TMI Tax Updates - e-Newsletter
November 10, 2014

Case Laws in this Newsletter:

Income Tax Service Tax

Articles

1. BELATED RETURNS IN SERVICE TAX

   By: Dr. Sanjiv Agarwal

2. Demand not sustainable only because the Assessee had admitted Service tax liability

   By: Bimal jain

News

1. CBDT Issues Instructions to Its Field Offices Regarding Endeavour Towards a Non-Adversarial Tax Regime; Emphasis on Cleanliness, Punctuality, Timeliness in Appointment, Avoiding Unnecessary Adjournments Among Others

2. Government Committed to Remove Red Tape and Provide Single Window Clearance for Investors: Sitharaman VIII India Russia Forum on Trade and Investment held in Delhi

Notifications

DGFT

1. 97 (RE – 2013)/2009-2014 - dated 7-11-2014 - FTP

Revision in Import Policy for Natural Sand.

Income Tax

2. 55/2014 - dated 30-10-2014 - IT

U/s 120 of the Income Tax Act 1961 - Direction made by CBDT to income-tax authority to exercise the powers and perform functions as specified.

Circulars / Instructions / Orders

DGFT

1. 72 /2009-2014 (RE-2013) - dated 7-11-2014

Trade in Border Haat across the border at Tripura between Bangladesh and India.

Highlights / Catch Notes

Income Tax

• Assessee retains Section 54 deduction despite late occupancy certificate; timely payment ensures eligibility for tax benefit.

  Case-Laws - AT : Treatment of LTCG u/s 54 - Assessee has paid the amount within the time but Assessee got the occupancy certificate after three years - the Assessee is entitled for deduction u/s 54 - AT
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• Deduction Disallowed: Section 80P(2)(a)(i) Requires Banking License from RBI for Legal Business Operations.

  Case-Laws - AT : Claim u/s 80P(2)(a)(i) disallowed - Banking license from RBI not possessed by assessee - If licence is not obtained it may be an illegal banking business under the other statute - deduction u/s 80P allowed - AT
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• Denial of Tax Exemption u/s 11 Overturned: Audited Report Submission Timing Not Grounds for Rejection.

  Case-Laws - AT : CIT (A) was not justified in confirming the denial of exemption u/s 11 of the Act only for the reason that the audited report was not submitted along with the return of income but during the assessment proceedings - AT
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Case Laws:

• Income Tax

• 2014 (11) TMI 275
  Allowbility of the claim u/s. 40(a)(ia) r.w.s. 9(1) - Payment of sales commission made to the selling agents without deduction of TDS – Held that:- The disallowance shall be made in case of any payment made which is chargeable under this Act and is payable outside India or in India to a non resident not being a company or to a foreign company on which tax is deductible at source - the agreement entered into by the assessee with foreign agents revealed that they have been appointed to act as Commission agents outside India in their respective countries -there is nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non resident agents in India or by any other person on their behalf - the non-resident agents did not carry out any business operations in India and has acted as selling agents of the assessee outside India - the commission earned by them for services rendered by them outside India cannot be considered as income chargeable to tax in India. The AO has failed to bring any material on record on the basis of which it could be concluded that commission paid to foreign agents is chargeable to tax in India - Unless the income is chargeable to tax in India, then tax is not required to be deducted u/s 195(1) - no definite conclusion can be made that the commission paid to foreign agents is chargeable to tax in India - the foreign concern, namely M/s. Al Hassan Electricals Company, Oman was acting as the selling agent for the assessee and for that the assessee had outside India and no services rendered by it within the taxable territory, the amount payable as commission was not liable to tax and as the income is arising or accruing to a foreign concern in India, therefore, no disallowance u/s. 40(a)(ia) of the Act on the ground that the tax is not deducted at source u/s. 195 of the Act or remittances made to a foreign concern – Decided against revenue.

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• 2014 (11) TMI 274
  Denial of exemption u/s 10(23B) - Non-production of certificate for exemption from Khadi and Village Industries Commission under the KVIC Act – Held that:- Separate clause for assessment of the Institutions falling under section 10(23B) of the Act has been provided in sections 139 and 143 of the Act - Institution can claim exemption of income attributable to the business or production, sale or marketing of Khadi or products of Village Industries, if it obtains approval from the Khadi and Village Industries Commission - the assessee could not place exemption certificate for the AY – even before the Tribunal, the assessee could not furnish exemption certificate for the AY duly granted by the prescribed authority - He has simply placed reliance upon the earlier certificate granted for AY 2007-08 - He has also placed reliance upon the recommendation of the U.P. Khadi and Village Industries Board, Planning Division, Lucknow vide letter dated 16.6.2009 to the State Director, Khadi and Village Industries Commission - This recommendation was made in June 2009 and till date exemption certificate has not been granted to the assessee - it cannot be presumed or assumed that once recommendations are made, exemption certificate will certainly be granted to the assessee - the contention of the assessee that the assessee has made best efforts for obtaining the exemption certificate and in the light of its efforts, exemption may be granted, cannot be accepted, as before allowing exemption, assessee must have exemption certificate as per provisions of section 143(3) of the Act - the exemption certificate is to be granted for a particular AY, therefore, it cannot be used for other AY for which it was not granted – thus, CIT(A) has rightly denied the benefit of exemption u/s 10(23B) of the Act – Decided against assessee.

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• 2014 (11) TMI 273
  Income from other sources or agricultural receipts - Site visits and enquires were caused to be made through the inspector who reported that there was no farm existing in which the purported ornamental plants are nurtured or not - Held that:- The assessee has engaged in production of Ornamental Plants - The assessee engaged in business of agricultural production and he has nursery farms by name M/s. Chandeshwar Farms at Survey No.11, Kinaya Xetavaril Moddi, Cotombi, Quepem, Goa, spread across area of 10,150 square meters - The books of account of the assessee has been audited by Charter Accountant u/s. 44AB of the Income Tax Act.1961 and the copy of the audit report along with the return - in the previous year 2006-07 the assessee has carried out the agricultural activities for which return was processed - the AO’s objection is that the assessee has not carried out any agricultural activities - The Inspector was deputed for making enquiry whether the assessee has carried any agricultural activities or not - The Inspector reported that there was some land on which the compound wall with metallic gate on which the name Hariyalee Nursery was fabricated - The compound had some shade nets in which no plants were seen and some plants standing therein distinctly had appearance of plant brought from somewhere and stored - The Inspector has doubted about the genuineness of the agricultural income - The AO recorded the statements of the assessee’s son and he came to conclusion that assessee has not carried any agricultural activities and he has not produced any ornamental plants etc. - the CIT(A) has held that the assessee has carried out agricultural activities which has been verified by the AO - the CIT(A) was of the view that the assessee has carried out agricultural activities - as per the documentary evidence the land exists, therefore, proper course for the AO was to make enquiry from the respective land records officer and he should find out whether any agricultural activities was carried out or not - The AO failed to make the enquiry and he jumped to conclusion that no agricultural activities was carried out - assessee has produced all the documentary evidence to show that assessee has in fact carried out agricultural activities – the order of the CIT(A) is upheld – Decided against revenue.

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• 2014 (11) TMI 272
  Taxability of deferred tax u/s 41(1) or u/s 28(4) – Whether the Tribunal was correct in holding that the assessee is not liable to pay tax in respect of the amount which was collected as BST and CST on behalf of Maharashtra State and allowed as a deduction during the assessment year 2003-04 which was waived during the current AY 2004-05 and had been brought to tax u/s 41 – Held that:- If the assessee obtains, whether in cash or in any other manner in respect of such loss or expenditure or some benefit in respect of trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of the previous year - the assessee should obtain benefit, before it is deemed to be profits and gains of business or profession. As per the scheme he was allowed to retain the sales tax as determined by the competent authority and pay the same 15 years thereafter - The tax collected was deemed to have been paid and, therefore, the tax so collected cannot be construed as income in the hands of the assessee - The tax so retained by the assessee is in the nature of a loan given by the Government as an incentive for setting up the industrial unit in a rural area - The loan had to be repaid after 15 years - Again it is an incentive - However, by a subsequent scheme, a provision was made for premature payment - when the assessee had the benefit of making the payment after 15 years, if he is making a premature payment, the said amount equal to the net present value of the deferred tax was determined and on such payment the entire liability to pay tax/loan stood discharged - Again it is not a benefit conferred on an assessee - Sectio n41 (1) of the Act is not attracted - the Tribunal was justified in holding that there is no liability to pay tax – thus, the order of the Tribunal is upheld – Decided against revenue.

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• 2014 (11) TMI 271
  Reopening of assessment u/s 147 – Change of opinion – Held that:- The AO in the assessment order has referred to the facts - the Tribunal rightly concluded that the reasons which have been assigned to reopen the assessment are nothing but reflecting a change in the opinion - That cannot be the basis for reopening the same is the settled legal position - there is no tangible material based on which the AO can come to a conclusion that the payment made by the Assessee to foreign parties for software was a payment for license to use the software - In the absence of relevant materials and particulars substantiating and proving the reasons and grounds the Tribunal concluded that the reopening is purely on a change of opinion - so long as there are reasons and which constitute the belief for reopening the assessment whether they are established or proved is something which cannot be decided in the writ jurisdiction – in Assistant Commissioner of Income-Tax Versus Rajesh Jhaveri Stock Brokers P. Limited [2007 (5) TMI 197 - SUPREME Court] it has been held that if the AO has reason to believe that income and escaped assessment it confers jurisdiction to reopen the same - The ambit and scope of the powers being clear, in no case they enable the AO to reopen the assessment on mere change of opinion – thus, the order of the Tribunal is upheld – Decided against revenue.

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• 2014 (11) TMI 270
  Grant of interest on interest – Amount due to assessee by way of refund - Whether an assessee under the Income Tax Act would be entitled to receive any amount by way of interest on interest under the Income Tax Act - Held that:- The original petition as it claims interest on interest on the amounts that were due to the petitioner by way of refund failed - in Sandvik Asia Ltd. v. Commissioner of Income-Tax and Others – [2006 (1) TMI 55 - SUPREME Court] it has been held that although the assessee was not entitled to interest on interest under the Income Tax Act, he was nevertheless entitled to a reasonable amount by way of compensation for the delayed payment of amounts that were due to him by way of refund of tax and interest thereon, the Supreme Court on the facts of that case, proceeded to grant the assessee an additional amount towards compensation for the period during which the Department had delayed the payment of refund, and interest thereon, to the assessee. The prayer in the original petition with regard to interest on interest cannot be granted - While the assessee would point out that, even if interest on interest was not granted, it was open to the Court to consider the issue of grant of appropriate compensation in lieu of interest on interest, insofar as the computation shown reveals that assessee has computed interest in accordance with the provisions of the Act for the entire period for which they had withheld the amounts due to the assessee by way of refund, there is no scope for the issuance of a direction to grant a compensation over and above the statutory interest that has already been reckoned for the purposes of computation of the amounts due to the assessee – Decided against assessee.

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• 2014 (11) TMI 269
  Commission of offences u/s 277 – Criminal complaint – Criminal procedure prescribed u/s 245 Cr.P.C not fulfilled - Held that:- The assessee filed a petition to quash the proceedings and the court disposed of the petition leaving open the right of the petitioner to file an application under Section 245 of the Code of Criminal Procedure for discharge and it is on that basis, the petition has been filed - it is seen from the order of the court that no pre charge evidence has been taken - only after taking evidence under Section 244 of Code of Criminal Procedure of the complainant and their witnesses and after considering the documents and evidence, court needs to consider whether charge has to be framed in this case or not and the revision petitioner has to be discharged or not and only thereafter, the question of framing charge or discharging the accused under Section 245 of Code of Criminal Procedure will arise.

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• 2014 (11) TMI 268
  Order u/s 127 – Power to transfer case – Held that:- The transfer order is bereft of any reason – thus, the order is set aside and the Chief Commissioner is directed to pass a fresh order with reasons after giving an opportunity of hearing to the assessee – Decided in favour of assessee.

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• 2014 (11) TMI 267
  Taxability of income - Regular assessment or block assessment - Whether the Tribunal was correct in holding that after the search and in the consequential survey it was discovered that the assessee had adopted a modus operandi where there was separation of sales which could be brought to tax in regular assessments and not in Block assessment - Held that:- During the search no undisclosed income was detected - No seizure of incriminating materials was made - It is only in the course of survey, the incriminating material was found - That material is not relatable to any incriminating material found during survey - on the basis of the incriminating material found in the course of survey merely because the same was put to the Assessee and his statement was recorded subsequent to the search, it cannot be held to be relatable to the Assessee - the authorities were justified in holding that the material found in the course of survey can become the subject matter of regular assessment and it cannot become the subject matter of Block assessment – thus, the order of the Tribunal is upheld – Decided against revenue.

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• 2014 (11) TMI 266
  Inclusion of selling expenses in the AMP basket of expenses – Held that:- The assessee declared a loss by way of filing its return on 29.09.2008 which was selected for scrutiny through CASS after issuance of notice u/s 143(2) of the Income Tax Act. The AO made a reference to the TPO - the TPO after considering the Transfer Pricing study of the assessee, wherein the assessee described its activities as that of a distributor; and considering the Importation Agreement entered into by the assessee with the parent company, i.e. BMW w.e.f 01.01.2006 which assigned the duties of the assessee with regard to marketing and promotion of the products of the parent company - it was submitted that the AMP expenses include expenses of certain items like after sales support costs incurred for company dealers and salesman bonus and it was urged that these should not form part of AMP expenses. The assessee has performed advertisement, marketing and sale promotion activities (marketing or AMP expenditure) which exceed the activities performed by comparable independent enterprises as selected by the assessee - the assessee has not been reimbursed for such non routine AMP activities and no return was provided to the assessee for carrying out these additional significant marketing functions for its AE The assessee through its non routine marketing (AMP) activities has not only enhanced the brand value of the AE in India but has also developed marketing intangible for the BMW products of its AE which resulted in enhanced sale and profit to the AEs - Since legal ownership of brand is with the AE the assessee would not be entitled to share in any return attributable to the increase in the value of the brand - the assessee have assumed significantly greater risk than the arm's length price - the assessee is not only entitled for reimbursement of non-routine AMP expenditure but also a normal return on such AMP activities provided for the benefited of the AEs. The assessee has objected to use of PLR for computing the minimum return expected to be earned on amount of AMP expenses - If the assessee would have invested the money spent on AMP expenses over and above the bright line limit (non- routine AMP), assessee would have earned a return which is at least equivalent to PLR - assessee should earn some markup on the value of services rendered, time and effort spent on incurring non-routine AMP expenditure to build the brand of the AE - assessee should have been reimbursed for the non-routine AMP expenses with a markup of PLR+2.5% i.e. 15.27% - The assessee has also stated that since PLR is being used the monthly expenditure should have been taken for the purpose of this markup - it is appropriate to accept the departmental stand and direct the assessee to demonstrate its claim before the TPO. Selection of comparables – Held that:- The contention of the assessee is accepted about the necessity of choosing properly comparable cases in the first instance before starting the exercise of making comparison of the AMP expenses incurred by them for finding out the amount spent by the assessee for its own business purpose - choosing cases using the foreign brand ex facie cannot be accepted - the AMP expenses of such cases will also include contribution towards brand building of their respective foreign AEs - the comparison would become meaningless as their total AMP expenses will stand on the same footing as that of the assessee before the exclusion of expenses in relation to brand building for the foreign AE – thus, the matter is remitted back to the TPO for fresh selection of comparables. Determination of the ALP - Intra Group Service Charges as NIL by using CUP method – Held that:- The assessee has not identified the services actually availed of and has only given a general response - The contemporaneous evidence to show that the services have actually been received it was held was not made available and the assessee had merely submitted sub-inter company invoices, description of the service which was ostensibly to be rendered by the AE - they did not prove the fact that it was actually made available and received - the payments were also on cost to cost basis without any profit margin/mark-up built in and there was no basis of actual cost allocation - there was no evidence to show that there was any designated person rendering the services as same persons were found to be on the payroll of AE and major portion of work it was presumed would have been carried out by them for the AE and only ancillary services if any would be provided to the assessee company - the documentary evidence in support of the claim was missing - the assessee had made payments to its AE for intra-group services which are not found to exist - The arm's length price of these services is held to be nil on application of CUP method as no uncontrolled enterprise would have paid any amount for services which do not tantamount to intra group services with demonstrable benefits - on similar facts no adjustment was made by the TPO in the immediately preceding assessment year appears to be a plausible belief that contemporaneous documentation may not be required to be demonstrated – thus, the matter is to be remitted back to the TPO for adjudication – Decided in favour of assessee.

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• 2014 (11) TMI 265
  Reopening of assessment u/ 147 – Reason to believe - Held that:- As decided in Assistant Commissioner of Income-tax, Circle-1(1), Panaji, Goa Versus Durgadas K. Prabhu Shastri [2014 (10) TMI 35 - THE ITAT PANAJI] - The scope and effect of Sec.147 as substituted w.e.f. 1.4.1989 is substantially different from the provisions as stood prior to such substitution - The court has interpreted from time to time that there must be bona fide reason to believe - Where the AO has applied his mind to the material available with him, he cannot be permitted to review the assessment in the garb of ‘reason to believe' – in ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., [2007 (5) TMI 197 - SUPREME Court] it has been held that the intimation u/s 143(1) cannot be treated to be an order of assessment - The AO is bound to accept the return as has been filed by the Assessee and process it. Since the AO is bound to process the return without making any addition, no question of application of mind by the AO arises - it cannot be said that the AO has applied his mind and if the AO is taking action u/s 147 on the basis of the material available on record for escapement of the income as per the definition given under explanation 2(b), it cannot be said that such an action is illegal and without jurisdiction - Sec. 147 permitted the AO to assess or re-assess the income chargeable to tax when he has reason to believe income escaping assessment - The mere failure to take steps u/s 143(3) would not render the AO powerless to initiate proceedings u/s 147 of the Act even when intimation u/s 143(1) had been issued - with the amendment brought to Sec. 147 of the Act on and from 1.4.1989 and the elucidation on the scope of the authority and jurisdiction of the officer u/s 147 of the Act, the proceedings initiated by the AO u/s 147 are valid and the AO could have taken the action u/s 147 on the basis of the material available and filed along with the return - There is no need of any fresh tangible material for coming to the ‘reason to believe' that the income has escaped assessment in view of explanation 2 clause (b) of Sec. 147 – Decided against assessee. Adoption of FMV of agricultural land sold during the year as on 1.4.1981 - Whether the land sold by the Assessee is a Capital asset - Held that:- Provisions of Sec. 2(14) be referred to as ‘Capital asset' is defined u/s 2(14) of the Income Tax Act - the property of any kind held by the Assessee whether or not connected with his business or profession are capital asset but the assets which are given under sub-clause (i), (ii) and (iii) are excluded from the capital asset - The Assessee claims that the land sold by the Assessee is an agricultural land in India while the claim of the Revenue is that the land cannot be regarded to be an agricultural land - No agricultural activities or operations being carried out on the land were found - the AO is directed to treat only 4/5th of the land to be the capital asset and the consideration received to that extent be treated as if said consideration has been received on the transfer of capital asset and the capital gain on the transfer of such land be computed in accordance with the provision of the Income Tax Act to the extent each of the co-owner has the share proportionately the capital gain so computed on 4/5th of the total consideration be assessed in the hands of respective assessee – Decided in favour of assessee.

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• 2014 (11) TMI 264
  Applicability of provisions u/s 14A r.w Rule 8D – Held that:- In Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] it has been held that Rule 8D is application from AY 2008-09 - disallowance for earlier period to be determined on reasonable basis U/s 14A – the AO is directed to re-compute the disallowance U/s 14A of the Act after providing reasonable opportunity of being heard to the assessee. Depreciation on investment in respect of securities shifted from "Held For Trading" category to "Available for Sale" category disallowed – Held that:- All the banks are regulated by the RBI and all instructions issued by the RBI are binding on every banks - The RBI also prescribed the valuation method of securities as per the circular should be done at the acquisition cost/book value/market value on the date of transfer, which is the least and the depreciation if any on such transfer should be fully provided for - CIT(A) referred the CBDT instruction No. 17/2008 vide letter no. F.No.228/3/2008-ITA-III dated 26/11/2008 wherein RBI guideline dated 26/10/2000 had been clarified - CIT(A) has not controverted the calculation made and claimed by the appellant that there is no net depreciation - Since the appreciation of securities in the category of Available for Sale is more than the depreciation of securities in the same category i.e. Available for Sale - the assessee had rightly claimed depreciation on transfer from securities Held for Trading category to Available for Sale category – following the decision in State Bank of Mysore Vs. DCIT [2009 (5) TMI 610 - ITAT BANGALORE] – Decided in favour of assessee. Prior paid expenses and Misc. expenses disallowed – Held that:- The period expenses were claimed by the assessee have been crystallized during the year - The assessee has number of branches in all over the India and certain expenses of previous year were claimed after the closing of books of account, which has been clarified by the auditor in audit report - The genuineness of the expenses has not been doubted by the lower authorities – the expenses were allowable in respective year to which they pertained but information of expenses with evidence received by the appellant from the various branches after closing of books of account – as decided in assessee’s own case for the earlier assessment year, it has been held that such difference cannot be categorized as an error or omission – As decided in assessee’s own case for the earlier assessment year, it has been held that the refusal to the department by the committee as the income from interest on Government securities/debentures etc. is thus directed to be taxed on due basis - The effect of this for the year, be that the income assessed by the A.O. would increase by Rs. 2,26,89,880/- Decided in favour of assessee.

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• 2014 (11) TMI 263
  Treatment of service income earned – Income from other sources or business income – Held that:-The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] - the word “business” is one of wide import and which means an activity carried out continuously and systematically by a person by the application of his labour and skill with a view to earn income - the assessee is receiving the income from parent company i.e. YRI and not making payment to it – the AO miserably failed to appreciate the facts and circumstance - The assessee has been offering income from consultancy etc. as a business income - It has duly been accepted by the department since 1998-99 - The AO without assigning any valid reason concluded that it is an income from other sources – the First Authority has considered this issue in right perspective – Decided in favour of assessee. Royalty expenses disallowed - Whether there was any technology transfer to the appellant under the Technology License Agreement with YRAPL – Held that:- The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] - The AO has misread the approvals granted by the Govt. of India while arriving at a conclusion that assessee has not been remitting the payment as per the approvals - In the approval SIA has used expression “royalty as well as fee for technical services” loosely and interchangeably - Apart from all these things, the tax rate for remitting a royalty as well as fee for technical service is 15% plus the research and development cess - The assessee has paid both these amounts while remitting the payment - The expense is directly related to its business - It has been incurred wholly and exclusively for running the franchises within India – Decided in favour of assessee. Hypothetical disallowance of the administrative expenses – Held that:- The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] - The CIT(A) deleted the disallowance - YRMPL was incorporated on 8th June, 1999 - It is a 100% owned subsidiary of the assessee - It has been incorporated to carry out advertisement, marketing and promotion activities of the assessee as well as various franchise - The assessee had entered into a tripartite agreement with its franchise and YRMPL - As per this agreement, the franchise shall pay AMP contribution to YRMPL and assessee may not pay a separate contribution - YRMPL was to carry out the activities on no profit no loss basis - The AO has disallowed the expenses which are attributable to YRMPL but in fact, he ought to have not disallowed any such amount because ultimately it is the assessee who has to contribute for all these sums - The assessee can bear the cost of administrative expenses to be incurred by YRMPL or it can separately remitted the amount to YRMPL towards such cost - it is the assessee or its franchise who has to contribute this amount - Decided in favour of assessee. Lease rent disallowed - Rent free accommodation obtained for its managing director – Held that:- The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] - These disallowances have been made by invoking the provisions of section 40A(2)(b) of the Act is on account of excessive rental paid to the related parties - The payment has been made to the persons who are covered by section 40A(2)(b) of the Act - In the case of M/s. Mezbaan Hoteliers Pvt. Ltd., it is well established that payments had been made in excess for which such goods and services were available - the assessee company has extended extra peculiar benefits to its Managing Director who is covered by the provisions of section 40A(2)(b) of the Act – thus, the order of the CIT(A) is upheld – Decided against assessee. Tax depreciation disallowed - Actual physical possession of the fixed assets relevant or not for the claim of tax depreciation - Fixed assets sold in past years relating to the Delhi restaurant outlets - Held that:- The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] - The AO has highlighted certain discrepancies in the maintenance of WDV of the assets as well as identification of each asset - There may be some shortcomings but that does not mean that assessee was not having any assets and they were not used for the purpose of business - AO ought to have identified each item and find out how that item is treated in the block of assets, if it is established that those assets were not used for the purpose of the assessee’s business then he should make out a care for disallowance of depreciation - By making general observation, he cannot deny the total claim of the depreciation of the assessee - CIT(A) has already directed the AO to give effect outcome of 1999-2000 - The depreciation disallowed in asstt. year 1999- 2000 would be considered for disallowance in this year also – Decided in favour of assessee. Software expenses disallowed - Capital expenses or Revenue – Held that:- The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] – The AO has allowed annual maintenance charges as revenue expenditure and the expenditure on MIS Project and payment for cheque printing facility has been taken as capital in nature - This nature of expenditure has to be ascertained whether it has been made on the new acquisition of software or on the upgradation of the software – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of assessee.

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• 2014 (11) TMI 262
  Transfer pricing adjustment – Determination of ALP – Held that:- The ALP in almost all the (nonpurchase) transactions has been determined at nil either in view of the assessee being not able to furnish the complete details or because the Revenue is of the view that there was no economic justification for the assessee to have incurred the relevant expenditure - The payments to, and the assistance from the AE having crystallized, it is the operating margin as obtaining that is to be determined, and on the adequacy of which, i.e., with reference to that of the comparables, reckoned on an average, that the TP adjustment, if any, shall arise - the reason/s for effecting the adjustment notwithstanding, the TNMM at the entity level shall substitute as the most appropriate method for all the international transactions. Validity of the comparables - ADS Diagnostics Ltd. - Held that:- The company has two segments, namely medical diagnostics services and trading activities - The trading, which is also in the health care segment, is of high-end medical equipments, viz. bone denstimeters, digitizers, mammographic equipments - The other ground on which the assessee seeks to distinguish its case is that the said company has also commission income. As such, without prejudice, even if the said company is considered as a comparable, the income ought to be excluded while drawing the comparison, doing which would reduce its income to 1.36% - the company was also engaged in distribution of medical devices and equipments - The commission income was only marginal - Both the assessee and the comparable are operating in the health care segment, dealing in premium products - The commission is only on the distribution activity, so that the income is essentially against services relating to distribution activity - The assessee’s business profile, which also includes marketing, pre/after sales and training services, thus matches with the comparable. Advanced Micronic Devices Ltd. – Held that:- Given the broad range of the assessee’s activities (and functions), its’ stating of being a limited risk distributor is internally inconsistent, if not anomalous - both the aforesaid comparables have been rightly included in the list of comparables by the Revenue, resulting in the profit level indicator (PLI), which has been accepted as the operating margin on sales, at a mean of 8.88%. Adjustment of business development expenses and disallowance made u/s 37(1) – Held that:- All the expenditure incurred by the assessee during the year and, therefore, including on the WT event, shall form part of its operating statement for the year, even clarifying that even where any such expenditure stands directly recovered, the same would need to be incorporated in the operating statement - The assessee, as a part of its business profile, is to market, sale and distribute the principal’s products, as well as provide technical services related thereto. The participants are all doctors from India - the assessee claims a quantum increase in both its’ sale as well as customer base, i.e., for the relevant year, vis-à-vis the immediately preceding year, with the most of the new customers being participants of the event - The assertions have not been rebutted by the Revenue in any manner - an incidental third party benefit would not oust the claim the claim for deduction u/s. 37(1) – Decided in favour of assessee. Provision for obsolete and non-moving inventory disallowed – Provision for sales return – Held that:- The drop in the sale value (Rs.7.74 lacs), separately provided, forms only a part of the total provision of Rs. 70.65 lacs, so that the basis for the balance, stated to be a provision toward non-moving and slow items, would need to be ascertained and verified - This would also meet the Revenue’s objection, which, in essence, states of the provision being contingent and not based on facts – thus, the matter is to be remitted back to the AO for examination – Decided in favour of assessee.

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• 2014 (11) TMI 261
  Treatment of LTCG u/s 54 - Whether the amount of the capital gain is equal to the cost of the new residential house and Capital Gains chargeable under the Act and Assessee is entitled for exemption u/s 54 of the Act or not - Assessee did not construct new house nor purchased a new house – Held that:- The Assessee has sold two properties, Flat at Lawande Manor for Rs. 81 lacs and Flat at Cabo Housing complex for Rs. 1.60 crore - The flat at Lawande Manor was owned by Shri Girish Ragha and sold to Shri Arjun Mangaldas by sale deed - The Assessee has invested Rs. 1,64,22,535/- to purchase a new residential house from M/s. Ashraya Real Estate Developers with the agreement that the house has to be handed over within two years - As per Sec. 54 of the Income Tax Act, Assessee has sold two residential properties; one on 17.9.2009 and other on 1.12.2009 - The last property was sold on 1.12.2009, the Assessee has to get the house and occupancy certificate from M/s. Ashraya Real Estate Developers before 1.12.2011 - the Assessee has sold the second property on 1.12.2009 - The Assessee has made the payment on 16.3.2010 - The Assessee was required to get the house and occupancy certificate on/before 1.12.2011 - the Assessee got occupancy certificate of the property on 17.1.2014 - As per Sec. 54 the Assessee is required to get the occupancy certificate within two years but the possession was handed over to the Assessee only on 17.1.2014 - The Assessee submitted documentary evidence before us to show that after purchasing the property there was a civil suit filed by the other parties and Assessee could not start construction and licence for constructing the house was obtained by the Assessee on 16.5.2011. The Assessee's construction was delayed, therefore, Assessee has taken the contention before CIT(A) that though the Assessee has made the payment but the Assessee could not get the possession within three years – relying upon CIT vs. Sadarmal Kothari [2008 (6) TMI 15 - MADRAS HIGH COURT] - in order to get the benefit u/s 54 of the Income Tax Act, the Assessee need not complete the construction of house and occupy the same - If the Assessee has invested the money and the occupancy certificate is got delayed which is beyond the control of the Assessee, then, the Assessee is entitled for deduction u/s 54 of the Act - if substantial amount is paid in terms of purchase agreement within the stipulated period, exemption u/s 54 is available even if the premises is handed over after the stipulated period - the Assessee has paid the amount within the time but Assessee got the occupancy certificate after three years - the Assessee is entitled for deduction u/s 54 of the Act - CIT(A) has rightly held that the Assessee is entitled for deduction u/s 54 of the Act – Decided against revenue.

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• 2014 (11) TMI 260
  Claim of deduction u/s 80P(2)(a)(i) disallowed - Nature of assessee – Cooperative bank or not – Whether the Assessee is entitled for deduction u/s 80P(2)(a)(i) and whether the Assessee is hit by the provisions of Sec. 80P(4) which was introduced in the statute by the Finance Act, 2006 w.e.f. 1.4.2007 – Held that:- Banking means accepting deposit of money from the public which is repayable on demand or otherwise and withdrawal of these deposits by cheque, draft, order or otherwise and these deposits are accepted for the purpose of lending or investment - These deposits must be accepted from the public, not only from the members - These deposits must be repayable on demand or otherwise and could be withdrawn by the depositor by cheque, draft or otherwise - the assesse has accepted deposits from non-members - No evidence were filed before us by Ld. AR to contradict the finding given by CIT(A) - Even though he contended that none of the objects permits the assesse to accept deposits from the public – it cannot be held that the assesse did not accept the deposit from public during the year - The assesse since not discharged the onus. The deposits accepted are used by the Assessee co-operative society for lending or investment - Even out of the deposits so received, the loans have been given to the members of the society in accordance with the objects - the Assessee society was carrying on banking business as it was accepting deposits from the persons who were not members during the year - the paid up share capital and reserves in the case of the Assessee is more than Rs. 1 lac - Sec. 16 of The Karnataka State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member - section 80P(2)(a)(i) nowhere talks of co-operative credit society and therefore the distinction made under the Banking Regulation Act cannot be imported u/s 80P(2)(a)(i) - the Assessee has to be regarded to be a primary co-operative bank as all the three basic conditions are complied with, therefore, it is a co-operative bank and the provisions of Sec. 80P(4) are applicable in the case of the Assessee and Assessee is entitled for deduction u/s 80P(2)(a)(i) – the order of the CIT(A) is upheld – Decided against assessee.

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• 2014 (11) TMI 259
  Claim u/s 80P(2)(a)(i) disallowed - Banking license from RBI not possessed by assessee - co-operative society registered under the Karnataka State Co-operative Societies Act – Nature of assessee as “Primary Cooperative Society” read Section 5 of the Banking Regulation Act 1949 or not - Held that:- The provisions of Sec. 80P(4) mandates that the provisions of Sec. 80P will not apply to any co-operative bank other than a primary agricultural credit society or primary co-operative agricultural and rural development bank but as per the provisions of Sec. 80P(2)(a)(i), a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members is entitled for deduction - the Assessee is a co-operative bank, the Assessee will not be entitled for deduction as stipulated u/s 80P(2)(a)(i) but in case the Assessee is not a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the provisions of Sec. 80P(2)(a)(i) will be applicable to the Assessee provided the Assessee is engaged in carrying on business of banking or providing credit facilities to its members. Whether the Assessee is a co- operative bank or not – Held that:- It is not necessary that the co- operative society should have a banking licence as per the definition under the Income Tax Act for carrying on banking business - If licence is not obtained it may be an illegal banking business under the other statute - The income has to be assessed u/s 14 of the Income Tax Act under the same head even if the nature of the business is illegal - the types of the deposits which the assessee has accepted as per bye-laws are the same as are being accepted during the course of the carrying out the banking activities - the paid up share capital and reserves in the case of the Assessee is more than Rs. 1 lac - the Assessee satisfies the second condition - Sec. 16 of The Karnataka State Co-operative Societies Act, 1959 permits admission of any other co-operative society as a member – the assessee will be entitled for the deduction u/s 80P(2)(a)(i) - The Assessee has not to be regarded to be a primary co-operative bank as all the three basic conditions are not complied with, therefore, it is not a co-operative bank and the provisions of Sec. 80P(4) are not applicable in the case of the Assessee and Assessee is entitled for deduction u/s 80P(2)(a)(i) – thus, the order of the CIT(A) is set aside – Decided in favour of assessee.

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• 2014 (11) TMI 258
  Transaction of purchase and sale of agricultural land - Business income or capital gains – Investment to be treated as capital asset or not u/s 2(14)(iii)(b) - Land located beyond 8 kilometers from the local limits of any Municipality or not - Held that:- The land is an agricultural land which is so recognized in the land revenue records at the time of purchase by the assessee and nothing has been done by the assessee for putting it to non-agricultural use - the sale of such land cannot be treated as sale of stock-in-trade merely because assessee is otherwise engaged in the business of sale/development of lands - onus has been aptly discharged by the assessee - the assessee has shown the land as a 'Personal Asset' as distinct from 'Business Assets' in the Balance Sheets - the lower authorities erred in treating the income arising on the sale of land at village Dhamane to be sale of stock-in-trade - the income arising on the sale of land at village Dhamane was on account of sale of investment - the land carried the features prescribed in section 2(14)(iii) of the Act, and, it qualifies to be an agricultural land excludible from the expression "capital asset" – thus, the matter is restored to the return of income filed by the assessee regarding the surplus on sale of agricultural land at village Dhamane – Decided in favour of assessee. Nature of income arising on the sale of plot at Kondhwa – Onus discharged or not - Held that:- The aspect that a taxpayer can have two portfolios i.e. investment portfolio comprising of assets which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading asset has already been noted by us in the earlier paras - merely because assessee is dealing in purchase and sale of land also cannot be a conclusive factor in holding that the impugned sale of land was a business transaction - the land has been disclosed in the account books as an 'Investment' and not as a stock-in-trade - the land has been held for a period of 9 to 10 years by the assessee - there is no charge made by the Revenue against the assessee that any steps were undertaken by the assessee for development of the land during the period it has been held by him – the transaction of sale of land at Kondhwa is to be treated as sale of investment chargeable to tax under the head 'capital gains' – thus, the CIT(A) is directed to assess the income on sale of land at Kondhwa as sale of investment chargeable under the head capital gains – Decided in favour of assessee.

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• 2014 (11) TMI 257
  Transfer pricing adjustment - Investment advisory services rendered to the overseas AE – Held that:- The assessee’s margin was 23.29%, it was claimed by the assessee that its international transactions are at arm’s length price – the company has completed its third Financial Year since inception and 45 transactions in the field of takeover, acquisition, disinvestment - The primary activity of M/s Motilal Oswal Investment Advisor Pvt. Ltd. during the year was in the field of capital market, private equity and mezzanine finance as well as acquisition mergers and the cross boarder acquisition for its clients in India - the majority of transactions completed by Motilal Oswal Investment Advisor Pvt. Ltd. are in the filed of investment banking transactions comprising private placing of equity, syndication of project debt by taking of equity shares, acquisition, initial public offer (IPO), open offer and sponsor etc. – Decision in the case of M/s Carlyle India Advisors Pvt Ltd. Vs. DCIT [2014 (2) TMI 648 - ITAT MUMBAI] relied upon. The similar business activity was carried out during the year, therefore, having considered the business profile of the assessee as well as M/s Motilal Oswal Investment Advisor Pvt. Ltd., the company is not functionally comparable with the business of the assessee and it cannot be regarded as good comparable for the purpose of determination of arm’s length price in respect of international transaction of the assessee – the AO/TPO is directed to exclude the company from the set of comparables - The details of comparables have also been considered by the TPO in the set of four comparables from which, Motilal Oswal Investment Advisor Pvt. Ltd. is not a good comparable, the mean margin of the remaining three comparable comes to 24.99% in comparison to the assessee’s margin of 23.29% - Since the assessee’s margin is within the tolerance range of +/- 5% of the mean margin, therefore, no adjustment on account of transfer pricing is required in respect of international transaction of the assessee – Decided in favour of assessee.

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• 2014 (11) TMI 256
  Denial of exemption u/s 11 – Held that:- In CIT vs. Hardeodas Agarwalla Trust [1991 (7) TMI 22 - CALCUTTA High Court] it has been held that a procedural provision, ordinarily, should not be construed as mandatory, if the defect in the act done in pursuance of it can be cured by permitting appropriate rectification to be carried out at a subsequent stage and having regard to the object of section 12A, it cannot be that the legislature intended that even where the trust has got its accounts audited and the certificate obtained in Form No.10B before the assessment is completed, merely because such report could not be filed in the course of assessment proceedings, it would deprive a trust from getting the exemption if it is otherwise entitled to it in law - the CIT (A) was not justified in confirming the denial of exemption u/s 11 of the Act only for the reason that the audited report was not submitted along with the return of income but during the assessment proceedings - the assessee deserves to exemption u/s 11 in the year. Treatment of expenses on dismantling of huts as capital expenditure – Held that:- The assessee has incurred this expenditure by dismantling the temporary structure which was constructed during construction of school building at Vasant Kunj - Since the CIT (A) has upheld this addition as capital expenditure but we note that the order is not a speaking order on the issue – the matter is remitted back to the CIT(A). Various expenses claimed by the assessee disallowed - Held that:- Simply payment made through cheque shall not justify the claim of the assessee - The expenditure has been debited in the books of account of assessee - It was for assessee to establish that the expenditure was genuine and was spent wholly and exclusively for the business purposes of the assessee - The genuineness of expenditure remains unverified. Depreciation on building at Virendra Gram disallowed – Held that:- The assets in the form of building were used for educational purposes - The buildings were shown in the balance sheet of the society while the other assets are shown in the balance sheet of the school - The AO himself has allowed depreciation in respect of the assets which have been shown in the balance sheet of school - It is only because of accounting convenience that the assessee society has chosen to disclose the buildings in its own balance sheet but that does not mean that such buildings are not used for the purpose of business - The claim of the assessee cannot be disallowed merely on the ground that such depreciation is claimed in the income and expenditure account of society – the order of the CIT(A) is upheld – Decided in favour of assessee. Deletion of addition – Held that:- It is not a case of cessation of liabilities which can be covered by section 41(1) of the Act - The company had taken over the liability to refund the caution money as and when required - The AO has accepted the sale of land and building of the school on which the capital gain has been computed - The AO also accepted the sale of movable assets – Decided against revenue.

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• 2014 (11) TMI 255
  Reopening of assessment u/s 147 – Disallowance of interest by AO – Reasons for reopening not furnished by AO- Held that:- The AO did not furnish the reasons for reopening of assessment to the assessee before the completion of the assessment - the AO has extracted the reasons for reopening in the assessment order - the disallowance made relates to the interest paid u/s 234A and 234B of the Act – as decided in Bharat Commerce And Industries Ltd. Versus Commissioner of Income-Tax [1998 (3) TMI 2 - SUPREME Court] - the payment of interest cannot be allowed as deduction - apparently the assessee may not be having a case on merits - the assessee is strongly placing reliance on the technical ground of non- furnishing of reasons - Commissioner of Income-tax Versus Videsh Sanchar Nigam Ltd. [2011 (7) TMI 715 - Bombay High Court] - the assessment order cannot be upheld, since the AO has failed to furnish the reasons for reopening to the assessee before the completion of the assessment – Decided in favour of assessee.

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• 2014 (11) TMI 254
  Determination of ALP - Interest payment on External Commercial Borrowings - Conditions laid down in section 10(15)(iv)(c) fulfilled or not – Held that:- It is a fact that the CBDT has examined the receipt of interest as per the provisions of section 10(15)(iv)(c) of the Act - where the utilization is for purchase outside India of raw material, components or Plant & Machinery, so long as exemption granted is valid, the interest received by the other party is not covered by the IT Act and by virtue of exemption granted by the Central Govt., the question of TDS on the above amount does not arise at all. Since there is no requirement of TDS, question of disallowance under section 40(a)(ia) for non deduction of tax also does not arise - They also placed on record the approval of the RBI for the purpose of financing the Put Option under Euro Convertible Bonds issue of USD 75 Million - After examining the relevant certificates the CBDT Foreign Tax Division vide letter dated 12.03.1997 granted the approval under section 10(15)(iv)(c) - the contention of assessee now made at the time of payment of interest does not survive as the issue of utilization of the funds was already examined by the CBDT at the time of granting exemption - once the interest income is not taxable in the hands of recipient and was exempted by the Govt. of India, question of TDS on the interest paid by assessee does not arise – Decided against Revenue. Addition in respect of sale of AE – Held that:- Assessee has already considered all the 8 transactions with its AE in totality by aggregating the same whereas the TPO picked up two transactions where the price charge was less than the average market price - Rule 10(A)(a) defines a transaction to include a number of closely linked transaction – in case they are closely linked then they can be aggregated for determining the ALP - assessee has exported hot rolled coils to its AE between 30-6-2005 to 10-3-2006, the price has been determined from the website whose data is not subject to challenge - The product remains the same and the source from which the average price has been taken remains the same - if the average price is adopted for all the 8 transactions, then the average comes exactly to 420.71 which is what the price charged by the assessee to its AE - the detailed finding recorded by the CIT(A) – there is no reason to interfere in the order of CIT(A) for deleting the addition in respect of adjustment – Decided against revenue.

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• Service Tax

• 2014 (11) TMI 277
  Packaging services - Assessee provide packaging service to fertilizer manufactured by other company - Held that:- It is cleared that fertilizer cannot be marketed without packaging in the manner specified under the said order, thus packaging of fertilizer is a statutory requirement for sale of the fertilizer. We further find that sale of fertilizer in bulk requires a license to sell in bulk. As the appellant is not having any such license, therefore, packaging is a statutory requirement for sale of fertilizer by M/s Zuari Industries Ltd. If marketing of fertilizer cannot take place without packaging, the appellant is a manufacturer as per section 2(f)(i) of the Central Excise Act, 1944, wherein manufacture includes any process incidental or ancillary to the completion of a manufactured final product. - appellant being a manufacturer is doing the packaging activity and does not fall under packaging activity defined in section 65(76b) of the Finance Act, 1994. - Decided in favour of assessee.

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• 2014 (11) TMI 276
  Construction of Residential Complex Service - Liability to pay tax prior to 1-7-2010 and subsequent to it - Held that:- Prior to 1.7.2010, what was liable was ‘construction of residential complex’ and when there is an agreement between the buyer and the customers for construction of flat, it cannot be said that such an agreement is for construction of residential complex. Therefore, prior to 1.7.2010, when the explanation was added to the definition of ‘commercial or industrial complex service’, tax is not payable. after 1.7.2010, the appellant does not have a case on merits. Adjustment to tax paid for the earlier period with the tax liability of subsequent period - Held that:- Admittedly, the amount was paid prior to 1.7.2010. Despite discussions for quite some time and despite queries from the Bench, learned counsel could not convince that this amount was not paid after collecting from customers and also could not indicate the date on which such payment was made. We also find this amount has not been appropriated by the original authority also. Therefore, this amount cannot be taken for adjustment with the amount payable subsequent to 1.7.2010 - prior to 1.7.2010, the appellant is not liable to pay tax and adjustment of amount paid prior to 1.7.2010 is not possible - Stay denied for the subsequent period.

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