Unprotected Tribunal Decisions

S. 145 of the Income-tax Act, 1961 — Method of accounting — Assessee having more than one source of income under the head ‘Business income’ — Whether the assessee has the option to follow different method of accounting in respect of each of the different sources of income under the head — Held, Yes.

During the year the assessee had returned income under the head salary, business and income from other sources. In respect of income under the head business, he had three different sources of income viz., (i) Remuneration from partnership firm where he was a partner; (ii) income from proprietary concern; and (iii) consultancy fee. In respect of the first two sources of business income, the assessee was following mercantile system of accounting, while in case of the latter, the assessee claimed that it was following cash method of accounting. Accordingly, from the consultancy fee of Rs.7.87 lacs receivable, he offered to tax the sum of Rs.41,344 i.e., the sum equal to the tax deducted at source by the client and for which the TDS certificate was received by him, for tax.

According to the AO, the assessee was not allowed to adopt different methods of accounting for different sources of income falling under the same head. Therefore, he brought to tax the entire consultancy fee of Rs.7.87 lacs. On appeal, the CIT(A) allowed the appeal of the assessee.

The Tribunal noted that the object of the amendment of S. 145 made by the Finance Act, 1995 was only to do away with the mixed system of accounting, by which certain transactions relating to a particular source were recorded following one system and the other transactions following the other system of accounting. According to the Tribunal, if there were more than one sources of income falling under the same head of income, and the assessee follows either cash or mercantile system of accounting for different sources income, it cannot be said that the hybrid system of accounting for different sources of income is being followed. According to it, so long as for a particular source either cash or mercantile system was followed, there can be no objection. Thus, as noted by the CIT(A), since the assessee was consistently following the cash system of accounting for his consultancy income, it accepted the submission of the assessee and dismissed the appeal filed by the Revenue.

Project completion method of accounting — AO cannot adopt two methods of accounting in one project to determine the income of the assessee — In the case of an assessee following project completion method, profit arising on sale of TDR which TDR was received as consideration for the project, could not be taxed in the year of sale of TDR.

The assessee was in the business of construction of buildings and was regularly following project completion method which method was accepted by the Revenue. The assessee started project of construction of a building known as ‘Kailash Towers’ (KT) on a plot of land at Anik Village, Chembur of which the assessee was the owner. Till 31-3-1994, the assessee received Rs.32,31,159 as advances for sale of flats in KT. The assessee had incurred expenditure of Rs.87,35,285 (which included cost of land and also cost of work done on this project).

While the project was on, the entire plot of land admeasuring 44544.25 sq.mts. was required by the Government of Maharashtra for construction of Eastern Express Freeway and also for construction of tenements for rehabilitation of slum dwellers. An agreement was executed between the assessee, the Slum Rehabilitation Authority (SRA) and the Government of Maharashtra through PWD which agreement detailed modalities as to how the land was to be acquired and in what manner TDR was to be granted to the assessee. The agreement was a composite agreement for construction of Eastern Express Freeway to be carried out by the Government of Maharashtra after acquiring land from the assessee and also for rehabilitation of the slum dwellers living in 7500 hutments on the freeway land required for the purpose of Eastern Express Freeway. 1474 tenements and 92 shops were to be constructed by the assessee. The assessee was entitled to receive land TDR for handing over land to the Government and Construction TDR for constructing tenements and shops on land belonging to it. The grant of TDR was to be in phases. The assessee was not entitled to any monetary consideration.

During the previous year relevant to the assessment year under consideration the assessee sold certain TDR and the sale consideration was reflected on the liability side of the balance sheet. Sale consideration of TDR was regarded by the assessee as a receipt of the project to be taxed in the year of completion of the project.

The AO dissected the entire project into two schemes (1) Transfer of land for construction of Eastern Express Freeway by the Government of Maharashtra and the Road TDR granted to the assessee in lieu thereof; (2) Transfer of land and construction of tenements and shops by the assessee itself and the grant of TDR in lieu thereof. The AO, accordingly, applied different methods of accounting to both the projects. In respect of road TDR he taxed the assessee yearwise in the year in which TDR was sold and in respect of the project for transfer of land and construction of tenements and shops he accepted project completion method. In A.Y. 2000-01 the AO made an addition of Rs.1,88,86,810.

The CIT(A) held that Road TDR was directly related to the said project and sale proceeds against this TDR were to be recognised as a revenue receipt in the year in which the project was completed.

The Tribunal noted that the agreement was a composite agreement for handing over land for Expressway and also for construction of tenements and shops by the assessee on land belonging to it. The Tribunal also noted that the entire land was acquired in phases and also consideration in the form of TDR was received in phases. Consideration was received in kind. The funds received on sale of TDR were utilised for construction of tenements and shops. The Tribunal held that it was clearly one project and not two projects as they have been treated by the AO. The Tribunal held that the AO cannot adopt two methods of accounting in one project to determine the income of the assessee. It observed that in case of construction activity there are two recognised methods of accounting viz. (1) Project Completion Method and (2) Percentage Completion Method. The Tribunal stated that the assessee has a right or a privilege to adopt any one of the methods of accounting for determining its profit. In the present case, the assessee had been following the project completion method to determine the profits of a project for last so many years, but, during the year under consideration the AO had dissected the project in two segments and for one segment he applied project completion method and for the remaining segment, he determined the profit on sale of TDR. The method of accounting adopted by the AO was held to be neither prevalent nor recognised by the ICAI or under any law. The Tribunal held that the assessee had rightly computed its profit on the basis of the project completion method. Accordingly, it upheld the order of CIT(A) and dismissed the appeal filed by the Revenue.

Sections 28, 145 — Project completion method — In the case of an assessee following project completion method, receipts by way of sale of TDR, which TDR has direct nexus with the project undertaken, can be brought to tax only in the year in which the project is completed.

The assessee, a partnership firm, engaged in construction activity especially the Slum Rehabilitation Programme (SRA Scheme) launched by the Government of Maharashtra, had undertaken two projects of slum rehabilitation, during the financial year 2005-06, which were not completed as on 31-3-2006. The assessee was following project completion method of accounting.

During the financial year 2005-06, the assessee sold TDR allotted to it by BMC, which TDR was directly linked to the projects undertaken by the assessee, for a consideration of Rs.2,67,29,626. Since the projects were not complete as on 31-3-2006, this amount was reflected in the balance sheet as on 31-3-2006 as advance.

The Assessing Officer (AO) rejected the contentions of the assessee and brought to tax the entire amount as income of the assessee for A.Y. 2006-07.

Aggrieved, the assessee preferred an appeal where it was also submitted that the entire sale proceeds of TDR totalling to Rs.6,90,26,192 were reflected in the P & L Account for A.Y. 2008-09 and surplus income of Rs.2,78,59,939 was offered. The CIT(A) confirmed the order of the AO.

The Tribunal noted that admittedly the two slum rehabilitation projects were not completed in A.Y. 2006-07 and also that the TDR in quesetion had direct nexus with the two projects undertaken by the assessee. It found that the contention of the assessee is supported by the decision of the jurisdictional High Court in the case of CIT Central I, Mumbai v. Chembur Trade Corporation, (ITA No. 3179 of 2009) order dated 14-9-2011 and also the decision of Mumbai Bench of ITAT in the case of ACIT v. Skylark Building, 48 SOT 306 (Mum.) and also that the assessee has offered the amounts in A.Y. 2008-09 when the projects were completed.

The Tribunal accepted the contention of the assessee and restored the matter back to the file of the AO with a direction to verify whether the assessee has offered sale consideration of TDR in question in A.Y. 2008-09. If it has so offered, then the same should not be taxed in A.Y. 2006-07.

S/s 10(11) – ITAT can consider a new deduction which, inadvertently, was not claimed in the return filed by the assessee. Assessee is entitled to claim interest on PPF to be exempt even though the same was not claimed in the income tax return.

The assessee in the return of income filed, which return of income was revised on two occasions, as well as in the two revised returns filed by him offered for taxation under the head Income from Other Sources, Rs 3,81,565 being interest on PPF. The Assessing Officer (AO) completed the scrutiny assessment by accepting the returned income.

In an appeal to CIT(A), the assessee contended that he should be allowed exemption in respect of interest on PPF deposit u/s. 10(11) of the Act. The CIT(A), relying on the decision of the Apex Court in the case of Goetze India Ltd. (284 ITR 323) held that no fresh claim can be made by the assessee. He dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee, it was contended that a statutory claim can be made at any stage; mistake which has crept in the income-tax return was inadvertent; and the assessee cannot be put in a position so as to be taxed on something which he is not legally bound to. Reliance was also placed on the decision of Bombay High Court in the case of CIT v Pruthvi Brokers & Shareholders Pvt. Ltd. (ITA No. 3908 of 2010).

The Tribunal noted that the assessee failed to claim interest on PPF deposits as exempt from tax even in the revised returns and the impugned amount of interest is exempt from tax u/s. 10(11) of the Act. It noted that the Supreme Court, in the case of National Thermal Power Company Ltd. v CIT 229 ITR 383 (SC), has observed that even if a claim is not made before the AO, it can be made before the Appellate authority. It also noted that the decision of the Bombay High Court on which assessee has placed reliance, having considered the decisions of the Supreme Court in the case of Goetze India Ltd. (supra) and also National Thermal Power Company Ltd. v CIT (supra), held as under:

“The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgement does not impinge on the power of the Tribunal u/s. 254.”

Following the above mentioned decision of the Bombay High Court, the Tribunal directed the AO to allow exemption of interest on PPF deposit at Rs. 3,81,565. The appeal filed by the assessee was allowed.

S.254(2B) of the Income-tax Act, 1961 – Assessment made without following the directions of the CIT(A) and without giving adequate opportunity to the assessee – Not valid – Appellant also asked to pay cost to the assessee for casual and irresponsible approach.

The assessee was a division of DSJ Finance Corporation Ltd. and came into being under a scheme of demerger. In the return of income for the year, it returned a loss of Rs.32.35 lacs which was arrived at after claiming lease rent of Rs.39.28 lacs payable to ICICI. Since the same was not actually paid it was disallowed by the Assessing Officer. The assessee’s explanation that it was in financial crisis, including the fact that its parent company was also in liquidation, was not accepted by Assessing Officer. On appeal the CIT(A) vide his order dated 6^th November 2000 directed the Assessing Officer to frame fresh assessment order after ascertaining

The Assessing Officer did not take any step up to March 2002 and on 27^th March 2002 directed the assessee to supply information and thereafter on the very next day passed an order assessing the income at the same amount of Rs.7.53 lacs, the amount at which it was assessed earlier by him.

On appeal the CIT(A) after taking note of flagrant violation of the principle of natural justice, annulled the assessment order.

Before the Tribunal the assessee pointed out that since the Assessing Officer miserably failed in complying with the CIT(A) direction, his order was rightly annulled by the CIT(A).

According to the Tribunal, the CIT(A) had co-terminus power with that of the Assessing Officer, therefore instead of annulling the assessment, he should have examined the record at his end and decided the issue on merit. Therefore, it set aside his order and returned the issue back to the file of assessing officer with a direction to follow the directions given by the CIT(A). It further imposed cost of Rs.5,000 upon the appellant for the casual and irresponsible approach of the Assessing Officer, which led the assessee into two rounds of litigation.

S. 143(3) read with S. 252 — De novo Assessment pursuant to order of the Tribunal — Whether AO justified in enhancing assessed income while doing de novo assessment — Held, No.

The assessee had filed return of income declaring total income of Rs.1,980. The income was assessed u/s.143(3) at Rs.10.19 lac. This order was set aside by the Tribunal to the file of the AO for making fresh assessment after taking into account evidences including the evidence in the form of books of accounts. In pursuance thereof, the assessment was framed determining the total income at Rs.40.64 lac. The major addition was on account of share application money of Rs.38.84 lac. The CIT(A) on appeal deleted the addition made on this count.

Before the Tribunal, the Revenue contended that when the Tribunal restored the matter to the file of the AO with a view to take into account all the evidences, the AO was well within his right to consider all matters, including the issue regarding share application money, which was not the subject matter of appeal before the Tribunal.

The Tribunal noted that although it has all the powers to decide an issue before it, in any manner, the accepted position of law is that it has no power to enhance the assessment. In such a situation, the order of the Tribunal restoring the matter to the file of the AO cannot be construed in a manner as to grant power to the AO to include a totally new issue, which has the effect of enhancing the income. Thus, what cannot be done directly, cannot be done indirectly also. Accordingly, it dismissed the appeal filed by the Revenue.

S. 115JA of the Income-tax Act, 1961 – Tax payable on book profit – Whether receipt of capital subsidy credited to profit and loss account could form part of book profit – Held, No

The issue before the Tribunal was whether a capital subsidy received by the assessee from SICOM and credited to Profit and Loss account would form part of ‘Book Profit’ u/s.115JA of the Act. According to the Revenue, such receipt was not exempt from tax in terms of Chapter III of the Act. Further, in terms of the provisions, the said sum could not be excluded as it amounted to re-writing the Profit and Loss account prepared under the Companies Act and it could not be done in the light of the Supreme Court decision in the case of Apollo Tyres Ltd.

The Tribunal noted that the revenue had accepted the fact that the receipt of capital subsidy by the assessee was exempt by virtue of the decision of the Supreme Court in the case of P. J. Chemicals. Further, referring to the decision of the Mumbai Tribunal in the case of Frigsales (India) Ltd., the Tribunal noted the observations made therein viz., that ‘exemption allowed by one provisions of the Act cannot be taken away by another provision of the Act’. Accordingly, it held that if a capital subsidy was exempt from tax, then it cannot be taxed u/s.115JA of the Act.

S. 115JA of the Income tax Act, 1961 – Minimum Alternate Tax – Determination of Book Profit – Whether amount transferred to ‘lease equalization reserve’ by a lessor was allowable as deduction – Held, Yes

The assessee was engaged in the business of leasing and finance. The issue before the Tribunal was whether the sum of Rs. 4.49 crore, being the amount of lease equalisation reserve, should be added to the book profit u/s.115JA. The assessee claimed that :

· the said amount was debited to the Profit and Loss Account as required under the guidance note issued by the Institute of Chartered Accountants of India (ICAI); and

· it was not transferred to any reserve, but was reduced from the gross block of fixed assets. However, the AO added the said amount to the book profit applying the provisions of Explanation (b) to S. 115JA(2). On appeal, the CIT(A) reversed the order of the AO and allowed the appeal of the assessee.

Before the Tribunal, the Revenue, relying on the Tribunal decision in the case of M. J. Export Ltd., contended that the AO had the power to make adjustments to book profit, which he considered necessary, notwithstanding the Apex Court decision in the case of Apollo Tyres Ltd. Further, relying on the Madras Tribunal decision in the case of Alagendran Finance Ltd., it was contended that the guidance note issued by the ICAI could not override the provisions of the Act.

S. 115JA of the Income tax Act, 1961 – Tax on Book Profit – Computation of the amount of loss brought forward under clause (iii) of S.115JA(2) – Whether such loss pertaining prior to 1-4-1997 included depreciation – Held, Yes

The issue before the Tribunal was, effective from A.Y. 1997-98, whether the loss brought forward from the preceding year would include the depreciation of preceding year(s) or not. The AO, in the original assessment, computed the book profit u/s.115JA as under :

According to the assessee, the AO was not correct in comparing the brought-forward business loss, excluding depreciation and unabsorbed depreciation. It was pointed out that prior to the amendment w.e.f. 1-4-1997, business loss included depreciation and till A.Y. 1996-97, the unabsorbed depreciation and business loss was to be computed accordingly. For the purpose, reliance was placed on the decision of the Apex Court in the case of Surana Steels Pvt. Ltd. Accordingly, an application u/s.154 was made claiming mistake apparent from record, claiming that the eligible adjustments u/s.115JA(2)(iii) should be Rs.63,77,767, arrived at as under :

In view of the decision of the Supreme court referred to by the assessee, the AO accepted the contention of the assessee and computed the book profit at ‘nil’ after adjusting the brought-forward unabsorbed depreciation at Rs.63,77,767. According to the CIT, acting u/s.263, the decision of the Supreme Court was rendered with reference to S. 115J, hence not applicable to the provisions of S. 115JA. Based thereon and other reasoning, the CIT quashed the order passed u/s.154 and restored the original assessment made by the AO.

The Tribunal compared the provisions of S. 115J(1)(iv) with S. 115JA(2)(iii) and noted that both the provisions incorporate the method prescribed in S. 205(1)(b) of the Companies Act, 1956 either explicitly [115J(1)(iv)] or implicitly [115JA(2)(iii)]. According to it, though the wordings in S. 115JA(2)(iii) do not make specific reference to the provisions of S. 205(1)(b), yet the methodology prescribed is the same as in the said provisions. Thus, the Tribunal noted that both the provisions are similar.

According to it, the implication of Explanation (a) to S. 115JA(2)(iii) was that after working out the quantum of brought-forward business loss and unabsorbed depreciation as per the books of account, the amount of depreciation included in the loss brought forward has to be excluded there from, and the quantum of loss so arrived at would have to be compared with the quantum of unabsorbed depreciation, and lesser of the two would be reduced from the net profit so as to compute the book profit for the purposes of S. 115JA. Thus, it was held that as far as computation of loss brought forward and unabsorbed depreciation was concerned, the ratio of the decision of the Supreme Court in the case of Surana Steels Pvt. Ltd. was still applicable. Accordingly, the Tribunal upheld the view taken by the AO in the order passed u/s.154 and quashed the action of the CIT u/s.263.

S. 115JA — Stock borrowing charges not debited to P & L Account as required under Schedule VI of the Companies Act can be claimed as revenue expenditure even in the case of an assessee who is mandatorily bound to follow the accounting standards as prescribed.

The total income of the assessee, assessed u/s.143(3) of the Act, was a loss of Rs.55,37,760. Subsequently vide order passed u/s.143(3) r.w. S. 147 the AO inter alia disallowed Rs.53,55,000 towards stock borrowing charges incurred by the assessee and claimed in its computation of total income but were not debited to its Profit & Loss Account. The AO held that not debiting the expenditure to P & L Account was in violation of clause (xii)(b) of Rule 3 of Part II of Schedule VI and hence the same was not allowable.

The Tribunal noted that the provisions of Minimum AlternateTaxascontainedinS.115Jwereconsidered by the Apex Court in the case of Apollo Tyres Ltd. It observed that the scheme of S. 115JA is identical with that of S. 115J. It held that if the P & L Account prepared by the assessee was not in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956, then to that extent the AO can make the corrections and adjustments, but the AO cannot make disallowance in respect of expenses which are otherwise allowable but are not debited to P & L Account. The Tribunal held that the stock borrowing charges were rightly allowed as a deduction by the CIT(A).

3. DCIT, Cir 3(1) Mumbai v. Adbhut Trading Co. Pvt Ltd., (ITA No. 3597/Mum./2002), dated 25-7-2005

4. ITO v. Adbhut Trading Co. Pvt Ltd., (ITA No. 2869/Mum./2004), dated 25-4-2007

5. ITO v. Vicraze Investments & Trdg. Co. P. Ltd., (ITA No. 6276/M/2004), dated 24-4-2007.

S. 154 read with S. 115JA of the Income-tax Act, 1961 — Rectification of mistake apparent from record — Provision for doubtful debts debited to Profit and Loss account — Book profit as per S. 115JA assessed without making any adjustment qua the said provisions per Tribunal order — By retrospective amendment such provision made liable for inclusion in book profit — Whether AO justified in claiming that there was mistake apparent from record and accordingly, rectifying the order — Held, No.

The assessee had filed a return of income for the A.Y. 1998-99 declaring the total income at Rs.11.62 crore u/s.115JA of the Act. The AO assessed the total income at Rs.34.63 crore. Later on, it was noticed by the AO that the provision of doubtful debts of Rs.18.99 lacs was not added back to the profit & loss account while computing income u/s.115JA of the Act. Therefore, the AO passed an order u/s.154 of the Act on 30-12-2004 adding back the provision for doubtful debts u/s.115JA of the Act. On appeal the CIT(A) allowed the same relying upon the decision of the Bombay High Court in the case of CIT v. Echjay Forgins (P) Ltd., (251 ITR 15). The Tribunal vide order dated 17-3-2009 confirmed the order of the CIT(A).

Thereafter, by the Finance Act, 2009 clause (g) was inserted in Explanation to S. 115JA(2) of the Act w.e.f. A.Y. 1998-99 providing that provisions for doubtful debts and advances are disallowable while calculating book profit u/s.115JA of the Act. Relying on the decision of the Karnataka High Court reported in the case of M. Srinivasalu v. UOI, (239 ITR 282), the Revenue contended that an order which is not in accordance with the retrospective law can be rectified u/s.154 of the Act.

The Tribunal noted that in respect of the year under appeal the Tribunal had already decided the case in favour of the assessee by its order dated 17th March, 2009, whereas the retrospective amendment of the provisions received the assent of the President of India on 19-8-2009 i.e., after the order of the Tribunal was passed. Further relying on the Bombay High Court decision in the case of Sudha S. Mehta, it held that the assessment proceedings got concluded before the Tribunal under the then existing law and, therefore, there was no mistake apparent from record in the order of the Tribunal. Accordingly, the Revenue’s miscellaneous application was dismissed.

Book Profits – Sec.115JA/JB – Expenditure for earning tax free income – Not debited to profit and loss account – Provisions of s.14A not to apply

For AY 2007-08, the assessee invested Rs. 10 crores in shares and units. The assessee claimed that it had incurred no expenditure to earn tax-free income though the AO & CIT (A) made a disallowance of Rs. 19.58 lakhs u/s 14A r.w. Rule 8D. Before the Tribunal, the assessee claimed that (i) Rule 8D could not apply to AY 2007-08 and (ii) No disallowance u/s 14A could be made for purposes of computing book profits u/s 115JB.

Under the normal provisions of the Act, Rule 8D cannot apply till AY 2008-09 though the AO is at liberty to identify actual expenditure incurred to earn tax-free income & make disallowance. However, while computing book profit u/s 115JB, no actual expenditure was debited in the profit & loss account relating to the earning of exempt income. S. 14A cannot be imported into while computing the book profit u/s 115JB because clause (f) of Explanation to s. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s 115JB of the Act. In Goetze (India) Ltd. vs. CIT 32 SOT 101 (Del) it was held that sub-sec. (2) & (3) of s. 14A cannot be imported into clause (f) of the Explanation to s. 115JA. Accordingly, it is held that no addition to book profit can be made on account of alleged expenditure incurred to earn exempt income while computing income u/s 115JB.

S. 158B(b) of the Income-tax Act, 1961 — Undisclosed income — Assessee in employment, not filed her return of income — Whether salary income could be considered as undisclosed income — Held, No.

S. 158BFA(1) of the Income-tax Act, 1961 — Interest chargeable for delay in filing of return — Assessee’s application for extension of time for filing of return was not rejected — Whether the return filed by the extended period could be considered as late — Held, No.

The assessee was serving as a nurse in Breach Candy Hospital drawing salary. A search was conducted at her residence on 3-8-1999. In respect of the block of ten years viz., A.Ys. 1990-91 to 2000-01, the undisclosed income of Rs.3.85 lacs was determined and confirmed by the CIT(A). The contention of the assessee that her income by way of salary was subjected to TDS, hence, if at all there was concealment, it could only be with reference to her interest and dividend income, was not accepted. Before the Tribunal, the Revenue supported the orders of the lower authorities, on the ground that in respect of her salary income for the A.Ys. 1996-97 to 1999-2000, no tax was deducted from her salary income (which was for the reason that the income was below taxable).

Another ground of appeal was with reference to charging of interest u/s.158BFA(1) of the Act. The assessee had applied for extension of time of 30 days for filing of the return of income, which was not rejected by the AO. The assessee had filed her return by the said extended date.

The Tribunal noted that for the A.Ys. 1996-97 to 1999-2000, no tax was deducted from salary income of the assessee, for the reason that the same was not taxable. Further, it observed that her employer was required to intimate the Tax Department about the salary paid by it in the TDS returns filed by it. Therefore, it held that it cannot be said that the income of the assessee, which was already in the knowledge of the Revenue, was undisclosed income of the assessee.

As regards charging of interest u/s.158BFA(1) of the Act, the Tribunal noted that since the application filed by the assessee was not rejected, and the return was filed by the extended time, there was no delay in filing of return, and therefore, no interest is chargeable.

(A) S. 14A of the Income tax Act, 1961 - Disallowance of expenditure to earn exempt income - Assessee maintaining separate books of account for the purpose of business and the investments, from which the exempt income was earned - No disallowance made on the ground of personal expenditure while assessing business income - Held that no disallowance can be made u/s.14A.

(B) S. 36(2) of the Income-tax Act, 1961 - Bad debts in the business of vyaj badla - Whether allowable - Held, Yes.

The assessee was an individual, the proprietor of M/s. Pawankumar Parmeshwarlal, dealing in shares and securities. During the year under appeal, the assessee had claimed as exempt the income earned by way of dividend Rs.3.19 lacs, interest on RBI bonds Rs.1.11 lacs and PPF interest of Rs.0.07 lac. According to the assessee, none of these activities required any expenditure and as such no amount was disallowable u/s.14A. However, the AO was of the view that assessee would have spent some amount for earning the tax-free incomes and disallowed an amount of Rs.0.2 lac u/s.14A.

The assessee had claimed the sum of Rs.13.16 lacs as bad debts in the business of vyaj badla and the same was disallowed by the AO.

On appeal before the CIT(A), in respect of claim re : disallowance u/s.14A, the CIT(A) directed the AO to compute deduction as per Rule 8D. In respect of the claim for bad debts, he relied on the decision in the case of Arshad J. Choksi v. ACIT, (51 ITD 511), and held that the conditions u/s.36(2) were not satisfied in the badla transactions.

The Tribunal noted that the assessee was maintaining separate books of account for the purpose of business and the investments, from which the exempt income was earned, were made in his personal capacity. Further, while assessing the business income, no part of expenditure claimed by the assessee was treated or disallowed by the AO on the ground of being of personal in nature. In view of this, it held that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity. Further, it noted that the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, (328 ITR 81) has considered Rule 8D to be applicable prospective and since the assessment year involved was before the introduction of Ss.(2) and Ss.(3) of S. 14A, it held that there was no question of disallowing the amounts invoking Rule 8D.

According to the Tribunal, the lower authorities were not correct in disallowing the claim of bad debts. It noted that the assessee, being a stockbroker, had advanced money as part of his business activity. Therefore, relying on the decision of the Special Bench Mumbai Tribunal in the case of DCIT v. Shreyas S. Morakhia, (5 ITR TRIB.1), it held that the amounts advanced by the assessee in the course of business activity were to be treated as an allowable amount u/s.36(2).

Business expenses – S.14A disallowance – Interest on borrowing – Disallowance on ground that assessee ought to have repaid borrowing instead of investing in tax-free investments – Disallowance not justified

The assessee earned tax-free dividends of Rs. 21.73 crores from shares & units and claimed that the investment in the shares & units having been made out of own funds, no part of the interest on the borrowed funds could be disallowed u/s 14A. The AO, relying on Abhishek Industries 286 ITR 1 (P&H) held that the assessee ought to have utilized the own funds for repaying the borrowing instead of investing in shares and that it was a case of indirect diversion of borrowed funds into the shares and units to earn tax-free income. Interest of Rs. 9.91 crores was disallowed on a pro-rata basis. This was upheld by the CIT (A). On appeal by the assessee,

(ii) The AO’s argument that the assessee could have utilized its surplus funds for repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT vs. Hero Cycles Ltd 323 ITR 518 (P&H) where Abhishek Industries was distinguished and it was held disallowance u/s 14A of interest on borrowed funds was not permissible if the investment in shares was made out of own funds.

Section 14A — Rule 8D can be invoked only after AO records his satisfaction on how the assessee’s calculation is incorrect. Onus is on the AO to show that expenditure has been incurred for earning tax free income. Disallowance u/s.14A cannot be made on the basis of presumptions.

The AO disallowed a sum of Rs.31.01,542 u/s.14A of the Act by invoking Rule 8D. However, he did not record satisfaction as to how the assessee’s calculation was not correct. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) upheld the applicability of Rule 8D but he reduced the amount of disallowance to Rs.19,43,022 by reducing the amount of disallowance on account of interest but as regards disallowance of administrative expenses he upheld the action of the AO. He also upheld the applicability of Rule 8D.

Aggrieved, the Revenue preferred an appeal to the Tribunal and the assessee filed cross-objections.

The Tribunal noted that the assessee has suo motu made a disallowance u/s.14A. The Tribunal also noted that the AO has invoked Rule 8D without recording satisfaction as to how the assessee’s calculation is incorrect. Upon considering the ratio of various decisions of the Tribunal and the decision of the Punjab & Haryana High Court in the case of CIT v. Hero Cycles, (323 ITR 518), the Tribunal held that for invoking Rule 8D the AO must record satisfaction as to how the claim of the assessee is incorrect. If that is not done, provisions of Rule 8D cannot be invoked. An ad hoc disallowance cannot be madeunder Rule 8D. The onus is on the AO to establish that expenditure has been incurred for earning exempt income. Disallowance u/s.14A cannot be made on the basis of presumption that the assessee must have incurred expenditure to earn tax-free income. Since the AO had not recorded satisfaction regarding the assessee’s calculation being incorrect and since such satisfaction is a pre-requisite for invoking Rule 8D, the CIT(A) erred in partially approving the action of the AO.

No S. 14A disallowance in absence of nexus between investment in tax-free securities & borrowed funds. S. 14A disallowance cannot exceed exempt income

In AY 2007-08, the assessee received dividend of Rs. 4 lakhs 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. He applied the rate of interest paid on the borrowings and disallowed Rs. 12.73 lakhs. This was deleted by the CIT (A). On appeal by the department, HELD dismissing the appeal:

(i) If there is no nexus between borrowed funds and investments made in purchase of shares, disallowance u/s 14A is not warranted (Winsome Textiles 319 ITR 204 (P&H) & Hero Cycles 323 ITR 518 followed);

(ii) As the total dividend income received was Rs.4 lakhs, a disallowance of Rs.12 lakhs by invoking s.14A is not warranted.

Section 14A, Rule 8D – No disallowance can be made in respect of expenses in relation to dividend received from trading in shares. In view of the judgment of Karnataka High Court in the case of CCI Ltd vs. JCIT, the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. cannot be followed.

The assessee received exempt income in the form of dividend from personal investments and also from shares held for trading. It also received tax free interest from relief bonds. The assessee maintained separate accounts including separate bank accounts and balance sheets for personal investments and trading activities in which expenses relating to these two activities were shown separately.

In the course of assessment proceedings, on being asked to show cause as to why expenses relating to such income should not be disallowed u/s. 14A of the Act, the assessee submitted that from the separate accounts maintained, it is clear that personal investments were made out of profit earned in the past and not from borrowings. It also contended that no expenses were incurred in respect of such investment. As regards shares held for trading it was contended that the provisions of section 14A are not applicable. The AO relying on the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd. (ITA No. 8057/Mum/2003) held that section 14A does apply even to shares held as stock-in-trade. The AO disallowed the expenses in respect of both shares held as personal investment as well as shares held for trading.

Aggrieved, both the assessee and the Revenue, preferred an appeal to the Tribunal.

The Tribunal noted that the CIT(A) had given a clear finding that the assessee maintained separate accounts including separate bank accounts and balance sheets for the two activities. He gave a finding that the personal investments were made out of own funds, investments in RBI Relief Bonds and LIC had been made in earlier years and since the assessee was having vast experience in these matters, he was personally handling these investments, there were no expenses required. Similarly, the shares which were of unlisted group companies held for the purpose of retaining control over these companies, did not require any day to day expenses. The Tribunal confirmed the action of the CIT(A) in holding that no disallowance is called for in relation to shares held as personal investments.

As regards the shares held for trading, the Tribunal noted that subsequent to the decision of the Special Bench of ITAT in the case of Daga Capital Management Pvt. Ltd. (supra), in which it has been held that section 14A would apply even to dividend income for trading in shares, the Karnataka High Court in the case of CCI vs. JCIT (250 CTR 290)(Kar) has in relation to trading shares held that the assessee had not retained shares with the intention of earning dividend income which was only incidental to shares which remained unsold by the assessee. The High Court held that no disallowance of expenses was required in relation to dividend from trading shares. The Tribunal also noted that the Mumbai Bench of the Tribunal in the case of DCIT vs. India Advantage Securities Ltd. (ITA No. 6711/Mum/2011, Assessment Year: 2008-09; order dated 14-9-2011) held that in view of the judgment of the Karnataka High Court in the case of CCI Ltd. vs. JCIT, the decision of the Special Bench in the case of Daga Capital Management Pvt. Ltd., could not be followed and no disallowance could be made of expenses in relation to dividend received from trading in shares. The Tribunal set aside the order of CIT(A) and deleted the disallowance upheld by him in relation to trading in shares.

The appeal filed by the assessee was allowed and the appeal filed by the Revenue was dismissed.

S. 31 of the Income tax Act, 1961 – Current repairs – Expenditure incurred on repairs and replacement of worn-out equipments and other assets – Expenses disallowed on the ground that expense allowable are only those which are necessitated by the wear and tear of the relevant year, but not the accumulated repairs – Whether AO justified – Held, No

The assessee was in hotel business since 1984. During the year, it incurred expenditure aggregating to Rs.20.48 lacs on repairs and replacement of worn-out equipments in its bar and conference room. According to the Assessing Officer, the expenditure had resulted in acquiring of new assets, like furniture, cots, fridge, T.V. stand, etc. According to him, u/s.31, only such repairs as were necessitated by the day-to-day wear and tear during the relevant year were allowable as current repairs, and not the accumulated repairs. Since the expenditure had resulted in the acquisition of new assets, the Assessing Officer disallowed the sum of Rs.10.04 lacs, by treating the same as capital expenditure. He, however, allowed the depreciation thereon.

Being aggrieved, the assessee appealed before the CIT(A) and submitted that ever since the hotel was constituted in 1984, there had not been any replacement and by effluxion of time, the panelling comprising of plywood and coir as well as interior and cots and other furnishings in the rooms had become obsolete and worn out and it had necessarily to be replaced keeping with the status of the company. It was also pleaded before the CIT(A) that the works, such as the wooden ceiling work, bar front door and side doors, wooden with glass work, bar panelling, floor tiling, fittings and electrical items, etc. could not be held as acquisition of new assets and that the expenses disallowed by the Assessing Officer were necessarily repair expenditure. The CIT(A), after considering the nature of the expenses and circumstances of the case of the assessee and also in the light of the judicial pronouncements, restricted the disallowance to Rs.3.36 lacs by treating the same as of capital expenditure.

According to the Tribunal, the CIT(A) had elaborately dealt with the matter by citing various decisions and applying the ratio to the items involved in the assessee’s case and accordingly, upheld his order and dismissed the Revenue’s appeal.

Section 32 — Depreciation — Income assessed applying the net profit rate of 8% to the turnover — Whether the assessee’s claim for allowance of depreciation from the income so determined tenable — Held : Yes.

The assessee failed to produce books of account and supporting vouchers before the AO. He applied the provisions of Section 44AD and assessed the income. He rejected the assessee’s claim to allow depreciation out of the income estimated. Before the CIT(A) the assessee contended that since his turnover was more than Rs.40 lacs, the provisions of Section 44AD were not applicable, hence its claim for depreciation was justifiable. The CIT(A) accepted the assessee’s contention and allowed the appeal of the assessee.

Before the Tribunal the Revenue accepted the fact that the turnover was above Rs.40 lacs. However, it justified the action of the AO in applying the provisions of Section 44AD, as according to it, the correctness of the accounts statement filed by the assessee was not verifiable and all the conditions for application of the said provisions were present and satisfied. For the same, it relied on the Board Circular no. 684, dt. 10.06.1994.

The Tribunal accepted the contention of the assessee and held that since the turnover of the assessee was more than Rs. 40 lacs, the provisions of Section 44AD were not applicable. It also held that the Revenue was justified in rejecting the book result and in applying a flat rate of 8%, though the issue admittedly was not before it. However, as regards the allowance of depreciation, it held in favour of the assessee by relying on the decision of the Allahabad high court in the case of Bishambhar Dayal & Co. and upheld the order of the CIT(A).

Section 36(1)(iii), section 37(1) and section 43B — Interest paid on unpaid purchase consideration — It was held that such interest is governed by the provisions of section 37(1) and not by section 36(1)(iii) — Further held that the provisions of section 43B are not applicable to such interest.

The assessee was engaged in the business of manufacturing of polyester films. It had its manufacturing facilities at GIDC, Gujarat. It was allotted plot of land by GIDC. As per the terms of allotment the assessee was required to pay the purchase consideration of the land in instalments with interest. For the year under consideration the assessee had paid the sum of Rs.99.97 lakh as interest to GIDC and the same was claimed as business expenditure. According to the AO the expenditure was of capital in nature. On appeal the CIT(A) allowed the appeal and held that the expenditure was of revenue in nature.

Before the Tribunal the Revenue supported the order of the AO and further contended that since the interest to GIDC was unpaid, it is not allowable u/s.43B.

The Tribunal, as per the order of the CIT(A), noted that the fact that the production by the assessee had commenced in October, 1988 was not controverted. Accordingly, it held that the interest paid during the year cannot be considered as capital expenditure. Further, it referred to the decision of the Supreme Court in the case of Bombay Steam Navigation Co. Pvt. Ltd. v. CIT, (1953) (56 ITR 52), where the interest paid on purchase consideration of the assets by the amalgamated company was held as allowable as business expenditure u/s. 10(2)(xv) of the 1922 Act (equivalent to section 37(1) of the 1961 Act) According to the Apex Court, the expression ‘capital’ used in section 10(2)(iii) of the 1922 Act (equivalent to section 36(1)(iii) of the 1961 Act), in the context in which it occurred, meant money and not any other asset. The Apex Court further observed that an agreement to pay the balance consideration due by the purchaser did not in truth give rise to a loan. On that basis the Apex Court held that the interest paid was not allowable as deduction u/s.10(2)(iii) of the 1922 Act, but as business expenditure u/s.10(2)(xv) of the 1922 Act. Applying the above ratio, the Tribunal held that the interest paid to GIDC by the assessee was allowable u/s.37(1). It further agreed with the assessee that the provisions of section 43B would also not apply to the

S. 37(1) of the Income-tax Act, 1961 — Allowability of disputed liability — Assessee following mercantile system of accounting claimed as business expenditure liability to the extent admitted by it — Appellate authority allowed only amount actually paid — Whether assessee justified in its claim — Held, Yes.

The assessee was in possession of and using land taken on lease from National Airport Authority of India. The said lease expired on 15-8-1994, when it was paying lease rent of Rs.192 per sq. m. The renewal of lease agreement was under negotiation and a dispute arose regarding the amount of lease rent. The lessor demanded a lease rent @ Rs.1,200 per sq. m., while the assessee offered Rs.616 per sq. m. The dispute could not be resolved and therefore the assessee provided in its books of account the expenditure on lease rent payable Rs.12.82 lacs calculated @ Rs.616 per sq. m. Against the said liability, the assessee had paid Rs.6.03 lacs during the year under the appeal.

During the course of assessment, the AO treated the said liability as contingent liability and disallowed the same. On appeal, the CIT(A) agreed with the AO, but held that to the extent of actual payment (Rs.6.03 lacs), the expenditure should be allowed. Being aggrieved, the assessee appealed before the Tribunal.

The Tribunal noted that the assessee was following mercantile system of accounting and therefore the income had to be assessed and expenditure had to be allowed on accrual basis. According to it, to the extent the amount provided by the assessee, there was no dispute and it was an ascertained liability. However, the Tribunal found the order of the CIT(A) allowing only the portion of the liability paid actually as illogical, as it is tantamount to forcing cash system of accounting in respect of the expenditure of lease rent. According to it, the liability had to be allowed or disallowed on accrual basis. According to it, the liability to the extent provided by the assessee had been crystallised and the assessee was justified in claiming the same as business expenditure. Accordingly, the claim of the assessee was fully allowed.

S. 37(1) — Treatment of deferred revenue expenditure — Expenditure on brand promotion and brand building classified in the books of account as deferred revenue expenditure — Allowable as revenue expenditure.

The assessee was engaged in the business of manufacturing and trading of edible and hair oils, cosmetics and hygiene products. For the relevant year the assessee had incurred total expenditure of Rs.1.53 crore on brand promotion and brand building. Out of the same, a sum of Rs.33.15 lacs had been debited to the profit and loss account and the balance amount of Rs.1.20 crore had been treated as deferred revenue expenditure in the books of account. In the return of income the assessee had claimed the entire amount of Rs.1.53 crore as revenue expenditure. According to the AO the accounting treatment given by the assessee clearly showed that the assessee was to derive benefits from the said expenditure for a number of years. He therefore disallowed the amount of Rs.1.20 crore shown by the assessee as a deferred expenditure and added to the total income. On appeal, the CIT(A) allowed the appeal of the assessee.

The Tribunal noted that the Assessing Officer had disallowed the claim mainly on the basis of the accounting treatment given by the assessee in the books of accounts. According to it, the advertisement expenditure was basically incurred for promoting the sale of the products. While incurring such expenses the assessee may derive some enduring benefits but as held by the Supreme Court in Empire Jute Co.’s case, test of enduring benefit was not conclusive in understanding the true nature of expenditure. A particular expenditure can be considered as capital expenditure only if there was some advantage in the capital field i.e., when the assessee had acquired any new assets or any new source of income. In case the expenditure had been incurred only for conducting the business more efficiently and more profitably, there being no advantage in the capital field, such expenses had to be treated as revenue expenditure as held by the Supreme Court in the above case. In the case of the assessee, by incurring expenditure on advertisement, it had not acquired any new asset or any new source of income. The expenditure had been incurred only for better profitability by promoting the sales. Such expenditure, according to the Tribunal had to be treated as revenue expenditure, irrespective of the accounting treatment given in the books as the accounting treatment is not conclusive in understanding the true nature of expenditure.

Section 37(1) — Business expenditure — Whether the expenditure, which are subjected to FBT, can part thereof be disallowed on the ground that the same are not for the purpose of the business — Held, No.

The assessee is a partnership firm engaged in the business of providing services as insurance surveyor and loss assessor. In one of the grounds before the Tribunal, the assesse had challenged disallowance made by the AO and confirmed by the CIT (Appeals), conveyance and telephone expenses of Rs.4,818 and Rs.17,224 out of Rs. 24,088 and Rs.86,120, respectively. In the absence of any record maintained by the assessee in the form of log book or call register to establish that the said expenses were wholly and exclusively for the purpose of its business, the same were disallowed by the AO to the extent of 20%.

The Tribunal referred to the CBDT Circular No. 8/2005, dated 29-8-2005 and opined that once fringe benefit tax is levied on expenses incurred, it follows that the same are treated as fringe benefits provided by the assessee as employer to its employees and the same have to be appropriately allowed as expenses incurred wholly and exclusively incurred by the assessee for the purpose of its business.

S.32 and s.37(2) of the Income tax Act, 1961 – Allowance of Depreciation on car and interest on car loan – Held the same cannot be disallowed on the ground of personal use

The AO disallowed 1/5th of the expenses incurred in relation to motorcar, viz., running and repair, depreciation and interest on loan. On appeal, the CIT(A) had sustained the said disallowance.

The Tribunal noted that the cars were maintained for the purposes of business. Relying on the Mumbai Bench of the Tribunal decision in the case of Mukesh K. Shah, whereunder depreciation was held to be fully allowable, the Tribunal fully allowed the depreciation as claimed by the assessee.

Further, according to it, the ratio laid down in the said case was also applicable to the interest paid on car loan, as the loan had been taken for the purpose of business.

As regards the other expenses on motorcar — the disallowance was restricted to 1/8th of expenses claimed.

Section 36 (i)(iii) — Allowance of interest paid — Where interest-free fund was more than the alleged investment in non-business assets, whether the interest paid could be disallowed —Held : No

The assessee was a non-banking finance company. As per its accounts, the accumulated loss was of Rs.52.2 lacs. It had claimed deduction of Rs.4.37 lacs towards interest. The AO noted that the assessee had invested Rs.40 lacs in shares, which according to it, was not for the purpose of the business activity of the assessee company. Therefore, the entire amount of interest of Rs.4.37 lacs was disallowed. On appeal the CIT(A) upheld the order of the AO.

From the accounts of the assessee the Tribunal noted that the assessee had interest-free loan and share capital aggregating to Rs.1.26 lacs and after adjusting the debit balance in the Profit and Loss account, the net interest free funds available at the disposal of the assessee was of around Rs.53 lacs. As against this, the investment in the shares was only to the tune of Rs.40 lacs. The Tribunal referred to the decision of the Mumbai High Court in the case of Reliance Utilities & Power Ltd. where it was held that if there were funds, both interest-free and interest bearing, then a presumption would be that the investment would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. Relying on the same, it held that since in the case of the assessee, the interest-free funds were more than the investment made in shares, the sustenance of disallowance of interest by the CIT(A) was not justified.

Section 36(1)(vii) — Bad debts — Assessee’s claim, who was an exporter, for allowability of bad debts was rejected on the grounds that the assessee was allowed deduction u/s.80HHC as also that it had not obtained RBI’s permission for write-off — Whether the lower authorities justified — Held, No.

The assessee was 100% exporter. Its claim for allowability of Rs.33.6 lakh as bad debts was disallowed by the AO on the grounds amongst others that it was allowed deduction u/s.80HHC. The CIT(A) dismissed the appeal for the reason that the assessee had not taken RBI’s permission for writing off of debts.

The Tribunal noted that the assessee had not included the unrealised export bills while claiming deduction u/s.80HHC. Further, relying on the decision of the Delhi High Court in the case of CIT v. Nilofer I. Singh, (309 ITR 233), it held that obtaining RBI’s permission for write-off of dues on a foreign importer was an irrelevant factor, so far as admissibility of deduction as bad debt was concerned. Relying on the Supreme Court decision in the case of TRF Ltd. v. CIT, (323 ITR 397), the Tribunal allowed the appeal of the assessee.

S. 36(1)(viia)(c) of the Income tax Act, 1961 – Provision for bad and doubtful debts – Assessee following cash system of accounting – Allowability of provision so made – Held, that deduction being statutory, allowable

The assessee was a state financial corporation providing long-term financial assistance by way of granting loans and lease finance to industrial units. It was following the cash method of accounting. During the year under appeal, the assessee had claimed deduction to the extent of 5% of its total income by way of provision for bad and doubtful debts u/s. 36(1)(viia)(c) of the Act. The said claim was denied by the AO for the reason that the assessee was following the cash method of accounting. According to him, such deduction could be allowed only when the income which had been accrued but not received was offered for taxation, as in the mercantile system of accounting. He further observed that allowing the provisions under the cash system of accounting defeats the very purpose of abolishing the hybrid system of accounting. On appeal, the CIT(A) allowed the deduction.

According to the Tribunal, as per the plain reading of the provisions of S. 36(1)(viia)(c), no condition of any specific system of accounting to be followed by the assessee had been provided. Therefore, the deduction being a statutory deduction, had to be allowed on the basis of the provisions made in the books of accounts, notwithstanding the fact that the assessee was following the cash system of accounting. It further noted that in the assessee’s case, the debts also included the amount of loans/advances, which were not affected by the method of accounting being followed by the assessee.

S. 37(1) — Capital or revenue expenditure — Cost of tools and dies — Allowed as expenditure on its issue for production. S. 145A — Valuation of inventory in accordance with the method of accounting regularly followed — Assessee justified in valuing three years old inventory at nil value.

The assessee was engaged in the business of developing and producing various electronic components, sophisticated systems, solar photovoltaic cells and other allied items for defence and other government departments. In its accounts it used to treat items of loose tools and small dies used in production as consumables. At the time of purchase of tools/dies the same were entered in the stock as consumable tools and were charged to consumption as and when issued for production activities. However, the AO treated the same as of capital nature subject to depreciation @ 25%, the rate applicable to plant and machinery.

Out of the other issues before the Tribunal — the one was regarding allowability of Rs.50.2 lakhs claimed by the assessee towards provision for slow moving inventory. As per the method of accounting regularly followed, the assessee used to write off all inventories which were more than three years old. According to the AO — the writing off was premature and was not allowable under the Act. The assessee justified its method of accounting on the ground of obsolescence resulting from change and/or upgradation in technology with the passage of time. It was submitted that the inventory so written off had no market value and for all practical purposes had only scrap value. The same was shown as income in the year of sale.

The Tribunal noted that the assessee was a Government undertaking and the accounting policy was being followed consistently. Its accounts were audited by CAG. Further, relying on the judgment of Rajasthan High Court in the case of Wolkem India Ltd., it allowed the claim of the assessee.

S. 37(1) — Capital or revenue expenditure — Expenditure incurred on launching of a new model of car — Held as revenue expenditure.

The assessee was carrying on the business of manufacture and sale of automobiles and machine tools. During the year under appeal, it had incurred expenditure of Rs.2.93 crore on van project. In its return of income the same was claimed as revenue expenditure though in its books of account, the same was capitalised and shown as ‘Capital work in progress’. The AO rejected the claim of the assessee for reasons amongst others, as under:

· The expense incurred was for development of a new car and hence cannot be termed as revenue expenditure;

· As per the Annual Report of the assessee — the project was under implementation and ready to launch. Therefore, the expense incurred up to the end of the previous year had rightly been capitalised by the assessee in its books of accounts.

The CIT(A) on appeal confirmed the action of the AO, observing that the project was new business and not the expansion of an existing business.

Before the Tribunal, the Revenue justified the orders of the lower authorities and further contended that:

According to the Tribunal the moot point for consideration was whether the expenditure incurred in launching a new model could be treated as expansion of same business or a new business. It referred to the CIT(A)’s observation that if the assessee had incurred expenditure for expansion of the production capacity of its Premier Padmini car or any of the cars which it was already manufacturing, it would amount to a case of expansion. According to the CIT(A), the product sought to be manufactured was a totally new product, even if it was a car. The Tribunal did not agree to it. According to it, the test to be applied for deciding whether a particular project was an expansion of the existing line of business or a new business was to determine whether there was unity of control and management and interlacing of funds or not. It noted that those two aspects in the case of the assessee had not been disputed by the Revenue. Therefore, it held that the expenditure incurred on the van project was revenue in nature being for expansion of the business. Accordingly, the appeal filed by the assessee on this ground was allowed.

S. 28 and S. 37(1) — Exchange loss arising on application of AS-11 — Allowable as business loss/expenditure — Ultimate utilization of fund for investment purpose would not affect the allowability of loss.

The assessee was a film actress. She had shown her professional receipts to the tune of Rs.6.12 crore and declared a total income of Rs.6.04 crore. During the course of assessment the AO noticed that the assessee had claimed foreign exchange loss of Rs.7.25 lacs. As per the assessee the loss was arising out of exchange rate difference in the EEFC account. The assessee had a large amount of dollar fund in the account at the beginning of the year and after deposits during the year into the same account, it was closed and converted into Indian Rupees. On conversion, due to reduction in the value of dollar vis-à-vis Rupee, there was a loss/reduction in the professional income accounted, which was claimed as a loss.

This method of accounting, which was based on Ac-counting Standard 11, was consistently followed by the assessee and the Department had also assessed the profits earned therefrom in earlier years. However, during the year, the AO disallowed the exchange loss, holding that the funds after conversion were utilised for investing in tax relief bonds/fixed deposits. Thus, since according to the AO, the utili-sation of foreign currency balance was not for profes-sional purposes, the exchange loss was disallowed.

Before the Tribunal the Revenue contended that the Assessing Officer’s finding was correct that the amount was not utilised for professional activities. It also relied on the decision of the Calcutta High Court in the case of invest import and contended that the capital loss cannot he allowed.

If further observed that the CIT(A) also erred in up-holding that it was a notional loss. This was an actual loss after conversion of balance in US into Indian Rupee. Accordingly, it was held that the loss was an allowable loss against professional receipts.

S. 37(1) — Business expenditure — Reimbursement of expenditure incurred in running the school — Whether allowable — Held, Yes.

The assessee was engaged in the business of export. One of the issues before the Tribunal wasregarding the allowability of expenditure incurred on the maintenance of a school run by TATA at Dewas. The school was situated at the place where the assessee’s factory was located and substantial number of students of the school were children of the assessee’s employees. During the year the assessee had paid the sum of Rs.1,88,540 by way of reimbursement, part of the expenditure incurred in running the School. The same was disallowed by the lower authorities.

According to the Tribunal, the case of the assessee was covered by the Tribunal decision in the assessee’s own case for the A.Ys. 1992-93, 1993-94 and 1994-95 which was later affirmed in the assessee’s own case for the A.Ys. 1996-97 to 1998-99. Noting the fact that the school was situated at the same place where the assessee’s factory was located and substantial number of students of the school were children of the assessee’s employees, the expenditure claimed was allowed.

S. 28, S. 36(1)(vii), S. 37. Amount paid by the assessee under Performance Guarantee Bond is allowable as a business loss/expenditure. Mere fact that the assessee has claimed the amount written off in the course of business as ‘bad debt’ does not preclude him from claiming the same as business loss/expenditure.

The assessee, as a part of its business activity, was introducing certain clients to M/s. Joindre Capital Services Ltd., who entered into share purchase and sale transactions for such clients. As per the terms of the agreement entered into between the assessee and M/s. Joindre Capital Services Pvt. Ltd., assessee had to indemnify Joindre Capital Services Ltd., in case clients introduced by the assessee failed to honor any of their commitments.

During the previous year in respect of three parties, assessee had shown a sum of Rs.11,90,779 as bad debts written off. The Assessing Officer (AO) held that such claim could not be allowed since assessee was a sub-broker and the debt was never taken into account for computing the income of the assessee for the relevant previous year or any preceding previous years.

Aggrieved, the assessee preferred an appeal to the Tribunal where disallowance of bad debt of Rs. 11,90,779 was taken as a ground. In the course of the hearing, the assessee withdrew the original ground and by way of an additional ground claimed that this sum of Rs.11,90,779 paid under a performance guarantee bond be allowed either as business expenditure u/s.37(1) or as business loss. On behalf of the assessee it was contended that the Tribunal has in the case of India Infoline Securities (P) Ltd. v. ACIT, (25 SOT 123) (Mum.) held that losses incurred by an assessee in the course of his business as a stock broker, on account of default of his clients, could be claimed as a business loss.

Neither the AO nor the CIT(A) had gone through the agreement entered into by the assessee with Joindre Capital Services Ltd., for verifying whether such claim could be allowed as business expense or loss. The fact that the assessee had claimed the amount as bad debt would not preclude it from claiming the amount as business loss or expenses, since the write off was done in the course of business only.

With a view to verify whether the claim of the as-sessee was in relation to clients introduced by it to M/s. Joindre Capital Services Ltd., as also whether the indemnity agreement with Joindre Capital Services Ltd. was applicable, in relation to such write off effected by the assessee, the Tribunal set aside the orders of the AO and the CIT(A) and restored the matter back to the AO for considering the issue afresh in accordance with law after giving proper opportunity to the assessee to represent its case.

S. 40A(2)(b) of the Income-tax Act, 1961 — Payments to relatives — Discount on sales given to sister concern — Whether covered under the provisions — Held, No.

The assessee had given sales discount of Rs. 19.3 lacs to its sister concern. Since no such discount was given to other parties, the AO treated the same as unreasonable and disallowed it u/s.40A(2)(b). On appeal, the CIT(A) noted that the sales to other parties were only of meager amount, while the sale to sister concern was in bulk. Accordingly, the assessee’s appeal was alllowed.

According to the Tribunal, a bare reading of the provisions reveals that such provision could be invoked only where an expenditure was incurred in respect of which, payment was to be made to the sister concern. In case of discount on sales, no payment was made by the assessee as it only reduced the sale price. Therefore, relying on the Madhya Pradesh High Court decision in the case of Udhaji Shrikrishanadas, it held that the assessee’s case was not covered u/s.40A(2)(b).

S. 40(b) — Remuneration to working partner as per the partnership deed — Partnership deed gave power to modify the terms of remuneration — Whether the existence of such term would render remuneration not qualified for deduction — Held, No.

The assessee, a firm, executed a supplementary partnership deed on 20-6-2004 to provide for the payment of interest and remuneration to the working partners. As per the deed, the remuneration was to be calculated as a percentage of the profit as per S. 40(b) of the Act. One of the clauses in the deed further provided that the partners may decide to pay remuneration at a lower amount or not to pay remuneration or to pay remuneration on any other criteria or ratio. According to the AO, as explained in Circular No. 739, dated 25-3-1996, since the partnership deed did not contain a specific provision for calculating the amount of remuneration, no remuneration was allowable. He further held that in any case, the remuneration for the period till 20-6-2004, since it pertained to the period prior to the date of the execution of the deed, cannot be allowed. The CIT(A) on appeal upheld the order of the AO.

According to the Tribunal, the Board Circular referred to by the Tribunal required that either the remuneration payable to each of the working partners is laid down in the deed or the deed must lay down the manner of ascertaining such remuneration. Referring to the supplementary deed, the Tribunal noted that the deed did provide the manner of quantifying the remuneration to the partners. According to the Tribunal, the presence of clause 3(d) which empowered the partners to lower the remuneration or to not pay the remuneration, did not erase the other clauses which clearly laid down the amount of remuneration payable. It further observed that even in the absence of the said clause 3(d), the partners had the power to alter the remuneration payable. Accordingly, the orders of the lower authorities were modified to the said extent.

S 40(a)(ia). Provisions of S. 40(a)(ia) are not applicable to expenditure which has accrued prior to 10-9-2004 when the Finance Act, (No. 2) 2004 got the presidential approval — Amendment to S. 40(a)(ia) by the Finance Act, 2010 which extends the time limit for all TDS payable throughout the year has been introduced as a curative measure and therefore would apply to earlier years also.

The Assessing Officer (AO) disallowed amounts aggregating to `29,52,389 u/s.40(a)(ia) on the ground that assessee had deposited TDS late in the Government Account. Aggrieved the assessee preferred an appeal to the CIT(A).

The CIT(A) rejected the contention made on behalf of the assessee that S. 40(a)(ia) as amended with retrospective effect by the Finance Act, 2008 and Explanatory Notes to the Finance Bill, 2004 issued by the CBDT vide Circular No. 5/2005, dated 15-7-2005 were brought in to existence after the end of the financial year 2004-05. He also rejected the contention that the assessee had complied with the very intention of introduction of S. 40(a)(ia) i.e., compliance of TDS provisions in case of residents and curbing bogus payments.

The Tribunal noted that the CBDT has in its Circular No. 1 of 2009, dated 27-3-2009 clarified the amendment made to S. 40(a)(ia) by the Finance Act, 2008 with retrospective effect from 1-4-2005 was to mitigate hardship caused by the above provisions of S. 40(a)(ia) while maintaining TDS discipline. The Tribunal also noted that there has been a further amendment to this Section by the Finance Act, 2010 whereby time limit for payment of TDS deducted/deductible during the year has been extended till the due date of filing return of income. The Tribunal observed that this is similar to provisions of S. 43B. The Supreme Court has in the case of CIT v. Alom Extrusions Ltd., (319 ITR 306) held the amendment to S. 43B to be retrospective in operation. The amendment made by the Finance Act, 2008 to the provisions of S. 40(a)(ia) being with retrospective effect shows that it was curative in nature and was brought in to ameliorate the hardship caused on account of nominal delay in payment of TDS. Applying the ratio of the decision of the Apex Court, the Tribunal held the amendment brought in by Finance Act, 2010 to be curative in nature and therefore applicable to all earlier years also. The Tribunal directed the AO not to disallow the expenditure (i) which has accrued prior to 10-9-2004 when the Finance Act (No. 2) 2004 got the presidential approval, up to which date the provisions of S. 40(a) (ia) will not be applicable and (ii) expenditure in respect of which TDS has been paid by the assessee before the due date of filing of the return.

Business expenditure – S.40(a)(ia) – Disallowance for non-deduction of TDS – Amendment by Finance Act 2010 is retrospective – Special Bench verdict not to be followed in view of High Court verdict

In AY 2005-06, the assessee made payments to contractors & for professionals & technical services. Though TDS was deducted, it was paid after the end of the FY but before filing the ROI. The assessee pleaded that s. 40(a)(ia), as amended by the FA 2010 w.e.f. 1.4.2010 to provide that no disallowance should be made if the TDS was paid before the due date of filing the ROI should be held to be retrospective. However, the AO & CIT (A), rejected the claim by relying on Bharati Shipyard Ltd 132 ITD 53 (Mum) (SB). On appeal to the Tribunal, Held allowing the appeal:

The issue involved has now been decided by the Calcutta High Court in CIT vs. Virgin Creators against the Revenue. However, it is noteworthy that the Special Bench of ITAT Mumbai in the case of Bharati Shipyard Ltd 132 ITD 53 (Mum) has taken a view that the amendment is prospective in nature and would apply accordingly. Respectfully following the decision of the Calcutta High Court in the case of Virgin Creators the order of the CIT(A) is not sustainable and the assessee’s appeal is allowed.

Similar view taken in – Shri Piyush C. Mehta v. ACIT, ITA No.1321/Mum/2009, AY 2005-06, Bench ‘C’, order dated 11/04/2012; Rajamahendri Shipping & Oil Field Services Ltd. v. Addl. CIT, ITA No.352/Vizag/2008, AY 2005-06, order dated 13/04/2012

Section 40(a)(ia) r.w.s. 194C and 194J — Disallowance of expenditure on account of non-deduction of tax at source — Whether the provisions applicable to the assessee-society engaged in charitable activities — Held, No.

For non-deduction of tax at source from the payments made towards advertisement expenses, the AO disallowed the sum of Rs.5.10 lac and taxed the same as business income. Before the CIT(A) the assessee contended that since its income is not chargeable u/s.26 to section 44AD under the head ‘Business income’, the provisions of section 40(a)(ia) were not applicable. However, the CIT(A) upheld the order of the AO.

Relying on the Amritsar Tribunal decision in the case of ITO v. Sangat Sahib Bhai Pheru Sikh Educational Society, (ITA Nos. 201 to 203/ASR/2004, dated 31-3-2006), which in turn was based on the Mumbai Tribunal decision in the case of CIT v. India Magnum Fund, (74 TTJ 620), the Tribunal accepted the contention of the assessee and allowed the appeal of the assessee.

Section 40(a)(ia) — Disallowance of expenditure on account of non-deduction of TDS — Non-deduction was on account of non-allotment of TAN — Whether the disallowance was justified — Held, No.

For non-deduction of tax at source the AO disallowed the sum of Rs.4.62 lakh paid by the assessee towards brokerage and commission. The non-payment was on account of the non-receipt of TAN. The assessee pointed out that he had immediately applied for TAN when the bank refused to accept tax payment without TAN. However, till 31-3-2005 TAN was not allotted. Hence, he again applied for TAN which was finally allotted on 15-4-2005 and the tax was paid on 25-4-2005. Since the tax was not paid by the year-end, the amount paid by way of brokerage and commission was disallowed by the AO u/s.40(a)(ia). On appeal, the CIT(A) confirmed the order of the AO.

The Tribunal noted that the assessee was depositing TDS in time up to 7-12-2004. He had also applied for TAN and since the bank refused to accept TDS without TAN, he was unable to pay tax. Thus, according to it, the assessee was prevented from performing his obligations under the law despite his bona fide efforts and he cannot be regarded as defaulter. For the purpose, it also relied on the decisions of the Calcutta High Court in the case of Modern Fibotex India Ltd. & Another v. DCIT, (212 ITR 496) which was approved by the Apex Court in the case of CIT v. Hindustan Electro Graphites Ltd., (243 ITR 48) and also on the Hyderabad Tribunal decision in the case of ACIT v. Jindal Irrigation Systems Ltd., 56 ITD 164 and Nagpur Bench of Tribunal decision in the case of Canara Bank v. ITO, (121 ITD 1).

The Tribunal further noted that the provisions of section 40(a)(ia) are amended by the Finance Act, 2010 w.e.f. 1-4-2010 to provide that the expenditure shall not be disallowed if TDS is paid on or before the due date specified in section 139(1). According to it, if the amendment is curative or is intended to remedy unintended consequences or to render the statutory provisions workable, the amendment was to be construed to relate back to the provisions in respect of which it applies to the remedy. It referred to the following decisions where it was held that the amendments were retrospective though such retrospectivity was not mentioned by the Legislature while introducing the provisions. The cases relied on were:

Further, relying on the decisions of the Ahmedabad Tribunal in the case of Kanubhai Ramjibhai v. ITO, (135 ITD 364) and of the Mumbai Tribunal in the case of Bansal Parvahan India Pvt. Ltd. v. ITO, (137 TTJ 319), where it was held that the amendment in section 40(a)(ia) was curative in nature, it allowed the appeal of the assessee.

Section 40(a)(ia) r.w. section 194A — Disallowance of interest for failure to deduct tax at source — Payment of disputed amount with interest as per the Court order — Interest paid without deduction of tax at source — Whether AO justified in disallowing the same — Held, No.

The assessee was liable to pay the sum of Rs.68.54 lakh to one of its creditors. On account of his failure to pay, the suit for recovery was filed by the said creditor. The Court passed the decree settling the amount at Rs.55 lakh, which also included the sum of Rs.18.5 lakh towards interest.

In the return of income filed by the assessee, the amount paid by way of interest was claimed as deduction. Since the assessee had not deducted tax at source, the AO disallowed the claim u/s.40(a)(ia). The CIT(A) on appeal upheld the order of the AO.

Before the Tribunal, the assessee contended that the amount was paid in accordance with the decision of the High Court. The interest payable under the decree of the Court was a judgment debt, therefore, he was not obliged to deduct tax at source.

In view of the ratio laid down by the Bombay High Court in the case of Madhusudan Shrikrishna v. Emkay Exports, (188 Taxman 195), the Tribunal agreed with the assessee and held that the assessee had no obligation to deduct tax at source on the interest amount of Rs.18.5 lakh paid to the creditor.

Section 28 – Merely by initiating the compensation suit, the amount claimed therein cannot be treated as assessee’s income unless the other party admits the liability to pay compensation or there is a decree in favour of the assessee.

The assessee, manufacturer and domestic seller of grey fabric, filed its return of income for the AY 2008-09 declaring a loss of Rs. 31,31,568. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had acquired a 1250 MW windmill, from M/s Suzlon Energy, for captive consumption. The purchase order contained compensation clause, which provided that the assessee was entitled to compensation in case of any loss of generation on account of non-availability of the machine below 95% @ 3.67/KWH or as per the TNEB tariff during the warranty period. He also noticed that the generation of power unit did not touch the assured level of 37 lakh units. The assessee had filed a compensation case before the Jurisdictional High Court raising claim of Rs. 17,58,014 upto 15-9-2007 for shortfall in generation of power. Since the other party had not accepted the assessee’s claim for compensation and also the case was pending before the Court, the assessee had not declared the amount claimed as its income. The AO held that, since the assessee was entitled to compensation as per the agreement, he taxed the sum of Rs. 17,58,014 as the income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the addition made by the AO.

The Tribunal noted that the capacity assured was never achieved and the assessee had initiated compensation proceedings before the Honourable High Court. The High Court had referred the case to the Sole Arbitrator, who expired during the pendency of the arbitration proceedings. The Tribunal held that it is unable to concur with the stand of the Revenue that merely by initiating the compensation suit, the amount claimed therein is liable to be assessed as assessee’s income. It also noted that the other party has not admitted any compensation or its part as payable to the assessee nor there any decree in favour of the assessee so as to realise the amount. It held that once the arbitration proceedings are pending, the outcome of the assessee’s claim involved still hangs in balance. It observed that when there is no actual receipt of any amount or accrual, the same cannot be taken as income of the assessee. It held that the amount claimed by the assessee as compensation cannot be taken to be its income. The Tribunal upheld the order of CIT(A).

S/s. 28, 45 – In case of assessee following project completion method, sale proceeds of TDR allotted consequent to development of road need to be reduced from WIP.

The assessee company engaged in construction activity had undertaken to develop the D.P. Road leading to Vikroli property on which it was to construct flats. Upon development of the road, the assessee became entitled to TDR which was sold on 5.8.2005. Cost incurred on development of road was considered as part of WIP and the sale consideration of TDR was reduced from WIP which had the effect of reducing the total expenditure incurred till the end of the year, on the project under development. The AO assessed the receipts arising on sale of TDR under the head `Income from Capital Gains’.

Aggrieved the assessee preferred an appeal to CIT(A) who allowed the assessee’s appeal.

The Tribunal noted that the receipt of TDR had direct nexus with the work done by the appellant and was incidental to the entire project undertaken. It held that the assessee was correct in reducing the sale proceeds of TDR from work-in-progress. The Tribunal confirmed the order passed by the CIT(A) and dismissed the appeal filed by the revenue.

Section 41(1) — Whether the sum of Rs.1,77,27,681 reflected in the Balance Sheet of the assessee as on 31.3.1996 and thereafter carried forward in all subsequent balance sheets till 31.3.2002, which sum represented untaxed income of A.Ys. 1995-96 and 1996-97, could be taxed in AY 2003-04 on the ground that upon transfer to capital account during the financial year 2002-03 it has assumed the character of income, as it was no more payable and did not represent liability as falsely disclosed in the accounts by the assessee – Held: No

The assessee had received professional fees for executing off-shore project during the financial years 1994-95 and 1995-96. The gross bills raised in relation to the work were to the tune of Rs.2,46,95,375 and after setting off various expenses and amounts written off, the net professional fees were to the tune of Rs.1,77,27,681. This sum was grouped under ‘current liabilities’ as off-shore project advances in the balance sheet as on 31.3.1996 and then carried forward to subsequent years till 31.3.2002. During the financial year 2002-03, this amount of Rs.1,77,27,681 was transferred by the assessee to his capital account.

The Assessing Officer (AO) added this sum on a protective basis to the income of the assessee for the AY 1997-98, after reopening the assessment on the ground that the assessee had earned this income in that assessment year and also made an addition on substantive basis in AY 2003-04 on the ground that this amount had assumed the character of taxable income, as it was no more payable and did not represent any liability as falsely disclosed in the accounts by the assessee. The AO invoked the provisions of S. 41(1) of the Act. He also held that the opening balance was a Revenue receipt which was transferred to capital account in financial year 2002-03 and therefore this amount was taxed by him on a substantive basis as income of AY 2003-04.

The CIT(A) decided the issue in favour of the assessee and held that the income had accrued during the financial year relevant to A.Y.s 1995-96 and 1996-97 and only because of transfer of receipt to the capital account in the year relevant to AY 2003-04, it cannot be held to be taxable in AY 2003-04.

The agreement for rendering particular services was executed on 23rd Feb., 1995 between the assessee and Mazgaon Docks Ltd. and according to the work schedule, the required work was to be completed pre-monsoon 1995. The invoices were raised between 23rd March, 1995 to 26th April, 1995. The work was completed before start of the monsoon. The payments were received by the assessee between 6.4.1995 to 1.6.1995. While making payments, the payer had deducted TDS. Accounts were finally settled within financial year 1996-97.

S. 41(1) — Remission or cessation of liability — Receipt of advance money against order remaining unclaimed — Creditor under liquidation — Whether AO justified in treating the unclaimed sum as income — Held, No.

The assessee had received the sum of Rs.36.33 lacs in the F.Y. 1996-97 from a party called PMA Ltd. as advance against sales. Before the assessee could supply the material, PMA went into liquidation. The last correspondence with the party was in February 1999 when a liquidator informed the assessee about the fact of liquidation.

Applying the ratio of the decision of the Supreme Court in the case of T. V. Sundaram Iyenger & Sons Ltd., of the Chennai High Court in the case of Aries Advertising Pvt. Ltd. and of the Delhi High Court in the case of State Corporation of India Ltd., the AO treated the said unclaimed amount as the income of the assessee. On appeal the CIT(A) agreed with the order of the AO and noted that since the amount remained unpaid for a long period, it assumed the character of trade receipt taxable u/s.41(1) of the Act. He also relied on the decision of the Karnataka High Court in the case of Mysore Thermo Electric Pvt. Ltd.

According to the Tribunal, the provisions of S. 41 would apply where an allowance or deduction had been made of loss or expenditure in the assessment of earlier year and in any subsequent years the assessee availed the benefit by way of remission or cessation of such trading liability. In the case of the assessee, the impugned amount was not of the character of ‘trading liability’ for which the assessee had ever obtained any benefit or deduction or allowance in any of the past years. Further, there was no evidence or any specific communication to indicate the remission or waiver of debt by the creditor. Hence, according to the Tribunal, the provisions of S. 41(1) were not applicable. For the purpose it also relied on the decisions of the Calcutta High Court in the case of S. K. Bhagat & Co. and of the Rajasthan High Court in the case of Shree Pipes Ltd. According to it, all the decisions relied on by the lower authorities were distinguishable on

Sections 28(iv) and 41(1) — Remission of loan liability — Loan utilised for the purpose of acquisition of capital assets — Whether loan liability remitted taxable — Held, No.

During the year under appeal, the assessee had shown Rs.13.54 crore as extra ordinary income in the profit and loss account. It represented Rs.6 crore as unsecured loan from corporate written back and Rs.7.61 crore, being concession given by banks towards waiver of principal amount of loan. According to the AO, the said income, which was taxable u/s.28(iv), had escaped assessment. Hence, the case was reopened and income was assessed u/s.143(3) r.w.s. 147. On appeal, the CIT(A) confirmed the order of the AO.

Before the Tribunal the assessee challenged the reopening of the case and contended that the

The Revenue supported the orders of the lower authorities and relied on the order of the Supreme Court in the case of T. V. Sundaram Iyengar & Sons v. CIT, (222 ITR 344) and the decision of the Bombay High Court in the case of Solid Containers v. DCIT, (308 ITR 417). According to it, the loans availed by the assessee were utilised for the purpose of carrying on of the business and therefore the AO was right in holding that it was the benefit which arose to the assessee during the course of its business and taxable u/s.28(iv).

The Tribunal agreed with the assessee and relying on the decision of the Supreme Court in the case of Commissioner of Agricultural Income Tax v. Kerala Estate Mooriad Chalapuram, (161 ITR 155) held that since the loan received was utilised for acquiring capital assets, the amount remitted was not taxable u/s.41(1). According to the Tribunal the decision of the Chennai High Court in the case of Iskraemeco Regent Ltd. v. CIT, (196 Taxman 103) was also directly applicable to the case of the assessee. According to it, the said decision had considered the decisions of the Bombay High Court not only in the case of Solid Containers Ltd. v. DCIT, (308 ITR 417), but also that of Mahindra & Mahindra Ltd. v. CIT, (261 ITR 501). Further it was noted that the said decision had also distinguished the decision of the Supreme Court in the case of T. V. Sundaram Iyengar & Sons, which was relied on by the Revenue. Accordingly, the appeal of the assessee was allowed.

Section 36(1)(vii) r.w.s. 36(2), S. 28 — Whether loss due to irrecoverability of security deposit given for taking godown on rent is allowable as a business loss — Held : Yes.

The assessee had given a security deposit of Rs.5,00,000 to one Mr. Agrawal for taking his godown on rent. The assessee stated that the owner had not returned the money and accordingly claimed the same as ‘bad debt’. This amount was written off by the assessee. The Assessing Officer (AO) held that since the provisions of S. 36(2) were not fulfilled the claim for bad debt could not be allowed. No relief was allowed in the first appeal. On an appeal to the Tribunal,

Sub-Section (2) of Section 36 provides that no deduction for bad debt shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of business of banking or money lending which is carried on by the assessee.

The Tribunal noted that this amount was not taken into account in computing the income of the assessee of an earlier or current year.

Satisfaction of the provisions of S. 36(2) is a pre-condition for claiming deduction u/s. 36(1)(vii). Since the assessee had not satisfied the provisions of S. 36(2), it was not entitled to claim deduction u/s 36(1)(vii).

However, the Tribunal noted that the amount was given as security for acquiring godown for carrying on the business. The Tribunal noted that the Apex Court has in the case of Mysore Sugar Co. held that loss due to irrecoverable advance/security given for the purpose of trade is allowable. The Tribunal also noted that the Bombay High Court had in the case of IBM World Trade Corporation held that the money advanced by the assessee to the landlord for the purposes of and in connection with the acquisition of the premises on lease was not recoverable, such loss of advance was a business loss.

Section 28 — Non realisability of balances lying with a bank in FD and current accounts held to be allowable as business loss.

The assessee was conducting business as a proprietor. His banker was Madhavpura Mercantile Co-op. Bank Ltd. From the balance in his current account with the bank, on 12.03.2001, he received a pay order of Rs. 6.75 lakhs favouring a company in which he was a director. On the very next day, the bank collapsed due to a securities scam and the RBI suspended all its operations with immediate effect. Consequently, the pay order was not cleared. In addition, the assessee also had fixed deposits worth Rs. 4 lakhs with the bank with provision for availing credit facilities for business purposes. As there was no hope to recover any money, he claimed sum of Rs. 0.3 lakhs towards balance in his current account, the Rs. 6.75 lakhs pay order and the fixed deposit worth Rs. 4 lakhs as a business loss.

• The bank had not denied its liability to pay while confirming the above balance in May 2001;

• On 7.9.2001, the assessee himself had applied for revalidation of the pay order;

• The fixed deposit was a surplus fund withdrawn from the business by the assessee.

The CIT (A) confirmed the AO’s order, as according to him, the amount claimed as loss was out of the loans received by the assessee just a few days prior to the collapse of the bank. Further, he observed that even if it was accepted that the FDRs had been pledged for business, based on the decision of the Madras High Court in the case of Menon Impex Ltd., it did not show any direct nexus of the FDR with business.

Before the Tribunal, the revenue justified the orders of the lower authorities and submitted that the amounts written-off were in fact loans taken; and hence, it was a loss of capital and not a business loss.

According to the Tribunal, though the money in the bank account was accountable as mainly loans received by the assessee, there was no dispute that the current account was being operated for the purpose of carrying on business. Therefore, according to the Tribunal, the money lost was during the course of carrying on business. Hence, the loss was a business loss. Further, relying on the decision of the Mumbai High Court in the case of Goodlass Nerolac Paints Ltd. that once it was established that an amount related to trade and had become bad, the decision of the assessee to write-off the amount in a particular year should not be interfered with, it allowed the claim of the assessee.

Sections 22, 28 — Rental income for letting out premises, which are duly notified as IT Park and can be used only for a specific purpose along with provision of complex service facilities and infrastructure for operation such business is chargeable to tax under the head ‘Income from Business’.

The assessee had let out on leave and licence basis for a period of 33 months property purchased by it along with the infrastructure, equipment and facilities, which were prescribed both by the Ministry of Commerce as well as the CBDT. The I.T. Park was duly notified by the Ministry of Commerce and also by the CBDT. The assessee offered licence fees in respect of this activity, for taxation, under the head ‘Income from Business’. The Assessing Officer (AO) relying on the decision of the Apex Court in the case of Shambhu Investments P. Ltd. v. CIT, 263 ITR 143 (SC) held that the income is assessable under the head ‘Income from House Property’. Aggrieved the assessee preferred an appeal to the CIT(A).

The CIT(A) upheld the action of the AO. Aggrieved the assessee preferred an appeal to the Tribunal.

The Tribunal noted that the property in question was not a simple building but an I.T. Park with all infrastructure facilities and services. It observed that the Ministry of Commerce and Industries, notifies certain buildings as I.T. Park only if various facilities and infrastructure, as specified by the Department, are provided. It noted that all the technical requirements, infrastructures, facilities and services were being provided for in the building and it was for this reason that not only the Ministry of Commerce & Industries but also the CBDT notified the same as an I.T. Park which entitles the assessee to earn certain incentives. It also observed that the intention of the assessee while purchasing the property is to participate in the I.T. Park and it cannot be said that the intention is only to invest in property. The Tribunal observed that:

“The assessee is offering complex services by way of providing operation place in a notified I.T. Park, with all services and amenities such as infrastructure facilities, waiting room, conference room, valet parking, reception, canteen, 24 hours’ securities, internal facilities, high-speed lift, power back-up, etc. Just because a sister concern incurred this expenditure and claims reimbursement from the assessee, it cannot be said that the facilities are not provided for by the assessee. Whoever maintains them, the fact remains that it is the assessee who ultimately bears such expenditure for the services and undertakes to provide such services. The facilities are made available by the assessee to the person occupying the premises.”

The Tribunal noted that the Gujarat High Court has in the case of Saptarshi Services Ltd. 265 ITR 379 (Guj.) held that the income earned from business centre is to be assessed under the head ‘Income from Business and Profession’ and SLP filed by the Revenue against this judgment was rejected by the Supreme Court [264 ITR 36 (St)]. It also noted that the Mumbai Bench of ITAT has in the case of ITO v. Shanaya Enterprises, (ITA No. 3648/Mum./2010, A.Y. 2006-07, order dated 30th June, 2011) held that when the property is used for specific purposes and in the nature of providing complex services, the income is taxable under the head ‘Income from Business’.

Applying the propositions laid down in the abovementioned decisions, the Tribunal held that since the property can be used only for a specific purpose i.e., I.T. operation and the assessee has provided complex service facilities and infrastructure for operating such business, the income in question be assessed under the head ‘Income from Business & Profession’. It set aside the order passed by the CIT(A) and allowed this ground of the assessee’s appeal.

Property Rental assessable as “business profits” if commercial activities carried out

The assessee let out its studio to production houses for shooting TV serials etc and offered the hire charges to tax as “business income”. The AO relied on Sultan Brothers vs. CIT 51 ITR 353 (SC) & CIT vs. Shambhu Investments 263 ITR 143 (SC) and held that as the “main intention” was letting out of property, the hire charges was assessable as “Income from house property“. The AO noted that TDS on the hire charges was deducted u/s 194-I. On appeal, the CIT (A) reversed the AO on the ground that the assessee had “exploited the property by way of commercial activity” and the receipts constituted “business income“. On appeal by the department to the Tribunal, HELD dismissing the appeal:

(i) The law laid down in CIT vs. Shambhu Investment 249 ITR 7 (Cal) approved in 263 ITR 143 (SC) is that merely because income is attached to immovable property cannot be the sole factor for assessment of such income as income from property. What has to be seen is the primary object of the assessee while exploiting the property. If the main intention is to let out the property, the income is assessable as “income from house property” while if the main intention is to exploit the immovable property by way of complex commercial activities, the income is assessable as business income {Sultan Brothers 51 ITR 353 (SC) explained as not being in conflict with Shambhu Investments 263 ITR 143 (SC)};

S. 14 of the Income tax Act, 1961 – Heads of Income – Loss on sale of units in mutual fund – Assessee’s claim to treat it as business loss and allow it to be set off against his other income rejected by AO holding the same as capital loss – On

During the year under appeal, the assessee had earned dividend of Rs.2.77 lacs and suffered a loss of Rs.2.63 lacs on sale and purchase of the mutual fund units. In his return of income filed, the dividend income was claimed as exempt and the loss was claimed as short-term capital loss. Subsequently, during the assessment proceedings, the assessee claimed that the loss be treated as business loss and be set off against his other income. The AO, relying on the Supreme Court decision in the case of McDowell and Co., observed that the assessee had adopted a dubious method to avoid tax. Accordingly, he treated the loss as capital loss and set off the same against the dividend income. Thus, the assessee’s claim to treat the loss as business loss and to set it off against his other income was rejected. On appeal, the CIT(A) allowed the appeal of the assessee.

· The assessee was engaged in frequent transactions of purchase and sale of shares and units in mutual funds.

· The units of mutual funds were purchased from open market and were not allotted to him on application.

· In accounts, the assessee had treated the same as profit from trading in shares and mutual funds.

Thus, according to it, the totality of facts and circumstances suggested that the assessee intended to do a business in shares and mutual funds. Therefore, according to it, the resultant loss or profit had to be held as loss from business. In support, it also relied on the decisions listed at Serial Nos. 1 to 3 below. Accordingly, the CIT(A)’s order was upheld and appeal of the Revenue was rejected.

Editor’s Note : This decision was for a period prior to insertion of S. 94(7), w.e.f. A.Y. 2002-03, provisions of S. 94(7) would also have to be considered.

S. 28 and S. 45 — Gains arising to the society on sale of 50% of the areas constructed by the builder, at his own cost, by utilising additional FSI received by society from BMC in lieu of roads taken over by BMC are chargeable to tax as Capital Gains.

The assessee co-operative society was formed in 1971. The land on which the building of the society stood had roads on two sides. The BMC acquired some part of the society’s land in 1991 and again in 1994 for the purposes of road widening and as compensation therefor granted additional FSI to the society which the society decided to utilise on existing building. Accordingly, the society entered into an Agreement with the builder pursuant to which the builder agreed to put up the entire construction at his own cost and in turn would be entitled to 50% of the area of the constructed flats. The society was entitled to the balance 50% of the area of the constructed flats. The construction was completed in 1999. Upon completion of construction, the flats coming to the share of the society were sold for Rs.1,06,18,000. The sale consideration of flats was returned by the society as long term capital gains. The AO reassessed this amount under the head ‘Income from Business’ on the ground that the society did not have funds for construction and therefore it indirectly has obtained loan from the builder and has instructed the builder for appointing architect for getting various sanctions of plans and approvals to construct the flats. These factors, according to him, were indicative that the society was engaged in a trade with profit motive.

Aggrieved, the society preferred an appeal to the CIT(A) where it contended that the income be assessed as long term capital gains or alternatively, if itisassessedasbusiness income, then, in terms of S. 45(2), fair market value of FSI on date of conversion should be taken as cost for computing profits of the said business. The CIT(A) held that the income was chargeable to tax as ‘Income from Capital Gains’.

There is no evidence on record that the amount spent by the assessee was loan. The builder was to put up construction at its own cost and in turn would be entitled to 50% of the area of the constructed flats and after completion of the project the remaining 50% of the area shall be given to the society which can be sold by the society. BMC had allowed FSI to the society in lieu of land taken over by the BMC. The Tribunal concurred with the findings and decision of the CIT(A) viz. that there were no business considerations in undertaking the transaction by the assessee, the assessee could have either sold FSI or utilised it by constructing additional areas; by deciding to utilise it in construction of additional areas it had maximised its gains but maximisation of gains cannot by itself impress a transaction with the character of business; the society did not have profit sharing arrangement with the builder; the transaction under consideration cannot be held to be a business transaction.

Capital Gains vis-à-vis business income – Share transactions – Despite large number of share transactions, profits assessable as capital gains

The assessee HUF offered income from sale of shares as short-term capital gains (STCG). The AO held the income to be business profits on the ground that (i) the assessee had 158 share transactions in the year which showed the intention to trade, (ii) The regularity and frequency of transactions showed no intention to hold shares to earn dividend and (iii) Instead of one or two demat accounts, the assessee had adopted a professional approach and transacted through several brokers. On appeal, the CIT (A) held that profit on sale of shares held for less than 30 days was business profits while other profits was STCG. On appeal by the assessee and department, HELD deciding in favour of the assessee:

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. The gains earned by the assessee deserve to be assessed as capital gains because:

(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 AO had vide scrutiny assessments treated the assessee as an investor.

Capital Gains vis-à-vis business income – Large volume in shares – Not deciding factor to hold assessee as trader

The assessee, a retired professor, offered gains from sale of shares as short-term capital gains (STCG). The AO assessed the gains as business profits on the ground that (a) in the earlier years, the assessee had offered similar gains as business profits and the volume of transactions was higher in the present year, (b) there were 54 scrips which were purchased and sold during the year which resulted in sales of more than Rs. 24 crores, (c) In one particular share, the assessee purchased on 54 occasions and sold on on 25 occasions within a short duration. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:

The assessee was an investor and the gains are assessable as capital gains because:

(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;

(d) The assessee did not do any speculative activity nor indulge in any sales without delivery;

(f) The assessee had not pledged any shares with any financial institutions, nor borrowed any funds

Business income v. Capital gains – Assessee showing investment in shares – Period of holding of shares very short and high volume – Profit on sale of shares assessable as short term capital gains

The assessee, a marine consultant, offered income by way of LTCG, STCG, speculative profit & profit from futures trading. The AO held that as the volume of transactions was high (222), the period of holding of the STCG shares was short (2 -5 Months) & there was speculation & F&O profit, the LTCG & STCG was assessable as business profit. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:

(i) As regards the LTCG, the shares were held for several years and so the assessee has acted as investor and not as a trader and so the gains are assessable as LTCG;

(c) In the preceding AY, the AO did not assess the STCG as business income and on the principles of consistency, a different view cannot be taken on the same facts

(e) merely because there was a speculative business does not mean that even delivery based transactions of shares should be assessed under the head business.

Capital gains or business income – Short period of holding shares does not per se suggest business activity

The assessee, a stock broker with NSE, offered short-term capital gains (“STCG”) of Rs. 47.23 lakhs. The AO assessed the STCG as business profit on the ground that (a) the purchase to sale ratio was higher than the ratio in the earlier year and (b) the assessee had borrowed funds of Rs. 21.73 crores which were mixed with common funds and not segregated and (c) the assessee had not been able to show his intent to hold the scrips. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:

(i) In Circular No. 4/2007 dated 15.6.2007 the CBDT has emphasized that it is possible for a tax payer to have two portfolios, i.e. an investment portfolio and a trading portfolio;

(ii) The assessee had maintained separate books of account as well as separate demat accounts in respect of his trading & investment activity. The manner in which books are kept is an important piece of evidence as per Raja Bahadur Visheshwar Singh vs. CIT 41 ITR 685 (SC);

(iii) Whether the assessee’s conduct is that of an investor or a trader depends on the facts and circumstances of the case. No single fact is decisive nor has any acid test been laid down in any judgment;

(iv) Primarily, the intention with which an assessee starts his activity is the most important factor. If shares are purchased from own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of share over a period then merely because the assessee liquidates its investment within six months or eight months would not lead to the conclusion that the assessee had no intention to keep the funds as invested in equity shares but was actually intended to trade in shares. Mere intention to liquidate the investment at higher value does not imply that the intention was only to trade in security. However, it cannot be held that in all circumstances if assessee has used its own funds for share activity then it would only lead to inference of investment being the sole intention. In such circumstances, frequency of transactions will have to be considered to arrive at proper conclusion regarding the true intention of the assessee. However, if the assessee, on the other hand, borrows funds for making investment in shares then definitely it is a very important indicator of its intention to trade in shares;

(v) On facts the AO proceeded on the assumption that borrowed funds had been utilized for buying shares on the ground that funds were common and could not be segregated. However, it was categorically pointed out before the CIT (A) that no part of the borrowed funds was utilized for acquisition of shares on investment account. Nothing was brought on record by the department to controvert this fact;

(vi) Further, the AO accepted the assessee’s claim of LTCG to the extent of Rs. 2 crores which implies that he has accepted the assessee’s claim regarding holding investment portfolio.

Capital gains or business income – Multiple orders for purchase/ sale of shares may constitute one transaction

The assessee offered short term capital gain (STCG) of Rs.1.07 crores on sale of shares. The AO held the assessee to be a trader in shares & assessed the gains as business profits on the ground that (a) there was high frequency of 127 purchase & 83 sale transactions, (b) there were instances where delivery was not taken and shares were sold within a short period, (c) 88% of the shares sold were purchased during the year and (d) the available capital was turned over 85 times to make purchases of Rs.23 crores & sales of Rs. 29 crores. This was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal:

(i) The AO had not correctly calculated the number of transactions because sometimes a single transaction is split by the computers trading of the stock exchanges into many smaller transactions but that does not mean that assessee has carried so many transactions. If someone places an order for purchase of 1000 shares and the same is executed by the electronic trading system of stock exchange into 100 smaller transactions, it does not mean that 100 transactions have been entered into. The assessee had carried out only 31 purchase and 25 sale transactions which cannot be said to be a great volume of transactions;

(ii) At the end of the year, the assessee was holding shares worth Rs. 11.56 crores with a market value of Rs.17.69 crores. If assessee was a trader, he would have definitely realized the huge profit of almost Rs. 6 crores immediately and not carried out the stock to the next year;

(iii) The transactions in which no delivery was taken and it was settled in the same day appear to be cases where the particulars were wrongly carried out on behalf of the assessee by the broker & that’s why assessee got them settled on the same day;

(iv) The assessee has not borrowed any money and he was occupied full time in the business of garments;

(v) In identical circumstances in the case of the assessee’s sister, the Tribunal had decided in favour on the ground that (a) the assessee’s background did not indicate she was familiar with the share business, (b) there was no borrowing for the shares, (c) the shares were shown as a capital asset in the balance sheet, (d) the AO had accepted the LTCG, (e) the average investment in one scrip is taken was about Rs.45.00 lakhs which appeared to be too high for an individual to hold as stock-in-trade, (f) the portfolio contained many shares of blue chip companies, (g) there were no dealings in futures and options and (h) about 30 scrips were sold and there were 49 purchases & 43 sales (treating multiple lots on the same day as one transaction).

Capital Gains v. Business Income – Long term and short term gains on sale of shares – Transactions done through PMS – Transactions taxable as business profits

The assessee offered LTCG & STCG on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The AO & CIT (A) held that as the transactions by the PMS manager were frequent and the holding period was short, the LTCG & STCG were assessable as business profits. On appeal by the assessee, Held dismissing the appeal:

In a Portfolio Management Scheme, the choice of securities and its period of holding is left to the portfolio manager and the assessee has no control. Only the portfolio manager can deal with the Demat account of the assessee. While, at the time of depositing the amount, the assessee will make entry in his books of account as investment in PMS, he is not aware of the transactions in the shares being entered into by the portfolio manager on his behalf as his agent. Since the assessee comes to know about the purchase and sale of shares under PMS after the expiry of the quarter, the accounting treatment in the books of the assessee in respect of shares purchased/sold by the portfolio manager under PMS cannot be entered in the books of the assessee. It is at the end of the year the shares available in the DEMAT account can be entered. Therefore, at the time of deposit of amount, the intention of the assessee was to maximize the profit. As the purchase and sale of shares under PMS is not in the control of the assessee at all, it cannot be said that the assessee had invested money under PMS with intention to hold shares as investment. The portfolio manager carried out trading in shares on behalf of his clients to maximize the profits. Therefore, it cannot be said that shares were held by the assessee as investment. The fact that the transactions were frequent and its volume was high indicated that the portfolio manager had done trading on behalf of the assessee. The fact that the shares remaining at the end of the year were shown under the head ‘investment’ makes no difference. Even the LTCG is assessable as business profits and s. 10(38) exemption is not available. The fact that the AO took a contrary view in the preceding year is irrelevant. There is no difference between similar transactions carried out by an individual in shares and the transactions carried out by portfolio manager. There is, however, a difference between investment in a mutual fund and PMS.

S. 45 and S. 48 — Amount received by the society from the builder for permitting him to construct additional floors on existing building of the society by utilising TDR FSI belonging to him is not chargeable to tax since there is no cost of acquisition.

The assessee, a co-operative society, on request of the developer granted him permission to construct 2 floors having 8 flats, on the existing building of the assessee by utilising TDR FSI available to the developer. As consideration, the developer paid Rs.26 lakhs to the assessee and Rs.5.50 lakhs to each of the 12 members of the assessee.

According to the assessee, the members owned a piece of land on which 12 flats were constructed by utilising maximum FSI available to them. These persons formed a society. Since the assessee had no right to construct further structure, there was no question of exploiting any of its available right so as to earn income out of it. The assessee had regarded the amounts received by it as not being chargeable to tax.

The Assessing Officer held that the permission granted by the assessee-society resulted into transfer by way of relinquishment of the right i.e., ‘to load TDR and construct additional floors’ and since there was no cost of acquisition, in absence of details, he taxed the entire consideration of Rs.26 lakhs as long-term capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A) who enhanced the assessment and charged even Rs.66 lakhs, being the amount paid by the developer to individual members of the society, as long-term capital gains in the hands of the assessee.

The assessee and its members had exhausted the right available while constructing the flats and therefore the assessee and its members had no right to construct additional floors on the existing building. The Tribunal noted that TDR was not obtained by the assessee and sold to the developer. The Tribunal held that the assessee had not transferred any existing right to the developer, nor any cost was incurred/suffered prior to permitting the developer to construct the additional floors. Since there was no cost of acquisition, following the ratio of the decision of the Apex Court in B. C. Srinivasa Shetty 128 ITR 294 (SC), the consideration was held to be not assessable as capital gains.

S 45. Beneficial ownership of the balance FSI and right to use TDR was that of the members of the society. The members transferred the rights and received consideration for such transfer.

The assessee-society was the owner of land together with two buildings situated thereon. The society had sixteen members who held, on ownership basis, sixteen flats in the said buildings. It was possible to construct additional flats on the existing buildings by utilising balance FSI of the property and FSI that may be obtained from other properties under the TDR scheme. The total area of the property was 1063.60 sq. mts., it was possible to construct 11,448 sq. feet on the said property by procuring TDR FSI.

The society, at its Special General Body Meeting held on 15th July, 2001 passed a resolution to the effect that the benefit of constructing additional flats by utilising any FSI available on the said property and by bringing in TDR/FSI belongs to the members equally. Each member thus became entitled to 715.50 sq. feet by way of TDR/FSI. The society agreed that each member would be entitled at their own costs to procure proportionate TDR/FSI and to use his/her respective entitlement for constructing a new flat for himself or each member may grant development rights to a common developer.

The developer vide agreement dated 29-8-2001 agreed to pay to the society an amount of Rs.1,76,000 as well as carry out works of repairs and improvements to the existing buildings and compound of the society in consideration of the society permitting the developer to construct additional floors from the entitlement of each of the members of the society.

The developers agreed to pay each of the members a lump sum of Rs.7,00,000 as compensation for inconveniences and hardships faced or to be faced by the members during and on account of additional construction. Further, in consideration of the member granting development rights in respect of his/her entitlement to the developers, the developers agreed to pay the member a lump sum monetary consideration of Rs.7,20,000.

In the course of assessment proceedings u/s.147, the assessee took the stand that by virtue of a resolution passed by the Managing Committee of the society, the society has specifically authorised each of the members to sell and transfer their proportionate rights in the FSI and development of the building with the consent of the society, which means the society has renounced its rights in favour of individual members and on the basis of this resolution and upon renouncement of the rights in favour of individual members, the members were fully authorised and having accepted the renunciation, have a legal sanction to sell their proportionate right to the builders for development. The income received by individual members is their individual income and the same is not liable to be taxed in the hands of the society. The members had filed their return of income offering to tax receipts on sale of their rights. The AO held that since the society is the owner of the plot of land, the FSI/TDR is available to the society and individual members cannot transfer the FSI/TDR directly to the developers. He taxed the entire compensation received (including amounts received by the members) in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who upon considering the definition of the term ‘society’ as defined in the Maharashtra Co-operative Societies Act and also the fact that the Bombay Stamp Act provides for payment of stamp duty by each member at the time of purchase of individual flat and that such registered agreements are deemed to be conveyance, held that capital gains have to be taxed in the hands of the members of the society who have accounted for the same in their individual returns of income. He allowed the appeal filed by the assessee.

The Tribunal held that the order passed by the CIT(A) does not call for interference. It held that the beneficial ownership was that of the members of the society. It was the members who transferred the rights and received consideration for such transfer. The Tribunal agreed with the view of the CIT(A) holding the conclusion of the AO to the contrary to be not proper.

S. 45. According to Circular No. 9, the legal ownership in flats vests in individual members and not in the co-operative society - Flat owners have proportionate interest in the land and building - Amount received for permitting developer to construct additional area - Held not income of the society.

Vide development agreement dated 15-2-2004 entered into between the assessee society, its members and the developer, the assessee society allowed the developer to construct an additional area aggregating to 30,000 sq.ft for a consideration of Rs. 10.41 crores. Of this sum of Rs. 10.41 crores an amount of Rs. 15 lakhs was retained by the assessee and the balance amount was distributed amongst its members in proportion to area of the flat. The assessee in its revised return of income declared amount received from developers as ‘Income from Other Sources’.

The Assessing Officer (AO) was of the view that the assessee was the rightful owner of the land and the legal ownership vested with it. Since the assessee was held to be the legal owner, the capital gain was assessed as income of the assessee. The AO considered the consideration of Rs. 10.26 crores received by flat owners to be income of the assessee.

Aggrieved the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) who upheld the assessment done by the AO.

The Tribunal noted that the assessee, co-operative housing society, was registered under the Maharashtra Co-operative Societies Act, 1960 as a Tenant Co-partnership Hsg. Society under Rule 10(1) Clause 5(b). It also noted that the flat owner members have transferred their individual entitlement/right to TDR/FSI in favour of the developers and were entitled to receive directly from the developers aggregate compensation of Rs. 10.26 crores. All the individual flat owners offered for taxation their share of compensation, in their respective return of income. The Tribunal held as under :

“According to CBDT Circular No. 9, dated 25-3-1969, the legal ownership in flats is vested in individual members and not in the co-operative society. Further, the flat owners have proportionate interest in the land and building. The society is only ostensible owner and in reality and truth, the flat owners own the land and building for which they have paid full consideration and amount received from the developer by the flat owner in their individual capacity is the income of the individual flat owner. The flat owners have relinquished their interest in the property. The society has no right or control over such income of the individual owners.”

The Tribunal observed that the benefit of additional TDR was derived and enjoyed by the members of the assessee-society and no income has accrued to the society. Following the decision of the Mumbai Bench of ITAT in the case of Jethalal D. Mehta v. DCIT, which held that such rights do not have any cost of acquisition, the Tribunal held that there is no merit in computing any capital gains on the sale of the said TDR in the hands of the assessee society.

Section 2(47)(v) — Since the assessee had not received full consideration nor handed over possession of the property, capital gains cannot be assessed in the year of execution of the development agreement.

The assessee, B. V. Kodre (HUF), entered into a development agreement on 26-6-2003 with M/s. Deepganga Associates, whereby the HUF gave rights of development of an agricultural land to M/s. Deepganga Associates. The development agreement was stamped under Article 5(ga) of Schedule I of the Bombay Stamp Act, 1958. Under the said article stamp duty was leviable @ 1%. The said article applied if possession of the property was not handed over. In cases where possession of property is handed over, the instrument would be covered by Article 25 and the stamp duty leviable would be 5%. Clause 10 of the agreement provided that possession would be given to the developer on receipt of full payment of consideration. Of the total consideration of Rs.60 lakhs the amount of Rs.38,48,150 was given by the developers to the assessee.

The assessee submitted that since it has not handed over possession of the property and also entire consideration has not been received, there was no transfer. Mere registration of development agreement does not give rise to a transfer. It was contended that since there was no transfer, capital gain is not chargeable to tax in the year under consideration. The AO did not agree with the contentions of the assessee. He noted that transfer u/s.2(47)(v) is wider than that as per the Transfer of Property Act, 1882. He noted that clause 5 of the development agreement allowed the developer to amalgamate, divide, plan and construct. According to him, this indicated that it was a transaction u/s.2(47)(v) of the Act. He charged capital gain to tax.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to ITAT where it relied on the ratio of the following decisions:

The Tribunal noted that it has not been rebutted by the Revenue that the development agreement has been stamped under Article 5(ga) of Schedule I of the Bombay Stamp Act and not under Article 25. It also noted that clause 10 of the development agreement provides that property as stated in clause 1 of the agreement will be transferred and the purchase deed will be executed only after the receipt of the payment of entire consideration of Rs.60 lakhs and payment of stamp duty. The Tribunal held that registration is prima facie proof of an intention to transfer but it is no proof of an operative transfer, if there is a condition precedent as to payment of consideration. The transfer u/s.2(47) of the Act must mean any effective conveyance of capital asset to the transferee. Accordingly, where the parties had clearly intended that despite the execution and registration of the sale deed, transfer by way of sale would become effective only on payment of the entire sale consideration, it had to be held that there was no transfer made. Upon considering the ratio of the 3 decisions relied upon by the assessee, the Tribunal observed that the agreement in question does not establish that a transaction of sale of property was completed in terms of provisions of section 2(47)(v) of the Act r.w.s. 53A of the Transfer of Property Act, as neither the sale consideration was paid, nor the possession of the property was handed over to the vendor, and so, the capital gain worked out by the AO and added to the income of the assessee was not justified. The amount received out of the agreed consideration, during the year, at best can be treated as advance towards the agreed consideration of the transaction.

The Tribunal further held that it is an established proposition of the law that the AO is required to make just and proper assessment as per the law based on the merits of the

The facts of the present case are distinguishable from the facts before the Apex Court in the case of Goetze (India) Ltd. v. CIT. In the case before the Apex Court the assessee subsequent to filing of return of income, claimed a deduction by filing a letter. The AO disallowed it on the ground that there was no provision in the Act to allow an amendment in the return without revising it. The action of the AO was upheld. In the present case the question is whether there was a transfer u/s.2(47) of the Act to make an assessee liable to pay capital gains tax. There is no estoppels against proper application of the law.

Compiler’s Note: It appears that the assessee had originally returned capital gain and subsequently in the course of assessment proceedings took a plea that the same is not chargeable to tax since there is no transfer.

Capital Gains – Transfer of land with TDR – No cost incurred for acquiring TDR – Gains not taxable even if land has cost since cost of improvement (TDR) could not be determined

The assessee was the owner of land acquired in 1963. Pursuant to the Development Control Regulations, 1991, the assessee was entitled to construct up to 1:1 FSI on the property. The assessee was also entitled to load Transferable Development Rights (“TDR”) on the property. The assessee entered into a development agreement with a developer pursuant to which the developer agreed to develop on the said land by utilizing the FSI & TDR and paid compensation to the assessee. The assessee claimed that the TDR was an “improvement” of the land and as a “cost of improvement” of the land could not be determined, no capital gains was chargeable. In appeal, the CIT (A) held that the FSI and TDR were separate & distinct assets and that while the TDR did not have a cost, the FSI did and if both were transferred together, there was a “cost” for the “asset” and capital gains was chargeable. On appeal by the assessee, held allowing the appeal:

The assessee transferred “Development Rights” being the FSI and the “right to load TDR” on the land. While the right to construct on the land by consuming FSI was a capital asset which was acquired at a cost, the right to load TDR arose pursuant to the DC Regulations, 1991 without payment of any cost. The said right to “load TDR” was an improvement to the “capital asset” held by the assessee. If the “cost of improvement” of an asset is not determinable, capital gains are not chargeable. The result was that even the consideration attributable to the FSI (which had a cost) was not assessable to tax (Principle laid down in Jethalal D. Mehta 2 SOT 422 (Mum) & Maheshwar Prakash CHS 24 SOT 366 (Mum) in the context of transfer of only TDR followed).

S. 48 — Capital gains on sale of land — Land purchased out of borrowed funds — Whether registration charges and interest paid on borrowings eligible for deduction and indexation — Held, Yes.

The assessee had purchased a piece of land in October 2006 out of borrowed funds. The land was sold in the year under appeal. While returning income as long term capital gains — it claimed registration charges of Rs.4.63 lacs and the interest paid by him during the years 1997-98 to 2001-02 aggregating to Rs.72 29 lacs, as the cost of improvement. The claim was disallowed by the AO. On appeal the CIT(A) allowed the claim qua the registration charges, however, the claim for indexation was denied. In respect of interest paid, the CIT(A) agreed with the AO and held that the interest payable on loan taken for acquisition of the land was not part of the cost of acquisition/improvement.

The Tribunal noted that the registration charges paid was treated as cost of improvement of the land and as such allowed as deduction by the CIT(A). Referring to the provisions of second proviso to S. 48, it agreed with the submission of the assessee that the provisions contained in clause (ii) shall have the effect as if for the words ‘cost of acquisition’ and ‘cost of any improvement’, the words ‘indexed cost of acquisition’ and ‘indexed cost of any improvement’ had respectively been substituted. Therefore, it was held that the assessee was entitled to indexation with reference to the registration charges paid.

In respect of interest paid — the Tribunal agreed with the assessee that as held by the Delhi High Court in case of CIT v. Mithlesh Kumari, the actual cost of the asset need not be only those costs incurred on the date of acquisition. Accordingly, relying on the decision of the Delhi High Court (supra), it held that interest paid on borrowed funds for purchase of land after its actual purchase constituted cost of the land. It further held that in terms of second proviso to S. 48, the cost has to be indexed for working out the capital gains.

S. 48 — When interest-bearing borrowed funds are utilised for making an application for allotment of shares and the number of shares allotted is less than the number of shares applied for, the entire interest (including interest on funds borrowed for shares applied for but not allotted) is to be treated as cost of acquisition of shares allotted.

The assessee applied for 1,26,000 shares of Punjab National Bank. For this purpose she borrowed Rs.4 crores @ 15% p.a. for 15 days and paid interest of Rs.2,63,015. She was allotted 4,635 shares. The entire amount of interest of Rs.2,63,015 was capitalised as cost of shares allotted. Similarly, the assessee applied for 8,76,000 shares of NTPC Ltd. For this purpose she borrowed Rs.4.88 crores @ 17% p.a. for 17 days and paid interest of Rs.3,87,317. She was allotted 73,403 shares. The entire amount of interest of Rs.3,87,317 was capitalised as cost of shares allotted.

The assessee sold the shares allotted. While computing capital gains on sale of shares allotted the entire amount of interest capitalised was regarded as cost of acquisition and claimed as deduction.

The Assessing Officer (AO) disallowed the entire interest of Rs.6,50,330 (Rs.2,63,015 + Rs.3,87,317).

The CIT(A) allowed the claim of deduction for interest to the extent of borrowed amount utilised for the purpose of payments of shares allotted by Punjab National Bank and NTPC. The assessee preferred an appeal to the Tribunal.

The Tribunal noted that there was no dispute that the entire loan was borrowed for the purpose of acquiring the shares of Punjab National Bank and NTPC and also that immediately after allotment of shares, money refunded by both the companies was refunded to the financiers. The Tribunal held that the fact that applied shares were not allotted in full will not deprive the assessee from claiming the entire interest paid as part of the cost of acquisition of the shares allotted, as money borrowed has direct nexus with acquisition of shares. The Tribunal directed the AO to treat the interest paid by the assessee to both the financiers as part of cost of acquisition of shares and allow the same as a deduction.

S/s 2(14), 45, 55(2) – Right to use a portion of the shed, in which the looms and machinery taken on license basis are situated, by way of permissible use on license basis as incidental to using the said looms and machinery is covered by the term “any kind of property” and is therefore a capital asset. Amount received on surrender of such right is chargeable to tax under the head Income from Capital Gains and not Income from Other Sources.

The assessee, a partnership firm, through its partners entered into an agreement dated 13.6.1972 with Modern Textile Rayon and Silk Mills Pvt. Ltd. (Modern) whereby it took on license basis, for a period of one year, loom and machinery described in first schedule of the said agreement on a monthly compensation of Rs. 3,250 per month. Modern was the tenant of the shed belonging to Mr. Paresh S. Shah. This agreement referred to the assessee as licensee. The assessee was entitled to use a portion of the shed in which the looms were situated by way of permissible use on license basis only as incidental to using the said looms and machinery. The agreement provided that the assessee shall never be construed as sublessee in any form of the said portion of the said shed. The assessee was also provided with access to the said portion of the said shed through portion of the shed retained by the licensors or otherwise. Thus, as per the agreement the assessee had incidental right of premises through which the looms were to be used. The said right of the assessee was recognised from the date of the agreement till the date of its surrender.

The assessee regarded this right as sub-tenancy and in the return of income filed the amounts received on surrender thereof were offered for taxation under the head Income from Capital Gains after claiming exemption u/s. 54EC of the Act.

The Assessing Officer after going through various clauses of the agreement dated 13.6.1972 came to the conclusion that the assessee was not a sub-tenant of the land which had been sold by the owner thereof but only had an incidental right to use the shed and that the amounts received are not assessable as capital gains. He also examined the purchasers of the said land who mentioned that only Modern and M/s Saurdeep Chemicals Pvt. Ltd were tenants of the land purchased by them. However, actual possession and occupation was held by the assessee and payments have been made to the assessee in order to get peaceful and vacant possession of the property. The AO observed that the payment received was in the nature of nuisance value and assessee did not have any capital right since the possession of portion of the shed was incidental to the license granted to it for use of machinery. The amount received was assessed to tax under the head Income from Other Sources.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

The Tribunal noted that the incidental right to use the premises was provided by the agreement dated 13.6.1972 itself and also that the assessee was referred to as the licensee in the said agreement. By an amendment in 1973, which is subsequent to the date of the agreement entered into by the assessee, certain licensees have been deemed to be tenants u/s. 15A of the Bombay Rent, Hotel & Lodging and House Rates Control Act, 1947 and were to be considered as tenants. Therefore, in any case the assessee had acquired the status of tenant of the landlord. As per provisions of section 55(2) tenancy right has been considered to be a capital asset. Moreover, the definition of capital asset as per section 2(14) of the Act is wide enough to cover “property of any kind” and the type of right acquired by the assessee in the property used by it cannot in any manner be said to be less than “any kind of property” held by the assessee.

The Tribunal also observed from some of the rent receipts filed by the assessee before the Tribunal that the amount being paid by the assessee was considered to be rent by the other parties and thus parties in principle had accepted that the assessee was the tenant from whom the rent was being received by the other party. The further correspondence between the assessee and its licensor, the purchaser of the land and the assessee are also describing the right of the assessee as tenancy right only and the deed executed between purchaser of the premises and the assessee is also described as deed of surrender of tenancy. Thus, the assessee was enjoying a right over the property in the nature of being tenant of the same for the last so many years and that right of the assessee cannot be considered as evaluated much less than the right of tenancy right.

The assessee, in fact, was enjoying the possession of the impugned property and for peaceful vacation thereof it had received the impugned amount which was described by both the parties as the amount paid for surrender of tenancy rights. The assessee had acquired the said right long back and licensor to the assessee also had recognised the said right of the assessee. The right of the assessee was undisputed and nature thereof was “property of any kind” which was held by the assessee and was to be termed as capital asset within the meaning of section 2(14) of the Act. Tenancy right has also been recognised as capital asset within the meaning of section 55(2)(a) of the Act.

The tribunal held that the amount received by the assessee is assessable as capital gains and not as income from other sources. The appeal filed by the assessee was allowed.

S. 43(6)(c) — When an asset is sold, the block of assets stands reduced only by moneys payable on account of sale of the asset and not by the fair market value of the asset sold.

During the previous year relevant to the assessment year under consideration, the assessee sold a flat which formed part of block of assets and on which depreciation was claimed and was allowed @ 5%, for a consideration of Rs.9,00,000. The District Valuation Officer (DVO), on a reference by the Assessing Officer (AO), valued the flat at Rs.66,44,902. For the purposes of computing the amount of depreciation allowable, the AO computed the written down value of the block by reducing the value determined by the DVO instead of reducing the consideration for which the flat was sold. He, therefore, disallowed depreciation of Rs.2,96,551.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal and held that for computing written down value it is only the sale consideration of the asset sold, which needs to be deducted and not the fair market value of the asset sold.

In view of the provisions of S. 43(6)(c) read with Explanation 4 to S. 43(6) and also Explanation below S. 41(4), when an asset is sold, the block of assets shall stand reduced by ‘moneys payable’ in respect of the asset sold. The expression moneys payable refers to ‘the price at which it is sold’. What really matters is the price at which the asset is sold and not its fair market value. The AO does not have any power to tinker with the sale price of the asset sold. The AO ought to take the sale price for computing the WDV of the block.

Section 50 — Capital gains arising on transfer of a capital asset (flat) on which depreciation was allowed for two years but thereafter the assessee stopped claiming depreciation and also gave the flat on rent is chargeable as long-term capital gains after allowing the benefit of indexation.

The assessee, a private limited company, carried on business of investment. During the previous year 2003-04 it sold a flat for Rs.1,30,00,000. This flat was purchased by the assessee in the year 1987. Depreciation on this flat was claimed up till A.Y. 1991-92. In A.Ys. 1992-93 and 1993-94 the assessee claimed depreciation only in books of accounts but not in the return of income. For A.Y. 1994-95 and all subsequent years the assessee did not provide any depreciation in respect of the flat as the same was not used as office premises during the year. The flat was classified as a fixed asset in the balance sheet and was shown at cost less depreciation.

In the return of income the profit arising on transfer of this flat was shown as long-term capital gain. The long-term capital gain was computed after taking indexation benefit and also exemption u/s.54EC. The assessee relied upon the decision of the Bombay High Court in CIT v. Ace Builders P. Ltd., (281 ITR 210) for claiming indexation benefit even in respect of a depreciable asset. The Assessing Officer held that the decision of the Bombay High Court was not applicable to the case of the assessee and since the flat was the only asset in the block, the capital gain arising on sale of flat was taken to be short-term capital gain u/s.50(1).

Aggrieved the assessee preferred an appeal to the CIT(A) who held that the nature of asset continued to be a business asset in absence of anything to suggest that the assessee had taken a conscious decision to treat the flat as an investment. He distinguished the decision of the Cochin Bench of ITAT in Sakthi Metal Depot v. ITO, (2005) 3 SOT 368 (Coch.) on the ground that in the said decision the property was specifically treated by the assessee as an investment in the books of account. He upheld the order passed by the AO.

Aggrieved by the order of the CIT(A), the assessee preferred an appeal to the Tribunal.

The judgment of the Bombay High Court in Ace Builders was not concerned with the benefit of cost indexation. The decision is confined to relationship between section 50 and section 54E of the Act. The assessee cannot rely upon this decision to contend that the cost indexation benefit should be given even in the case of computation of short-term capital gains u/s.50 of the Act.

On facts the decision of the Cochin Bench of the Tribunal in Sakthi Metal Depot is applicable, in which it has been held that if no depreciation had been claimed or allowed in respect of the asset, even though for an earlier period depreciation was claimed and allowed, from the year in which the claim of depreciation was discontinued, the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirtysix months from the date of sale, it would be a case of long-term capital gains. 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. It noted that the order of the Cochin Bench of ITAT applies in favour of the assessee. The Tribunal observed that the principle of the order, dated 31-1-2007, of the Mumbai Bench of ITAT, in the case of Glaxo Laboratories (I) Ltd., though laid down in a different context, would support the assessee in the sense that it is possible for a business asset to change its character into that of a fixed asset or investment. The Tribunal directed that the capital gains be assessed as long-term capital gains after allowing the benefit of cost indexation as claimed by the assessee.

S 50C and 69B– Provisions of S. 50C do not apply to the purchaser of property. S 69B requires collection of independent evidence to show that any undisclosed investment was made by the assessee in purchase of property failing which the buyer could not be saddled with the liability on account of undisclosed investment.

While assessing the total income of the assessee, the Assessing Officer made an addition of Rs 9,49,400 on account of investment made by the assessee in the purchase of property. The amount of addition represented the difference between the value of the property as determined by the stamp valuation authorities and the purchase consideration paid by the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A), who deleted the addition.

Aggrieved by the order of CIT(A) the Revenue preferred an appeal to the Tribunal where it was contended that the addition was made u/s 69B though the assessment order did not mention the section. The Revenue also contended that the tribunal direct the AO to make a reference to the valuation officer u/s 142A for determining the value of investment in the property during the year.

The Tribunal following the order in the case of Smt. Chandni Bhuchar held that, in the case of the purchaser of the property, –

(ii) the AO ought to collect evidence indicating that the assessee paid money over and above the amount disclosed in the purchase deed.

Following the order in the case of Smt. Chandni Bhuchar, it also held that it cannot issue directions to the Revenue in second appeal to make a reference to the Valuation Officer.

Section 50C – Transfer of tenancy right – Held such transaction not covered under the provisions of section 50C.

During the year, the assessee had sold a tenancy right for Rs. 30 lakhs. In her return of income, the assessee had computed the long term capital gain based on the said consideration. However, the AO observed that for the purpose of stamp duty, the Sub-Registrar had adopted the market value of Rs. 33.11 lakhs. Therefore, applying the provisions of section 50C, he computed the capital gain based on the market value of Rs. 33.11 lakhs.

One of the issues raised before the tribunal was whether the provisions of section 50C were applicable to a tenancy right.

The tribunal noted that by virtue of section 50C, a legal fiction had been created for assuming the value adopted or assessed by any authority of the State Government as the full value of sale consideration received in respect of transfer of land or building. Relying on the decisions of the Supreme Court in the case of Amar Chand Shroff and in the case of Mother India Refrigeration Industries Pvt. Ltd., the tribunal observed that the legal fiction cannot be extended beyond the purpose for which it was enacted. Accordingly, it noted that as per the plain reading of the provisions of section 50C, it applies only to those items of capital assets which are either land or building or both. Since in the case of the assessee, the capital assets transferred was tenancy right, it held that the provisions of section 50C were not applicable.

Section 49(1), section 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’ — Section 50C does not apply to leasehold rights.

On 16-8-2004, the assessee was allotted leasehold rights in a plot of land for a period of 60 years under ‘12.50% Gaothan Expansion Scheme’. The allotment was in lieu of agricultural land owned by the assessee’s father which land was acquired by the Government of Maharashtra. The lease agreement, in favour of the assessee, was executed on 8-8-2005. On 25-8-2005, the assessee transferred its rights in the said plot for a consideration of Rs.2.50 crore. In the return of income, the assessee took the stand that since the plot which was transferred by the assessee was received in consideration for agricultural land which was not a capital asset, this plot is also not a capital asset and hence gain on its transfer is not chargeable u/s.45 of the Act. Alternatively, it was contended that the market value of the plot on the date of its allotment to the assessee be taken to be its cost of acquisition. The Assessing Officer (AO) held that though the original land was agricultural, the allotted land was not agricultural and therefore the land transferred was capital asset. He held that by virtue of section 49, the cost of acquisition of original land in the hands of the assessee’s father has to be regarded as the cost of acquisition of the land transferred by the assessee. Also, he invoked the provisions of section 50C and considered the market value of land as per stamp valuation authorities to be full value of consideration.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

(1) There were two distinct transactions — the first was the acquisition by the Government of land belonging to the assessee’s father, against which the assessee, as legal heir, was given lease of plot on 16-8-2004. This transaction got completed when the assessee got the leasehold rights viz. on 16-8-2004. The second transaction was transferring, on 25-8-2005, leasehold rights in the plot for a consideration of Rs.2.50 crores. The second asset i.e., leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act.

(2) The sole criteria for considering whether the asset transferred is capital asset u/s.2(14) or not is to consider the nature of asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired. The second asset i.e., the leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act. Hence, gains arising on transfer of leasehold rights were chargeable to tax u/s.45 of the Act.

(3) Section 49(1) provides that where a capital asset becomes the property of the assessee by any of the modes specified in clauses (i) to (iv), such as gift or will, succession, inheritance or devolution, etc., the cost of acquisition of such capital asset in the hands of the assessee receiving such capital asset shall be deemed to be the cost for which it was acquired by the person transferring such capital asset in the prescribed modes. In order to apply the mandate of section 49(1), it is a sine qua non that the capital asset acquired by the assessee in any of the modes prescribed in clauses (i) to (iv) should become the subject matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. Once such capital asset is transferred and another capital asset is acquired, there is no applicability of section 49(1) to such converted asset. The lower authorities erred in applying the provisions of section 49(1) to transfer of leasehold rights.

(4) Since the market value of the leasehold rights, on the date of allotment, constituted full value of consideration for transfer of lands belonging to the assessee’s father, the cost of acquisition of leasehold rights will be its market value on the date of allotment. 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.

(5) Section 50C is a deeming provision which extends only to land or building or both. Deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. The distinction between a capital asset being ‘land or building or both’ and any right in land or building or both is well recognised under the Income-tax Act. The deeming fiction in section 50C applies only to a capital asset being land or building or both, it cannot be made applicable to lease rights in land. As the assessee had transferred lease rights for sixty years in the plot and not land itself, the provisions of section 50C cannot be invoked.

Section 50C — Transfer of leasehold rights in a building does not attract provisions of section 50C.

The assessee along with one Amardeep Singh had vide registered lease deeds dated 19th November, 1992 acquired from Shree Khubchand Sethia Charitable Trust (Owner), leasehold rights for 99 years, in a house property at Kolkata.

By a tripartite registered deed dated 20th July, 2007 entered into between the owner, the assessee and Amardeep Singh (lessees) and three entities viz. Sugam Builders Pvt. Ltd., Neelanchal Sales and Suppliers Pvt. Ltd. and Pleasant Niryat Pvt. Ltd. (purchasers), the purchasers purchased this property. Under this deed dated 20th July, 2007 the owner transferred its ownership and reversionary rights in the said property for a consideration of Rs.1,00,00,000; the lessees for a consideration of Rs.3,19,00,000 gave up all their rights and interests in the said premises. Thus, purchasers paid total consideration of Rs.4,19,00,000 — Rs.1,00,00,000 to the owner and Rs.1,59,50,000 to the assessee and Rs.1,59,50,000 to Amardeep Singh — co-lessee. As against the consideration of Rs.4,19,00,000 the stamp duty valuation of the property was Rs.5,59,57,375.

The Assessing Officer (AO) computed the capital gains by adopting the stamp duty valuation to be the full value of consideration and notionally divided the said amount amongst the owner and the lessees in the ratio of actual consideration received by them. Accordingly, as against actual consideration of Rs.1,59,50,000 the AO computed capital gain by adopting Rs.2,12,47,375 to be the full value of consideration. He considered the lease rents paid over a period of time, duly indexed, to be the indexed cost of acquisition and on this basis arrived at LTCG of Rs.1,84,17,692. Since the assessee had invested Rs.1,96,03,685 and not the entire consideration adopted by the AO for computing capital gains, the AO granted proportionate exemption u/s.54F and charged balance Rs.14,46,692 to tax as LTCG.

Aggrieved the assessee preferred an appeal to the CIT(A) who relying upon various Tribunal decisions held that provisions of section 50C do not apply to transfer of leasehold rights.

Aggrieved the revenue preferred an appeal to the Tribunal and the assessee filed cross-objection on the ground that the CIT(A) has not adjudicated the alternative ground of the assessee viz. for the purposes of section 54F, full value of consideration does not mean value determined u/s.50C.

The Tribunal noted that the assessee was a lessee of the property which was sold by the owner of the property, yet the AO had treated the assessee as a seller apparently because the assessee was a party to the sale deed. The Tribunal held that in case of purchase of tenanted property the buyer pays the owner for ownership rights and if he wants to have possession of the property and remove the fetters of tenancy rights he would pay the tenants for surrendering their tenancy rights. Merely because the amount is paid at the time of purchase of the property, the character of receipt will not change.

The provisions of section 50C are not applicable where only tenancy rights are transferred or surrendered. On facts, the assessee had the rights of the lessee and not ownership rights. The assessee had granted, conveyed, transferred and assigned leasehold right, title and interest.

S. 50C — Substitution of sales consideration on transfer of land and building with the value adopted by the stamp valuation authority — Assessee objecting to the substitution of sales price — AO has no discretion and should refer the matter to Valuation Officer to determine fair value.

During the year the assessee had sold an industrial gala for a consideration of Rs.20 lakhs. Based thereon the assessee had offered to tax the sum of Rs.18.73 lacs by way of capital gains. The Assessing Officer noted that the stamp duty authorities had valued the said property at Rs.44.62 lakhs. The assessee brought to the notice of the AO the various negative factors. He also filed a valuation report of the registered valuer, according to which, the value of the said premises was Rs.18.66 lakhs. He also requested the Assessing Officer if the valuation report was not accepted, then the same may be referred to the DVO u/s.50C of the Act.

However, the Assessing Officer did not accept the contention of the assessee. He was of the opinion that since the assessee had not taken objection before the Registrar in the initial stages when the property was sold and it was only during the stage when objection was raised, the assessee filed a valuation report of registered valuer after giving second thought. Therefore, he was not under obligation to refer the matter to the DVO. He accordingly adopted the value determined by the stamp duty authorities at Rs.44.62 lakhs u/s.50C and made the addition of Rs.25.88 lakhs as short-term capital gain being the difference between the amount declared by the assessee and the amount finally determined by him. In appeal the learned CIT(A) upheld the action of the Assessing Officer.

Before the Tribunal the Revenue submitted that the Assessing Officer can refer the matter to the DVO only if the assessee claims that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property on the date of transfer and the value adopted or assessed by the stamp valuation authority had not been disputed in any appeal or revision or no reference had been made before any authority. According to it, in the absence of the word ‘or’ between sub clause (a) and (b) of S. 50C(2), both the conditions, as per clauses (a) and (b) of S. 50C(2), are to be fulfilled before referring the matter to the DVO.

According to the Tribunal, the word ‘may’ used in Ss.(2) of S. 50C had to be read as ‘should’ and the Assessing Officer had no discretion but to refer the matter to the DVO for the valuation of the property when the assessee had raised an objection that the value adopted or assessed by the stamp valuation authority exceeded the fair market value of the property. Accordingly, the matter was referred back to the file of the Assessing Officer with a direction to refer the matter to the DVO and decide the issue afresh as per law.

S. 50C in the event of the assessee contending that valuation as done by Stamp Valuation Authority is not acceptable to him and asking the Assessing Officer to make a reference to the Valuation Officer, it is mandatory on the part of the Assessing Officer to make such a reference notwithstanding that the assessee has not filed an appeal against such valuation.

The assessee, a partnership firm, filed its return of income declaring total income of Rs.1,75,108. The assessee had sold its factory premises for a consideration of Rs.15,05,000 and had shown profit on sale of factory premises amounting to Rs.10,94,721. The market value of the factory premises as per stamp valuation authorities was Rs.43,98,500. The assessee drew the attention of the AO to the observations of the Bombay High Court while admitting the petition filed by Practicing Valuers Association and Others v. State of Maharashtra, (Writ Petition No. 2027 of 2001) and contended that the valuation given in the stamp duty ready reckoner cannot be universally accepted. It was also submitted that it had not preferred an appeal against the valuation as done by Stamp Valuation Authorities since the purchaser had already paid stamp duty. However, the assessee requested the AO to make a reference to the valuation cell of the Department as per the provisions of S. 50C. The AO held that the reference to the valuation officer is optional and since the assessee had not objected to the value adopted by the stamp valuation authority there was no need to refer the matter to the valuation officer. He, accordingly, adopted the value of the property at Rs.43,98,500 and computed short term capital gain at Rs.35,89,503.

Aggrieved, the assessee preferred an appeal to the Tribunal where it mainly argued that the matter be sent back to the file of the AO with a direction to refer the same to the valuation officer for valuing the property at market rate. It was also pointed out that the assessee was not the owner of the land but was only a lessee and capital gain has arisen on transfer of leasehold rights. It was also contended that in the case of assignment of rights after obtaining necessary permission, S. 50C is not applicable.

The assessee had transferred leasehold rights and had itself offered capital gain on the same. S. 50C is a special provision for determining full value of consideration in certain cases. The assessee while making the claim before the AO has to satisfy him that the valuation adopted by the stamp valuation authority is not based on sound criteria. In such a case, the AO is bound to refer the matter to the DVO for arriving at the fair market value of the property. The assessee had vide its letter filed with the AO relied upon two decisions to the effect that the valuation given in the stamp duty ready reckoner cannot be universally adopted. In such cases, it is necessary for the AO to refer the matter to the DVO. The Tribunal has in ITO v. Smt. Manju Rani Jain, 24 SOT 24 (Del.) and Mehraj Baid v. ITO, (2008) 23 SOT 25 (Jodh.) held that the word ‘may’ used in S. 50C should be read as ‘should’ and the AO has no discretion but to refer the matter to the DVO for the valuation of the property. The Tribunal remanded the issue to the file of the AO with a direction to refer the valuation of the property to the DVO and determine the value in accordance with law.

Section 50C does not apply to transfer of immovable property held through company.

The assessee was holding 306 equity shares of Rs. 100 each in a private company (‘the company’). The total share capital of the company was 3,813 equity shares of Rs. 100 each. The company owned two flats in a residential building and was earning rent income from the same. During the year under appeal the assessee sold the shares for Rs. 37.51 lakh and capital gain was offered on that basis. According to the AO the assesse engineered the sale of the shares of all other shareholders of the company and thereby effectively transferred the immovable property belonging to the company. According to him, it was an indirect way of transferring the immovable properties, being the flats in the building. He accordingly ‘pierced the corporate veil and invoked the provisions of section 50C and computed the capital gains by adopting the stamp duty value of the flats.

The tribunal noted that the provisions of section 50C applies on fulfillment of two conditions viz., (i) when a transfer of “capital asset, being land or building or both” takes place; and (ii) the consideration for a transfer is less than the value “assessed” by any authority of a State Government for stamp duty purposes. It further observed that the term “transfer” as used in the provisions would only cover direct transfer. While in the case of the assesse, the assets transferred were shares in a company and not land and/or building. The flats were owned by the company who continues to remain its owner even after the transfer of the shares by the assesse. Secondly, the consideration for transfer received by the assesse is also not “assessed” by any authority. Thus, the other condition to attract the provisions of section 50C is also not complied with. According to it, since the provisions of section 50C are deeming provisions, the same have to be interpreted strictly in accordance with the spirit of the provisions. Therefore, the appeal filed by the assesse was allowed and it was held that the AO’s decision to invoke the provisions of section 50C to the tax planning adopted by the assessee was not proper and it does not have the sanction of the provisions of the Act.

S. 50B read with S. 2(42C) — Slump sale — Sale of one of the manufacturing divisions of the assessee — Whether the transaction could be considered as slump sale — On the facts
Held : No.
Per P. M. Jagtap:

The assessee was engaged in the business of manufacturing pharmaceutical and agrochemical products. During the year under consideration, its agrochemical division was sold for an agreed consideration of Rs.72.70 crores. During the course of assessment proceedings, the assessee was asked to explain as to why the said sale be not treated as a slump sale and capital gain arising therefrom be not computed u/s.50B. In reply, the assessee explained that it had sold the assets and liabilities of its agrochemical division by identifying the value of each and every item. In support, the break up of the agreed consideration of Rs.72.7 crore was given. The attention of the AO was drawn to the various schedules of the agreement where the fixed assets were valued item-wise by ascertaining the value of land, building, plant and machinery, furniture and fixtures and capital work-in-progress separately.

However, the assessee’s submissions were not found acceptable by the AO for reasons, amongst others, as under:

· Assessee had transferred the entire undertaking as a going concern along with all existing employees.

· The intention of the contracting parties was to sell the agrochemical undertaking and not the land, building, plant and machinery and furniture and fixtures and other intangible and current assets, all of which comprised the agrochemical division separately.

· The individual assets of agrochemical division were not separately valued but only group of assets were valued.

· The valuation report valuing individual assets and/or schedules to the agreement listing out individual assets and value thereof have no relevance unless the consideration is determined on the basis of itemised value.

· All the licences, old records of account books, vouchers pertaining to agrochemical business were also transferred by the assesses.

Accordingly, it was held that that the sale of the agrochemical division by the assessee was slump sale and the capital gain arising there from was chargeable to tax in its hand as per the provisions of S. 50B.

On appeal the CIT(A) accepted the stand of the assessee that sale of its agrochemical division was not a slump sale.

The Tribunal noted that as confirmed by the CIT(A) in his order — all the fixed assets as well as the current assets of agrochemical division were valued. The fixed assets were valued itemised by ascertaining the value of each and every asset separately and after adding non-compete fee of Rs.4 crores to the said value, the value of the fixed assets was worked out at Rs.54.33 crores. In a similar manner, net current assets were valued at Rs.58.38 crores and after deducting the value of net current liabilities therefrom, the total value was arrived at Rs.88.68 crores. As against the said value, the consideration finally agreed was Rs.72.70 crores and the reconciliation to explain the difference between the same was also furnished. The Revenue was not able to controvert or rebut the findings recorded by the CIT(A). Therefore, the Tribunal upheld the order of the CIT(A).

Deduction – Sec.54EC – Cheque issued within 6 months of transfer for acquiring bonds eligible for deduction u/s.54EC – Cheque cleared and bonds issued after 6 months – Relief available

On 9.8.2005 (AY 2006-07) the assessee earned LTCG on sale of land. U/s 54EC, NABARD bonds were a “specified asset” till 31.3.2006 and the assessee had time till 9.2.06 (6 months) to make the investment. The assessee issued a cheque on 7.2.06 and sent it by courier to NABARD. The cheque was encashed on 13.2.2006 and the bonds were allotted on 15.2.06. The AO & CIT(A) rejected the claim on the ground that (i) NABARD bonds were not a “specified asset” as of 1.4.06 & (ii) the investment was not within 6 months of the transfer. On appeal to the Tribunal, HELD allowing the appeal:

(i) The department’s argument that for AY 2006-07 only the “specified assets” as of 1.4.06 should be considered is not acceptable. Instead, the law as it stood on the date of transfer of the capital asset has to be applied;

(ii) When a payment is made by cheque, then the ‘date of payment‘ is the ‘date of the cheque‘ even though the cheque may be encashed subsequently. As the cheque was issued within 6 months of the transfer, s. 54EC relief was available even though the cheque was encashed, and bonds were allotted, later.

Section 2(22B), section 50C, section 55(2)(b)(i) — Cost of acquisition of the property u/s.55(2) (b)(i) will be its fair market value as on 1-4-1981 as determined by the registered valuer and not the circle rate.

The assessee sold property acquired by him prior to 1-4-1981. The assessee computed capital gains by considering fair market value of the property on 1-4-1981 to be its cost of acquisition. The fair market value adopted by the assessee was on the basis of a valuation report of a registered valuer. The Assessing Officer (AO), on the basis of Inspector’s Report, took circle rate list dated 8-6-1981 and valued the land on 1-4-1981 on the basis of circle rate and regarded this value to be the fair market value to be considered as cost of acquisition for computing capital gains.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the order passed by the AO.

Aggrieved, by the order of the CIT(A), the assessee preferred an appeal to the Tribunal.

The Tribunal noted that the term ‘fair market value’ is defined in section 2(22B) and no rules have been made for purpose of determining fair market value. The assessee had relied on the valuation report which he obtained from the registered valuer who is technical person and duly approved by the Department, whereas the AO had deputed the Inspector who brought the circle rate of the village where the land was situated and had adopted the circle rate to be fair market value. There is no provision under the chapter relating to capital gains which states that circle rate will be treated as cost of acquisition. Circle rates are notified by the State Government for levy of stamp duty for registration of sale deeds. The circle rates are deemed to be full value of consideration received or accruing as a result of transfer u/s.50C. But this section nowhere states that circle rates as notified will be the fair market value. The Tribunal held that in view of the provisions of section 55A once the assessee has submitted the necessary evidence by way of valuation report made by the Registered Valuer, the onus gets shifted on the AO to contradict the report of the Registered Valuer. The registered valuation officer is a technical expert and the opinion of an expert cannot be thrown out without bringing any material to the contrary on record. In case the AO was not agreeable with the report of the Registered Valuer, he was duty bound to refer the matter to the DVO for determining the fair market value of the land as on 1-4-1981 which he failed to do so. The Tribunal held that the Revenue has not discharged the onus but merely rejected the fair market value taken by the assessee. It set aside the order of the CIT(A) and directed the AO to re-compute the capital gain after taking the fair market value of the land as on 1-4-1981, as claimed by the assessee.

Section 54F — Amounts paid for completion of flat purchased in semi-finished condition, pursuant to a tripartite agreement entered into by the assessee with the contractors and the builder form part of cost of new house even though such agreement was entered prior to agreement for purchase of house.

The assessee who was 50% co-owner of a flat at Walkeshwar sold the same for a sum of Rs.2.30 crores as per transfer deed dated 15-1-2006. The assessee invested sale proceeds in purchase of a house property vide agreement dated 26-5-2006 for Rs.45.60 lacs. The assessee had before completion of the building incurred expenditure of Rs.43 lakhs as per three supplementary agreements dated 22-4-2006. The assessee, therefore, treated the cost of the new house at Rs.88.60 lakhs for the purpose of claiming deduction u/s.54F.

The assessee explained to the AO that the flat purchased was in a semi-finished condition without flooring, plumbing, wiring, etc. Therefore, for providing internal basic amenities as mentioned in the main agreement, the assessee entered into a supplementary agreements which were also signed by the builder. The AO observed that the supplementary agreements were entered prior to the main agreement. The main agreement did not have reference of the supplementary agreements. The main agreement clearly provided that the builder was providing the flat with all basic amenities required for making the premises habitable. He did not allow the exemption with reference to this sum of Rs.43 lakhs and held the expenditure of Rs.43 lakhs incurred by the assessee to be cost of improvement of the flat, which could not be considered for deduction u/s.54F.

Aggrieved the assessee preferred an appeal to the CIT(A) where he submitted that since the assessee was in urgent need of the flat and the flat being purchased was in skeletal condition, the seller suggested that the assessee engage other contractors for finishing the work. It was because of this reason that the supplementary agreement was entered into before the main agreement. The assessee substantiated his contentions by referring to letter dated 29-3-2006 written by the builder. The CIT(A) confirmed the order passed by the AO.

The Tribunal noted that the assessee took possession of the flat on 15-5-2006 and thereafter the registered deed was executed on 26-5-2006. The Tribunal held that the claim of the assessee cannot be rejected only on the ground that the agreement had been entered into prior to taking over possession of the flat. The claim of the assessee to engage other contractors to expedite work as suggested by the builder cannot be held unjustified on the

Note: It appears that the reference to section 54F should be a reference to section 54, since the assessee had sold a residential house.

(1) Section 54F — Exemption of long-term capital gains where sales consideration is invested in purchase of a house — Whether purchase of house jointly with spouse is eligible — Held, Yes.

(2) Section 94(7) — Purchase of units and sale thereof at loss after earning dividend — If date of tender of cheque for purchase of shares was considered as the date of purchase, then the sale was not within three months of purchase — Whether the provisions of section 94(7) attracted — Held, No.

(1) The assessee had made long-term capital gain on sale of shares. The sales proceeds were invested in purchase of row house and exemption u/s.54F was claimed. One of the grounds on which the exemption was denied by the AO was that the house purchased by the assessee was in the joint name of his wife.

(2) The assessee had purchased units of mutual funds of Rs.3 crore on 26-12-2003. On the very same date, the assessee received a dividend of Rs.1.16 crore. On 29-3-2004, the assessee redeemed the units for Rs.1.7 crore and thereby booked a short term capital loss of Rs.1.3 crore. The AO found that the cheque of Rs.3 crore for the purchase of units was actually realised on 30-12-2003 and therefore, according to him, the period of holding before the redemption of the said units on 29-3-2004 was only 88 days i.e., less than 3 months. Therefore, according to him, the transaction was hit by the provisions of section 94(7) of the Act. The AO was also of the view that the entire transaction of sale and purchase of mutual fund units was nothing but a colourable device for setting off of the capital gains arising on sale of shares. Accordingly, the set off of short term capital loss claimed by the assessee was denied.

On appeal the CIT(A) confirmed the denial of exemption u/s.54F. While on the issue regarding applicability of section 94(7) he noted that the provisions of section 94(7) lays down three cumulative conditions, the non-fulfilment of any one of the conditions would result into non applicability of section 94(7). Thus, if the date of the purchase as claimed by the AO was 30-12-2003, then it cannot be said that the units were purchased within three months prior to the record date because the record date was 26-12-2003 when the dividend was declared. Thus, one of the conditions essential for application of section 94(7) is not fulfilled. Secondly, the CIT(A) noted that the mutual fund had accepted 26-12-2003 as the date on which the units were allotted to the assessee. Based on the said date, the second conditions viz. that the units are sold within a period of three months was also not fulfilled. Accordingly, it was held that the provisions of section 94(7) were not applicable. As regards the point raised by the AO that the entire transaction was a colourable device, the CIT(A) relying on the decision of the Bombay High Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd., Appeal No. 18 of 2006 held that as the conditions of section 94(7) have not been fulfilled, no disallowance was permissible.

(1) The Tribunal noted that the total consideration for the house had been met by the assessee. According to it the assessee had added the name of his wife only for the sake of convenience. It also drew support from the provisions of section 45 of the Transfer of Property Act which provides that the share in the property will depend on the amount contributed towards the purchase consideration. Further, relying on the decisions listed below, the Tribunal held that since the total consideration for the house had been paid by the assessee, the exemption cannot be denied on this ground. The decisions relied on are as under:

· ITO v. Arvind T. Thakkar in ITA No. 7338/Mum./2005 vide order dated 29-4-2011;

· Ravinder Kumar Arora v. ACIT in ITA No. 4998/Del./2010 vide order dated 11-3-2011; and

(2) As regards section 94(7) The Tribunal noted that the whole issue revolved around the date of purchase of units. The Tribunal agreed with the findings of the CIT(A) and the appeal filed by the Revenue was dismissed.

S. 11 of the Income-tax Act, 1961 – Whether the income of the Bombay Stock Exchange was from property held for charitable purposes and accordingly, exempt from tax – Held, Yes

The assessee’s claim for exemption u/s.11 of the Act was rejected by the AO, on the ground that the basic purpose of the exchange was to support, protect and to encourage the business of stock-brokers and dealers and in this process no interest of public was served. On appeal, the CIT(A) allowed the appeal of the assessee, relying on the decisions given by his predecessor in the A.Ys. 1991-92 to 1998-99 and also on the decision of the Apex Court in the case of Surat Art Silk Cloth Manufacturers’ Association and also in the cases of Pune Stock Exchange and The Stock Exchange, Ahmedabad.

Being aggrieved, the Revenue appealed before the Tribunal and contended that for the purpose of S. 11, incomes should be derived from property held under a trust. However, in the case of the assessee, there was no trust deed and the property was not held upon the trust. It was also emphasised (relying on the Mumbai Tribunal decision in the case of Atco Health Care) that each year was an independent year and the exemption granted in earlier years cannot be the criteria for grant of the exemption. A reference was also made to the Bombay High Court decision in the assessee’s own case where the Court had mentioned the assessee as an association of mutual concern. Alternatively, it was submitted that the exemption u/s.11 should be confined to only such portion of income which was applied to charitable or religious purpose. Relying on the Supreme Court decision in the case of Jindal Dye Intermediate Ltd., it was also suggested that the Tribunal should refer the matter to a larger Bench.

The Tribunal did not find any force in the Revenue’s contention that to avail exemption the property should be held under a trust and no trust deed was discernible in the case of the assessee, for the reason that right from its very inception, under the old Act as well as under the new Act, the assessee had been recognised as charitable institution which was holding property as legal entity, and enjoying the benefit of S. 11. According to it, the Revenue cannot draw any benefit by relying on the decision of the Tribunal in the case of Atco Health Care, as the decision was based on the

Section 12AA — Registration of Trust — Delay in application for registration — Refusal to grant registration on the ground that the trust was claiming exemption u/s.11 even though it was not registered — Whether the refusal was on the valid ground — Held, No.

The assessee trust came into existence vide trust deed dated 24th August, 2006. It had not applied for registration till 30-10-2009. However, all along the trust was carrying on its activities and duly filing its return of income with claims for exemption u/s.11. The DIT refused to grant registration for the reason that the assessee was claiming exemption u/s.11 even though it had not complied with the mandatory provisions of registration. According to him the assessee had concealed its income by claiming exemption which otherwise it was not entitled to.

According to the Tribunal the reason for refusal to grant registration as given by the DIT was not relevant to the consideration on which an application for registration of a trust or charitable institution is to be examined. Further, it also noted that the assessee had admitted an inadvertent lapse in nonfiling of registration application and also the fact that the trust had not accepted any donation, other than corpus donation at the time of formation of the trust. According to it, the lapse by the assessee cannot be visited with the consequence of its being declined registration later also, which approach was not supported either by any specific legal provisions or plain logic or rationale. The DIT was only required to examine if the objects of the trust were charitable and the activities were bona fide. Further noting that the assessee had placed enough relevant details and supportive evidences in support of the trust objects being charitable and the activities being bona fide, the Tribunal directed the DIT to grant registration.

Section 12AA — Registration of charitable trust — Trust constituted with the object clause consisting of charitable as well as religious — Whether entitled for registration — Held, Yes.

The assessee trust had applied for registration u/s.12AA of the Act. Its objects, as per its trust deed, were charitable as well as religious. According to the DIT, since the objects were admixture of religious as well as non-religious, relying on the decision of the Jammu & Kashmir High Court in the case of Ghulam Mohidin Trust v. CIT, (248 ITR 587) and the decision of the Supreme Court in the case of State of Kerala v. M. P. Shanti Verma Jain, (231 ITR 787), the registration u/s.12AA was denied. Before the Tribunal, the Revenue justified the order of the DIT on the ground that at the time of grant of registration u/s.12AA, it was necessary that he was satisfied that the objects are charitable and as per section 2(15), which defines the term ‘charitable purpose’, religious purpose is not part of charitable purpose.

According to the Tribunal, the trust, whose objects are religious as well as charitable, would be entitled for grant of registration and also to claim exemption u/s.11. For the purpose, reliance was placed on the decision of the Gujarat High Court in the case of ACIT v. Bibijiwala, (AA) Trust (100 ITR 516). It further observed that when the assessee seek exemption u/s.11, the same would be allowed subject to provision of section 13(1)(a) and (b) of the Act. According to it, the decisions relied on by the Revenue were on different facts , hence, not applicable to the case of the assessee.

S. 10A of the Income-tax Act, 1961 – Assessee, originally a firm, registered itself under Part IX of the Companies Act and became a company – Claim for deduction made in the status of a company denied on the ground that it was not a new undertaking – Whether AO justified – Held, No

Prior to its existing avatar, the assessee was a firm, which was originally constituted in November 1993. It registered itself as a company under Part IX of the Companies Act, 1956 on 24-7-2001. During its existence as a firm it was in export of software and was claiming deduction u/s.80HHE. The assessee got itself registered as STP unit on 3-1-2002 and claimed deduction u/s.10A for the first time in the A.Y. 2002-03. The claim was rejected by the AO, on the grounds that the conditions of S. 10A(2)(ii) and (iii) were not fulfilled. According to him, the assessee’s case was also hit by the provisions of S. 10A(9). On appeal, however, the CIT(A) allowed the claim of the assessee.

Before the Tribunal, the Revenue contended that the relief under the provisions of S. 10A was available only to a newly established industrial undertaking. According to it, the provisions of S. 10A(2) were also not fulfilled because the so-called newly formed company was using 100% assets which were already put to use in

India

by the firm.

The Tribunal agreed with the CIT(A) that in the assessee’s case, the conversion of a firm into a company was not a transfer as held by the Bombay High Court in the case of Texspin Engineering and Manufacturing Works. Therefore, according to it, there was no violation of any condition of S. 10A(2)(ii) and (iii).

Further, noting the fact that the undertaking got itself registered as STP unit for the first time in the year 2002 and started claiming deduction u/s.10A for the first time from the A.Y. 2002-03, the Tribunal relying on the Board Circular No. 1/2005 and the EXIM Policy permitting existing DTA unit to get itself registered as EOU, upheld the order of the CIT(A) and held that the assessee was entitled to deduction u/s.10A of the Act.

Section 10A of the Income tax Act, 1961 — Exemption to new undertaking in FTZ — (i) Whether receipt by way of reimbursement of expense eligible for exemption — Held : Yes (ii) Whether AO justified in denying the exemption in a case where export proceeds received after 6 months but within the period of one year — Held : No.

1. The assessee was denied exemption u/s. 10A in respect of Rs. 0.35 lac received from Export Promotion Council by way of reimbursement of exhibition participation costs. The corresponding expense was incurred by the assessee in the earlier year. According to the AO, the receipt cannot be said to have been derived from export activity, hence the claim for exemption u/s. 10A qua the said receipt was denied by him. On appeal, the CIT(A) confirmed the AO’s order holding that the proximate source of the receipt was the grant and was not the export proceeds.

2. Whether the delayed payments towards the employees’ contribution to ESIC u/s. 2(24) r.w. Section 36 were chargeable under the head ‘Income from other sources’ as held by the AO or as business income as claimed by the assessee.

3. The assessee was denied exemption u/s. 10A in respect of the sum of Rs. 21.16 lacs since, the same was received beyond the specified period of 6 months.

1. The Tribunal relied on the Delhi Tribunal decision in the case of Perot System TSI Ltd. It noted that the said decision was in the context of reimbursement by the EXIM bank. According to the Tribunal, the decision had generated the legal principle viz., where the expenses which were reimbursed had direct link with the business of the assessee’s undertaking, the same were eligible for exemption u/s. 10A. Applying the said proposition, the Tribunal held that the reimbursed amount received from Export Promotion Council was directly linked to the business of the assssee's undertaking and therefore, entitled to deduction u/s. 10A.

2. The Tribunal agreed with the assessee’s reasoning that when the contribution was made in time, such payments were allowed as business expenditure, accordingly, the disallowance if any made in this regard could only give rise to business income. Accordingly, it was held that the delayed payments towards the employees’ contribution to ESIC was taxable as business income.

3. The Tribunal noted that as per Section 10A(3) below Explanation 1, the RBI was authorised to grant extension to the said period of 6 months. Accordingly, relying on the Circular No. 28 of 30.3.2001 and Circular No. 91 of 1.4.2003, the Tribunal agreed with the assessee that for the unit in the SEZ, the RBI has granted extension period of one year. Hence, it was held that the export proceeds realised within the extended period were eligible for exemption u/s. 10A.

Deduction – Sec. 10B – Existing units – Extension of relief w.e.f. 1-4-1999 – Period of 5 years extended to 10 years – Extension of relief period available to existing units

The assessee, a 100 % EOU, commenced commercial production in AY 1992-93 and was entitled to claim exemption u/s 10B(3) in any 5 consecutive assessment years falling within the period of 8 years. The assessee did not claim a deduction in the first 3 assessment years as there was a loss and claimed it for the first time in AY 1995-96. The eligibility period was upto AY 1999-2000. With effect from 1.4.1999, the period of exemption prescribed u/s 10B(3) of 5 years was substituted by 10 years. The assessee claimed that it was entitled for exemption u/s 10-B for a further period of two years i.e. AY 2000-01 and 2001-02. Thereafter, w.e.f. 1.4.2001, s. 10B was substituted by the Finance Act, 2000. The assessee’s claim was resisted by the AO & CIT (A) on the ground that the benefit applied only to “new undertakings” set up after that date and not to existing units. Held by the Special Bench:

(i) In AY 1999-2000, before expiry of the original time limit of five consecutive assessment years for which deduction was available as per then applicable law, the amended law became applicable and the assessee was accordingly eligible for deduction for the extended period of 10 years, as against 5 years allowed under the preamended law (DSL Software Ltd followed);

(ii) If there is only one decision of a non-jurisdictional Hon’ble High Court on the issue, it is binding on the Special Bench in view of the settled principle of judicial proprietary;

(iii) The department’s argument that the new units set up by the assessee was a mere “capacity extension” and not a separate industrial undertaking on the basis that the certificates granted by the EOU authorities was for enhanced capacity and not for setting up a new industrial undertaking is not acceptable because S. 10B does not stipulate the issue of a separate approval for each unit from the competent authority. The only requirement is that the undertaking should be approved (Saurashtra Cement & Chemical Industries 260 ITR 181 (SC) distinguished)

(iv) On the question whether export incentives are “derived” from the undertaking and are eligible for deduction u/s 10B, s. 10B(4) stipulates a formula by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, though s. 10B(1) refers to profits “derived” by the EOU, the manner of determining such eligible profits has to be done as per the formula. S. 10B(4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking and be eligible for deduction.

S.80IA(4) - S. 80-IA(4) 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 issues as to (i) whether the word “contractor” is synonymous with “developer” within the meaning of s. 80-IA(4)(i) and (ii) whether the condition in clause (c) is applicable to a developer who is not carrying on the business of operating and maintaining the infrastructural facilities are covered by the judgement in ABG Heavy Industries 322 ITR 323 (Bom). There, it was held that the department’s contention that since the assessee was not “operating and maintaining the facility”, he was not eligible for s. 80-IA(4) deduction was wrong because a 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. The result is that even a contractor who merely develops but does not operate or maintain the infrastructure facility is eligible for s. 80-IA(4) deduction (B.T.Patil & Sons Belgaum vs. ACIT 126 TTJ 577 (Mum) impliedly held not good law).

ITA Nos.7943, 7944, 7946, 2255/Mum/2011; AY 2005-06 to 2008-09; order dt.13/02/13

S. 80-IA(5): Loss of eligible unit, even if set-off against non-eligible profits, has to be aggregated & carried forward for set-off against future eligible profits

The assessee set up two windmills, the income from which was eligible for deduction u/s 80IA. The assessee suffered a loss in the said Wind Mills and claimed a set-off of the same against its other income. The AO and the CIT(A) rejected the claim by relying on Gold Mine Shares 113 ITD 209 (SB) (Ahd) where it was held that in view of s. 80-IA(5), the loss suffered by the eligible unit cannot be set off against the profits of other units / other business in the initial year of assessment or subsequent years of eligible years of assessments. The Tribunal had to consider the following legal issues: (i) what is the “initial assessment year“?, (ii) whether the loss/ depreciation from the eligible unit is entitled to be set-off against the other income?, (iii) whether the said loss/ depreciation of the eligible unit is, after set-off against the other income, still required to be notionally carried forward for set-off against the future profits of the eligible unit? Held by the Tribunal:

(i) The “initial assessment year” is the year in which the eligible unit commences operations. It is not the year in which the assessee chooses to claim deduction. The requirement of s. 80-IA(5) is that the loss and unabsorbed depreciation of the eligible unit should begin to be aggregated from the “initial assessment year” to the last allowable year. The aggregation has to continue for every year irrespective of whether s. 80-IA (1) deduction for that year is exigible or not;

(ii) If the eligible unit has no profit, the loss & depreciation of the eligible unit is entitled to be set-off against the other income. However, despite such set-off, the loss and depreciation has to be aggregated and notionally carried forward for set-off against the future profits of the eligible unit.

S. 80IB(10) of the Income tax Act, 1961 – Deduction in respect of income from development and building of housing projects – Project consisting of residential units where the individual flat size varied between 800 sq. ft. to 3,000 sq. ft. – Whether the assessee entitled to claim deduction (computed on proportionate basis) – Held Yes

The assessee was engaged in the business of development and construction of residential apartments. One of its projects consisted of 261 residential units and the individual flat size varied between 800 sq.ft to 3,000 sq.ft. It had claimed deduction u/s.80IB(10) of the Act with reference to the profit attributable to the built-up area, which was occupied by the residential units having individual flat size of less than 1,500 sq.ft. The profit was computed on a proportionate basis — based on the ratio of the built-up area of the eligible sized flats to the total area of the project. Similar deduction was also claimed with reference to the income earned on account of the forfeited amount on cancellation of the agreement by the prospective buyers and on the sale of scrap (‘other income’).

According to the AO, the deduction was allowable only where each and every residential unit comprised in the project had maximum built-up area of 1,500 sq.ft. Further, in respect of the other income, since the said income was not derived directly from the project itself, according to him, no deduction could be allowed. Thus, the assessee’s claim was rejected. On appeal, the CIT(A) gave partial relief by allowing deduction in respect of the profit derived on sale of flats. However, in respect of the other income, he upheld the order of the AO. So both the parties filed appeal before the Tribunal.

The Tribunal noted that the provisions of S. 80IB(10) do not provide for denial of deduction, if a housing complex contains both, the smaller and larger residential units. Following the decision in the case of Bajaj Tempo Ltd., where the Supreme Court had observed that such provisions should be interpreted liberally, it upheld the order of the CIT(A) qua the deduction claimed with reference to the profit on sale of residential units.

In respect of the income earned on account of the forfeited amount on cancellation of the agreement by the prospective buyers, the Tribunal found that the said receipts by the assessee were directly related to the construction and development of the housing complex, and hence, eligible for deduction u/s.80IB(10). As regards the income from scrap, it was noted that it was not the case of the Revenue that such scrap was from the business, other than the business of construction and development of residential complex. Thus, according to it, the scrap was generated from the construction and development activity only. Thus, according to the Tribunal, the CIT(A)’s action in denying the deduction was not correct, accordingly, the assessee’s cross appeal on the point was allowed.

S. 80IB(10) — Amenities provided by the assessee at the time of construction itself, though by way of a separate agreement, are to be treated as part of the housing project undertaken by the assessee — Deduction u/s.80IB(10) is allowable in respect of receipts for amenities — When there is direct nexus between the funds borrowed and funds advanced to sister concerns interest received on amounts advanced can be netted off against interest paid.

The assessee was engaged in the business of constructing residential buildings. During the assessment year under consideration the assessee had claimed deduction of Rs.3,15,40,268 u/s.80IB(10). The Assessing Officer (AO) noted that the assessee had considered receipts for amenities as part of total sales and had claimed deduction u/s.80IB on the profit element contained in receipts for amenities. He observed that the amenities included superior quality flooring, false ceiling, fans and tubes, superior quality fittings in toilets, box grills and pipe gas from Mahanagar Gas Limited. The AO did not consider profit derived from providing amenities as part of total sales and accordingly denied benefit of deduction on an amount of Rs.22,12,360 being the profit on amenities receipts of Rs.55,34,797.

The CIT(A) held that provision of amenities should be treated as part of the housing project undertaken by the assessee and since these amenities are provided by the assessee at the time of construction itself, though by way of a separate agreement, the profit element in receipts for amenities qualifies for deduction u/s.80IB(10). He allowed the appeal of the assessee.

The CIT(A), in the course of appeal proceedings before him, noted that the assessee had advanced monies to its sister concerns and had received interest of Rs.16,27,802 which interest was netted off against interest paid. After giving an opportunity to the assessee, he held that interest receipts should be excluded for the purpose of calculating deduction u/s.80IB(10) of the Act. He directed AO to recompute the deduction u/s.80IB(10) by excluding interest receipts.

The Tribunal noted that the extra amenities are provided only to purchasers of the flats at the time of purchase of flat itself and no such activity has been undertaken for any other person; the agreement for sale of flat and for provision of extra amenities were both entered on the same date; work for extra amenities was carried out through the same contractor at the time of construction of the flat itself. It found merit in the submission that extra amenities given to the buyer cannot be provided in isolation as the same are inextricably connected with the housing project and the decision of providing such extra amenities to the buyer was a commercial decision and within the conditions of S. 80IB(10) of the Act. Accordingly, this ground was decided in favor of the assessee.

As regards the exclusion of interest receipts for computing deduction u/s.80IB(10) the Tribunal after considering the submissions made on behalf of the assessee (viz. that the funds were borrowed from banks and private parties for the purpose of its housing project; the borrowings from the banks were for a specified period and prepayment would have resulted into levy of penalty interest and therefore funds were advanced to sister concerns on a temporary basis so as to recoup part of the interest costs) directed the AO to give an opportunity to the assessee to prove the nexus that borrowed funds were used for giving advances on which interest has been earned and if the assessee can prove such nexus then netting may be allowed.

S. 80IB(10) of the Income-tax Act, 1961 - Deduction in respect of profits and gains arising from development of housing project - Date of completion of the housing project - Relevant date is not the date of issuance of the completion certificate by the local authority but the date of completion as mentioned in the certificate

The assessee was engaged in the business of civil construction, building and developing housing project. It claimed deduction of Rs.36.63 lacs u/s. 80IB(10) of the Act. According to the AO, the housing project was not completed prior to the prescribed date of 31-3-2008. The contention of the assessee was that it had completed the project before the prescribed date and the local authority was duly informed of the fact vide its letter dated 21-3-2008. According to the assessee, merely because the completion certificate was not issued by the local authority, over which the assessee had no control, the same could not be made a basis for denial of claim. However, according to the AO, the availability of the completion certificate before the date prescribed was a must for the allowance of deduction u/s.80IB(10). Therefore, he rejected the assesseeâ€™s claim for deduction. On appeal, the CIT(A) confirmed the disallowance.

According to the Tribunal, what is crucial is not the date of issue of letter by the local authority, but the 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.

Section 80IB(10) — Amendment to section 80IB(10) w.e.f. A.Y. 2005-06 restricting the commercial area to 5% is not applicable to projects commenced prior to 1-4-2005.

The assessee, a builder and land developer, had entered into an agreement to develop and construct a building project on land situated at Mira Taluka, Dist. Thane. For A.Y. 2005-06, the assessee filed a return of income in which it claimed deduction u/s.80IB(10) of the Act. The AO noted that the housing project which consisted of 94,255 sq. ft had shopping area to the extent of 7,935 sq. ft. The AO denied the deduction on the ground that in view of the amendment to section 80IB(10) w.e.f. 1-4-2005, the assessee was not entitled to deduction u/s.80IB(10) of the Act.

Aggrieved by the order passed by the CIT(A) the Revenue preferred an appeal to the Tribunal.

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 assessee’s project had commenced in December 2003, the Tribunal held the amendment to be not applicable to the assessee’s case.

Section 80IB(10) — While computing the area of plot, the area of a plot acquired subsequently for providing approach road also needs to be included in the measurement of total plot area. Areas of open land/garden/store/gym room meant for common use are not to be included for calculating built-up area of the residential unit. Merger of flats, after purchase, by the owners thereof to make it into a larger flat for their own convenience cannot be a cause for denial of deduction u/s.80IB(10).

The assessee-firm started construction of a residential project at Aundh, Pune. As per the original lay-out plan approved by Pune Municipal Corporation (PMC), the total area of the plot was shown to be 3995.34 sq.mts. i.e., marginally less than the prescribed area of 1 acre. The assessee submitted that in addition to the above-stated area of land, an additional land measuring 5 ‘Are’ was also acquired by the assessee for the approach road to the said project vide a separate agreement made with the same landlords from whom the above-stated area of 3995.34 sq.mts. of land was purchased. On including this area, the size of the plot exceeded 1 acre. The assessee submitted that if this area would not have been acquired, the PMC would not have sanctioned the plan and issued commencement certificate. The AO visited the site and being satisfied allowed the deduction.

The CIT found this order to be erroneous and prejudicial to the interest of the revenue on the ground that: (1) the area of the plot is less than 1 acre; (2) as per sale agreement of row house, the saleable area mentioned is more than 1500 sq. feet; (3) in A.Y. 2005-06 the AO has in order passed u/s.143(3) denied deduction u/s.80IB(10); and (4) flats have been merged together and the modification is not as per approved plans.

Aggrieved, the assessee filed an appeal questioning the validity of revisional order passed u/s.263 of the Act.

The Tribunal noted that in the case of Haware Engineers and Builders (P) Ltd. v. ACIT, (11 Taxmann.com 286) (Mum.) deduction claimed u/s.80IB(10) was denied by the A.O. on the ground that the additional plot acquired subsequently, by allotment, was a distinct plot which cannot be included in computation of the area of the plot. The Mumbai Bench of Tribunal held that in case an assessee finds that he is not eligible for deduction u/s.80IB(10), because size of the plot on which project is built is less than minimum necessary size, and he makes good that deficiency, and ensures that all the necessary pre-conditions are satisfied and approvals obtained, the assessee is eligible for deduction u/s.80IB(10). It was further held that the fact that he satisfied the conditions later, does not adversely affect its claim for deduction. What is material is that at the point of time when matter comes up for examination of the claim, the necessary pre-conditions for being eligible to claim are satisfied. The Tribunal held that the

As regards the second ground about row house having area exceeding 1500 sq.ft., the Tribunal noted that sale area included area of open land/garden and if that is excluded, then area of the row house is less than 1500 sq.ft.

As regards the merger of flats and thereby exceeding the prescribed limit of 1500 sq.ft. being taken as a basis for denial of deduction in A.Y. 2005-06, the Tribunal held that there is no substance since it is undisputed fact that each flat was within the prescribed limit of 1500 sq.ft. area and if after purchasing of 2 flats the owner(s) of flats merges it into a larger flat, the claimed deduction cannot be denied to the assessee.

The Tribunal held that the grounds on which the assessment order has been treated as erroneous and prejudicial to the interest of the Revenue are debatable and hence revisional powers cannot be invoked.

Section 80IB, Form No. 10CCB — By filing Form No. 10CCB in the course of reassessment proceedings (which form was not filed with the return of income, nor was it filed in the course of assessment proceedings) the assessee is not making any fresh claim for deduction u/s.80IB but merely furnishing the documents to substantiate its claim made during the course of assessment and even reassessment proceedings.

For A.Y. 2003-04, the assessee filed its return of income by due date mentioned in section 139(3) of the Act. In the return of income filed the assessee claimed deduction u/s.80IB. The Assessing Officer (AO) assessed the total income u/s.143(3) to be Rs.7,31,51,920 as against returned income of Rs.5,16,02,964 by restricting deduction u/s.80IB on allocation of corporate expenses proportionately over all units. Subsequently, the AO noticed that the assessee had not filed audit report in Form No. 10CCB, hence is not eligible for deduction u/s.80IB and due to that the income has escaped assessment. The AO initiated proceedings u/s.147 r.w.s. 148 of the Act.

In the course of reassessment proceedings the assessee filed Form No. 10CCB and claimed that non filing of Form No. 10CCB is only a technical default and since original Form No. 10CCB was filed along with return of income u/s.148, technical default is removed and deduction u/s.80IB should be allowed. The AO noticed that the due date of filing return of income u/s.139(3) was 30-11-2003 and the assessment u/s.143(3) was completed on 31-3-2006, but the audit report filed along with return u/s.148 was dated 23-2-2007 and also balance sheet of Silvasa Unit, in respect of which deduction u/s.80IB was claimed, was audited on 23-2-2007, whereas the P & L Account of Silvasa unit was audited on 16-10-2003. He held that there was severe non-compliance on the part of the assessee. He, accordingly, denied claim for deduction u/s.80IB. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) confirmed the jurisdiction, but he allowed the claim of the assessee u/s.80IB by holidng that submission of audit report in Form No. 10CCB is directory in nature and it is not mandatory and that submission of audit report even during reassessment proceedings is sufficient compliance u/s.80IB of the Act. The assessee did not challenge the decision of the CIT(A) confirming jurisdiction. Therefore, the assumption of jurisdiction became final.

The Tribunal noted that the AO while framing assessment u/s.143(3) of the Act, originally, accepted the claim of deduction u/s.80IB of the Act despite the fact that there was no audit report in Form No. 10CCB i.e., that means that the AO was also under bona fide belief that the assessee is entitled to deduction u/s.80IB of the Act and he allowed the same. It was subsequently that he noticed that the assessee had not filed the audit report along with return of income, nor had it filed the same during the course of assessment proceedings. He, accordingly, recorded reasons and re-opened the assessment. The Tribunal held that the assessee is not making any fresh claim for deduction u/s.80IB of the Act, but merely furnishing the documents to substantiate its claim made during the course of assessment and even reassessment proceedings. The Tribunal held that there is no infirmity in allowing the claim of deduction even though the assessee has filed audit report in Form No. 10CCB during the course of reassessment proceedings. It upheld the order of the CIT(A).

S. 80HHC of the Income-tax Act, 1961 — Deduction in respect of export profit — Export of goods made directly by the assessee from one country to another country — Whether eligible for relief — Held, Yes.

The assessee had purchased machinery from Germany and sold it directly to a party in Dhaka, Bangladesh without bringing the same into Indian territory. Its claim for deduction u/s.80HHC qua the said transaction was rejected by the AO on the ground that the export was not out of India. On appeal, the CIT(A) confirmed the AO’s order.

Before the Tribunal, the order of the CIT(A) was justified by the Revenue and it was further contended that the legislative intent was to give boost to the export of Indian products. It also relied on certain decisions.

Referring to the definition of ‘export out of India’ as given in Explanation (aa) to S. 80HHC, the Tribunal, relying on the Allahabad High Court decision in the case of Ram Babu & Sons and on the Supreme Court decision in the case of Silver & Arts Palace and on the Board Circular No. 621, noted that the said Explanation applies only to sales made over the counter in a shop, emporium or such other establishment. Therefore, the Explanation has no relevance to the case of the assessee.

· The relevant documents showed that it was the assessee who had purchased machinery and in exercise of its right as the owner, had exported the said machinery to a party in Bangladesh.

Further, relying on the Supreme Court decision in the case of Bombay Burma Trading Corporation, Madras High Court decision in the case of N. S. Gumpex Pvt. Ltd. and of the Mumbai Tribunal decision in the case of Asif Taherbhai, it noted that the literary meaning of the term ‘export’ means sending goods to another country. It did not mean only sending goods out of one’s own country to another. According to it, the reliance placed by the Revenue on the decision of the Mumbai Tribunal in the case of Hindustan Lever Ltd. was misplaced, as the said decision did not have occasion to consider the Bombay High Court decision in the case of Bombay Burma Trading Corporation (188 ITR 122).

Explanation (aa) to S. 80HHC — Date of export out of India — Held that the relevant date was the date when the goods were dispatched and cleared by the customs and not the date as per the bill of lading.

One of the issues before the tribunal was regarding the year in which the exports made by the assessee under certain invoices fall. The AO noted that exports under Invoice Nos. 435 to 444, though dated March, the corresponding bills of lading were dated April. The assessee contended that during the financial year itself the goods were dispatched and the custom clearance was obtained. However, the AO held that these goods cannot be considered as export of the current year. On appeal the CIT(A) held that the AO’s view that the bill of lading was the date of sale was absolutely contrary to the provisions of explanation (aa) of S. 80HHC.

Before the Tribunal the Revenue submitted that the bill of lading was the authoritative document for dealing with the period of export sales. It was further submitted that those goods had been exported on FOB (Free on Board) wherein risk passes to buyer, once goods were delivered on board of the ship by the seller.

(a) it had been regular system of accounting wherein exports were accounted according to the date of export invoices;

(b) the goods had been dispatched from the factory premises of the assessee and had been duly cleared by the customs during the financial year;

Further, referring to Explanation (aa) to S. 80HHC defining ‘export out of India’ and relying on the decision of the Apex Court in the case of Silver and Arts Place which explains what is ‘export out of India’, the Tribunal upheld the order of the CIT(A).

S. 80HHF of the Income tax Act, 1961 – Deduction in respect of profits and gains from export of films – Transfer of telecast rights of film by way of assignment – Lack of documentary evidence indicating export out of India not fatal – Held, assessee entitled to deduction

The assessee was engaged in the business of production, distribution and export of feature films. During the year under appeal, it had received a sum of Rs.9.5 crores for the transfer of satellite rights in respect of the feature films ‘Refugee’ and ‘Border’ to a party in Hong Kong. With reference to the same, its claim for deduction u/s.80HHF was rejected, on the ground that it was not able to furnish any documentary evidence to show that it was exported out of India. On appeal, the CIT(A) allowed the assessee’s appeal.

Before the Tribunal, the Revenue contended that the basic and primary condition of the provisions of S. 80HHF was that the export was out of India and if the same was not satisfied, no deduction could be allowed. It also relied on the decisions of the Delhi High Court in the case of Sanjeev Malhotra and of the Mumbai Tribunal in the case of Siemens Ltd.

The Tribunal noted that the provisions of S. 80HHF contain the phrase ‘transfer by any means’, which according to it imply that transfer should not be through any unlawful means, i.e., smuggling, piracy, etc. It also noted that it was not the case of the AO that the transfer of the tapes was through unlawful means. According to it, if the transfer of right was by way of assignment through an agreement, it was immaterial as to who performed the procedural formalities. The absence of strict adherence to the procedure would not vitiate the factum of the exports, since the tapes were admittedly received abroad. The Tribunal also agreed with the CIT(A)’s view that the AO’s action, to exclude it from export turnover without bringing any evidence on record, indicating that the transaction was domestic sale, cannot be sustained. Also, relying on the Co-ordinate Bench decision in the case of K. R. Films, the Tribunal upheld the order of the CIT(A).

Income-tax Act, 1961 — Section 2(22)(e) — Whether in a case where a shareholder holding more than 10% of the shareholding in a company in which public are not substantially interested is a debenture holder of such a company and also has current account with such a company, while considering whether such a shareholder has taken a loan or advance from the said company aggregate of balance in debenture account and also current account needs to be considered — Held : Yes.

The assessee was a shareholder of Star Synthetics Pvt. Ltd. (SSPL) having more than 10% of its shareholding. The assessee had also subscribed to 4% non-secured convertible debentures issued by SSPL of Rs.50,00,000. The Board resolution which approved the issue of debentures provided that a debenture holder could have a current account with the company, provided that the debit balance in current account could not exceed the amount of debentures subscribed by the debenture holder. The Assessing Officer (AO) noted that the assessee had two accounts with SSPL—one in his individual name and another in the name of his proprietory concern. The aggregate amount of loans taken by the assessee and his proprietary concern from SSPL was Rs.23,65,000. SSPL had reserves of Rs.64,28,793. The AO regarded the aggregate of amounts borrowed by assessee and his proprietary concern as deemed dividend u/s. 2(22)(e).

Aggrieved, the assessee preferred an appeal to the CIT(A) where he submitted that the AO ought to have considered the balance in debenture account alongwith the balance in the current account of the assessee and his proprietary concern, and if so considered the assessee did not owe any amount to SSPL. He also submitted that while considering the amount of accumulated profits of SSPL, the balance of share premium should not be considered as forming part of accumulated profits. The CIT(A) was of the opinion that since debentures are for a fixed period and bear a fixed rate of interest, their nature is different from that of an unsecured loan. He confirmed the addition made by the AO.

The Tribunal after considering the meaning of the term ‘debenture’ as per various dictionaries and judicial precedents held that debenture account is only a loan account and that while considering the amount of loan taken by the assessee from SSPL the AO ought to have considered all the three accounts viz. the debenture account, the assessee’s personal account and the account of his proprietary concern and then concluded whether the assessee has received any loan from SSPL.

Since upon consideration of the balance in all the three accounts in aggregate the assessee did not owe any money to SSPL, the addition made by AO and confirmed by CIT(A) was deleted by the Tribunal.

As regards inclusion of share premium in computation of accumulated profits, the Tribunal found the issue to be covered in favour of the assessee by the decision of the Delhi Tribunal in the case of Maipo India.

DCIT vs. Maipo India Ltd., (116 TTJ 791)(Del.); Narendra Kumar vs. UOI, (1960)(47 AIR 0430)(SC).

S. 69 of the Income-tax Act, 1961 — Unexplained investment — Assessee in construction business following project completion method — AO, based on the estimation of the work in progress made by him, taxed the difference as unexplained investment — Assessee’s accounts were audited and all expenditure was duly supported by bills and vouchers — Whether AO’s action justified — Held, No.

b) The expenditure on the project was backed by bills and vouchers and the AO had not found any discrepancy in the maintenance thereof;

c) The estimates made by the AO were mere surmises and hypothetical figures and had no basis.

In view of the above, according to the Tribunal, there was no scope for enhancement in the value of work in progress as shown by the assessee, and accordingly, the assessee’s appeal was allowed.

S. 68 — Cash credit — Loan amount received in earlier year converted into gift — Valid gift

During the year under appeal the assessee had claimed to have received gift of Rs.2.5 lacs from his uncle on the occasion of his marriage anniversary. As per the facts noted, the said amount had been shown by the assessee in his balance sheet as loan from his uncle up to 31-3-2001. During the year under consideration, the said loan was converted into gift vide gift deed dated 6-1-2002. The assessee passed necessary journal entry and the amount was transferred to his capital account from the loan account. According to the AO since the gift was not received by actual delivery of cash/cheque, it cannot be considered as valid gift and he treated the said amount as unexplained cash credit in the hands of the assessee u/s.68 of the Act. The CIT(A) on appeal relied on the decision of the Apex Court in the case of Dr. R. S. Gupta and upheld the order of the AO.

According to the Tribunal, the case relied on by the CIT(A) was distinguishable on the facts . In the case of Dr. R. S. Gupta, the amount was deposited with a third person while in the case of the assessee, the loan amount was with him only which was converted as gift. Further, it observed that even if the gift was not considered as genuine gift, the addition of Rs.2.5 lacs was not warranted u/s.68 because the credit entry as loan was there as on 31-3-2001 with the assessee himself and there was no fresh cash credit during the year.

Section 32, Appendix to Income-tax Rules – UPS being energy saving device is entitled for higher depreciation @ 80%.

The assessee claimed depreciation on UPS @ 80% on the ground that it is employed by it as an energy saving device. The claim of the revenue was that the same is not an energy saving device but an energy supply device.

The Tribunal noted that the issue is covered by the decision of the Tribunal in assessee’s own case for A.Y. 2002-03 in ITA No. 2792/M/06; for AY 2003-04 in ITA No. 1071/M/2007; for AY 2004-05 in ITA No. 5569/M/2007 and for AY 2005-06 in ITA No. 6964/M/2008. The Tribunal noted the following observations in respect of AY 2002-03:

“13. We have heard the rival contentions. Short question is whether UPS is a `Automatic Voltage Controller’ falling within the heading of energy saving device in the Appendix to the Income-tax Rules, 1962 giving depreciation rates. Legislature in its wisdom has chosen to show an Automatic Voltage Controller as an electrical equipment eligible for 100% depreciation, falling under the broader head of energy saving devices. Once Legislature deemed that an `Automatic Voltage Controller’ is a specie falling within energy saving device, it is not for the Assessing Officer or Ld CIT(A) to further analyse whether such an item would (sic was) indeed be an energy saving device. In fact it is beyond their powers. Hence the only question to answer, in our opinion is whether an UPS is an `Automatic Voltage Controller’. It is mentioned in the product brochure (Paper Book Page 64) that the UPS automatically corrected low and high voltage conditions and stepped up low voltage to safe output levels. Thus in our opinion, there cannot be a quarrel that UPS was doing the job of voltage controlling automatically. Even when it was supplying electricity at the time of power voltage, the voltages remained controlled. Therefore in our opinion, a UPS would definitely fall under the head of `Automatic Voltage Controller’. We are fortified in taking this view by the decision of Jodhpur Bench in the case of Surface Finishing Equipment (supra). As for the decision of the Delhi Bench in the case of Nestle India (supra) referred by the Ld. DR, there the question was whether UPS could be considered as `computer’ for depreciation rate of 60%. There was no issue or question, whether it could be considered as an Automatic Voltage Controller and hence in our opinion that case would not help the Revenue here. Therefore, we are of the opinion that the assessee was eligible for claiming 100% depreciation on UPS. Disallowance of Rs. 6,82,443 therefore stands deleted. Ground number 3 is allowed.”

Following the above mentioned decision, the Tribunal decided the issue in favour of the assessee. This ground was decided in favour of the assessee.

Ss. 28(iv)/56(2) – Gift of residential flats through transfer of shares by foreign company to Indian company – Whether taxable – Held no.

The assessee had received by way of a gift, three residential flats in Hill Park from its sister concern viz., BISNCL, a UK based company. BISNCL was holding shares of Hill Park Ltd. which entitled it for use and occupation of the said three flats and the gift was effected by transfer of the said shares. Both, the assessee and BISNCL, were 100% subsidiary of a U.K. based entity which in its turn was 100% subsidy of a Dubai based entity. This transaction, in the eyes of the AO, was a colourable device who taxed the value adopted for WT purpose as income from other sources. However, the same, in the eyes of the CIT[A], was nothing but a benefit derived by the donee out of its business relations with the donor company and therefore, he taxed the same as profit and gains of business & profession.

The issue before the tribunal was whether such transaction can be termed as a ‘Gift ‘or Income in the hands of the Donee.

According to the tribunal, such a transfer may trigger capital gains ramifications in India, since the shares of an Indian company were situated in India and when the transferor is a non-resident, the deeming provisions of section 9(i)(i) of the I.T. Act, 1961 came into play. However, referring to section 47(iii), the tribunal noted that the transfer of a capital asset, amongst others, under a gift is not treated as transfers for the purposes of section 45 of the Act. Referring to the provisions of section 5 and section 122 of the Transfer of Property Act (‘TPA’), the tribunal noted that there was no requirement in the TPA that a ‘gift’ can be made only between two natural persons out of natural love and affection which means that as long as a donor company is permitted by its Articles of Association to make a ‘gift’, it can do so. In case where donor is a foreign company, the tribunal noted that the relevant corporate/commercial law of the jurisdiction where the donor is based needs to be considered. Referring to the Certificate and Attestation by the Notary Public of the City of London, England, wherein the authority has inter alia certified and attested that the Deed of Gift was binding on BISNCL in accordance with the relevant provisions of English law, the tribunal concluded that BISNCL was legally authorised to give gift of shares.

Therefore, it held that the gift of shares of an Indian Company by a foreign company without consideration has to be treated as gift within the meaning of section 47(iii) of the Act.

As regards the order of the CIT(A) applying the provisions of section 28(iv), it observed that simply because both the donor and the donee happened to belong to the same group cannot ipso facto establish that they have any business dealings to attract the provisions of section 28(iv). Therefore, it was held that in the absence of any specific provision taxing a Gift as a deemed business income, provisions of section 28[iv] cannot be applied

As regards the applicability of the provisions of section 56 relied upon by the AO, the tribunal noted that a plain reading of the provisions show that not every receipt is taxable under the head ‘Income from other sources‘ but only those which can be shown as ‘Income‘ can be brought to tax under this head, if it does not fall directly under other heads of income specified in section 14 of the Act. According to it, the issue involved under the present appeal got covered under the clause (viia) of section 56(2). However, the said clause was introduced with effect from 1st day of June, 2010, hence, not applicable to the case of the assessee.

Accordingly, it was held that the transaction involved in the present appeal was nothing but a Gift and thus it was a capital receipt not taxable under the provisions of the Act.

S. 23 of the Income-tax Act, 1961 — Vacancy allowance can be claimed even if the property was let out only for a short period during the year and it was under renovation for the rest of the year.

The Tribunal set aside the CIT(A)’s order and allowed the assessee’s claim. The Tribunal noted as under:

a. it was held by the Calcutta High Court in the case of Liquidator, Mahmudabad Properties Ltd. v. CIT, 83 ITR 470, that merely because the property was in a state of disrepair, it cannot be said that the same had no annual value.

b. the Calcutta High Court has also held that annual value u/s.23 is deemed to be the sum for which the property might reasonably be expected to be let out from year to year — which is based on the idea of hypothetical tenancy and for this purpose, the property has to be considered as it is at the time of valuation for determination of the annual value.

c. therefore, the assessee had rightly calculated the annual value for the entire year under consideration and the action of the lower authorities was totally unjustified.

d. the assessee was also entitled to vacancy allowance for 346 days, since the property was let out for a period of 19 days during the year.

Sections 22, 28 and 58 — Income received on lease of a portion of terrace of the building and a wall of the building for the purpose of fixing of hoarding, neon sign, etc., is assessable under the head ‘Income from House Property’.

The assessee leased out portion of terrace of the building and a wall of the building to one Mrs. Sudha Vora, for the purpose of fixing of hoarding, neon sign, etc. The Assessing Officer, while assessing the total income for A.Y. 2000-01, assessed the income under the head ‘Income from Other Sources’ on the ground that the amount received by the assessee was not for letting of a building or terrace or any land appurtenant thereto but on account of allowing Mrs. Sudha Vora to display the advertisement of neon sign, illuminated hoarding, of a size 60 ft x 20 ft on the terrace and also illuminated hoarding of size 20 ft x 50 ft on a vertical wall of a building facing Pedder Road. Aggrieved, the assessee preferred an appeal to the CIT(A).

The CIT(A) held that the terrace has not been let out but merely permission has been granted to use the terrace only to set up the hoarding and to display the hoarding. He also observed that the lessee could use only a portion of the terrace and the purpose of utilisation was not for stay, etc. He upheld the action of the AO.

(1) ITO v. Cuffe Parade Sainara Premises Co-op. Society Ltd., (ITA No. 7225/Mum./2005, order dated 28-4-2008)

(2) Dalamal House Commercial Complex Premises Co-op. Society Ltd. v. ITO, (ITA No. 2286/ Mum./2008, order dated 29-5-2009)

(3) Sharda Chambers Premises Co-op. Society Ltd. v. ITO, (ITA No. 1234/Mum./2008, order dated 1-9-2009)

(6) CIT v. Bajaj Bhavan Owners Premises Co-op. Society Ltd., (ITA No. 3183 of 2010/Mum.).

The Tribunal noted that in the case of Bajaj Bhavan Owners Premises Co-op. Society Ltd. v. ITO, Mumbai ‘B’ Bench of the Tribunal in ITA No. 5048/Mum./2004, A.Y. 2001-02 and ITA No. 1433/Mum./2007, for A.Y. 2002-03 and ITA No. 1434/Mum./2007, for A.Y. 2003-04, order dated 4-11-2009, the

The Tribunal further noted that the jurisdictional High Court in ITA No. 3183 of 2010 in para 3 of judgment dated 16th August, 2011 confirmed the findings of the Tribunal in the case of Bajaj Bhavan Owners Premises Co-op. Society Ltd.

In view of the aforesaid binding judgment of the jurisdictional High Court, the Tribunal set aside the impugned order of the CIT(A), allowed the ground raised by the assessee and directed the AO to assess the income in question under the head ‘Income from House Property’.

S.22 of the Income tax Act, 1961 – Income from house property – Annual value – In addition to the letting of premises, the assessee was also responsible to provide additional facilities and amenities to its tenants – Equipments required for such additional facilities and amenities given on rent to the party to whom the task relating to provision of additional facilities and amenities was outsourced – The amount received by the said party from the tenants also considered by the AO while determining the annual value – Whether the action of the AO justified – Held, No

The assessee was engaged in the business of real estate and leasing out of properties. It had let out its premises to different tenants and was deriving rental income from them. As per the terms of the agreement between the assessee and its tenants, the assessee had to provide different amenities to the tenants and also carry out maintenance.

The assessee entered into an agreement with another company called Buharia Trading Co. (P) Ltd. (‘lessee’) to which the equipments like airconditioner, lift, generator, etc. were given on lease and as per the agreement between the assessee and the said lessee company, the assessee was receiving lease hire charges of Rs.43.68 lac per annum, which was shown under the head ‘business income’ and the assessee had declared the loss after set-off of depreciation. The assessee firm had given the contract for providing the amenities to the tenants and also maintenance of the complexes to the said lessee, which had collected the sum of Rs.71.54 lac from the tenants, who claimed to have provided amenities and maintenance and services to the tenants. The AO was of the opinion that the agreement between the assessee and its tenants was inseparable one and whatever was collected from the tenants as amenities and maintenance charges was a part of the rent. Further, applying the decision of the Supreme Court in the case of McDowell and Co. Ltd., he held that the agreement between the assessee and the lessee was a colourable device in the attempt to reduce tax liability.

The CIT (Appeals) on appeal, concurred with the finding of the AO that a combined reading of the lease agreement between the assessee and its tenants and between Buharia Trading Co. (P) Ltd. and the tenants made it clear that the services rendered to the tenants were not separable from the letting out of the premises and M/s. Buharia Trading Co. (P) Ltd. had not acted independently in its own right; rather the said company had no say in any matter and was not accountable to the tenants in any manner. The CIT (Appeals) finally came to the conclusion that letting out of the buildings by the assessee to the tenants and the provision of amenities and maintenance services to its tenants was one whole unitary process and cannot be separated and the decision of the Madras High Court in the case of Indian Metal and Metallurgical Corporation was applicable to the assessee’s case in principle.

Relying on the decision of the Madras High Court in the case of Tarapore & Co., it was held that the amount received from the tenants for providing amenities and maintenance cannot form part of the annual value of the property for the purpose of S. 22 of the Act. Thus, according to it, only the actual rent received from the tenants would be relevant for the purpose of determining income under the head ‘Income from house property’.

As regards the CIT(A)’s view that by outsourcing its contractual obligations to the lessee, the assessee had adopted dubious and colourable device to avoid payment of legitimate tax, it observed that in order to meet the requirements of business in the modern era, one needs back-up of huge manpower and systematic elaborate planning, like industrial service, which in all the cases may not be possible for the landlord to provide. Secondly, it was noted that the assessee had not given equipments free of cost, but had charged hire charges from the lessee. Therefore, relying on the decision of the Madras High Court in the case of M. V. Valliappan & Others, it held that the arrangement with the lessee entered into by the assessee could not be said to be made with an intention to divert its income and reduce its incidence of tax. Accordingly, the order of the CIT(A) to consider the amount collected by the lessee from the tenants towards the amenity charges while determining the annual value was held as unjustified.

DCIT v. Reclamation Realty India Pvt. Ltd., DCIT v. Reclamation Properties India Pvt. Ltd., DCIT v. Reclamation Real Estate Co. India Pvt. Ltd.

Income-tax Act, 1961, S. 23 - For applying provisions of S. 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 let from year to year, the actual rent received should be the annual value of the property u/s.23(1)(b) of the Act

M/s. Reclamation Real Estate Co. Pvt. Ltd., the assessee, owned premises admeasuring 15,645 sq.ft. situated on 9th floor of a building known as Mafatlal Centre (â€˜the propertyâ€™). It had let out the property to J. P. Morgan Chase Bank on an annual rent of Rs.2,87,87,660. The lease commenced from 17-12-1998 for a period of 152 weeks up to November 2001. The lease was thereafter renewed for a further period of 156 weeks from November 2001. The lease was to expire in November 2004. When the lease was renewed in April 2002, the entire rent for the period of lease i.e., for 156 weeks, was paid by the tenant. This was a sum of Rs.8,58,91,050. In addition, the tenant also paid a refundable interest free security deposit of Rs.2,60,00,000. Rate of rent at Rs.2,87,87,660 (being rent for the previous year 2003-04) in terms of rate per sq.ft. worked out to Rs.152.50 per month. Municipal valuation of the property was Rs.27,50,835.

Since the amount of rent received (Rs.2,87,87,660) was more than the municipal valuation of the property, the assessee adopted actual rent received as the annual value of the property.

According to the AO, the municipal valuation as adopted by the municipal authorities did not reflect the true sum for which the property might reasonably be expected to let from year to year. He held that the rent of Rs.152.50 per sq.ft. was too low and the rent was reduced due to the fact that the rent for the entire period of lease was paid in advance and tenant had also given an interest-free security deposit. He estimated the annual value by allocating notional interest on rent received in advance and interest-free security deposit and arrived at an annual value of Rs.3,42,23,856. He held that he was not adding notional interest on security deposit and rent received in advance to the actual rent received for determining annual value u/s.23(1)(b) of the Act, but was treating the same as the sum for which the property might reasonably be expected to let from year to year u/s.23(1)(a) of the Act.

The Tribunal considered the original provisions of S. 23 of the Act and the amendments made thereto by Taxation Laws Amendment Act, 1975 w.e.f. 1-4-1976 and noted that :

(i) Circular No. 204, dated 24-7-1976 gives an indication as to how the expression â€˜the sum for which, the property might reasonably be expected to let from year to yearâ€™ used in S. 23(1)(a) has to be interpreted;

(ii) the Calcutta High Court in CIT v. Prabhabati Bansali, (141 ITR 419) concluded that the municipal valuation and the annual value u/s. 23(1)(a) are one and the same;

(iii) the decision of the Calcutta High Court has been followed by the Bombay High Court in the case of M. V. Sonawala v. CIT, 177 ITR 246 (Bom.);

(iv) the Bombay High Court has in the case of Smitaben N. Ambani v. CWT, 323 ITR 104 (Bom.) in the context of Rule 1BB to the Wealth Tax Rules, which uses the same expression â€˜the sum for which the property might be reasonably expected to let from year to yearâ€™ as is found in S. 23(1)(a) of the Act, held that ratable value as determined by the municipal authorities shall be the yardstick.

(i) the charge u/s.22 is not on the market rent but is on the annual value and in the case of property which is not let out, municipal value would be a proper yardstick for determining the annual value. If the property is subject to rent control laws and the fair rent determined in accordance with such law is less than the municipal valuation, then only that can be substituted by the municipal value;

(ii) the Bombay High Court which is the jurisdictional High Court has held that ratable value under the municipal law has to be adopted as annual value u/s.23(1)(a) of the Act. The decision of the Mumbai Bench of ITAT in the case of Makrupa Chemicals (108 ITD 95) (Mum.), following the decision of Patna High Court in the case of Kashi Prasad Katarvka v. CIT, (101 ITR 810) (Pat.) has held that ratable value is not binding on the AO if the AO can show that the ratable value under the municipal law does not represent correct fair rent. Since the decision of Mumbai Tribunal is contrary to the ratio laid down by jurisdictional High Court it cannot be followed. Also, the decision in the case of Baker Technical Services (P) Ltd., on which reliance was placed by the Revenue, being contrary to the decision of the Bombay High Court, cannot be followed;

(iii) The decisions in the case of Fizz Drinks Ltd. and Tivoli Investment & Trading Co. (P) Ltd., relied upon by the Revenue, are distinguishable;

(iv) the municipal valuation/ratable value adopted by the municipal authorities in respect of the property at Rs.27,50,835 should be the determining factor for applying the provisions of S. 23(1)(a) of the Act. Since the rent received by the assessee was more than the sum for which the property might reasonably be expected to let from year to year, the actual rent received should be the annual value of the property u/s.23(1)(b) of the Act. Notional interest on interest-free security deposit/rent received in advance should not be added to the same in view of the decision of the Bombay High Court in the case of J. K. Investors (Bombay) Ltd.

S. 234B — Assessee is not liable to pay interest u/s.234B when by retrospective amendment made later the amount becomes taxable. The fact that administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with a valid appeal laid before it.

The assessee company while computing book profit u/s.115JB of the Act deducted the deferred tax amounting to Rs.4,94,21,478 and fringe benefit tax of Rs.62,279. At the time when the assessee filed the return of income, there was no specific provision in the Section to the effect that deferred tax was not deductible while arriving at the book profit. However, by the Finance Act, 2008 an amendment was made to the Section with retrospective effect from 1-4-2001, that is, w.e.f. A.Y. 2001-02, that the deferred tax cannot be deducted in arriving at the book profit.

The Assessing Officer (AO) in the order passed u/s.143(3) of the Act computed the book profits by adding back the amount of deferred tax and fringe benefit tax to book profits computed by the assessee and gave a direction to charge interest accordingly. Aggrieved the assessee filed an appeal to the CIT(A) on the ground that levy of interest was illegal since the amount of deferred tax became liable to be added to the book profit only because of the retrospective amendment made to the Section which could not be anticipated by the assessee.

The CIT(A) was of the view that levy of interest was mandatory and power was vested with the CBDT to waive or reduce the same, subject to certain conditions, one of which is that no interest can be charged if addition or disallowance is due to a retrospective amendment in law. He upheld the levy but held that it was open to the assessee to seek waiver/reduction from the CCIT/DGIT.

The Tribunal held that the following judgments support the case of the assessee :

It observed that the judgment of the Madras High Court is a case of liability arising on account of a retrospective amendment, as in the present case. It held that levy of interest in respect of the amount of deferred tax deducted while arriving at the book profit in the return is invalid.

As regards the argument raised at the time of hearing that since powers of reduction/waiver are vested in the CBDT whether the Tribunal can examine the validity of the levy of interest, the Tribunal having noted that the Supreme Court has in the case of Central Provinces Manganese Ore (160 ITR 961) held that if the assessee denies his liability to pay interest the appeal on that point was maintainable. Based on the ratio of the decision of the Apex Court and also having noted that there is no express or implied restriction on the powers of the Tribunal while disposing of the appeal, it held that the appeal of the assessee is maintainable. It further held that the fact that the administrative relief can be obtained by the assessee cannot erode the powers of the Tribunal while dealing with a valid appeal before it.

S. 234C of the Income-tax Act, 1961 — Interest for deferment of advance tax — Assessee company incorporated on 4-12-2002 and commenced business in January — Whether liable to pay advance tax in December — Held, No.

The assessee company was incorporated on 4-12-2002 and the first installment of advance tax was paid on 15-3-2003. According to the assessee, its business commenced only from January, 2003 when the first sales invoice was raised. However, according to the lower authorities, the assessee was liable to pay advance tax on 15-12-2002, accordingly, interest of Rs.2.24 lacs (which was recomputed by the CIT(A) at Rs.1.24 lacs) u/s.234C was charged.

According to the Tribunal, as the assessee had not received any income till the first invoice was issued by it in January, to say that the assessee was liable to pay advance tax on 15-12-2002 was not sustainable on the

S. 234C — Interest u/s.234C is not payable if, on the date of payment of advance tax it is not known whether the demerger scheme will be sanctioned or not and from which date it would be sanctioned.

The assessee, pursuant to a demerger scheme, acquired cement business of L & T Limited from 1-4-2003. The scheme of demerger was sanctioned by the Bombay High Court on 22-4-2004 effective from 1-4-2003 as a result of which the income for the period from 1-4-2003 to 31-3-2004 became taxable in the hands of the assessee. The assessee had not paid advance tax in respect of this income. Consequently, the Assessing Officer charged interest of Rs.44,94,392 u/s.234C.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it contended that interest is not payable since on the due dates for payment of advance tax there was no liability to pay tax. It was further submitted that if the liability to pay advance tax arises on account of subsequent event, i.e. demerger sanctioned after the end of the previous year then in such an event it cannot be said that the assessee was liable to pay advance tax on due dates specified in S. 210. The CIT(A) dismissed the ground by observing that the assessee was liable for payment of advance tax u/s.208 with all consequences of law to pay interest u/s.234B and u/s.234C. He held that since there was a shortfall in payment of installments of advance tax, liability of interest u/s.234C is automatically attracted.

Aggrieved, the assessee preferred an appeal to the Tribunal where it was also contended on behalf of the assessee that it was impossible to pay advance tax as it was not aware whether the demerger scheme would be sanctioned and if yes, from which date.

The Tribunal observed that the liability to pay advance tax in respect of cement business had arisen consequent to the sanction of the demerger scheme by the Bombay High Court on 22-4-2004 i.e. after the due dates of payments of advance tax. The Tribunal noted that the tax liability arising after the date of sanction of the demerger scheme has been paid by the assessee while filing its return of income along with interest u/s.234A & B. It held that payment of advance tax in respect of cement division was an impossible situation. The Mumbai Bench of the Tribunal in the case of Reliance Energy Ltd. in ITA No. 218/Mum./05 (order dated 24-1-2008) has after considering several decisions of the Tribunal and discussing the doctrine of impossibility held that an assessee cannot be forced to do an impossible task.

The Tribunal directed the AO to recompute the charging of interest u/s.234C in view of its observations. This ground of the assessee’s appeal was allowed.

S. 115JA, S. 244A — While computing tax liability u/s.115JA credit for tax paid in foreign country is allowable — Grant of interest u/s.244A can not be denied on the ground that the TDS certificate was filed in the course of assessment proceedings and not along with the return of income.

The assessment of total income of the assessee was completed u/s.143(3) of the Act on 31-3-2003 assessing the total income at Rs.97,09,81,536 u/s.115JA. Subsequently, the AO observed that the assessee was allowed double tax relief while assessing the income u/s.115JA. Notice u/s.154 of the Act was issued and the credit for foreign tax given was denied on the ground that intention behind S. 115JA is that assessee should pay minimum tax in India on 30% of book profits and credit for taxes paid in foreign country could not be allowed against tax liability in India when income was assessed u/s.115JA of the Act.

In the rectification proceedings the AO did not allow interest in respect of TDS certificates on the ground that such certificates were not submitted along with the return of income, but were submitted in the course of assessment proceedings.

The Tribunal noted that the income on which tax has been paid abroad was included in ‘book profit’ for the purpose of S. 115JA. The Tribunal held that once taxable income is determined either under the normal provisions or as per S. 115JA, subsequent portion relating to the computation of tax has to be governed by the normal provisions of the Act. It also held that there is no provision in the Act debarring granting of credit for tax paid abroad in case income is computed u/s.115JA. It held the assessee cannot be denied the set-off of tax relief of Rs.22,88,464 against the tax liability determined u/s.115JA. It upheld the order of CIT(A) on this ground.

The Tribunal noted that tax was deducted at source at the right time. It was also deposited into the exchequer in time. The Tribunal noted that the AO had given credit for TDS, but had denied interest thereon u/s.244A. The Tribunal held that interest u/s.244A cannot be denied only on the ground that TDS certificates were not furnished along with the return of income. It upheld the order of CIT(A) on this ground.

S. 220(2) — Liability to pay interest by assessee — AO not justified in charging interest for the intervening period when the CIT(A) allowed the appeal in favour of the assessee to the period when the Tribunal allowed the appeal in favour of the revenue.

According to the Revenue the CIT(A) had erred in deleting the interest charged u/s.220(2) for the intervening period when the CIT(A) allowed the appeal in favour of the assessee to the period when the Tribunal allowed the appeal in favour of the Revenue. It relied on the decisions of the Madras High Court in the case of Super Spinning Mills Ltd. and of the Karnataka High Court in the case of Vikrant Tyres Ltd. and the Board Circular.

The Tribunal agreed with the assessee that the issue was covered by the decision of the Supreme Court in the case of Vikrant Tyres Ltd. The provisions of S. 220 only revives the old demand notice which had never been satisfied by the assessee and which notice got quashed during some stage of the appellate proceedings. In the case of the assessee, no such demand was pending. Accordingly, the appeal filed by the Revenue was dismissed.

Section 220(2) — Interest payable by assessee — Manner of computing default period — Original assessment set aside and fresh assessment made by the AO — Whether period of levy of interest is to be reckoned from the date of default as per the original assessment order or as per the fresh assessment order — Held that interest payable is to be computed from the date of fresh assessment order.

When original assessment has been set aside by the Tribunal and fresh assessment has been made by the AO, the period of levy of interest u/s.220(2) should be reckoned from the date of default as per the original assessment order or as per the fresh assessment order.

In the case of the assessee the original assessment was confirmed by the CIT(A) but on further appeal, the Tribunal set aside the order of the CIT(A) and the issue was restored back to the AO. In the fresh assessment, the AO repeated the addition raising the same demand but interest u/s.220(2) was levied from the date of demand notice issued as per the original assessment order. The assessee disputed the AO’s action relying on the Board Circular No. 334, dated 3-4-1982, and contended that as the original assessment had been set aside by the Tribunal, the interest u/s.220(2) could be charged only from the date when the demand become due as per the fresh assessment order and not from the date of original assessment order.

In terms of the Board Circular (supra), in case the assessment is set aside by the CIT(A) and setting aside become final, interest u/s.220(2) has to be charged only after expiry of 35 days from the date of service of demand notice pursuant to the fresh assessment order. In the case of the assessee, since the original order of assessment was confirmed by the CIT(A) but on further appeal, the Tribunal set aside the order of the CIT(A) and the issue restored to the AO, it was held that in terms of the Circular, the interest u/s.220(2) had to be charged only from the date of the fresh assessment order.

Income-tax Act, 1961, section 244A — Interest u/s.244A(1)(b) is allowable and should be granted on refund of tax paid in pursuance of an order u/s.201 of the Act.

The assessee hired M/s. Jardine Flemming as lead managers for the GDR issue and paid commission to them as well as to their associates without deducting tax at source u/s.195. The Assessing Officer (AO) in an order passed u/s.201, after issuing the requisite notice and considering the submissions made by the assessee, held that the assessee was liable to deduct tax at source and accordingly directed the assessee to pay USD 26,76,750. Aggrieved by the order of the AO the assessee preferred an appeal to the CIT(A) who partly allowed the appeal. On further appeal to the Tribunal, the Tribunal set aside the matter to the file of the AO. Consequently, the AO passed the impugned order dated 7-3-2008 and determined a refund but did not grant interest u/s.244A.

The CIT(A) rejected the claim by holding that the assessee could not show that TDS was voluntarily deposited by it or under protest u/s.195(2) and hence was not eligible for interest u/s.244A.

The Tribunal held that the assessee is entitled to interest u/s.244A. It was of the opinion that the issue stands covered in favour of the assessee by the judgment of the Supreme Court in the case of ITO v. Delhi Development Authority, (252 ITR 772) (SC) and also by the following orders of the Tribunal, on which reliance was placed on behalf of the assessee :

(4) DDIT (IT) v. Star Cruises (India) Travel Services Pvt. Ltd., (ITA Nos. 6498 & 6500/M/06, C.O.os. 10 & 12/Mum./2009.)

S. 2(24) of the Income-tax Act, 1961 — Income — Whether the receipts of non-occupancy charges, transfer fees and voluntary contribution from its members by the cooperative housing society is taxable — Held, No.

The assessee was a co-operative housing society. During the year under appeal, it had shown following receipts in its accounts which is the subject matter of dispute :

(iii) Voluntary contribution (Donation) from outgoing members and incoming members Rs. 54.52 lakh;

The assessee contended that all the above three receipts were exempt from tax on the principle of mutuality. However, the AO, following the decisions of the Bombay High Court in the case of Presidency Co-op. Housing Society Ltd. (216 ITR 321) taxed the above receipts. On appeal, the CIT(A) relying on the decisions of the Bombay High Court in the cases of Shyam Co-op. Housing Society Ltd. (ITA Nos. 92, 93 and 206, dated 17-7-2009) and Su Prabhat Co-op. Housing Society Ltd. v. ITO, (ITA No. 1972 of 2009, dated 1-10-2009), allowed the appeal of the assessee.

The Revenue challenged the order of the CIT(A) before the Tribunal on the ground that the two decisions relied on by the CIT(A) have not been accepted by the Department and the same is challenged before the higher authority. Thus, according to it, the matter was sub-judice.

As regards non-occupancy charges — the Tribunal relying on the decision of the Bombay High Court in the cases of Su Prabhat Co-op. Housing Society Ltd. upheld the order of the CIT(A). With regard to transfer fee and voluntary contribution — it agreed with the assessee and held that its case was covered in favour of the assessee by the decision of the Bombay High Court in the case of Sind Co-op. Housing Society Ltd. v. ITO, (317 ITR 47).

According to the Tribunal, the decision of the Bombay High Court in the case of Presidency Coop. Housing Society Ltd. relied on by the Revenue, had been distinguished by the Bombay High Court in the case of Sind Co-op. Housing Society Ltd. Further, it observed that the Revenue was not able to show any other contrary decisions. As regards the Revenue’s contention about the nonacceptance of the Bombay High Court decisions, since the same have been challenged, the Tribunal based on the Bombay High Court decision in the case of Bank of Baroda v. H. C. Srivastava and another, (256 ITR 385) held that the ground taken by the Revenue was devoid of any merit and accordingly, the same was rejected.

Section 2(24) — Income — Taxability of receipt of transfer fees and non-occupancy charges from its members by the housing society — Amount received in excess of the limits prescribed under the law — Held that the sum received is exempt from tax on the principle of mutuality.

The assessee was a co-operative housing society. During the year under appeal, its claim to treat the receipt of the sum of Rs.15 lac towards transfer charges (described as contribution to heavy repair fund) and Rs.1.31 lac towards non-occupancy charges as exempt was negatived by the AO. On appeal, the CIT(A) held that these receipts are exempt under the principle of mutuality.

As regards the receipt of Rs.15 lacs towards transfer charges, relying on the Bombay High Court decision in the case of the Sind Co-operative Housing Society v. Income-tax Officer, (317 ITR 47), which was also followed in the cases of Suprabhat Co-operative Housing Society Ltd. v. ITO, (ITA No. 1972 of 2009 dated 1-10-2009) as well as Shyam Co-operative Housing Society Ltd. v. CIT, (ITA Nos. 92, 93 and 206 of 2008, dated 17-7-2009), the Tribunal held that the principle of mutuality applies to the receipt of transfer fees. Similarly, in respect of the receipt of Rs.1.31 lac towards non-occupancy charges, the Tribunal relied on the decision of the Bombay High Court in the case of Mittal Court Premises Co-op Society v. ITO, (320 ITR 414) and held that the principle of mutuality equally applies to such receipt. It further held that the restriction on the quantum of receipt by an association from its members prescribed by any other law regulating the relationship between members and its association will not be relevant while taxing the receipts under the Act. Thus, according to it, the principle of mutuality will not cease to exist in respect of receipts from members by an association beyond the quantum restricted by any law regulating the relationship between members and its association.

Section 271B r.w. s. 44AB of the Income-tax Act, 1961 — Penalty for non-furnishing of Tax Audit Report — Assessee who was property developer, was following project completion method of accounting — During the year the project was not completed — Whether AO justified in holding that since the advance received against the flats sold exceeded the prescribed limit of Rs.40 lakh, the assessee was liable to get the accounts audited u/s.44AB — Held, No.

The issue before the Tribunal was whether on the basis of the facts, the assessee was liable to get its accounts audited u/s.44AB of the Act. The assessee, a property developer, was following project completion method of accounting. As per its accounts, the work in progress as at the beginning of the year was Rs.4.35 crores and as at the end of the year was Rs.10.07 crores. During the year it had received advances against the sale of flats of Rs.4.03 crores. Referring to the Board Circular (No. 387, dated 6-7-1984), the authorities below contended that the legislative intent would be defeated if the provisions were applied only in the year when the project was completed. According to the Revenue, if the project takes the period as long as 10 years, then as contended by the assessee, the audit report would be filed in the said tenth year when it would not be possible for the AO to look into the details of 10 years. Secondly, during the year under appeal, the value of the work in progress as well as the receipt of advances from the customers had exceeded the prescribed limit of Rs.40 lakh.

According to the Tribunal, 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. For the purpose it relied on the Pune Tribunal decision in the case of ACIT v. B. K. Jhala & Associates and the views of the Institute of Chartered Accountants of India. Accordingly, the appeal filed by the assessee against the order for levy of penalty u/s.271B was allowed.

S. 271(1)(c) — Penalty for concealment of income — Additions/disallowances sustained by the appellate authority — Whether sufficient ground for levy of penalty — Since full disclosure of particulars of transactions were made and additions were on account of different view adopted, penalty cannot be imposed.

The assessee was a company incorporated in 1983. During the year it had not carried on the business and it had returned a loss of Rs.1.41 crore. On account of the flood which took place on 26/27 July in Mumbai, all its records and documents got destroyed and it was not able to produce documents asked for by the AO. However, a copy of the police complaint and the certificate issued by the Chartered Engineer evaluating the bad impact of the flood and loss of material were furnished by the assessee. The AO however, completed the assessment u/s.144 determining income at Nil after setting off carried forward loss of Rs.11.15 lacs. The major disallowances made were as under:

· Stock valuation: A plot of land of Rs.6.56 crore, held as stock in trade, was mortgaged to a bank. In order to recover its dues, the bank had initiated the process of the sale of plot and the sale price mentioned was Rs.5.2 crore. In view of the same, the assessee had valued the plot of land at the said price thereby resulting into a loss of Rs.1.35 crore. The AO was not satisfied with the explanation and disregarded the downward valuation of stock;

· Depreciation: Since the Company was defunct, according to the AO, it cannot be allowed depreciation of Rs.9.74 lacs.

The assessee did not prefer any appeal when the AO’s order was upheld by the CIT(A). The AO initiated penalty proceedings and after hearing, held that the assessee was in default u/s.271(1)(c) read with Explanation 4(a). He accordingly, levied penalty of Rs.54.46 lacs being the minimum penalty @100% of tax sought to be evaded.

The CIT(A) on appeal cancelled the penalty levied as according to him, no inaccurate particulars were furnished by the assessee and the disallowance was not based on any independent evidence brought on record by the AO.

Before the Tribunal the Revenue submitted that the non-filing of any appeal against the assessment order amounted to the acceptance by the assessee that it had furnished inaccurate particulars. Further, relying on the decision of the Supreme Court in the case of Dharmendra Textiles Processors & Others, it contended that mens rea was not an essential condition for levying of penalty.

The Tribunal noted that the assessee had made full disclosure of all the particulars relating to the transactions in its accounts filed with the Income-tax Department. The additions were made merely because the AO did not share the views of the assessee. It was not disputed that the plot of land was treated as stock in trade and was sold at a loss. As regards claim for depreciation, it was noted that there were diverse decisions, both for and against the assessee when the business was discontinued. As regards the other expenses disallowed, it agreed with the assessee that in order to maintain the corporate entity, certain expenses need to be incurred. Thus, according to it, the decision of the Supreme Court in the case of Dharmendra Textiles was not applicable to the

S. 271(1)(c) — Penalty for concealment of income — Whether non bifurcation of short term capital loss from the overall business loss amounted to concealment of income and furnishing of inaccurate particulars of income — Held, No.

The assessee had filed return of income declaring business loss of Rs.1.37 crore. During the course of assessment proceedings, it was noticed by the AO that the Auditors in Form No. 3CD had reported that debit to the Profit & Loss account included capital expenditure by way of fixed assets written off amounting to Rs.l0.17 lacs, which was not added back by the assessee. The same was added to the income (reduced from the loss) of the assessee and the business loss was assessed accordingly. According to the AO since the assessee accepted the mistake only after the show cause was issued, he was of the view that the assessee had concealed his income and furnished inaccurate particulars of income. He therefore levied penalty of Rs.3.65 lacs u/s.271(1)(c) of the Act. On appeal, the CIT(A) confirmed the same.

Before the Tribunal the assessee explained that instead of classifying the sum of Rs.10.17 lacs as short term capital loss, which was allowable to be carried forward u/s.70 of the Act, the assessee in its return made a technical error of not bifurcating short term capital loss from the overall business loss of the company. The assessee claimed that the same cannot by any assumption be deemed to be concealment of income or furnishing of inaccurate particulars of the income.

According to the Tribunal, a mere omission or negligence would not constitute a deliberate act of suppression. It agreed with the assessee that its explanation cannot be treated as false and inaccurate simply because of its mistake in wrongly classifying heads of loss. Accordingly, the penalty imposed was deleted.

Income-tax Act, 1961 — Section 271(1)(c). Penalty u/s.271(1)(c) is not leviable on addition arising u/s.50C.

The assessee inter alia sold a residential flat for a consideration of Rs.63,00,000, whereas the value of this flat as per the Stamp Valuation Authoritieswas Rs.72,00,824. Thus, there was a difference of Rs.9,00,824. The assessee in her return of income computed capital gains with reference to sale consideration as per sale agreement. In the course of the assessment proceedings, upon being asked to show cause why the difference should not be added back to the total income, the assessee agreed to the same. Accordingly, the said sum of Rs.9,00,824 was added to the total income of the assessee by applying the provisions of section 50C of the Act. The AO initiated penalty proceedings u/s.271(1)(c) and vide order dated 20-3-2009 levied the penalty of Rs.1,98,181 (being 100% of tax sought to be evaded). Aggrieved by the levy of penalty, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved by the order of the CIT(A), the assessee preferred an appeal to the Tribunal.

The Tribunal having noted that — (i) the AO had not questioned the actual consideration received by the assessee, but the addition was purely on the basis of deeming provisions of section 50C of the Act; (ii) the AO had not given any finding that the actual sale consideration was more than the sale consideration admitted and mentioned in the sale agreement; and (iii) the assessee had furnished all the relevant facts , documents/material including the sale agreement, the genuineness and validity whereof was not doubted by the AO, observed that the assessee’s agreement to an addition on the basis of valuation by the Stamp Valuation Authority would not be a conclusive proof that the sale consideration as per agreement was incorrect and wrong. It held that the addition because of the deeming provisions does not ipso facto attract penalty u/s.271(1)(c). In view of the decision of the Apex Court in the case of CIT v. Reliance Petroproducts Pvt. Ltd., (322 ITR 158) (SC), the penalty levied was held to be not sustainable. The appeal filed by the assessee was allowed.

Penalty – S.271(1)(c) – Admission of appeal by High Court – Admission itself show debatable issue – Sufficient to disbar 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 AO levied penalty u/s 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 u/s 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.

Section 271(1)(c) — Penalty for concealment of income — During quantum proceedings assessee failed to explain certain discrepancies in respect of its claim for loss in share trading business — AO disallowed the loss and imposed penalty — Held that in the absence of the finding that the claim for loss was bogus or false, penalty cannot be imposed.

The impugned penalty was levied in respect of disallowance of loss in share trading business. The loss was disallowed on the ground of discrepancy in the distinctive number of shares purchased and sold and which could not be explained at the relevant point of time. It was only for the lack of explanation for discrepancy that quantum addition was finally confirmed.

Before the Tribunal the assessee furnished reconciliation in order to explain the discrepancy and it also filed an affidavit setting out the reasons as to why the same could not be explained earlier.

According to the Tribunal, once the assessee had given a reasonable explanation which was not found to be false, imposition of penalty in respect of the same cannot be justified. Further, it observed that the mere fact that the assessee could not explain its claim in the quantum proceedings and in the absence of any independent finding in the penalty order to the effect that claim for loss made by the assessee was bogus or false, it held that the penalty cannot be imposed.

Penalty – Sec. 271(1)(c) – Surrender after detection in search while filing 153A return – Penalty can still be waived / deleted

Pursuant to a search & s. 153A assessment on the basis of seized papers, statements etc; the assessee offered additional income of Rs. 2.68 crores on the basis that he was unable to explain the old records. Some of the other additions made by the AO were partly deleted by the CIT (A) & Tribunal. The AO & CIT (A) levied s. 271(1)(c) penalty on the ground that the assessee’s offer of additional income was not voluntary or bona fide. On appeal by the assessee to the Tribunal, Held allowing the appeal:

Though the assessee owned the unaccounted transactions only after search action, when an assessee admits his mistake and that he has committed a wrong and offers the additional income to tax, it cannot be said that his statement is false or not bona fide. Neither the CIT (A) nor the Tribunal were completely clear about the exact amount of concealment and there was no conclusive evidence as some additions had been deleted. S. 271(1)(c) gives discretion to the AO to exonerate the assessee from levy of penalty even in case where the assessee has concealed the income or furnished incorrect particulars of income. Penalty should not be imposed merely because it is lawful to do so. The AO has to exercise his discretion judiciously. If an assessee files a revised return though at a later stage or discloses true income, penalty need not be levied. No doubt, merely offering additional income will not automatically protect the assessee from levy of penalty but in a given case where the assessee came forward with additional income though after detection because he was not in a position to explain the seized material properly and expresses remorse in his conduct un-hesitantly, the AO has to exercise the discretion in favour of such assessee as otherwise the expression ‘may’ in s. 271(1)(c) becomes redundant. In a case of admitted income, concealment penalty is not automatic. The discretion vested in the AO should be used not to levy penalty. On facts the case was most befitting to exercise such discretion because there was divergent opinion while deleting or sustaining the addition and there was no conclusive proof that the assessee concealed income or furnished inaccurate particulars of income. The assessee’s offer was to avoid litigation. If the AO had clinching evidence of concealment, he should not have accepted the assessee’s offer and should have proceeded on the basis of material on record (VIP Industries 112 TTJ 289, Siddharth Enterprises 184 TM 460 (P&H) & Reliance Petro Products 322 ITR 158 (SC) followed).

S/s 44AB, 271B – In case of an assessee following project completion method, advance received which is required to be adjusted against future income cannot be considered as gross receipt of business or turnover. Bonafide belief constitutes reasonable cause for non levy of penalty.

The assessee company was engaged in business of construction. It was following project completion method of accounting. In respect of a SRA project taken up by the assessee, it had received a booking advance of Rs. 11.25 crore from M/s Welspun Gujarat Stahi Robern Ltd. The advance was subsequently returned in 2010 since the property had several encroachments.

The assessee did not get its accounts audited as required u/s. 44AB of the Act since it was of the view that the provisions of section 44AB would apply only when sales, turnover or gross receipts exceed Rs 40 lakh. Since the assessee had only received an advance which was later refunded and the assessee was following project completion method and the sales would be accounted in the year of completion of the project.

The Assessing Officer (AO) relying on the decision of Lucknow Bench of ITAT in the case of Gopal Krishan Builders (91 ITD 124) levied penalty u/s. 271B of the Act.

Aggrieved the assessee preferred an appeal to CIT(A) who confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

The Tribunal noted that the assessee was following project completion method, the advance received has been subsequently returned, the project in respect of which advance was received had not commenced even when the matter was being heard by the Tribunal. It also noted that section 44AB applies only when sales, turnover or gross receipts of business exceed Rs. 40 lakh. The amount of advance received was only from one party and also this advance was subsequently returned.

The Tribunal relying on the decision of the Delhi High Court in the case of Dinesh Kumar Goel (239 ITR 46) held that the advance received which is required to be adjusted against future income cannot be considered as gross receipt of business or turnover. The decision of the Lucknow Bench of Tribunal in the case of Gopal Krishan (supra) cannot be followed in view of the decision of the Delhi High Court in Dinesh Kumar Goel. Moreover, the issue being debatable, the plea of the assessee that it was of the view that books were not required to be audited u/s 44AB has to be considered as bonafide. Bonafide belief constitutes a reasonable cause.

Section 271D r.w.s 269SS — Penalty for acceptance of loan/deposit otherwise than by account payee cheque/draft — Assessee’s bona fide belief and conduct established a sufficient and reasonable cause — Penalty deleted.

The assessee had taken cash deposit from three persons amounting to Rs.2.5 lakh from each, aggregating to Rs.7.5 lakh. In response to showcause notice, the assessee explained that on account of urgency, as otherwise the cheque issued by him to the third party would have bounced, he took the cash deposit. Further it was pleaded that he was under the genuine impression that the provisions of section 269SS applied only to the business transactions and not to the personal transactions. However, according to the ACIT, the cheque issued to the third party by the assessee was not for payments to a creditor or discharge of any liability, but the same was issued for payment of a loan to the third party. The ACIT further did not agree with the assessee that the personal transactions were not covered and pointed out that the provisions of section 269SS do not make such distinction. Thus, he imposed a penalty u/s.271D of Rs.7.5 lakh.

According to the CIT(A) none of the exceptions provided u/s.269SS apply to the case of the assessee and the assessee had no compelling reasons to violate the provisions of section 269SS. Accordingly, he confirmed the order imposing penalty.

The Tribunal noted that the assessee was under bona fide belief that the provisions of section 269SS do not apply to the personal transactions and this belief had not been found to be false or untrue. Secondly, it was noted that the loan so taken was immediately deposited in the bank account and the transactions were duly recorded by the assessee in his books of accounts. According to the Tribunal, the assessee had not consciously disregarded the provisions of section 269SS of the Act. Therefore, relying on the decisions of the Punjab & Haryana High Court in the case of CIT v. Speedways Rubber Pvt. Ltd., (326 ITR 31), it held that the assessee had been able to establish a sufficient and reasonable cause for not accepting the loan by account payee cheque/ draft, and accordingly the penalty imposed was deleted.

Note: In Hemendra Chandulal Shah v. ACIT, (ITA No. 1129/Ahd./2010), where on a direction of the bank a father had taken cash loan from his son to clear the debit balance in his bank account, according to the Ahmedabad Tribunal, there was reasonable cause and penalty u/s.271D could be imposed. The full text of the decision is available in the office of the Society.

Income-tax Act, 1961 — Section 254 — Whether an order of the Tribunal can be recalled on the ground that it has been passed without considering decision cited in the course of hearing — Held : Yes.

The assessee had filed an appeal to the Tribunal against the block assessment order passed in his case. The two issues raised by the assessee and the direction of the Tribunal thereon were as under:

The first issue was that the notice issued u/s. 158BD gave the assessee less than 15 days time to file the return and therefore was invalid. For this proposition the assessee had relied on the decision of Special Bench (SB) in the case of Manoj Aggarwal. The Tribunal decided this issue against the assessee by relying on the decision of the Bombay High Court in the case of Shirish Madhukar Dalvi, where it was held that technical defects mentioned in a notice u/s. 158BC would stand cured by S. 292B. The second issue was that a notice u/s. 143(2) was not issued and therefore the assessment was invalid. For this proposition reliance was placed on twelve decisions. The Tribunal in its order dealt with only one of the decisions viz. decision of the Gauhati High Court in the case of Bandana Gogoi and found it to be contrary to the decision of the Special Bench in Navalkishore & Sons. It set aside the assessment and remitted it back to the AO for completing it after observance of procedural law relating to issue of various notices under the Act.

The assessee filed a miscellaneous application requesting the Tribunal to recall its order on both the issues. On the first issue the assessee submitted that the decision of SB in the case of Manoj Aggarwal had made a distinction between the provisions of S. 158BC and S. 158BD and also that the decision of the Bombay High Court in Shirish Madhukar Dalvi dealt with S. 158BC. On the second issue the assessee submitted that the Tribunal had not considered the other decisions relied upon by the assessee. According to the assessee, non-consideration of the decisions cited constituted an error apparent from record. For this proposition reliance was placed on the decision of the Bombay High Court in the case of Stanlek Engineering Pvt. Ltd. The assessee vide this miscellaneous application requested that the order passed by the Tribunal be recalled.

On the first issue the Tribunal, after noting that there was an amendment to the provisions of S. 158BD and that the present case was for a period before amendment of S. 158BD, held that there was a mistake apparent on record in not considering the correct position of law and the decision of SB in Manoj Aggarwal’s case in the correct perspective. On the second issue the Tribunal noted that it had considered only one of the decisions relied on by the assessee. Following the ratio of the decision of the Bombay High Court in the case of Stanlek Engineering it held there was an apparent mistake in the order of the Tribunal. The Tribunal recalled its order and directed hearing the appeal afresh.

S. 254 — A request made at the time of hearing, which has not been dealt with in the order of the Tribunal, constitutes an error in the order—The action of the Tribunal in setting aside the order of CIT(A) and upholding the action of the AO in a case where the CIT(A) has not adjudicated on the specific grounds raised by the assessee and also on alternate grounds raised, constitutes a mistake apparent on record.

The assessee filed a miscellaneous application requesting amendment of the order dated 20.4.2009 of the Tribunal, in ITA No. 1483/M/2007. The facts of the case and the mistakes pointed out by the assessee in the order of the Tribunal were as follows:

The assessee had shown a loss of Rs. 1,35,88,144 on account of trading in shares which the AO had treated as speculative loss in terms of Explanation to s. 73. Aggrieved, the assessee preferred an appeal to CIT(A).

In an appeal to the CIT(A), the assessee, inter alia, contended that its case was covered by the exceptions provided in Explanation to s. 73; and an alternate ground was raised regarding apportionment of expenses towards speculative businesses, in case the claim of the assessee was not accepted. The CIT(A) held that the provisions of Explanation to s. 73 were applicable only in case of purchases and sales of shares of group companies. And since the assessee was not trading in shares of group companies, the CIT(A), following the decision of the SMC Bench of the Tribunal in the case of Aman Portfolio, directed the AO to treat the loss as business loss. He did not adjudicate on the issue as to whether the assessee was covered by the exceptions provided in Explanation to s. 73. He also did not deal with the alternate ground raised by the assessee.

The revenue filed an appeal against the order of the CIT(A). The assessee did not prefer an appeal to the Tribunal.

The Tribunal, while disposing the revenue’s appeal, noted that the decision of the SMC Bench of the Tribunal in the case of Aman Portfolio, had been reversed by the SB of the Tribunal in the case of AMP Spinning and Weaving Mills Pvt. Ltd (100 ITD 142), in which it was held that Explanation to s. 73 was applicable to all transactions of purchases and sales of shares.

It also observed that the main business of the assessee was trading in shares and that loss had arisen on account of trading in shares.

The assessee contended that in the course of hearing, the members had expressed an opinion that the issue be set aside to the file of the AO, to be decided afresh after considering various decisions regarding applicability of Explanation to s. 73. The assessee was accordingly asked to file a letter mentioning the issues that required to be considered afresh before the AO. In compliance, the assessee filed a letter dated 18.3.2009. Therefore, the order of the Tribunal setting aside the order of the CIT(A) and confirming the order of the AO was contrary to the views expressed at the time of hearing; and, therefore, there was an apparent mistake.

(i) The log book of hearing maintained by the Accountant Member did not show that the bench had expressed any view in the matter. The notings did show that the AR had made a request for restoring the matter to the AO, but the bench did not express any view in the matter. The log book of the Judicial Member was not available. In view of these facts , the Tribunal did not accept the point made in the MA that the members of the bench had expressed any view in the matter. However, since the request made by the AR for restoring the matter was not dealt with, there was an error in the order to that extent.

(ii) The Tribunal noted that the assessee had specifically mentioned to the CIT(A) that its case is covered by the exceptions provided to Explanation to s. 73, and had also raised an alternate ground regarding apportionment of expenses towards speculative businesses, in case the claim of the assessee was not accepted. Since the CIT(A) had decided the issue in favor of the assessee on technical grounds, he had not adjudicated on these issues. In spite of these facts , the Tribunal had stated in para 3 of its order that according to the findings by the AO, that the main business was trading in shares had become final, because the assessee had not appealed against the order of the CIT(A). This finding of the Tribunal constituted a mistake, apparent on record.

(iii) It is a settled legal position that the assessee, as a respondent, can support the order of the CIT(A) on alternate grounds also. The only limitation is that the assessee, as a respondent, cannot argue against the finding of the CIT(A) which is in favour of the revenue. In the present case, the CIT(A) had not given any finding on whether the case was covered by exceptions provided in Explanation to s. 73 and also regarding apportionment of expenses.

(iv) Once the Tribunal did not accept the technical ground, it was required to restore the matter to the file of the CIT(A) for deciding the issue on merits.

The order passed by the Tribunal was modified by holding that the order of the CIT(A) had been set aside and the matter restored back to him for adjudicating the specific grounds raised by the assessee with him. The miscellaneous application of the assessee was allowed.

S.240 read with s.148 of the Income-tax Act, 1961 – Return filed in pursuance to notice u/s.148 – No return filed u/s.139(1) or u/s.139(4) – On assessment and giving effect to prepaid taxes, assessee becoming entitled to refund of excess tax paid – Whether AO justified in refusing claim of applying provisions of s.239 – Held, No

For the years under appeal, the assessee had not filed its return of income u/s.139(1) or u/s.139(4). The returns were filed in response to notice issued u/s.148 of the Act. One of the issues before the Tribunal was regarding the refund of taxes paid in excess. While the AO allowed the credit for prepaid taxes as per the law, he refused the refund of excess taxes paid, holding that the same was not allowable u/s.239 of the Act. The CIT(A) on appeal, relied on the Supreme Court decision in the case of Sun Engg. Works Pvt. Ltd. and also on the ground that the claim was barred by limitation u/s.239(2) of the Act, upheld the order of the AO.

Referring to the provisions of S. 240, the Tribunal noted that a refund becomes due to an assessee as a result of any order passed in appeal or other proceedings under the Act. Relying on the Gujarat High Court decisions in the cases of Laxmiben Hemdas Patel and Atmaram J. Hathiwala, it noted that the phrase ‘other proceedings’ used in S. 240 was of wide amplitude to cover any order passed in proceedings other than appeals under the Act. Secondly, as held by the Punjab High Court in the case of Inder Paul Khanna, the assessee was not required to make claim for the refund. Accordingly, it was held that the assessee was entitled to refund of excess taxes paid.

S. 148 of the Income tax Act, 1961 – Notice for re-assessment – No assessment made pursuant to first notice issued u/s.148 – Second notice u/s.148 issued after the time limit for assessment under the first notice expired – Whether the second notice so issued valid – Held, No

The assessee’s return was processed u/s.143(1)(a) on 28-10-1994. Thereafter, notices u/s.154 were issued on 6-6-1996 and 8-8-1996, which were duly replied. Thereafter on 6-10-1997, notice u/s.148 was issued. The assessee vide its letter dated 13-11-1997 requested the AO to treat the original return filed as the return filed under the said notice. The time limit for completing the assessment expired on 31-3-2000 and no assessment was done. The AO again issued a notice u/s.148 on 25-5-2000. The assessee found that the AO had issued the second notice on the same reasons on which the earlier notice was issued. Therefore, the second notice issued was challenged as illegal and void.

The Tribunal, following the decisions listed below, held that unless and until the earlier proceedings commenced on issuance of notice u/s.148 were disposed of, subsequent notice u/s.148 cannot be issued. Accordingly, the appeal filed by the assessee was allowed and the second notice issued by the AO was held as not valid and the assessment made thereunder was quashed.

2. Trustees of H.E.H. Nizam’s Supplemental Family Trust v. CIT, 242 ITR 381 (SC)

Income-tax Act, 1961 — S. 143(1)(a), S. 147. Even when the original assessment is u/s.143(1) and even when reassessment proceedings are initiated within a period of four years, it is still necessary that there should be reasons to believe that income had escaped assessment and such reasons are subject to judicial scrutiny.

The assessee was a charitable trust, registered u/s.12A of the Act, notified, for the relevant period, u/s.10(23C)(iv) of the Act. The assessee in its return of income filed on 29th October, 2001 declared exemption u/s.10(23C) and declared nil taxable income. This return was processed u/s. 143(1)(a). On 26th May, 2004, the assessee was served a notice u/s.148 and income of the assessee was proposed to be reassessed. The Assessing Officer (AO) had, in the reasons recorded, stated that since the assessee has not invested a sum of Rs.1.02 crores in accordance with the provisions of S. 11(5), the said sum of Rs.1.02 crores is chargeable to tax and has escaped assessment.

Aggrieved the assessee preferred an appeal to the CIT(A) and challenged the validity of the jurisdiction assumed u/s.147 of the Act on the ground that the AO had resorted to reassessment proceedings without having a valid reason to believe that the income had escaped assessment. The CIT(A) upheld the action of the AO.

(1) The recorded reasons that the violation of S. 11(5) r.w. S. 13(1)(d) by the assessee leads to the amount of Rs.1.02 crores to be included in the assessee’s total income are clearly contrary to the legal position which is that while the assessee may lose exemption u/s.10(23)(c) for not adhering to the conditions of S. 11(5), this does not result in the said amount being chargeable to tax in the hands of the assessee. The Tribunal held that the reasons for reopening of assessment have been recorded without application of mind and without considering the applicable legal position, as expected of an AO while exercising his powers u/s.147.

(2) The Tribunal after examining the reasons recorded in the light of the observations of the Bombay High Court in the case of Hindustan Lever Ltd. (268 ITR 332) and of the Supreme Court in the case of Kelvinator of India Ltd. (320 ITR 561) concluded that there was no material before the AO that any income, leave aside the income of Rs.1.02 crores has escaped assessment. The Tribunal observed that no reasonable person, with basic understanding of the scheme of income-tax law, can come to the conclusion that the AO has arrived at. It held that there was no cause and effect relationship between what the AO has noticed in the attachments to the income-tax return and the conclusion he has arrived at.

(3) Even when the original assessment is u/s. 143(1) and even when reassessment proceedings are initiated within a period of four years, it is still necessary that there should be reasons to believe that income had escaped assessment and such reasons are subject to judicial scrutiny. No doubt that at the stage of reassessment proceedings, it is not necessary to establish that there has been an escapement of income, but essentially there have to be valid reasons to believe that the income has escaped assessment and these reasons, on a standalone basis, must be considered appropriate for arriving at the conclusion arrived at by the Officer recording the reasons.

(2) Prashant S. Joshi v. ITO, (Writ Petition No. 2287 of 2009, judgment dated 22-2-2010)

S. 148 — Reassessment completed by an AO on the basis of a notice u/s 148 issued by another AO who had no jurisdiction over the assessee is not valid.

The ITO Ward 21(3), Ghaziabad, based on information received by him from Additional Commissioner, Range 1, Ghaziabad, regarding receipt of Rs.5 lakhs on 19-2-2000 from Sanjay Mohan Agarwal recorded reasons of income escaping assessment on 25-3-2008 and issued notice u/s.148 on 27-3-2008. In response thereto, the assessee submitted to ITO, Ghaziabad that she has filed her return of income with ITO, Range-48, New Delhi on 3-9-2001 and hence his notice was without jurisdiction. Subsequently, the assessee, at request of ITO, Ghaziabad, vide her letter dated 6-12-2008, submitted a copy of income-tax return for A.Y. 2007-08 along with acknowledgment of receipt of AO, Ward, 34(2), New Delhi.

The ITO, Ghaziabad transferred the case to the office of AO, Ward 34(2), New Delhi who issued a notice dated 16-12-2008 to the assessee u/s. 143(2) of the Act. In response thereto, the assessee submitted her reply mentioning that the proceedings had become time-barred and were illegal and the proceedings need to be filed. The assessee received a letter dated 2-12-2008 from the AO, New Delhi assessing the income at Rs.9,6,380 by adding the gifted amount of Rs.5,00,000.

The Tribunal following decisions in the cases of ITO v. Krishan Kumar Gupta, (2008) 16 DTR 1 (Del.) (Trib.) 1; Ranjeet Singh v. ACIT, (2009) 120 TTJ 517 (Del.) and CIT v. Smt. Anjali Dua, (2008) 174 Taxman 72 (Del.) held that the notice u/s.148 issued by ITO, Ghaziabad was without jurisdiction and consequently the reassessment framed by the AO, Delhi is invalid. The Tribunal quashed the order passed by the AO, Delhi.

Section 147 — Even an assessment completed u/s.143(1) cannot be reopened unless there is fresh material.

The assessee company, engaged in the business of manufacturing heavy gear boxes, filed its return of income, on 31-10-2001, declaring a loss of Rs. 73,57,95,273. This return of income was processed u/s.143(1) on 28-1-2003. The assessee filed a revised return of income on 27-3-2003 declaring a loss of Rs.74,22,78,281 after revising its claim u/s.35DDA in respect of employee separation cost. The AO, from the balance sheet filed by the assessee along with its return of income observed that the assessee had incurred expenses towards ERP software amounting to Rs.95,14,000 and although 20% of the said expenses were only debited in P&L account, the entire amount of Rs.95,14,000 was claimed as a deduction in computation of total income. He, accordingly, entertained a belief that to this extent income has escaped assessment and the assessment was reopened by issuing a notice u/s.148 on 3-3-2006.

In an order passed u/s.143(3) r.w.s. 147, the AO assessed the loss to be Rs.50,17,47,153 after making addition inter alia on account of disallowance of expenses incurred on ERP software treating the same as of capital nature. He also disallowed claim for depreciation at 100% in respect of pollution control and energy saving devices at 100% valued at Rs.29.27 crore holding that the same had been earlier used by sister concern of the assessee-company.

Aggrieved the assessee preferred an appeal to the CIT(A) challenging the validity of the said assessment and also the various additions/disallowances made therein. The CIT(A) upheld the validity of reassessment proceedings and also the addition on account of disallowance of expenses incurred on ERP software treating the same as capital in nature. He, however, allowed relief in respect of depreciation at the rate of 100% on pollution control and energy saving devices.

Aggrieved, the assessee preferred an appeal to the Tribunal challenging inter alia the validity of the assessment on the ground that initiation of reassessment proceedings was bad in law.

The Tribunal on perusal of the reasons recorded by the AO noted that there was no new material coming to the possession of the AO on the basis of which the assessment completed u/s.143(1) was reopened. The Tribunal also noted that in the case of Telco Dadaji Dhackjee Ltd. v. DCIT, (ITA No. 4613/Mum./2005, dated 12th May, 2010) (Mum.) (TM), the Third Member, had relying on the decision of the Supreme Court in the case of CIT v. Kelvinator of India, (256 ITR 1) (SC), held that while resorting to section 147 even in a case where only an intimation had been issued u/s.143(1)(a), it is essential that the AO should have before him tangible material justifying his reason that income has escaped assessment. The Tribunal held that the TM decision of the Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) is squarely applicable to the present case. Following this decision, it held that the initiation of reassessment proceedings by the AO itself was bad in law and reassessment completed in pursuance thereof is liable to be quashed being invalid.

Reassessment – S. 148 - S. 148 notice, even if unserved, is valid & second s. 148 notice issued to meet assessee’s claim of non-service, is invalid & renders assessment void

For AY 2001-02 (and other years), the AO recorded reasons for reopening of assessment on 22.9.05 and issued s. 148 notice on 23.9.05. The notice was sent through speed post and was not returned undelivered. Though the assessee appeared before the AO on several occasions and wrote letters, he claimed vide Affidavit that the s. 148 notice was not received by him. Pursuant to the assessee’s claim, the AO issued another notice dated 25.9.06 u/s 148 and an assessment order u/s 143(3)/147 was passed on 24.12.2007. The assessee challenged the reassessment on the ground that (i) with respect to the s. 148 notice dated 23.9.05, the assessment order passed on 24.12.07 was time-barred and (ii) with respect to the s. 148 notice dated 25.9.06 that it could not have been issued during the pendency of the first notice. The department argued that as the assessee had claimed that he had not received the first notice dated 23.9.05, only the second notice could be considered and if so, the assessment was valid. HELD allowing the appeal:

(i) Though the assessee claimed by affidavit that he had not received the first s. 148 notice (and that formed the basis of the second 148 notice), as the first notice was sent by speed post as permitted by s. 282, it is presumed to have been duly served upon the assessee and was valid;

(ii) There is a difference between “issue” and “service”. To obtain jurisdiction to assess/reassess the escaped income, the s. 148 notice has to be “issued” but need not be “served”. Service is not a condition precedent to conferment of jurisdiction on the AO but a condition precedent only to the making of the order of assessment. The word “issue” means that the notice must leave the custody of the AO and as the Post Office is not the department’s agent, sending it by post completes “issue”. Accordingly, though the first notice was not (according to the assessee & department) served on the assessee, the AO was vested with power to assess/reassess the escaped income (R. K. Upadhyaya 166 ITR 163 (SC) & Sheo Kumari Debi 157 ITR 13 (Pat) (FB) followed);

(iii) With regard to the second notice, as the first s. 148 notice was valid and reassessment proceedings were pending, the second s. 148 notice is a ‘nullity’. Unless the reassessment proceedings initiated u/s 147 are concluded & brought to a logical end, the AO cannot issue fresh notice u/s 148. This is not an “irregularity” but a “nullity” (Ranchhoddas Karsandas 26 ITR 105 (SC) & Jai Dev Jain 227 ITR 301 (Raj) followed);

(iv) The result is that the limitation period has to be reckoned with reference to the first notice dated 23.09.05 as per which the assessment order dated 24.11.07 is beyond time.

Reassessment – Ss.143(2) & 147 – Non-issue of notice u/s.143(2) – Assessment order u/s.143(2) invalid

The AO passed an assessment order u/s 143(3) r.w.s. 147 without issuing a notice u/s 143(2). The assessee challenged the reassessment order on the ground that the non-issue of the s. 143(2) notice rendered the order void. HELD upholding the challenge:

The law relating to validity of the assessment proceedings in absence of issuance of notice u/s 143(2), in a case where the AO proceeded to frame the assessment in pursuance of a return is well established. If the assessment is framed u/s 143 (3), either read with s. 158 BC or s. 147, it is mandatory for the AO to issue notice u/s 143 (2). The issuance and service of notice u/s 143 (2) is mandatory and not procedural. 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).

Section 148 — Reassessment proceedings — Assessee’s appeal allowed by the CIT(A) on merits — In the appellate proceedings whether the assessee can challenge the validity of the reassessment proceedings — Held, Yes.

The assessee firm was engaged in the business of manufacturing and trading in fabrics. Pursuant to the scrutiny assessment proceedings, the assessment for the A.Y. 2001-02 was finalised on 19-12-2003. In its return the assessee had claimed deduction u/s.80HHC amounting to Rs.3.18 crores which was computed after considering the sum of Rs.24.03 lac received on account of sale of DEPB licence. The assessment for A.Y. 2002-03 was made u/s.143(1).

By the Taxation Laws (Amendment) Act, 2005, the receipt on account of the sale of DEPB licence was excluded from the definition of the term ‘total turnover’. The amendment made was retrospective from April 1, 1998. In view thereof, the AO reopened the assessment u/s.147 and issued the notice dated 28-3-2008 u/s.148. The assessee challenged validity of the action of the AO. On appeal, the CIT(A) treated the grievance against reopening of assessment as not pressed but gave relief to the assess on merits in respect of additions made on account of the sale of DEPB licence by following the Special Bench decision of the Mumbai Tribunal in the case of Topman Exports [318 ITR (AT) 87].

Before the Tribunal, the Revenue relied on the decision of the Bombay High Court in the case of Kalpataru Colours & Chemicals (328 ITR 451) whereunder the Special Bench decision of the Mumbai Tribunal in the case of Topman Exports was reversed. As regards the validity of reopening of assessment, it was contended that since the assessee did not object to reopening of assessment before the CIT(A), it was not open to do so now.

According to the Tribunal, the mere fact that the assessee was not allowed to, or did not, press the grievance against the reopening of assessment before the CIT(A), particularly in a situation in which the resultant addition on merits could not have been sustained because of binding judicial precedent then holding at the relevant point of time, the assessee cannot be deprived of his rights to adjudicate the reopening of assessment at a later stage. Accordingly, it proceeded to decide the validity of the reassessment proceedings.

Relying on the Mumbai Tribunal decision in the case of Dharmik Exim Pvt. Ltd. v. ACIT, (ITA No. 232/ Mum./2009), the Tribunal observed that it was a settled legal position that when the assessment is reopened beyond four years from the end of the relevant previous year and unless it cannot be established that the assessee had failed to disclose all the material

Ss. 68, 145 and 263 of the Income tax Act, 1961 – Assessee following project completion method of accounting – Loan treated as non-genuine, added u/s.68 – Addition accepted on the condition that the same was to be adjusted against expenditure capitalized – Whether CIT justified in treating the order of the AO as erroneous and prejudicial to the interest of the Revenue – Held, No

During the course of assessment proceedings, the assessee was not able to produce the creditor as required by the AO and therefore, it agreed for addition of loan of Rs.15 lacs received u/s.68 on the condition that the said amount should be adjusted against interest and other expense of Rs.39.47 lacs capitalised in the accounts. The AO agreed and reduced the said capitalised sum to Rs.24.47 lacs. However, according to the CIT, the order passed by the AO was erroneous and prejudicial to the interest of the Revenue, and therefore, the AO was directed to assess the said amount of Rs.15 lacs independently without setting it off against the expenditure capitalised.

The Tribunal noted that in the Tribunal decisions in the case of Sealink Construction Pvt. Ltd. and in the case of Silver Land Development Corpn., the ratio has been laid down that any income derived by the assessee has to be adjusted against its business expenditure of the same year, though the assessee may be maintaining its accounts on project completion method (which was the case with the assessee). According to the Tribunal, the sum of Rs.15 lacs considered as income u/s.68 was business income of the assessee. Therefore, the AO was justified in adopting the view expressed by the Tribunals in the above-referred decisions, and adjusting the loan amount against the expenditure capitalised. Therefore, relying on the Supreme Court decision in the case of Malabar Industrial Co. Ltd., the Tribunal set aside the order of the CIT.

S.14 of the Income-tax Act, 1961 – Assessee rendering service of secretary to film star – Whether remuneration received is taxable as ‘Salary’ or as ‘Profits and gains of business or profession’ – On

The assessee was the mother of a film actress. She was rendering service as a secretary to her daughter. The issue before the Tribunal was — whether the sum of Rs.7 lacs received by her from her daughter would be taxed as salary or as professional income. According to the AO, the assessee was merely attending to phone calls, fixing appointments and shooting schedules. He further observed that her assistance in fixation of contractual particulars, etc. could not be considered as rendering of professional service. Therefore, he held that the sum of Rs.7 lacs was taxable as salary and not as professional income as claimed by the assessee. Accordingly, various expenditure claimed by the assessee were disallowed.

On appeal before the CIT(A), the CIT(A) noted that the assessee herself was a singer and had also earlier managed the affairs of her sister, the famous Bengali actress, Debashree Roy. Thus, she had a vast experience and knowledge of the film industry. Her role was not a role of grooming her daughter, but to build her career and assist her in carrying out her profession as a film actress. According to him, the role of a star secretary required the knowledge of the film industry and the work involved included selection of movies, arrangement of dates and to advise the star how to go about various things like which party to attend, with whom to be seen, etc. Thus, according to him the role of a secretary was professional in nature; hence he allowed the appeal of the assessee.

Before the Tribunal, the Revenue contended that the assessee did not have expertise in the film industry, nor any requisite professional skill or qualification. According to it, the emphasis given by the CIT(A) on the fact that the assessee was a singer or that she had earlier assisted her sister was unnecessary.

The Tribunal noted that in the earlier assessment years as well as in the orders passed u/s.143(3), subsequent to the date of filing of the appeal by the Revenue, the assessee’s claim of professional receipts was not disputed. This inconsistency in the view adopted by the Revenue, on the same set of facts , was not justifiable. On merits — the Tribunal noted that in the assessee’s case, there was no fixed time schedule or fixed nature of work, which is generally observed in the case of an employment. Her work involved rendering consultation and advice on a wide array of matters. According to it, since there was nothing on record to suggest that anyone else, other than the assessee herself, performed the duties of a secretary to the film star, it was immaterial as to what expertise and skill the assessee had, to perform the task as secretary. Considering the nature of the task performed by the assessee, the Tribunal upheld the order of the CIT(A).

Pursuant to a search u/s 132, cash was seized from the assessee and third parties and assessed as the assessee’s income. Though the assessee requested that the said seized cash be treated as payment of “advance tax”, the AO ignored the same and levied interest u/s 234A, 234B & 234C on the basis that advance tax had not been paid. On appeal, the CIT (A) relied on Central Provinces Manganese 160 ITR 961 (SC) and held that the ground was not maintainable. It was also held that cash seized from third parties could not be treated as the assessee’s payment of advance tax. On appeal by the assessee, HELD allowing the appeal:

(i) S. 246 permits an appeal to be filed when the assessee “denies his liability to be assessed”. The levy of interest u/s 234A to 234C is a part of the process of assessment. The expression “denies his liability to be assessed” does not mean a total denial of liability. Even a partial denial of the assessment i.e. of the liability to pay interest is covered and the appeal is maintainable (C. P Manganese 160 ITR 961 (SC) explained, Kanpur Coal Syndicate 53 ITR 225 (SC) & JK Synthetics 119 CTR 222 (SC) followed);

(ii) On merits, s. 132B (1) provides that the assets seized u/s 132 may be adjusted against the amount of any “existing liability” and the liability determined on completion of the assessment. The expression “existing liability” cannot be ascribed a restricted meaning. The liability to pay advance tax is an “existing liability” and so the cash seized ought to have been adjusted against that liability. The cash seized from third parties, having been assessed in the assessee’s hands, retains the same character as cash seized from the assessee (Sudhakar Shetty 10 DTR (Mum) 173 followed).

S. 74(1)(b) — The amendment to s. 74(1)(b) does not apply to long- term capital loss incurred prior to AY 2003-04—Long-term capital loss of an assessment year prior to AY 2003-04 can be set-off even against short-term capital gain of AY 2003-04 or thereafter.

The assessee had brought forward its long-term capital loss of AY 2002-03, which was set-off against the short-term capital gain of Rs. 4,34,330 of AY 2004-05. In view of the amendment to s. 74(1)(b) w.e.f. AY 2003-04, the AO held that long-term capital loss can be set-off only against long-term capital gain.

Aggrieved, the assessee preferred an appeal to the CIT(A), who dismissed the appeal.

Prior to amendment of s. 74(1)(b), w.e.f. AY 2003-04, if the net result of the computation was a loss under the head `Capital Gains’, the law, as it stood then, gave a right of set-off to the assessee against future capital gains income. This right to set-off vested in the assessee in the year in which the loss was incurred. There is nothing in the amendment which withdrew this vested right of the assessee. The Tribunal, after considering the ratio of the decision of the Apex Court in the case of Govinddas and Others, and also the ratio of the decision of the Bombay High Court in the case of Central Bank of India, held that the amendment to s. 74(1)(b) is prospective and not retrospective; and that the assessee is entitled to set-off long-term capital loss incurred in AY 2002-03 against any income assessable under the head `Capital Gains’ for any subsequent assessment year.

Explanation to S. 73 of the Income-tax Act, 1961 — Speculation loss — Whether income derived from bills discounting and vyaj badla could be considered as income from granting of loans and advances — Held, yes.

The assessee was engaged in the business of advancing loans, bills discounting and trading in shares. During the year, its income comprised as under :

The AO did not agree with the assessee’s contention that its principal business was that of granting of loans and advances and held that Explanation to S. 73 was applicable to the assessee. Accordingly, the loss of Rs.2.75 lacs was treated by him as a speculation loss.

Before the Tribunal, the Revenue justified the orders of the lower authorities and submitted that the assessee’s interest income was derived from bills discounting and vyaj badla, and this income cannot be considered as from the business of granting of loans and advances.

According to the Tribunal, if the funds of any company were deployed or invested or advanced for any purpose, including for the purpose of bill discounting or vyaj badla, the same would amount to granting of loans and advances for the purpose of Explanation to S. 73. In coming to this conclusion, the Tribunal also relied on the observations of the Supreme Court in the case of Podar Cement Pvt. Ltd.

The Tribunal then referred to the details filed by the assessee, as given in the Table referred above.

According to the Tribunal, considering the above factual position, the decision of the Kolkata Special Bench in the case of Venkateswar Investment & Finance Pvt. Ltd. was applicable to the assessee. Accordingly, it was held that the Explanation to S. 73 was not applicable to the assessee.

S. 73 of the Income tax Act, 1961 – Set-off of speculation loss against profit in speculation business of the same year – Assessee earning speculation profit from share trading and suffering deemed speculation loss under Explanation to s.73 – Whether set-off of loss against profit permissible – Held Yes

During the year, the assessee had earned profit on sale of shares (without taking delivery) of Rs.1.52 lacs. In the same year, it had suffered a loss of Rs.4.24 lacs from trading in shares. In terms of the provisions of S. 73, including the Explanation thereto, the assessee adjusted the profit earned against the loss. However, the AO disallowed the adjustment and observed that the entire loss of Rs.4.24 lacs would be carried forward to the next year for set-off against speculative income. On appeal, the CIT(A) confirmed the AO’s order.

The Tribunal referred to the Mumbai Tribunal decision in the case of Samba Trading & Investment Pvt. Ltd. and observed that there was no warrant in the language of the Section for distinction between speculative losses in one business and deemed speculation losses under Explanation to S. 73 of the Act. As per the said decision, the profit in another speculative business has to be set off against deemed speculation losses. Further, relying on the decision of the Special Bench, Ahmedabad Tribunal in the case of A. M. P. Spinning & Weaving Pvt. Ltd. and on the Board Circular No. 204, dated 24-7-1996, the Tribunal allowed the assessee’s appeal.

Explanation to S. 73 — Speculation business — Assessee company earning income from the sale of shares — AO holding that income earned was from speculation — On the facts held that income earned was in the nature of capital gains.

The assessee was a public limited company engaged in the business of investment, dealing in shares/ securities/bonds, etc. The assessee during the impugned assessment year had shown income under the head capital gain at Rs.22,98,229 the break-up of which was as under:

	Rs.
Long-term capital gains	41,85,744
Less: Adjusted b/f long-term capital loss	18,80,681
Less: Short-term capital loss	6,834
	22,98,229

On being questioned the assessee explained that in the current year no shares were purchased or sold as stock in trade. It was only the shares held as investment that were sold during the year. However, the Assessing Officer did not accept the contention of the assessee on account of the reasons, amongst followings:

(a) The assessee had claimed deduction of entire expenses on share dealings as business expenses though the transactions shown were for sale of investments;

(b) In earlier years also the assessee had not shown any stock in trade, even though, shares were acquired for resale;

(c) Memorandum of Association of the assessee company showed that it was formed with the main objective of carrying on the business of share trading along with other activities mentioned therein.

(d) As per Note in Part I of Schedule VI of the Companies Act — for an investment company, shares take the character of stock in trade and as such, shares shown as investment in the balance sheet could be stock-in-trade also. The Companies Law does not differentiate between the capital or revenue nature of transactions of investments and stock-in-trade.

Further, relying on a couple of decisions, the Assessing Officer concluded that Explanation to S. 73 of the Act was applicable to the transactions in question. He accordingly treated the net result of the profit and loss of such transactions as arising out of speculation business. He further did not allow any set-off of the brought forward long-term capital loss of the preceding year against the income of the current year.

Before the CIT(A) the assessee submitted that the original intention of the assessee at the time of entering into share transactions was to earn dividend and hold them for appreciation in value. The shares were held as investment and not as stock-in-trade. However, the CIT(A) held that the claim of the assessee cannot be sustained on the following reasons:

(a) Although the appellant admitted that in the earlier years as well as in the subsequent year, transactions in share trading were carried out but not during the current year, in earlier years also no stock-in-trade of shares was shown in the balance sheet. Shares were always shown as investments only;

(b) All the expenses incurred on transactions in share investments were claimed as business expenses in the Profit and Loss A/c.;

(c) The appellant had shown short-term capital loss of Rs.6,834. It means that it was engaged in frequent purchase and sale of shares during the year under consideration, which fact clearly proves the intention of the appellant for dealing in shares as stock-in-trade.

The Tribunal found merit in the submission of the assessee that the provisions of Explanation to S. 73 were not applicable to the facts of the present case for the reasons that:

(a) In the assessment order passed u/s.143(3) of the Act for the A.Ys. 2005-06 and 2006-07, the Assessing Officer in the orders had considered the income from sale of shares as income from long-term capital gain/short-term capital gain and not as speculation business.

(b) There is no purchase or sale of shares during the year and the assessee has sold the shares/units of mutual funds which were shown under the head investment.

(c) The shares were held for a long period and no borrowed fund had been utilised by the assessee for purchase of shares/units.

As regards the Assessing Officer disallowing the expenses of Rs.4 lakhs out of the total expenses of Rs.6.16 lacs on the ground that the same could have been incurred for earning of speculation income, the Tribunal agreed with the assessee’s contention that the entire expenditure relates to maintaining the corporate entity of the assessee. Accordingly it held that no part of expenditure was disallowable.

S. 73—Any speculation loss computed for A.Y. 2006-07 and later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006 by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent assessment years applies only to such loss.

In A.Y. 2001-02 the assessee suffered a speculation loss of Rs.4,55,30,494 which loss was allowed to be carried forward to subsequent years u/s.73(2) of the Act. In the return filed for A.Y. 2006-07 the assessee claimed that speculation loss brought forward from A.Y. 2001-02 should be set off against speculation profits for the A.Y. 2006-07. The Assessing Officer (AO) denied the claim of the assessee on the ground that u/s.73(4) no loss shall be carried forward for more than four assessment years immediately succeeding the assessment year for which it was first computed. He held that speculation loss for A.Y. 2001-02 cannot be carried forward beyond A.Y. 2005-06.

Aggrieved the assessee preferred an appeal to CIT(A) who upheld the action of the AO.

It is a settled rule of interpretation that a vested right can be taken away only by express language or by necessary implication. This is settled by the decision of the Privy Council in Delhi Cloth & General Mills Company Ltd. v. CIT, AIR 1927 (PC) 242 and the same has been cited with approval by the Supreme Court in the case of Jose Dacosta v. Bascora Sadashiv Sinai Narcomin, AIR (1975) SC 1843. The assessee had a vested right to carry forward the speculation loss for a period of eight assessment years as per S. 73(4) as it stood before the amendment made by the Finance Act, 2005. That such a right is a vested right cannot be doubted after the judgment of the Supreme Court in the case of CIT v. Shah Sadiq & Sons, 166 ITR 102 (SC). In S. 73(4) or in any other provision there is no express language or any implication to the effect that the right of the assessee to carry forward the speculation loss for a period of eight subsequent assessment years has been taken away.

Any speculation loss computed for the A.Y. 2006-07 and later assessment years alone would be hit by the amendment and such loss can be carried forward only for four subsequent assessment years. The vested right of the assessee has not been taken away.

The amendment made by The Finance Act, 2005 w.e.f. 1-4-2006 is merely to substitute the words ‘four assessment years’ for the words ‘eight assessment years’ in Ss.(4) of S. 73. Ss.(4) of S. 73 refers only to the loss to be carried forward to the subsequent years. It does not say anything about the set-off of the speculation loss brought forward from the earlier years. There is a distinction between a loss brought forward from the earlier years and a loss to be carried forward to the subsequent years. The sub-section deals only with the speculation loss to be carried forward to the subsequent years andin the very nature of the things, it cannot apply to speculation loss quantified in any assessment year before the A.Y. 2006-07.

The Tribunal made a reference to the Income-tax Rules prescribing form of return of income and noted that the form in ITR 4 makes a distinction between loss brought forward and loss to be carried forward. It held that since in the present case it was concerned with the assessee’s right to set off the brought forward speculation losses against speculation profits for A.Y. 2006-07, Ss.(4) of S. 73 has no application.

Explanation to S. 73 — For the purpose of deciding whether the case of the assessee is covered by exceptions provided in Explanation to S. 73, speculation loss is to be excluded while computing business income and arriving at the gross total income.

The assessee incurred speculation loss of Rs.22,728. This speculation loss was in addition to the loss on trading in shares amounting to Rs.6,66,971 separately shown in P & L Account. While assessing the total income u/s.143(3) of the Act, in order to ascertain whether the Explanation to S. 73 applies, and therefore the loss of Rs.6,66,971 on trading in shares is to be regarded as speculation loss, the Assessing Officer (AO) treated speculation loss of Rs.22,728 as such and excluded it from computation under the head ‘Profits and Gains of Business’. In the computation filed by the assessee, there was a carried forward speculation business loss of Rs.22,728 and unabsorbed depreciation of Rs.36,992 which was to be carried forward. The assessee contended that depreciation on business premises of Rs.38,881 on new office which was not put to use needs to be excluded since the same was claimed wrongly and is not allowable since the new office has not been put to use. The ITAT remanded this matter (of depreciation being not allowable) along with the issue of application of S. 73 to the AO.

In reassessment proceedings, AO reiterated the contentions in original assessment but the CIT(A) after admitting additional evidences and remanding the matter back to the AO gave a finding that the assessee had not put to use the office premises and the AO was directed to withdraw the depreciation on the new building and recompute business loss. However, the CIT(A) worked out gross total income by treating speculation loss of Rs.22,728 as part of business income. He rejected the assessee’s contention that for computing gross total income, speculation loss of Rs.22,728 should not form part of business income and therefore also for arriving at gross total income.

Aggrieved, the assessee preferred an appeal to the Tribunal. The question for consideration being whether the speculation loss of Rs.22,728 is to be included as part of gross total income or to be excluded while computing business income and arriving at the gross total income.

The Tribunal after referring to the judgment in the case of IIT Invest Trust Ltd. 107 ITD 257, held that under the scheme of the Act whenever there is a separate loss which cannot be set off in the computation under each head, the same cannot be included in the gross total income and it does not enter in the computation of gross total income being a loss, unless set off against income under any other head. The Tribunal held that the speculation loss was to be treated separately under the provisions of the Act. Explanation 2 to S. 28 makes it mandatory that where speculative transactions carried on by the assessee are of such a nature as to constitute the business, the business shall be deemed to be distinct and separate from any other business. The Tribunal held that the speculation loss of Rs.22,728 constituted a separate business and it cannot be set off from other business loss or profit including income from other sources. Accordingly, it was held that the same be excluded while working out gross total income. Upon excluding the speculation loss of Rs.22,728 the gross total income became a positive figure of Rs.2,957 and accordingly income from other sources was more than business profits and assessee’s loss on trading in shares was not attracted by provisions of S. 73. The assessee’s case was held to be covered by first exception in Explanation to S. 73. The Tribunal observed that this principle is also laid down in IIT Invest Trust Ltd. 107 ITD 257 and also in Concord Commercial Pvt. Ltd. 95 ITD 117 (SB).

Counsel for assessee / revenue: S.E. Dastur, Nitesh Joshi & D.V. Lakhani / Vikram Gaur

Proviso to s. 254(2A) — Tribunal can stay the proceedings before the AO in exercise of its incidental powers as well as in view of the proviso to S. 254(2A)—The Tribunal disposed the stay application by directing the AO to pass the assessment order by 31.12.2009 in accordance with law, but not to serve the same on the assessee; and, thus, not to give effect to the same for a period of six months from the date of passing of its order or till date of passing of the appellate order by the Tribunal

For the assessment years 2004-05 and 2005-06, the CIT passed orders u/s 263 of the Act directing the AO to: (i) Tax the advances towards sale of room nights by the assessee from its card members under the Holiday Membership schemes, in the year in which such advances are received; and (ii) Not allow deduction for the provision in respect of the prorata amount relatable to the difference between the offer price and the surrender value.

The assessee preferred an appeal to the Tribunal against the orders passed by CIT u/s 263 of the Act. The appeals filed by the assessee came up for hearing on 15.12.2009, but the Tribunal adjourned the hearing to 24.3.2010 to await the decision of the Special Bench constituted in Chennai in the case of Mahindra Holiday Resorts Ltd.

The AO was required to complete the assessment proceedings by 31.12.2009 to give effect to the orders of the CIT. As a result of the said additions/disallowances, there would be an addition to the total income of Rs 195,07,77,400, thereby creating a huge demand against the assessee. Accordingly, the assessee filed an application for stay of the assessment proceedings before the AO.

It is trite law that the Tribunal can stay the proceedings before the AO in exercise of its incidental powers as well as in view of the proviso to s. 254(2A). The Tribunal noted that similar power had been exercised by the Tribunal in the case of M/s Reliance Communications Infrastructures Ltd. in S.A. No. 135/M/2009, for the assessment year 2004-05, vide its order dated 24.4.2009. The Tribunal directed the AO to pass the assessment order by 31.12.2009 in accordance with the law, but not to serve the same on the assessee; and, thus, not to give effect to the same for a period of six months from the date of its order or till the date of passing of the appellate order by the Tribunal, whichever is earlier.

3 State of Andra Pradesh vs V.B.C. Fertilisers & Chemicals Ltd., (1994) (2) ALT 487.

Stay Application in Tribunal maintainable despite non-filing of stay petition before lower authorities

The assessee filed an application in the Tribunal seeking stay on recovery of demand of Rs. 7.05 crores raised pursuant to the order of the Dispute Resolution Tribunal. The stay application was filed without approaching the lower authorities for stay. The department, relying on RPG Enterprises Ltd vs. DCIT 251 ITR 20 (AT) (Bom), opposed the application on the ground that the assessee ought to have approached the lower authorities first so that “the department would get an opportunity to study the situation and gather the necessary data for evaluating the application for stay and may also get an opportunity in protecting the interests of the Revenue”. HELD rejecting the objection:

There are differences in the approach of the Tribunal on whether the tribunal can be directly approached for stay of demand without approaching the lower authorities. In view of the decision in Broswel Pharmaceutical Inc vs ITO 83 TTJ 126 (All) it is not mandatory on the part of the assessee to move application before the Revenue Authorities for granting of stay of outstanding demand. Accordingly, there is no merit in the argument of the department that the stay application should be rejected outright since the assessee has not moved any petition before the Revenue Authorities seeking stay of the demand. Seeking stay before the lower authorities is directory and not mandatory.

S. 133 A of the Income tax Act, 1961 – Assessee’s declaration that additional income invested in trading stock ignored and income was assessed independently – Whether AO justified – Held, No

During the course of survey, the assessee had offered an additional income of Rs.34.56 lacs. It was then made clear to the assessing authority that the additional income offered was in respect of its trading stock. The Assessing Officer completed the assessment accepting the additional income offered, but he treated the same as an independent income without adding it to the closing stock. As there was no additional demand on account of this adjustment, the assessee did not prefer an appeal. It was only when the assessment of the succeeding year came up for consideration, the assessee understood its impact and filed an appeal. In order to condone the delay, an affidavit confirming the above explanation of the consultant, who also owned up the lacuna in the professional advice given to the assessee, was filed. The Tribunal accepted the explanation offered and condoned the delay.

The Tribunal noted that the assessee, by its letter filed before the assessing authority, had clearly stated that the income offered was in respect of additional stock. Therefore, according to the Tribunal, the AO was not justified in ignoring the declaration made by the assessee. Accordingly, the AO was directed to treat the undisclosed income by way of enhanced value of closing stock.

Survey – Section 133A – Assessee, a civil contractor doing construction work of Government as well as of private parties – In survey, surrendered Rs.25 lakhs and paid taxes – Return of income filed without offering the amount surrendered in survey – Explanation of assessee that surrender made under pressure and mentally disturbed state of mind – No material or evidence found in survey to support the amount surrendered – Addition made only on basis of surrender deleted

A survey was conducted u/s.133A on 6/3/2002. In the course of survey, the assessee surrendered Rs.25 lakhs even though no material / evidence were found in survey action supporting such disclosure. No discrepancy or defects were pointed out by the AO in the entire assessment order. The trading results were accepted by the AO and the same was better that those of the immediate preceding years. The books of account were audited and no purchases or sales have been found to be made outside the books of account. As per the instructions issued by the CBDT dated 10.3.2003, the same would apply to pending assessments and AO should rely upon the evidence or material gathered in search/seizure and survey operations while framing assessment order rather than on confessions obtained as to undisclosed income. In Paul Mathews & Sons v. CIT [2003] 263 ITR 101 (Ker) it has been held that a statement recorded at the time of survey does not carry any evidentiary value whatsoever. In respect of the contention of the DR that by making the surrender, it pre-empted the department from carrying on investigations does not hold water for the reason that statement was made at the behest of the department even though no inventory of stock was prepared & no site of assessee was visited. The another plea of department that the retraction came about after a gap of 8 months have no force since the retraction was made immediately at the time of filing the return of income by entering a note at the end of the return itself and distinguished the case of Hiralal Maganlal & Co. v. DVIT [2005] 96 ITD 113 (Mum) that the statement cannot be said to be voluntary disclosure. In view of the same, it was held that the surrender made was successfully retracted and the addition was therefore deleted.

S. 17 r.w.s. 192 of the Income tax Act, 1961 – Motor car expenses reimbursed to employers – AO holding that same amounted to perquisite liable to deduction of tax at source u/s.192 – Assessee considered as assessee in default u/s.191 for failure to deduct tax from perquisite value – Whether AO justified – Held, No

According to the ITO(TDS), u/s.192 the assessee was liable to deduct tax at source from the monthly payments made to its employees towards reimbursement of motor car expenses incurred by them. On appeal, the CIT(A) held that only 20% of the amount reimbursed could be considered as perquisite, liable to tax. Accordingly, the assessee was treated as assessee in default.

Relying on the Ahmedabad Tribunal decision in the case of Balsara Home Products Ltd. the Tribunal held that since the assessee’s case was for the period prior to 1-6-2003 i.e., the date when Explanation to S. 191 was inserted, the Revenue cannot recover the tax, even if the assessee was liable to deduct the tax. It was further held that on merits also, the assessee was entitled to succeed, as it was not liable to deduct tax based on the decisions listed at S. Nos. 2 to 7.

S. 40(a)(i) of the Income tax Act, 1961 – Disallowance of expense for no deduction of tax at source – Whether tax is required to be deducted from payments made to (i) telecom operators for down-linking (bandwidth) charges and (ii) subscription fees paid by way of an access fee to database maintained outside India – Held, No

Amongst the various issues decided by the Tribunal, the following issues as to whether the assessee was liable to deduct tax at source from the following payments were considered :

(i) Amounts paid to foreign companies viz., AT&T and MCI Telecommunication, for down-linking (bandwidth) charges.

(ii) Subscription payments made to Gartner group and others, which entitled the assessee to be a licensed user which enabled it to pose queries to analysts around the globe via the web, conference calls and face-to-face meetings. According to the AO, the assessee got the benefit of technical consultation and therefore, the payments fall within the ambit of S. 195.

Based on the decision of the same Tribunal in the assessee’s own case, (which decision was based on the Bangalore Bench of Tribunal decision in the case of Wipro Ltd.), it was held that :

(i) The services provided by the telecom operators to the customers did not amount to technical service or royalty u/s.9(1)(vii) of the Act. Accordingly, it was held that the assessee was not liable to deduct tax at source.

(ii) The subscription paid to Gartner and others was an access fee to Gartner database maintained outside India. The payment was for obtaining data. It was for use of copy-righted information, like book, which could not be passed on to anyone else. Secondly, it was noted that since the copyright was not for literary, artistic or scientific work, the payment could not be classified as royalty. Accordingly, it was held that the assessee was not liable to deduct tax at source.

TDS – 194I – Distinction between “hire of vehicles” & “transportation contract”

The assessee paid “hire charges” for hiring helicopter & aircraft services and deducted TDS at 2% u/s 194C. The AO & CIT (A) held that the assessee ought to have deducted TDS at 22.44% u/s 194-I on the ground that “vehicles” were “plant and machinery” and the assessee had “hired” the vehicles and not merely taken services for carrying passengers or goods. The assessee was held liable to pay the deficit u/s 201. On appeal by the assessee, Held allowing the appeal:

The department’s argument that the assessee has hired helicopter/air craft/vehicle is not correct because these were not hired on a periodic basis or on day-to-day basis. Instead, the transport services provided by the transporters were availed of. The assessee paid charges on the basis of flying hours, cost of landing charges and refuelling charges, etc. The crew, fuel, maintenance operation licences, etc. were all under the control of the service providers and not under the control of the assessee. If the assessee does not enjoy control over the vehicles and if the running and maintenance expenditure is borne by the transport service providers, the contract is not one for the “hiring” but is merely for availing transportation services. Payment for transportation services is not covered by s. 194-I (Accenture Services 44 SOT 290 (Mum), Tata AIG 43 SOT 215 (Mum) and Ahmedabad Urban Development Authority followed).

Ss.194C v. 194I – Test to distinguish “transportation contract” from “hire contract”

The assessee entered into contracts with transporters for transporting petroleum products from the plant to various destinations. The assessee deducted TDS u/s 194C at 2% on the basis that the transportation contract was “work”. The AO held that the contract was a “hiring” of vehicles on the basis that (i) the assessee had exclusive possession and usage, (ii) the use was for a fixed tenure, (iii) the tankers were customized to the assessee’s requirements and that TDS ought to have been u/s 194-I at 10%. The assessee was held to be in default u/s 201. On appeal, the CIT (A) reversed the AO. On appeal by the department, HELD dismissing the appeal:

To decide whether a contract is one for “transportation” or for “hiring”, the crucial thing is to see who is doing the transportation work. If the assessee takes the trucks and does the work of transportation himself, it would amount to hiring. However, if the services of the carrier were used and the payment was for actual transportation work, the contract is for transportation of goods and not an arrangement for hiring of vehicles. On facts , the agreement was of the nature of transport agreement and not one for hiring of vehicles because the tank truck owners did not simply confine themselves to providing vehicles at the disposal of the assessee in lieu of rent but also engaged their drivers in driving such vehicles and thereby in transporting petroleum products from one place to the other. In effect, the truck remained in the possession of the staff of the carrier. Further, the assessee was required to pay for the transportation work on the basis of distance and no idle charges were payable. There was no transfer of the right to use the vehicle involved in the agreement. The agreement was merely for carriage of petroleum products and so s. 194-I was not applicable.

S. 195: If DTAA is silent, no obligation to deduct surcharge & education cess

The assessee made a remittance of management fee and interest to a resident of France. The AO held that in deducting TDS thereon u/s 195, the assessee ought to have deducted surcharge and education cess. The assessee claimed that as the India-France DTAA was silent about inclusion of surcharge & education cess, it was under no obligation to do so. Held by the Tribunal upholding the assessee’s plea:

The India-France DTAA does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there is an apparent conflict between the Income-tax Act and the DTAA between the two sovereign countries with regard to deduction of tax at source on surcharge and education cess. U/s 90(2) if the provisions of the DTAA are more beneficial to the taxpayer, the DTAA prevails over the Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, the taxpayer may take advantage of that provision in the DTAA for deduction of tax.

CBDT Instruction No. 3/2011, dated 9-2-2011 — CBDT Circular fixing monetary limits for filing appeals by the Department applies to pending appeals as well.

This was an appeal filed by the Revenue against the order of the CIT(A) directing the AO to allow deduction u/s.10A amounting to Rs.5,78,432 in respect of interest income, which according to the AO was not derived from the business or profession. On behalf of the assessee, relying on the decision of the Bombay High Court in the case of CIT v. Madhukar K. Inamdar, (318 ITR 149) (Bom.) and also on the ratio of the decision of the Delhi High Court in the case of CIT v. Delhi Race Club Ltd., (ITA No. 128 of 2008 dated 3-3-2011), it was argued that the tax effect is only Rs.2,07,512 and as per Instruction No. 3/2011, the Revenue should not contest appeal up to Rs.3,00,000.

Considering the similar situation where tax limits were modified by the CBDT Instruction No. 5 of 2008, the Jurisdictional High Court in the case of CIT v. Madhukar Inamdar, (HUF) (supra) held that the Circular will be applicable to the cases pending before the Court either for admission or for final disposal.

The Tribunal dismissed the appeal filed by the Revenue on issue of tax effect involved.

Transfer Pricing: Turnover filter must be applied to exclude giant companies from comparison

The assessee, a provider of software development services, claimed that in determining the ALP under TNMM, Infosys Technologies & Wipro were not comparable entities given their extreme large turnover in comparison to that of the assessee. To oppose this, the Department relied on Capgemini India (ITAT Mum) where it was held that the concept of economy of scale was not applicable to service oriented companies and that the turnover filter could not be applied to exclude companies with an extremely large turnover. Held by the Tribunal:

Though in Capgemini it was held that the concept of economy of scale is relevant only for manufacturing concerns, which have high fixed assets, and not for service concerns and that the turnover filter cannot be applied to exclude companies with an extremely large turnover from comparison, a contrary view has been taken in Deloitte Consulting 145 TTJ 589 (Hyd) that “giant” companies like Wipro are not at all comparable with smaller “pygmy” companies. Consequently, giant companies line Wipro and Infosys cannot be taken as comparables as their turnover is multiple number of times higher compared to that of the assessee and the TPO erred in considering their PLI to arrive at the arithmetic mean.

The Special Bench was constituted to consider whether prior to the insertion of the second proviso to s. 92C(2), the benefit of 5% tolerance margin as prescribed under proviso to s. 92C(2) for the purposes of determining the arm’s length price of an international transaction is allowable as a standard deduction in all cases, or is allowable only if the difference is less than 5%. In the meanwhile the second proviso to s. 92C(2) was amended by the Finance Act, 2012 with retrospective effect from 1.4.2002. The assessee claimed, relying on Piagio Vehicle P. Ltd. vs. DCIT that even after the retrospective amendment by the Finance Act, 2012, it was entitled to the benefit of adjustment of +/- 5% variation while computing the ALP. It was also argued that the amendment was unconstitutional. Held by the Special Bench:

There was a controversy on whether the +/- 5% tolerance adjustment was a standard deduction or not. After the retrospective amendment to the second proviso to s. 92C by the Finance Act, 2012 with retrospective effect from 1.4.2002, it is evident that if the variation between the arm’s length price and the price at which international transaction was actually undertaken does not exceed the specified percentage, then only the price at which the international transaction has actually been undertaken shall be deemed to be arm’s length price. Thus, the benefit of tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeded the tolerance margin, then there would be no benefit even up to tolerance margin. Then, the ALP as worked out under s. 92C(1) shall be taken as ALP without any benefit of tolerance margin. The view taken in Piagio Vehicle was without considering the amendment and is per incuriam and not good law. The challenge to the constitutional validity of the retrospective amendment cannot be made before the Tribunal as it is a creation of the Act and not a constitutional authority.

Transfer Pricing: Foreign AE cannot be the tested party. TP additions can exceed overall group profits

The Tribunal had to consider the following important transfer pricing issues: (i) whether the foreign AE can be taken as as the tested party & if the sale price received by the foreign AEs from the services ultimately sold to customers is equal to that charged by the assessee from its AEs, it would show that the international transaction between the assessee and the AEs is at ALP? (ii) whether the transfer pricing additions can result in the overall profit of the group of AEs being breached? & (iii) whether if the assessee has consistently followed a method for determination of the ALP and the same has been accepted by the TPO in the past, he cannot reject that method for the current year? Held by the Tribunal:

(i) The argument that the foreign AE should be selected as the tested party and the profit earned by the foreign AE from outside comparables should be compared with the price charged by the assessee from the AE to determine whether they are at ALP is not acceptable because under the scheme of s. 92C, the profit actually realized by the Indian assessee from the transaction with its foreign AE has to be compared with that of the comparables. There is no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee and its foreign AE. The contention that the profit earned by the foreign AE should be substituted for the profit of the comparables is patently unacceptable. The fact that this may be permissible under the US and UK transfer pricing regulations is irrelevant;

(ii) The contention of the assessee that the authorities cannot go beyond the overall profit of the group of AEs in determining the ALP of the international transaction is also not acceptable because it will constitute a new method/ yardstick for determining the ALP. The transfer pricing adjustments made in India may result in the overall profit earned by all the AEs taken as one unit being breached;

(iii) The contention that as the assessee consistently followed the same method for determination of the ALP and it was accepted by the TPO in the past, he cannot take a different view is not acceptable. A delicate balance needs to be maintained between the principle of consistency and the rule of res judicata. There is no estoppel against the provisions of the Act. As the method employed by the assessee for determining the ALP is contrary to the statutory provisions, the inadvertent acceptance of the wrong method by the TPO in an earlier year does not grant a license to the assessee to continue calculating the ALP in the grossly erroneous manner in perpetuity. It needs to be discontinued forthwith.

Transfer Pricing: Important principles on “turnover filter” & comparison explained

The Tribunal had to consider the following important transfer pricing issues: (i) whether a one-time and extraordinary item of expenditure (ESOP cost) debited to the assessee’s P&L A/c has to be excluded while comparing the margins, (ii) whether for the purpose of comparison of margins, the consolidated results of comparables having profit from different overseas markets can be considered? (iii) whether extreme profit and loss cases should be excluded or in case extreme profit cases are included, the case of losses should also be included? (iv) whether a turnover filter can be adopted to exclude companies with extremely high turnover? (v) whether the assessee can seek to exclude its own comparables? (vi) whether an adjustment for working capital is permissible? (vii) whether if the assessee can show that because the AE is in a high tax jurisdiction and that there is no transfer of profit to a low tax jurisdiction, a transfer pricing adjustment need not be made? Held by the Tribunal:

(i) A comparison of margin between the assessee and the comparables has to be made under identical conditions. As the comparables had not claimed any extraordinary item of expenditure on account of ESOP cost, for the purpose of making proper comparison of the margin, onetime ESOP cost incurred by the assessee has to be excluded. There is nothing in the Rules that prohibits adjustment in the margin of the assessee to remove impact of any extraordinary factors (Skoda 30 SOT 319 (Pune), Demag Cranes 49 SOT 610 (Pune), Transwitch, Toyota Kirloskar Motors followed);

(ii) Under Rule 10B(2)(d), the comparability of transactions has to be considered after taking into account the prevailing market conditions including geographical locations, size of market and cost of capital and labour etc. Therefore, consolidated results which include profit from different overseas jurisdictions having different geographical and marketing conditions will not be comparable. Only standalone results should be adopted for the purpose of comparison of margins (American Express followed);

(iii) Comparable cases cannot be rejected only on the ground of extremely high profit or loss. In case the companies satisfy the comparability criteria, and do not involve any abnormal business conditions, the same cannot be rejected only on the ground of loss or high profit. The OECD guidelines also provide that loss making uncontrolled transactions should be further investigated and it should be rejected only when the loss does not reflect the normal business conditions;

(iva) In certain Tribunal decisions, various reasons have been given for applying the turnover filter for comparison of margins such as economy of scale, greater bargaining power, more skilled employees and higher risk taking capabilities in cases of high turnover companies, which increase the margins with rise in turnover. However, in these decisions, no detailed examination has been made as to how these factors increase the profitability with rising turnover. The concept of economy of scale is relevant to manufacturing concerns, which have high fixed assets and, therefore, with the rise in volume, cost per unit of the product decreases, which is the reason of increase in margin as scale of operations goes up because with the same fixed cost there is more output when the turnover is high. The same is not true in case of service companies, which do not require high fixed assets. In these cases employees are the main assets, who in the case of the assessee are software engineers, who are recruited from project to project depending upon the requirement. The revenue in these cases is directly related to manpower utilized. With rise in volume cost goes up proportionately. Therefore, the concept of economy of scale cannot be applied to service oriented companies. On facts , it is shown by the department that in the case of the comparables selected by the assessee, there is no linear relationship between margin and turnover and that that the margin has come down with the rise in turnover in some cases. Such detailed study was not available before the various Benches of the Tribunal which have applied the turnover filter and consequently those decisions cannot be followed;

(ivb) Under Rule 10B(2), comparability of international transactions with uncontrolled transactions has to be judged with reference to functions performed, asset employed and risk assumed. The functions performed by all comparable companies are same as it is because of same functions they have been selected by the assessee as comparables. The asset employed has two dimensions i.e. quantity and quality. More employees would mean more turnover but there is no linear relationship between margin and turnover. As regards quality of employees, this will depend upon the nature of projects and since the comparables are operating in the same field having similar nature of work, and employee cost being more in case of more skilled manpower, it will not have much impact on the margins. As for the bargaining power, the assessee is part of a multinational group and well established in the field and, therefore, it can not be accepted that it has less bargaining power than any of the Indian Companies, however big it may be. Therefore, it would not be appropriate to apply turnover filter for the purpose of comparison of margins. However, for the purpose of comparison, the turnover would be relevant only from the limited purpose to ensure that the comparable selected is an established player capable of executing all types of work relating to software development as the assessee is also an established company in the field (Genesis Integrating System not followed);

(v) The assessee had selected Infosys and Wipro as comparables on the basis of its own transfer pricing study after being fully aware of its work profile. The assessee raised no plea either before the TPO or DRP for excluding these comparables though it had added some more comparables. The assessee, therefore, cannot raise any grievance before the Tribunal to exclude these comparables, without giving any cogent and convincing reason. The reasons given by the assessee (turnover filter) are not found convincing and so it cannot be permitted to exclude Infosys and Wipro (Kansai Nerolac Paint followed)

(vi) Working capital adjustments are required to be made because these do impact the profitability of the company. Rule 10B(2)(d) also provides that the comparability has to be judged with respect to various factors including the market conditions, geographical conditions, cost of labour and capital in the market. Accounts receivable/payable effect the cost of working capital. A company which has a substantial amount blocked with the debtors for a long period cannot be fully comparable to the case which is able to recover the debt promptly. The average of opening and closing balance in the account receivable/payable for the relevant year may be adopted which may broadly give the representative level of working capital over the year. Even if there is some difference with respect to the representative level, it will not effect the comparability as the same method will be applied to all cases. Working capital adjustment can not be denied to the assessee only on the ground that the assessee had not made any claim in the TP study if it is possible to make such adjustment. Working capital adjustment will improve the comparability.

(vii) The argument that no adjustment need be made because the parent company is situated in US where tax rate is high and that there was no reason for the assessee to transfer profit to the parent company is not acceptable. The arm’s length price of an international transaction has to be calculated with respect to similar transaction with an unrelated party as per the method prescribed and the revenue is not required to prove tax avoidance due to transfer of profit to lower tax jurisdiction. Arguments such as that the parent company was incurring loss or had shown lower margin are not relevant (Aztek Software 107 ITD 141 (SB) & 24/7 Customers.com followed)

S. 144C(8): DRP entitled to enhance by questioning very existence of transaction

The assessee entered into international transactions with its AE by way of payment of management fees, reimbursement of tender cost and payment of R&D expenses and claimed that the transactions were at ALP. The TPO & AO did not dispute that the transactions had been entered into for business purposes and determined the ALP by making adjustments. The assessee filed objections before the DRP. The DRP held that the assessee had to first show that the services had been rendered by the AE and that some tangible and direct benefit was derived by the assessee as a result of such payment and called upon the assessee to produce proof. As the assessee failed to do so, the DRP held that no tangible and direct benefit was derived by the assessee and directed that a much larger adjustment by way of disallowance of the entire amount be made. The assessee appealed to the Tribunal and claimed that the DRP could not have enhanced the assessment. Held by the Tribunal:

S. 144C(8) empowers the DRP not only to confirm or reduce the variation proposed in the draft order to the benefit of the assessee but also to enhance it to the prejudice of the assessee. This power of enhancement which is impliedly embedded in the matter of issuing directions, due to the use of expression `as it thinks fit’ in s. 144C(5) is expressly set out in s. 144C(8). If the DRP reaches the conclusion that the TPO erred in determining the ALP correctly, warranting further adjustment, the assessee, objecting to the variation in the income due to the order of the TPO, may land in difficulty, and end up with the enhancement of variation. But, for the DRP to exercise its power there has to be some variation proposed in the draft order. The Explanation to s. 144C(8) inserted by the Finance Act, 2012 with retrospective effect from 01.04.2009 has widened the DRP’s power of enhancement to all the matters arising out of the assessment proceedings irrespective of whether they were raised or not by the assessee. With this amplification of the power, even the matters not agitated by the assessee before the DRP can also be considered for the purposes of enhancement. Accordingly, in principle, the DRP was entitled to embark upon the question of enhancement of the TP adjustments. However, on facts as the DRP did not give reasonable opportunity to the assessee, the matter has to be remanded to it for fresh consideration.

Transfer Pricing: Even business advances have to be benchmarked on Libor ALP

The assessee, an Indian company, gave loans of Rs. 15.65 crores to its AEs in USA, Singapore and Bahrain. It claimed that the said loans were “working capital advances” given for commercial consideration to secure business and that no interest was recoverable on it. The TPO applied the CUP method and determined the ALP of the advances at LIBOR plus 3% mark up. The DRP held that only inbound loans (ECBs) taken by the Indian entities from outside India could be benchmarked with LIBOR and that outbound loans had to be benchmarked on the interest rate prevailing in India on corporate bonds. It treated the advance as an unrated bond having very high risk and enhanced the assessment by directing the TPO to adopt 14% as the ALP rate. On appeal by the assessee, Held reversing the DRP:

The assessee’s argument that the non-charging of interest on the working capital advances to AEs from whom the assessee was getting good business was justified by commercial considerations and that no transfer pricing adjustment is warranted is not acceptable because the existence or non-existence of commercial consideration between the assessee and the AEs is not a required condition for applicability of the TP regulations Further, the advance was not the credit period extended to the AEs in respect of business transactions but was a transaction of advancing loans to the AEs which falls under the ambit of “international transaction” u/s 92B. In principle, the DRP is justified in its view that the ALP should be determined on the basis of the interest rate that would have been earned by the assessee by advancing loans to an unrelated third party (in India) such as a Fixed Deposit with the Bank. However, since LIBOR has been accepted by the Tribunal in other cases, the ALP should be determined on the basis of LIBOR + 2% (Siva Industries 59 DTR 182 (Che), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) referred).

S. 69C—If there is a dispute of the source of the expenditure, then addition can be made u/s.69C — Merely because labour charges are shown as outstanding cannot be a ground to make addition u/s.69C.

The assessee was carrying on business of civil construction contract work and labour contract. It filed its return of income declaring an income of Rs.14,29,579. In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had debited labour charges of Rs.1.10 crores in the P & L Account and in the balance sheet out of the said expenditure a sum of Rs.54,56,235 was shown as outstanding. The outstanding labour charges were for the months of Jan, Feb and March 2005. In response to the show cause notice issued by the AO asking the assessee to explain why outstanding labour charges/ wages should not be treated as unexplained, the assessee submitted that it was facing a financial crunch in the business and the break-up of monthly wages in respect of each type of labour like carpenter, mason, etc. was furnished. The AO, not being satisfied with the explanation furnished, added the amount of Rs.54,56,235 as unexplained expenditure u/s.69C.

Aggrieved the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

The Tribunal noted that nothing has been brought on record by the AO to show that the assessee has used the money which was not reflected in the books of account. It also noted that in the immediate next year the assessee has paid the outstanding wages/labour charges and also that in the assessment order for A.Y. 2006-07 the AO has discussed the issue. The Tribunal held that as per the language used by the Legislature in S. 69C, if there is a dispute of the source of the expenditure, then the addition can be made. Since the payment of outstanding wages has been accepted by the AO in the next year, hence no addition can be made u/s.69C of the Act. It also noted that it was not that the expenditure was bogus or non-genuine and the AO has also not examined any of the labourers to support his case. It held that merely because labour charges are shown as outstanding that cannot be a ground to make the addition u/s.69C.

The Tribunal deleted the addition and decided the ground in favour of the assessee.