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2007 (6) TMI 280
Issues Involved:
1. Jurisdiction of the Civil Court.
2. Territorial Jurisdiction.
3. Maintainability of the suit under SEBI Act.
4. Registration requirement under SEBI Act.
5. Arbitration clause applicability.
6. Bar of jurisdiction under SEBI Act and SCRA.
7. Rejection of the plaint under Order VII, Rule 11 of CPC.
Detailed Analysis:
1. Jurisdiction of the Civil Court:
The primary issue was whether the civil court had jurisdiction to entertain the suit. The court analyzed Section 20A of the SEBI Act, which bars civil courts from matters that the SEBI Board or Adjudicating Officer is empowered to decide. However, it was concluded that the SEBI Act does not empower these authorities to resolve disputes regarding non-payment by a client to a sub-broker. The court noted that the jurisdiction of civil courts is not barred for such disputes, as indicated by Section 21 of the SEBI Act, which states that nothing in the Act exempts any person from any suit or proceedings that might be brought against them apart from the Act.
2. Territorial Jurisdiction:
The defendants challenged the territorial jurisdiction of the Civil Court at Jalgaon. The plaintiff contended that part of the cause of action arose at Jalgaon due to business dealings and communications made from Jalgaon. The court found that the defendants failed to counter the plaintiff's claim effectively. Therefore, the challenge to the territorial jurisdiction was dismissed.
3. Maintainability of the Suit under SEBI Act:
The trial court initially dismissed the suit on the grounds that the plaintiff, as an unregistered sub-broker, could not maintain the suit under the SEBI Act. However, the appellate court clarified that this issue pertains to the merits of the case and not to the jurisdiction of the court to entertain the suit. The court emphasized that the civil court's jurisdiction is not excluded by the SEBI Act for disputes between non-members.
4. Registration Requirement under SEBI Act:
The plaintiff admitted to acting as a sub-broker without registration, which is mandatory under the SEBI Act. The court noted that while this could affect the merits of the case, it does not affect the court's jurisdiction to entertain the suit.
5. Arbitration Clause Applicability:
The defendants argued that the dispute should be referred to arbitration as per the SEBI (Stock Brokers and Sub-brokers) Rules, 1992, and the model agreements which include arbitration clauses. The court found that these regulations require an agreement between the sub-broker and the client but do not mandate that the agreement must include all terms of the model agreement, including the arbitration clause. Therefore, the court did not accept the argument that the arbitration clause is a statutory term and condition binding the parties.
6. Bar of Jurisdiction under SEBI Act and SCRA:
The court examined the SEBI Act and the Securities Contracts (Regulation) Act, 1956 (SCRA), to determine if they provided an alternate forum for resolving the dispute. It was found that neither the SEBI Act nor the SCRA explicitly barred the jurisdiction of civil courts for disputes regarding non-payment by clients to sub-brokers. The court referred to the Full Bench decision in St. Ulai High School v. Devendraprasad Jagannath Singh, which emphasized that exclusion of civil court jurisdiction is not readily inferred unless the statute provides an adequate alternative remedy.
7. Rejection of the Plaint under Order VII, Rule 11 of CPC:
The trial court had rejected the plaint under Order VII, Rule 11(d) of the CPC, on the grounds that the suit was barred by law. The appellate court found this to be erroneous. It clarified that if the court finds it lacks jurisdiction, it should return the plaint under Order VII, Rule 10 of the CPC, rather than reject it. Since the appellate court concluded that the civil court has jurisdiction, the order of rejection was quashed.
Conclusion:
The appellate court quashed the trial court's order rejecting the plaint and directed the trial court to proceed with the suit on its merits. The court clarified that it did not address the issues of the suit's maintainability on merits due to the plaintiff's unregistered status or whether the transactions were void against public policy.
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2007 (6) TMI 279
Issues involved:
Seeking sanction for a scheme of amalgamation u/s 391 to 394 of the Companies Act, 1956 involving Indian Petrochemicals Corporation Limited and Reliance Industries Limited.
Details of the Judgment:
1. Scheme of Amalgamation:
The scheme involves the amalgamation of Indian Petrochemicals Corporation Limited with Reliance Industries Limited. The scheme was approved by the Board of Directors, with the appointed date being 1-4-2006. New equity shares are to be issued by the transferee to the shareholders of the transferor in a specified ratio. Both the Bombay Stock Exchange and the National Stock Exchange have expressed no objection to the scheme.
2. Meetings and Voting:
Meetings were held for equity shareholders, secured creditors (including debentureholders), and unsecured creditors. The majority of shareholders and creditors voted in favor of the scheme, with only a small percentage voting against it. Some votes were declared invalid during the process.
3. Compliance and Advertisements:
After the petition was admitted, due advertisements were made in newspapers, and notices were served to relevant authorities. The Regional Director has confirmed that the scheme is not against public interest or the interest of stakeholders. All statutory requirements have been duly complied with, and there is no objection to the scheme.
4. Court Order:
The Court granted the requested relief under sections 391 to 394 of the Companies Act, 1956. The scheme of amalgamation was sanctioned, making it binding on the petitioner company, transferor company, shareholders, creditors, and all concerned parties. Various orders were issued regarding the transfer of business, debts, liabilities, continuation of legal proceedings, issuance of equity shares, employment transfer, and registration requirements.
5. Additional Requirement:
The Court directed the petitioner company to deliver a certified copy of the order to the Registrar of Companies, Maharashtra within a specified timeframe for registration purposes.
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2007 (6) TMI 278
Liability before levy - Held that: - services came into service tax net only with effect from 1-5-2006 and a demand to levy the service tax retrospectively under other categories such as ‘Business Auxiliary Service” is not justified - appeal dismissed - decided against Revenue.
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2007 (6) TMI 277
Indian resident deriving foreign income - taxability of particular income in both the contracting states - loss incurred by the PE abroad - DTAA with Japan - CIT(A) held that loss incurred by Japan office of the assessee company is not to be taken into account while computing its income taxable in India - HELD THAT:- The law laid down by the Hon'ble Supreme Court in the case of Union of India vs. Azadi Bachao Andolan [2003 (10) TMI 5 - SUPREME COURT] is binding on us under art. 141 of the Constitution of India. The prevailing legal position, therefore, is that once an income is held to be taxable in a tax jurisdiction under a DTAA and unless there is a specific mention that it can also be taxed in the other tax jurisdiction, the other tax jurisdiction is denuded of its powers to tax the same. To that extent, the worldwide basis of taxation in the scheme of the Indian IT Act is no longer applicable in a situation provisions of a DTAA entered into u/s 90 apply.
Just because the assessee may, in AO's perception, claim treaty protection in a subsequent year, the treaty provisions cannot be thrust on the assessee this year as well. In this view of the matter, the assessee was indeed eligible to claim taxation on worldwide basis, disregard the scheme of taxability under the India Japan tax treaty, and, in effect, claim deduction of loss incurred by the PE in Japan. The CIT(A) was thus justified in his conclusion to the effect that losses of assessee's PE in Japan are to be taken into account while computing assessee's total income liable to tax in India.
When the assessee makes profits in the subsequent years, and whether or not the assessee recaptures loss in the subsequent years, its entire PE income remains outside the scope of 'total income' u/s 5 of the Act. In effect, therefore, the loss of the PE abroad is deducted twice. This position may be unintended or even undesirable, as evident from the global concern to neutralise such dual benefits in the international taxation, but that is an inevitable corollary to the legal position existing now.
Thus, we approve the conclusion arrived at by the learned CIT(A). His having arrived at right conclusion may have been somewhat fortuitous, in the sense it was without really analyzing the nuances of relevant legal position, but what is material is that he reached the right conclusion. We approve his conclusion and decline to interfere in the matter.
In the result, the appeal filed by the AO is dismissed.
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2007 (6) TMI 275
Issues Involved:
1. Whether the Assessing Officer (AO) was justified in recomputing the capital balances of partners by reducing depreciation.
2. Whether the AO was justified in disallowing the interest claimed by the assessee u/s 40(b) of the IT Act.
3. Whether the AO was justified in making an addition towards the interest receivable from the partners.
Summary:
Issue 1: Recomputing Capital Balances by Reducing Depreciation
The assessee firm, engaged in running a nursing home, declared taxable income for the assessment years 2003-04 and 2004-05. The AO noticed that the assessee did not charge depreciation to the P&L account but claimed it in the computation of total income, which artificially increased the partners' capital accounts. The AO recomputed the capital balances by reducing the depreciation, resulting in debit balances and implying withdrawals from the capitals. The AO disallowed the interest payment to partners and added back the interest receivable from the partners as per the adjusted capital accounts. The CIT(A) upheld the AO's decision, stating that the capital balances reflected in the books were not in accordance with standard accountancy principles and needed correction.
Issue 2: Disallowing Interest Claimed u/s 40(b)
The assessee contended that the interest paid to partners should be based on the books of account maintained by the assessee, which consistently did not charge depreciation to the P&L account. However, the CIT(A) and the AO held that the assessee's method of not charging depreciation resulted in artificially inflated profits and capital balances, contrary to the mandatory provisions of the IT Act and accounting standards. The AO's action of disallowing the interest claimed u/s 40(b) was justified as it corrected the error and ensured the true and correct state of affairs of the partnership firm.
Issue 3: Addition Towards Interest Receivable from Partners
The AO added the interest receivable from the partners based on the recomputed capital balances. The CIT(A) supported this action, stating that the AO's verification of the correctness of the capital balances was necessary and justified. The Tribunal upheld the AO's decision, emphasizing that the assessee's method did not disclose true and proper income, and the AO was duty-bound to correct the mistakes in conformity with the standard method of accounting.
Conclusion:
The appeals filed by the assessee were dismissed, and the AO's actions of recomputing the capital balances, disallowing the interest claimed u/s 40(b), and adding the interest receivable from the partners were upheld as justified and in accordance with the law.
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2007 (6) TMI 273
Denial for exemption u/s 10A - STPI Unit engaged in the business of software development and export - Free Trade Zone - newly established undertakings - provisions of section 10A are same as section 80HHE - HELD THAT:- We find that in this case there is a clear establishment of new unit by substantial investment in Plant and Machinery. The STPI Unit is an integrated unit by itself. The assessee is engaged in export of computer software which duly qualifies for exemption u/s 10A. The assessee commenced export of computer software from the current assessment year. The assessee's activities include development and export of software. This, inter alia, includes onsite integration of software. The Assessing Officer's contention that earlier developed software is only being sold is unfounded and devoid of cogency. The fact that new unit also deals in the same products as that of old unit or that there are some old unit's employees or customers cannot be taken as a ground for denying the benefit u/s 10A as evident from the case laws cited above. The old unit's incurring of losses etc. has also been explained by giving data that the domestic turnover has resulted in a very small profit or loss in earlier years and it is only the exports, which are profitable.
Therefore, it is clear that it cannot be said that the STPI Unit of the assessee was established as a result of splitting or reconstruction of the old unit. Hence, we uphold the order of the ld CIT (A) in this regard and decide the issue in favour of the assessee.
It will not be out of place here to mention that it is a settled proposition often reiterated by the Hon'ble Apex Court that in cases where two views are possible, the one favourable to the assessee should be adopted. CIT v. Podar Cements (P.) Ltd.[1997 (5) TMI 2 - SUPREME COURT] and Mysore Minerals Ltd. v. CIT [1999 (9) TMI 1 - SUPREME COURT].
Deduction u/s 80HHE - consultancy charges, subscription charges, exhibition expenses, advertisement, travelling expenses and software-expenses - expenditures incurred in foreign currency - HELD THAT:- It is seen that what is excluded from export turnover is also excluded from total turnover. Now in this case, the ld CIT (A) has held that section 10A is akin to section 80HHE, hence the deduction can be properly computed only by deducting expenditure incurred in foreign exchange, both from the total turnover and also from the export turnover.
We find that Hon'ble Apex Court in the case of CIT v. Lakshmi Machine Works [2007 (4) TMI 202 - SUPREME COURT] had the occasion to consider the meaning of 'total turnover' with respect to section 80HHC.'
We find that section 10A also is a beneficial section. It is intended to provide incentive to promote exports. In fact section 10A is meant to provide a larger benefit than that provided by section 80HHE by providing the tax holiday to the assessee. If the expenditure incurred in foreign currency are excluded from export turnover but not from total turnover, the benefit granted by section 10A would be considerably reduced. This, in our opinion, cannot be the scheme of the Act.
In this regard, Hon'ble Apex Court in the case of K.P. Varghese v. ITO [1981 (9) TMI 1 - SUPREME COURT] had held that a literal construction that leads to absurdity, unjust result or mischief should be avoided. Similarly Hon'ble Apex Court in the case of Bajaj Tempo Ltd. [1992 (4) TMI 4 - SUPREME COURT] with respect to relief for new industrial undertaking u/s 15C of the Income-tax Act, 1922 has held that such provisions should be construed liberally. Very literal Construction which defeats the very purpose of enacting the provision should be avoided.
Thus, these expenditures incurred in foreign currency are to be excluded from export turnover and they should also be excluded from total turnover in order to properly work out and grant relief that is intended by this section. Hence, in our opinion, these items which are to be excluded from export turnover cannot be included in total turnover while calculating the relief u/s 10A.
In the result, this appeal by the revenue is partly allowed.
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2007 (6) TMI 272
Issues Involved:
1. Whether the non-compete fee received by the assessee is a revenue receipt or a capital receipt.
2. Applicability of section 10(3) and section 28(va) of the Income-tax Act on the non-compete fee.
Summary:
Issue 1: Non-Compete Fee as Revenue or Capital Receipt
The primary issue raised is whether the Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in treating the non-compete fee as a revenue receipt. The assessee argued that the amount of Rs. 3,44,92,800 received from London International Group was not taxable as it represented a capital asset given up, relying on several judicial decisions including CWT v. G.D. Naidu, CIT v. Saraswathi Publicities, and Oberoi Hotel (P.) Ltd. v. CIT. The Assessing Officer, however, treated the non-compete fee as compensation for loss of business profit, taxable u/s 10(3) of the Income-tax Act, and cited cases like Ramkumar Agarwal & Bros. and Mineral Mining Co. Pvt. Ltd. in support.
Upon review, the Tribunal found that the non-compete fee was indeed a capital receipt, not taxable as revenue. The Tribunal emphasized that the payment was for the closure of business, resulting in the impairment of profit-earning capacity, and thus, it was a capital receipt. The Tribunal also noted that the Assessing Officer's reliance on section 28(va), introduced with effect from 1-4-2003, was misplaced as the provision is prospective and not retrospective.
Issue 2: Applicability of Section 10(3) and Section 28(va)
The Tribunal examined the applicability of section 10(3) and found that the sum involved did not qualify as taxable under this section. The Tribunal also addressed the argument regarding the retrospective application of section 28(va) and concluded that the provision is prospective, as held in the case of R.K. Swamy v. Asstt. CIT.
The Tribunal further analyzed the Non-Compete Agreement and concluded that the assessee had indeed given up the profit-making apparatus, thus supporting the claim that the non-compete fee was a capital receipt. The Tribunal relied on the decision in Oberoi Hotel (P.) Ltd., which established that compensation for giving up a source of income is a capital receipt.
Conclusion:
The Tribunal concluded that the non-compete fee of Rs. 3,44,92,800 received by the assessee was a capital receipt and not taxable for the relevant assessment year. The order of the authorities below was set aside, and the appeal by the assessee was allowed.
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2007 (6) TMI 271
Issues:
Deduction under section 80-IB of the Income Tax Act for the assessment year 2004-05.
Analysis:
The appeal concerned the denial of deduction under section 80-IB of the Income Tax Act for the assessment year 2004-05. The assessee, a partnership firm engaged in manufacturing lamination blades, filed a return of income claiming the deduction but the assessment was completed disallowing the deduction. The Assessing Officer (AO) concluded that the activity did not amount to manufacturing and the firm did not employ the required number of workers. The AO's decision was based on an inspection revealing lack of activity at the unit, insufficient workers, and absence of a power connection. The AO's denial of the claim was upheld by the Commissioner of Income Tax (Appeals). The assessee contended that natural justice was violated as the AO did not allow cross-examination of a witness and failed to consider casual laborers in the workforce. The assessee argued that the process amounted to production and provided evidence of power usage. The Tribunal noted violations of equity and natural justice, directing the AO to reevaluate the claim considering all evidence and providing a fair opportunity for the assessee to present its case. The AO was instructed to also address the issue of interest under section 234B.
The Tribunal found that the AO's decision lacked adherence to principles of equity and natural justice. The AO failed to provide the assessee with an opportunity to cross-examine a key witness and did not consider all aspects of the manufacturing process. The Tribunal referenced a High Court decision emphasizing the importance of considering all employees involved in the manufacturing process, including casual laborers. Despite the assessee's evidence of power usage in production, the authorities did not acknowledge this fact. The Tribunal highlighted the AO's oversight in not examining the employment of casual laborers and not considering the evidence presented by the assessee. Therefore, the Tribunal set aside the CIT(A)'s order and remanded the issue to the AO for a fresh assessment, emphasizing the importance of a fair hearing for the assessee and cooperation in providing necessary details.
The Tribunal's decision emphasized the importance of procedural fairness and thorough consideration of all aspects of the case. The AO's failure to allow cross-examination, assess the employment of casual laborers, and consider evidence of power usage led to a violation of natural justice. By remanding the issue back to the AO, the Tribunal aimed to ensure a comprehensive evaluation of the claim under section 80-IB, with proper consideration of all relevant factors and evidence. The Tribunal directed the assessee to cooperate with the AO in providing necessary information, including addressing the issue of interest under section 234B. The appeal was treated as allowed for statistical purposes.
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2007 (6) TMI 268
Remaining profit after claiming deduction u/s 10B - eligible from set off of business loss and unabsorbed depreciation of earlier years? - HELD THAT:- When s.10B was introduced for the first time by the Finance Act, 1988 w.e.f. 1st April, 1989, sub-s. (1) thereof provided for a clear exclusion of the income referred to in the said section from the total income of an assessee. Since these provisions provided for total exclusion from the total income, they were grouped along with s. 10 in Chapter III of the Act. However, later on, the nature of relief provided by these sections underwent a sea change insofar as that total exclusion of the income was removed and only deduction was provided for. This is clear from the language used in s. 10A, s. 10AA, s. 10B and s. 10BA.
Once when deduction u/s 10B has to be allowed, the total income of the undertaking will enter the computation and then only deduction will be given to the assessee. If that is the case, then the stand of the CIT(A) that s. 10B is a secluded provision cannot be accepted. Had it been a case where total exclusion from income was provided for, then perhaps, the observation of the CIT(A) that such income cannot be taken into consideration for set off under s. 70, 71 or 72 would have been proper.
In the light of these provisions, we are inclined to agree with the contentions of the learned counsel and accordingly we direct the AO to consider the set off of unabsorbed business losses and depreciation after availing deduction u/s 10B of the Act. We also agree with the contention that s. 10B(6) is applicable only for the last year of deduction and not for the earlier years of deduction. Accordingly, the claim of the assessee is allowed.
Disallowance on loss - HELD THAT:- In case the expenditure cannot be linked to any assets, to the extent certain expenditure relates to development of a particular software, such expenditure should be taken as cost of development of that particular software and allowed to be set off against the income from that software. In case it is a general expenditure which cannot be apportioned to any asset or any particular software, such expenditure is to be capitalized and allowed over next four years @ 25 per cent. Thus, it can be seen that the CIT(A) did not stop at merely making an observation but went into the computational aspect of four subsequent years to direct the AO to grant deduction at a particular rate for a specific period. This exercise of jurisdiction by the CIT(A) was not warranted because he had no such jurisdiction in terms of several judgments including-those of the Supreme Court particularly in the case of ITO vs. Murlidhar Bhagwan Das[1964 (1) TMI 5 - SUPREME COURT]. Accordingly, we allow the ground of the Department and delete these directions which relate to the subsequent years.
In the result, appeal of the assessee is allowed and appeal of the Department is also allowed.
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2007 (6) TMI 267
Issues Involved:
1. Validity of reassessment proceedings u/s 147.
2. Allowance of claims under s. 40A(7) and s. 80HHC.
3. Jurisdiction to reopen assessments when regular assessment proceedings were pending.
4. Whether a return filed pursuant to the notice under s. 148 can be revised.
5. Whether the issuance of notice under s. 148 restricts the time limit provided in s. 139(5) to file a revised return.
Summary:
1. Validity of Reassessment Proceedings u/s 147:
The assessee challenged the reassessment proceedings on the ground that the AO had no jurisdiction to reopen the assessments when regular assessment proceedings were pending. The CIT(A) upheld the reassessment proceedings, noting that the time available for scrutiny assessment was up to 31st March 2002, and the assessment was completed on 26th March 2002. The Tribunal, following the jurisdictional High Court's judgment in Sri Krishna Mahal vs. Asstt. CIT, held the reassessment proceedings to be valid.
2. Allowance of Claims under s. 40A(7) and s. 80HHC:
For asst. yr. 1999-2000, the CIT(A) allowed the assessee's claim to restrict the disallowance under s. 40A(7) and the amount paid to LIC Employees Group Gratuity Scheme, noting that the revised return was filed before the return in response to the notice under s. 148. The Tribunal upheld this decision. For asst. yr. 2000-01, the CIT(A) allowed the claim under s. 80HHC, but the Tribunal reversed this decision, stating that the revised return filed after the return under s. 148 cannot claim deductions not claimed in the original return.
3. Jurisdiction to Reopen Assessments:
The assessee argued that the AO had no jurisdiction to reopen assessments when regular assessment proceedings were pending. The Tribunal, following the jurisdictional High Court's judgment, held that a notice under s. 148 can be issued even if an assessment has been made under s. 143(3), and thus upheld the reassessment proceedings.
4. Whether a Return Filed Pursuant to the Notice under s. 148 Can Be Revised:
The Tribunal held that a return filed under s. 148 can be revised, but only for the benefit of the Revenue and not for the assessee. This conclusion was drawn from the Supreme Court's judgment in R. Dalmia & Anr. vs. CIT and Sun Engineering Works (P) Ltd., which emphasized that the provisions of s. 147 are meant for the benefit of the Revenue.
5. Whether the Issuance of Notice under s. 148 Restricts the Time Limit Provided in s. 139(5) to File a Revised Return:
The Tribunal clarified that the issuance of a notice under s. 148 does not restrict the time limit prescribed in s. 139(5) to revise the original return, provided the revised return is filed before filing the return under s. 148. If the revised return is filed after the return under s. 148, it will be deemed to revise the return filed under s. 148 and not the original return.
Conclusion:
The appeal of the Department for asst. yr. 1999-2000 is dismissed, the appeal for asst. yr. 2000-01 is partly allowed, and the cross-objections of the assessee for both years are dismissed.
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2007 (6) TMI 266
Issues Involved:
1. Validity of CIT's jurisdiction u/s 263 of the IT Act, 1961.
2. Examination of lease transactions and depreciation claims.
3. Consideration of other issues such as broken period interest, expenditure relating to exempt income, foreign exchange fluctuations, and securities valuation.
Summary:
1. Validity of CIT's Jurisdiction u/s 263:
The common grounds raised in the appeals were that the CIT was not justified in invoking his jurisdiction u/s 263 of the IT Act, 1961. The assessee challenged the validity of assuming the said jurisdiction and raised grounds on the observations made by the CIT in respect of several items. The CIT examined the second assessment order and concluded that it was erroneous and prejudicial to the interests of the Revenue, thus issuing a notice u/s 263. The CIT's notice mentioned that the assessment order lacked proper application of mind and disregarded the CIT(A)'s order. The Tribunal upheld the CIT's jurisdiction u/s 263 for items other than lease transactions, stating that the AO failed to conduct proper enquiry, rendering the order erroneous.
2. Examination of Lease Transactions and Depreciation Claims:
The assessee, a banking company, had entered into 17 lease transactions and claimed depreciation on 14 of them. The AO disallowed the entire depreciation claimed, considering some transactions as non-genuine or finance transactions. The CIT(A) set aside the assessment, directing the AO to frame the assessment de novo after complying with natural justice requirements. In the second round, the AO disallowed depreciation in 8 transactions and allowed it in 6. The CIT found the AO's order erroneous for allowing depreciation in 6 transactions. However, the Tribunal quashed the CIT's order regarding lease transactions, stating that the AO's decision on the 6 transactions was based on the same material and could not be termed erroneous and prejudicial to the Revenue.
3. Consideration of Other Issues:
The CIT raised issues like the allowability of broken period interest, expenditure relating to exempt income, profit/loss from foreign exchange fluctuations, and securities valuation. The Tribunal noted that the AO did not discuss or enquire into these issues in the assessment orders. The Tribunal upheld the CIT's order u/s 263 for these items, stating that the AO's failure to conduct due enquiry rendered the order erroneous. The Tribunal did not delve into the merits of these issues, as the CIT had not given specific directions but had set aside the assessment for fresh framing.
Conclusion:
The Tribunal partly allowed the assessee's appeals, upholding the CIT's order u/s 263 for items other than lease transactions and quashing the order regarding lease transactions. The AO was directed to follow the CIT's directions for reassessment on the other issues.
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2007 (6) TMI 265
Deduction claimed u/s 10B denied on the basis of established by splitting the earlier business - Free Trade Zone - development of software both for export and local market - New STPI Unit at Trichy - HELD THAT:- We find that in this case there is a clear establishment of new unit by substantial investment in Plant and Machinery. The new unit though, took some of the old unit's employees but during the financial year itself the substantial expansion led to almost threefold increase in the number of employees. There was substantial addition to the nature and type of services rendered to the clients and also in the volume of business. Furthermore, there was good increase in the number of customers also. The old unit's incurring losses has been duly explained as mainly due to completion of Reliance Petroleum Ltd., Jam Nagar Project which led to substantial reduction in assessee's business.
Another objection raised by the revenue is that the ld CIT (A) failed to note that in the earlier year the assessee had claimed relief u/s 80HHE which profits/receipts from Trichy Unit also and hence, as per section 80HHE(5), the assessee is not permitted to claim relief u/s 10A.
In this regard the learned counsel of the assessee submitted that this is factually wrong. He referred to Assessing Officer's finding in the assessment order where it is clearly mentioned that the STPI Unit commenced its commercial operation from April, 2001. The ld DR did not dispute this finding.
In this regard, we further find that Hon'ble jurisdictional High Court in the case of L.G. Balakrishnan & Bros. Ltd. v. CIT[1983 (9) TMI 32 - MADRAS HIGH COURT] held that a new undertaking can be said to have been formed only when it is ready to commence the production of article for which the undertaking was established and the formation of company will not include the initial steps taken for its establishment.
Thus, we find that this objection by the revenue is unfounded.
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2007 (6) TMI 256
Computation of total turnover for the section 10A - expenses incurred in foreign currency - excluded from the total turnover - section 10A is akin to section 80HHE - HELD THAT:- We find that section 10A also is a beneficial section. It is intended to provide incentive to promote exports. In fact section 10A is meant to provide a larger benefit than that provided by section 80HHE by providing the tax holiday to the assessee. If the expenditure incurred in foreign currency are excluded from export turnover but not from total turnover, the benefit granted by section 10A would be considerably reduced. This, in our opinion, cannot be the scheme of the Act.
In this regard the apex court in the case of K.P. Varghese v. ITO [1981 (9) TMI 1 - SUPREME COURT] held that a literal construction that leads to absurdity, unjust result or mischief should be avoided. Similarly the apex court in the case of Bajaj Tempo Ltd. v. CIT [1992 (4) TMI 4 - SUPREME COURT] with respect to relief for new industrial undertaking u/s 15C of the Indian Income-tax Act, 1922 has held that such provisions should be construed liberally. Very literal construction which defeats the very purpose of enacting the provision should be avoided.
Thus, these expenditures incurred in foreign currency which are excluded from the export turnover should also be excluded from the total turnover in order to properly work out and grant relief that is intended by this section. Hence, in our opinion, these items which are to be excluded from the export turnover cannot be included in the total turnover while calculating the relief u/s 10A. Hence, we uphold the order of the ld CIT (A) in this regard and decide the issue in favour of the assessee.
In the result, this appeal by the Revenue is dismissed.
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2007 (6) TMI 254
Issues Involved:
1. Validity of proceedings initiated under section 147.
2. Validity of notice issued under section 148.
3. Non-issuance of notice under section 143(2).
4. Addition of unexplained credits under section 68.
5. Disallowance of various expenses.
6. Claim for relief under section 80-IA.
7. Levy of interest under various heads.
8. General contention that the order is contrary to facts, law, and principles of natural justice.
Detailed Analysis:
1. Validity of Proceedings Initiated Under Section 147:
The assessee contended that the "reasons recorded" did not constitute requisite material for initiating proceedings under section 147. The Tribunal upheld the reopening of the assessment, noting that the Assessing Officer had recorded adequate reasons to believe that income had escaped assessment. The reasons were based on the absence of complete addresses and confirmations for loans shown in the balance sheet, which led to the belief that these credits were not genuine. The Tribunal found no infirmity in the reasons recorded and upheld the reopening of the assessment.
2. Validity of Notice Issued Under Section 148:
The assessee argued that the notice under section 148 was not validly issued and served. The Tribunal found that the notice was indeed issued and served in accordance with the law. The Assessing Officer had sufficient reason to believe that income had escaped assessment, justifying the issuance of the notice under section 148.
3. Non-Issuance of Notice Under Section 143(2):
The assessee claimed that the non-issuance of notice under section 143(2) after filing the return in compliance with the notice under section 148 was fatal to the assessment order. The Tribunal noted that the return filed by the assessee in response to the notice under section 148 was beyond the time prescribed, rendering it invalid. Consequently, the Assessing Officer was not legally obliged to issue a notice under section 143(2). The Tribunal also held that non-issuance of notice under section 143(2) would only be an irregularity and would not vitiate the entire assessment.
4. Addition of Unexplained Credits Under Section 68:
The Assessing Officer added Rs. 63,100 as unexplained credits under section 68, as the assessee failed to establish the identity, creditworthiness, and genuineness of the creditors. The Tribunal agreed with the assessee that adequate time was not given to produce the creditors. The matter was restored to the Assessing Officer to give the assessee adequate opportunity to produce the creditors and explain the credits.
5. Disallowance of Various Expenses:
The Assessing Officer disallowed various expenses on an ad hoc basis, which the assessee contested. The Tribunal found that adequate opportunity was not provided to justify the claim of expenses. The matter was restored to the Assessing Officer to give the assessee adequate opportunity to prove the expenses, considering that the books were audited and expenses had been verified by the auditors.
6. Claim for Relief Under Section 80-IA:
The assessee claimed relief under section 80-IA, which was denied by the CIT(A) on the grounds that the claim was not made at the original stage and was not maintainable in proceedings under section 148. The Tribunal held that once the reopening of the assessment is justified, the assessee is within its right to submit the audit report in Form No. 10CCB at any time before the completion of the assessment.
7. Levy of Interest Under Various Heads:
The Tribunal directed the Assessing Officer to work out the interest as per law based on the finally assessed income.
8. General Contention:
The assessee's general contention that the order was contrary to facts, law, and principles of natural justice was addressed through the detailed examination of the specific issues raised.
Conclusion:
The appeal was partly allowed for statistical purposes, with the matter being restored to the Assessing Officer to provide adequate opportunity to the assessee to produce creditors, explain credits, and justify the expenses. The claim under section 80-IA was also to be reconsidered. The levy of interest was to be recalculated based on the final assessed income.
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2007 (6) TMI 253
Deductions u/s 80HH and 80-I - Industrial undertaking - no change in the nature of activities from earlier years - income from repair of transformers of U.P. State Electricity Board ("UPSEB") - HELD THAT:- It is an admitted fact that the assessee-company is claiming deductions under ss. 80HH and 80-I of the Act since asst. yr. 1992-93. The Department has allowed deductions under ss. 80HH and 80-I for the asst. yrs. 1992-93, 1993-94, 1994-95, 1995-96, 1996-97 and 1997-98. Even the AO has allowed deductions under ss. 80HH and 80-I to the assessee for the AY 1998-99. The deductions, in question, are available to an assessee for 8 years and the year under consideration is the last year and the year under consideration is the last year. The learned CIT(A) has not brought any material on record to show that there was any change in the activities of the assessee as compared to earlier years. Thus it is clear that since asst. yrs. 1992-93 to 1997-98, the assessee has been consistently getting deductions under ss. 80HH and 80-I of the Act. In our considered view, the learned CIT (A) was not justified in withdrawing the deductions in question.
Hon'ble Delhi High Court in the case of Lovely Bal Shiksha Parishad[2003 (10) TMI 25 - DELHI HIGH COURT] held that there was no change in the nature of activities and the assessee had been granted exemption u/s 10(22) of the IT Act not only in respect of earlier years but subsequent year as well, the assessee was entitled to the exemption in the asst. yr. 1991-92. In this case also, the Hon'ble Delhi High Court has applied the ratio laid down by the Hon'ble Supreme Court in the case of Radhasoami Satsang vs. CIT [1991 (11) TMI 2 - SUPREME COURT].
Following the above referred cases. We, therefore, reverse the order of the learned CIT(A) and restore that of the AO. Accordingly, we allow the appeal filed by the assessee.
In the result, the appeal is allowed.
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2007 (6) TMI 252
Issues Involved:
1. Addition of Rs. 1,67,245 u/s 40A(3) for AY 1992-93.
2. Addition of Rs. 4,40,181 u/s 40A(3) for AY 1991-92.
Summary:
Issue 1: Addition of Rs. 1,67,245 u/s 40A(3) for AY 1992-93
The assessee challenged the addition of Rs. 1,67,245 made u/s 40A(3) of the IT Act, 1961. The AO disallowed payments to various parties, asserting no exceptional circumstances justified cash payments. The CIT(A) confirmed the addition, leading to the appeal.
The assessee argued that s. 40A(3) provides exceptions for cash payments under exceptional circumstances, supported by Circular No. 220, dt. 31st May, 1997. The assessee claimed that the parties did not have bank accounts at Baheri and insisted on cash or bearer cheques due to clearing delays. The payments were made under exceptional circumstances, including after banking hours.
The Tribunal noted that the AO did not doubt the genuineness of transactions. The payments were made under exceptional circumstances as per r. 6DD(j) and CBDT Circular No. 220. The Supreme Court in Attar Singh Gurmukh Singh vs. ITO emphasized that genuine transactions should not be disallowed. Consequently, the Tribunal deleted the addition of Rs. 1,68,245.
Issue 2: Addition of Rs. 4,40,181 u/s 40A(3) for AY 1991-92
The assessee challenged the addition of Rs. 4,40,181 made u/s 40A(3) of the IT Act, 1961. The AO made two separate additions of Rs. 1,71,631 and Rs. 2,66,550 for payments made in cash to various parties. The CIT(A) confirmed the additions.
The assessee argued that the payments were made under exceptional circumstances, supported by certificates from the parties indicating no bank accounts at Baheri. The payments were made through bearer cheques due to clearing delays. The Tribunal noted that the AO did not doubt the genuineness of transactions. The payments were made under exceptional circumstances as per r. 6DD(j) and CBDT Circular No. 220. The Tribunal referred to the Calcutta High Court's decision in Giridharilal Goenka vs. CIT, which emphasized allowing deductions for genuine transactions. Consequently, the Tribunal deleted the additions of Rs. 1,71,631 and Rs. 2,66,550.
Conclusion:
Both appeals were allowed, and the additions made by the AO and confirmed by CIT(A) were deleted.
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2007 (6) TMI 248
Issues Involved:
1. Sustenance of addition of Rs. 1,91,506 against Rs. 13,50,000 made by the AO.
2. Unexplained investment in furniture.
3. Excess stock.
4. Unexplained sales.
5. Order goods.
Summary:
1. Sustenance of Addition:
The appeal by the Revenue challenges the CIT(A)'s order reducing the addition from Rs. 13,50,000 to Rs. 1,91,506 based on a survey u/s 133A conducted on 26th Feb., 1998 at M/s Shimla Jewellers. The AO noted incomplete recording of purchases and sales, leading to an initial surrender of Rs. 13,50,000 by the assessee, which was not offered for taxation in the return filed.
2. Unexplained Investment in Furniture:
The AO added Rs. 6 lakhs for unexplained investment in furniture, based on an insurance policy of Rs. 10 lakhs. The CIT(A) found that Rs. 4 lakhs of the insurance was for stock, reducing the addition to Rs. 1,83,246. The Tribunal upheld this reduction, noting no evidence of investment beyond the books.
3. Excess Stock:
The AO added Rs. 2 lakhs for excess stock based on a surrender during the survey. The CIT(A) found a stock shortage of 78.670 gms, valuing it at Rs. 33,041 and applying a 25% GP rate, restricted the addition to Rs. 8,260. The Tribunal corrected the stock shortage to 203.94 gms, valuing it at Rs. 85,655, and increased the addition to Rs. 21,414.
4. Unexplained Sales:
The AO added Rs. 2 lakhs for unexplained sales based on a surrender during the survey. The CIT(A) deleted this addition, and the Tribunal upheld this, noting that only the profit element of sales can be taxed and the cash position was explained. No evidence of unaccounted sales was found.
5. Order Goods:
The AO added Rs. 3.50 lakhs for order goods based on a surrender during the survey. The CIT(A) deleted this addition, finding that the assessee maintained complete records of job orders, supported by affidavits and statements from customers. The Tribunal upheld this deletion, noting that the surrender was not voluntary and the AO ignored evidence favoring the assessee.
Conclusion:
The Tribunal upheld the CIT(A)'s order, sustaining additions only to the extent legally required and partly allowing the Revenue's appeal.
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2007 (6) TMI 246
Issues involved:
The judgment involves challenges related to invoking provisions of reassessment u/s 147 based on a Supreme Court decision, denial of deduction u/s 80-IA, charging of interest u/s 234B, and admission of additional ground for exemption of sales tax.
Asst. yr. 1997-98:
The AO initiated reassessment proceedings based on a Supreme Court decision affecting deduction u/s 80-IA, which was upheld by the CIT(A). The assessee contended the initiation was invalid citing a recent High Court judgment. The Tribunal found the AO's reliance on the Supreme Court decision unfounded due to a subsequent High Court judgment, quashing the reassessment proceedings.
Asst. yr. 1998-99, 1999-2000, 2001-02:
Similar to 1997-98, reassessment notices were issued based on the same Supreme Court decision. Following the precedent set in the earlier year, the Tribunal quashed the notices for these years as well.
Asst. yr. 2000-01:
Reassessment notice was issued based on the same Supreme Court decision and also on the eligibility of deductions u/s 80-IA and 80HHC. The Tribunal quashed the notice as the AO's grounds were found unsustainable, citing a Tribunal decision supporting the assessee's eligibility for deduction u/s 80HHC.
In conclusion, the Tribunal consistently quashed reassessment notices for multiple years due to invalid grounds and unsustainable arguments by the AO, ensuring fair treatment and adherence to legal precedents.
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2007 (6) TMI 245
Issues involved: Appeal against penalty order u/s 271(1)(c) of the IT Act, 1961 for concealment of taxable income and furnishing inaccurate particulars of income.
Summary:
The appeal was against a penalty order u/s 271(1)(c) of the IT Act, 1961, arising from a survey where the assessee surrendered amounts on excess stock and cash, and claimed long-term capital loss. The AO initiated penalty proceedings for concealment of income. The CIT(A) confirmed the penalty, leading to the second appeal.
The Authorized Representative argued that penalty cannot be levied on estimated additions alone and highlighted the timing of the application of s. 50C. The Department contended that the additions were not voluntary disclosures. The Tribunal emphasized that penalty requires establishing concealment or furnishing inaccurate particulars. The AO must consider all facts before concluding on penalty, exercising discretion judiciously.
The assessee, engaged in photography services, revised the return after a survey, surrendering income and paying taxes accordingly. The Tribunal noted discrepancies in the statement made during the survey and emphasized the lack of Departmental authorization for the statement. Legal precedents were cited to support the argument that concealment must be proven, not inferred from surrender. The Tribunal concluded that in this case, no penalty under s. 271(1)(c) could be levied due to the circumstances, setting aside the CIT(A) order and canceling the penalty.
In conclusion, the Tribunal allowed the appeal of the assessee, canceling the penalty imposed under s. 271(1)(c) of the IT Act, 1961.
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2007 (6) TMI 242
Issues Involved:
1. Application of Provisions of Section 145 and Gross Profit Rate
2. Treatment of Interest on FDRs as 'Income from Other Sources'
3. Exclusion of Duty Difference and FDR Interest from Eligible Business Income under Section 80-IB
4. Reduction of Deduction under Section 80HHC by the Amount of Deduction under Section 80-IB
Issue-wise Detailed Analysis:
1. Application of Provisions of Section 145 and Gross Profit Rate:
The assessee contested the application of provisions of Section 145 and the gross profit (G.P.) rate applied by the Assessing Officer (AO). The AO observed discrepancies in the reconciliation of raw materials and finished goods, leading to the rejection of the books of account. The AO applied a G.P. rate of 27.3% compared to the 22% declared by the assessee, resulting in a trading addition. The CIT(A) accepted the rejection of books but applied a G.P. rate of 22.5%, providing partial relief. Upon review, it was found that the assessee maintained comprehensive records and adhered to EXIM policy norms, which were verified by independent authorities. The Tribunal concluded that the AO's rejection of the books and the application of a higher G.P. rate were unjustified, leading to the deletion of the trading addition.
2. Treatment of Interest on FDRs as 'Income from Other Sources':
The assessee argued that interest on FDRs should be treated as business income since the FDRs were kept as margin money for availing overdraft facilities used in the export business. However, the AO and CIT(A) treated the interest as 'Income from Other Sources' and did not allow netting against interest paid on loans. The Tribunal upheld this treatment, referencing the Supreme Court decision in CIT vs. Dr. V.P. Gopinathan, which established that interest on FDRs is not business income and cannot be netted against business expenditure.
3. Exclusion of Duty Difference and FDR Interest from Eligible Business Income under Section 80-IB:
The AO excluded the value of duty difference and interest on FDRs from the eligible business income for calculating deduction under Section 80-IB, reducing the deduction claimed by the assessee. The CIT(A) confirmed this action. The Tribunal, however, found that the duty difference was part of the direct cost of the business and should not be excluded from the eligible business income. The Tribunal directed the AO to treat the duty difference as part of the direct cost and allow the deduction under Section 80-IB as claimed by the assessee. The interest on FDRs was correctly treated as 'Income from Other Sources.'
4. Reduction of Deduction under Section 80HHC by the Amount of Deduction under Section 80-IB:
The AO first allowed the deduction under Section 80-IB and then reduced the deduction under Section 80HHC by the amount of the Section 80-IB deduction. The CIT(A) upheld this approach. The assessee argued that deductions under Sections 80HHC and 80-IB should be computed independently. The Tribunal agreed, noting that Section 80AB, which has an overriding effect on Chapter VI-A, supports the independent computation of deductions. The Tribunal directed the AO to allow the deduction under Section 80HHC on the full profit without reducing it by the Section 80-IB deduction, ensuring the total deductions do not exceed the business profits.
Conclusion:
The Tribunal allowed the assessee's appeal in part, reversing the rejection of the books of account and the application of a higher G.P. rate, and directed the AO to treat the duty difference as part of the direct cost for Section 80-IB deduction. The treatment of interest on FDRs as 'Income from Other Sources' was upheld. The Tribunal also directed the AO to compute the deductions under Sections 80HHC and 80-IB independently. The Revenue's appeal was dismissed.
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