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2009 (7) TMI 917
Issues Involved:
1. Validity of reopening of assessments u/s 147 read with section 148.
2. Computation of deduction on account of salary paid to partners u/s 40(b).
Summary:
Issue 1: Validity of Reopening of Assessments u/s 147 read with section 148
The assessee challenged the validity of reopening assessments for the years 2002-03, 2003-04, and 2004-05. The Assessing Officer (AO) had issued notices u/s 148 and made assessments u/s 147, restricting the deduction u/s 40(b) by excluding interest earned on bank deposits from book profits. The CIT(A) dismissed the assessee's challenge regarding the validity of reopening but allowed relief on merits. The Tribunal upheld the reopening of assessments, referencing the Supreme Court decision in Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500, which clarified that intimation u/s 143(1) does not preclude the AO's right to reopen assessments. The Tribunal found the reopening valid as the AO had not expressed any opinion on the issue during the original assessments.
Issue 2: Computation of Deduction on Account of Salary Paid to Partners u/s 40(b)
The core issue was whether the interest earned on bank deposits should be included in the book profits for computing the deduction u/s 40(b). The assessee argued that the interest was part of professional income, as the deposits were made from client advances, mandated by The Bombay High Court (Original Side) Rules. The Tribunal agreed, stating that the interest on such deposits is assessable under "Profits and gains of business or profession" and not "Income from other sources." This decision was supported by the Bombay High Court's ruling in Manilal Kher Ambalal & Co. v. A.G. Lulla, Seventh ITO [1989] 176 ITR 253, which confirmed that solicitors must deposit client funds in a separate account, and interest from such deposits is professional income. Consequently, the Tribunal upheld the CIT(A)'s decision to allow the deduction, dismissing the revenue's appeals.
Conclusion:
The Tribunal dismissed the cross-objections of the assessee regarding the validity of reopening assessments and upheld the CIT(A)'s decision on merits, confirming that interest earned on client account deposits is part of professional income for the purpose of computing deductions u/s 40(b). The revenue's appeals were dismissed.
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2009 (7) TMI 916
Issues Involved:
1. Assignment of Sales Tax Liability
2. Duty-Free Advance License (Duty Benefit)
Issue-wise Detailed Analysis:
1. Assignment of Sales Tax Liability:
The assessee filed a miscellaneous application pointing out mistakes in the Tribunal's order dated 26-5-2008. The Tribunal had previously expressed that the difference arising from assignment of the sales tax loan liability is not taxable under sections 41(1) or 28(iv) and that the amount treated by the CIT(A) as interest accruing to the assessee cannot be taxed since Ganjam had already been taxed on the income. However, the Tribunal's written order contradicted this view, confirming the CIT(A)'s decision and rejecting the assessee's arguments.
The Tribunal's findings stated that the benefit received by the assessee was not related to the remission of sales tax liability but was instead related to an agreement with Ganjam Trading Company (GTC). The Tribunal concluded that the liability of the assessee had not ceased and that the difference of Rs. 18,74,92,706 was taxable as income arising from an advance payment of Rs. 5,62,31,224. This was because the loan liability remained unchanged, and the payment by GTC on behalf of the assessee was considered interest income. The Tribunal held that this income should be taxed in the respective years, as the benefit arose from the advance payment.
2. Duty-Free Advance License (Duty Benefit):
The second issue involved the taxability of Rs. 80,75,513 as duty benefit from an advance license. The Tribunal had initially expressed that the duty benefit should be assessed in the year of utilization, not in the year of entitlement. However, the written order contradicted this by confirming the CIT(A)'s decision to assess the duty benefit in the year it was accounted for in the assessee's books.
The Tribunal's findings indicated that the assessee had accounted for the duty benefit as income in its books for the year under appeal. The Tribunal followed its earlier decision for the assessment year 1996-97, holding that the duty benefit was taxable in the year it was accounted for, regardless of whether it was received. The Tribunal concluded that the income was to be assessed in the year it was accounted for by the assessee.
Legal Analysis:
The Tribunal, upon reviewing the submissions and material on record, adjudicated both issues on merit. The Tribunal referenced the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. v. CIT, which supported the spreading of income over several years. The Tribunal held that the issues raised by the assessee were debatable and not mistakes apparent from the record. The Tribunal emphasized that section 254(2) of the Act does not allow for review or reversal of decisions on merit but only for rectification of obvious and patent mistakes.
The Tribunal cited several judicial precedents, including decisions from the Supreme Court and High Courts, to support its view that the issues raised by the assessee did not fall under the purview of section 254(2) of the Act. The Tribunal concluded that the issues were not errors apparent from the record and could not be rectified under section 254(2).
Conclusion:
The Tribunal dismissed the miscellaneous application, holding that the issues raised by the assessee were adjudicated on merit and did not constitute mistakes apparent from the record. The Tribunal emphasized that section 254(2) does not confer the power to review or reconsider decisions on merit, and the issues raised were beyond the scope of rectification under this provision.
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2009 (7) TMI 915
Revision u/s 263 - as per CIT Assessee claimed excess deduction u/s 10A on software units - Whether Order of the AO was prejudicial to the interest of revenue? - whether AO had allowed an excess deduction under section 10A without appreciating the fact that the appellant had two software undertakings and the figures considered by the ld. CIT were in respect of only one undertaking? - CIT u/s 263 has taken the total turnover of only one unit into consideration and has ignored the turnover of the second unit and cumulative deduction of both the units -
HELD THAT:- We find that the CIT has revised the assessment order u/s143(3) by issuing show-cause notice only with regard to not reducing the expenditure incurred in the foreign currency from the total export turnover while computing the deduction u/s 10A. But in the revision order, the assessment was set aside also on the other ground that some of the sale proceeds was yet to be received by the assessee.
The revision u/s 263 is not like the reopening of the assessment where once the assessment is reopened, entire assessment is open before the AO to be reconsidered in accordance with law. In the revision proceedings, the CIT cannot travel beyond the reasons given by him for revision in the show-cause notice. Therefore, we hold that the revision on the ground that part of the sale proceeds is yet to be received by the assessee is not tenable.
We find that section 10A is a special provision relating to newly established undertaking in trading zones and the clause (iv) of Explanation (2) of section 10A defines the export turnover, according to which, it is the consideration in respect of the export by the undertaking articles or things or computer software received in or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), i.e., within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf and it does not include freight, telecommunication charges or insurance charges attributable to the delivery of articles or things or computer software outside India. The other expenditure which can be reduced is the expenditure incurred in foreign exchange in providing the technical services outside India.
The nature of the expenditure incurred by the assessee is not in the nature of technical expenditure for providing the technical services outside India. Therefore, the assessee has correctly not reduced the same from the export turnover while computing the deduction u/s 10A. This view is also fortified by the decision of the ITAT, Bangalore in the case of Infosys Technologies (P.) Ltd.[2006 (4) TMI 447 - ITAT BANGALORE] and also ITAT, Hyderabad in the case of Patni Telecom (P.) Ltd.[2008 (1) TMI 452 - ITAT HYDERABAD-A]. Further these decisions also were already delivered when the assessment order was passed on 20-3-2006 and the view adopted by the AO is in consonance with the said decision as held by the Hon’ble Supreme Court in the case of Max India Ltd.[2007 (11) TMI 12 - SUPREME COURT] and Malabar Industrial Co. Ltd.[2000 (2) TMI 10 - SUPREME COURT].
When two different views existed when the Commissioner was passing the order, it had to be taken into account and the Commissioner has no jurisdictional power to revise u/s 263. In the result, the assessee’s appeal is allowed and the order of the AO u/s 143(3) is restored.
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2009 (7) TMI 914
Issues Involved:
1. Whether Dearness Allowance (DA) should be considered part of salary for computing perquisites under Rule 3 of the Income-tax Rules, 1962.
2. Whether the assessee is in default under section 201(1) of the Income-tax Act for short-deducting tax at source.
3. The impact of the Financial Adviser's order dated 20-5-2004 on the computation of salary and perquisites.
Detailed Analysis:
Issue 1: Dearness Allowance as Part of Salary for Perquisites
The primary issue in these appeals is whether DA should be considered part of salary for computing the perquisite value of accommodation provided to employees. The Assessing Officer (AO) argued that DA forms part of salary for retirement benefits like gratuity and leave encashment, and thus, should be included in salary for perquisite valuation under Rule 3 of the Income-tax Rules, 1962. The AO noted that other sister-concern companies were already including DA in salary for this purpose.
However, the CIT (Appeals) found that the term "retirement benefits" is not defined under the Income-tax Act and should include all benefits given at retirement. Since DA was not included in salary for all retirement benefits (specifically pension), it should not be considered part of salary for perquisite valuation. The CIT (Appeals) observed that only 50% of DA was merged with basic pay from 1-4-2004 as per the Financial Adviser's order and should be considered part of salary from that date onwards.
Issue 2: Assessee in Default under Section 201(1)
The AO held the assessee in default under section 201(1) for short-deducting tax at source by not including DA in salary. Interest was also charged under section 201(1A). The CIT (Appeals) disagreed, stating that the assessee had a bona fide estimate and followed guidelines from the head office, which did not include DA for computing pension, a key retirement benefit.
The Tribunal supported the CIT (Appeals), noting that the legal position at the relevant time did not consider the accommodation perk as taxable. Various judicial decisions supported this view, and any error in valuation was deemed bona fide, thus not warranting default status under section 201(1).
Issue 3: Impact of Financial Adviser's Order Dated 20-5-2004
The Financial Adviser's order stated that 50% of DA merged with basic pay from 1-4-2004 and should be counted for various purposes, including retirement benefits. The CIT (Appeals) concluded that this 50% of DA should be considered part of salary for computing perquisites from 1-4-2004 onwards, but not for the financial years 2001-02 to 2003-04.
Conclusion:
The Tribunal upheld the CIT (Appeals) decision, stating that for financial years 2001-02 to 2003-04, no part of DA should be treated as part of salary for computing perquisites under Rule 3. Consequently, the assessee was not in default for short-deducting tax at source during these years. The appeals were dismissed, affirming that the inclusion of DA in salary for perquisite valuation should only apply from 1-4-2004, following the Financial Adviser's order.
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2009 (7) TMI 913
Issues Involved:
1. Disallowance of bad debts for assessment years 2002-03 and 2003-04.
2. Additional ground for further allowance of bad debts for assessment year 2002-03.
Issue-wise Detailed Analysis:
1. Disallowance of Bad Debts for Assessment Years 2002-03 and 2003-04:
The assessee, a public sector undertaking engaged in banking for small industries, claimed bad debts of Rs. 84,70,66,503 for the assessment year 2002-03 and Rs. 178,23,55,838 for the assessment year 2003-04. The Assessing Officer (AO) disallowed these claims, arguing that the debts originated from periods when the assessee's income was exempt from tax under section 50 of the Small Industries Development Bank of India (SIDBI) Act, 1989. The AO relied on CIT v. S.S. Thiagarajan [1981] 129 ITR 115 and CIT v. Hariprasad & Co. (P.) Ltd. [1975] 99 ITR 118.
The assessee argued that the business itself was not exempt, only the income, profits, and gains were. They cited several judicial precedents, including CIT v. Karamchand Premchand Ltd. [1960] 40 ITR 106 and Royal Calcutta Turf Club v. CIT [1983] 144 ITR 709, to support their claim that bad debts should be deductible as they were incurred in the ordinary course of banking business.
The Tribunal agreed with the assessee, stating that the business was not exempt, only the income was, and thus the bad debts were allowable under section 36(1)(vii) read with section 36(2) of the Income-tax Act. The Tribunal also noted that the assessee satisfied the conditions of section 36(2) as the debts represented money lent in the ordinary course of banking.
2. Additional Ground for Further Allowance of Bad Debts for Assessment Year 2002-03:
The assessee raised an additional ground, claiming that the actual bad debts written off amounted to Rs. 102.43 crores, not Rs. 84.71 crores, and sought an additional allowance of Rs. 17.72 crores. The Tribunal rejected this additional ground, noting that the AO had only disallowed Rs. 84.71 crores and not Rs. 102.43 crores. Furthermore, the assessee did not obtain the necessary permission from the Committee on Disputes (COD) to raise this additional ground.
Conclusion:
The Tribunal allowed the assessee's claim for bad debts for both assessment years, directing the AO to compute the deductions in accordance with section 36(1)(vii) and section 36(1)(viia). The additional ground for further allowance of Rs. 17.72 crores was rejected due to lack of COD permission and because the AO had not disallowed this amount. The appeals were partly allowed.
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2009 (7) TMI 912
Issues Involved:
1. Reopening of assessment under section 147.
2. Disallowance under section 36(1)(viii) due to withdrawal from reserves.
3. Deduction under section 36(1)(viii) for lease rentals.
4. Disallowance under section 36(1)(viia)(c).
5. Interdependence of deductions under sections 36(1)(viia)(c) and 36(1)(viii).
6. Opportunity to rectify shortfall in provisions for bad and doubtful debts and reserves.
7. Levy of interest under sections 234B, 234C, and 234D.
Detailed Analysis:
1. Reopening of Assessment under Section 147:
For the assessment years 1997-98 and 1998-99, the assessee challenged the validity of re-assessment proceedings initiated under section 147. The tribunal found that the Assessing Officer had recorded reasons for reopening the assessments, citing that the assessee had overstated deductions and understated total income, and had not fully disclosed material facts in the original assessment. Therefore, the reopening was upheld as valid. For the assessment year 1999-2000, the Committee of Disputes (COD) did not grant permission to pursue this issue.
2. Disallowance under Section 36(1)(viii) Due to Withdrawal from Reserves:
For the assessment year 1997-98, the issue of disallowance under section 36(1)(viii) due to the withdrawal from reserves was withdrawn by the assessee following directions from the Authority for Advance Rulings (AAR). The tribunal noted that this issue was decided in favor of the assessee by the AAR.
3. Deduction under Section 36(1)(viii) for Lease Rentals:
The tribunal allowed the deduction under section 36(1)(viii) for lease rental income for all the relevant assessment years. This decision was based on the precedent set in the assessee's own case for the subsequent assessment years 2001-02 and 2002-03, where the deduction was allowed by the tribunal.
4. Disallowance under Section 36(1)(viia)(c):
For the assessment years 1997-98, 1998-99, and 1999-2000, the disallowance under section 36(1)(viia)(c) was contested. The tribunal noted that the AAR had ruled in favor of the assessee, stating that debiting in the appropriation account does not disqualify the deduction. This view was also supported by the ITAT Delhi in the case of Power Finance Corporation Ltd. Consequently, the tribunal decided in favor of the assessee for these years.
5. Interdependence of Deductions under Sections 36(1)(viia)(c) and 36(1)(viii):
The assessee argued that deductions under sections 36(1)(viia)(c) and 36(1)(viii) are interdependent. The tribunal disagreed, stating that each deduction should be computed separately as per the provisions of the respective sections. The tribunal directed the Assessing Officer to recompute the deductions accordingly.
6. Opportunity to Rectify Shortfall in Provisions for Bad and Doubtful Debts and Reserves:
The assessee contended that it should be allowed to make good any shortfall in provisions for bad and doubtful debts and reserves. The tribunal found no merit in this contention, noting that the assessee had ample opportunity during the assessment proceedings to rectify any such shortfall. This ground was thus rejected for all relevant assessment years.
7. Levy of Interest under Sections 234B, 234C, and 234D:
The tribunal did not specifically address the issue of levy of interest under sections 234B, 234C, and 234D in detail, indicating that the primary focus was on the substantive issues related to deductions and reopening of assessments.
Conclusion:
The appeals were partly allowed, with the tribunal upholding the reopening of assessments under section 147, allowing deductions under section 36(1)(viii) for lease rentals, and directing the Assessing Officer to recompute deductions under sections 36(1)(viia)(c) and 36(1)(viii) separately. The tribunal rejected the assessee's contention regarding the opportunity to rectify shortfalls in provisions and reserves.
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2009 (7) TMI 911
Addition based on income surrendered during survey - Statement recorded during survey u/s 133A relied upon but later on retracted without any corroborating evidence at all - construction cost of building unexplained - real owner - difference in stock found during the survey - CIT(A) confirmed the addition.
HELD THAT:- Nothing was found during the course of survey to indicate that assessee has either incurred himself any expenditure on the construction of building nor that he has advanced the money to his brother for construction of the building, which was not found to be recorded in the books of account. Even the CIT(A) while upholding the addition on account of surrender made on account of investment in building did not refer the matter to the DVO to find out if any excess investment was made in the building as compared to the investment shown by brother of the assessee who was separately assessed.
Merely on the basis of statement having been recorded, no addition can be made unless the same can be corroborated by any material either found during the course of survey or subsequently brought on record by the department while framing the assessment. Even appellate proceedings are extension of the assessment proceedings and the CIT(A) has got co-terminus powers to do what the AO has failed to do.
The fact that surrender on account of investment in building was not recorded on the day of survey, but the assessee was subsequently called to the office on the next date and he was forced to surrender the amount itself indicate that undue influence was exercised on the assessee to surrender the amount. As in the case of Paul Mathews & Sons v. CIT [2003 (2) TMI 25 - KERALA HIGH COURT] held that statement of assessee recorded during the course of survey under provisions of section 133A(3)(iii) can be said to be useful or relevant to the assessment proceedings only in the circumstances when there is a material on record to prove through the existence of any of the activities on the basis of which disclosure is stated to be made.
It was categorically mentioned by the Hon’ble High Court that statement recorded u/s 133A cannot be given evidentiary value as such evidentiary value is not attached with the provisions of section 133A. The only basis for addition as per AO was the statement of the assessee without any corroborative material or documentary evidence on record. Hon’ble Madras High Court in the case of CIT v. S. Khandar Khan Chand [2007 (7) TMI 182 - MADRAS HIGH COURT] , observed that where assessee has admitted suppressed income but there was no documentary evidence in possession of the department, no addition can be made on the basis of such statement.
The Hon’ble High Court reviewed all the available judgments on the point along with CBDT Instructions dated 10-3-2003, and went to the extent of holding that section 133A does not empower any IT authorities to examine any person on oath and hence, such statement has no evidentiary value and any admission made during such statement cannot by itself be made the basis for addition.
The AO has also recorded a wrong fact to the effect that advance tax payment was made by the assessee on the surrendered amount. However, neither any tax was paid by the assessee nor the amount of surrender in the investment in the building was offered for tax in the return of income filed after the survey. Thus, it is crystal clear that the AO has made addition contrary to the Instruction of CBDT dated 10-3-2003 and also against clear ratio of the decision of Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd.[1971 (9) TMI 64 - SUPREME COURT].
Therefore, the addition made by the lower authorities merely on the basis of statement recorded during survey and thereafter, without bringing any corroborative material on record, was devoid of any merits. We are, therefore inclined to hold that no addition was warranted on account of mere surrender taken during survey by exercising undue influence and which was retracted while filing the return after survey.
In the result, the appeal of the assessee is allowed.
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2009 (7) TMI 910
Issues Involved:
1. Exemption u/s 10(5B) of the Income-tax Act.
2. Reduction of addition on account of reimbursement of living expenses.
Summary:
Issue 1: Exemption u/s 10(5B) of the Income-tax Act
The revenue appealed against the CIT(A)'s order allowing an exemption of Rs. 20,66,400 u/s 10(5B) of the Income-tax Act. The Tribunal initially dismissed the appeal, granting the exemption, but the High Court remitted the matter back for fresh consideration of whether the assessee qualified as a "technician" u/s 10(5B). The assessee, employed by M/s. Rieter India (P.) Ltd., claimed exemption based on his specialized knowledge and experience in textile technology. The Assessing Officer (AO) rejected the claim due to lack of documentary evidence of technical qualifications. However, the CIT(A) accepted the assessee's bio-data, affidavit, and job responsibilities as sufficient proof of his technical expertise, granting the exemption. The Tribunal, upon review, upheld the CIT(A)'s decision, noting that specialized knowledge and experience could be demonstrated through circumstantial evidence and practical experience, not necessarily through formal certificates.
Issue 2: Reduction of Addition on Account of Reimbursement of Living Expenses
The revenue also contested the CIT(A)'s reduction of the AO's addition from Rs. 2 lakhs to Rs. 20,000 on account of reimbursement of living expenses. The Tribunal did not find any specific discussion or detailed reasoning in the provided text regarding this issue, implying that the primary focus was on the exemption u/s 10(5B).
Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to grant the exemption u/s 10(5B) and reduce the addition on account of living expenses reimbursement. The Tribunal emphasized the practical demonstration of technical expertise over formal qualifications in determining eligibility for the exemption.
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2009 (7) TMI 909
Issues Involved:
1. Classification of compensation on non-pari passu shares as dividend income.
2. Entitlement to the benefit of indexation for long-term capital gain/loss under section 48 of the Income-tax Act.
Issue-Wise Detailed Analysis:
1. Classification of Compensation on Non-Pari Passu Shares as Dividend Income:
The assessee, a company incorporated in the USA and registered with SEBI as a Foreign Institutional Investor (FII), filed its return of income for the assessment year 1998-99. The Assessing Officer included compensation of Rs. 99,260 received on non-pari passu shares as dividend income. The CIT(A) upheld this classification, leading the assessee to appeal to the Tribunal.
The Tribunal noted that the concept of compensation on non-pari passu shares arises when shares are entitled to a proportionate dividend due to their allotment date. In the secondary market, these shares are not quoted separately, and the buyer expects a full year's dividend. Compensation is paid to adjust the differential dividend as per SEBI guidelines.
In a similar case (Emerging Markets Growth Fund v. Jt. DIT), the Tribunal held that compensation received on non-pari passu shares from brokers is a capital receipt, not taxable as 'income from other sources,' and should reduce the cost of new shares purchased. The Tribunal followed this precedent, ruling that the compensation of Rs. 99,260 is a capital receipt not chargeable to tax, thereby reducing the cost of acquisition of the shares. Consequently, ground No. 1.2 did not require consideration.
2. Entitlement to the Benefit of Indexation for Long-Term Capital Gain/Loss:
The assessee claimed the benefit of indexation on the cost of acquisition for computing capital loss, which was initially rejected by the CIT(A) based on section 115AD(3) of the Act. The assessee argued that section 115AD is meant to benefit FIIs and should not be more onerous than other provisions. They contended that section 115AD does not prohibit a FII from availing benefits under section 112(1)(c)(ii) of the Act, and where two options are available, the one with the least tax burden should be chosen.
The Departmental Representative countered that section 115AD is a specific code for taxing capital gains of FIIs, overriding the general provisions of section 48. The Tribunal considered the submissions and the legislative intent behind sections 48 and 112, which provide for the computation of capital gains and prescribe the rate of tax on long-term capital gains, respectively.
Section 115AD, introduced to provide tax incentives for FIIs, specifies that the first and second provisos to section 48 do not apply for computing capital gains from the transfer of securities by FIIs. The Tribunal referenced the AAR's decision in Universities Superannuation Scheme Ltd., which held that section 115AD is a self-contained code for FIIs, and they cannot opt out of it to claim benefits under sections 48 and 112.
The Tribunal agreed with the AAR's reasoning, concluding that FIIs must be assessed under section 115AD for capital gains/losses and cannot claim indexation benefits under section 48. Thus, ground No. 2 of the assessee was dismissed.
Conclusion:
The appeal by the assessee was partly allowed. The Tribunal ruled that compensation on non-pari passu shares is a capital receipt, not chargeable to tax, and should reduce the cost of acquisition of shares. However, the assessee's claim for indexation benefits under section 48 was dismissed, affirming that FIIs must be assessed under section 115AD without the benefit of indexation.
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2009 (7) TMI 908
Issues Involved:
1. Set-off of short-term capital loss against short-term capital gains.
2. Computation of short-term capital gains under different tax rates.
3. Application of Section 70 of the Income-tax Act.
4. Interest under Section 244A and granting of refund.
Detailed Analysis:
1. Set-off of Short-term Capital Loss Against Short-term Capital Gains:
The primary issue revolves around whether the assessee can set off short-term capital loss arising from transactions subject to securities transaction tax against short-term capital gains from transactions not subject to such tax. The assessee, a tax resident of Ireland and registered as a Foreign Institutional Investor, declared short-term capital gains and losses for the assessment year 2005-06. The Assessing Officer disapproved of the assessee's method of setting off losses, arguing that the computation should separately account for gains and losses under sections 111A and 115AD before arriving at the net result.
2. Computation of Short-term Capital Gains Under Different Tax Rates:
The Assessing Officer noted that Section 111A, effective from 1-4-2005, applied a 10% tax rate on short-term capital gains from transactions subject to securities transaction tax, while Section 115AD applied a 30% tax rate on gains from transactions before 1-10-2004. The Officer concluded that the assessee incorrectly set off post-30-9-2004 losses against pre-30-9-2004 gains to reduce tax liability. The Officer recalculated the gains, taxing pre-30-9-2004 gains at 30% and post-30-9-2004 gains at 10%.
3. Application of Section 70 of the Income-tax Act:
The assessee argued that Section 70(2) allows for the set-off of short-term capital losses against gains from any other short-term capital asset, asserting the option to choose the set-off method. The Departmental Representative countered that the assessee was attempting to shift income to a lower tax category, which was not permissible. The Tribunal examined the language of Section 70, noting that the provision allows the assessee to set off losses from one transaction against gains from any other transaction, suggesting that the choice rests with the assessee. The Tribunal emphasized that the computation of capital gains under Section 48 is distinct from the application of tax rates under Sections 111A and 115AD.
4. Interest Under Section 244A and Granting of Refund:
Grounds related to interest under Section 244A and the granting of refunds were admitted to be consequential and thus dependent on the outcome of the primary issue.
Conclusion:
The Tribunal concluded that the authorities erred in rejecting the assessee's computation of short-term capital gains and upheld the assessee's method of set-off. The Tribunal allowed the appeal, overturning the impugned order, and noted that the issues regarding interest and refunds were consequential. The decision underscores the assessee's discretion in setting off short-term capital losses against gains under Section 70, provided the overall computation of taxable income remains compliant with the Act.
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2009 (7) TMI 907
Issues Involved:
1. Taxability of profits u/s 40BBB.
2. Consistency in the method of computing taxable profit.
3. Applicability of the rule of consistency and the principle of res judicata.
4. Interpretation of section 44BBB and its precedence over normal provisions.
5. Set off of losses u/s 70 in conjunction with section 44BBB.
Summary:
1. Taxability of Profits u/s 40BBB:
The primary issue in this appeal concerns the taxability of the profits of the assessee, a German company, u/s 40BBB. The assessee had set up a branch office in India and entered into an agreement with NHPC for a project. The assessee offered 10% of the receipts as taxable profits and claimed losses incurred by the branch office against this income. The Assessing Officer (AO) observed that the assessee had inconsistently applied the deeming provisions and normal provisions of the Act, and thus, computed the income on a net basis as per section 44BBB(2).
2. Consistency in the Method of Computing Taxable Profit:
The CIT (Appeals) upheld the AO's order, emphasizing that the assessee had consistently disclosed profit on a net basis in previous years and had no valid reason for changing the method to a gross basis in the current year. The CIT (Appeals) cited the rule of consistency and the judgment of the Delhi High Court in CIT v. A.R.J. Security Printers [2003] 264 ITR 276, which supports maintaining consistency in income-tax proceedings unless fresh facts are found.
3. Applicability of the Rule of Consistency and the Principle of Res Judicata:
The CIT (Appeals) and the AO relied on the principle of consistency and the Supreme Court's decision in Radhasoami Satsang v. CIT [1992] 193 ITR 321, which states that earlier decisions on the same question should not be reopened unless new facts emerge. The CIT (Appeals) concluded that the assessee was not justified in changing the method of profit computation without any change in facts and circumstances.
4. Interpretation of Section 44BBB and Its Precedence Over Normal Provisions:
The Tribunal noted that section 44BBB provides a special provision for computing profits of foreign companies engaged in turnkey power projects. This section, being a non obstante provision, overrides sections 28 to 44AA. The Tribunal held that the AO cannot force the system followed in earlier years if the assessee opts for the presumptive tax provision u/s 44BBB(1). The Tribunal emphasized that the mandate of section 44BBB must be followed, and the AO cannot ignore these provisions on the pretext of consistency.
5. Set Off of Losses u/s 70 in Conjunction with Section 44BBB:
The Tribunal also addressed the assessee's contention regarding the set off of losses u/s 70, which is not overridden by section 44BBB. The Tribunal directed the AO to consider the decisions in CIT Alcatel [1993] 47 ITD 275 (Delhi) and Anchor Line Ltd. v. ITO [1990] 32 ITD 403 (Bom.) for setting off losses against the profits computed u/s 44BBB.
Conclusion:
The Tribunal reversed the orders of the CIT (Appeals) and the AO, directing the AO to determine the income of the assessee as per the provisions of section 44BBB and to consider the set off of losses. The appeal of the assessee was allowed.
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2009 (7) TMI 906
Issues Involved:
1. Whether the assessee had a Permanent Establishment (PE) in India.
2. Nature of payments (distribution fee) received by the assessee under the Distribution Agreement (DA).
Issue-wise Detailed Analysis:
1. Whether the assessee had a Permanent Establishment (PE) in India:
The revenue's primary contention was that the assessee had a PE in India through its Indian subsidiary, RIPL, under Article 5 of the India-UK DTAA. The Assessing Officer (AO) argued that RIPL acted as a dependent agent of the assessee, thus constituting a PE in India. The AO also considered RIPL to have the authority to negotiate and enter into contracts on behalf of the assessee, thereby fulfilling the conditions of Article 5(4) of the DTAA. However, the AO did not provide detailed reasoning for this conclusion.
The CIT(A) examined whether RIPL could be considered a dependent or independent agent under Article 5(4) and 5(5) of the DTAA. The CIT(A) concluded that RIPL was not an independent agent since its activities were almost wholly related to the assessee, but also held that RIPL did not satisfy the conditions to be deemed a PE under Article 5(4). Specifically, RIPL did not have the authority to negotiate and enter into contracts for the assessee, did not maintain a stock of goods for the assessee, and did not habitually secure orders for the assessee.
The Tribunal noted that the CIT(A) had contradictory findings regarding RIPL's status as an agent. The CIT(A) initially stated that RIPL was not a PE under Article 5(4) or 5(5), but later suggested that RIPL could be considered an independent agent under Article 5(5). This inconsistency warranted a fresh examination by the AO.
The Tribunal also considered the possibility of the assessee having a Service PE under Article 5(2)(k) of the DTAA, which was not addressed by the AO. The CIT(A) for the subsequent assessment year (1998-99) had found that the assessee had a Service PE in India due to the deputation of employees who rendered managerial services in India. The Tribunal noted that similar facts existed for the assessment year 1997-98, with evidence of the assessee's employee being deputed to work in India.
Given the prima facie evidence and the need for a thorough examination, the Tribunal remanded the matter to the AO for fresh consideration of whether the assessee had a PE in India under Article 5(2)(k) and 5(5) of the DTAA.
2. Nature of payments (distribution fee) received by the assessee under the Distribution Agreement (DA):
The CIT(A) had determined that the distribution fee paid under the DA was not royalty or fees for technical services (FTS) but constituted business profits. The revenue did not challenge this finding in the appeal. Therefore, the Tribunal did not address this issue further.
Conclusion:
The Tribunal remanded the matter to the AO for fresh consideration regarding the existence of a PE of the assessee in India under Article 5(2)(k) and 5(5) of the India-UK DTAA. The appeal of the revenue was treated as allowed for statistical purposes.
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2009 (7) TMI 905
Issues:
1. Taxability of pick-up and drop facility as a taxable perquisite.
2. Tax treatment of conveyance allowance and pick-up/drop facility expenditure.
3. Default status of the appellant for not deducting tax at source under section 192.
Issue 1: Taxability of pick-up and drop facility as a taxable perquisite
The case involved a company providing pick-up and drop facilities to its employees in addition to conveyance allowance. The Assessing Officer treated the additional expenditure on transportation as a taxable perquisite subject to TDS. The company argued that the pick-up and drop facility should not be considered a taxable perquisite under section 17(2) of the Income-tax Act, citing relevant provisions and amendments. The company contended that the facility provided was not in lieu of or in addition to the conveyance allowance. The Tribunal agreed, emphasizing that the transportation facilities from residence to office and vice versa were not perquisites within the meaning of the Act, and thus, no TDS was deductible by the company. The Tribunal also highlighted that the value of such perquisite could not be determined individually for each employee, following precedents where computation machinery failure led to non-taxability.
Issue 2: Tax treatment of conveyance allowance and pick-up/drop facility expenditure
The Assessing Officer calculated the tax liability on the total transport charges incurred by the company, leading to a demand for tax and interest under section 201(1A) of the Act. The CIT(A) partially upheld the order but recognized that not all employees utilized the facilities and many fell below the taxable limit. The Tribunal noted that the conveyance allowance was distinct from the pick-up and drop facilities, which were not taxable perquisites under section 17(2). Relying on previous decisions, the Tribunal held that the value of the perquisite attributable to each employee could not be determined, thus supporting the non-taxability of the facilities. Consequently, the appeal of the company was allowed.
Issue 3: Default status of the appellant for not deducting tax at source under section 192
The Assessing Officer treated the company as a defaulter for not deducting TDS on the additional expenditure related to transportation facilities provided to employees. However, the Tribunal, based on the non-taxability of the facilities as perquisites, concluded that no TDS was required. The Tribunal's decision to allow the appeal of the company also negated the default status imposed by the Assessing Officer, highlighting the company's compliance with the relevant provisions of the Income-tax Act.
This judgment clarifies the tax treatment of pick-up and drop facilities provided by companies to employees, distinguishing them from conveyance allowances and emphasizing the non-taxability of such facilities as perquisites under specific provisions of the Income-tax Act. The decision underscores the importance of considering the nature of benefits granted to employees and the applicability of tax deductions in line with the statutory provisions and judicial precedents.
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2009 (7) TMI 904
Issues:
1. Disallowance of deductions claimed under section 80-IA of the Income-tax Act, 1961.
2. Disallowance and addition of expenditure incidental to business into income.
Analysis:
Issue 1 - Disallowance of deductions under section 80-IA:
The assessee, engaged in infrastructure development, claimed exemption under section 80-IA for a specific amount. The Assessing Officer disallowed the claim, stating that the work undertaken did not qualify as developing a new infrastructure facility as required by the Act. The CIT(A) upheld this decision, emphasizing that the activity was merely improving an existing facility, not creating a new one. The tribunal found that the agreement with the West Bengal Government focused on strengthening an existing road, leading to the conclusion that it did not constitute a new infrastructure facility. However, the tribunal highlighted that the term 'new' could also imply 'renewed' and referenced legal precedents to support a broader interpretation. Consequently, the tribunal remitted the matter to the Assessing Officer for a fresh decision, instructing a detailed examination of the work carried out under the contract to determine if it met the criteria for a new infrastructure facility.
Issue 2 - Disallowance and addition of incidental expenditure:
The second ground of disallowance and addition of expenditure incidental to business was not pressed by the assessee and was rejected. As this issue was not pursued, no further analysis or decision was provided by the tribunal.
In a separate appeal regarding the concealment penalty, the tribunal remitted the matter back to the Assessing Officer in line with the decision on the assessment proceedings. Both appeals filed by the assessee were treated as allowed for statistical purposes, pending further assessment and decision by the tax authorities.
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2009 (7) TMI 903
Issues Involved:
1. Disallowance of entrance fee paid to Delhi Golf Club.
2. Disallowance of pre-operative expenses.
3. Disallowance of cost of software.
4. Disallowance of commission paid to Direct Selling Agent (DSA).
Summary:
1. Disallowance of Entrance Fee Paid to Delhi Golf Club:
The first ground of appeal concerns the disallowance of Rs. 60,000 as entrance fee paid to Delhi Golf Club. The Assessing Officer (AO) considered this a capital expenditure, providing enduring advantage. The CIT(A) upheld this view, deeming the expenditure personal. However, the Tribunal, referencing the Delhi High Court's decision in CIT v. Samtel Color Ltd., held that the expenditure on corporate membership is revenue in nature and thus allowable.
2. Disallowance of Pre-Operative Expenses:
The second issue involves the disallowance of Rs. 1,11,70,464 as pre-operative expenses. The AO noted that the assessee was incorporated on 1-5-1997 but received NBFC registration from RBI on 25-9-1997. Expenses prior to this date were treated as capital in nature and only allowable u/s 35D. The CIT(A) agreed, stating the business could not generate income before RBI registration. The Tribunal upheld this view, emphasizing that expenses incurred before the business was carried on are not allowable u/s 37.
3. Disallowance of Cost of Software:
The third issue is the disallowance of Rs. 35,91,227 for software costs, treated as capital expenditure by the AO with depreciation allowed at 25%. Both counsels agreed that the nature of this expenditure should be examined per the guidelines in Amway India Enterprises v. Dy. CIT. The Tribunal restored the matter to the AO for re-examination.
4. Disallowance of Commission Paid to Direct Selling Agent (DSA):
The fourth issue involves the disallowance of Rs. 48,38,636 as commission paid to DSAs. The AO treated this as deferred revenue expenditure, not allowable in one year, referencing Madras Industrial Investment Corpn. Ltd. v. CIT. The CIT(A) upheld this view. The Tribunal noted that the commission is based on sourcing hirers and not directly linked to the period of financing. However, due to insufficient material, the Tribunal remitted the matter back to the AO to examine the facts afresh and determine the allowability based on the nature of income receivable by the assessee.
Conclusion:
The appeal is partly allowed, with specific issues remitted back to the AO for further examination.
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2009 (7) TMI 902
Issues Involved:
1. Treatment of waiver of outstanding principal amount of loan as subsidy, grant, or reimbursement u/s 43 Explanation 10 of the Income-tax Act, 1961.
2. Confirmation of disallowance of depreciation by the Assessing Officer and CIT(A).
Summary:
Issue 1: Treatment of Waiver of Loan
The primary issue in this appeal is whether the waiver of the outstanding principal amount of loan by Wipro Finance Ltd. should be treated as a subsidy, grant, or reimbursement towards the cost of fixed assets as envisaged u/s 43 Explanation 10 of the Income-tax Act, 1961. The assessee argued that the loan was obtained for working capital requirements and not for purchasing plant and machinery. The Assessing Officer and CIT(A) inferred that the loan waiver should reduce the actual cost of the plant and machinery, thereby affecting the depreciation calculation. However, the Tribunal observed that there was no direct or indirect nexus between the loan taken and the purchase of plant and machinery. The loan was not intended to meet the cost of the assets, and the waiver of the loan does not fall under the terms "subsidy," "grant," or "reimbursement" as defined in Explanation 10 of section 43(1).
Issue 2: Disallowance of Depreciation
The Assessing Officer disallowed 25% of the depreciation on Rs. 86,02,061 by reducing this amount from the cost of plant and machinery, which was confirmed by the CIT(A). The Tribunal, however, concluded that the waiver of the loan by Wipro Finance Ltd. could not be related to the purchase of plant and machinery and thus should not reduce the actual cost for the purpose of calculating depreciation. The Tribunal emphasized that the waiver of the loan is not equivalent to a subsidy, grant, or reimbursement and does not affect the actual cost of the asset.
Conclusion:
The appeal filed by the assessee is allowed, and the waiver of the loan amounting to Rs. 86,02,061 should not be treated as a subsidy, grant, or reimbursement towards the cost of fixed assets u/s 43 Explanation 10 of the Income-tax Act, 1961. Consequently, the disallowance of depreciation by the Assessing Officer and CIT(A) is not justified.
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2009 (7) TMI 901
Income from speculation business - Treatment of profit on sale of shares - capital gain - HELD THAT:- The assessee in his individual capacity carries on business of jewellery. Apart from said business, the assessee invested in shares and treats shares as investment in his books of account. This itself manifests the intention of the assessee as to whether he proposed into dealing in shares or earn dividend and profit out of such investment.
Here the assessee has been holding the shares by taking delivery and making full payment for such investment. In such circumstances, the transactions are to be treated as giving rise to the capital gain and cannot be branded as trading in shares. What is relevant is the intention of the assessee himself at the time of making investment so as to determine whether the transaction was for dealing in shares or making investment for earning dividend and appreciation from such investment. The total number of shares dealt in respect of long-term portfolio is only 5. This cannot be considered as voluminous transaction. Therefore, this transaction in shares cannot be said to be with intention to deal in such shares. Rather the transactions were with intention of earning appreciation from such shares. Therefore, the same are assessable as capital gain and not as profits and gains of business. We, therefore, uphold the orders of the learned CIT(A).
In the result, both the appeals are dismissed.
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2009 (7) TMI 900
Issues Involved:
1. Deleting the disallowance of foreign exchange fluctuation loss.
2. Deleting the addition under section 14A of the Act.
3. Inclusion of excise duty in total turnover for deduction under section 80HHC.
4. Exclusion of turnover of unit exempted under section 10A from total turnover for deduction under section 80HHC.
5. Excluding 100% interest income, commission, and rent while computing deduction under section 80HHC.
6. Allocation of expenses to the section 10A unit.
Issue-wise Detailed Analysis:
1. Deleting the Disallowance of Foreign Exchange Fluctuation Loss:
The assessee restated the values of debtors and import invoices due to foreign exchange fluctuation as of 31-3-2004, resulting in a decrease in the value of debtors and an enhancement of import invoices. The Assessing Officer disallowed the claim, treating it as unascertained liabilities/notional losses. On appeal, the CIT(A) allowed the claim, following the ITAT decision in Oil & Natural Gas Corpn. Ltd. v. Dy. CIT. The Tribunal upheld this decision, citing the Supreme Court's ruling in CIT v. Woodward Governor India (P.) Ltd., which held that losses due to foreign exchange fluctuation as of the balance sheet date are allowable under section 37(1) of the Act. The Assessing Officer was directed to delete the addition.
2. Deleting the Addition under Section 14A of the Act:
The Assessing Officer disallowed 20% of the dividend income, arguing that the assessee had not provided evidence to show no expenses were incurred in earning the dividend income. The CIT(A) deleted the addition, noting that the Assessing Officer failed to prove a nexus between the expenses and the income. The Tribunal set aside the matter to the Assessing Officer, instructing to re-examine the claim in light of the ITAT Special Bench decision in ITO v. Daga Capital Management (P.) Ltd., and to compute the disallowance as per Rule 8D of the Income-tax Rules, 1962.
3. Inclusion of Excise Duty in Total Turnover for Deduction under Section 80HHC:
The Assessing Officer included excise duty and customs supervision charges in the total turnover while computing the deduction under section 80HHC. The CIT(A) deleted the addition, following his decision for the previous year. The Tribunal upheld this, referencing the Supreme Court's decision in CIT v. Lakshmi Machine Works, which held that excise duty and sales tax do not constitute turnover and should not be included in total turnover for section 80HHC purposes.
4. Exclusion of Turnover of Unit Exempted under Section 10A from Total Turnover for Deduction under Section 80HHC:
The Assessing Officer included the turnover of the exempted unit in the total turnover for computing the deduction under section 80HHC. The CIT(A) directed the exclusion of the exempted unit's turnover, agreeing with the assessee that the turnover of a unit exempt under section 10A should not be included. The Tribunal, however, restored the Assessing Officer's order, noting interlacing of funds and common management between the units and the absence of specific provisions in sections 80HHC or 10A to exclude such turnover.
5. Excluding 100% Interest Income, Commission, and Rent while Computing Deduction under Section 80HHC:
The Assessing Officer excluded interest, commission, and rent while computing the deduction under section 80HHC. The CIT(A) allowed relief based on ITAT's decision for an earlier year. The Tribunal set aside the issue to the Assessing Officer, instructing to examine the nature of interest income in light of the Delhi High Court decision in CIT v. Shri Ram Honda Power Equip. The Assessing Officer was directed to verify whether the commission and rental income are assessable as business income or under 'other sources' and to adjust the deduction computation accordingly.
6. Allocation of Expenses to the Section 10A Unit:
The Assessing Officer allocated common expenses between the 10A unit and the non-10A unit based on their turnover ratio, resulting in a reduction of the 10A unit's profit. The CIT(A) upheld this allocation. The Tribunal found no infirmity in this method, noting the absence of evidence from the assessee to demonstrate the allocation was unjustified and upheld the CIT(A)'s decision.
Conclusion:
The appeal by the Revenue was partly allowed, and the cross-objection by the assessee was dismissed.
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2009 (7) TMI 899
Whether Tribunal was justified in declining to admit the additional ground regarding charging of interest under section 234B of Income-tax Act, 1961 – Held that:- it is pure question of law - It was a plea, which could be allowed to be raised by the assessee in their appeal before the Tribunal notwithstanding the fact that it was not raised by them before the lower authorities - Tribunal was not justified when it did not allow the assessee to admit the additional ground in their memo of appeal and to urge the same in their appeal regarding charging of interest under section 234B of the Income-tax Act before the Tribunal
Whether a receipt is capital or income - payment made by the foreign collaborator to the assessee - foreign collaborator had granted to the assessee non-exclusive right to use the technical know-how - non-exclusive licence was granted to the assessee on payment of Rs. 20 lakhs in three instalments and on payment of recurring royalty on annual basis for three years – Held that:- it was essentially in the nature of compensation paid to the assessee to adjust the relations between the parties, which had become strained on account of committing breaches by the parties as against each other in execution of the agreement. If the original agreements did not create any capital asset or advantage of enduring nature in favour of the assessee due to several restrictions and limitations in the agreement while using the technical know-how then as necessary corollary consequent upon termination of such agreement, the amount received by the assessee from their foreign collaborator too did not create any asset of capital nature nor created advantage of enduring nature in favour of the assessee so as to entitle the assessee to claim exemption from payment of tax on the said sum as capital receipt.
Contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period, and in this respect, it differs from an agency agreement – it is revenue receipt in the hands of the assessee and was liable to be assessed as revenue receipt.
Mercantile system of accounting - accrual of income - held that:- since in this case a right to receive accrued to the assessee on November 22, 1991, which also included a right to receive even the second instalment and hence, its taxability in the hands of the assessee could not be postponed till the date of its actual receipt, i.e., up to November 30, 1992. In other words, it had to be taxed in the hands of the assessee as if received on November 22, 1991, i.e., the date on which agreement was executed. Since, this date fell in the assessment year 1992-93 and hence, it was rightly taxed by the Assessing Officer in the assessment year 1992-93.
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2009 (7) TMI 898
Advertisement services- The applicant is providing the service of advertising agency. The applicant is procuring advertisement and arranges the space in media. Department made a demand of service tax. Held that- As the appellant is making arrangements for display of the advertisement in the media at a particular time prima facie it is not a fit case for total waiver of amount of service tax. Thus direct to pre-deposit the amount.
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