furniture, carpets, paintings,watches and crystal itemsinheritedfromhisfatherinassessmentyearinquestion,saiditemsbeinginnatureof'personaleffects,'TheCourtheldthattheassesseewasnotliabletopaycapitalgaintaxonsaleofthoseitems.Amendment tosection2(14),whichhasbeenbroughtaboutby theFinanceAct,2007with, effect from 142008 andwhich alters the clause pertaining to 'personal effects,' hasprospective application.With effect from 142008 even paintings, sculptures,works of art,archaeologicalcollectionsanddrawings,inadditiontojewellery,havebeenexcludedfromtheexpression'personaleffects'whichwouldbeapplicablefrom142008.(A.Y.200203)FaizMurtazaAliv.CIT(2013)214Taxman30/85DTR33(Delhi)(HC)S.2(14):Capital assetAgricultural land situatedbeyond8 kms frommunicipal limits andbeyond19kms from centre of cityNot a capital assetLand shown in revenue records as agriculturalcompensationisnotassessableascapitalgains.(S.45)

The assessee's lands were acquired by Reliance Projects Engineering Association Ltd through theGovernment of Gujarat and the assessee received compensation. He claimed the same as theagriculturalincomeconsideringitsagriculturalnature.TheAssessingOfficerrejectedtheclaimholding,thattheassesseefailedtoprovideproofthatthelandwasagriculturalanddidnotsubstantiatethatthelandwasoutside thepurviewof thedefinitionof "capitalasset"under section2(14)of theAct,andtreated the income as longterm capital gains. The Commissioner (Appeals) held that the land waslocatedinavillagewhichwas19.34kmsawayfromthemaincity.Further,theCommissioner(Appeals)opined that the Assessing Officer invoked the powers conferred by the Act and have obtained theGovernmentrecordsfromtheLandRevenueDepartmentforascertainingwhetherthe landfellwithintheboundariesof8kmsfromthemunicipallimitsornot.Accordingly,theCommissioner(Appeals)heldthatthelandwaslocatedoutsidethevillage,whichwaslocatedatadistanceofmorethan19kmsawayfromcityandgrantedrelieftotheassessee.OnappealbytheDepartment:

Held, dismissing the appeal, that the landwas located beyond 8 kms of theMunicipal limits of theJamnagarandwasalso locatedbeyond19kmsfromthecentreofthecityofJamnagar.Onthis issue,thedefinitionofcapitalassetprovidedinsection2(14)(iii)wasnotmet.Therewasnonotificationissuedby theCentralGovernment regarding thesamebeingacapitalasset.Therefore, the landheldby theassesseewasagricultural land.ItwasborneoutfromtherecordsoftheRevenueDepartmentthatthelandsweredescribedbytheDistrictCollector,Jamnagar,asagriculturallands.TherewasnomaterialinthepossessionoftheAssessingOfficertoholdthatthe landwasacapitalassetwithinthemeaningofsection2(14)oftheAct.ThedecisionoftheCommissioner(Appeals)didnotcallforanyinterference(A.Y.20072008).


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ITOv.AmrutilalB.Shah(2013)22ITR668(Mum)(Trib)

S.2(15): Charitable purposeTrade business or commercePublic utilityActivity of evolving,prescribing, standards Activities cannot be termed as business activityExemption wasgranted.(S.10)(23C).TheBureauof IndianStandards (BIS),a sovereignentity createdunder theBureauof IndianStandardsAct,1986,hadbeengrantedexemptionundersection10(23C).The Director of Incometax (Exemption) withdrew the said exemption on the ground thatactivitiesofBISwere in thenatureofbusinessandhence,coveredby theproviso tosection2(15).TheassesseechallengedthesaidorderbywayofWrittotheHighCourt,whereinitwasheld that, activities of Bureau of Indian Standards (BIS) in prescribing of standards ofgoods/articlesandenforcingthosestandardsthroughaccreditationandcontinuingsupervisionthroughinspection,etc.,cannotbeconsideredastrade,businessorcommercialactivitymerelybecausetestingproceduresinvolveschargingoffees.AccordinglyallowingthePetitiontheDIGwasdirectedtoissuetheexemptioncertificateundersection10(23C)oftheAct.Bureauof IndianStandardsvDGIT (Exemptions) (2013)212Taxman210/89DTR93 (Delhi)(HC)S.2(22)(e): Deemed dividendAccumulated profits do not include current years businessprofits since it accrues only at the end of year Deemed dividend assessable should bereducedfromtheaccumulatedprofits.Purposeofsection2(22)(e),accumulatedprofitsdonotincludecurrentyear'sbusinessprofit.itaccrues only at end of year. deemed dividend assessable in any of earlier years has to bereduced fromaccumulatedprofits. itwasnotassessed in thatyear,amountofaccumulatedprofithastobedeterminedondateonwhichloansweregivenbycompanyandnotatendofyear.Deemeddividendassessableshouldbereducedfromtheaccumulatedprofits,even if itwasnotassessedinthatyear.(A.Y.200708)P.SatyaPrasadv.ITO(2013)141ITD403(Visakhapatnam)(Trib.)S.2(22)(e):DividendDeemeddividendShareapplicationmoney Colourdevice Notloanoradvance,cannotbeassessedasdeemeddividend.Theassesseewasabeneficial shareholderof three companiesnamedKingstonPropertiesPLtd. (KPPL), New Dimensions Consultants P Ltd (NDCPL) & R. S. Estate Developers P Ltd(RSEDPL). NDCPL & RESEDPL advanced various sums of money to KPPL towards shareapplicationmoney.However,someoftheadvanceswerereturnedbyKPPLwhilesomewereadjusted towards allotment of shares. The AO held that the transaction was a colourabledeviceandaloanandadvancewhichfellwithintheambitofs.2(22)(e).Thesaidloanandadvance was assessed as deemed dividend in the hands of the assessee beneficialshareholder followingUniversalMedicare Pvt. Ltd. (2010) 324 ITR 263 (Bom). The CIT (A)reversedtheAO.OnappealbythedepartmenttotheTribunalHELDdismissingtheappeal:Share application money or share application advance is distinct from loan or advance.Althoughshareapplicationmoneyisonekindofadvancegivenwiththeintentiontoobtaintheallotment of shares/equity/preference shares etc., such advances are different form the


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normalloanoradvancesspecifiedbothinsection269SSor2(22)(e)oftheAct.Unlessthemalafide isdemonstratedbytheAOwithevidence,thebookentriesorresolutionoftheBoardoftheassesseebecome relevantand credible,which shouldnotbedismissedwithoutbringingany adverse material to demonstrate the contrary. It is also evident that share applicationmoney when partly returned without any allotment of shares, such refunds should not beclassifiedas loanoradvancemerelybecause shareapplicationadvance is returnedwithoutallotmentof share. In the instant case, the refundof the amountwasdone for commercialreasons and also in the best interest of the prospective share applicant. Further, it is selfexplanatorythattheassesseebeingabeneficialshareholder,derivesnobenefitwhatsoever,when the impugned share application money/advance is finally returned without anyallotmentofsharesforcommercialreasons.Inthiskindofsituations,thebooksentriesbecomereally relevant as they show the initial intentions of the parties into the transactions. It isundisputedthatthebooksentriessuggestclearlytheshareapplicationnatureoftheadvanceand not the loan or advance. As such the revenue hasmerely suspected the transactionswithout containing any material to support the suspicion. Therefore, the share applicationmoneymaybeanadvancebuttheyarenotadvanceswhicharereferredtoinsection2(22)(e)oftheAct.Suchadvances,whenreturnedwithoutanyallotmentorpartallotmentofsharestotheapplicant/subscriber,willnottakeanatureofthe loanmerelybecausethesame isrepaidorreturnedorrefundedinthesameyearorlateryearsafterkeepingthemoneyforsometimewiththecompany.So longastheoriginal intentionofpaymentofshareapplicationmoney istowardstheallotmentofsharesofanykind,thesamecannotbedeemedasloanoradvanceunlessthemalafideintentionsareexposedbytheAOwithevidence.(A.Y.200203to200708)DCITv.VikasOberoi(Mum.)(Trib.)www.itatonline.org.S.2(22)(e):DividendDeemed dividendLoans and advancesLegal fiction does not extend tobroadentheconceptofshareholdertomaketaxloansoradvancesasdeemeddividendinthehandsofdeemedshareholder.(CompaniesAct,S.153,187C)Duringsearch various papers relatingshare holding pattern ofAmod Stampings Pvt Ltdwereseized.Itwasfoundthatsaidcompanyhadgrantedloanstovariouscompanieswhereinshareholdingsandvotingpowerexceeded10percent.Itwasexplained thaton creationofTrustapartofsaidcompanyweresettledinfavourofTrustandafterexcludingofsharestheassesseedidnothavemorethan10percentvotingpowerandtheassesseehadnobeneficialinterestinthesaidTrust.TheAssessingOfficerheldthatcreationofTrustwasanafterthoughtandtaxedtheamountasdeemeddividend.BeforeCommissioner (Appeals) itwascontended thataspersection153oftheCompaniesActacompanyisnotpermittedtoincludethenameofthetrustintheregisterofmembers. Itwasalsocontendedthattheprovisionofsection187Chavebeenmadeineffectivew.e.f.13thDecember,2000andthereforethere isnorequirementatpresenttodeclarebeneficial interestetc.,thereforesuchbeneficial interestwas isnotdeclared intheregisteroftheCompanyortheRegistraroftheCompanies.HoweverCommissioner(Appeals)up held the addition.On appeal the Tribunal held that since the said Company was notpermitted to include name of Trust in its register, name which was earlier noted asshareholdersremainedsame,howeverthroughaBoardmeetingitwasresolvedtoacknowledgechange investingofshares,hence inviewofthefactsdeemeddividendcouldnotbetaxed inhands of assessee.Legal fiction created under section 2(22) (e) does not extend further for


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broadening concept of shareholder so as to tax loans or advances as deemed dividend inhandsofa'deemingshareholder'.(.AY.200607)KrupeshbhaiN.Patelv.Dy.CIT(2013)140ITD176(Ahd.)(Trib.)S.2(22)(e):DividendDeemeddividendCreditbalanceinCapitalaccountNonencashmentofchequetheamount iscreditedbacktocompanysaccountcannotbeassessedasdeemeddividend.The assessee is running a proprietorship concern which was converted into private limitedcompany.Therewascreditbalanceincapitalaccountoftheassesseeinproprietorshipconcernagainstwhichpaymentwasmadebyproprietorshipconcerntotheassessee.However,becauseofconversion,chequecouldnotbeencashedandsamewasreturnedtocompanywhichwascredited to the assessees accountby company. Subsequentlymoneywaswithdrawnby theassessee. Itwas held that the said amount could not be treated as deemed dividend. (A.Y.200809)Dy.CITv.RadheShyamJain(2013)140ITD244/86DTR42(Chandigarh)(Trib.)S.2(22)(e):DividendDeemeddividendAccumulatedprofitsSharepremiumaccountdoesnotpartakenatureofcommercialprofithencenotbetreatedasaccumulatedprofit.Sharepremiumaccountwouldnotpartakenatureof commercialprofitsand thus cannotbetreatedasaccumulatedprofit.(A.Y.200809)Dy.CITv.RadheShyamJain(2013)140ITR244(Chandigarh)(Trib.)S.2(22)(e):DividendDeemeddividendAdvancegiven tocompany inwhichassesseeholdssubstantialstakeisheldtobedeemeddividend.AO treatedadvance takenbyassessee froma company inwhichhaving substantial stakeasdeemeddividend. Itwascaseof theassessee thatsince theyhadmortgages theirpropertieswithbanktoenablecompanytoavailfinancefacilitiesfrombank,advancebycompanywasnotagratuitousloanoradvancebutinreturnforanadvantagewhichcompanyhadalreadyavailedonaccountofmortgagingofpropertiesdonebyassessee.However,itwasafactonrecordthatassesseehadnotproducedanydocumentstoprovefactthatpersonalpropertiesofassesseewereactuallymortgagedwith thebank for sakeofavailing loansby company.Assesseehadalso not produced any correspondence made either with bank or with company towardsreleaseofpropertiesmortgaged.Thus,revenuerightlyconsideredadvancesgivenbycompanytoassesseeasdeemeddividend.(A.Y.200203,200304&200607)Dy.CITv.B.DhanunjayaRao(2013)140ITD443(Hyd.)(Trib.)S.2(22)(e):DividendDeemeddividendAdvancetowardsSaleofPropertyMatterremanded.Theassessee isengaged in realestatedevelopment.Theassessee receivedadvance towardssale of property. The Assessing Officer treated the said amount as deemed dividend.Commissioner(Appeals)deletedtheaddition.OnappealbydepartmenttheTribunalsetasidetheorderofCommissioner(Appeals)ashefailedtopassasspeakingorder.Matterremanded.(A.Y.200607,200708)ITOv.NamEstatesP.Ltd(2013)141ITD659/21ITR109(Bang.)(Trib.)


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S.2(22)(e):DividendDeemed dividendLoans and advancesBusiness of financeLoanswouldnotberegardedasdeemeddividend.The company fromwhom the assessee had obtained loanwas engaged in the business offinance andhence itwas contended that the loan transaction from the company fell in theexclusionaryclauseand theamountof loanwasoutof thepurviewof section2(22) (e).TheDepartments contention was that financing was not a major part of the business of thecompanyandhencetheassesseecouldnottakeshelterundertheexclusionaryclause.Beforethe Tribunal the assessee relied upon the decision of the Honble Bombay High Court inCITv.Parle Plastics Ltd (2011) 332 ITR 63 (Bom.) (HC) wherein it was held that the saidexpressionsubstantialpartofthebusinessins.2(22)(e),clause(ii),doesnotconnoteanideaof being the "major part" or the part that constitutesmajority of thewhole.Itwas furtherexplained by the Hon'ble Bombay High Court that any business of a company which thecompanydoesnotregardassmall,trivialor inconsequentialascomparedtothewholeofthebusinessissubstantialbusinessandvariousfactorsandcircumstanceswouldberequiredtobelooked intowhile consideringwhetherapartof thebusinessofa company is its substantialbusiness. Itwas held that sometimes a portionwhich contributes a substantial part of theturnover,thoughitcontributesrelativelysmallportionoftheprofit,wouldbeasubstantialpartofthebusiness.Similarly,aportionwhichisrelativelysmallascomparedtothetotalturnover,butgeneratesalargeportion,saymorethan50%ofthetotalprofitofthecompanywouldalsobeasubstantialpartofhisbusiness. InviewofthesaiddecisionoftheHonbleBombayHighCourt, itwasheld that the assessees case fell in theexclusionary clause andhence section2(22)(e)wasnotapplicable.(A.Y.200607)JayantH.Modi(2013)56SOT84(Mum.)(Trib.)S.2(24):IncomeLotteryPrizeContessa carDrawof lotsunder the incentive schemeof theNationalSavingsSchemewasnotlotteryandwasnotliabletotax.TheassesseewasallottedaContessacarasthefirstprizeundertheNationalSavingsScheme.TheAssessingOfficertreatedtheprizeaswinningsfromlotterieswithinthemeaningofsection2(24)(ix),subjecttothespecialratesenvisagedundersection115BB.Heldthatthecarwonbytheassesseeondrawof lotsunderthe incentiveschemeoftheNationalSavingsSchemewasnotalotteryandwasnotliabletotax.CITv.S.P.SugunaSeelan(Dr.)(2013)353ITR391(Mad.)(HC)S.2(28A):InterestDiscountchargesDeductionatsourceBusinessincomehencenotliabletodeducttaxatsource.[S.40(a)(i)]TheCourtheld thatdiscountchargesearnedbyassesseefinancialserviceproviderbywayofdiscounting bill of exchange and promissory notes in favour of Indian companies is to betreatedasbusiness income,andnotas interest income Infavourofassessee.(A.Y.200506to200708)DIT(IT)v.CargilTSFPTELtd.(2013)212Taxman16(Delhi)(HC)S:2(29B):CapitalgainsShorttermorlongtermPurchaseofpropertybytenantwasheldtobelongterm.(S.(2(42A),45)


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Assesseeboughtthepropertyofwhichshewasoneofthetenants.Allthetenantsenteredintoan agreement on 10th June 1999 and formed a cooperative society. The old building wasdemolishedandanewbuildingwas constructed thereon.The tenantsgotpossession inA.Y.200203.Assesseesoldherpropertyon17thSeptember2004.Heldthattheagreementdated10th June1999 itselfgave interestand right in the impugnedproperty to theassesseealongwithothertenants,thetransactionclearlyinvolvedlongtermcapitalgains.(A.Y.200506)NilaV.Shah(Mrs)v.ITO(2013)83DTR218(Mum.)(Trib.)S.2(47):TransferSharespledgedwithgroupcompanyAtransaction inrespectoftransferofsharepledgedwithabanktoagroupcompanycanberegardedasTransferforincometaxpurposesofarasrequirementofs.2(47)arecompliedwithLosssufferedisallowable.Atransaction inrespectofsaleofsharespledgedwithabanktoagroupcompanycannotbesaidtobeacolorabledevicemerelyonthegroundsthatsuchatransactionresultedintolosstotheassesseeandthattherequirementsofsection108ofTheCompaniesAct,1956regardingregistration of transfer of shares have not been complied with since the share were inpossessionofabankowingtowhichsuchsharescouldnothavebeensaidtobetransferred.Sofarastherequirementsofsection2(47)oftheActarecompliedwiththetransaction istoberegarded as Transfer for the incometax purposes. There is no restriction that such atransactioncannotbeeffectedwithagroupcompany.Also it isnotopen for the revenue todoubtthelosssufferedbytheassesseeunlessitdoubtsthesalepricesoftheshares.(T.A.No.260of2000,dated07/08/2012)]BirajInvestmentPvt.Ltd.(2012)BCAJNovemberPg.402/(2013)86DTR69(Guj.)(HC)S.2(47):TransferHandingoverofpossessionYearoftransfer.[S.45,TheTransferofpropertyAct,1882S.53A]Even if some part of consideration remains to be paid, the transaction shall not affect theliabilitytocapitalgainstaxsoastopostpone it indefinitely.What ismeant inclause(v) isthe"transfer" which involves allowing possession so as to allow developer to undertakedevelopmentworkonthesite.Itisageneralcontroloverthepropertyinpartperformanceofthecontract.Thedateofthattransactiondeterminesthedateoftransfer. It isenough ifthetransferee has, by virtue of the transaction, a right to enter upon and exercise the act ofpossession effectively and such an act amounts to legal possession over the property. Thecompletionoftransferofan immoveablepropertyundergeneral lawwasnot required fortheapplicabilityoftheprovisionsofsubclause(v)ofsection2(47).Capitalgainisassessableonhandingoverofpossession.(A.Y.20052006)DurdanaKhatoon(Mrs.)v.ACIT(2013)24ITR55(Hyd.)(Trib)S.2(47):TransferCapitalgainsAgreementforsaleIncompletetransaction.[S.45]TheassesseeenteredintoagreementforsaleoflandforconsiderationofRs.2.24croreoutofwhichitreceivedRs.8lakh.Theassesseewasstillownerofpropertyandhadnotpartedwithpossessionofsame.Hence,thetransactioncouldbetreatedastransfer.(A.Y.200809)MaliFlorexLtd.v.DCIT(2013)57SOT37(URO)(Hyd.)(Trib.)


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S.2(47):TransferSurrenderoftenancyrightsIncomefromothersourcesConsentgivenbyland lord for transfer of tenancy rights would not result in transfer of any capital assetexemptionundersection54ECisnoteligible.[S.45,54EC,56]Theassesseewasownerofaproperty,whichwaspartlyoccupiedbyhimandpartlyrentedto'V'.As per the tripartite agreement between the assessee, 'V' and new tenant, the tenancyrights and possession of the said property was surrendered in favour of new tenants. Theassessee claimed that the amount so received by it in respect of the surrenderwas capitalreceipt.Heclaimedexemptionundersection54ECbyinvestingtheamountinNABARDBonds.TheAOrejectedtheassessee'sclaimofexemptionundersection54ECongroundsthat'V'hadsurrendered the tenancy rights in favour of new tenants and not in favour of assessee.Therefore, the amount received was not a capital receipt and consequently the claim ofexemptionundersection54ECdidnotarise, insteadtheamountwaschargeabletotaxunderthehead'Incomefromothersources'.Heldthatthere isnoevidenceto inferthatthehouse is invacantpossessionoftheassesseeeven after the alleged end of the tenancy of 'V' and, therefore, it can be stated that theassesseehasnevergotthepropertyinvacantcondition.Theconsiderationforconsentimpliesnotransferofanycapitalassetbythelandlordtothenewtenant.Further,theagreementrulesoutthattheimpugnedconsiderationforconsentisfortherentortowardstherentaladvance.Further also, considering the rentoriented terms and conditions specified in the tripartiteagreement,itcannotbeinferredthatthenewtenantreceivedmerelyrentalrightsandthereisnotransferofanycapitalrightstothenewtenantbythelandlord.Thereforetheconsiderationreceivedbytheassessee isneitheracapitalreceiptnorarentalreceipt.Hence,theactionoftheAssessingOfficerwassustained.(A.Y.200607)VinodV.Chhapiav.ITO(2013)56SOT465(Mum.)(Trib.)S.4:Charge of incometaxAccrual IncomeInterest on arbitration awardWhen arbitrationawardisaliveandispendingincomedoesnotaccrue.[S.5,197]Thecourtheldthatso longasthechallengetothearbitralaward isaliveand ispending,andthelegalityofthearbitralawardhasnotattainedfinality,theamountwhichhasbeenawardedhas not attained finality, the amount which has been awarded does not represent incomewhichhasaccrued;no interest income canalsobe said toaccrue; theAssessingOfficerwasdirectedtoissuethecertificateundersection197.(F.Y.201213)DSLEnterprises(P)Ltdv.N.C.Chandratre(Mrs.)ITO(2013)258CTR156(Bom.)(HC)

S.4:Chargeof incometaxAccrual Income Intereston loanDebtordeclaredsickcompanyNomaterialtosubstantiatetheclaimInterestaccruedandassessableasincome.[S.2(24)]Thematerial on record showed that the company court orderedwinding up of the debtorcompanybasedon therecommendationof theBIFR.However, thedebtorcompanywentonappealbeforetheDivisionBench,whereinitwascontendedthattheorderofwindingupbasedon the recommendation of the BIFR was bad in law. In that event, in the absence of anymaterialtosubstantiatethattheinterestontheborrowedamountcouldnotberecoveredand,hence,hadnot accrued. Thus, interestwasheld tohave accrued andwas assessable. (A.Y.199293)CITv.PeriaKaramalaiTeaandProduceCo.Ltd.(2013)353ITR22(Mad.)(HC)


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S.4:Chargeable to taxMercantile systemAccrualInterest on non performing assetsNonbankingfinancialcompanyCharacterisationasnonperformingassetsalonenotsufficientUncertaintyinrealizationofincomeorinteresttobeprovedMatterremanded.[S.5,145]Theassesseehastoprove ineachcasethat interestnotrecognisedornottaken intoaccountwas in fact due to uncertainty in collection of interest and it is for theAssessingOfficer toexamine the facts of each individual case. Mere characterisation of an account as a nonperformingassetwouldnotby itselfbe sufficient to say that there isuncertaintyas regardsrealizabilityofincomeorinterestthereon.Accrualofinterestisamatteroffacttobedecidedseparatelyforeachcaseonthebasisofexaminationofthefactsandcircumstances.Thesystemof accounting followed only recognises it, bringing the income into the books. The adoptedaccountingpolicy,i.e.,recognisingincomeonthenonperformingassetsaccountsonlysubjectto realisation does not serve as a standard category. Since, the Assessing Officer had notrecordedfindingswhethertherewasanyuncertaintyincollectionofincomeandthattherewasnothing to indicate that the interest was nonrecoverable, the matter was remitted to theAssessingOfficertodecideissueafresh.(A.Ys.19992000,20002001)CITv.SakthiFinanceLtd.(2013)352ITR102/86DTR59/258CTR433/214Taxman21(Mad.)(HC)S.4:ChargeofincometaxAssociationofpersonsJoiningofresourcesCoinheritorsAssessableasindividuals.(S.2(13),167B)Five persons including assessee were coowners of agricultural land inherited from theirforefathers.Theyexecutedageneralpowerofattorneyinfavourofassesseeappointinghimtoconstructplinthsontheirjointagriculturallandinnamesofallownersandtofurtherleaseoutsuch open plinths to any party on their behalf. An agreement was executed by coownersleasingoutplinthsto'P'Ltd.Assesseefiledhisreturnshowingrentalincomeandalsopaidtaxaccordingly.Similarreturnswerefiledincasesofothercoownerswherevertheyweretaxable.AssessingOfficer, however, assessed coowners as an association of persons treating entireincomefromplinthsasincomefromothersources.Whetherinordertoassessindividualstobeforming 'associationofpersons', individualcoownersshouldhave joined theirresourcesandthereafteracquiredpropertyinnameofassociationofpersonsandpropertyshouldhavebeencommonlymanaged, since coownershad inheritedproperty from theirancestorsand therewasnothingtoshowthattheyhadactedasassociationofpersons,incomewastobeassessedin status of 'individual', therefore, impugned order passed by Assessing Officer framingassessment in status of association of personswas not sustainable.Once it is held that theincomewastobeassessedasindividualandnotan'associationofpersons',therefore,section167Bisnotattracted.SudhirNagpalv.ITO(2013)214Taxman13(Mag.)/84DTR110/257CTR253/349ITR636(P&H)(HC)S.4:ChargeofincometaxAdditionIncomedisclosedinthereturnamountreflectedintheTDScertificate,additionwasheldtobejustified.Allauthoritiesbelowarrivedatsimilarconclusion that theassesseeclaimedhighercredit forTDS by annexing TDS certificates but had not reflected all of them in its return. Held that


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TribunalwasjustifiedinconcludingthatnousefulpurposewouldbeservedbyremandingthematterbacktotheAO.(A.Y.199899)LaxmiVentures(Bombay)(P)Ltd.v.Dy.CIT(2013)83DTR36/257CTR232(Bom.)(HC)S.4:Charge of incometax Capital or revenue receipt Sale of trees is held to be capitalreceipt.Assessee, an agriculturist, cut and sold trees to the forest department. Treeswere cut in amannersuchthattheywouldnotregenerateinnearfutureasthespecieshadnospontaneousgrowth.Thereceiptsfromthetransactionwereheldtobeinthenatureofcapitalreceipt.(A.Y.199495)CITv.MahendraKarma(2013)83DTR153(Chattisgarh)(HC)S.4:Chargeof incometaxInterestonbehalfofGovernmentIfanassesseecompanycannotallot share immediately in favor of State Government against investment made be it inAssesseeCompany,theninterestearnedondepositsmadeoutofsuchfundsshallbelongtotheStategovt.andshallnotbetaxedinthehandsofassessee.Theassesseecompanyreceivedcertain funds fromgovt.ofGujaratascontribution toward itequitysharecapital.Tillthetimetheassesseecompanyallottedsharestogovt.ofGujarat,thesaidfundswereparkedinshorttermdepositswithaschedulebankonwhichitearnedcertaininterest. The assessee company and govt. of Gujarat had entered into as arrangementaccording towhich the said interest shouldbelong toandbe receivedonbehalfofGovt.ofGujarat.ItwasheldbytheHonbleHighCourtthatduringthependencyofallotmentofshares,thefundsreceivedtowardequitysharecapitalwereheldbytheassesseecompanyintrustforandonbehalfofgovt.ofGujaratandhence,anyinterestaccruedbyinvestmentofsuchfundsmustbelongtothegovt.ofGujaratandtillitremaindinthehandsoftheassesseecompany,itmustbetreatedtohavebeenheldintrust.(A.Y.199293GujaratPowerCorporationLtd.(2012)BCAJNovemberP.402/(2013)354ITR201)(Guj.)(HC)Editorial:TheSupremeCourthasdismissedthespecial leavepetitionfiledbytheDepartmentagainstthisjudgment.ITOv.GujaratPowerCorporationLtd(2013)354ITR82(St)S.4:ChargeofincometaxSubsidyEntertainmenttaxCapitalreceiptHeldtobecapitalinnature.Thequestionraisedbefore theCourtonbehalfof therevenuewas thebenefitofexemptionfromentertainmenttaxwasavailabletoassesseeonlyoncethemultiplexwasinoperationandit is revenue receipt. High Court followed the Judgment of Bombay High Court in CIT v.Chaphalkar Brothers, (2013) 351 ITR 392 (Bom)(HC),and held that such exemption ofentertainmenttaxwasofcapitalreceipt.Appealofrevenuewasdismissed.(A.Y.200304)DCITv.InoxLeisureLtd(2013)351ITR314/213Taxman160/85DTR103(Guj.)(HC)S.4:ChargeofincometaxNoncompetefeeAssessableascapitalreceipt.Payment received by assessee as noncompete fee under a negative covenant is a capitalreceiptnottaxableunderAct(A.Y.200102)CITv.RealImage(P.)Ltd.(2013)213Taxman169(Mad.)(HC)


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S.4:ChargeofIncometaxCompensationforlossofsourceofincomeCapitalreceiptCompensationtoCAFirmforlossofreferralworkisanontaxablecapitalreceipt.Theassessee,afirmofCharteredAccountants,wasoneoftheassociatemembersofDeloitteHaskins&Sellsfor13yearspursuanttowhichitwasentitledtopracticeinthatname.Deloittedesired tomergeall theassociatemembers intoone firm.As thiswasnotacceptable to theassessee,itwithdrewfromthemembershipandreceivedconsiderationofRs.1.15croresfromDeloitte.Thesaidamountwascreditedtothepartnerscapitalaccounts&claimedtobeanontaxable capital receiptby the assessee.TheAO rejected the claim.TheCIT (A) reversed theorderofAO.TheTribunal reversed theCIT (A)order.Onappealby theassessee to theHighCourt,reversingtheTribunalorderheldthat:(i)There isadistinctionbetween thecompensation received for injury to tradingoperationsarising frombreachofcontractandcompensationreceivedassolatium for lossofoffice.Thecompensationreceived for lossofanassetofenduringvaluewouldberegardedascapital. Ifthereceiptrepresentscompensationforthelossofasourceofincome,itwouldbecapitalanditmatters little that theassesseecontinues tobe in receiptof income from itsother similaroperations(KettlewellBullenandCo.Ltd.V.CIT(1964)53ITR261(SC)&OberoiHotel(P)Ltd.v.CIT(1999)236ITR903(SC)followed);(ii)Onfacts,thecompensationwasforlossofasourceofincome,namelyreferredworkfromDeloitte because it is somewhat difficult to conceive of a professional firm of charteredaccountantsenteringintosucharrangementswithinternationalfirmsofCAs,astheassesseeinthe present case had done,with the same frequency and regularitywithwhich companiescarrying on business take agencies, simultaneously running the risk of such agencies beingterminatedwith the strong possibility of fresh agencies being taken. In a firm of charteredaccountants there couldbe separate sourcesofprofessional income suchas taxwork,auditwork,certificationwork,opinionworkasalsoreferredwork.UnderthearrangementwithDHStherewasaregular inflowofreferredwork fromDHSthroughtheCalcutta firm inrespectofclientsbasedinDelhiandnearbyareas.Thereisnoevidencethattheassesseehadenteredintosimilararrangementswithotherinternationalfirmsofcharteredaccountants.ThearrangementwithDHSwas invogue fora fairly longperiodof time 13yearsandhadacquiredakindofpermanency as a source of income. When that source was unexpectedly terminated, itamountedtothe impairmentoftheprofitmakingstructureorapparatusoftheassessee.It isfor that lossof the sourceof income that the compensationwas calculatedandpaid to theassessee.ThecompensationwasthusasubstituteforthesourceandtheTribunalwaswrongintreating the receipt as being revenue in nature (CIT v. Best & Co (1966) 60 ITR 11 (SC)distinguished).(A.Y.199798)Khanna and Annadhanam v. CIT(2013)/351 ITR 110/213 Taxman 347/258 CTR 72/85 DTR164(Delhi)(HC).S.4:ChargeofincometaxIncomeorcapitalPowersubsidyreceivedfromStateGovernmentSubsidygivenyearafteryearonactualpowerconsumptionisrevenuereceipt.The power subsidywas granted after the commencement of production, and itwas to theextentof10percent.or12.5percent.,as thecasemaybe.Thiswasgivenonactualpowerconsumption andhadnothing todowith the investment subsidy given forestablishmentofindustriesorexpanding industries inbackwardareas.Thepower subsidygivenaspartofan


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incentivescheme,aftercommencementofproduction,shouldbetreatedassubsidy linkedtoproduction,andtherefore,arevenuereceipt(A.Y.19831984to19901991)CITv.RassiCementsLtd.(2013)351ITR169/215Taxman144(Mag.)(AP)(HC)CITv.DeccanCementsLtd(2013)351ITR169(AP)(HC)S.4:Charge of IncometaxMutualityClubsInterest on fixed depositConcept of mutualitycannotbeextended.Assessee, a club, received interest on fixed depositwith banks. It claimed that principle ofmutualityapplied in instantcaseand,hence, interest incomewasnottaxable.In instantcase,contributors/membersofassesseemadecontributions,whichhadbeenkept in fixeddepositwith thirdpartybanksand those thirdpartybankshad contributed tomembers fund, sincemembers'fundhadbeenexpendednotbycontributors/membersbutbyathirdparty,interestincome could not be said to have been derived from any activity based on principle ofmutuality. Inordertobean incomederivedfromactivitiesbasedonprincipleofmutuality, itmust be shown that contributions have been made by contributors and same can only beexpandedorreturnedtocontributors.Infavourofrevenue.(A.Y.19992000)CITvDehradunClubLtd.(2013)212Taxman269/258CTR443/86DTR86(Uttarakhand)(HC)S.4:ChargeofincometaxHinduundividedfamilyIndividualIncomefromagriculturallandwhich was received on partition assessable as HUF income and income from remainingagriculturallandassessableasanindividual.AssesseefiledreturninhiscapacityaskartaofHUF.Heclaimedthatheowned20.88acresofagriculturallandinthestatusofHUFandtheentireincomeearnedfromagriculturallandwasincome fromHUFproperty.AssessingOfficerrejectedtheclaimofassesseeandassessedtheentire income from theagricultural lands in thestatusas individual.Healsomadeprotectiveassessment at the hands of the assessee in the capacity of HUF. In appeal Commissioner(Appeals)heldthat inclusionofthe income fromthe land inthe individualassessmentoftheassessee was not correct. He also held that the assessment made in the hands of HUF asprotectiveassessmentshouldbetreatedasasubstantiveassessment.InappealbyrevenuetheTribunalreversedthefindingofCommissioner(Appeals).OnappealtoHighCourt,itwasheldthatAgricultural land toanextentof4.63acreswasoriginally joint familypropertyandvidepartitiondeeddated2421981executedbetweenassessee,hisbrotherandtheirfathersamewasallottedtoassessee.Nomaterialonrecordtoshowthatbalance16.25acresoflandwasinfactHUF property of assesse.Only agricultural income earned from 4.63 acres of landwasassessableathandsofassesseeinstatusofHUFandremainingagriculturalincomeearnedfrombalance16.25acresoflandwasassessableatindividualhandsofassessee.(A.Y.198485,198586)K.P.NachimuthuvCIT(2013)212Taxman584(Mad.)(HC)S.4:ChargeofincometaxReceiptsfromheadofficePaymenttoselfCannotbeassessedasincome.InviewoforderofSpecialBenchofMumbaiTribunalrendered incaseofOman InternationalBank S.A.O.G. v. Asstt. CIT [IT Appeal Nos. 19811982 (Mum.) of 2001, dated 2962012],


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addition of interest received by assessee from its head office and overseas branches, beingpaymenttoself,wasnotjustifiedinaddingthesameasincome.(A.Y.19992000)DresdnerBankAGv.ACIT(2013)57SOT203(Mum.)(Trib.)S.4:ChargeofincometaxAIRinformationOfferedtotaxinthehandsofHUF,sameincomecannotbeassessedinthehandsofindividualonthebasisofAIRinformation.OnreceivingsomeAIRinformation,AssessingOfficerassessedcapitalgainonsaleofapropertyand interestonmutual fund inhandsofassessee,an individual.Theassesseesubmittedthatcapitalgainand interest incomehadbeenoffered fortaxation inhisHUFcapacity.Heldthat,once capitalgainon saleofpropertyand interest income shown inhandsofHUFhadbeenacceptedbyrevenue,samecouldnotbeassessedagaininhandsofindividual.(A.Y.200809)JyotindraNatwarlalNaikv.ITO(2013)57SOT114(Mum.)(Trib.)

S.4:IncomeMutualconcernSportsclubNodisputesastoidentitiesofcontributorsandparticipators,principleofmutualityisapplicable.

Duringthefinancialyearrelevanttotheassessmentyeartheassesseeclubclaimedexemptionontheprincipleofmutuality.TheAssessingOfficerheld that the clubpremiseswereallowed tobeusedbyprivate parties and the assessee had no control on the receipts which were directly made by thecontractors or professionals and that the amount collected at the rate of 20 per cent was directlyenjoyedbythemembersoftheclub,that inordertogetthebenefitoftheprincipleofmutualitytheassesseeshouldconfine itsactivitiesonlyamongthemembers.Thereforeherejectedtheclaimoftheassessee that its incomewas exempt on the ground of principle ofmutuality and treated the totalreceiptsoftheassesseeas incomefrombusinessactivitiesandtaxedthemaccordingly.OnappealtheCommissioner (Appeals) held that the clubwas registered under section 12Aof the IncometaxAct,1961,thattheAssessingOfficerintheearlieryearshadnotquestionedtheapplicabilityoftheprinciplesof mutuality. On appeal, the Tribunal held that there was no dispute as to the identities of thecontributorsandtheparticipatorsoftheclub.Further,theAssessingOfficerdidnotdisputethefactthatonlythemembersandtheirfamiliesandguestswereallowedtoparticipate inclubactivities.Becausesome professionals were engaged in organising the club activities from whom the club derivedcommission,itcouldnotbesaidthattheclubwasnoteligibleforexemptiononprincipleofmutuality.Therefore,theorderoftheCommissioner(Appeals)wascorrect.(A.Ys.20072008,20082009)

ITOv.KamalaViharSportsClub(2013)23ITR104(Mum.)(Trib.)

S.4:ChargeofincometaxAccrualBankGuaranteecommissionIfrefundableonrevocationofguarantee,commissiontobespreadoverperiodofguarantee.Matterremanded.TheTribunalheldthatiftheguaranteecommissionisrefundableontherevocationofguarantee,itcannotbesaidthattheabsoluterighttothecommissionhasaccruedtotheassesseeatthetimeofexecutionofthecontractforfurnishingtheguarantee,andthecommissionistobespreadovertheperiodforwhichtheguaranteeisgiven.Inallothercases,theamountistobetaxedintheyearinwhichtheguaranteehasactuallybeengivenirrespectiveoftheperiodofguarantee.Matterremanded.(A.Y.199899)(A.Y.19981999to20032004)SocieteGeneralev.Dy.DIT(IT)(2013)21ITR606/57SOT101(Mum.)(Trib.)


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S.4:ChargeofincometaxMutualityInterestpaidtoheadofficeoroverseasbranchesnotconsidered as expenditure in hands of Indian branchInterest received is also not to beconsideredasincomeinhandsofheadofficeoroverseasbranches.Theassesseereceivedinterestfromitsheadofficeoroverseasbranches,whichwasnotofferedfortaxationtheTribunalheldthatontheprincipleofmutualitytheinterestincomereceivedbytheassesseefrom itsheadofficeoroverseasbrancheswasnotchargeabletotaxand interestpaid to the head office or other overseas brancheswasnot deductible. (A.Y.199899) (A. Y.19981999to20032004)SocieteGeneralev.Dy.DIT(IT)(2013)21ITR606/57SOT101(Mum.)(Trib.)S.4:Charge of incometax Mutuality NonGovernment organisations managing selfhelpgroupsofvillagersandtheirfamiliesprincipleofmutuality isapplicable income isnot liabletotax.AnallIndianationalapexbodycalledtheAssociationofSarvaSevaFarms,anationalleveltrust,formed for the upliftment of poor villagers who had received in the past, parcels of landdistributedbytheBoodhanmovementbutwerenotinapositiontoraiseresourcestocarryonagricultural and other related activities in the land allotted to them, arranged for funds fordistribution among the Boodhan land allottees, on the security of the Boodhan land. Thenational apexbodywas a charitable institution and anonprofitorganisation. The assesseetrusts were nonGovernment organisations registered in Tamil Nadu, to manage selfhelpgroupsofvillagersandtheirfamiliesandundertakingprogrammestogenerateincomeforthebenefit of themembers of that selfhelp group. The assesseetrustswere under a commonumbrella micro financing company, which obtained loans from statutory corporations andnationalised banks and distributed them to the assessees. The assessees, in turn, lent themoneytotheselfhelpgroupsunderthem.Theumbrellacompanychargedinterestattherateof12percentonthenetbalancemethodfortheamountadvancedbyittotheassessees.Theassessees, inturn,advancedthese loanstotheirselfhelpgroupsataflatrateof12percent.Thisdifferentialmethodgeneratedsurplusincomeinthehandsoftheassessees.Thebyelawsof theassesseetrustsprovided that95percentofsuchsurpluswouldbedistributedamongthemembersoftheselfhelpgroupsworkingunderthemand5percentofthesurplusretainedby the assesseetrusts for their ownmaintenance and other administrative overheads. Fieldorganisations like the umbrella company, the assesseetrusts and individual selfhelp groupsworkedunder theoverallguidanceandpolicy formulationof thenationalapexbody. In thecourseoftheassessmentsoftheseassesseetrusts,theAssessingOfficerheldthatbecausethedistributionof95percentmadeby theassesseetrusts tomember selfhelpgroupswasnotdeterminatewith reference to individual recipients95per centof surplusdistributedby theassesseetruststotheirmemberselfhelpgroupshadtobetreatedasincomeoftherespectivetrusts.Tribunal held thatmonies obtained by assesseetrusts from umbrella micro financingorganisation lenttoselfhelpgroupsunderthem95percentofsurplus incomeofassesseesdistributedamongmembersofselfhelpgroups.Detailsofeverymemberbelongingtoselfhelpgroup available on record. Details of loans availed of by various selfhelp groups properlyrecorded. Distribution of funds by selfhelp groups to individual members properlydocumented.Tribunalheld that finding that shareofevery selfhelpgroupor shareofevery


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individualmemberindeterminatewithoutanybasis.Distributionbyassesseetruststoselfhelpgroupsunderthemwasassessableasincomeofthoseselfhelpgroupsthemselves.Assesseeisgovernedbyprinciplesofmutualityhenceisnottaxableincome.(A.Ys.20072008,20082009)ITOv.SarvodayaMutualBenefitTrust(2013)22ITR277/56SOT507(Chennai)(Trib.)S.4:Chargeof incometaxCapitalorrevenueRefundofexciseduty iscapitalreceipthencenotchargeabletotax.(S.28(i))ThequestionbeforetheSpecialBenchwaswhetherinthefactsandcircumstancesofthecase,theexcisedutyrefundsetoffisacapitalreceipt.Iftheexcisedutyrefund/setoffisheldtoberevenue receipt,whether the said amount is to be included in the business profits for thepurposeofdeductionundersection80IBofthe IncometaxAct.TheSpecialBenchheldthatrefundofexciseduty istobetreatedascapitalreceipt inthehandsoftheassessee,which isnotchargeabletotax.Asthefirstquestionisdecidedinfavourofassesseethesecondquestionwasnotdecided.(A.Y.200607)VinodKumarJainv.ITO(2013)140ITD1/83DTR258/152TTJ445/22ITR567(SB)(Asr.)(Trib.)BalajiRosinIndustriesv.ITO(2013)140ITD1/83DTR258/152TTJ445(SB)(Asr.)(Trib.)S.5: Scope of total incomeAccrualGuarantee commissionCancellation before expiryperiodIncomehasnotaccruedTheassesseereceivedcommissiononguaranteeprovidedtoitsclient.Thesaidcommission,toextentattributabletoperiodended3132001wasofferedbyassesseetotaxinAY200102onaccrualbasisandbalanceamountattributabletofinancialyearended3132002wasofferedinAY200203.TheAssessingOfficerbroughttotax,theentireguaranteecommissioninhandsofassessee forAY200102.TheCommissioner (Appeals)and theTribunal found thatguaranteewhichhadbeen issued for a certainperiodof timewas cancelledby clientbeforeexpiryoftenureofguaranteeresultingintoassesseereturningtoitsclientpartofguaranteecommissionattributable tounexpiredperiodofguarantee.Hence, theorderof theAssessingOfficerwasnotsustainable.OnappealHighCourtalsoconfirmedtheorderofTribunal.(AY200203)DITv.BNPParibasSA(2013)214Taxman548(Bom.)(HC)S.5:ScopeoftotalincomeMercantilesystemofaccountingAccrualofdisputedpaymentsAmountreceivedtaxableasrevenuereceipt.(S.145)The assessee was maintaining mercantile system of accounts. In earlier years it suppliedrectifiedspirittovariousretailvendorsonbehalfofGovernment.Consequenttoagovernmentorder, theamount tobe receivedby theassessee stoodenhanced.Theassesseehad shownsaidamountasoutstandingliabilityinbalancesheetfiledalongwithreturnforassessmentyear199394andwascontinued tobe shownas liabilityevenduringassessmentyear199798.ApublicinterestlitigationwasfiledchallengingtheaforesaidGovernmentorderandHighCourtallowed writ petition. There upon, the Government vide its order dated 1892000 hadwithdrawn itsearlierorderofenhancement.TheassesseechallengedthewithdrawalorderofGovernmentandthematterwaspendinginwritappeal.Held,sincetheaforesaidamountpaidtoassesseewasdefiniteandascertainedamount, itwas inthenatureofrevenuereceiptandwaschargeabletotaxinhandsofassesseeinAY199394.(A.Y.199394)CITv.SapthagiriEnterprises(2013)214Taxman458(Karn.)(HC)


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S.5:Scopeof total income Accrualof InterestCertificateofdepositInterest receivedonmaturityistaxableintheyearofmaturity.Assesseecompany purchased three certificates of deposit from three banks on 3131997.Certificates of deposit issued by respective banks showed period of deposit as 92 days. Inreturnfiledforassessmentyear199798,assesseeofferedasumofRs.3.37 lakhsas interestrelatableto3131997, i.e.,dateofpurchaseofcertificatesofdeposit,andbalance interestofRs.3.07croreswasofferedinnextassessmentyear199899.AssessingOfficerassessedentireinterestincome,i.e.,Rs.3.10croresinassessmentyear199798itself.TheCourtheldthatsinceassesseereceived interestonlyonmaturitydate, i.e.,on171997,AssessingOfficerwouldbeentitled to assess a sum of Rs. 3.37 lakhs alone for assessment year 199798 and balanceamountofRs.3.07croreshad tobeassessed innextassessmentyear199899. In favourofassessee.(A.Y.199798)InfrastructureDevelopment FinanceCo. Ltd. v. Jt.CIT (2013)213 Taxman28(Mag.) (Mad.)(HC)S.5:ScopeoftotalIncomeAccrualStockbrokerIncomebyoverridingtitleAmountpaidonbehalfofpublicsectorcompaniescannotbeincludedasincomeofassessee.[S.37(1)]Assesseearegisteredstockbrokerheclaimedtobeabrokerof Indianbankwhichpurchasedsecuritiesofdifferentpublic sectorundertakings (PSUs)ataparticular ratequotedby IndianBankand sold them to saidbank throughBankofMadura,whichactedas routingbankandchargedservicecharges.Assesseewaspaidcommissionfortransaction.Assesseeclaimedthathis rolewasonlyofa conduit for takingdemanddraftsofRs.14.79 crores favouringPSUs inrespectofadditionalinterestpayablebybanktoPSUsondepositskeptbythem.Thisclaimwasconfirmedby IndianBankTheAssessingOfficer found thatneitherpublicsectororgainsationsnorIndianBankhadanyagreementwiththeassessee.Outof8Publicsectorcompaniesonly3had confirmed receipt of demand drafts. The Assessee also took alternative plea that theamountmay be treated as business expenditure under section 37(1). The AssessingOfficerincluded theamount in theassessees incomeholding that thepaymentsmade to thepublicsectorundertakingswerenot fallingunder thecategoryofdiversionof incomebyoverridingtitle at source. On appeal Commissioner (Appeals) accepted the claim of assessee. In themeantime,thecriminalprosecutionwaslaidagainsttheassesseeandtheBankChairman.TheCBIacquitted themas thechargeshadnotbeenprovedbeyond reasonabledoubt. InappealbeforetheTribunaltheTribunalsetasidetheorderofCommissioner(Appeals)onthegroundthat the criminal Courts decisionwas not binding on the Tribunal and had no relevance indecidingtheissue.OnappealbyassesseetheCourtheldthatquestionwithreferencetostatusofassesseeasabrokerhadbeenclearlyspokentobywitnesseswhowereofficersofbank,whohadunderstood roleofassesseeand,accordingly, instructedassessee toact.Courtheld thatsince evidence recorded clearly proved status of assessee as a broker only, even going bytheoryofpreponderanceofprobabilities,assesseecouldnotbemulctedwithany liabilityasregardssumofRs.14.79croresashis income. Infavourofassessee.(A.Ys.199192,199293,199394)T.Jayachandranv.Dy.CIT(2013)212Taxman620(Mad)(HC)


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S.5:Scopeof total incomeIncomeAccrualMembership fee60%as income in the firstyearandbalance40%asincomeinremaining24years.[S.145]Assessee is engaged in business of running holiday homes on time share basis. It providedholidayhome facilityto itsmembers foraperiodof25years. Ina25yearsplan,60percentmembershipfeeswastreatedasincomeofassesseeoffirstyearandbalance40percentwastreatedasincomeofremaining24yearsonaproratabasis.AssessingOfficertreatedhundredpercentofmembershipcollectionasincomeliablefortaxationforimpugnedassessmentyear.Onappealfollowingthespecialbench inACITv.MahindraHoliday&Resorts(India)Ltd(2010)39SOT438(SB)(Chennai)(Trib.),TheTribunalheldthattheassesseewasjustifiedintreatingonly60percentofitsmembershipfeecollectionasitsincome.(A.Y.20062007)MahindraHolidaysandResortsIndiaLtd.vDy.CIT(2013)141ITD363(Chennai)(Trib.)S.5:Scopeoftotal incomeInterestonsecuritiesAccruedbutnotdueshouldnotbetreatedasincome.Foryearendingon3131999,ithadcreditedincomefrominterestonsecuritiesondaytodayaccrualbasis.However,itdidnotoffersaidinterestfortaxationandclaimedthatinterestwhichhadnotbecomedueforpaymentduringpreviousyearshouldnotbetreatedasincome.Held,inviewof judgmentofBombayHighCourtrendered incaseofDIT(InternationalTaxation)v.CreditSuisseFirstBaston(Cyprus)Ltd.[2012]209Taxman234,theinterestinquestiondidnotconstitute incomeofassessee forassessmentyearunderconsiderationas the samewasnotdue.(A.Y.19992000)DresdnerBankAGv.ACIT(2013)57SOT203(Mum.)(Trib.)S.5:ScopeoftotalincomeAccrualRetentionmoneyAccruesonperformanceofconditionsintheagreement.Customerretainedmoney inrespectofacompletedcontract forsatisfactoryperformanceofcontract, for which due diligence was undertaken. Only on demonstration of satisfactoryperformance of contract,moneywas to be released finally to assessee, otherwise it had torepairfaultorpayliquidateddamages.Tribunalheldthatsuchretentionmoneydidnotaccrueasincometoassesseeonraisingbillaftercompletionofproject,incomearoseonperformanceofconditionalitiesofagreementand, thus, itdidnotaccrueas income incurrentyear. (A.Y.200910)Dy.CITv.AngeliqueInternationalLtd.(2013)55SOT226(Delhi)(Trib.)S.5:Scopeof total income AccrualRevenue for services Unusedprepaidcards sold tousersoftelecomservicesisassessableintheyearwhentalktimeisactuallyused.Talktimechargesreceivedbytheassessee,atelecomserviceprovider,onthesaleofprepaidcardsaretoberecognizedas incomeoftherelevantyearonlytotheextentthetalktimehasbeenactuallyusedbythecustomers,andtheamountreferabletotheunusedtalktimeistoberecognizedasincomeinthesubsequentyearwhenthetalktimeisactuallyused.ACITv.ShyamTelelinkLtd(2013)151TTJ464(Delhi.(Trib.))S.5:ScopeoftotalincomeAmountpayabletoforeignentitydidnotconstitutetheincomeofforeignentityintheabsenceofpermissionobtainedfromRBIasrequiredbyFERA


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Theassesse,M/s.BrozAllen&Hamilton(BAH)India, isaforeignpartnershipfirmand ithasabranchofficeinIndiathroughwhichitrendersmanagementandtechnicalconsultancyservices.BAHIndiahasavailedtheservicesfromvariousgroupentitiesandmadethepaymentsforthesame.According toAssessingOfficer, thepaymentsmadebyBAH India to thegroupentitiesabroadwerechargeabletotaxasfeesfortechnicalservices.TheAssessingOfficercompletedassessmentsundersection143(3)r.w.s.148treatingBAH Indiaasagentofgroupentitiesandtheamountpaidweretaxableasfeesfortechnicalservices.TheCIT(A)upheldthevalidityofassessmentsmadebytheAssessingOfficer.TheTribunalheldthattheamountspayablebyBAH Indiatothreegroupentities inGermany,IndiaandPanama(SEAsia)didnotconstitutetheirincomechargeabletotaxintheyearunderconsiderationas therewasnoaccrualof income in theabsenceofpermissionobtained fromRBIas requiredbyFERA.Tribunal followed the twodecisionsofHonbleBombayHighCourtnamely,1.CITvs.KirloskarTractorsLtd.(1998)231ITR849(Bom.)2.CITvs.JohnFowler(I)Ltd.,(1999)239ITR312(Bom.).(A.Y.199899)Booz Allen & Hamilton (India) Ltd. v. ADIT (2013) 152 TTJ 497/83 DTR305/56 SOT 96(Mum.)(Trib.)S.6(1):ResidenceinIndiaIndividualConditionscumulativeIndividualresidinginIndiaformorethan365daysinimmediatelyprecedingfouryearsbutresidingforlessthan182daysinpreviousyearisnotaresident.Section6(1)(a)makes itclear thatan individualwouldbea residentof India inanypreviousyearifhewasinIndiainthatyearforaperiodorperiodsamountinginallto182daysormore.Section6(1)(c)appliestocitizensof Indiaaswellastopersonsof Indianorigin. InthecaseofcitizensofIndia,thelengthofstayinIndiainaparticularyearhasbeenextendedto182daysascomparedto60daysforforeigners.Althoughtheassesseehadinthepreceding4yearsstayedinIndiaforaperiodinexcessof365daysinIndia,innoneoftheyearshadhebeeninIndiaforaperiodinexcessof182days.Therefore,theassesseewasnotaresidentofIndia(A.Ys.20012002to20032004).CITv.SureshNanda(2013)352ITR611(Delhi)(HC)S.6(6):ResidenceinIndiaNotordinarilyresidentAccrualofIncomeAssesseehastoprovethatincomehadaccruedorarisenoutsideIndia.(S.5(1)(c)Thecourtheldthatforavailingbenefitsofprovisotosection5(1)(c),mereclaimthatassesseeisaperson'notordinarilyresidentinIndia,isnotsufficient.InabsenceofanyproofthatincomethathadaccruedorarisenoutsideIndiawasnotonaccountofanybusinessinterestortradeinIndia,benefitsofprovisotosection5(1)(c)couldnotbetakenadvantageofbyaperson 'notordinarilyresident'inIndia.Infavourofrevenue.(B.P.198687to199697)KumariKanagam(Mrs)v.CIT(2013)213Taxman154(Mad.)(HC)S.9(1)(i):IncomedeemedtoaccrueorariseinIndiaBusinessconnectionliaisonofficeNoincome is attributable to LiaisonOffices activity of sourcingmanufactured products fromIndiaeveniffeeforserviceisreceivedfromoverseasbuyer.(S.5)


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Theassessee,aUSAcompany,setupa liaisonoffice inIndiawhosemainactivitywasto liaisewith Indian manufacturers for purchase of apparels from India by the assessees HO andoverseassubsidiaries.Itemployeda largevarietyofstaffwhosetaskwastocreateawarenessamongst the Indian manufacturers of the need to maintain quality control and adhere tostandards.ThepriceforeachapparelwasnegotiatedwiththemanufacturerandthesampleswereforwardedtotheUSoffice.Theliaisonofficegaveitsopinionaboutthereasonablenessofthepriceandallrelatedissuesetc.TheUSofficedecidedabouttheprice,quality,quantity,towhomtobeshippedandbilled.The liaisonofficekeptaclosewatchontheprogress,quality,time schedule etc at the manufacturing workshop. The AO held that the activities of theassessee of identifying exclusive manufacturers, designing the products, supervising themanufactureandqualityof theandmarketing theproductswerebeyond that requiredbyaliaisonofficeandresultedinincomeaccruingorarisinginIndiau/s5(2)readwiths.9(1)(i).Heaccordinglyheldthat5%oftheexportvalueofthegoodswasattributabletoIndiaoperationsandwaschargeable to tax.Thiswasupheldby theCIT(A).Onappeal, theTribunal (G.G.Dhi(Dr.)v.ACIT(2010)125ITD35(Bang)heldthattheactivityoftheliaisonofficewasmerelythatof purchasing goods for the purpose of exports as the agent of the buyer and that underExplanation(1)(b)tos.9,noincomecanbesaidtobederivedbytheassesseeinIndiathroughthe operations of the liaison office.On appeal by the department to theHigh Court,HELDdismissingtheappeal:(i)U/s9(1)(i) incomeaccruingorarisingfromanybusinessconnection inIndia isdeemedtoaccrueorariseinIndia.TheexpressionbusinessconnectionisdefinedinExplanation2tos.9to includeanybusinessactivitiescarriedoutbyapersonwho ishabituallyactingonbehalfofthenonresidentinIndia.However,thisdoesnotincludeanauthoritytoconcludecontractsonbehalf of the nonresident if the activities are limited to the purchase of the goods ormerchandise for thenonresident.UnderExplanation1(b) to s.9(1)(e) anonresident isnotliabletotaxinIndiaonanyincomeattributabletooperationsconfinedtopurchaseofgoodsinIndiaforexport,evenifthenonresidenthasanofficeoragencyinIndiaforthatpurposeandthe goods are subjected by him to anymanufacturing process before being exported fromIndia. The result is that no income is deemed to accrue or arise in India to a nonresident,whetherdirectlyor indirectly throughor fromanybusinessconnection, if theactivitiesareconfinedforthepurposeofexport.(ii) On facts, the assessee isnot carrying anybusiness in India. Theobjectof the liaisonoffice is to identify manufacturers, give them technical knowhow and see that theymanufacture goods according to the assessees specification which would be sold to theassesseesaffiliates.Thepersonwhopurchasesthegoodspaysmoneytomanufacturerandinthe said income, the assesseehasno right.The said income cannotbe said tobe a incomearisingoraccruing in Indiavisavistheassessee.AstheentireoperationsareconfinedtothepurchaseofgoodsinIndiaforthepurposeofexport,theincomederivedtherefromcannotbedeemedtoaccrueorariseinIndia.Thenonresidentbuyermayinturnpaysomeconsiderationto the assessee outside India but as that contract between the assessee and the buyer isenteredoutside India, that incomearisesoraccrues to theassesseeoutside Indiaand isnotchargeabletotaxinIndia(AngloFrenchTextileCompanyLtd.vCIT(1953)23ITR101(SC)&CITv.R.D.AgarwalandCo.(1965)56ITR20(SC)referred)


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CITv.NikeInc(Karn.)(HC)www.itatonline.org.S.9(1)(i): Incomedeemed toaccrueorarise in India BusinessconnectionOffshoresupplyequipmentDespite retrospective amendment to section 9(1) with effect from 161976assesseewould not be liable to tax under Explanation to said section.DTAAIndia Japan[S.9(vii),90Art.7]AsperearlierSupremeCourtdecision inassessee'sowncase in IshikawajimaHarimaHeavyIndustriesCoLtd(2007)288ITR408(SC),amountreceivablebyassessee inrespectofoffshoresupplyofequipmentandoffshore serviceswasnot liable to tax inviewofarticle7ofDTAAbetween India and Japan.Courtheld that,despite retrospective amendment to section9(1)witheffectfrom161976assesseewouldnotbeliabletotaxinrespectofsuchamountunderExplanationtosaidsection.Infavourofassessee.(A.Y.200304)DIT(IT)vIshikawjimaHarimaHeavyInds.Co.Ltd.(2013)212Taxman273/258CTR335/86DTR330(Bom.)(HC)S.9(1)(i): Incomedeemed toaccrueorarise in India BusinessprofitsStrategicconsultancyservicestoclientsAssessableasbusinessincomeneitherroyaltynorasotherincomeDTAAIndiaIndonesia.[S.9(1)(vi),56,57,Art.7,12,22]Assesseeisaforeigncompanywhichisengagedinbusinessofprovidingstrategicconsultancyservices to clients. It provided its Indian group company various information as required.AssesseeclaimedthatthechargesreceivedfromIndiangroupcompanywastobeassessedasbusinessprofits .TheAssessingOfficerheld that the feesreceivedby theassessee fell in thecategoryofRoyaltyintermsofarticle12oftheDTAA.TheDRPheldthatprovisionsofarticle22(3) of DTA treaty were applicable and the receipt in question was to be taxed as otherincome.TheTribunalheldthatinformationsuppliedwasinnatureofdataanddidnotariseoutofexploitationofknowhowgeneratedbyskillsandinnovationofpersonswhopossessedsuchtalent.Amount received by assessee from Indian group company did not fall in category ofroyalty.TheTribunalalsoheldthatincomecanbetaxedunderanyotherarticle,provisionsofarticle22willnotbeapplicable.TheArticle22residuaryarticlesimilartoprovisionsofsection56and57oftheIncometaxAct1961i.e.Incomefromothersources.(A.Y.200708)P.T.McKinseyIndonesia.vDy.CIT(2013)141ITD357/88DTR324(Mum.)(Trib.)S.9(1)(i):IncomedeemedtoaccrueorariseinIndiaBusinessincomeAmountreceivedfortestingsolutionsisassessableasbusinessincomeandnotasfeesfortechnicalservicesDTAAIndiaSingapore.[S.9(1)(vii),Art.12]AssesseeaSingaporean companyprovided services toan Indian company rendering servicesrelatingtotestingsolutions,sampleanalyticaltestingoffoodandfeedsamples.ItclaimedthatreceipttherefromwastaxableasbusinessincomeandthusnottaxableinIndia.TheAssessingOfficer held that the amount receivedwas taxable as technical services as per article 12(4)between Indiaand Singapore.Tribunalheld that servicesprovidedbyassessee couldnotbesaidto 'makeavailable'anytechnicalknowledge,experience,skill,knowhoworprocessestoassessee. The receipts of the assesseewould not amount to be fees for technical services.(A.Y.200506)RomerLabsSingaporePte.Ltd.vADIT(2013)141ITD50(Delhi)(Trib.)


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S.9(1)(i):IncomedeemedtoaccrueorariseinIndiaBusinessconnectionInterestPermanentestablishmentDTAAIndiaFrance.[Art.5]Assessee,a foreigncompany incorporated inFrancewasengaged inbusinessofoperationofships in India. It filed itsreturnof incomeclaimingtaxand interestpayableat 'nil'ongroundthat itwasentitledtobenefitunderDTAA.AssessingOfficerheldthatbusinessofassessee inIndiawascarriedoutthroughafixedplacethrough itsagent inIndiaandagentofassessee inIndiawasdependentonassesseeandhencesuchdependentagentconstitutedaPEofassesseeinIndia.Tribunalinassesseesowncasefortheassessmentyear200607heldthatsincetherewasnonegativefindingthattransactionsbetweenassesseeandagentwerenotmadeunderatarm'slengthcondition,agentwasofindependentstatus,standofAssessingOfficerwithregardtoexistenceofPEwasnotsustainable in law.TribunalheldthatassesseehadnoPE in India,andhence,notliabletotax.Followedearlieryearorder.(A.Y.200708)DelmasFranceS.A.vADIT(2013)141ITD67/86DTR145/154TTJ561(Mum.)(Trib.)S.9(1)(i): Income deemed to accrue or arise in India Business connection Directly or indirectlyattributable to permanent establishmentDTAAIndia UKTaxation of foreign professional firms&concept of force of attraction under IndiaUK DTAA explained. Linklaters LLP(2010) 40 SOT 51(Mum)heldtobenotgoodlawIncomeattributabletoservicesrenderedoutsideIndiaisnottaxablein IndiaExplanationtosection9(1)ofthe IncometaxAct,1961,wasamendedbytheFinanceAct,2010withretrospectiveeffectfromJune1,1976isapplicableinthecaseofincomeofanonresidentcoveredbyclause(v)orclause(vii)ofsubsection(1)ofsection9.[Arts.5,7,15]

The assessee, a U.K. partnership firm of Solicitors, provided legal consultancy services inconnectionwithdifferentprojectsinIndiaandclaimedthatthetaxabilityoftheincomearisingthere fromhad tobeprocessedunderArticle15 (independentprofessionalservices)of theIndiaUKDTAA.TheAOrejectedtheclaimregardingapplicabilityofArticle15andheldthatastheassesseehadaPE inIndiaasperArticle5andastheserviceshadbeenrendered inIndia,theentire incomewaschargeableto tax in IndiaunderArticle7. InAY199697, theTribunal{Cliffordchance,UnitedKingdomv.Dy.CIT(2002)82ITD106(Mum)}acceptedtheclaimoftheassessee that if the aggregateperiodof stay of the employees/partnersdidnot exceed 90days,theincomewasnottaxableunderArticle15oftheDTAAandifitexceededthatperiod,onlytheIndianactivitywastaxableu/s9(i).ThesaidverdictwasaffirmedbytheBombayHighCourt in 176 Taxman 485. Later, another Bench in Linklaters LLP vs. ITO (2010) 40 SOT 51(Mum)heldthatastheaforesaidverdictsoftheTribunal&HighCourtinCliffordChanceturnedonthebasisthatfeesfortechnicalservicesrenderedoutsideIndiawerenotchargeabletotaxu/s9(1)(vii)andthattheywerenotgoodlawinviewoftheretrospectiveamendmenttos.9(1)bytheFinanceAct,2010w.e.f.1.6.1976whichprovidedthatfeesfortechnicalserviceswouldbetaxable in Indiaeven iftheywererenderedoutside India. InLinklatersLLP itwasalsoheldthat the expression directly or indirectlyattributable inArticle 7(1) triggered the force ofattraction rule and that the entire earnings relatable to the projects in India would bechargeabletotax in India.Astherewasdoubtastothecorrectnessoftheview inLinklaters,theSpecialBenchwasconstituted toconsider two issues (i)whether theverdictof theHighCourtinCliffordChancewasgoodlawaftertheretrospectiveamendmenttos.9&(ii)whetherthe expression directly or indirectly attributable to the PE in Article 7(1) meant that the


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considerationattributable to theservices rendered in theStateof residence is taxable in thesourceState.HELDbytheSpecialBench:(i)TheviewtakenbytheTribunalandtheHighCourtinCliffordChancewasthatifArticle15ofthe IndiaUKTreaty isnotapplicablebecause thestayof thepartnerexceeded90days, thenthetaxabilityofthe incomewouldbedeterminedbys.9(1)(i)oftheAct. Itwasheldthat fordeterminationofincomeu/s9(1)(i),theterritorialnexusdoctrineplaysanimportantpartandifthe incomearisesoutofoperations inmore thanone jurisdiction, itwouldnotbecorrect tocontend that theentire incomeaccruesorarises ineachof the jurisdictions.TheHighCourtapplied the law laid down by the Supreme Court in the context of s. 9(1)(i) that if all theoperations are not carried out in the taxable territories, the profits and gains of businessdeemed toaccrue in India throughand frombusiness connection in India shallbeonly suchprofits and gains as are reasonably attributable to theoperations carriedout in the taxableterritories.Accordingly,theviewexpressed inLinklatersLLPthatthejudgmentoftheBombayHighCourtisbasedonthepremiseofs.9(1)(vii)andthatthesaidpremisenolongerholdsgoodinviewof the retrospectiveamendment isnotcorrect.The law laiddownby theHighCourtcontinuestobegoodlaw;(ii)Asregardstheruleofforceofattraction,Article7(1)providesthattheprofitsoftheUKenterprise directly or indirectly attributable to the PE may be assessed in India. Theconnotation of what is directly attributable to the PE is set out in Article 7(2) while theconnotationofwhat is indirectlyattributable to thePE is setout inArticle7(3).When theconnotationofprofits indirectlyattributable to thePE isdefined specifically inArticle7(3),onecannotrefertoArticle7(1)oftheUNModelConventionwhichismateriallydifferentfromArticle 7(1)& 7(3) of the IndiaUKDTAA. The reliance placed in Linklater on theUNModelConventiontocometotheconclusionthattheconnotationofprofitsindirectlyattributabletoPE inArticle 7(1) incorporates the force of attraction rule thereby bringing an enterprisehavingaPE inanothercountrywithinthe fiscal jurisdictionofthatanothercountrytosuchadegreethatsuchanothercountrycanproperlytaxallprofitsthattheenterprisederivesfromthatcountry,whetherthetransactionsareroutedandperformedthroughtheirPEornot, isclearlymisplacedandnotacceptable.(A.Ys.199899to200304)ADIT(IT)v.CliffordChance(2013)24ITR1/87DTR210/154TTJ537(SB)(Mum.)(Trib.)S.9(1)(i):IncomedeemedtoaccruetoorariseBusinessconnectionDTAAIndiaGermanySupplyofimportedequipmentandmaterialsfromGermanyandsupervisionoferection,startupandcommissioningofpowerprojectIncomebetaxedasbusinessprofit.(S.44D,115A,Art.7)The assessee a company was awarded a contract by State Government for renovation,modernization and up gradation of a power house. The scope of work included supply ofimported equipment andmaterials fromGermany and supervision of erection, startup andcommissioningofpowerproject.Theassesseeofferedtheamount fortaxationattherateof10% of contract value as per section 44BBof the Incometax Act.The revenue taxed theconsiderationinrespectoftheseactivitiesasBusinessProfit.Itwasheldthattherewasneitheranyother contrary viewnor the assesseebroughton record anymaterial controverting thefindingsof theAO in this regards.Thus, the considerationbe taxedunderarticle7ofDTAAr.w.s.44DandS.115A.Accordinglytheappealofassesseewasdismissed.(A.Y.200708)


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VoithSeimensHydroKraftwerkstechnikGmbh&Co.KG(2013)140ITD216(Delhi.)(Trib.)S.9(1)(i):Incomedeemed toaccrueorarise in IndiaBusinessconnectionService renderedabroadDeductionatsourceDTAAIndiaUKPolandBrazilCanadaAustraliaBusinessprofitAssesseewasnotliabletodeducttaxatsourcefromsaidpaymentsandAssessingOfficerwasnot liabletodeducttaxatsource,hencetheassesseecannotbetreatedas indefaultundersection201.(S.9(1)(vii),195,201)Assesseecompanywasengagedinbusinessofproductionoffilms,shootingofwhichwasoftendoneoutsideIndia.ForshootingfilmsoutsideIndia,itsproductionunitusedtogoabroadandservices required in connection with work of shooting abroad were availed from variousoverseas providers. The assesseemade payment to five such overseas service providers forservices availed in connectionwith shooting of different films. Itwas held that the servicesrendered by overseas service providerswould not fallwithin ambit of technical services asgiven inExplanation2tosection9(1)(vii) insteadtheywere innatureofcommercialservicesandamountreceivedforsuchservicesconstitutedbusinessprofit.(AY200506&200607)YashRajFilmsP.Ltd.v.ITO(IT)(2013)140ITD625/23ITR125(Mum.)(Trib.)S.9(1)(i): Income deemed to accrue or arise in India Business connectionDeduction atsourceCommissionForeignagentNotliabletodeducttaxatsource.(S.40(a)(ia),195)Assesseepaidcommissiontoforeignagentsforservicesrenderedbythem inconnectionwitheffectuatingexportsales.AssessingOfficerobservedthatsuchforeignagentswerepaidbywayoftelegraphictransferobtainedfrombanksinIndiaandformedanopinionthatbanksinIndiaacted as agents of foreign agents and received payment on their behalf in India. AssessingOfficeronsuchfactsheldcommissionsopaidtobedeemedtohavebeenreceivedinIndiaandcharged tax thereupon. Tribunalheld thatmerelybecause commissionwerepaid to foreignagentsintheirbankaccountsbytelegraphictransferthroughbanksinIndia,itcouldnotbesaidthatincomeweredeemedtohavebeenarisentosuchforeignagentsinIndiawhentherewasnomaterialon record toshow thatsuch foreignagentshad renderedanypartofservices inIndiaorhadapermanentestablishmentandbusinessconnectioninIndia.Infavourofassessee.(A.Y.200506)ACITv.AvonOrganicsLtd.(2013)55SOT260(Hyd.)(Trib.)S.9(1)(i): Income deemed to accrue or arise in India Business connection Deduction atsourceOECDModelTaxConventionCommissionpaidoutside India isnot liabletodeducttaxatsource.(S.40(a)(ia),195).In the course of its export business activities, the assessee paid commission to its foreignagents for their services. The assessee submitted that the agentsoperatedoutof India andprovidedtheirservicesoutsideIndiaandnoneofthemhadanyofficeorplaceofprofitoranyotherbusinessconnection in India.Thus,nopartofthe incomeoftheforeignagentsarose inIndia and, consequently, no tax was to be deducted from the commission payments. TheAssessing Officer held that the exporter utilizes the information, data and know how, asgathered by the agent, to further his business activities and thus, therewas an element ofconsultancy,technicalandmanagerialservicesforwhichthecommissioninquestionwaspaidfor services rendered regarding the nature of products and inspection, timing and prices of


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products and detailed technical and other formalities; that thus, the provisions of section 9wouldcomeintoplay.Sincetheassesseehadnotdeductedtaxatsourceundersection195,theAssessing Officer disallowed the amount of commission paid under section 40(a) (ia). Onappeal,theCommissioner(Appeals),followingthefirstappellateorderfortheassessmentyear200809 in favour of the assessee, deleted the addition of Rs. 37,87, 26,158 made by theAssessingOfficer.Onappealbyrevenue,thetribunalheldthatwheretheexportcommissionpaidtoanonresidentagentforservicesrenderedoutsideIndiaisnotchargeabletotaxinIndiafavourofassessee.(A.Y.200910)Dy.CITv.AngeliqueInternationalLtd.(2013)55SOT226(Delhi)(Trib.)S.9(1)(vi):IncomedeemedtoaccrueorariseinIndiaRoyaltyReimbursementofleaselinecharges Force of attraction rule. Marketing and management servicesDTAAIndiaUK(Art.5).Theamountreceivedbyassesseeasreimbursementofleaselinechargesandwouldnotclassifyeitherasroyaltyorasincomeattributedtoapermanentestablishment.LowerauthoritiesheldthatfeesreceivedbyassesseeforprovidingmarketingandmanagementservicesoutsideIndiacould not be subjected to tax in India, as same was not attributable to PermanentEstablishment(PE)inIndia.RevenuecontendedbeforetheCourtthatincomeinquestionwasattributabletoaPermanentEstablishmentinIndiabyvirtueofforceofattractionrules,sincerevenuehadnotcanvassed forceofattraction rulesbeforeauthoritiesanddecisionof lowerauthoritiesbeingbasedonfindingoffact,itdidnotwarrantanyinterference.(A.Y.200405)DITv.WNSGlobalServices(UK)Ltd.(2013)214Taxman317(Bom.)(HC)S.9(1)(vi):Incomedeemedtoaccrueorarise in IndiaBeneficialownerRoyaltyDTAAIndiaNetherlands.(Art.12)Assessee,acompany incorporatedunder lawsofNetherlands,claimedbenefitofarticle12ofDTAAbetweenIndiaandNetherlandsandsoughttopaytaxatconcessionalrate inrespectofroyaltyincomereceivedfromanIndiancompany.AssessingOfficerdeniedbenefitofarticle12ofDTAAongroundthatassesseewasnotbeneficialownerofmusicaltracksinrespectofwhichroyalty incomewasearned.Tribunalonbasisofcertificates issuedby revenueauthoritiesofNetherlandsheldthatassesseewasbeneficialownerofroyaltyreceived inrespectofmusicaltracks given to aforesaid company and, therefore, itwas entitled to benefit of article 12 ofDTAATheCourtheldthatthedecisionofTribunalbeingbasedonafindingoffactdeservedtobeupheld.DITv.UniversalInternationalMusicB.V(2013)214Taxman19(Bom.)(HC)S.9(1)(vi): Incomedeemed toaccrueorarise in IndiaMarketingandmanagerialservices isnottaxableasperarticle12DTAAIndiaUSA[Art.12]AssesseeaUScompanyentered intoagreementwithWNS India forprovidingmarketingandsales services.AssessingOfficer held that assessee's personnel visitedWNS India to providemanagerial serviceswhich amounted to rendering of expertise and technical knowledge forconduct of Indian concern, therefore ,marketing and management services rendered byassesseewere innatureoftechnicalservicesaspersection9(1)(vii)samewouldnotbecomeFIS as per IndoUS DTAA. DRP up held the order of Assessing Officer. Tribunal held that


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assessee inthe instantcasehasnotmadeavailableanytechnicalknowledge,experience,skilletctoWNSIndia,thesamecannotbesubjectedtotaxaspersection9(1)(vi).Astheprovisionsof article 12(4)(b) shall apply which is more beneficial to assessee which shall applysupersession of section 9(1)(vi) of the Act. It is therefore held that the marketing andmanagerialservicesrenderedbytheassesseetoWNS IndiawerenotchargeabletotaxasFISundertheArticle12oftheDTAA.(A.Y.20062007)WNSNorthAmericaInc.v.ACIT(2013)141ITD117(Mum.)(Trib.)S.9(1)(vi): Income deemed to accrue or arise in India RoyaltyBusiness profitsReimbursementofleaselinechargesisnottaxableDTAAIndiaUSA.[S.9(1)(i),Art.7,12]AssesseeaUScompany received reimbursementof lease linecharges fromWNS India.WNSIndiawas inbusinessofprovidingsoftwareand ITenabledservicestoclients locatedoutsideIndia.transmittingdata fromunitofWNS Indiatocustomers locatedoutside India.AssessingOfficer treated payment received towards reimbursement of international telecomconnectivity charges as royalty taxable as perArticle 12of IndoUSDTAA.Assesseewas notownerorlessorofequipments,amountreceivednotberegardedas'royalty'withinmeaningofsection9(1)(vi).Tribunalheld thatLease linecharges recoveredbyassessee fromWNS Indiawerewithoutanymarkuporprofitelementandsaidamountcouldnotbetaxevenasbusinessprofitsunderarticle7ofDTAA.(A.Y.200607)WNSNorthAmericaInc.v.ACIT(2013)141ITD117(Mum.)(Trib.)S.9(1)(vi): Income deemed to accrue or arise in India Royalty Live telecast of cricketmatchesBusinessprofitDTAAIndiaSingapore[S.9(1)(i),195,Art.12]Assessee entered into an agreement with a foreign company for obtaining licence for livetelecastrightofcricketseriestobeplayedoutsideIndia.Assesseesoughtforacertificateofnildeduction of TDS on ground that fees for live coveragewould not be in nature of royalty.However,theAssessingOfficerheldthatpaymentoffeesforlivetelecastingwasinnatureofroyalty and assessee was liable to deduct tax at source. Held, that the procedure of livetelecasting,doesnotgivebirthtoa 'work'capableofcopyrightandanyconsiderationfor livebroadcastingcannotbeconsideredas'royalty'.Whereanonresidentonlyallowsaresidenttoexploit some rightsvested in itoncommercialbasis, itcannotbe said thatnonresidenthascarriedoutanybusinessactivity inIndia.Nonresidentonlyallowsaresidenttoexploitsomevestedinitoncommercialbasis,itcannotbesaidthatnonresidenthascarriedhascarriedoutanybusinessactivityinIndia.(A.Y.200910)DCITv.NimbusCommunicationsLtd.(2013)57SOT92(Mum.)(Trib.)S.9(1)(vi):IncomedeemedtoaccrueorariseinIndiaRoyaltyLawonwhatconstitutesaPEandhowtoattributeprofitstoaPEexplained.

TheTribunalhadtoconsiderthefollowinglegalissues:(i)whethertheassesseecouldbesaidtohave aPE in termsofArticle 5(1) and 5(2)of theDTAA? (ii)what is the correctmethod toallocate profits to the PE? (iii) whether fees for software is assessable as royalty after theretrospectiveamendmenttos.9(1)(vi)and(iv)whetherthepaymentforlinkchargesistaxableasequipmentroyalty?HELDbytheTribunal:


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(i)Theassesseesargument that itdoesnothaveaPEunderArticle5(1)cannotbeacceptedbecause itsemployeesfrequentlyvisitedthepremisesofCIStoprovidesupervision,directionandcontrolovertheoperationsofCISandsuchemployeeshadafixedplaceofbusinessattheirdisposal.CISwaspractically theprojectionofassesseesbusiness in Indiaand carriedout itsbusinessunderthecontrolandguidanceoftheassesseeandwithoutassuminganysignificantriskinrelationtosuchfunctions.BesidestheassesseehasalsoprovidedcertainhardwareandsoftwareassetsonfreeofcostbasistoCIS.However,itdoesnotconstituteadependentagentPEintermsofArticle5(4)and5(5)oftheDTAA;(ii)ThecorrectapproachtoarriveattheprofitsattributabletothePEshould.beasunder:(i)computetheGlobaloperatingIncomepercentageofthecustomercarebusinessasperannualreport/10Kofthecompany,(ii)thispercentageshouldbeappliedtotheendcustomerrevenuewithregardtocontracts/projectswhereserviceswereprocuredfromCIS.Theamountarrivedat is the Operating Income from Indian operations, (iii) the operating income from Indiaoperations is tobe reducedby theprofitbefore taxofCIS.This residual isnowattributablebetweenUSand India, (iv) theprofitattributable to thePE shouldbeestimatedon residualprofitsasdeterminedunderStep3above;(iii)Asregardsthetaxabilityofsoftwarelicensefees,theretrospectiveamendmenttos.9(1)(vi)by the Finance Act, 2012widens the scope of the term royalty but does not impact theprovisionsoftheDTAAinanymanner.Consequently,thepurchaseofsoftwarefallswithinthecategoryofcopyrightedarticleandnottowardsacquisitionofanycopyrightinthesoftwareandhencetheconsiderationisnotassessableasRoyalty.Evenotherwise,asthepaymentisinthenature of reimbursement of expenses, it is not taxable in the hands of the assessee (B4UInternationalHolding&NokiaNetworksOYfollowed);(iv)As regards thepaymentof linkchargesasequipment royalty, there isno transferof therighttouse,eithertotheassesseeortoCIS.Theassesseehasmerelyprocuredaserviceandprovided the same toCIS,nopartofequipmentwas leasedout toCIS.Evenotherwise, thepayment is in the nature of reimbursement of expenses and accordingly not taxable in thehandsoftheassessee.(A.Ys.200607&200809)ConvergysCustomerManagementGroupIncv.ADIT(Delhi)(Trib.)www.itatonline.org.

S.9(1)(vi):IncomedeemedtoaccrueorariseinIndiaRoyaltyDeductionatsourceRightforsatellitebroadcastingPurchase and sale of rights in satellite andmovies is liable to deduct tax at source.[S.40(a)(ia),194J].

Assesseeisengagedinpurchaseandsaleofrightsinsatelliteandmovies.Assesseehaddebitedinitsaccountasumforpurchasingsatelliterightsoffilmsandprograms.Sinceassesseedidnotpurchase cinematographic films as such rather it had only received right for satellitebroadcasting,insuchacase,amountpaidforacquiringsaidrightwouldfallwithindefinitionof'royalty'inviewofExplanation2tosection9(1)(vi),therefore,assesseewasliabletodeducttaxatsourceundersection194Jonpaymentseffected.However,theadditionalgroundraisedbythe assessee that the rigours of section 40(a)(ia) are attracted only on amounts standingpayableattheendoftheyear,isjustifiedinviewofthedecisionofSpecialBenchofTribunalinthecaseofMerilynShipping&Transportsv.Addl.CIT(2012)136 ITD23/20 taxmann.com244(Visakha)(SB).Intheresult,theappealofrevenueisallowedbutatthesametime,theissueis


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remitted back to the file of the Assessing Officer for applying section 40(a)(ia) as perlaw.(A.Y.200809)ACITvShriBalajiCommunications.(2013)140ITD687(Chennai)(Trib.)S.9(1)(vi):IncomedeemedtoaccrueorariseinIndiaRoyaltySoftwareservicesDTAAIndiaUSA.[S.195,Art12]Assesseeengaged'I',USAtoprovidesoftwareservicesinrelationtocertainaccountingsystemsofassesseeforwhichitmadepaymentswithoutdeductingtaxatsource.AssessingOfficerwasofview thatpaymentsmade for services renderedby 'I'USAamounted to fees for technicalservices as it fulfilled conditions contemplated in article 12(4) of IndiaUSA DTAA and wastherefore,taxable in India.Onappeal, itwasnotedthat inassessmentproceedings issuewasconfinedtoholdingastowhetherpaymentwastaxable in Indiaunderarticle12of IndiaUSADTAA,however,therewasnodeterminationastowhetherornotpaymentmadetoconsultant'I',USA,forservicesrenderedwasinnatureofroyaltyascontemplatedbyprovisionsofsection9(1)(vii)therebyattractingprovisionsofTDS. Inviewofabove, impugnedorderwastobesetasideand,matterwastoberemandedbackfordisposalafresh.Matterremanded.(A.Y.200708)GoldmanSachsServices(P.)Ltd.v.Dy.DIT(2013)140ITD434(Bang.)(Trib.)S.9(1)(vi):IncomedeemedtoaccrueorariseinIndiaRoyaltyRoyaltyearnedbynonresidentfromanothernonresidentisnottaxableinIndiaevenifpayerusestheknowhowforsaleofproductstoIndia.Theassessee,aUSAbased company,heldpatents to theCDMAmobile technologywhich itlicensed to various unrelated wireless Original Equipment Manufacturers (OEMs) locatedoutside India. The OEMs used the assessees technology to manufacture CDMA handsetsoutside Indiawhichwere sold to telecomcompanies in India (e.g.RelianceCom).The IndiantelecomcompaniessoldthehandsetstoIndianconsumers.TheAOandCIT(A)heldthatastheOEMssoldthehandsetstocustomers in India,theywerecarryingonabusiness in IndiaorhadasourceofincomeinIndiaandsotheroyaltypaidbythemtotheassesseewastaxablein India u/s 9(1) (vii) (c). On appeal by the assessee to the Tribunal, held by the Tribunalallowingtheappeal:(i) U/s9(1)(vi)(c)royaltypayablebyapersonwhoisanonresidentisdeemedtoariseinIndiawhere the royalty ispayable in respectof any rightetc.utilised for thepurposesof abusinesscarriedonbysuchpersoninIndiaorforthepurposesofearninganyincomefromanysourceinIndia.S.9(1)(vi)(c)isadeemingprovisionandtheburdenisontheRevenuetoprovethatthepayerhasabusiness/sourceofincomeinIndia.Whatisimportantfors.9(1)(vi)(c)isnot whether the right to property is used in or for the purpose of a business, but todeterminewhethersuchbusinessiscarriedonbysuchpersoninIndia;(ii) Thefirstquestion iswhethertheOEMshavecarriedonbusiness in Indiaandusedtheassessees patents for that purpose. Themere fact that the productsmanufactured by theOEMs outside Indiawere sold to parties in India does notmean that theOEMs carried onbusinessinIndia.ForabusinesstobecarriedoutinIndiathereshouldbesomeactivitycarried


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out in India.AmerepurchaseandsalewithanIndianparty isnotsufficient.ThefactthattheOEMscustomizedthehandsetssoas lockthemtoaspecificoperatorand includedHindiandregional languages, etc. was irrelevant as such customization was not connected with theassessees patents. Therewas no customization of the hand set qua the CDMA technology.Further,even if theOEMcustomized thehandsets to Indianspecifications thatdidnotmeanthattheOEMwascarryingonbusinessinIndia.Theassesseesroleendedwhenitlicenseditspatents to the OEMs and the OEMs role ended when they sold the handset to the Indiancustomer.The salewasofachattelasachatteland though theproduct isacombinationofhardware and technology, the revenues attempt to break down the sale into variouscomponentsisnotsupportedbythetermsoftheagreementandthefactsanditcannotbesaidthat every item other than software was sold and that the embedded software has beenseparately licensed. There is also no evidence on record to show that title to the handsetspassedinIndiaorthatcertainfurtheractivitywasdonebytheOEMsinIndiaafterthesale.Ontheotherhand, title to theequipmentpassed to the Indian customeronhigh seas and theprofits made by the OEMs would not be chargeable to tax in India. The taxability of theassessee directly depends on the taxability of theOEMs and if theOEM is not taxable, theassessee cannot bemade taxable (Ericsson AB 246 CTR 433 (Del), Skoda Export,NokiaNetWorksfollowed).Evenotherwise,themerepassingoftitleinimportedgoodsinIndiadoesnotmeanthattheOEMiscarryingonbusinessinIndia.ItisbusinesswithIndiaandnotbusinessinIndia;(iii) ThesecondquestioniswhethertheOEMshaveusedtheasssesseestechnologytoearnormakeincomefromasourceinIndia.Asourceofincomeistheactivitythatgivesraisetoincome.Thesourceoftheroyalty incomefortheassessee istheactivityofmanufacturingbytheOEMs,which iscarriedoutoutside India(RhodesiaMetals9 ITR(Suppl)45&Havells Indiafollowed). The departments argument that the assessee had made available the CDMAtechnology(software)totheOEMsintheformofchipsetsandthatOEMshaveinsertedthesechipsetsintothehandsetsmanufacturedbythemandthattheseinturnhavebeenlicensedtoIndianoperatorsforwhichOEMshavereceivedaconsiderationandhencetheyhaveasourceofincomeinIndiaiscontrarytothefacts.ItisalsonotthebasisonwhichtheassessmentwasmadebytheAO&CIT(A).Whatwasbroughttotaxwastheroyaltyearnedfromthelicensingofpatentsandnotroyaltyearnedonsoftwareembeddedinthechipsets.(A.Y.200001to200405)QualcommIncorporatedv.ADIT(2013)23ITR239/85DTR156/153TTJ513/56SOT72(URO)(Delhi)(Trib.)S.9(1)(vi):Incomedeemedtoaccrueorarise in IndiaFees fortechnicalservicesPermanentestablishmentDTAA India USA Creative fees and Database cost is held as Fees forIncludedServicesandclientcoordination feesisheldasbusinessprofitcouldnotbe taxed inIndia.(Art7,12)Assessee,USAbasedcompany,actedasacommunicationinterfacebetweenitsgroupconcernsandgroupconcernsandmultinationalclients.Theassesseeprovidedservicestooneofitsgroupconcernandreceived feesascreative fees,databasecostandclientcoordination fees. ItwasheldthatfeesundertheheadcreativefeesanddatabasecostamountedtoFeesfor included


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servicesasperArt.12ofDTAAandchargeableattherateof15%.However,clientcoordinationfeeswhichwastaxedasbusinessprofit,couldnotbetaxedinIndia,duetononexistenceofPE.(A.Y.201011)DDIT (IT) v. Euro RSCG Worldwide Inc. (2013) 140 ITD 210/84 DTR 29/153 TTJ 378(Mum.)(Trib.)S.9(1)(vi):Incomedeemed toaccrueorarise in IndiaRoyaltyConsideration received forsupplyofshrinkwrapsoftwareisnotroyaltyDTAAIndiaUSA.(Art12(3))Amount received for supply of shrinkwrap softwarewasnot royaltywithin themeaning ofArticle 12(3) of the DTAA between India and USA. Tribunal held that the receipt wouldconstitutebusinessreceiptsinthehandsofassesseeandtheassesseewhoisnonresidentdoesnot have a PE. Therefore, business income of the assessee cannot be taxed in India in theabsenceofPE.(A.Y.200607)Dy.DIT(IT)v.SolidWorksCorporation(2013)152TTJ570/82DTR316(Mum.)(Trib.)S.9(1)(vi):IncomedeemedtoaccrueorariseinIndiaRoyaltyComputersoftwareDeductionatsource.(S.40(a)(ia))PaymentmadeforuseofcomputersoftwaredoesnotamounttoroyaltyunderExplanation2tosection9(1)(vi)andthussection40(a)(i)doesnotapplytosuchpayment.(A.Y.200708)SKOLBreweriesLtdv.ACIT(2013)142ITD49/84DTR271/153TTJ257(Mum.)(Trib.)S.9(1)(vii): Incomedeemedtoaccrueorarise in India Fees fortechnicalservicesRoyaltySoftware licenceRighttousesaidconfidential information informofcomputerprogrammesoftwarewoulditselfconstituteroyaltyandattracttax.DTAAIndiaIreland(Art12)Assessee granted a nonexclusive nontransferable software license without right of sublicence.Licenseemightmakea reasonablenumberofcopiesof licensedsoftware forbackupand/orarchivalpurposesonly,evenifitwasnottransferofexclusiverightincopyright,righttouseconfidentialinformationembeddedinsoftwareintermsofaforesaidlicensewhichmakesitabundantlyclearthattherewastransferofcertainrightswh

consolidated digest of case laws jan 2013 may 2013

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