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2010 (10) TMI 1098
Issues involved: Appeal against order of Commissioner of Income Tax (Appeals) regarding deletion of excess labour payments and treatment of forward contract cancellation loss.
Issue 1: Excess Labour Payments
The Revenue appealed against the deletion of Rs. 3,50,000 addition made by the Assessing Officer on account of excess labour payments by the assessee to its contractors. The Assessing Officer observed discrepancies in labour charges claimed by the assessee compared to similar concerns and made a disallowance of Rs. 4,00,000. On appeal, the Commissioner of Income Tax (Appeals) considered the submissions and confirmed a lump sum disallowance of Rs. 50,000, deleting the balance addition of Rs. 3,50,000. The Commissioner emphasized the need for concrete proof to disallow labour charges solely based on rates paid by other parties. The Tribunal upheld the Commissioner's decision, noting that no specific error was pointed out in the order and that there was no evidence to show the claimed labour charges were unsupported.
Issue 2: Forward Contract Cancellation Loss
The second ground of appeal pertained to the treatment of a loss of Rs. 5,29,446 on cancellation of forward contracts. The Assessing Officer treated this loss as speculation loss under section 43(5) of the Act, alleging that the contracts were cancelled to avoid losses due to price fluctuations. On appeal, the Commissioner of Income Tax (Appeals) considered the nature of the contracts and ruled that they were hedging transactions against specific import/export orders, not speculative in intent. The Commissioner allowed the loss as a business loss. The Tribunal upheld this decision, noting that the contracts were entered into to protect against exchange rate fluctuations and were not speculative transactions as alleged by the Assessing Officer.
In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the decisions of the Commissioner of Income Tax (Appeals) regarding both the excess labour payments and the treatment of forward contract cancellation loss.
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2010 (10) TMI 1097
Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) and validity of assessment.
2. Addition on account of capital gains.
3. Consideration of guideline value for computing capital gains.
Issue-wise Detailed Analysis:
1. Jurisdiction of the Assessing Officer (AO) and Validity of Assessment:
The assessee contended that the assessment order was without jurisdiction as it was completed in the name of a non-existent firm "Anand Theatres" instead of the joint stock company "Anand Citi Centre Holding P. Ltd." The conversion of the firm into a company under Part IX of the Companies Act 1956 was noted by the AO but the assessment was still completed in the name of the firm. The Tribunal found that the firm ceased to exist upon its conversion into a company, and the assessment done on a non-existent firm was void. The Tribunal concluded that there was no dissolution of the firm, and the business continued seamlessly in the company's new form. The assessment on the non-existent firm was quashed, allowing grounds 2 and 3 of the assessee.
2. Addition on Account of Capital Gains:
The AO had concluded that there was a transfer of property to M/s ETA in the relevant previous year based on the MOUs and the possession handed over, thus attracting capital gains. The Tribunal examined the MOUs and found discrepancies in the AO's conclusions. The Tribunal noted that the first MOU required the purchase of additional properties by M/s ETA, and the second MOU revised the terms significantly. The Tribunal found no evidence of actual possession being handed over to M/s ETA in the relevant previous year. The Tribunal also noted that M/s ETA's inability to proceed with the project due to FDI guidelines was not rebutted. The Tribunal concluded that there was no transfer of possession or constructive transfer, and hence, no capital gains were exigible. Grounds 4 to 6 of the assessee were allowed.
3. Consideration of Guideline Value for Computing Capital Gains:
The AO had recommended considering the guideline value for computing capital gains based on Section 50C of the Act. Since the Tribunal found that there was no transfer warranting a levy of capital gains tax, this ground became infructuous.
Conclusion:
The Tribunal allowed the appeal of the assessee, quashing the assessment done on the non-existent firm and ruling out the addition on account of capital gains due to the lack of actual or constructive transfer of property. The consideration of guideline value for computing capital gains was rendered irrelevant. The order was pronounced in the Open Court on 22-10-2010.
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2010 (10) TMI 1096
Release of detained goods without security - valid declaration form - Held that: - the period of validity of declaration form was not over. Since there is no evidence on record before the Tribunal to come to the conclusion that the goods were actually being unloaded in the State of U.P. and the period of validity of the documents was still valid the Tribunal has rightly directed for release of the goods without security - revision dismissed - decided against Revenue.
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2010 (10) TMI 1095
Issues involved: Registration under section 12A of the Income-tax Act, refusal of registration, legality of the order, compliance with principles of natural justice, activities of the trust being considered as business.
Registration under section 12A:
The assessee trust applied for registration under section 12A of the Act with the DIT (E) on 25th July, 2008, providing details of its activities. The DIT (E) conducted multiple hearings and requested additional information, which the trust duly submitted. However, the DIT (E) observed that the trust deed was not registered and lacked irrevocability clause. Consequently, the DIT (E) rejected the registration application, deeming the trust's activities as business-oriented rather than charitable, as it involved renting out buildings for events. The rejection was based on the provision of sub-section (15) of section 2 of the Income-tax Act. The assessee appealed against this decision.
Legality of the refusal of registration:
The counsel for the assessee argued that the DIT (E) did not provide a reasonable opportunity for the trust to be heard before refusing registration, as mandated by section 12AA of the Act. The counsel contended that the order was passed without proper consideration and violated principles of natural justice. It was emphasized that the DIT (E) failed to adhere to the statutory requirement of granting a fair hearing before making a decision. The counsel also highlighted the limitation period of six months for passing such orders, asserting that the impugned order was non est due to procedural irregularities.
Compliance with principles of natural justice:
The counsel for the assessee contended that the DIT (E) did not follow the statutory provisions requiring a reasonable opportunity for the trust to present its case before a decision was made. The failure to provide a proper hearing before refusing registration was deemed a violation of natural justice, rendering the order invalid. The counsel argued that the trust should have been granted registration under section 12AA of the Act due to the procedural lapses.
Activities of the trust considered as business:
Upon review, it was found that the trust engaged in activities that were more aligned with business operations rather than charitable endeavors. The trust leased property from another entity and rented it out for events, generating income through hire charges. This commercial aspect of the trust's operations led to the conclusion that its activities did not qualify as charitable under the relevant provisions of the Income-tax Act. The DIT (E) was justified in refusing registration based on the nature of the trust's operations.
Conclusion:
After considering the arguments and reviewing the activities of the trust, the appeal was dismissed. The Tribunal found that the DIT (E) had provided adequate opportunities for the trust to present its case and that the refusal of registration was justified based on the commercial nature of the trust's operations. The decision was pronounced on 21-10-2010.
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2010 (10) TMI 1094
Issues involved:
The issues involved in this case include challenges to the validity and legality of the assessment, disallowance of depreciation and interest expenditure, disallowance of foreign travel expenses, disallowance of deferred expenditure u/s 35D, levy of interest u/s 234B, correctness of book profit computed u/s 115JA, disallowance of consultancy charges, disallowance of management consultancy fees, disallowance of depreciation on additional demand, and upholding the AO's order.
Validity of Assessment Order:
The assessee raised concerns regarding the validity of the assessment order, citing lack of adequate time for submission of replies and cross-examination of relevant persons. The AO allegedly did not provide legible copies of impounded documents and statements, hindering the assessee's ability to defend against proposed additions. The Tribunal concluded that the assessment needed to be redone as the assessee was not given a reasonable opportunity to be heard, emphasizing the importance of providing full support to enable the AO to enforce the attendance of relevant persons.
Disallowance of Expenses:
The CIT(A) disallowed various expenses, including depreciation, interest expenditure, foreign travel expenses, and deferred expenditure u/s 35D. The Tribunal found errors in the disallowances and ordered the appeals to be restored to the AO for fresh consideration, highlighting the need for proper examination and support to address the issues raised.
Levy of Interest u/s 234B:
The CIT(A) upheld the levy of interest u/s 234B, while the assessee contended that it was not a fit case for such levy. The Tribunal allowed the appeals but for statistical purposes, indicating a need for a re-examination of the issues related to the levy of interest u/s 234B.
Disallowed Consultancy Charges and Fees:
The Revenue's appeal included grounds related to the disallowance of consultancy charges and management consultancy fees. The Tribunal found errors in the disallowances and emphasized the necessity for a proper assessment based on the facts of the case.
Conclusion:
The Tribunal ordered a fresh assessment by the AO, highlighting the importance of providing a reasonable opportunity for the assessee to be heard and to address the issues raised regarding the validity of the assessment order and various disallowances. The appeals were allowed, signaling the need for a thorough re-examination of the case to ensure a fair and accurate assessment.
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2010 (10) TMI 1093
The Supreme Court dismissed the special leave petition after hearing the counsel for the petitioner. Delay was condoned. (Case citation: 2010 (10) TMI 1093 - SC Order)
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2010 (10) TMI 1092
1. ISSUES PRESENTED and CONSIDERED
The legal judgment from the Appellate Tribunal ITAT Mumbai addresses the following core legal questions:
- Whether the protective addition made by the Additional Commissioner of Income Tax regarding the depreciation on the Stock Exchange Card is justified.
- Whether the depreciation allowed on the Stock Exchange Card in earlier years constitutes a taxable benefit under Section 28(iv) of the Income Tax Act, 1961.
- Whether the deletion of disallowance of VSAT charges and transaction charges under Section 40(a)(1a) paid by the assessee to the Stock Exchange is correct.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Protective Addition on Depreciation
- Relevant Legal Framework and Precedents: The main legal provisions involved are Section 28(iv) and Section 55(2)(ab) of the Income Tax Act, 1961. The precedents include the case of Techno Shares & Stocks Ltd. Vs CIT.
- Court's Interpretation and Reasoning: The Tribunal found that the protective addition made by the AO was not justified. The AO's reasoning was based on the assumption that the depreciation allowed in earlier years constitutes a benefit under Section 28(iv), which the Tribunal did not agree with.
- Key Evidence and Findings: The Tribunal noted that the cost of acquisition of shares in the Stock Exchange, as per Section 55(2)(ab), is deemed to be the cost of acquisition of the original membership, and this does not confer any taxable benefit under Section 28(iv).
- Application of Law to Facts: The Tribunal applied the provisions of Section 55(2)(ab) and concluded that the allotment of shares does not confer any benefit that could be taxed under Section 28(iv).
- Treatment of Competing Arguments: The Tribunal considered the AO's view that the depreciation allowed constitutes a benefit, but it rejected this argument, stating that the benefit does not arise from the conduct of business by the assessee.
- Conclusions: The Tribunal deleted the protective addition of Rs. 21,961,712, concluding that it was not justified.
Issue 2: Disallowance of VSAT and Transaction Charges
- Relevant Legal Framework and Precedents: The provisions involved are Section 40(a)(1a) and Section 194J of the Income Tax Act, 1961. Relevant case law includes Angel Broking Ltd. and Kotak Securities Ltd. vs Addl. CIT.
- Court's Interpretation and Reasoning: The Tribunal found that the VSAT and transaction charges paid by the assessee to the Stock Exchange do not constitute fees for technical services and are not subject to disallowance under Section 40(a)(1a).
- Key Evidence and Findings: The Tribunal noted that the charges are for the use of facilities provided by the Stock Exchange and not for any technical services rendered.
- Application of Law to Facts: The Tribunal applied the provisions of Section 194J and determined that the payments made by the assessee do not fall under the category of fees for technical services.
- Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument that the payments were for technical services, citing the lack of evidence supporting such a characterization.
- Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 413,192 for VSAT charges and Rs. 6,712,842 for transaction charges.
3. SIGNIFICANT HOLDINGS
- Preserve Verbatim Quotes of Crucial Legal Reasoning: "The statute has provided for the deemed cost of acquisition of the shares in the Stock exchange company. Merely because the cost of acquisition as provided in the statute is higher than the cost of acquisition/ WDV of the assets as on the date of such exchange does not mean that the assessee has acquired any benefit u/s 28(iv)."
- Core Principles Established: The Tribunal established that the conversion of a Stock Exchange membership card to shares does not constitute a taxable benefit under Section 28(iv) and that VSAT and transaction charges are not fees for technical services.
- Final Determinations on Each Issue: The Tribunal allowed the assessee's appeal regarding the protective addition and upheld the CIT(A)'s decision on the deletion of disallowances related to VSAT and transaction charges.
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2010 (10) TMI 1091
Issues involved: Appeal against denial of approval u/s 80G of the Income Tax Act by the Director of Income Tax (Exemption), Mumbai.
Summary:
The appeal was filed by the assessee against the order of the Director of Income Tax (Exemption), Mumbai denying approval u/s 80G of the Act. The assessee contended that all conditions for approval were met and approval should have been granted. The Director noted that the trust was approved u/s 12A but had not carried out charitable activities for the last three years, leading to the denial of the certificate u/s 80G.
The assessee, represented by counsel, argued that despite not receiving donations in the last three years, it had previously constructed a School and Hospital, subsequently handed over to the Government, demonstrating charitable activities. The Tribunal found merit in the assessee's submissions, setting aside the Director's order and remitting the matter for reconsideration. It was emphasized that if the School and Hospital were indeed constructed and handed over to the Government, approval u/s 80G should be granted.
Ultimately, the appeal was allowed for statistical purposes, with the Tribunal directing a reconsideration of the issue by the Director of Income Tax (Exemption), Mumbai. The order was pronounced on October 8, 2010.
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2010 (10) TMI 1090
Issues: Disallowance of additional depreciation claimed by the assessee u/s 32(1)(iia) of the Income Tax Act, 1961.
Summary:
The appeal was filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-II, Surat, which deleted the disallowance of additional depreciation claimed by the assessee for the assessment year 2007-08.
The Assessing Officer disallowed the claim of additional depreciation on the grounds that the assessee was not engaged in manufacturing or embroidery works on fabrics as required by section 32(1)(iia) of the Income Tax Act, 1961. However, the Learned Commissioner of Income Tax (Appeals) allowed the claim based on the provisions of section 32(1)(iia) and directed the Assessing Officer to allow the depreciation.
During the hearing, the Revenue contended that the assessee was not engaged in manufacturing and therefore not entitled to additional depreciation. On the other hand, the assessee's counsel cited a previous decision of ITAT, 'SMC' Bench, Ahmedabad, which held that an assessee engaged in embroidery work on fabrics is entitled to additional depreciation under section 32(1)(iia).
After considering the arguments and the previous decision, the Tribunal upheld that the assessee was entitled to additional depreciation under section 32(1)(iia) of the Income Tax Act, 1961. The Tribunal found no infirmity in the order of the Learned Commissioner of Income Tax (Appeals) and dismissed the appeal filed by the Revenue.
The decision was based on the interpretation of the activities carried out by the assessee in embroidery work, which were deemed to result in the production of a new article with different commercial value, thus qualifying for additional depreciation under the relevant provisions of the Income Tax Act.
The Tribunal's decision aligned with the previous ruling of ITAT, 'SMC' Bench, Ahmedabad, and the principles established by the Hon'ble Supreme Court regarding the eligibility for additional depreciation in cases involving the production of new articles or things.
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2010 (10) TMI 1089
Chargeability to income-tax on Subsidy received under Package Scheme of Incentives 1993 from State Government - credited to Capital Reserve A/c - nature of receipt - revenue or capital receipt - A.O was of the view that as per Explanation-10 to Section 43(1), any subsidy received from the Government is required to be reduced from the actual cost of the assets for the purpose of depreciation under the Income Tax Act 1961 - A.O was not satisfied with the explanation of the assessee and finally concluded that the subsidy should be excluded from the cost of the assets for the depreciation and made an addition after re-working the same - CIT(A) upheld the action of the A.O.
HELD THAT:- An identical issue was raised under similar material facts in the case of M/s. Sapna Re-rolling Industries v. ITO wherein following the decision of the Tribunal in the case of Sasisri Extractions Ltd. v. ACIT,[2008 (1) TMI 485 - ITAT VISAKHAPATNAM], held that;
“A careful perusal of “Target 2000” scheme shows that the scheme was intended to accelerate industrial development of the State and the incentive was given for setting up of determining the amount of subsidy to be given the cost of eligible investment was taken as the basis, though it was not specifically intended to subsidise the cost of the capital. Under the circumstances, we are of the view that the incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost of thus falls outside the ken of Explanation 10 to section 43(1). Therefore, we are of the view that for the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the actual cost of the capital asset. AO is directed accordingly.”
We, thus, following the decision, set aside orders of the lower authorities on the issue with direction to the A.O to decide the issue in view of the above cited decision. Ground is, accordingly, allowed in favour of the assessee.
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2010 (10) TMI 1088
Issues involved: Appeal against invoking provisions of sec. 14A of the Income Tax Act and disallowance of expenses under Rule 8D of the Income-tax Rules for Assessment Year 2007-08.
The appellant challenged the order of the Commissioner of Income-tax (Appeals) regarding the invocation of sec. 14A of the Income Tax Act and the disallowance of expenses under Rule 8D. The Assessing Officer disallowed a sum under Rule 8D without identifying actual expenditure for earning exempted income. The CIT(A) upheld the AO's decision, stating that the provisions of sec. 14A and Rule 8D were correctly applied. The appellant then appealed to the Tribunal.
Upon review, the Tribunal found that the AO and CIT(A) had disallowed expenses based on Rule 8 of the Income-tax Rules without evidence of actual expenditure for earning exempt income. The Tribunal noted that the Bombay High Court ruled that Rule 8D applies only from Assessment Year 2008-09, not for the present case in Assessment Year 2007-08. Consequently, the Tribunal set aside the lower authorities' orders, stating that no disallowance under sec. 14A was warranted as no expenses were incurred by the assessee to earn exempt income. The AO was directed to adjust the assessment order accordingly.
The Tribunal allowed the appeal filed by the assessee, emphasizing that the application of Rule 8D for disallowance was incorrect for Assessment Year 2007-08. The decision was pronounced in the Open Court on 22nd October, 2010.
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2010 (10) TMI 1087
Issues involved: Whether the amount received by the assessees towards consideration for retirement from the partnership firm amounts to transfer attracting capital gains.
In the judgment, the High Court of Kerala considered multiple appeals filed by the revenue challenging the Tribunal's decision that the amount received by the assessees for retirement from the partnership firm does not attract capital gains. The assessees were partners in a firm operating a bar attached hotel, and during their retirement, a significant amount was paid towards unaccounted consideration. The Assessing Officer treated this as a transfer attracting capital gains, but the Tribunal ruled otherwise, emphasizing that the retirement and reconstitution did not lead to the dissolution of the firm. The High Court referred to Supreme Court decisions which held that the retirement of a partner does not constitute a transfer under Section 2(47) of the Income Tax Act, and therefore, capital gains assessment is not applicable in such cases. The court dismissed the appeals filed by the revenue based on this legal interpretation.
The High Court's decision in the above appeals also applied to Appeal Nos: 842/2009 & 1471/2009, where the respondent-assessees were partners in the same firm. Since the court had already ruled that no capital gains are assessable on retiring partners in the batch case, the same conclusion was extended to these appeals involving partners from the same firm. Consequently, the court dismissed these additional appeals filed by the revenue, maintaining consistency with its earlier findings.
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2010 (10) TMI 1086
Issues Involved:
1. Validity of the order u/s 263 of the Income Tax Act.
2. Non-disallowance u/s 40(a) for payment to Nilakandan Brothers Constructions.
3. Non-admission of work-in-progress in the balance sheet.
Summary:
1. Validity of the order u/s 263 of the Income Tax Act:
The appeal was directed against the order u/s 263 passed by the CIT, Salem, which set aside the assessment order for AY 2006-07. The CIT issued a show cause notice u/s 263, stating that the assessment order was erroneous and prejudicial to the interest of revenue due to lack of disallowance u/s 40(a) and non-admission of work-in-progress. The assessee contended that the Assessing Officer (AO) had made proper inquiries and the order was not erroneous. However, the CIT concluded that the AO failed to make necessary inquiries, rendering the assessment order erroneous and prejudicial to the revenue.
2. Non-disallowance u/s 40(a) for payment to Nilakandan Brothers Constructions:
The CIT noted that the AO did not disallow Rs. 1,00,00,000/- paid to Nilakandan Brothers Constructions despite no evidence of TDS deduction. The assessee argued that TDS was deducted and deposited, providing Form No. 16A as evidence. The CIT found that the AO did not verify these details during the assessment, thus failing to make proper inquiries.
3. Non-admission of work-in-progress in the balance sheet:
The CIT observed that the AO did not obtain details of major expenditures or verify the non-admission of work-in-progress, which was consistently not admitted by the assessee. The CIT held that this consistent non-admission could result in incorrect income computation. The CIT directed the AO to obtain details of TDS on the payment to Nilakandan Brothers Constructions and to make necessary inquiries regarding major expenditures and work-in-progress.
Conclusion:
The Tribunal upheld the CIT's order, stating that the AO's failure to make necessary inquiries rendered the assessment order erroneous and prejudicial to the revenue. The Tribunal cited various judicial precedents supporting the CIT's action u/s 263. The appeal of the assessee was dismissed, confirming the CIT's directions for a fresh assessment.
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2010 (10) TMI 1085
Issues Involved:1. Computation of Fair Market Value (FMV) as on 1.4.1981 for the purpose of capital gain tax. Summary:Issue 1: Computation of Fair Market Value (FMV) as on 1.4.1981 for the purpose of capital gain taxThe appeal by the assessee is directed against the order of the CIT(A)-II, Hyderabad dated 30.12.2009 and pertains to assessment year 2006-07. The only issue arises for consideration is computation of fair market value (FMV) as on 1.4.1981 for the purpose of capital gain tax. The assessee received a plot of land admeasuring 8091 square yards (SY) at Hydernagar, Kukatpally, Hyderabad by a gift deed dated 24.1.2006 and sold it for a sale consideration of Rs. 5,58,30,000. For the purpose of capital gain, the assessee adopted the FMV as on 1.4.1981 at Rs. 750 per SY based on the valuation report of the registered valuer. However, the Assessing Officer adopted the FMV as on 1.4.1981 at Rs. 8 per SY based on the guideline value of the State Registration Department. The learned representative for the assessee argued that the guideline value of the Registration Department is only a guidance for the Sub-Registrar to find out the market rate for the purpose of collecting stamp duty and does not reflect the FMV. The guideline value in Andhra Pradesh was fixed in 1976 and not revised until 1995. Therefore, adopting the guideline value fixed in 1976 as the FMV as on 1.4.1981 is not justified. The assessee has rightly adopted the FMV as on 1.4.1981 on the basis of the report of the valuation officer. On the contrary, the learned DR submitted that the assessee adopted Rs. 750 per SY as on 1.4.1981 after reverse indexation of the cost of inflation, which is not permissible as per the decision of the Special Bench of this Tribunal in Hiralal Lokchandani vs. ITO (2007) 106 ITD 45 (KOL) (SB). Therefore, the Assessing Officer rightly adopted Rs. 8 per SY as per guideline value of the Registration Department. The Tribunal considered the rival submissions and perused the material on record. It was found that the guideline value of the State Registration Department was fixed in 1976 and not revised till 1995. The Tribunal had previously considered an identical issue in the case of G. Vijay & Ors. and found that the guideline value was fixed without any scientific data and cannot be treated as comparable value of the market value as on 1.4.1981. The Tribunal observed that the guideline value/basic value register was not prepared scientifically. The CIT(A) erroneously adopted the market value of the property as on 1.4.1981 at Rs. 8 per SY based on the certificate issued by the Registration Department, which is an extract of the basic value register. The Tribunal noted that the guideline value/basic value register was not revised till 1995 and was not prepared scientifically. Therefore, the lower authorities were not justified in placing reliance on the guideline value fixed by the Government in 1976. The Tribunal also considered the decision of the Kolkata Special Bench in Hiralal Lokchandani and found that the application of the cost inflation index in reverse direction is not permissible. However, in this case, the valuation officer fixed the value after considering the locality and infrastructure available in the area. The valuation officer's report, which considered the location, infrastructure, and potential for future development, was found reasonable. The Tribunal concluded that the property would fetch Rs. 750 per SY if sold in the open market as on 1.4.1981. Therefore, the assessee reasonably estimated the FMV as on 1.4.1981 at Rs. 750 per SY. In conclusion, the Tribunal set aside the orders of the lower authorities and directed the Assessing Officer to take the FMV as on 1.4.1981 at Rs. 750 per SY and compute the capital gain tax accordingly. The appeal of the assessee was allowed. Order pronounced in the open court on 29th October, 2010.
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2010 (10) TMI 1084
Deduction on account of write off of the outstanding loans - Payment towards compliance of the Rehabilitation Scheme - investment made in GPEL - business loss u/s.28(1) or bad debt u/s.36(1)(vii) or a revenue expenditure u/s.37 - Provision towards payment of bonus - Allocation of overhead expenses - computation of the profits of an undertaking eligible for deduction u/s.80IA - Book profits u/s 115JB -
HELD THAT:- The payment made by the assessee is, in fact, towards compliance of the Rehabilitation Scheme. It clearly shows that the assessee company was trying to rehabilitate the operations of the GPEL but still the same could not be revived. Therefore, in addition to the above compulsions by the order of the BIFR, the assessee company was further required to defend its reputation by paying to the financial institutions and bankers towards discharge of its guaranteed liabilities and other liabilities as proposed by the BIFR. Failure to pay these liabilities would have exposed the assessee company of getting black listed and losing the face from financial institutions and banks for its future projects. In fact, when the whole situation is looked from this angle, it seems that the assessee company had no choice but to pay the amount. Even the delay for making these payments would have led the assessee company into further trouble in the sense that liabilities of financial institutions and banks would have gone up further.
Thus, it is clear that payments were made out of the commercial expediency and as observed by the Hon'ble Supreme Court in the case of in the case of S. A. Builders [2006 (12) TMI 82 - SUPREME COURT] that even if there is no necessity to make the payments and such payments are made voluntarily on the grounds of commercial expediency, then such claim has to be allowed.
Thus, it become clear that claim has to be allowed even if it is not necessary to make such payments if the payments had been made voluntarily on the grounds of commercial expediency. Further it is not necessary that such business should be that of assessee itself. In the case before us though the amounts have been made in respect of GPEL but basically assessee was trying to establish the new business through GPEL and was also trying to achieve the larger business interest by establishing further factory in the State of Gujarat and it has been done also by establishment of tyre manufacturing unit at Limda near Baroda.
In fact, as pointed out by the ld. counsel of the assessee, the whole exercise was not done for the sake of fun or with an altruistic motive. But the assessee was trying to achieve a large business interest. Here it would be pertinent to note that this exercise is not being done up with the purpose of siphoning off the money or parking of the funds in the private companies of the promoters. This is so, because, GIIC is a government company being an organisation promoted by the State of Gujarat for establishment and encouragement of new industrial projects in the State of Gujarat.
Moreover, the effective management of GPEL was with the assessee company and the Chairman and Managing Director also belonged to the assessee company. Then viewing it from this angle, which we have observed earlier also, that after all it was a case of saving of reputation of assessee company by meeting the liabilities of banks and financial institutions which were in pursuance of Rehabilitation Scheme.
One more objection was taken by the AO as well as the ld. CIT DR that since Board’s resolution was passed on 26-6-2002, therefore, liabilities cannot be claimed in this year. Firstly, we agree with the submissions of the ld. counsel of the assessee that in the case of company accounts are not closed on the last day of business but they are generally finalised much after that and, therefore, assessee company had the right to claim this amount before the accounts were finalised.
Thus, it is clear that a company is entitled in law to finalise the accounts later as to what was the position of its account upto a particular date. Therefore, we find no merit in this objection.
From the above it is clear that the claim was made only as a bad debt. No other provision was relied on. Moreover, there was no privity of contract or any legal relationship between the assessee and the selling agent. There was no statutory provision or contractual obligation by which the assessee was bound to pay the guaranteed loan and it was not authorised by the memorandum of association of the company. In the case before us, as pointed out by the ld. counsel of the assessee, the same is authorised by clause-6 of ancillary object. With GPEL assessee is clearly related as a promoter and major shareholder towards diversification of its business. Moreover, the payments have been made under the legal compulsion in terms of Rehabilitation Scheme formulated by BIFR.
ld. CIT(A) held that - '' the amount being advance made to Gujarat Prestrop Electricals Ltd. [GPEL] towards the liability of financial institutions, was for business purpose and that the claim of write off of the same was admissible. The learned CIT(A) also erred in allowing write off on account of reduction in the value of equity investments in the said Gujarat Prestrop Electricals Ltd. The CIT (Appeals) ought to have appreciated that the assessee company had no normal business transactions with GPEL''.
Thus, we confirm the order of the ld. CIT(A).
Provision towards payment of bonus - The proviso to sec.43B gives further concession that if payment in respect of any of the items referred in sec.43B is made in a particular year before the due date of filing of the income tax return, then such claim can be made in the earlier year also for which return is due to be filed. This seems to be only a further concession and cannot be read as a restriction that necessarily deduction has to be claimed in the earlier year which AO had interpreted.
The deduction relates to payment of bonus which has been actually paid in the present year and deduction has been claimed as per sec.43B. Such deduction has been claimed on consistent basis in the year of payment and, therefore, no adverse inference should have been taken. Thus, we find nothing wrong in the order of the ld. CIT[A] and confirm the same.
Allocation of overhead expenses - Profits of DG Power Generation unit - manufacturing unit - We are of the view that if a sum of ₹ 10 lakhs is allocated out of the expenses of this power unit that would meet the ends of justice. However, in addition to this, interest has also to be allocated. For this purpose, we set aside the order of the ld. CIT[A] and remit the matter back to the file of the AO with a direction to ascertain whether any direct borrowings were made for the purpose of acquire the machinery for power generation unit, then such interest may be allocated. If the investment has been made out of the common funds then interest may be allocated on the basis of the turnover which the AO has already adopted for allocation of the expenses. Thus, this ground is partly allowed.
Book profits - Interestingly, AO and ld. CIT DR as well as the Ld.counsel of the assessee have all relied on the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT [2002 (5) TMI 5 - SUPREME COURT]. Therefore, we deem it fit to discuss that decision because it cannot support both sides.
Thus, from the above, it is clear that Hon’ble Supreme Court has laid down a very simple principle that normally the assessing authority is bound to assess accounts prepared as per the requirements of Parts II and III of Schedule VI of the Companies Act and the book profits declared therein cannot be tinkered with except in the circumstances prescribed under the Act. Now Explanation 1 prescribes various adjustments by which profits can be increased as well as decreased.
Now when clause (i) of Explanation 1 to sec.115JB which we have already reproduced above specifically provides for reduction of the amounts withdrawn from any reserve or provision, then such amounts have to be reduced from the book profits unless it is hit by the proviso to that clause. Admittedly, the profits credited in earlier year have already suffered tax though under normal provisions and, therefore, same is not hit by the proviso. In these circumstances, we are of the view, that assessee has correctly reduced the amount of general reserve which was duly withdrawn and reflected in the profit & loss account. Thus, we confirm the order of the ld. CIT(A).
In the result revenue’s appeal is partly allowed
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2010 (10) TMI 1083
Set off allowable u/s 10A/10B - A.O. observed that the assessee had suffered losses for the assessment year 2002-03, which it had carried forward and had set off against the profits of the subsequent years - A.O. was of the opinion that such a set off was not allowable u/s 10A/10B of the Act and relied on section 10B(6)to arrive at his conclusion - CIT (A) after considering the submissions made before him, allowed the ground of the assessee - HELD THAT:- The undisputed fact in this case is that the assessee has not claimed deduction u/s 10A for the assessment year 2002-03. An order u/s 143(3) was passed on 24-3- 2005 for the assessment year 2002-03 and returned loss has been accepted. Thus the assessee is entitled for carry forward and set off of the assessed loss pertaining to the assessment year 2002-03.
Sub-clause (2) of clause (6) to section 10A clearly states that no loss shall be carried forward or set-off where such loss relates to any of the relevant Assessment Years. There is no ambiguity in the Act and it is also an undisputed fact that the appellant was entitled to deduction u/s 10A which it had been allowed in the A.Y. 2001-02 and which it allegedly did not claim in the A.Y. 2002-03.
It is also not in dispute by the A.O. that the appellant had not made a declaration as required u/s 10A(8) of the Act for not claiming deduction u/s 10A - appellant has pointed out to the declaration vide letter dated 08.10.2002 In view of the above facts and circumstances of the case, the stand of the A.O. not allowing the set-off of carry forward loss incurred during the A.Y. 2002- 03 cannot be sustained. - Ground No.1 of the Revenue is dismissed.
Claim u/s. 10B - on-site development of computer software at the site of customers abroad - Employees who have worked onsite had left India for USA, before the date of setting up of SEEPZ Unit - HELD THAT:- From the facts it is clear that the finding of the AO that the employees do not belong to the Company is incorrect. All the employees belong to the company. They are the employees of M/s Geebs Software International P. Ltd. which has amalgamated to the assessee company. Just because the employees were allocated to an other unit of the company which is exempt u/s 10A in the earlier years, and because these employees were assigned duties of the SEZ units in the impugned assessment year, it does not lead to a conclusion that the assessee cannot claim exemption u/s 10B. The AO has granted exemption u/s 80HHE. The allegation that the payments not made are at arm’s length is also not correct because for the assessment year 2003-04 the Transfer Pricing Officer has passed an order u/s 92CA(3) upholding the price paid by the assessee as that which is an another employee - Ground No.2 of the Revenue is dismissed.
Exemption u/s 10B as worked out on proportionate basis - payments as made to certain companies on account of job work and concluded that as the assessee is not a manufacturer to that extent - assessee submitted that there is no finding whatsoever in the assessment order that what was contributed to the assessee company by the job work contractors, was part of a module and not the module itself. He argued that there is no prohibition laid down in the Act for getting jobs done on job work basis - HELD THAT:- Nowhere in the assessment order, the AO has given a finding, that what is got by the assessee from the job work contractors is a product by itself. The assessee had in fact contended before AO that only a part work was done through job work contracts. The AO, in our considered view, was wrong in coming to a conclusion that in the case of manufacture of software, no part job can be outsourced, as in the case of other manufacturing activities. Out of a total receipt on account of sale of software of 13.11 crores, the outsourcing billing was ₹ 1.36 crores. A software product, contains within its numerous sub software programmes which are integrated.
The fact is that the appellant through its 100% export unit exported computer software and the profits on which deduction has been claimed is derived from the unit/undertaking. If part of the work has been done by outside parties, it cannot be concluded that the profit has not been derived by the appellant from the undertaking. It is not in dispute that the entire profit of 100% is only out of the export undertaking. Under the circumstances, the stand of the A.O. cannot be sustained.
We also hold that this decision is in line with the judgment of the jurisdictional High Court in the case of CIT vs. Penwalt India Ltd.[1991 (4) TMI 33 - BOMBAY HIGH COURT]. This ground of the Revenue is dismissed.
Deduction u/s 10B disallowed - “restructure of the unit” - Out of 5000 sq.ft. premises, 2,000 sq.ft. was earmarked for the new unit, which received permission from the Development Commissioner on 17-11-2001. Thus he concluded that the SEEPZ unit was a restructuring of an existing unit - HELD THAT:- As carefully examined the order of the AO and have taken into account the various details filed by the appellant pertaining to the assets in question which exclusively belongs to the STPI Unit – which was situated outside the SEEPZ-SEZ area – and the Unit which was situated within the SEEPZ SEZ and conclude that the AO erred on facts.
The Schedule of assets as per Schedule ‘E’ shows additions to the opening balances - further, the ledger account of Computers purchased during the year 2003-04 along with the copies of the invoices, bills and challans clearly supports the view of the appellant that the Unit situated outside the SEEPZ Unit i.e. the STPI Unit which was itself eligible for deduction u/s 10A – and which had been in earlier year allowed the deduction – was a separate and exclusive Unit distinct from the SEEPZ-SEZ Unit and that in the Unit established in the SEEPZ, the addition to the fixed assets.
AO erred in holding that there was a restructuring of the 10B Unit located in the SEEPZ-SEZ area and the old assets had been utilized in this particular Unit. The two units continued to be exclusive and distinct unit during the year and the Schedule of assets clearly shows that there was no restructuring. The stand of the AO cannot be upheld. To conclude, AO erred in disallowing the claim of the appellant u/s 10B.
Software being done of outsourcing on job work basis and that the employees who have done onsite development were not appointed by the SEEPZ unit - As we follow our earlier order and dismiss this appeal of the Revenue. The fact that the assessee has not maintained separate books of account also does not permit the AO to deny exemption as held in the case of DCIT vs. Arabian Exports Ltd.[2007 (3) TMI 287 - ITAT BOMBAY-G]. Even otherwise when the entire income is from the 10B unit, no separate books need be maintained.
Appeals of the Revenue are dismissed.
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2010 (10) TMI 1082
Chargeability of capital gain on sale of an agricultural land - nature of land sold - whether impugned land fall outside the radius of 8 kms. from the municipality limit of the Visakhapatnam Municipality? - Agricultural land or not? - HELD THAT:- Undisputedly the impugned land was initially situated beyond the 8 kms. from the municipality limit of Visakhapatnam Municipal Corporation. But later on, on incorporation of Greater Visakhapatnam Municipal Corporation, it falls within the 8 kms. from the municipal limit. But no notification as required u/s 2(14)(iii)(b) of the I.T. Act was issued in the Official Gazette by the Central Government.
This issue was examined by us in the case of SMT. C. GIRIJA VERSUS ACIT [2010 (9) TMI 1133 - ITAT VISHAKAPATNAM] in which we have given a categorical finding that to bring a land within the purview of clause (b) of section 2(14)(iii), the Central Government is required to issue a notification in the Official Gazette and without a notification a land falls within the 8 kms. from the local limit of any municipality would not cease to be an agricultural land.
Appeal of Revenue dismissed.
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2010 (10) TMI 1081
Issues involved: Appeal by Revenue against order of CIT(Appeals)-IX, Chennai for assessment year 2002-03 regarding addition of unexplained investment in stock and disallowance of interest.
Addition of Unexplained Investment in Stock:
The Revenue raised grounds against CIT(A)'s deletion of the addition of Rs. 4,81,53,853 representing unexplained stock investment. Arguments included discrepancies between stock declared to bankers and in books, lack of survey evidence for current year, and relevance of past Tribunal decisions. The authorized representative cited precedents emphasizing assessment based on corroborated material and factual findings. The Tribunal noted the absence of current survey evidence and directed reassessment by the Assessing Officer considering market value, corroborative evidence, and stock valuation principles.
Disallowance of Interest:
The Revenue challenged CIT(A)'s deletion of Rs. 26,39,608 interest disallowance, contending it was paid for non-business assets. The authorized representative argued for upholding the deletion, mentioning auditors' disallowance and loan purpose diversification. The Tribunal observed the CIT(A)'s reasoning on proportionate interest disallowance and the assessee's self-disallowed amount. Considering the interrelation with stock valuation, the Tribunal directed reassessment of interest allowance based on loan purpose and stock valuation.
The Tribunal allowed the Revenue's appeal for statistical purposes, emphasizing reassessment requirements for both stock valuation and interest disallowance issues.
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2010 (10) TMI 1080
Issues involved: Appeal against order treating certain receipts as income not forming part of export profit eligible for deduction u/s 10BA of the Act.
Summary:
The appeal was filed by the assessee against the order of the Ld. CIT (A) dated 15th February, 2010, contending that the authorities erred in treating the receipt of DDB and DEPB as income not forming part of the export profit eligible for deduction u/s 10BA of the Act. The assessee, a partnership concern engaged in manufacturing, processing, and export of handicraft articles, mainly wooden, claimed deduction u/s 10BA of the Act. The Ld. Assessing Officer restricted the claim of deduction based on eligible export sales and disallowed certain articles as non-eligible. The assessee failed to produce receipts of DEPB and DDB, which were not considered allowable for deduction u/s 10BA by the revenue. The Ld. CIT (A) denied the claim based on the decision of the Hon'ble Apex Court in Liberty India Vs CIT, which was challenged before the Tribunal.
Upon review, the Tribunal found that the Duty Draw Back receipt (DDB) and DEPB do not form part of the net profit of an eligible industrial undertaking for the purpose of deduction u/s 10BA, in line with the decision of the Hon'ble Apex Court. The Tribunal noted that the wording in relevant sections of the Act emphasizes profit "derived from" export, and only the eligible articles were considered for exemption while non-eligible articles were disallowed. Consequently, the Tribunal affirmed the decision of the Ld. CIT (A) and dismissed the appeal of the assessee.
This order was pronounced in the open court on 8-10-2010.
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2010 (10) TMI 1079
Issues involved: Interpretation of deduction u/s 80IB(10) for proceeds from sale of unutilized FSI in housing projects.
Summary:
The appeal by revenue challenged the order of the Commissioner of Income-tax (Appeals)-II, Baroda regarding the allowance of deduction u/s 80IB(10) for the sale of unutilized FSI in a housing project for assessment year 2007-08. The assessing officer contended that the profit from the sale of unutilized FSI was not derived from development and construction activities, limiting the deduction to a specific portion of the FSI. The assessee cited a previous decision by ITAT, Ahmedabad in the case of Radhe Developer to support their position. The Commissioner, relying on the Radhe Developer case, ruled in favor of the assessee and deleted the addition made by the assessing officer.
The Departmental Representative argued that the issue was already decided in favor of the assessee by ITAT in the Radhe Developer case. After considering the submissions and facts, the Tribunal agreed that the issue was indeed covered by the Radhe Developer case. Consequently, the Tribunal upheld the decision of the Commissioner and dismissed the revenue's appeal.
In conclusion, the Tribunal found no fault with the Commissioner's order and confirmed the decision in favor of the assessee based on the precedent set by the Radhe Developer case. Therefore, the departmental appeal was dismissed.
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