TMI Tax Updates - e-Newsletter
May 29, 2012

Case Laws in this Newsletter:

Income Tax Customs Service Tax Central Excise

Articles

1. MORE WIDE REVERSE CHARGE METHOD OF SERVICE TAX IS DESIRABLE – THAT WILL IMPROVE COLLECTION OF TAX CONSIDERABLY.

   By: DEVKUMAR KOTHARI

2. REVISION ON GROUND DIFFERENT FROM THAT STATED IN SHOW CAUSE NOTICE IS NOT PERMISSIBLE.

   By: DR.MARIAPPAN GOVINDARAJAN

Circulars / Instructions / Orders

Income Tax

1. 04/2012 - dated 25-5-2012

Section 143 of the Income-tax Act, 1961 - Assessment - General - Processing of returns of A.Y. 2011-12 - Steps to clear backlog - Withdrawal of Instruction No. 1/2012.

Highlights / Catch Notes

Income Tax

• Receipt Not Taxable Under Income Tax Act Exempt from Double Taxation Agreement Assessment; Decision Favors Taxpayer.

  Case-Laws - HC : It is axiomatic that if the receipt is not taxable under the Income Tax Act, then there is no need to examine whether it would fall under any of the provisions of the agreement for avoidance of double taxation. - Decided against revenue. - HC
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• Court Rules No Addition Needed for Unexplained Expenditure u/s 69C in Cash Withdrawal Case.

  Case-Laws - AT : Reassessment - Addition u/s 69C - Unexplained expenditure - Withdrawal of cash from third party account after making payment against purchases - no addition - Decided in favor of assessee. - AT
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• Expenses Deductible Even if Assessee's Income is Minimal or Negligible Under Income Tax Laws.

  Case-Laws - AT : Merely because the assessee's income, after incurring such expenses, was found to be little or negligible, it cannot be said that the said expenditure became an impermissible deduction. - AT
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• Head Office and Branch Transactions in India: No Valid Sale Allowed Between Principal Entities Under Law.

  Case-Laws - AT : Transaction between the head office of the assessee and its branch in India was a transaction between the principal and principal. In law, there cannot be a valid transaction of sale between the branch and its head office. As it is ultimately based on a proposition that no person can enter into contract with one self. Debiting or crediting one's account cannot alter the legal position. - AT
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• Income Tax Act Update: Streamlined Assessment Process for 2011-12 with Withdrawal of Instruction No. 1/2012.

  Circulars : Section 143 of the Income-tax Act, 1961 - Assessment - General - Processing of returns of A.Y. 2011-12 - Steps to clear backlog - Withdrawal of Instruction No. 1/2012. - Order-Instruction
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Indian Laws

• Advocating Broader Reverse Charge for Service Tax: Shifts Payment Duty to Recipients, Boosts Compliance, Reduces Evasion.

  Articles : MORE WIDE REVERSE CHARGE METHOD OF SERVICE TAX IS DESIRABLE – THAT WILL IMPROVE COLLECTION OF TAX CONSIDERABLY. - Article
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• Revisions on new grounds not in initial show cause notice violate Indian law, ensuring fair defense preparation.

  Articles : REVISION ON GROUND DIFFERENT FROM THAT STATED IN SHOW CAUSE NOTICE IS NOT PERMISSIBLE. - Article
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Service Tax

• Document Arrangement for Bank Credit Assessments Classified as Business Auxiliary Service for Tax Purposes.

  Case-Laws - AT : Service provided to bank in relation to loan - arranging documents for the bank to evaluate creditability, eligibility and financial status of the prospective customer for funding by the bank - held as Business Auxiliary Service (BAS) - AT
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Central Excise

• SEZ Export Bill Filing: Ensure Substantial Rebate Claims Aren't Denied for Procedural Non-Compliance.

  Case-Laws - CGOVT : Though Bill of Export is required to be filed for making clearances to SEZ, yet the substantial benefit of rebate claim cannot be denied only for this lapse. - CGOVT
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Case Laws:

• Income Tax

• 2012 (5) TMI 449
  Pre-operative expenses - revenue or cpaital expenditure - Non deduction of TDS - testing charges paid to the US Company - Disallowance u/s 40(a)(i) - fee for technical services under Section 9(1)(vii)(b) - held that:- the fees for technical services are taxable in the hands of the US Company under the provisions of the Act. The question to be considered then would be whether there is anything in the agreement for avoidance of double taxation between India and USA which would exempt or reduce the burden of taxation in respect of the fees for technical services received by the US Company. This aspect of the matter has not been examined by the Tribunal, though raised before it by the assessee, since there was no occasion for the Tribunal to do so on account of the view it took regarding the taxability of the fees for technical services under the Act. It is axiomatic that if the receipt is not taxable under the Act, then there is no need to examine whether it would fall under any of the provisions of the agreement for avoidance of double taxation. - Decided against revenue. Pre operative expenses - held that:- The fact that in the books of account the assessee had capitalised the expenses does not prevent the assessee from claiming them as revenue expenses since the question of allowance of expenses has to be considered in the light of the legal position and the accounting treatment cannot be conclusive. - Decided in favor of assessee and against the revenue. Expenditure relating to fully convertible debentures - whether related to issue or shares or merely related to issue of debenture - held that:- It is well settled that expenditure incurred in connection with the issue of debentures or obtaining loan is revenue expenditure. - The question before us however, is whether it is a debenture issue or an issue of share capital involving the strengthening of the capital base of the company. Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius Company under the Investor Agreement which would result in strengthening of the assessee's capital base, having regard to the judgments cited on behalf of the assessee [India Cements Ltd. v. CIT [1965 (12) TMI 22 (SC)], in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue - Decided in favor of assessee.

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• 2012 (5) TMI 443
  Set Off of Losses - rectification application u/s 154 seeking set off of brought forward loss and carry forward of the balance loss rejected stating that set off of losses cannot be a matter of rectification - in electronic processing of e-return filed by assessee, loss set off was shown at Zero - Held that:- Copy of return as well as the processing done by the CPC clearly shows that the assessee had claimed set off of losses amounting to Rs. 9.53 crores out of total carry forwarded losses of Rs.12.43 crores. Further the assessee had also filed the copy of return for earlier years which shows that the losses were returned in those years. Once the losses have bee claimed the same were required to be allowed as set off after verification that such losses were determined losses - Decided in favor of assessee. AO and appellate authority passed orders while performing their duty, therefore, this is not a fit case for levy of cost.

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• 2012 (5) TMI 442
  Reassessment - Addition u/s 69C - Unexplained expenditure - Withdrawal of cash from third party account after making payment against purchases - held that:- The information emanates from a third party, namely, JECPL. - The impugned bank account and the Kachhi Rokar is owned, operated and maintained by JECPL. The third party in factual terms accepted that the assessee used to make the payment of purchases by way of a/c payee cheques, which are deposited in JECPL a/c in clear and unambiguous terms. - In our considered opinion, looking at the entirety of facts and circumstances and in view of above observations, the addition on the basis of such a third party's evidence cannot be made in the hands of the assessee. - The bank a/c is owned and operated by JECPL, assessee clearly has no role or involvement in operation of this bank a/c. - In our considered opinion, by interpreting 2 or 3 sentences of third party's statement, which is not allowed for cross-examination by the assessee, cannot be made a basis to make these additions in the hands of the assessee u/s 69C as unexplained purchases. - Decided in favor of assessee.

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• 2012 (5) TMI 441
  Revision u/s 263 - computation of Capital gains - determination of cost of acquisition - It is on record that A.O. has issued show cause notice to the assessee to enquire about the working of the capital gains. It is also on record that assessee has replied in detail as stated in the arguments with reference to the working of long term capital gain of lese hold land and relied on the valuer's report - In the year 1989, for the first time Ready Reckoner was prepared and relevant instructions were issued in respect of how to adopt the valuation of properties of 1981 on the basis of the valuation adopted in the year 1989 - As seen from the above letter it is very clear that there was no fixed guidelines as of year 1981 and it is only on estimation and presumptions the valuation was done, therefore, even the rate at which the CIT took decision of Rs.72/-per sq.ft. is not based on any authentic documentation but only on certain instructions given how to adopt valuation of property based on Ready Reckoner 1989. At the time of passing the assessment order the A.O. has relied on the valuation report in which the valuer for the reasons stated therein has adopted the average value of the value of open land and value of land with buildings and adopted an average value so arrived at - A.O. has taken one of the possible views in adopting the cost of acquisition as supported by the valuation report - the action of the CIT in invoking of section 263 is without any jurisdiction for the reasons stated - Decided in favor of the assessee

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• 2012 (5) TMI 440
  Disallowance of 90% of expenses related to other group concerns and their directors or their relatives - held that:- while accepting the principle that for eligibility of an allowance under section 10(2)(xv), there should be a nexus between the expenditure and the purpose of the business and the expenditure should have been wholly and exclusively laid out for that purpose. Merely because the assessee's income, after incurring such expenses, was found to be little or negligible, it cannot be said that the said expenditure became an impermissible deduction. Once it is found that the expenditure was bona fide incurred and that the same related to the business activity, then it would become deductible as the same is permitted by the provisions of law. In the light of view taken in these decisions, we are of the opinion that disallowance of a portion of establishment expenses by the ld. CIT(A) was not justified. - The mere fact that no tangible business came out of the foreign visit is not a ground for disallowing the foreign travel expenditure, because it is possible that in the first meeting only business discussions would take place and nothing tangible may come out. - Unless the business is abandoned or closed and even if business is at a dormant stage waiting for proper market conditions to develop, the expenditure incurred in the course of such a business is to be allowed as deduction. Delay in filing an appeal - Appeal against order of Rectification u/s 154 - held that:- the asseessee seems to be quite negligent by not taking the necessary steps for filing the appeal within the time prescribed by the statute. The conduct of the assessee reveals that the assessee takes the condonation of delay provision as granted. The assessee did not care to submit any request for condonation of delay, even when it was brought specifically to their notice. In granting the indulgence and condoning the delay, it must be proved beyond the shadow of doubt that the assessee was diligent and was not guilty of negligence whatsoever. - Delay not condoned - decided against the assessee.

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• 2012 (5) TMI 439
  Non deduction of TDS - Payment to directors - Disallowance under section 40(a)(ia) - TDS u/s 194H or 192 - held that:- the commission paid to directors as per terms of employment for the work done in their capacity as whole-time directors is to be treated as incentive in addition to salary, etc. and did not come within the purview of commission and brokerage as defined in section 194H or fee for professional or technical services as defined in s. 194J and therefore, same cannot be disallowed under s. 40(a)(ia) of the Act. - Decided in favor of assessee.

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• 2012 (5) TMI 438
  Penalty u/s 271(1)(c) - It is quite evident that the appellant had made wrong claim of deduction in respect of commission intentionally and inspite of a number of opportunities given to the appellant by the A.O. the said claim was not withdrawn suo-moto - As per the evidence before us in this case, we have to draw the inference that it was a deliberate or conscious attempt on the part of the assessee to manipulate the book result by passing the false entry of 'commission payment' to evade the tax. Admittedly, as per the reply filed by the assessee to the A.O. it was contended that the assessee has paid the commission to M/s. KAP Ltd. and only after investigation was started by the A.O. through DDI (Invt), New Delhi, assessee came forward claiming innocence and stated it was a bona fide mistake - Decided against the assessee

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• 2012 (5) TMI 437
  Deduction u/s 10(23G) - assessee is a public sector scheduled bank and earned income of Rs.146,33,70,763/- by way of interest from infrastructure bonds - It was noted by the Assessing Officer that the total interest was to the extent of Rs.146,33,70,763/-. The notification granting the approval by the CBDT in respect of the other projects which involved the interest of Rs.109,56,32,636/- was not produced before the Assessing Officer Hence, the Assessing Officer made the addition - Held that: Learned CIT(A), in our view, has rightly directed the granting of exemption under Section 10(23G) of the Act in respect of interest on such bonds whose certificate of exemption was filed before him - However no assessee produced the remaining certificates - matter remanded back to AO - If the assessee, for any reason, is not able to produce such certificates when the Assessing Officer is giving effect to, the Assessing Officer is free to confirm the addition to that extent - Appeal is allowed for statistical purpose. Remission of liability - Deemed income u/s 41(1) - amount transferred from inter branch transaction blocked accounts to reserves through the medium of profit and loss account. - held that:- the disputed amounts were part of inter branch transactions and there was a mismatch of the transactions between different branches of the same bank and it was not reconciled and these are all carried forward from so many years from the bank and its branches. - None of these transactions, as we see from the records presented before us and the information available with us, show that the involved transactions have revenue implications by nature which could spring the income subject to assessment under the Income-tax Act. Transaction between the head office of the assessee and its branch in India was a transaction between the principal and principal. In law, there cannot be a valid transaction of sale between the branch and its head office. As it is ultimately based on a proposition that no person can enter into contract with one self. Debiting or crediting one's account cannot alter the legal position. When that primary requirement is absent, the question of bringing the sums in question to tax under Section 41(1) may not be legally permissible to the Revenue. - Decided in favor of assessee.

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• 2012 (5) TMI 436
  Rejection of book of accoutns - Estimation of income at 5% of the gross turnover of the company - A.O. noticed that there are huge losses incurred by the assessee and the losses cannot be accepted as the projects undertaken by the assessee were having escalation clause - held that:- The provision empowers the A.O. to reject the books of account and estimate income as provided under section 144 / 145 only if he is satisfied about the correctness and completeness of accounts of assessee or accounting standards notified have not been followed by the assessee. The assessee has maintained complete books of account including vouchers and also justified the increase in cost, reasons for suffering losses and also the fact that stock registers were maintained at the respective places. Just because the assessee has suffered losses, it does not mean that the assessee's books of account are to be rejected. Assessee has maintained complete books of account including vouchers and also justified the increase in cost, reasons for suffering losses and also the fact that stock registers were maintained at the respective places - The assessee also justified why it has suffered losses by giving detailed reasons including the escalation clause, cost of increase in material and difficulty in implementing the road projects in Naxal-hit areas as a new venture - Decided in favor of the assessee

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• 2012 (5) TMI 435
  Deleting the addition by CIT (A) on account of treatment of dead stock expenses as capital expenses – Held that:- Examining the details of dead stock expenses , the expenses incurred for purchase of TV, Refrigerator, Battery and Office table etc. are to be capitalized and the same is not allowable as revenue expenditure - the disallowance was rightly made by the AO and the order of ld. CIT(A) is not sustainable – in favour of revenue. Deleting the addition by CIT (A) on account of treatment of land restoration expenses as capital expenses - Held that:- No finding of ld. CIT(A) that the receipts on this account are not declared as income in the present year then even if it is accepted that these expenses are in connection with laying of pipe lines, the same has to be added to the value of closing stock and it will not be allowable as expenditure in the present year – remand back matter to the file of ld. CIT(A) for fresh adjudication whether the receipt on account of laying of pipe lines in respect of which it is claimed that the land leveling expenses were incurred have been shown as income in the present year or not - order of ld. CIT(A) is not sustainable – in favour of revenue. Deleting the addition by CIT(A) on account of treatment of stamp duty expenses as capital expenses – Held that:- Merely making contention that stamp duty expenses were incurred for obtaining loan cannot be accepted unless the same is supported by some evidence - since there is no mention in the order of ld. CIT(A) or in the submission made about evidence and no reply or evidence was produced before the AO, the disallowance made by the AO is justified and the order of ld. CIT(A) for deleting the addition is not sustainable – in favour of revenue. Deleting the addition by CIT (A) on account of disallowance of depreciation – Held that:- Simply because the payment is made by cheque and some entries are made in the inward register, it cannot be accepted that the assets were procured and were put to use and hence depreciation is allowable - No such bill has been produced by the assessee before ld. CIT(A) regarding the purchase of assets or evidence in respect of putting into use of the assets- in favour of revenue.

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• 2012 (5) TMI 434
  Business income or Capital gain - shares - investment or stock in trade - Held that:- as long as shares are acquired on the grounds of business expediency, any loss on sale thereof is also required to be treated as an admissible business deduction - Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss - Appeal is dismissed

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• Customs

• 2012 (5) TMI 433
  Confiscation of the newsprint seized - Redemption fine - As per the public notice dated 31-9-1993 issued by Ministry of Commerce, Govt, of India, the newsprint can be imported directly by those who hold a certificate of entitlement to import newsprint issued by Registrar of Newspaper, Govt, of India or through Newspaper handling agency authorized by them - redemption fine and penalties on appellants as there is a violation of conditions of import policy, keeping in view the value of the seized goods which were subsequently confiscated, the redemption fine is reduced

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• Service Tax

• 2012 (5) TMI 448
  Demand of service tax along with interest and penalties - appellant had claimed that the amount which is sought added in gross value in storage and warehousing services, is pertaining to rent received for leasing out of godown to various customers and that the amount accounted as 'dispatch money' is nothing but an incentive received for speedy discharge of goods. It is the submission that they had produced various evidence before the Commissioner (Appeals) in support of the claim which have not been considered - appellant's claim that he had produced the evidence seems to be correct. It is also seen that the Commissioner (Appeals) had not considered the said evidence and no findings have been recorded. appeal is allowed by way of remand

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• 2012 (5) TMI 447
  CENVAT credit of Service Tax paid on outdoor caterer's service – Held that:- Under the provisions of Section 46 of the Factories Act, 1948, it is mandatory for the appellant to provide canteen facility for the worker in their factory premises as a measure of welfare of the workers. The canteen facility also helps in furtherance of the manufacture. Thus, the caterer service has nexus or integral connection with the business of manufacture of final product and this would qualify to be input service under Rule 2(1) of Cenvat Credit Rules, 2004. Revenue's appeal is dismissed

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• 2012 (5) TMI 446
  CENVAT credit - assessee availed CENVAT credit on 'Business Auxiliary Services' for the period from March, 2005 to June, 2007 – Held that:- in the case of ABB Ltd. (2009 - TMI - 34139 - CESTAT, BANGALORE - Service Tax) has held that the services availed by a manufacturer for outward transportation of final products from the place of removal shall be treated as input services in terms of Rule 2(l)(ii) of Cenvat Credit Rules, 2004. ultimate order passed by the Larger Bench of the Tribunal does not suffer from any infirmity so far as period prior to amendment of the said Rule i.e.01.04.2008, is concerned. decision is squarely applicable to the present case since the period involved in the case is prior to 01.04.2008 as already discussed, supra. order is set aside and appeal is allowed.

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• 2012 (5) TMI 445
  Refund claim - refund claim of Service Tax paid on GTA services on outward freight in relation to transportation of export consignment under Notification No. 41/07 dated 6.10.2007 – Held that:- expression used in the Notification No. 3/2008 is 'in relation to transport of export goods'. This expression covers the transport of empty container from the factory to place of export of goods.The Tribunal in the case of Tata Coffee Ltd. (2010 - TMI - 204927 - CESTAT, CHENNAI - Service Tax) has held that the expression 'in relation to transport of export goods' is wide enough to cover even transport of empty containers from the yard to the factory for stuffing of export goods. Commissioner (Appeals) is not sustainable in law, the same is set aside and the appeal is allowed

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• 2012 (5) TMI 444
  Business Auxiliary Service (BAS) - Service provided to bank in relation to loan - arranging documents for the bank to evaluate creditability, eligibility and financial status of the prospective customer for funding by the bank. - held that:- Appellant promoted funding business of bank gathering documents and preparing profiles to enable the bank to consider its funding activity. All these facts and attendant circumstances bring the bank and the Appellant to the understanding as taxable service provider and recipient of such service. - Appellant provided 'Business Auxiliary Service' to the bank liable to tax. Extended period of limitation - Show Cause Notice issued on 22.8.2006 for the period from 1.7.2003 to 31.3.2005 – Held that:- In the present case, limitation can be reckoned from the date of knowledge of the department on 20.1.2005 giving rise to cause of action. Adjudication is not time-barred. - Decision of Apex Court in CCE, Visakhapatnam Vs. Mehta & Co. (2011 (2) TMI 2 (SC)), followed. Whether amendment made by Finance Act 2004 coming into force with effect from 10.9.2004 read with Notification No.14/2004 dated 10.9.2004 granted immunity to the Appellant from levy – Held that:- service provided by the Appellant in the present case was to the financing bank but not to the borrower. Relation between the Appellant and the bank proves that there was quid pro quo between the Appellant and the bank to meet the requirement of funding. The Appellant had only served the bank but not acted on behalf of the bank. Borrower was not privy to the contract between the Appellant and the bank. So also in absence of any letter of appointment and agreement. Appellant has no scope to be benefited by the amendment of law. Penalty - held that:- But while appreciating the levy was new imposition of penalty under Section 78 and 76 of the Act, simultaneously shall be harsh. Therefore levy of penalty under Section 78 shall be proper dose to prevent the Appellant from recurrence of the contravention of law and to cause loss of revenue.

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• Central Excise

• 2012 (5) TMI 432
  Demand of duty, interest and penalty – assessee availed facility of Cenvat credit of duty paid on inputs and capital goods and service tax paid on input services used in or in relation to the manufacture of their final products in terms of Cenvat Credit Rules, 2004 - As per the conditions of this agreement, the appellant are entitled for “Operational Compensation” at specified rates if in a financial year M/s. Eicher Motors Ltd. failed to lift certain specified quantity of the goods – Held that:- operational compensation amount being received by the appellant is part of the price of the goods and the appellant’s plea that the same has no nexus with the sale of the goods does not appeal to be acceptable, requirement of pre-deposit of the interest and penalty shall stand waived and recovery thereof stayed till the disposal of the appeal

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• 2012 (5) TMI 431
  Demand of duty - order Commissioner has confirmed the demand of duty, which was earlier granted as rebate to the appellants - Commissioner has not doubted the factum of export of goods in question, in which case the appellants would be entitled to the benefit of duty draw back - exports were made under the rebate claim – Held that:- appellants rebate claim to the extent of around Rs. 2.20 Crores stands denied by the authorities below in respect of admitted exports, appellants have been able to make out a prima facie good case in their favour so as to dispense with the condition of pre-deposit of duty and penalty, stay petitions allowed

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• 2012 (5) TMI 430
  Legality of remand order passed by Commissioner - CENVAT Credit on electric cables and wires - Commissioner without giving any finding on the case laws cited by appellant, remanded the matter to lower authority after concluding that assessee is not entitled for credit - Held that:- Commissioner is not empowered to remand the case to the lower Adjudicating Authority, after the amendment of Section 35A and the Supreme Court's decision in the case of MIL India Ltd. vs. CCE, Noida (2007 (3) TMI 8 (SC)). In these circumstances, we direct Commissioner (Appeals) to decide the case afresh, while taking into consideration the case laws cited by the Appellant without insisting for predeposit.

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• 2012 (5) TMI 429
  CENVAT credit - bogus invoices and passing CENVAT credit wrongly without physical movement of Cenvatable inputs to their customers – Held that:- goods have been received. The department could not produce any evidence that the goods have not been received. in the case of CCE v. HMM Ltd. (1995 (1) TMI 70 (SC)) held that penalty is not imposable unless the department is able to sustain its demand show-cause notice which was under challenge on the ground of limitation. Revenue's appeal is dismissed

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• 2012 (5) TMI 428
  Revision Application - rebate claim – Held that:- Bill of Export should be filed under the claim of drawback or DEPB. Though Bill of Export is required to be filed for making clearances to SEZ, yet the substantial benefit of rebate claim cannot be denied only for this lapse. Government further observes that Custom Officer of SEZ Unit has endorsed on ARE-1 that the goods have been duly received by them. As the duty paid nature of goods and supply the same to SEZ is not under dispute, the rebate on export of duty paid goods under Rule 18 of Central Excise Rules, 2002 is admissible. Commissioner (Appeals) has rightly allowed the rebate claim, revision application by revenue rejected

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