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Showing 301 to 320 of 576 Records
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2008 (6) TMI 324
Appeal to High Court - The impugned order challenged herein is in relation to determination of the rates to be applied for fastening of liability of excise duty on the assessee. But, an appeal lies under Section 35L of the Central Excise Act, 1944 to the Apex Court. In view of this, the instant appeal is dismissed with liberty to the appellant to avail the appeal remedy before the Apex Court under the above said provision, but subject to limitation.
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2008 (6) TMI 321
Penalty under section 271D on ground that loan in cash exceeding prescribed limit - The assessee had taken from seven persons a loan of Rs. 20,000 each. This is a finding of fact and not in dispute - Central Board of Direct Taxes vide Circular No. 572, dated August 3, 1990 has clarified that if loan or deposit are in excess of Rs. 20,000 it would attract section 271D - provisions of section 269SS are not applicable - Considering the circular issued by the Central Board of Direct Taxes and the loan being not in excess of Ps. 20,000 from each person and the interpretation given by the Tribunal to the said circular, the question of law does not arise – It is now well settled that circulars issued by Central Board of Direct Taxes are statutory in character and are binding on the Departmental authorities.
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2008 (6) TMI 317
Use of common inputs in welding machines (which are dutiable) and medical equipments (which are exempted) - It has been argued on behalf of the Appellants that it is not practicable for them to maintain separate account for how much of brass is required to be consumed in the manufacture of medical equipments and how much for welding machines. The Department has levied 8% of the amount on the exempted medical equipments on the ground that no separate account has been maintained. - In similar situations where it was not practicable to maintain separate accounts of the inputs used in the exempted and dutiable finished goods, this Bench has taken a view that in the absence of separate Rule to deal with such a situation, it would be reasonable to ask the manufacturers to reverse the proportionate amount of credit. Accordingly we set aside the impugned order and remand the matter to the original Authority to check the calculation of the proportionate credit made by the Appellants and adjust the amount paid by the Appellants against the calculated amount which is payable by the Appellants.
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2008 (6) TMI 314
Issues Involved:
1. Entitlement to set off brought forward losses prior to the assessment year 2002-03.
2. Claim of lease rentals and improvements as revenue expenditure.
3. Entitlement for deduction u/s 35AB.
Summary:
1. Entitlement to Set Off Brought Forward Losses Prior to the Assessment Year 2002-03:
The first grievance of the assessee is that the learned CIT(A) erred in holding that the assessee company is not entitled to set off brought forward losses prior to the assessment year 2002-03 due to a violation of s. 79(1) of the Act. The AO noticed a change in shareholding during the period in which the assessee claimed set off of carry forward business loss. According to s. 79 of the IT Act, the benefit of carry forward of business loss is denied unless 51 percent of the voting power is beneficially held by the same persons who held it on the last date of the previous year in which such losses were incurred. The learned CIT(A) held that the assessee is not entitled to set off of carry forward loss, stating that even if APIL is a 100 percent subsidiary, it does not mean that ABL is the beneficial owner of the shares owned by APIL. The Tribunal, however, concluded that since the board of directors of M/s APIL is controlled by M/s ABL, the voting power of M/s APIL is controlled by M/s ABL, and hence such voting power is beneficially held by M/s ABL. Therefore, the assessee is entitled to set off and carry forward business loss.
2. Claim of Lease Rentals and Improvements as Revenue Expenditure:
The last grievance of the assessee is that the claim of lease rentals and improvements should have been allowed as revenue expenditure. The Tribunal noted that this issue was not raised before the learned CIT(A) and hence, it is not emanating from the order of the learned CIT(A). Therefore, this ground of appeal is dismissed.
3. Entitlement for Deduction u/s 35AB:
The Revenue is aggrieved by the finding of the learned CIT(A) in holding that the assessee is entitled to deduction u/s 35AB. The learned Departmental Representative argued that s. 35AB is applicable if any lump sum consideration is paid. The learned CIT(A) referred to the meaning of the word "paid" as given under s. 43(2) of the IT Act, which means actually paid or incurred according to the method of accounting. The Tribunal agreed with the learned CIT(A) that the liability to pay the consideration of Rs. 5 crores arose on 1st March 1998 by virtue of the agreement and this is to be treated as paid in view of the definition of the word "paid" as contained in s. 43(2) of the Act. Therefore, the deduction u/s 35AB should be allowed.
Conclusion:
The appeal filed by the Revenue is dismissed, while the appeal filed by the assessee is partly allowed.
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2008 (6) TMI 313
Deduction u/s 80IA - Industrial park - Nature of Income from renting - Business income or income from house property or income from other sources - CIT(A) held that the income in the nature of lease rentals from lease of the information technology park as considered by the AO should be charged to tax under the head 'Income from house property' - HELD THAT:- We are of the considered view that the assessee was incorporated with the sole intention of developing technology park for which it obtained leasehold land from the Karnataka Industrial Development Corporation and also obtained loan from Union Bank of India for constructing superstructure thereon which could not be considered as investment in a property for earning rental income only. The lease of the property was shown as part of the business activity, the income received therefrom cannot be said as income received as a land owner but as a trader. The conversion from leasehold to ownership led to a pure commercial proposition resulting in a business venture carried out by the assessee company.
We find force in the submission of learned counsel that the term 'business', as defined in the provision of infrastructure facility as provided in sub-cl. (iv) of s. 80-IA clearly explains the development and operation of the technology park has not been controverted by the authorities below. The main intention was to exploit the immovable property by way of commercial application which applies to the assessee's case and would leave no room for doubting that the intention of the assessee was in providing software development facility in the electronic city in the industrial area within the limits of Bangalore South District, Bangalore. Any activity undertaken with a profit motive would amount to business and not mere a return on investment when it is exploited. The Tribunal decision was relied upon by the apex Court decision rendered by a Bench consisting of four Judges whereas the decision of the same Court in East India Housing & Land Development Trust Ltd. vs. CIT [1960 (11) TMI 7 - SUPREME COURT] was rendered by a Bench of three Judges, will have a binding force who further held that the facts in the similar to that of decision in the case of Sri Balaji Enterprises [1997 (2) TMI 91 - KARNATAKA HIGH COURT] in which decision the Karnataka High Court held it as business income.
We are therefore inclined to consider the learned counsel contention that the facts of the assessee's case are similar to those of Sri Balaji Enterprises [1997 (2) TMI 91 - KARNATAKA HIGH COURT] and also S.G. Mercantile Corporation (P) Ltd. [1972 (1) TMI 2 - SUPREME COURT]. In view thereof, we direct the AO to assess the rental income as from business by setting aside the order of the learned CIT(A) on this issue. This being the sole ground agitated before us is held in assessee's favour.
In the result, the appeal is allowed.
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2008 (6) TMI 311
Notice issued u/s 148 for protective addition - Addition made in block assessment - Search And Seizure - Undisclosed investment in the share capital - CIT(A) held that the reopening is not valid - HELD THAT:- In the instant case, the assessment in the case of Shri G.P. Goyal was completed on July 31, 1997. Notice u/s 148 has been issued to the assessee-company on July 27, 1998. Once the Revenue has taken its stand that such investment in the share capital belong to Shri G.P. Goyal and the assessment order was passed, then it cannot be said that the AO was having reason to believe that income has escaped in the hands of the assessee-company. Reassessment cannot be made on mere suspicion. AO has to form a belief that income has escaped assessment in the hands of the assessee. Once it has been held that such investment belonged to Shri G.P. Goyal, then there was no further material to come to the conclusion that such escaped income belonged to the assessee.
The basic requirement for reopening the assessment is that the AO should have reason to believe that the income has escaped assessment is not satisfied in this case. Hence, we are satisfied that the ld CIT(A) was justified in holding that the assessment cannot be reopened for making protective addition.
The hon'ble apex court in the case of CIT v. Divine Leasing and Finance Ltd. [2007 (11) TMI 627 - SC ORDER] held that if the AO treats share application money as undisclosed income u/s 68 and the Revenue believes that the shareholders are bogus, then the AO is free to reopen the assessment of the shareholders. The apex court held that the share application money cannot be added in the hands of the company.
Therefore, it is held that the ld CIT(A) was justified in cancelling the assessment in the hands of the assessee.
In the result, the appeal filed by the Revenue is dismissed.
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2008 (6) TMI 306
Issues Involved:
1. Disallowance of deduction under Section 80G of the IT Act.
2. Allowability of the expenditure under Section 37(1) of the IT Act.
Issue-wise Detailed Analysis:
1. Disallowance of Deduction under Section 80G of the IT Act:
The primary issue in this appeal was whether the donation of Rs. 29,51,991 made by the assessee to the Chief Minister's Relief Fund qualifies for a deduction under Section 80G of the IT Act. The assessee argued that the payment was made by cheque to suppliers of grass fodder, as directed by the Government of Gujarat (GOG), to mitigate the severe drought conditions affecting cattle. The Assessing Officer (AO) disallowed the deduction, citing Explanation 5 to Section 80G, which states that no deduction shall be allowed unless the donation is of a sum of money. The AO held that the donation was in kind, not money, and thus disallowed the claim.
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the donation did not meet the conditions under Section 80G for 100% exemption as it was not directly paid to the Chief Minister's Relief Fund and was made in kind. The CIT(A) referenced several judgments, including H.H. Sri Rama Verma vs. CIT and Vijaipat Singhania vs. CIT, which supported the view that donations in kind do not qualify for deduction under Section 80G.
2. Allowability of the Expenditure under Section 37(1) of the IT Act:
The alternative issue was whether the expenditure could be allowed as a business expense under Section 37(1) of the IT Act. The assessee argued that the payment was made out of business expediency to maintain good relations with the GOG, which had significant control over the assessee's business operations, including the issuance of licenses for electricity distribution. The assessee contended that the expenditure was necessary for the smooth operation of its business and should be allowable under Section 37(1).
The Tribunal considered several case laws, including Mysore Kirloskar Ltd. vs. CIT and CIT vs. Chemicals & Plastics India Ltd., which established that expenditure incurred voluntarily but for the promotion of business is allowable under Section 37(1). The Tribunal noted that the expenditure was made in response to an appeal by the GOG during an emergent situation and was directly connected to the assessee's business interests.
The Tribunal concluded that the expenditure was incurred out of commercial expediency and was necessary for maintaining good relations with the GOG, which had a direct impact on the assessee's business. Therefore, the Tribunal allowed the expenditure under Section 37(1) of the IT Act.
Conclusion:
The Tribunal upheld the disallowance of the deduction under Section 80G due to the donation being in kind. However, it allowed the expenditure under Section 37(1), recognizing it as a business expense incurred out of commercial expediency. The appeal was thus allowed in favor of the assessee.
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2008 (6) TMI 303
Deduction u/s 80-I and 80HHA - process amounting to manufacture/production or not - new goods coming into existence or not? - Whether the process of pasteurization of milk amounts to process of manufacture/production? - Assessee contended that the activities of the assessee firm has been accepted as manufacture/production for the AY 1985-86 and the proposal to withdraw the benefit of investment allowance for the AY's 1980-81 and 1981-82 - It is independent from raw milk and therefore there is a manufacture of new product.
HELD THAT:- In the case of Sesa Goa Ltd. [2004 (11) TMI 14 - SUPREME COURT], the Hon'ble Supreme Court held that extraction and processing of iron ore amounts to manufacture or production of an article or thing. The Court held: "the word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which mayor may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods.
The Hon'ble Supreme Court in the case of Idandas v. Anant Ramchandra Phadke [1981 (11) TMI 185 - SUPREME COURT], has laid down three tests as to what constitutes manufacture. They are - (i) a certain commodity should have been produced; (ii) the process of production must involve either labour or machinery; and (iii) the end product should have a distinct character, name and used.
The complete pasteurize steps, are purification, boiling and standardization. It does not go beyond the stages of 'processing' and by this processing it has become little more 'clean' and 'more fit' for consumption. But the milk in its raw stage was also fit for consumption. Assessee do processing. But all processing does not amount to production of an article or thing. If the assessee markets curd, ghee or other products after processing, that amounts to 'manufacture or production of an article or thing'. Pasteurization and standardization does not amount to production.
Therefore, we hold that the process of standardization and pasteurization of milk amounts to processing but does not amount to manufacture/production for the purpose of claiming deduction under sections 80-I and 80HHA of the Act.
In the result, appeals by the assessee are rejected and appeals by the revenue are allowed.
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2008 (6) TMI 300
Allowability of expenses on account of reimbursement of service charges and the nature of services - expenses related to earlier years - related entities or not - Service charges - Marketing expenses - deductible u/s 37(1) or not.
Service charges - HELD THAT:- TCCC, USA is a multinational company operating in more than 150 countries through its subsidiaries. The three agreements are part of the 'business model' chosen by TCCC. The subsidiary companies like the CCI Inc. and the assessee are independent entities for the purpose of the IT Act, 1961. In such a situation, an expenditure incurred by one company may sometimes directly and/or indirectly benefit more than one group company. There will be inter se purchases and sales at rates carefully worked out after taking into consideration various factors - in respect of the expenses relating to the services rendered by CCI Inc. to the bottlers, it can be said that the necessary 'nexus' did exist between such expenses and the 'purpose of the business' of the assessee.
In respect of the impugned expenses incurred by the assessee under the head 'Service charges', the necessary 'nexus' between these expenses and the 'purpose' of the assessee's business did exist, and therefore, the requirement of s. 37(1) can be said to have been fulfilled. The fact that the bottlers and TCCC-a group company were also benefited by these services is immaterial - Therefore, on the facts of the case, we see no justification for the addition of Rs. 7,42.98,465 (Rs. 10,80,04,482 - 3,37,06,017) - the addition of Rs. 10,80,04,482 is reduced to Rs. 3,37,06,017. In other words, the assessee gets relief of Rs. 7,42,98,465.
Marketing expenses - HELD THAT:- The reasons given by the AO for making the ad hoc disallowance/ addition of Rs. 2,00,00,000 have no merit. The CIT(A) too gave no cogent reason to agree with the AO and therefore, there are no justification for the disallowance. It is accordingly deleted - the addition of Rs. 10,00,00,000 sustained by the CIT(A), in respect of 'marketing expenses' is reduced to Rs. 4,42,81,637 (Rs. 4,11,61,718 + Rs. 31,19,919). In other words, the assessee gets relief of Rs. 5,37,18,863 (Rs. 2,00,00,000 + Rs. 3,37,18,863) - the issue is partly allowed.
Appeal allowed in part.
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2008 (6) TMI 299
100 per cent EOU unit - transfer pricing - Addition on Adjustment in the arm's length price (ALP) u/s 92CA(3) - non-resident company - services rendered by the taxpayer to its parent company in USA - business of software product development - TNMM Method - receive actual cost + 5 per cent mark up for the software developed and supplied to the parent company - HELD THAT:- The area of difference is limited to selection of comparables adopted by the TPO for working out average profit without making adustment for the differences. The taxpayer has further contended that its profit be taken after adjustment of depreciation as per Chapter XIV of the Indian Companies Act. the dispute is restricted to mainly two entities namely, Thirdware Solutions Ltd. and WTI Advanced Technology Ltd. The reasons for exclusion of these two companies and for suitable adjustment while working average profit margin have already been noted.
In the case of Mentor Graphics (Noida) (P) Ltd. vs. Dy. CIT.[2007 (11) TMI 339 - ITAT DELHI-H] this issue has been thoroughly discussed and it has been laid down that even while applying TNMM, suitable adjustment for difference on account of FAR and other relevant factor is to made. In that decision, the Bench also took into account OECD Guidelines on application of TNMM method.
We further find that the provisions on transfer pricing in US also provide for "adjustment" of the differences while applying a method similar to TNMM. The method is described as 'comparable profit method'.
It is evident that both OECD Guidelines and US regulations insist on necessary adjustments for difference on issues affecting profitability. The TNMM may afford a practical solution to otherwise insoluble transfer pricing problems if it is used sensibly and with appropriate adjustments to account for differences of the type referred to above. Similarities and dissimilarities of the transactions under comparison are to be scrutinized to see differences of situations, circumstances and environment. Any difference which materially affects the market value is to be given a serious consideration. The degree of comparability between the tested party and the uncontrolled taxpayer with parameters like nature or line of business, product or service market, the assets composition employed, the size and scope of operation, the stage of business or product cycle are required to be seen. In case of uncontrolled entity, operative income attributable to assets other than assets under consideration is to be adjusted before taking transaction for working mean margin of profit. Income and expenses of the segment of total business may have to be considered.
Depending on facts and circumstances of the case, 'it may also be appropriate to adjust the operative profit of tested party and comparable parties'. But when we examine the orders of the Revenue authorities, we do not find that the comparables or the tested parties were scrutinized to find differences, which needed adjustments. We may not agree with the taxpayer that only entities having turnover between Rs. 8 crores to Rs. 18 crores were to be selected for comparison. But we see no justification for considering oversized companies as taken by the TPO.
The learned CIT(A) was justified in taking entities having turnover between Rs. 5 crores to Rs. 25 crores but he was in error in considering turnover as the only relevant factor needed to be considered for a proper analysis. The functions performed, assets employed, risk taken (FAR) analysis were also required to be undertaken as per the transfer pricing regulation and other guidelines. This was not done, which renders the comparison as unsound and unreliable.
When taxpayer's learned representative had specifically pointed out that companies at Sl. Nos. 16 and 19, namely, Thirdware Solutions Ltd. and WTI Advanced Technology Ltd. were showing extraordinary results and had income from sources other than business of software development, the learned CIT(A) did not care to examine the above contention or to verify the grievances raised by the taxpayer but confirmed the adjustments made. In these circumstances, we are inclined to hold that the approach and the order of the learned CIT(A) was legally incorrect and the order impugned before us cannot be upheld without material changes.
A cursory look at the chart in the assessment order of 20 comparables would reveal that the margin of profit shown by Thirdware Solutions Ltd. and WTI Advanced Technology is extraordinary at 67.65 per cent and 54.72 per cent respectively. Therefore, it was necessary for the tax authorities to examine whether these entities have rightly been taken as comparables for application of most appropriate method.
We are not in a position to reject the contention of Mr. Ostwal that these companies were trading in software and were giving licenses for use of software. Thus, line of business of these companies was different from the business of the taxpayer involved exclusively in the development of software for its parent company. On facts and material on record, we are of the view that the above two companies were required to be excluded.
As per the working given, the profit margin of the taxpayer is quite comparable with average profit margin taken into account by the Revenue other than two companies mentioned above. Therefore, in our opinion, there is no justification for making addition or adjustment for ALP shown by the taxpayer.
We further agree with the contention of the learned counsel for the taxpayer that the benefit of adjustment was required to be given in working the margin of profit of the taxpayer for not undertaking any risk in the transactions involved with its parent company. However, evaluation of above risk in the present case is not necessary as even otherwise the margin of profit shown by the taxpayer has fully satisfied the ALP benchmark.
The ld DR had also raised some objection to the revised margin of profit shown by the taxpayer by taking lower rate of depreciation. This objection, in our opinion, is without any substance. The depreciation is required to be worked out under the Indian Companies Act and, as provided in the Schedule thereto. Depreciation cannot be computed as per American rules applicable to the parent company. Therefore, Mr. Ostwal was correct in adjusting margin of profit of the taxpayer.
Therefore, the addition on account of 'adjustment' in ALP is deleted. No other point was argued before us during the hearing of the appeal.
In the result, the appeal of the assessee is allowed.
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2008 (6) TMI 292
Issues:
Challenge to correctness of CIT(A)'s order on assessment under section 143(3) for the assessment year 2003-04.
Validity of the IT return filed by the assessee.
Eligibility of the loss incurred by the assessee for carry forward and set off against future incomes.
Compliance with section 140(c) regarding signing and verification of Income-tax return by a company.
Analysis:
The assessee, a public sector undertaking owned by the Government of Maharashtra, challenged the correctness of the CIT(A)'s order on assessment under section 143(3) for the assessment year 2003-04. One of the key findings was that the IT return filed by the assessee was considered non est due to not being signed and verified in accordance with section 140(c) of the Income-tax Act. Consequently, the CIT(A) held that the loss incurred by the assessee was not eligible for carry forward and set off against future incomes, a decision contested by the assessee.
The nature of the assessee-company was crucial in determining the validity of the IT return. The company was formed under the Maharashtra Krishna Valley Development Corporation Act, 1996, for construction of dams, canals, and irrigation schemes. The day-to-day affairs were managed by an executive committee as per the Act. The CIT(A) found fault with the Income-tax return being signed by the Chief Accounts and Finance of the Corporation, deeming it a violation of section 140(c). However, the tribunal disagreed, stating that the members of the executive committee could be considered directors under the Companies Act, fulfilling the requirement of section 140(c) for signing the return.
The tribunal clarified that in the absence of a managing director, any director could sign the Income-tax return for a company. As there were no designated directors in the assessee-company, the members of the executive committee were considered directors as per the Companies Act. Therefore, the signing by the Chief Accounts and Finance of the Corporation, a member of the executive committee, was deemed compliant with section 140(c). Consequently, the tribunal set aside the CIT(A)'s decision on the return being non est and held that the assessment framed by the Assessing Officer was time-barred, leading to the acceptance of the income returned by the assessee.
In conclusion, the tribunal allowed the appeal, ruling in favor of the assessee based on the compliance with section 140(c) and the time-barred assessment by the Assessing Officer.
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2008 (6) TMI 291
Issues Involved:
1. Denial of interest on the refund of Rs. 34,74,781, treating it as MAT credit.
2. Delay attributable to the assessee in relation to TDS certificates for Rs. 3,53,516 and its impact on the interest on refund under Section 244A.
Detailed Analysis:
1. Denial of Interest on Refund of Rs. 34,74,781 as MAT Credit:
The assessee contested the denial of interest on the refund amount of Rs. 34,74,781, arguing that it was an excess of tax paid over the tax payable for the year, not merely MAT credit. The AO excluded this amount from the total refund while computing interest under Section 244A, which was challenged by the assessee. The CIT(A) upheld the AO's action, referencing the proviso to Section 115JAA(2) which states that no interest shall be payable on the tax credit allowed under Section 115JAA(1). The assessee argued that the AO had reduced the MAT credit amount twice, which was against the statutory provisions. The Tribunal examined the provisions of Section 115JA and Section 115JAA, concluding that the AO had indeed reduced the MAT credit amount twice, which was not intended by the statute. The Tribunal directed that interest under Section 244A should be computed on the refund amount without the double reduction of the MAT credit.
2. Delay Attributable to the Assessee in Relation to TDS Certificates for Rs. 3,53,516:
The assessee furnished TDS certificates amounting to Rs. 3,53,516 on 26th Dec., 2003, after filing the return on 29th Oct., 2001. The AO granted the TDS claim but reduced this amount while calculating interest under Section 244A, attributing the delay to the assessee. The CIT(A) upheld this decision, citing Section 244A(2), which excludes the period of delay attributable to the assessee from the interest computation period. The Tribunal noted that interest on refund is due on the amount of refund after credit for advance tax and TDS. The Tribunal acknowledged that the delay in furnishing TDS certificates could be due to late deduction by the deductors and not necessarily the assessee's fault. The Tribunal restored this issue to the AO to verify whether the delay was attributable to the assessee or the TDS deductors. If the delay was due to the deductors, the assessee would be entitled to interest under Section 244A.
Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to compute interest under Section 244A on the refund amount without the double reduction of MAT credit and to verify the cause of delay in furnishing TDS certificates to determine the assessee's entitlement to interest under Section 244A.
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2008 (6) TMI 288
Taxability of Income u/s 115A r/w s. 44D - Permanent establishment (PE) in India or not - nature of services - business of designing, manufacturing and marketing passive electronic components - whether the entire business receipts of the taxpayer sourced from India, are to be taxed in India on gross basis @ 20 per cent in terms of the provisions of s. 115A r/w s. 44D of the IT Act, 1961 - DTAA between India-Germany - interplay between existence of a PE and taxability as 'royalties and fees for technical services' - subsidiaries in India, namely-Epcos India (P) Ltd. at Nasik and Epcos Ferrites (P) Ltd. at Kolkatta -
HELD THAT:- In our considered view, the assessee company did not have any PE in India, much less a PE to which subject 'royalties' and 'fees for technical services' can be attributed. In terms of the India-Germany DTAA, India does not have right to tax these receipts as business profits under art. 7. Of course, in the light of our finding that no revenues earned by the assessee company could be said to be attributable to the PE, even if one was to come to the conclusion that a PE existed, no taxability could arise under art. 7. The assessee has offered the royalties and fees for technical services for taxability in India under art. 12, and, to that extent, admitted tax liability exists. The overzealous approach of the AO has been rightly rejected by the CIT(A). We approve and confirm the stand of the CIT(A), and decline to interfere in the matter.
Taxability @ 20 per cent in terms of s. 44D r/w s. 115A in case PE is found to be in existence - we had taken note of the proposition advanced by the Revenue authorities that once art. 12(5) is invoked, all the receipts as 'royalties and fees for technical services' are taxable in India on gross basis under s. 44D, though, as per the provisions of s. 115A, at a lower rate of 20 per cent.
The proposition is well settled that nobody can make profit out of self or trade deal with self or earn from self. It is so held it a series of cases, including Sir Kikabhai Premchand vs. CIT [1953 (10) TMI 5 - SUPREME COURT], Betts Hartley Huett & Co. Ltd. vs. CIT [1978 (4) TMI 58 - CALCUTTA HIGH COURT] and ABN Amro Bank NV us. Asstt. Director of IT [2005 (8) TMI 294 - ITAT CALCUTTA-E]. It is thus clear that an income of the Indian subsidiaries, on account of having rendered services to themselves, cannot be taxed. There cannot be any income in the hands of this PE, even if that be so, which can be brought to tax.
In terms of the indo German tax treaty provisions, it will have to be demonstrated that such royalties and fees for technical services have a live economic nexus with the PE and only then exclusion clause under art. 12(5) as also taxability under arts. 7(1) and 7(2), will come into play. It is only after these royalties and fees for technical services are so included in the business profits attributable to the PE that the provisions of ss. 44D and 115A can be invoked.
Therefore, even if we are to hold that the taxpayer had a PE in India, unless there is a categorical finding that entire receipts were attributable to that PE, entire business receipts of the taxpayer sourced from India would not have been taxable in India under art. 7. The provisions of s. 44D and s. 115A do not, therefore, come into play only because there is a PE in India.
Taxability of 'royalties and fees for technical services' earned by the assessee company - No dispute that the amounts received by the assessee company on this account meet the definition of 'royalties' and of fees for technical services' under s. 44D which, in turn, refers to Expln. 2 to s. 9(2)(vi) and to s. 9(1)(vii) respectively. Accordingly, the limitation on deductions, as set out in s. 44D, does apply on the facts of the case, and entire amount is to be taxable on gross basis. However, in view of the provisions of s. 115A, the rate of tax on such income will indeed be 20 per cent.
Thus, the taxability of amounts received by the assessee company on account of 'royalties' and 'fees for technical services', on the facts of this case and under the Indian IT Act, will be @ 20 per cent on gross basis, That aspect of the matter is, however, academic since we have already held that, on the facts of this case, source country does not have the right to tax income in question, except under art. 12(2) of the tax treaty and at a rate not exceeding 10 per cent. The assessee has already accepted tax liability to that extent, and there is no dispute so far as taxability under art. 12(2) is concerned.
In the result, the appeal lied by the AO is dismissed.
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2008 (6) TMI 285
Validity of reopening of assessment u/s 147 - Additions u/s. 68 - chit fund contributions - non-furnishing of reason for reopening the assessment - Contributions to chit are in the nature of deposit or investment within the meaning of s. 13(1)(d) r/w s. 11(5) of the Act?
Validity of reopening of assessment u/s 147 - Additions u/s. 68 - chit fund contributions - non-furnishing of reason for reopening the assessment - AO, in all the three years, has made the addition u/s. 68 on cash credits - without furnishing the details of such cash credits - CIT(A) deleted the said addition, that the AO has failed to make proper enquiries - HELD THAT:- We find from the assessment order that during the course of proceedings for granting recognition u/s. 80G of the Act, the Department has noticed the chit fund contributions and according to the Department, these deposits have been made in contravention of provisions of s. 11(5) of the Act. Consequent to the abovesaid information, the AO reopened the assessments - When the question is raised about the validity of reassessment notice, it is only to be seen whether there are reasonable grounds with the AO to initiate the proceedings of reopening of assessment and not whether the omission or failure and escapement of income is established. This view is supported by the decision of Hon'ble Supreme Court in Sri Krishna (P) Ltd. Etc. vs. ITO [1996 (7) TMI 2 - SUPREME COURT]. The letter issued by the AO also addresses upon certain objections raised by the assessee with regard to applicability of s. 11(5). However, the moot point here is that the assessee has not raised any objection to tile reopening, after furnishing the reasons letter, though a new ground has been raised before us. On a conspectus of the matter, we hold that the reopening of assessments u/s 147 of the Act is in accordance with the law and hence, the assessee fails on this issue.
Contributions to chit are not in the nature of deposit or investment within the meaning of s. 13(1)(d) r/w s. 11(5) of the Act - main contention of the ld AR is that the contribution to chit fund cannot be regarded as either an investment or deposit and hence the provisions of s. 11 (5) would not be applicable - HELD THAT:- The undisputed fact is that the chit fund scheme also constitutes a convenient instrument for savings. If one bids at the fag end of the chit period, it may result in a gain. In that case this instrument can be termed as income producing property and hence contributions to chit fund, in that case, will fall under the category of "investment" - the contributions made to chit fund scheme of Model Chit Fund Corporation are an investment and since this investment is not in the form or mode prescribed u/s. 11(5) of the Act, the provision of s. 13(1)(d) is attracted. Hence, we do not find any infirmity in the orders of learned CIT(A) - We find from the record that the AO has initially issued commissions to the ITOs located at Kakinada, Vizianagaram and Srikakulam. However, only the ITO, Kakinada, responded to the commission and sent the sworn statements recorded from some of the creditors. Subsequently, the AO issued summons to the assessee asking it to produce all the creditors. However, the assessee expressed its inability to produce all the creditors. Finally the AO made additions u/s. 68 without making further enquiries and without furnishing the details of such cash credits - From the assessment order we find that the AO has rejected the confirmation letter furnished by four creditors on surmises only. The AO should have listed out the cash credits on which he wanted details and then sought for the information from the assessee. Without affording such details to the assessee, the assessee cannot be expected to discharge the initial burden of proof placed upon it. Hence, we do not find any reason to interfere with the order of learned CIT(A) on this issue also.
In the result, the appeals filed by the assessee as well as Revenue are dismissed.
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2008 (6) TMI 283
Issues involved:
The judgment involves the interpretation of deduction under section 80P(2)(b) of the Income Tax Act, 1961 for a co-operative society engaged in supplying milk, specifically determining whether the society qualifies as a primary society for the purpose of the deduction.
Details of the judgment:
Issue 1: Deduction under section 80P(2)(b) for a co-operative society engaged in supplying milk
The appeals were filed by the Revenue against the CIT(A)'s order granting deduction under section 80P(2)(b) to the co-operative society. The society claimed to be a primary society supplying milk, while the Revenue argued it was a federal society collecting milk from primary societies. The CIT(A) granted the exemption, leading to the appeals.
Issue 2: Interpretation of "primary society" for deduction eligibility
The key dispute was whether the co-operative society should be considered a primary society for the deduction under section 80P(2)(b). The Revenue contended that the society did not qualify as a primary society, while the society argued it met the criteria based on the Government order and its role as an intermediary between primary societies and State apex societies.
Issue 3: Legal analysis and precedent
Both parties presented arguments citing judicial pronouncements to support their positions. The Revenue relied on various court decisions to emphasize the criteria for exemption eligibility. The society's defense included references to Supreme Court and High Court judgments highlighting the need for a liberal interpretation of exemption provisions for co-operative societies.
Conclusion:
After considering the arguments and legal provisions, the Tribunal held that the co-operative society did not qualify as a primary society engaged in supplying milk as required by section 80P(2)(b). The Tribunal set aside the CIT(A)'s order and restored the assessing authority's decision, allowing all four appeals filed by the Revenue.
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2008 (6) TMI 281
Allowability of deduction under s. 80-IA - work on contract basis - Allowability of employer's contribution to ESI payment - Paid beyond the due date but before the date of filing the return of income.
Allowability of deduction under s. 80-IA - work on contract basis - insitu lining for water supply project and anti-corrosive lining - Ex consequenti notice u/s. 148 issued and the deduction claimed u/s 80-IA was denied - CIT(A) reversed the order of the AO - 'Contractor' and 'developer' - HELD THAT:- 'Contractor' and 'developer' are two different terms. As per the Oxford Advanced Learner's Dictionary, 'developer' is a person or company that designs and creates new projects, whereas 'contractor' is a person or company that has a contract to do work or provides services or goods to another - It is made abundantly clear that the prescription of s. 80-IA shall not apply to a person who executes work contracts entered into with an undertaking or enterprise. Thus, in a case where a person who makes investment and himself executes development works and carries out civil works will be eligible for tax benefit u/s. 80-IA of the Act. In contrast to this, a person who enters into a contract with another person for executing works eon tract will not be eligible for the tax benefit u/s. 80-IA of the Act - Thus, the assessee was doing only contract works of insitu cement lining for water supply project of the Gujarat Water Supply and Sewerage Board. As such, the benefit of s. 80-IA cannot be extended to the assessee. The decisions relied upon by the assessee were rendered prior to the amendment and as such not relevant for deciding this issue - the order of the AO restored and the order of the CIT(A) reversed - In the result the Revenue's appeal stands allowed.
Allowability of employer's contribution to ESI payment - Paid beyond the due date but before the date of filing the return of income - HELD THAT:- The Hon'ble Supreme Court in the case of CIT vs. Vinay Cement Ltd. [2007 (3) TMI 346 - SC ORDER] held that the assessee was entitled to claim the benefit of s. 43B for that period, particularly in view of the fact that he has contributed to the provident fund before filing of the return. Respectfully following the precedent we decide this issue in favour of the assessee and against the Revenue.
In the result the cross-objection filed by the assessee stands partly allowed.
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2008 (6) TMI 280
Issues Involved:
1. Jurisdiction in reopening under s. 147.
2. Classification of land as agricultural or non-agricultural.
3. Indexation in computation of capital gains.
4. Interest on borrowed funds as cost of acquisition.
Summary:
Issue 1: Jurisdiction in reopening under s. 147
The CIT(A) upheld the reopening of assessment u/s 147. The Tribunal agreed, citing the Supreme Court's decision in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd., which clarified that taxing income escaping assessment under s. 143(1)(a) is covered by the main provision of s. 147. The Tribunal upheld the CIT(A)'s order, rejecting the assessee's ground.
Issue 2: Classification of land as agricultural or non-agricultural
The CIT(A) held that the land sold was non-agricultural at the time of transfer, making the gains taxable as capital gains. The Tribunal considered various factors, including the land's classification, usage, and surrounding development. The Tribunal referenced the Supreme Court's decision in Smt. Sarifabibi Mohmed Ibrahim & Ors., which established that land not used for agriculture and sold for non-agricultural purposes is not agricultural land. The Tribunal upheld the CIT(A)'s order, rejecting the assessee's ground.
Issue 3: Indexation in computation of capital gains
The CIT(A) denied the benefit of adding interest on borrowals for acquiring the land to the cost of acquisition for indexation purposes. The Tribunal noted that the interest component paid in the year of sale cannot be considered for indexation, as indexation is meant to account for inflation over time. The Tribunal upheld the CIT(A)'s decision on this point.
Issue 4: Interest on borrowed funds as cost of acquisition
The CIT(A) allowed part of the interest on borrowed funds as part of the cost of acquisition but restricted it to simple interest. The Tribunal remitted the matter back to the AO to examine the genuineness of the interest payments, including compound interest, and to pass a fresh order after giving the assessee an opportunity to be heard. The Tribunal upheld the CIT(A)'s decision to disallow expenses on manure/fertilizer and other maintenance/administrative expenses due to lack of evidence.
Department's Appeals:
The Department challenged the CIT(A)'s decision to allow interest on borrowed funds as part of the cost of acquisition. The Tribunal upheld the CIT(A)'s decision, citing the Madras High Court's ruling in CIT vs. K. Raja Gopala Rao, which held that interest on borrowed funds directly related to the acquisition of an asset forms part of the cost of acquisition. However, the Tribunal's decision is subject to the AO's examination of the genuineness of the interest payments.
Conclusion:
The Tribunal partly allowed the assessee's appeals and dismissed the Department's appeals, directing the AO to re-examine the genuineness of the interest payments and pass a fresh order accordingly.
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2008 (6) TMI 279
Issues involved:
The issues involved in this legal judgment include the assumption of jurisdiction by the Assessing Officer (AO) under section 147 of the Income Tax Act, 1961, and the validity of reopening the assessment for the assessment year 1996-97.
Assumption of Jurisdiction under Section 147:
The AO initiated proceedings under section 147 by issuing a notice under section 148, and in the reassessment order, the total income was assessed. The assessee challenged the assumption of jurisdiction by the AO under section 147 through various grounds. The AO mentioned reasons for issuing the notice under section 148, including discrepancies related to depreciation and deduction under section 80-O. The CIT(A) upheld the jurisdiction of the AO under section 147, stating that the income had escaped assessment due to the failure to disclose certain facts. However, it was noted that the CIT(A) did not consider the applicability of the proviso to section 147, which requires the assessee to disclose all material facts necessary for assessment.
Provisions of Section 147 and Legal Interpretation:
The legal interpretation of section 147 post the Direct Tax Laws (Amendment) Act, 1987 and 1989 was discussed. It was highlighted that the power to reopen an assessment under the amended section 147 is wider and can be exercised even if the assessee had fully disclosed all material facts. However, the proviso to section 147 imposes conditions for reopening assessments after four years from the end of the relevant assessment year. The onus is on the AO to establish that the assessee failed to disclose material facts necessary for assessment. The judgment emphasized that the disclosure must be of material facts existing at all relevant times between filing the return and assessment.
Conclusion and Disposition of Appeals:
The Tribunal concluded that the proceedings under section 147 for the assessment year 1996-97 were not validly initiated as the AO did not establish the failure of the assessee to disclose material facts. Consequently, the notice issued by the AO and the assessment order were quashed. As a result, the grounds related to the impugned assessment order were not adjudicated. The appeal filed by the assessee was allowed, and the appeal by the Department and cross-objection by the assessee were dismissed as the assessment order had been quashed.
This judgment provides a detailed analysis of the jurisdictional aspects under section 147 of the Income Tax Act and emphasizes the importance of disclosing all material facts for a valid reassessment.
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2008 (6) TMI 272
Issues Involved:
1. Deletion of penalty by CIT(A)
2. Non-declaration of bogus gifts
3. Element of mens rea
4. Validity of revised return
5. Satisfaction recording for penalty
Issue-wise Detailed Analysis:
1. Deletion of penalty by CIT(A):
The revenue challenged the CIT(A)'s decision to delete the penalty of Rs. 1,35,000 imposed under section 271(1)(c) of the Income-tax Act. The CIT(A) reasoned that the assessee had voluntarily filed a revised return before any detection by the department and had paid self-assessment tax on the surrendered amount of Rs. 3 lakhs. The CIT(A) concluded that the penalty was unwarranted as the revised return was filed to avoid protracted litigation and not due to any detection of concealment by the department.
2. Non-declaration of bogus gifts:
The assessee initially filed a return on 31-7-2001, which did not disclose the gifts received in the names of his minor children. The department's investigation revealed that one of the donors, Shri Vimlesh Kumar, was a man of no means and was providing accommodation entries. The assessee later filed a revised return on 5-2-2003, declaring the gifts as income after the department's investigation commenced. The Assessing Officer argued that the revised return was not valid under section 139(5) as there was no omission or wrong statement in the original return, and the gifts were known to be bogus from the beginning.
3. Element of mens rea:
The CIT(A) found no element of mens rea, stating that the assessee's conduct indicated a lack of intent to conceal income. The assessee had voluntarily declared the gifts before any adverse detection by the department. The CIT(A) relied on the Supreme Court's decision in Dilip N. Shroff v. Jt. CIT and the Gujarat High Court's decision in National Textiles v. CIT, which emphasized the absence of mens rea in penalty imposition under section 271(1)(c).
4. Validity of revised return:
The revenue contended that the revised return filed on 5-2-2003 was not valid under section 139(5) as it did not involve any bona fide omission or wrong statement. The Tribunal upheld this view, stating that the revised return did not qualify under section 139(5) because the gifts' bogus nature was known to the assessee at the time of filing the original return. The Tribunal distinguished between the gifts from Shri Vimlesh Kumar, which were proven bogus, and the other two donors, for which the department had no concrete evidence at the time of filing the revised return.
5. Satisfaction recording for penalty:
The assessee argued that the penalty order was not maintainable as the requisite satisfaction was not recorded. The Tribunal found that the Assessing Officer had clearly stated in the assessment order that the revised return was illegal and that the assessee had concealed income. This was deemed sufficient for inferring proper and lawful satisfaction before levying the penalty.
Conclusion:
The appeal by the revenue was partly allowed, restoring the penalty in respect of the gift from Shri Vimlesh Kumar, while the penalty in respect of the other two gifts was canceled. The cross-objection filed by the assessee was dismissed, upholding the validity of the penalty proceedings.
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2008 (6) TMI 271
Issues:
- Appeal against cancellation of penalty under section 271(1)(c) of the Act.
- Interpretation of the decision of Hon'ble Supreme Court in the case of Virtual Soft Systems Ltd.
- Application of penalty provisions in cases involving set off of brought forward losses.
Analysis:
1. The appeal was filed by the Revenue against the cancellation of a penalty of Rs. 3 lakhs imposed under section 271(1)(c) of the Act. The learned CIT(A) had cancelled the penalty based on the argument that the case of the assessee fell within the purview of the decision of Hon'ble Supreme Court in the case of Virtual Soft Systems Ltd.
2. The facts of the case involved the filing of a return disclosing income of Rs. 1,27,219, which was later adjusted against brought forward business losses during assessment proceedings. Various additions were made during the assessment, leading to a final assessed income of Rs. 24,62,160. The penalty was imposed by the AO based on a cash credit of Rs. 4,24,340 being treated as concealed income.
3. The Revenue contended that the decision in Virtual Soft Systems Ltd. was not applicable in this case as the returned income was a positive figure and so was the assessed income. The Revenue argued that the penalty should be decided on merits, emphasizing that the Hon'ble Supreme Court's decision was not directly applicable due to the differences in the factual scenario.
4. The assessee argued that the penalty provisions should not be applied as there was no tax payable by the assessee after setting off brought forward losses. The assessee maintained that the principles laid down in the Virtual Soft Systems case should be applied in this scenario as well.
5. The Tribunal analyzed the provisions of section 271(1)(c) of the Act and the explanation provided by the Hon'ble Supreme Court in the Virtual Soft Systems case. It was noted that the penalty could not be levied where there was no tax payable, as emphasized in the decision. The Tribunal held that the learned CIT(A) was justified in applying the principles of the Virtual Soft Systems case and subsequently dismissed the appeal filed by the Revenue.
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