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Showing 321 to 340 of 658 Records

• 2007 (11) TMI 356
  
  Issues Involved:
  1. Validity of the order passed u/s 143(3) r/w s. 147.
  2. Application of provisions of s. 150(1) and its jurisdiction.
  3. Reopening of assessment u/s 147 based on Tribunal's findings.
  4. Interpretation of "finding" and "direction" in the context of s. 150.
  
  Summary:
  
  1. Validity of the order passed u/s 143(3) r/w s. 147:
  The appellant contended that the order passed u/s 143(3) r/w s. 147 is not tenable in law as it was passed without resuming proper jurisdiction considering the provisions of sub-s. (1) of s. 150. The appellant argued that the AO erred in applying the provisions of s. 150(1) as the subject matter before the Tribunal was the firm and not the partner, relying on the case law ITO vs. Murlidhar Bhagwan Das (1964) 52 ITR 335 (SC).
  
  2. Application of provisions of s. 150(1) and its jurisdiction:
  The Tribunal had previously deleted the addition of Rs. 1,93,000 in the hands of the firm, stating that the credit amount standing in the names of partners was actually brought in by them. Consequently, the AO applied s. 150(1) to add the said sum in the hands of the appellant, a partner, since it was deleted from the hands of the firm. The appellant argued that s. 150 does not prescribe giving effect to an appellate order pertaining to another assessee and that the Tribunal's observations should not be taken into account for the appellant.
  
  3. Reopening of assessment u/s 147 based on Tribunal's findings:
  The AO reopened the assessment u/s 147 after the Tribunal deleted the addition from the firm's hands. The appellant objected, stating that the Tribunal's decision pertained to the firm and not the partners, and that the notice was issued beyond the time limit. The AO, however, applied s. 150(1) to give effect to the appellate order, adding the sum concerning the appellant.
  
  4. Interpretation of "finding" and "direction" in the context of s. 150:
  The Tribunal examined the language of s. 150 and related sections, concluding that the AO had jurisdiction to issue a notice u/s 148 to assess the impugned capital under s. 68 of the Act in the hands of the partner. The Tribunal referred to Explanation 3 to s. 153(3) and relevant case laws, including CIT vs. Metachem Industries and Lotus Investments Ltd., to interpret the terms "finding" and "direction." It was held that the AO's action was justified as the partner's assessment was intimately connected with the firm's assessment.
  
  Conclusion:
  The Tribunal dismissed the appeal, upholding the AO's view that the reopening of the assessment and the addition of the impugned amount in the hands of the partner were valid and in accordance with the law. The grounds raised by the appellant were dismissed, and the appeal was rejected.

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• 2007 (11) TMI 353
  
  Issues Involved:
  1. Whether the expenses on replacement of machinery should be treated as capital or revenue in nature.
  2. Whether excise duty and sales tax should be excluded from the turnover to work out the deduction under section 80HHC.
  3. Whether the deduction under section 80-IA should be allowed on the eligible profits without reducing the deduction given under section 80HHC.
  
  Issue-wise Detailed Analysis:
  
  1. Capital vs. Revenue Expenditure on Replacement of Machinery:
  
  The Revenue contended that the expenses on replacement of machinery should be treated as capital in nature, citing the decision in Ballimal Nawal Kishore & Anr. vs. CIT and CIT vs. Madras Cement Ltd., which held that only expenses on current repairs can be allowed as revenue expenditure. The CIT(A) relied on the judgment in CIT vs. Janakiram Mills Ltd., which was later reversed by the Supreme Court in CIT vs. Saravana Spinning Mills (P) Ltd. The assessee argued that the expenditure was claimed under section 37, not as current repairs. The Tribunal noted that the assessee had claimed the expenditure under "modernization and replacement" and not as current repairs. The Tribunal referred to the Supreme Court's principles in cases like Empire Jute Co. Ltd. vs. CIT, Alembic Chemical Works Co. Ltd. vs. CIT, and Assam Bengal Cement Co. Ltd. vs. CIT, emphasizing the nature of the advantage in a commercial sense and whether it leads to an increase in manufacturing capacity. The Tribunal concluded that the expenditure on auto cone winders was for modernization and did not increase the installed capacity, hence it was revenue in nature.
  
  2. Exclusion of Excise Duty and Sales Tax from Turnover for Section 80HHC Deduction:
  
  The CIT(A) held that excise duty and sales tax should be excluded from the turnover to work out the deduction under section 80HHC. The Tribunal confirmed this decision, citing the Supreme Court's judgment in CIT vs. Lakshmi Machine Works, which held that excise duty and sales tax cannot form part of the "total turnover" under section 80HHC(3) as they have no nexus with the activity of export. The Tribunal also referenced the Madras High Court's decision in CIT vs. Sundaram Clayton Ltd., supporting the exclusion of these taxes from the turnover.
  
  3. Deduction under Section 80-IA without Reducing Deduction under Section 80HHC:
  
  The CIT(A) directed that the deduction under section 80-IA should be allowed on the eligible profits without reducing the deduction given under section 80HHC. The Tribunal reversed this decision, following the Chennai Special Bench decision in Asstt. CIT vs. Rogini Garments, which held that full effect must be given to section 80-IA(9), requiring the reduction of the deduction allowed under section 80-IA before allowing the deduction under section 80HHC.
  
  Conclusion:
  
  The Tribunal partly allowed the Revenue's appeal. It upheld the CIT(A)'s decision on treating the replacement expenditure as revenue in nature and excluding excise duty and sales tax from the turnover for section 80HHC deduction. However, it reversed the CIT(A)'s decision on the deduction under section 80-IA, ruling in favor of the Revenue that the deduction under section 80-IA should reduce the eligible profits before allowing the deduction under section 80HHC.

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• 2007 (11) TMI 351
  

  Condonation of Huge delay of 7 years and 18 days - Appeal To Commissioner(A) - Original assessments set aside by the CIT(A) - AO wrongly made fresh assessments u/s 144 r/w section 251 - CIT(A) partly allowed the appeals of the assessee.

  Condonation of Huge delay of 7 years and 18 days - HELD THAT:- Where no negligence, or inaction or want of bona fide can be imputed to the appellant, a liberal construction of the limitation provisions has to be made in order to advance substantial justice. Seekers of justice must come with clean hands. We do not find any reasonable cause for condoning the delay. Keeping in view the facts and circumstances of the case in our opinion the delay was due to negligence and inaction on the part of the Revenue authorities and the inordinate delay of 2569 days cannot be condoned and the appeals are dismissed as time barred.

  Appeal To Commissioner(A) - Original assessments set aside by the CIT(A) - AO wrongly made fresh assessments u/s 144 r/w section 251 - CIT(A) partly allowed the appeals of the assessee - HELD THAT:- We are of the opinion that the CIT(A) has set aside the assessment means that he annulled the assessment, since he has not given any direction to re-do the assessment. This view of ours is supported by the judgment of the hon'ble Calcutta High Court in the case of Fu Sheen Tannery v. ITO[2003 (4) TMI 88 - CALCUTTA HIGH COURT]. As such, the Assessing Officer has no jurisdiction to pass any further order. He is duty bound to follow the direction of the CIT(A) and he cannot sit over the order of the CIT (A), who is a superior authority. The remedy lies with the Department and he has to filed an appeal against the order of the CIT (A) if they have any grievance.

  In the present case, instead of filing the appeal in time against the CIT (A), the AO made a fresh assessment without jurisdiction which is against the law on the facts of the case and not sustainable in the eyes of law. Therefore, the additional ground raised by the assessee is allowed and we cancel the impugned assessment order as well as the impugned order of the CIT(A) in view of the precedents discussed above. Since we have allowed the legal issue raised by the assessee and cancelled the assessments, we refrain from going through the merits of the case and it is only academic.

  Accordingly, we allow the appeals of the assessee. The appeals of the Revenue become infructuous and we dismiss the same as infructuous.

  In the result, the Revenue's appeals are dismissed and the assessee's appeals are allowed.

  ---

• 2007 (11) TMI 349
  
  Issues:
  Denial of agricultural income claim
  
  Analysis:
  The appeal pertains to the denial of the claim of agricultural income by the Assessing Officer (AO) and subsequent confirmation by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO added Rs. 90,627 as income from other sources out of the total agricultural income claimed by the assessee, leading to a dispute. The assessee declared income of Rs. 42,570 and agricultural income of Rs. 2,48,427, which was later revised to Rs. 1,36,047 during assessment. The AO based the denial on the grounds that the crop of Sarson was sown later than the sale date mentioned by the assessee, raising doubts on the possibility of the sale. The assessee provided evidence such as Girdawari report, sale receipts, and electricity bills to support the agricultural income claim. The CIT(A) upheld the AO's decision, prompting the appeal.
  
  Upon reviewing the submissions and evidence, it was highlighted that the assessee had no other source of income besides agriculture and interest income. The AO did not establish any other source of income for the assessee or involvement in crop trading. The assessee's ownership of agricultural land was acknowledged, and past acceptance of agricultural income by the AO was noted. A newspaper report questioning the reliability of Girdawari records was presented, casting doubt on the accuracy of such records. Given the absence of other income sources for the assessee and the existence of receipts from the Krishi Upaj Mandi Samiti, the claim of agricultural income was deemed valid. Legal precedents were cited to support this decision, leading to the reversal of the CIT(A)'s finding and the deletion of the addition made by the AO.
  
  In conclusion, the appellate tribunal allowed the appeal of the assessee, overturning the denial of the agricultural income claim. The entire addition of Rs. 90,627 was ordered to be deleted, emphasizing the assessee's reliance on agricultural income as the primary revenue source.

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• 2007 (11) TMI 348
  

  Claimed exemption u/s 11 - Addition made u/s 68 of the Act - Genuineness of the donations - Alleged Fake Donations - No opportunity of cross-examination - HELD THAT:- We are in agreement With the observations of learned CIT(A) when he says that exemption under s. 11 cannot be denied to the assessee on the basis of fake donations. The impugned claim of exemption can only be denied if (i) the activities of the trust are not genuine and (ii) its activities are not being carried out in accordance with the objects of the trust. Admittedly, no finding has been given by learned AO in this regard. He has not touched these ingredients, which are sine qua non for grant of impugned exemption. It is also a fact that registration granted under s. 12AA of the Act has not been withdrawn by CIT. None of the allegations contained in the assessment order for asst. yr. 2004-05 under consideration relates to the activities carried on by the society. Rather, the activities of the society are being carried out as per rules, stand confirmed from the evidences.

  It is a clear case that the AO did not make any enquiry in respect of the donations received from the trusts, companies and celebrities and other donors, which were received by account payee cheques/drafts. These donors are existing asses sees and have claimed deduction u/s 80G of the Act for the donation made to the assessee. Merely by recording statements of few persons on the back of the assessee, without producing them for cross-examination, the entire donations cannot be treated as bogus and as unexplained money of the society. The IT authorities cannot be allowed to take advantage of their own inaction to the prejudice of the assessee, in respect of the allegation that the assessee society has received donations from various trusts, well known companies and certain celebrities. The society has been working for the purpose of attaining its objects by carrying out various activities in the field of education. Therefore, there is nothing wrong to make donations to assessee society keeping in mind the charitable activity by it.

  Therefore, we confirm the impugned finding and dismiss the ground raised by the Revenue. As a result, the appeal of the Revenue is dismissed.

  As we have already observed while deciding the appeal of the Revenue that not providing the opportunity of cross-examination is a serious lacuna and not technical lapse an un scrutinised statement is not a statement at all and cannot be used against a person who was not given an opportunity to cross-examine the deponent in this case no such opportunity was given. Therefore, we amend the observations so made by the learned CIT(A) and allow this ground of cross-objection.

  In the result, the appeal of the Revenue is dismissed and the cross-objection is allowed.

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• 2007 (11) TMI 347
  
  Issues involved: Appeal by Revenue against CIT(A) order, cross-objection by assessee, addition of profit element vs. entire value of shortage of stock, undisclosed sales estimation, interest under s. 158BFA(1), surcharge under s. 113.
  
  Addition of Profit Element vs. Entire Value of Shortage of Stock:
  The Revenue contested the CIT(A)'s direction to add only the profit element of 10.5% GP involved in sales of Rs. 3,11,893 instead of the entire amount due to stock shortage. The CIT(A) accepted the assessee's argument that only the profit element should be added in case of stock shortage. The Tribunal upheld this view, citing precedents and held that only the profit element should be taxed, dismissing the Revenue's appeal.
  
  Undisclosed Sales Estimation:
  The AO estimated undisclosed sales at Rs. 2,29,50,883, while the CIT(A) directed to adopt it at Rs. 41,35,040, granting a relief of Rs. 23,04,315. The Tribunal found no evidence to justify enhancing sales for the entire block period beyond the CIT(A)'s decision. It emphasized the need for evidence to estimate undisclosed sales and dismissed the Revenue's appeal against the CIT(A)'s decision.
  
  Interest under s. 158BFA(1):
  The cross-objection raised concern about charging interest under s. 158BFA(1) of the Act. The Tribunal acknowledged the mandatory nature of interest under this section but allowed consequential relief, partly granting this ground of appeal.
  
  Surcharge under s. 113:
  Regarding the surcharge under s. 113, it was noted that the search took place before the provision was enacted. The Tribunal ruled that no surcharge could be levied in this case, leading to the dismissal of this ground.
  
  In conclusion, the Tribunal dismissed the Revenue's appeal and partly allowed the cross-objection, providing relief on the grounds of interest and surcharge as per the legal provisions.

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• 2007 (11) TMI 345
  

  Trading addition - rejection of the books of account u/s 145(3) - income from trading of machineries, electrical goods and accessories on wholesale and retail basis - HELD THAT:- It is well settled business proposition that for having increase in sales, a businessman has to sacrifice a small margin of profit rate. During the year the overall gross profit of the assessee has increased from Rs. 1.43 crores to Rs. 1.54 crores. No defect was found in the books of account. There is no valid reason for rejection of books of account during the year under consideration and thereby applying higher GP rate of 11.51 per cent. which was earned by the assessee on low sales of Rs. 1.24 crores in the preceding year. The other reason stated by the AO of making trading addition was that in asst. yr. 2001-02, GP rate declared by the assessee at 9.64 per cent was not accepted and trading addition so made by rejecting the books of account was confirmed by the learned CIT(A), therefore, by following the order of the earlier year the AO has made addition by rejecting the GP rate of 9.94 per cent declared during the year under consideration.

  The ld AR placed on record the order of the Tribunal in assessee's own case in AY 2001-02 wherein addition made by the AO by applying GP rate of 10.14 per cent was deleted by the Tribunal and the GP rate of 9.64 per cent declared by the assessee was found to be reasonable and correct. As the facts and circumstances during the year under consideration are same, the issue is squarely covered by the order of the Tribunal in the preceding year, respectfully following the same, we reverse the findings and conclusions of the lower authorities and direct the AO to delete the trading addition so made by him by rejecting the books of account.

  In the result the appeal of the assessee is allowed.

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• 2007 (11) TMI 341
  

  Disallowance of Payment on brokerage commission - nexus between the commission payment and sales - return of income declaring loss - difference of opinion between the Accountant Member and the Judicial Member - Third Member Order - Order AM - HELD THAT:- We noted that without making any inquiry by the Assessing Officer, he disallowed the huge amount. Further, the assessee had declared loss, which was assessed by the Assessing Officer. Therefore, we are unable to understand that why the assessee will claim bogus payment of commission without any gain as the company is running in loss and further the company is running under the State Government Management. Therefore, there is hardly any scope for claiming false payment of commission. Thus, we do not find any infirmity in the order of the CIT(A). Hence, this ground of appeal of the revenue is dismissed.

  Ground 2 Claim of telephone expenses - disallowed by the Assessing Officer for personal call - HELD THAT:- We noted that Hon'ble Gujarat High Court in the case of Sayaji Iron [2004 (2) TMI 6 - GUJARAT HIGH COURT] which is a private limited company is a distinct assessable entity as per the definition of 'person' under section 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the directors, 'even if they are personally used by the directors' the vehicles are personally used by the company, because a limited company by its very nature cannot have any 'personal use'. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of section 40(c) and section 40A(5) of the Act.

  Thus, we do not find any infirmity in the order of the CIT(A) - Consequently, the appeal of the revenue is dismissed.

  Order JM - I am of the view that since the ld. CIT(A) has not considered this issue in proper perspective and did not consider the objections raised by the Assessing Officer in the assessment order. The ld. CIT(A) was not justified in deleting the addition and the matter requires reconsideration at the level of the ld. CIT(A). I, therefore, set aside the order of the CIT(A) and restore the matter to his file with direction to decide the issue of commission payment afresh by giving reasonable sufficient opportunity of being heard to the assessee. The ld. CIT(A) shall also take into consideration the objections raised by the Assessing Officer in the assessment order while disallowing the commission payment. The ld. CIT(A) is directed to decide all the points which have been raised by the Assessing Officer in the assessment order.

  Third Member Order - It is clearly proved on record that the mill has been closed and BIFR recommended its winding up. The assessee did produce all the relevant material which was available with the assessee in support of its claim of commission/brokerage in dispute. It produced the details of sales on which commission was paid to majority of brokers. It is, therefore, not possible to accept that there is no evidence of services rendered by the brokers. It is further claimed that such commission and brokerage was paid as per business practice and on the basis of agreements. Copies of agreements were also made available to the Assessing Officer.

  The above material, in my opinion, fully discharged the burden which lay on the assessee to prove the payment of commission as similar commission was paid by the assessee in earlier year and is also paid by other mills of the assessee's size carrying on similar trade. It is difficult to hold that the expenditure of commission was not wholly laid for the purpose of business. The objection of the Assessing Officer that the agreements were not signed by the competent persons of the mill or counterfoils of cheques were not produced or to some of the brokers, commission paid was found to be paid at the rate of 1.399 per cent, was not material to disallow this claim. The Assessing Officer for verification of genuineness of payment was required to examine the bank statements of the assessee wherein the payment was debited.

  It is nobody's case that bank statements were not available with the assessee at the relevant time of such commission was not found debited. Without making any enquiry, the finding that the commission paid was not genuine could not be arrived at. Similarly, the finding that no services were rendered is also without any basis or justification.

  Therefore, on the facts of the case, I agree with the order proposed by the ld AM. The impugned order of the learned CIT(A) should be confirmed.

  Thus, the file should now be placed before the regular Bench for passing an appropriate order as per law.

  Ground No. 2 was dismissed vide separate order. However, on Ground No. 1, Third Member agreed with the order proposed by the AM - In view of the opinion of the majority of Members, the ground No. 1 in departmental appeal stands dismissed.

  As a result, appeal of the revenue is dismissed.

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• 2007 (11) TMI 340
  
  Issues involved:
  The issues involved in this case are related to the validity of the order passed by the CIT(A), the initiation of proceedings under section 158BD of the Income Tax Act, and the justification for such proceedings.
  
  Validity of CIT(A) Order:
  The appeal was made by the assessee against the order of CIT(A) which was related to the block period from 1st April, 1986 to 13th Feb., 1997. The assessee contended that the order passed by the CIT(A) was bad both in the eye of law and on facts.
  
  Proceedings under Section 158BD:
  The proceedings under section 158BD of the Act were initiated against the appellant after the framing of block assessment of the searched person. The question raised was whether the notice under section 158BD requires to be issued within a reasonable time, and if not, whether the assessment made pursuant to the notice is liable to be set aside on that ground.
  
  Justification for Proceedings:
  The assessee, engaged in the business of a commission agent of fruits, was involved in a search and seizure operation under section 132(1) of the IT Act. The AO issued a notice under section 158BD to the assessee much later after receiving information from the AO of the person who was subjected to a search. The Tribunal held that the notice should have been issued within a reasonable period, and in this case, a delay of 19 months was considered unreasonable, leading to the annulment of the block assessment order.
  
  Conclusion:
  The Tribunal, following the decision of the Hon'ble Gujarat High Court, held that the delay in issuing the notice under section 158BD was unreasonable, rendering the assessment made on the assessee as bad in law. Consequently, the order of block assessment was annulled, and the appeal by the assessee was allowed.

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• 2007 (11) TMI 339
  

  Transfer Pricing - Computation of Arm's length price of International Transactions - comparable selection - software services provided to its Associated Enterprises (AE) - deduction claimed u/s 10A - appropriate method u/s 92C - Transactional Net Margin Method (TNMM) - HELD THAT:- Assessing Officer did not apply Indian regulation or guidelines issued by OECD on transfer pricing. The taxpayer, on the other hand, carried out proper screening of approximately 8,000 companies carrying business of software in India and exporting services and goods abroad. It took into account characteristics of its company in question for the relevant assessment year and thereafter made selection of company after applying functional test with reference to assets employed and risk taken by those companies.

  Though identical transaction could not be located even by the assessee, an attempt was made to find comparable transactions as close as possible to the controlled transaction. Besides the assessee has rightly relied upon the transaction in the case of Integrated Hitech Ltd. with operating profit ratio of 3.16%. This transaction has been accepted as comparable by the TPO and, therefore, there is nothing further for the taxpayer to establish that controlled transaction with AE was an arm's length transaction.

  We are not taking into account high profit or high loss making companies as comparables. All the above, independent comparables have shown profit margin of less than the assessee and, therefore, in the light of above evidence, there is no reason to hold that taxpayer's international transaction with AE is not at arm's length. It has no tangible assets worked in no risk environment are very strong points of the taxpayer, not refuted on record.

  While holding so, we have not adopted mean profit of several comparable found by respective parties because in spite of our repeated requests, the parties before us, were unable to show us any rule or decision under which average or mean margin (OP/TC) of different companies is to be taken. Tax administration and parties can work different Arm's length price i.e. a range by the application of different methods. In such a situation, mean of Arm's Length Price as provided in proviso to section 92C(2) of the Act can be taken. But above Arm's length range is not the same thing as average operating profits of different entities with different FAR worked by the TPO through the same method as done in this case by adopting TNMM.

  The assessee has satisfied not one but several points of arms' length range worked out on record. In our considered view, it is not necessary for the taxpayer to satisfy all points in the range. Even if one point is satisfied, the assessee can be taken to have established its case and in that situation, the onus is shifted to the department to show why taxpayer's case be not accepted. Arm's length price does not mean maximum price or maximum profit in the range. A willing buyer in an open market shall pay minimum and not maximum price for goods or services. Of course, quality and brand name are important but considered not so by TPO as TNMM method was applied by him. Project profile and other factors were, therefore, not erroneously considered. As noted earlier, the case of Integrated Hitech has been specifically accepted as comparable by both the parties. On other four cases noted above, the TPO or other revenue authorities have not made any adverse comment at any stage of proceeding. It was open to them in proceedings before the ld. CIT(A) or the Appellate Tribunal to show that PIL figure of Integrated Hitech or other four companies were wrong or on account of their FAR analysis, these entities could not be taken as "reliable" comparables for computation of the Arm's Length Price. But no material was brought on record, no arguments advanced to reject the above transaction. Therefore, we accept them as comparable and accept the price disclosed by the taxpayer as Arm's Length Price. Consequently, the addition is directed to be deleted.

  Before close, we would like to draw attention to the following . observation of the Supreme Court in the case of Parashuram Pottery Works Co. Ltd v. ITO [1976 (11) TMI 1 - SUPREME COURT] wherein it was observed as under:- "It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realizing that price should familiarize themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity."

  That in the other ground, the taxpayer has raised objection on denial of deduction under section 10A of the IT Act. The question of allowability of claim to the appellant u/s 10A has already been considered and decided in the assessment year 2001 in the case of this very assessee. The Bench, after following the decision of the Tribunal in the case of Legato Systems India (P.) Ltd. v. ITO [2004 (11) TMI 294 - ITAT DELHI-E], restored the matter to the file of the Assessing Officer to make further inquiry and allow deduction to the assessee.

  The aforesaid decision is directed to be applied in the year under consideration as facts and circumstances as also objection of the revenue are similar as raised in that year. Besides, it may be pointed out that decision of the Tribunal in the case of Legato Systems India (P.) Ltd.[2004 (11) TMI 294 - ITAT DELHI-E] has been approved by the Hon'ble Delhi High Court.

  Thus, the appeal of the assessee is allowed.

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• 2007 (11) TMI 337
  
  Issues Involved:
  1. Whether the tax paid by the employer in respect of salaries paid to the employees is "salary" under rule 3 for computing the value of perquisites for rent-free accommodation.
  2. Whether the Assessing Officer had the jurisdiction to rectify the order under section 154 of the Income-tax Act.
  3. Whether the issue of including tax paid by the employer in "salary" is debatable or a patent mistake of law.
  
  Issue-Wise Detailed Analysis:
  
  1. Tax Paid by Employer as "Salary" for Perquisites Calculation:
  The core issue was whether the tax paid by the employer should be considered as "salary" under rule 3 for computing the value of perquisites related to rent-free accommodation provided to expatriate employees. The Commissioner of Income-tax (Appeals) (CIT(A)) held that the tax paid by the employer is part of the salary, not a perquisite, as both "salary" and "perquisite" are inclusive terms. The CIT(A) pointed out that any monetary payment by the employer is part of the salary. The Tribunal, following the decision of the Delhi High Court in T.P.S. Scott v. CIT, affirmed this view, stating that tax perquisite is part of the gross salary. The Tribunal also referenced the decisions of the Kerala High Court in C.W. Steel (No. 1) and the Bombay High Court in H.D. Dennis, which supported the inclusion of tax paid by the employer in the salary for determining the value of rent-free accommodation.
  
  2. Jurisdiction of the Assessing Officer under Section 154:
  The Tribunal examined whether the Assessing Officer had the jurisdiction to rectify the order under section 154 after the Tribunal's order. The Tribunal noted that the original order of the Assessing Officer did not merge with the Tribunal's order as the Tribunal did not adjudicate on the specific issue of including the tax perquisite in the salary. Therefore, the Assessing Officer retained the jurisdiction to rectify the order under section 154. The Tribunal cited sub-section (4) of section 154, which allows the income-tax authority concerned to amend the order if the mistake is apparent from the record.
  
  3. Debatable Issue or Patent Mistake of Law:
  The Tribunal considered whether the inclusion of tax paid by the employer in the salary was a debatable issue or a patent mistake of law. The Tribunal found that the definition of "salary" in rule 3 was clear and did not exclude the tax paid by the employer. The Tribunal referenced the decisions of the Kerala and Bombay High Courts, which had already clarified that tax paid by the employer is part of the salary. The Tribunal concluded that there was no scope to exclude the tax from "salary" under the rule as it existed for the relevant years. Therefore, the mistake was apparent from the record and could be rectified under section 154.
  
  Conclusion and Remand:
  The Tribunal upheld the order of the CIT(A) and the Assessing Officer regarding the inclusion of tax paid by the employer in the salary for computing the value of perquisites related to rent-free accommodation. However, the Tribunal remanded the matter to the Assessing Officer to examine the calculations provided by the assessee and determine the correct value of perquisites for all three years.
  
  Final Outcome:
  The appeals were partly allowed, with the Tribunal directing the Assessing Officer to re-examine the calculations for the value of perquisites.

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• 2007 (11) TMI 336
  
  Issues Involved:
  1. Disallowance of Loss on Sale of Debentures: Whether the Commissioner of Income-tax (Appeals) erred in upholding the Assessing Officer's disallowance of Rs. 1,57,95,000 on account of loss on sale of debentures.
  
  Issue-wise Detailed Analysis:
  
  Disallowance of Loss on Sale of Debentures
  
  Background and Facts:
  The assessee, an investment company, declared a loss of Rs. 2,07,98,394 in its return of income, including a loss of Rs. 1,57,94,206 on the sale of debentures. The company was allotted 1,95,000 12.5% secured redeemable non-convertible debentures (NCDs) of Rs. 250 each with detachable warrants from Max India Ltd. The NCDs were sold at Rs. 169 each, and the difference between the face value and the sale value was treated as a loss on the sale of debentures.
  
  Assessment Proceedings:
  During the assessment, the Assessing Officer (AO) examined the terms of the prospectus and offer made by Max India Ltd. The AO concluded that the cost of the warrant should be taken at Rs. 81, not nil, and the transaction did not suggest a loss of Rs. 81 per debenture. Consequently, the AO disallowed the claimed loss of Rs. 1,57,95,000.
  
  Appeal to CIT(A):
  The assessee argued that the NCDs were acquired at Rs. 250 each, and the detachable warrants were allotted without any extra cost. The CIT(A) upheld the AO's decision, agreeing that the entire arrangement was preconceived and that the cost of the warrant should be Rs. 81.
  
  Appeal to ITAT:
  The assessee contended that the cost of acquisition of NCDs should be Rs. 250 each, and the cost of detachable warrants should be nil, relying on section 55(2)(aa)(iiia) of the Income-tax Act. The assessee also cited the decision of the Delhi High Court in the case of Abhinandan Investments Ltd., where a similar issue was decided in favor of the assessee.
  
  Arguments by Revenue:
  The Revenue argued that the facts in the present case were different from those in Abhinandan Investments Ltd. They contended that the detachable warrants had value and the cost of acquisition should be attributed to them. The Revenue also relied on the doctrine of merger, arguing that the decision of the High Court dismissing the appeal on the ground that no substantial question of law arose did not constitute a binding precedent.
  
  Tribunal's Findings:
  The Tribunal compared the facts of the present case with those in Abhinandan Investments Ltd. and found them to be similar. It noted that the scheme of allotment and the terms of payment were almost identical. The Tribunal also considered the decision of the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd., which held that the dismissal of an appeal by the High Court on the ground that no substantial question of law arises implies that the order of the Tribunal stands merged in the order of the High Court.
  
  Conclusion:
  The Tribunal held that the decision of the Hon'ble Delhi High Court in the case of Abhinandan Investments Ltd. constituted a binding precedent. It directed the Assessing Officer to allow the claim of the assessee for the loss incurred on the sale of NCDs. The appeal of the assessee was allowed.
  
  Outcome:
  The Tribunal decided in favor of the assessee, allowing the claimed loss on the sale of debentures.

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• 2007 (11) TMI 335
  
  Issues Involved:
  - Appeal against combined order of CIT(A) for financial years 1999-2000 to 2004-05.
  - Preliminary issue of approval of COD.
  - Applicability of s. 194A of the IT Act to the assessee trust.
  - Status of the assessee trust as an individual for tax deduction at source.
  
  Analysis:
  
  1. Preliminary Issue of Approval of COD:
  The counsel for the assessee clarified that approval of COD is not required for the assessee trust as it is not a public sector undertaking. Citing relevant case law, it was argued that clearance from a committee is only necessary when disputes involve government ministries or public sector undertakings. The Departmental Representative did not contest this submission, leading to the conclusion that the appeals are legally maintainable.
  
  2. Applicability of s. 194A of the IT Act:
  The counsel contended that s. 194A is not applicable to the assessee trust, emphasizing that the trust should be treated as an individual for tax purposes. The AO had applied s. 194A incorrectly, leading to the trust being treated as an assessee in default. The counsel referenced various authorities to support the argument that the trust should be considered as an individual, thereby exempting it from the provisions of s. 194A.
  
  3. Status of the Assessee Trust as an Individual:
  The counsel presented arguments supported by legal precedents to establish that the trust should be regarded as an individual, not as an AOP or BOI. The learned CIT(A) had summarily rejected this argument without proper adjudication. Key judgments were cited to demonstrate that the trust, represented by individual employees and trustees, should not fall under the purview of s. 194A. The Tribunal's analysis concurred with the counsel's position, ruling in favor of the assessee on the grounds that s. 194A did not apply to the trust due to its status as an individual.
  
  4. Conclusion:
  The Tribunal allowed all appeals on the common ground that the provisions of s. 194A were not applicable to the assessee trust, leading to the quashing of orders passed by the AO and upheld by the CIT(A). As a result, the liability under s. 201(1) and 201(1A) was not applicable to the assessee trust. Since the appeals were allowed on this basis, the other grounds raised in the appeals were not addressed on their merits. Consequently, all the appeals were allowed based on the above analysis and conclusions.

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• 2007 (11) TMI 334
  

  Tax paid by the employer on the income (i.e. monetary perquisite) of the assessee is entitled to exemption under section 10(10CC) - Perquisite or Not - Whether tax actually paid by an employer at his option in case of an employee (individual) deriving income in the nature of a perquisite not provided for by way of monetary payment within the meaning of clause (2) of section 17 of the Act is not liable to be included in the total income of the employee? - meaning of 'at the option of the employer on behalf of the employee'.

  HELD THAT:- In our opinion, the words 'at the option of the employer' only imply that the employer now has an option to pay the taxes on behalf of the employees. It is for the employer to decide whether taxes are to be paid by the employee or the employer. The clause is not applicable in cases taxes are paid by the employee who is otherwise obliged to pay it. When so paid, no perquisite, as far as employee is concerned, would be involved.

  The cash payment to the employee by the employer might be assessable as "salary" but it is not a "perquisite or amenity or benefit". We have already noted view of Full Bench of Kerala High Court in Common Wealth Trust Ltd.'s case [1981 (11) TMI 47 - KERALA HIGH COURT] where their Lordships saw no good reason to give restricted meaning to the term "benefit, amenity or perquisite" as the same would not serve the purpose of the section. Their Lordships saw no rationality in the view of the majority High Courts, if it is held that cash allowance paid by the employer to an employee would be entitled to deduction, despite section 40(a)(v) and restrict the application of above provision to non-cash advantage. Such construction, according to their Lordships, would be quite irrational, defeating the very purpose of the Legislation. The aforesaid view, as noted, has not been approved by the Apex Court and a distinction has been drawn between cash payment on one hand and "benefit, amenity or a perquisite" on the other. It is, therefore, reasonable to conclude that payment of taxes by the employer, on behalf of the employee, is a perquisite within the meaning of clause (2) of section 17 of the Income-tax Act.

  It is clear that taxes paid by employer on behalf of the employee were treated as a perquisite covered by sub-clause (iv) of clause (2) of section 17 of the Income-tax Act and, therefore, includible in the salary. There is no dispute that payment of taxes made by the employer on behalf of the employee is a perquisite and part of the income assessable under the head "salary" if clause 10(10CC) was not brought on the Statute Book. It is also a benefit or amenity enjoyed by the employee but it is not a monetary payment to the employee. It is a payment by the employer which discharges an obligation of the employee, which otherwise would have been discharged by the employee. Such payments of taxes, therefore, are fully covered by above sub-clause (iv).

  It is not money, which is paid to the assessee when taxes are paid on his behalf. It is discharge of his obligation. The payment fully fits in the jacket of sub-clause (iv) of section 17(2) of the Act. It may be a monetary gain or monetary benefit or a monetary allowance but definitely it is not a monetary payment to the assessee. What is excluded in the clause is the perquisite is in the shape of a monetary payment to the assessee. If it is a payment to a third person like payment of taxes to the Government, then such payment of taxes cannot be excluded under clause 10(10CC). The circular of the Board and provision of sub-section (1A) of section 192, section 40(a)(v), 195A fully support the claim of the assessee. We, therefore, hold that the taxes paid by the employer on behalf of the employee is a perquisite within the meaning of section 17(2) of the Income-tax Act, which is not provided by way of monetary payment.

  Therefore, there is no reason not to exclude such payment of taxes from the total income of the assessee. In other words, taxes paid by the employer can be added only once in the salary of the employee. Thereafter, tax on such perquisite is not to be added again. We, therefore, find substance in the contention advanced on behalf of learned counsel for the assessees and the Interveners. The question referred to us is answered in favour of the assessee. The appeals of the assessees and Interveners are allowed on this issue.

  All the appeals of the assessees are allowed in terms stated above.

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• 2007 (11) TMI 333
  
  Issues Involved:
  1. Validity of penalty orders under Section 271(1)(c) due to lack of recorded satisfaction by the Assessing Officer (AO).
  2. Timeliness of penalty orders for assessment years 1996-97, 1997-98, and 1998-99.
  3. Merits of penalties imposed under Section 271(1)(c) for various assessment years.
  
  Detailed Analysis:
  
  1. Validity of Penalty Orders under Section 271(1)(c):
  The primary issue raised by the assessee was the validity of the penalty orders under Section 271(1)(c) due to the AO's failure to record any satisfaction in his assessment orders about the assessee having concealed particulars of income or having furnished inaccurate particulars of income. The Tribunal analyzed various judicial precedents, including decisions from the Hon'ble Delhi High Court, emphasizing that the AO must record satisfaction during the assessment proceedings. It was noted that the satisfaction must be apparent from the assessment order itself and cannot be presumed. The Tribunal found that the AO's notings in the assessment orders, such as "penalty proceedings under s. 271(1)(c) are being initiated separately," were insufficient to meet the statutory requirement. Consequently, the initiation of penalty proceedings was deemed invalid, and the penalties imposed were canceled.
  
  2. Timeliness of Penalty Orders for Assessment Years 1996-97, 1997-98, and 1998-99:
  The assessee contended that the penalty orders for these years were barred by time as per Section 275(1). The CIT(A) rejected this contention, explaining that the penalty proceedings were initiated by the AO in the assessment orders passed on 23rd February 2004, following the Tribunal's order to make fresh assessments. The CIT(A) noted that the appeals against these assessments were disposed of by the CIT(A) on 28th January 2005, and the penalty orders were passed on 30th March 2006, within the prescribed period under the proviso to Section 275(1)(a). Thus, the penalty orders were found to be within the time limit.
  
  3. Merits of Penalties Imposed under Section 271(1)(c):
  The merits of the penalties were also contested by the assessee, who argued that it was under a bona fide belief that the income from engineering and ground handling services was exempt under Article 8 of the DTAA and thus not taxable in India. The assessee claimed full disclosure of the income and argued that the issue was debatable, and merely because the AO disagreed with its stand, it did not imply concealment or furnishing of inaccurate particulars. The CIT(A), however, relied on Explanation 1 to Section 271(1)(c), which raises a presumption in favor of the Revenue that the additions made represent concealed income. The CIT(A) found that the assessee failed to rebut this presumption and upheld the penalties. However, since the Tribunal annulled the initiation of penalty proceedings on the preliminary ground of lack of recorded satisfaction by the AO, the merits of the penalties were rendered academic and were not adjudicated upon.
  
  Conclusion:
  The Tribunal allowed the appeals of the assessee, canceling the penalties imposed under Section 271(1)(c) for all the assessment years under consideration due to the AO's failure to record the requisite satisfaction in the assessment orders, thus invalidating the initiation of penalty proceedings. The timeliness of the penalty orders for the years 1996-97, 1997-98, and 1998-99 was upheld by the CIT(A), but this issue became moot due to the cancellation of penalties on the primary ground. The merits of the penalties were not addressed due to the preliminary decision on the invalid initiation of penalty proceedings.

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• 2007 (11) TMI 332
  

  Deduction Of Tax At Source u/s 195 - disallowance on reimbursement of mobilization and demobilization cost debited in the Profit and Loss Account u/s 40(a)(i) - chargeability of income - Non-resident recipient - PE in India - Scope, limitations, rights and duties of payer and the payee under the provisions of sections 195 of the Income-tax Act - Indian and Netherlands DTAA - HELD THAT:- In our opinion it is not material for the payer either to make the whole of the payment to the recipient/non-resident or to make part of the payment to the payee after deduction of the tax at source at the prescribed rates because in either of the conditions the payer/assessee has to part with the whole of the payment required to be made to the non-resident by him.

  More so when the deduction of the tax at source u/s 195 is subject to regular assessment and the right of non-resident is not adversely affected because at the time of regular assessment if the payee/recipient succeeds in proving before the Assessing Officer that such receipts, from the payer/assessee, were not its income and so it was not bound to pay tax thereon then such tax deducted at source by the payer/assessee and deposited with the Government is bound to be refunded or adjusted against the payment of tax, if any, to the recipient non-resident by the ITO at the time of regular assessment.

  We may mention that neither it is the duty nor it is desirable from the payer/assessee to examine whether any tax is deductible at source from the payments made to the nonresident. In case it feels that the tax is required to be deducted at source or required to be deducted at a lower rate then it is required to obtain such certificate u/s 195(2) from ITO or for non-deduction of tax at source. This is a safeguard provided u/s 195(2), 195(3) and 197 to payer and payee because before the Assessing Officer while obtaining certificate such facts are required to be established by them.

  Now reverting to the facts of the instant case of the assessee, the undisputed position emerges as under:- (a) The payer/assessee has made payments to the non-resident for the services rendered for mobilization and demobilization of dredgers to Adani Port in India. An application u/s 195 was moved for issuing 'Nil' tax withholding certificate on which an order u/s 195(2) was passed on 4-3-2001 and 17-4-2002 wherein VOAMC i.e., the non-resident company was held to have a PE in India on the ground that it was executing the Adani contract in India as the assessee did not have the technical competence or the infrastructure to execute the aforesaid contract.

  That reimbursement of charges/payments to VOAMC were liable to tax in India..

  It is clear from the facts that the order dated 22-11-2002 u/s 195(2) remained unchallenged by the assessee and the assessee/payer did not fully comply with the requirement of section 195 except allegedly deducting the tax at source at Rs. 6,98,26,456 against Rs. 8,65,57,909 determined in terms of order passed u/s 195(2) of the Act.

  Since the payer assessee has moved an application under sub-section (2) of section 195 to the Assessing Officer for obtaining a certificate for issuing 'nil' tax withholding certificate and the same having been rejected by the Assessing Officer and no appeal having been filed or the order being reversed the same has become final and for non-compliance with the provisions of section 195 by the payer by not deducting tax at source the Assessing Officer was fully justified in refusing deduction claimed by the payer assessee for such payments under section 40(a)(i) of Income-tax Act. Hence the impugned order of CIT (Appeals) in this regard is upheld.

  Since before us the assessee has claimed to have deducted tax at source for a sum of Rs. 6,98,26,456 in terms of the order u/s 195(2) out of the total amount of Rs. 8,65,57,909 under consideration, as determined in the order passed u/s 195(2) the Assessing Officer is directed to verify this fact and in case the same is found to be correct the Assessing Officer should allow the benefit of the same to the assessee out of the total amount of Rs. 8,65,57,909 under consideration. In this view of the matter the instant appeal and the grounds of appeal taken therein stand decided in terms of the order.

  In the result the appeal of the assessee is partly allowed in terms of the order hereinabove.

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• 2007 (11) TMI 331
  

  Disallowance of the expenditure - advance loans for interest - Late deposit of the employee's contribution to the provident fund - Penalty levied u/s 271(1)(c).

  Disallowance of the expenditure - advance loans for interest - difference between the date of setting up of a business and the date of commencement of the business - HELD THAT:- It is well-settled that there is a difference between the date of setting up of a business and the date of commencement of the business and this distinction has been brought out in Western India Vegetable Products Ltd. vs. CIT [1954 (3) TMI 59 - BOMBAY HIGH COURT] by observing that when a business is established and is ready to commence business then it can be said that it has been "set up", but before it is ready to commence business it is not "set up". There may be an interregnum between the date of setting up of the business and the date of actual commencement of the business, but under the Act all expenses incurred after the date of setting up are allowed as a deduction u/s 28. This decision has been applied in its recent judgment in the case of CIT vs. Hughes Escorts Communications Ltd.[2007 (9) TMI 261 - DELHI HIGH COURT].

  The fact that the foreign loan and FIPB approval for equity investment by the Whirlpool Corporation of USA were given in January, 1996 does not mean that the business was not set up before these events. These are not statutory formalities and even without the foreign loan and the equity participation the assessee company was in a position to carry on the business in accordance with the objects clause of its memorandum of association from November, 1995 when it had its own offices, branches and regional managers and staff, computers installed and was ready to commence its activities. The expenses were incurred through Kelvinator and Expo Machinery and evidence to this effect is placed at the paper book. Thus, it is clear that the business was set up from 1st Nov., 1995, by which date the company was ready and in a position to commence its business.

  We accordingly hold that the assessee had set up its business on 1st Nov., 1995 and not on 1st Feb., 1996 as claimed by the IT authorities. The disallowance of the expenditure made on this basis is deleted and the ground is allowed.

  Late deposit of the employee's contribution to the provident fund - Addition to the income by invoking s. 2(24)(x) of the Act, r/w s. 36(1)(va) - HELD THAT:- Under s. 10 of the General Clauses Act, 1897, if the last day prescribed for an act to be done falls on a day on which the office is closed, then the act shall be considered as done in due time if it is done on the next day afterwards in which the office is open. Applying this section, the deposit of the contribution on 22nd April, 1996 is within time. The addition of the same is accordingly deleted. The ground is allowed.

  In the result, the appeal is allowed.

  Penalty levied u/s 271(1)(c) - concealed its income or furnished inaccurate particulars - HELD THAT:- When all the facts are placed by the assessee, before the AO, who has not unearthed any fact not disclosed by the assessee, but has merely taken a view different from the view expressed by the assessee, it cannot be said that the assessee either concealed his income or furnished inaccurate particulars thereof:

  In Addl. CIT vs. Delhi Cloth & General Mills Co. Ltd. [1984 (1) TMI 10 - DELHI HIGH COURT] and CIT vs. Bacardi Martini India Ltd. [2006 (9) TMI 104 - DELHI HIGH COURT]. Therefore, the CIT(A) has rightly cancelled the penalty. Even otherwise, the penalty has no legs to stand in view of our decision that the business was set up on 1st Nov.,1995 as claimed by the assessee and all expenses incurred after that date are allowable as deduction. Thus, the appeal of the Department is dismissed.

  In the result, the appeal of the assessee is allowed and that of the Department is dismissed.

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• 2007 (11) TMI 330
  

  Business connection and/or PE in India as per section 9(1) or not - Income deemed to accrue or arise in India - Indo-Spain Treaty - Computing the profit attribution to the PE in India - interest under ss. 234A and 234B - computers installed at the premises of the subscribers constitutes a PE of the taxpayer in India in terms of Article 5(1) of India Spain Tax Treaty - remuneration paid to the dependent agent.

  Whether the appellant has any PE in India within the meaning of art. 5 of DTAA between India and Spain - HELD THAT:- In the present case it is seen that the CRS, which is the source of revenue is partially existent in the machines namely various computers installed at the premises of the subscribers. In some cases, the appellant itself has placed those computers and in all the cases the connectivity in the form of nodes leased from SITA are installed by the appellant through its agent. The computers so connected and configured which can perform the functions of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from AIPL who allows the use of such computers for reservation and ticketing. Without the authority of AIPL such computers are not capable of performing the reservation and ticketing part of the CRS system. The computer so installed cannot be shifted from one place to another even within the premises of the subscriber, leave apart the shifting of such computer from one person to another. Thus the appellant exercises complete control over the computers installed at the premises of the subscribers.

  In view of our discussion in the immediately preceding para, this amounts to a fixed place of business for carrying on the business of the enterprise in India. But for the supply of computers, the configuration of computers and connectivity which are provided by the appellant either directly or through its agent AIPL will amount to operating part of its CRS system through such subscribers in accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of para 1 of art. 5 of Indo-Spain treaty.

  Whether the exception provided in para 3 of art. 5 applies so as to hold that there is no PE in India - It is difficult to distinguish between the activities which are 'preparatory or auxiliary' character and those which are not. The decisive criteria is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Since part of the function is operated in India which directly contributes to the earning of revenue, the activities as narrated above carried out in India are in no way of 'preparatory or auxiliary' character. Thus the exception provided in para 3 of art. 5 will not apply and hence as stated above, the assessee shall be deemed to have a PE in India.

  Whether the assesses has a PE in India in the form of a dependent agent - The agents can be considered as PE only and only if when a person other than agent of an independent status, (i) has and habitually exercise in that State an authority to conclude contract or (ii) though he has no such authority but habitually maintains stock of goods from which he regularly delivers goods on behalf of the enterprise. Thus the first question to be decided is whether the agent is of a dependent status or of an independent status.

  In the present case we find that AIPL is totally dependent on the appellant. The entire business of AIPL is to provide data processing and software development services together with relative distribution of 'Amadeus products' to the subscribers in India. AIPL has also an authority to enter into agreements with the subscribers. AIPL installs the computers, configures the computers for accessing the CRS and also provides connectivity through SITA nodes. Thus functionally as well as financially it is dependent entirely on the appellant. It can therefore, be said that AIPL is a dependent agent of the appellant.

  Whether the appellant has PE in India within the meaning of cl. (b) of para 4 of art. 5 of the treaty - The reference to "stock of goods" in cl. (b) of para 4 of art. 5 has to be understood in the sense the business proper carried on by the enterprise. The delivery should be from the stock of goods which if considered in proper prospective will only be of the stock of goods dealt with by the assessee in regular course of its business. If the agent is to deliver the goods either the goods should be such in which the enterprise deals in or which are regularly hired out which may be considered as given on bailment from which the revenue is to be generated. But in the present case the computers supplied by AIPL to the subscribers are not dealt with by the assessee or which by themselves are the source of revenue. Thus cl. (b) of para 4 of art. 5 will not apply to consider the dependent agent as PE of the appellant in India.

  Attribution of Profits: Having considered that the appellant has a PE in India in two forms namely (1) fixed place PE under para 1 of art. 5 and (2) agency PE under d. (a) of para 4 of art. 5, we shall examine whether as to what is the profit attributable to the PE in terms of art. 7 of the DTAA between India and Spain. We shall also examine whether the income so computed would be absorbed by the expenses incurred to earn such income which will prima facie extinguish the assessment.

  Whether he is habitually exercising an authority to conclude contracts on behalf of the appellant - The appellant in the present case in order to enhance its business operations has appointed AIPL as its agent who promote the 'Amadeus products' in India. AIPL in its turn has appointed various subscribers for use of 'Amadeus products'. Though the revenue flows only from participants who have entered into PCA with the appellant, yet the revenue could not have been generated but for the subscribers using the 'Amadeus products'. In a way the revenue is generated from the participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would accrue to the appellant. Thus the agreements entered into by the AIPL with the subscribers under an authority granted to it, are contracts relating to operations which constitute business proper and not merely in the nature of internal operations.

  Such contracts are habitually exercised and there is nothing on record to suggest that such authority was cancelled at any point of time. We, therefore, hold that AIPL is dependent agent of the appellant who has habitually exercised the authority to conclude contracts on behalf of the appellant. To that extent the appellant has a PE in India.

  Since we have held that the remuneration paid to the dependent agent is exceeding the income attributable to the PE in India, the question of allowability of various expenses as are in appeal do not survive. The question of charging interest under ss. 234A and 234B will also not survive.

  In the result, appeals in ITA are partly allowed and appeals in ITA have become infructuous on the ground that the computation of income is a mere academic exercise and hence not considered. Thus these appeals will be treated as partly allowed.

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• 2007 (11) TMI 329
  

  Deemed To Accrue Or Arise In India - Existence of Permanent Establishment (PE) - Attribution of Profits to PE - Validity of Assessment and Tax Rate - resident of USA - DTAA between India and USA -business of maintaining and operating the system for providing electronic global distribution services to airlines, hotels, tour and cab operators by connecting to travel agents ('the TAs') utilising a Computerised Reservation System ('CRS') -

  Whether the assessee has any income chargeable to tax in India u/s 5(2) of the Act and whether the assessee has any business connection in India as per section 9(1)(i) of the Act? If yes, to what extent it is taxable inIndia.

  Existence of Business Connection - HELD THAT:- It is to be noted that all the subscribers in respect of which income is held taxable are situated inIndia. The equipment, i.e., computer in some cases and the connectivity as well as configuration of the computer in all the cases are provided by the appellant. The booking takes place inIndiaon the basis of the presence of such seamless CRS system. On the basis of booking made by the travel agent in India, the income generates to the appellant. But for the booking no income accrues to the appellant. Time and again it is contended that the whole of the processing work is carried out at host computer situated at Denverin Colorado, USA and only the display of information is in India for the proposition that there is no business connection in India. We are unable to agree with such proposition.

  The CRS extends to Indian territory also in the form of connectivity in India. But for the request generated from the subscriber's computer's situate in India, the booking is not possible which is the source of revenue to the appellant. The assessee is not to receive the payment only for display of information but the income will accrue only when the booking is completed at the desk of the subscriber's computer. In such a situation, there is a continuous seamless process involved, at least part of which is in India and hence, there is a business connection in India. The computers at the subscriber's desk are not dumb or are in the nature of kiosk incapable of performing any function. The computers along with the configuration has been supplied either by the appellant or through its agent Interglobe and the connectivity being provided by the appellant enables the subscribers to access the CRS and perform the ticketing and booking functions.

  Whether having held that there is business connection in India, how much income is chargeable to tax in India - In the present case, we have found that majority of the functions are performed outside India. Even the majority of the assets, i.e., host computer which is having very large capacity which processes information of all the participants is situated outside India. The CRS as a whole is developed and maintained outside India. The risk in this regard entirely rests with the appellant and that is in USA, outside India. However, it is equally important to note that but for the presence of the assessee in India and the configuration and connectivity being provided in India, the income would not have generated. Thus the initial cause of generation of income is in India also. On the basis of above facts we can reasonably attribute 15 per cent of the revenue accruing to the assessee in respect of bookings made in India as income accruing or arising in India and chargeable under section 5(2) read with section 9(1)(i) of the Act.

  Whether any income still is left to be taxed in India - Broadly the assessee receives three 'Euros' as fees per 'net booking', i.e., gross booking minus cancellation. The assessee passed one dollar to Interglobe for each net booking processed through Galileo system by subscriber. Thus in respect of the activities carried out in India and considering the income accruing in India, remuneration paid to the Indian agents consumes the entire income accruing or arising in India. It is also to be noted that the entire payment made by appellant to Interglobe has been allowed as expenses while computing total income of the appellant. In such a situation in view of Circular No. 23 of 23rd July, 1969 no income can be further charged to tax in India.

  As rightly contended by Shri Vyas the Circular equally applies to the sale of goods as well as rendering of services. The Hon'ble Supreme Court has taken judicial note of said Circular in the case of Morgan Stanley & Co. Inc.[2007 (7) TMI 201 - SUPREME COURT] and have held that once associated enterprise which is considered as PE of the non-resident assessee is remunerated at arm's length, nothing further would be left to be attributed to the PE of the non-resident. We, therefore, hold that in view of the above facts, no income is taxable in India.

  Permanent establishment - In the present case it is seen that the CRS, which is the source of revenue is partially existent in the machines namely various computers installed at the premises of the subscribers. In some cases, the appellant itself has placed those computers and in all the cases the connectivity in the form of nodes leased from SITA are installed by the appellant through its agent. The computers so connected and configured which can perform the function of reservation and ticketing is a part and parcel of the entire CRS. The computers so installed require further approval from appellant/Interglobe who allows the use of such computers for reservation and ticketing. Without the authority of appellant such computers are not capable of performing the reservation and ticketing part of the CRS system. The computer so installed cannot be shifted from one place to another even within the premises of the subscriber, leave apart the shifting of such computer from one person to another. Thus the appellant exercises complete control over the computers installed at the premises of the subscribers.

  In view of our discussion in the immediately preceding paragraph, this amounts to a fixed place of business for carrying on the business of the enterprise inIndia. But for the supply of computers, the configuration of computers and connectivity which are provided by the appellant either directly or through its agent Interglobe will amount to operating part of its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business inIndia. Thus the appellant can be said to have established a PE within the meaning of paragraph 1 of Article 5 of Indo-Spain Treaty.

  Since part of the function is operated in India which directly contributes to the earning of revenue, the activities as narrated above carried out in India is in no way of 'preparatory or auxiliary' character. Thus the exception provided in Paragraph 3 of Article 5 will not apply and hence as stated above, the assessee shall be deemed to have a permanent establishment inIndia.

  PE in India in the form of a dependent agent - In the present case we find that Interglobe is totally dependent on the appellant in respect of rendering services to subscribers in India. Thus that part of Interglobe's activities which earns its revenue by rendering services to the subscribers is carried on solely for the appellant. Though Interglobe might be carrying on any other activities, like a full fledge travel agency business, yet in respect of activity relating to installing CRS system of appellant at Subscribers Computers Provide connectivity, configuring the computers to enable it to access CRS, train the subscribers etc. is only and only for the appellant. Such type of activities are not carried on for any other person. Hence, the appellant and Interglobe are interdependent in this regard. The business of Interglobe is to provide data processing and software development services together with relative distribution of 'Galileo System' to the subscribers in India. Interglobe has also an authority to enter into agreements with the subscribers. Interglobe installs the computers, configures the computers for accessing the CRS and also provides connectivity through SITA notes. Thus functionally as well as financially it is dependent entirely on the appellant. It can, therefore, be said that Interglobe is a dependent agent of the appellant.

  Whether Interglobe is habitually exercising an authority to conclude contracts on behalf of the appellant - The dependent agent is not to be considered as PE unless he has authority to conclude contract on behalf of such enterprise. The authority to conclude contracts must be in respect of contracts relating to operations, which constitute the business proper of the enterprise. The appellant in the present case in order to enhance its business operations has appointed Interglobe as its agent who promote the 'Galileo System' in India. Interglobe in its turn has appointed various subscribers for use of 'Galileo System'.

  Though the revenue flows only from participants who have entered into PCA with the appellant, yet the revenue could not have been generated but for the subscribers using the 'Galileo System'. In a way the revenue is generated from the participants but only on the basis of use of CRS by the subscribers. But for such use no revenue would accrue to the appellant. Thus the agreements entered into by the Interglobe with the subscribers under an authority granted to it, are contracts relating to operations which constitute business proper and not merely in the nature of internal operations. Such contracts are habitually exercised and there is nothing on record to suggest that such authority was cancelled at any point of time. We, therefore, hold that Interglobe is dependent agent of the appellant who has habitually exercised the authority to conclude contracts on behalf of the appellant. To that extent the appellant has a PE in India. Since we have held that Interglobe is a dependent agent of appellant in India, we need not discuss para (5) of Article 5 of the treaty regarding independent agent form of PE.

  Whether the appellant has PE in India within the meaning of clause (b) of paragraph 4 of Article 5 of the Treaty - Since the appellant is not dealing in any goods, the question of delivery of such goods does not arise. The contention of learned DR that Interglobe maintains stock of computers which are delivered to the subscribers should be treated as delivery of goods. He also submitted that what is mentioned in Treaty is that there should be delivery of goods which may not necessarily be sale of goods. We are unable to accept such contention of the learned DR. The reference to "stock of goods" in clause (b) of paragraph 4 of Article 5 has to be understood in the sense the business proper carried on by the enterprise. The delivery should be from the stock of goods which if considered in proper prospective will only be of the stock of goods dealt with by the assessee in regular course of its business.

  If the agent is to deliver the goods either the goods should be such in which the enterprise deals in or which are regularly hired out which may be considered as given on bailment from which the revenue is to be generated. But in the present case the computers supplied by Interglobe to the subscribers are not dealt with by the assessee or which is by itself is the source of revenue. Thus clause (b) of paragraph 4 of Article 5 will not apply to consider the dependent agent as PE of the appellant in India.

  Attribution of Profits to the PE in terms of Article 7 of the DTAA between India and USA - Reading the above Article 7 of the treaty it is clear that the profit of an enterprise will be taxable only to the extent as is attributable to that permanent establishment. This is in pari materia with clause (a) of Explanation 1 to section 9(1)(i) of the Income-tax Act. Paragraph 5 of Article 7 of the treaty prescribes as to how the profits to be attributed to the PE is to be arrived at. It provides that only the profits derived from assets and activities of the PE shall be treated as attributable to the permanent establishment. It is argued that the clause 'derived from' should have narrower meaning and only the immediate and direct nexus should be between earning of income and assets and activities of the PE which can be brought to tax.

  We have also held that since the payment to the agent in India is more than what is the income attributable to the PE in India, it extinguish the assessment as no further income is taxable in India. It is to be noted that even in the first assessment framed by the Assessing Officer, the entire expenses in the form of remuneration paid to Interglobe was held as allowable deduction and was reduced while computing the income of appellant. If that be the case, the income attributable to PE in India being less than the remuneration paid to the dependent agent, it extinguishes the assessment and requires no further exercise for computation of income. We accordingly hold so and in view of the same the income of the appellant will be NIL.

  Since we have held that the remuneration paid to the dependent agent is exceeding the income attributable to the PE in India, the question of allowability of various expenses as are in appeal do not survive.

  The appeals by the appellant were partly allowed, and the cross objections raised by the revenue were allowed.

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• 2007 (11) TMI 328
  

  Genuineness of the transaction of gifts received by the family members - Applicability of s. 68 - income from undisclosed sources - survey u/s 133A - Disallowance of standard deduction - HELD THAT:- It is a settled legal position that for claiming the benefits of gifts, the assessee is required to satisfy the following conditions: (1) Identity of the donors. (2) Creditworthiness of the donors. (3) Genuineness of the transactions of the gifts.

  Identity of the donors: All the three donors appeared before the AO and their statements were recorded. Two of them appeared before the Addl. Director of IT (Inv.). All the three are assessed to tax. Donors appeared before three different authorities which confirms their identity.

  Creditworthiness of the donors: AO has held them to be non-creditworthiness only on the basis of surmises or guesswork. In fact, at the time of making assessment he made no enquiry about their wealth and net worth, which he subsequently made while submitting the remand report to CIT(A) and in which he found them to be creditworthy. Thus, in absence of any enquiry or any material about their creditworthiness, the AO was not justified in holding that the donors creditworthiness was in doubt.

  Genuineness of the transaction of gifts: Mere fact that the gift was made of huge amount or of valuable property in absence of any other material to doubt the genuineness of the gift, will not be sufficient to treat the gift as non-genuine. Lack of blood relationship or family relationship or absence of occasion for making gift are again not the only considerations for treating the gift as non-genuine. Although these may, at times, be relevant corroborative considerations to establish the non-genuineness of the transactions, but by itself none of such factors can be sufficient considerations for treating the gift as non-genuine.

  In the instant case there is no evidence on record to show that the assessee had in any way at any time financially or otherwise helped the donors to gain in any manner by misusing her position as a public servant. There is no proof that the donee made any investment in the property gifted lo her before the same was gifted. Smt. Veena Jain and Sh. Ashok Jain borrowed funds for purchasing the property gifted to the donee. There is no evidence that the donee had made arrangement of the loan or paid any part of them or interest thereon either prior to the purchase of the property or subsequently. In all the three gifts in question the entire investment made was from the source of donors and not from the donee.

  We are of the opinion that all the three gifts are not only genuine but also the identity and capacity of the donor to make the gift stands duly and fully established. Hence, we uphold the findings of the learned CIT(A) in holding that the assessee has fully discharged not only her onus but also the burden cast on her by proving the identity of the donors and their creditworthiness, as well as the genuineness of the gift. Accordingly, we uphold the findings of the learned CIT(A) deleting the additions made on account of the said gifts by the AO.

  Applicability of s. 68 - We are also of the opinion that s. 68 has no applicability to the facts of present case as the assessee is not maintaining any books of account. If that be so s. 68 does not apply in her case for the simple reason that the cheque received from Sh. Pankaj Jain has been deposited in her bank account. In this regard we are also of the opinion that balance sheet/statements of affairs cannot be equated to books of accounts because "in traditional terms books means a collection of sheets of paper bound together with the intention that such binding shall be permanent and papers used are kept collectively in one volume. It can also be assumed that it connotes the contention that it should serve as a permanent record." This is the finding of the Hon'ble judges of the Bombay High Court in Sheraton Apparels vs. Asstt. CIT

  In the instant case, neither the gifts relating to immovable properties can be covered under s. 68 nor the gift of Rs. 2,00,000 received by' the assessee can be covered under that provision. Nextly, in view of our findings, recorded above, all the gifts satisfied the requirement of a valid and genuine gift. The assessee has fully explained the same and, therefore, it cannot be said that the addition can be sustained even under s. 69 of the IT Act, as held by the AG, because the source of investment in the properties in question stand fully explained by the assessee in the form of gifts which are found to be genuine by us for the reasons given above. Consequently, the grounds taken by the Revenue are rejected.

  In the result, Revenue's appeal is dismissed.

  Claim of standard deduction u/s 16(1) amounting to Rs. 30,000 we are of the view that the assessee is not entitled to claim deduction under s. 16(1). We hold so because there is no relationship of "employer" and "employee" existing in the facts of the recent case. The position has also been further clarified by CBDT in Circular. The mistake of claiming this standard deduction may not be intentional or deliberate as submitted by assessee's counsel but in our opinion since it is not legally admissible, it cannot be allowed as a deduction. Keeping in view the same we uphold the finding of the CIT(A) that the assessee is not entitled to standard deduction under s. 16(1) amounting to Rs. 30,000. The assessee fails on this ground. Hence, the grounds taken by the assessee in her appeal stand rejected. Consequently, this appeal is also dismissed.

  In the result, both the appeals, filed by the assessee as well as the Revenue stand dismissed.

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