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2009 (10) TMI 644
Issues Involved:
1. Validity of reopening assessments under Section 147/148 of the Income-tax Act.
2. Application of tax rates applicable to foreign companies versus domestic companies.
Issue-wise Detailed Analysis:
1. Validity of Reopening Assessments under Section 147/148:
The revenue contended that the Commissioner of Income-tax (Appeals) erred in holding that the Assessing Officer was not justified in initiating action under Section 147, read with Section 148, merely based on a change of opinion. The Assessing Officer had reason to believe that income chargeable to tax had escaped assessment because it was taxed at a lower rate than applicable.
The Tribunal noted that the Assessing Officer must have "reason to believe" that income had escaped assessment, which is a stronger requirement than merely suspecting or doubting. The power to reopen assessments is wider post-1989, but it does not permit reopening based on a mere change of opinion. The original assessments were made applying the domestic tax rate based on a mutual agreement procedure under the DTAA between India and Korea, which was later challenged based on the decision of the Authority for Advance Ruling (AAR) in the French Bank case.
The Tribunal concluded that the reopening of assessments for the years 1995-96 and 1996-97 was invalid as the application of a higher tax rate was not the reason recorded for reopening under Section 148. The reopening was based on the interest income not being fully disclosed, not on the tax rate applied. Thus, the reopening was deemed a mere change of opinion, which is not permissible under the amended provisions of Section 147.
For the assessment year 1997-98, the Tribunal found that the reopening was valid as the notice under Section 148 was issued after the insertion of the Explanation to Section 90(2) by the Finance Act, 2001, with retrospective effect. The Assessing Officer had reason to believe that the assessee had been taxed at a lower rate, fulfilling the conditions for reopening under Section 147.
2. Application of Tax Rates Applicable to Foreign Companies versus Domestic Companies:
The Tribunal considered whether the Assessing Officer was justified in applying a higher tax rate applicable to foreign companies while framing the reassessment under Section 147/148. The Tribunal noted that the DTAA between India and Korea provided that the taxation on a permanent establishment should not be less favorable than that levied on domestic enterprises. The original assessments applied the domestic tax rate based on a mutual agreement procedure under the DTAA.
However, the Tribunal also considered the Explanation to Section 90(2), introduced by the Finance Act, 2001, which clarified that charging a foreign company at a higher rate than a domestic company is not considered less favorable. The Tribunal referred to its earlier decision in the case of the same assessee for subsequent years, where it upheld the application of the higher tax rate for foreign companies.
The Tribunal concluded that for the assessment years 1995-96 and 1996-97, the application of the higher tax rate was not justified as the reopening was invalid. However, for the assessment year 1997-98, the application of the higher tax rate was justified as the reopening was valid, and the Explanation to Section 90(2) applied.
Conclusion:
- For assessment years 1995-96 and 1996-97, the reopening of assessments was invalid, and the application of the higher tax rate was not justified.
- For assessment year 1997-98, the reopening was valid, and the application of the higher tax rate was justified.
The appeals of the revenue for the assessment years 1995-96 and 1996-97 were partly allowed, and the appeal for the assessment year 1997-98 was allowed.
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2009 (10) TMI 643
Computation of taxable profits of an insurance company - exemption claimed by the assessee on account of “profit on sale of investment” - scope of prospective amendment - whether or not the CIT(A) was justified in holding that the profit on sale of investments, is taxable in the hands of the assessee? -
HELD THAT:- The computation of taxable profits of an insurance company is governed by a specific legal provision, i.e., section 44 read with First Schedule to the Income-tax Act. Under the said scheme of things envisaged by these provisions, only such adjustments can be made to the profits disclosed by the annual accounts drawn up under the Insurance Act, 1938, as are specifically provides for under clause 5 of the First Schedule.
There was no dispute that the independent code is enacted by the introduction of section 44 which independently prescribed the mode and manner for assessment of Insurance Business. This section since contains non obstante clause, therefore, notwithstanding anything contained in any of the sections of the Act, the profits and gains of Insurance Business including any such business carried on by a Mutual Insurance Company or by an Co-operative Society shall be computed in accordance with the rules contained in First Schedule. Accordingly, there could not be any other income taxable other hand Insurance Business because section 44 overrules all other provisions of the Income-tax Act.
We have noted that the Legislature has now brought in a prospective amendment, with effect from assessment year 2011-12, in rule 5(b)(i ) of First Schedule to the Income-tax Act. By the virtue of this amendment, profits on sale of investments, in the case of insurance companies will be taxable with effect from 2011-12. Since the amendment so made in the statute, which cannot be inferred to be a superfluous amendment, is with effect from 2011-12, the conclusion arrived at by the Pune Bench stands further fortified. This further fortifies the stand taken by the co-ordinate Bench in the case of Bajaj Allianz General Insurance Co. Ltd [2009 (8) TMI 810 - ITAT PUNE-A],.
In view of discussions (supra), we uphold the grievance of the assessee. The profits on sale of investment in the years before us, which are year prior to the years with effect from which prospective amendment is made, are not taxable in the hands of the assessee.
The taxability of income of insurance companies under the head ‘Income from business and profession’ as governed by provisions of section 44, read with First Schedule to the Income-tax Act, does not extend to taxability of profits on sale of investments - So far as the assessment years before us are concerned.
Therefore, we direct the AO to exclude profits on sale of investments from income of the assessee liable to be taxed. The assessee gets the relief accordingly.
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2009 (10) TMI 642
Issues Involved:
1. Nature of expenditure on repair and renovation of leased premises.
2. Applicability of section 30(a)(ii) and section 37 of the Income-tax Act, 1961.
3. Treatment of expenditure as capital or revenue.
Summary:
Issue 1: Nature of expenditure on repair and renovation of leased premises
The primary issue was whether the expenditure of Rs. 44,03,606 incurred by the assessee on the renovation and refurbishment of leased premises used for running a restaurant and bar was capital or revenue in nature. The Assessing Officer (AO) deemed the expenditure as capital, citing Explanation 1 to section 32 and Explanation to section 30, which exclude capital expenditure from repairs. The AO allowed depreciation, resulting in a net addition of Rs. 41,83,426. The CIT (Appeals) upheld this view, noting the extensive nature of the renovations, which included significant structural changes and improvements.
Issue 2: Applicability of section 30(a)(ii) and section 37 of the Income-tax Act, 1961
The assessee argued that the expenditure was for repairs and renovation necessary for smooth business operation and should be deductible u/s 30(a)(ii) as current repairs. However, the Tribunal noted that the renovations were extensive and carried out before the commencement of business operations. The Tribunal referenced judicial precedents, including the Hon'ble Supreme Court's decision in Ballimal Naval Kishore v. CIT, which clarified that 'current repairs' do not include expenditures that bring a new asset into existence or provide a new advantage.
Issue 3: Treatment of expenditure as capital or revenue
The Tribunal concluded that the expenditure was capital in nature, as it was incurred before the business commenced and resulted in significant structural modifications. The Tribunal rejected the assessee's argument that the expenditure was incurred under a joint venture agreement and should be treated as a business expense. The Tribunal emphasized that the expenditure was not incurred during the course of actual business operations and thus could not be allowed as a deduction u/s 37. Consequently, the Tribunal upheld the AO's treatment of the expenditure as capital, allowing depreciation u/s 32(1).
Conclusion:
The appeal filed by the assessee was dismissed, affirming the lower authorities' decision to treat the expenditure on renovation and refurbishment of the leased premises as capital in nature.
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2009 (10) TMI 641
Issues Involved:
1. Sustenance of penalty u/s 271(1)(c) by CIT(A).
2. Validity of penalty proceedings initiated by the Assessing Officer.
3. Conditional surrender of income by the assessee.
4. Onus of proving concealment of income.
Summary:
1. Sustenance of penalty u/s 271(1)(c) by CIT(A):
The CIT(A) confirmed the penalty imposed by the Assessing Officer, observing that the assessee failed to establish the creditworthiness of the lenders and thus, the purported loans were rightly treated as income from undisclosed sources. The CIT(A) held that penalty was clearly attracted u/s 271(1)(c) due to the filing of inaccurate particulars of income.
2. Validity of penalty proceedings initiated by the Assessing Officer:
The Assessing Officer issued a notice u/s 271(1)(c) for concealment of income/furnishing inaccurate particulars of income. The penalty was imposed on the basis that the assessee had surrendered the loan as a result of the investigation carried out by the department and after issuing notice u/s 148, indicating concealment of income. However, the Tribunal noted that the Assessing Officer did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars, rendering the penalty order invalid as per the decision in New Sorathia Engg. Co. v. CIT.
3. Conditional surrender of income by the assessee:
The assessee had requested the addition of the unsecured loans to her income to avoid litigation and with the condition that no penalty be imposed. The Tribunal observed that the addition was made on the basis of this conditional offer and that the primary onus u/s 68 to prove the identity, creditworthiness, and genuineness of the transaction was on the assessee. However, the Tribunal held that the penalty could not be imposed solely based on the conditional offer, referencing the decision in National Textiles v. CIT.
4. Onus of proving concealment of income:
The Tribunal emphasized that the onus is on the revenue to establish that the assessee concealed income or furnished inaccurate particulars. The Tribunal found that the Assessing Officer did not bring any specific adverse material on record to prove concealment. The Tribunal also referenced the decision in CIT v. Suresh Chand Mittal, where it was held that if the income is surrendered to buy peace and avoid litigation, it could be treated as bona fide, and penalty should not be imposed.
Conclusion:
The Tribunal set aside the order of the CIT(A) and deleted the penalties imposed u/s 271(1)(c), allowing the appeal of the assessee.
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2009 (10) TMI 640
Disallowance of expenditure u/s 40(a)( ia) - Computation of income chargeable under the head ‘Profits and gains of business or profession’ - Methods of accounting - nature of business activities - Whether the AO can make any addition in total income on account of disallowing expenditure u/s 40(a), in a case where assessee follows ‘completed contract method’- AO noticed from audit report that the assessee made late payment of TDS - AO made the addition as same is not allowable u/s 40(a)( ia) - CIT(A) confirmed the action of the AO.
HELD THAT:- We find that certain expenditures are not allowable if the assessee failed to deduct tax or after deduction same was not paid in time. Basically, income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’, be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. “Completed contract method” is one such method. Similarly, “percentage of completion method” is another such method. Under the “completed contract method”, the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract period.
As per the accepted accounting principle, it is accumulated under one head of account, ‘work-in-progress’. The project constituted the stock-in-trade of the assessee. The project did not constitute a fixed asset of the assessee. In the last accounting period when work is completed, the profit and loss account is prepared, that ‘work-in-progress’ account is to be transferred in profit & loss account. Thus, the “completed contract method” determines profits/loss only when contract is completed.
Opening balance of work-in-progress of individual project will go up in the relevant year. When these projects were completed, in that year, income has to be computed after considering increased opening work-in-progress and receipts of the relevant project. Accordingly, in the year when these projects were completed, income on account of those projects is be computed after considering increased opening balance of work-in-progress due to addition of expenses for the period of project in work-in-progress. Contrary, if certain expenditures are not allowable under the Act, the work-in-progress will not increased by that amount. Such expenses are to exclude from the work-in-progress if same were included by the assessee.
For the above purposes, the AO has to examine the work-in-progress account in each assessment year. If on examination, AO found that the work-in-progress shown in books of account is not correct, the AO is empowered to correct the same. In other words, it can be said that work-in-progress is just like one side of profit & loss account, i.e., debit side, the AO can have all powers to examine this debit side of profit & loss account including the power of examination of allowability/disallowability of expenditure u/s 40(a).
In the case under consideration, we find that AO has rightly noted that the expenditure claimed by the assessee which are subject to TDS liability but TDS was no paid in time; therefore, these were disallowable u/s 40(a).
The correct procedure in “completed contract method” is that instead of making addition, AO should correct the amount of work-in-progress by reducing or enhancing work-in-progress as the case may be. Such corrected WIP will be finally considered in profit and loss account/contract account for the year in which work is completed. The result of calculation of correct profit in case of “completed contract method” could be attained by this procedure.
In the case under consideration, AO made addition in all the projects including incomplete projects, which is not warranted. Such addition in total income is warranted only in respect of project which is completed during the year. The ld AR has conceded the additions in respect of completed works. Necessary calculation is required after verification from original record. The original record is not readily available at this stage under the circumstances we send back this matter to the file of the AO with direction to delete the additions made in total income in respect of incomplete projects.
However, the addition in respect of completed project is to confirm subject to verification of calculation of the amount. AO is further directed to correct the amount of work-in-progress of incomplete works/projects in accordance with the above discussion and after providing opportunity of hearing to the assessee.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
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2009 (10) TMI 639
Disallowance of development expenses - Expenditure on know-how - Assessee claimed both the expenditure as revenue expenditure u/s 37(1) - whether the claim of the assessee is allowable u/s 37(1) or u/s 35AB of the Act - submission of the assessee is that the he paid the payment to M/s. Hawtal Whiting & Engineering Company Ltd., UK for improving the ride and handling comforts of its existing 2 wheel drive/4 wheel drive utility vehicles. These expenses are in the nature of development expenses for improving the performance of existing product i.e., utility vehicle - AO rejected the assessee’s contention and held that the payments were made for providing technical know-how services by M/s. Hawtal Whiting & Engineering Company Ltd., UK, therefore, the expenditure is covered u/s 35AB - CIT(A) confirmed the order of the AO.
HELD THAT:- If we consider the fundamental concept of section 35AB and section 37(1), we are of the view that any expenditure not being expenditure in the nature of capital expenditure or personal expenditure laid out or expended wholly and exclusively for the purpose of business is allowable expenses in computing income chargeable under the head ‘Business or profession’.
Since in the case under consideration, the expenditure claimed by the assessee is revenue in nature, therefore, the same is allowable u/s 37(1) of the Act and not u/s 35AB of the Act. The above view is supported by the fact that the Finance (No. 2) Act, 1998 introduced from the assessment year 1999-2000 onwards, the concept of allowance of depreciation on intangible assets like know-how, patent rights, copyrights, etc. As a consequence, sub-section (1) was also amended so as to provide that any expenditure of capital nature incurred on or after 1-4-1998 on the acquisition of know-how used for the purposes of business shall not qualify for deduction under the said section 35AB. Such capital expenditure incurred after 31-3-1998 would be eligible for depreciation allowance. We, therefore, set aside the orders of the revenue authorities and allow the claim of the assessee. Accordingly, ground Nos. 5 and 6 of the assessee are allowed.
Disallowance on payment to MSEB - assessee claimed that the payment was made to MSEB for additional power as a non-refundable consumer contribution/service charges and that the property of cable and related accessories was with MSEB - AO held that since the assets were required for the specific use of the assessee at their own site and their own requirement, the expenditure is capital in nature, on which, the AO allowed depreciation at 25 per cent. - CIT(A) confirmed the action of the AO.
HELD THAT:- In Indian Molasses Co. (P.) Ltd.’s case[1970 (8) TMI 9 - SUPREME COURT], the Supreme Court pointed out that the word "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning and it is with this meaning that one is concerned. "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably.
The Apex Court in CIT v. Nainital Bank Ltd.[1966 (9) TMI 46 - SUPREME COURT] held that in its normal meaning, the expression "expenditure" denotes "spending" or "paying out or away", i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not "expenditure"; it is only when he satisfies the obligation by delivery of cash or property or by the settlement of accounts, that there is expenditure. Further, mere payment by itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be paid for commercial considerations.
Therefore, we find that the expenditure incurred is not capital expenditure nor it is expenditure in the nature of personal. On account of these expenditures, there was no addition to the capital assets of the assessee and there is no change in the capital structure of the assessee. The amount is in respect of availing additional power facilities i.e., commercial consideration, which is in the nature of revenue expenditure laid down and expended wholly and exclusively for the purpose of business; therefore, the same is allowable. We accordingly, allow the claim of the assessee.
In the result, both the appeals are partly allowed for statistical purposes.
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2009 (10) TMI 638
Transfer pricing Adjustment - Interest free loan extended to the associated concerns as at arm’s length - commercially expediency for assessee to advance interest free loans to the AEs and that since no interest has actually been charged, there is no real income exigible to tax - The assessee extended two foreign currency loans to its associated enterprises - scrutiny of international transaction to determine whether or not the same it as arm’s length.
TPO held that the international transactions undertaken by the assessee, in relation to the interest free loan were not at arm’s length and undertook an upward adjustment to income for all the three financial years. In addition to the adjustment made by the TPO, the AO also made adjustment u/s 14A.
HELD THAT:- The principle of transfer pricing aims at determining the pricing in the situations of cross border international transactions, where two enterprises which are subject to the same centre or direction or control (associated enterprise) maintain commercially or financially relation with other. In such a situation, the possibility exist that by way of intervention from the centre or otherwise, business conditions must be accepted by the acting units which differs from those which in the same circumstances would have agreed upon between unrelated parties. The aim is to examine whether there is anomaly in the transaction which arise out of special relationship between the creditor and the debtor. Hence the contention of having actually not earned any income cannot come to the rescue of the assessee in this scenario.
The first objection of the TPO is that no two persons in normal business situation would grant interest free loan to the other persons. This is a fairly settled position. The assessee’s contention in this regard is that no one would have given the AEs loan at that point of time as they were in a start-up stage and that debt ratio was not comfortable. Now, even if one is to accept this argument, there is no case for not providing or charging any interest, if assessee is coming to the rescue of the AEs. We have not come across any feature in the agreement to accept the contention of the counsel that loan was quasi-capital. It is also not the case that there was any technical problem that loan could not have been contributed as capital originally if it was actually meant to be capital contribution. If the assessee’s contention that whenever interest free loan is granted to associated enterprises, there should not be any adjustment is accepted, it will tantamount to taking out such transactions from the realm of section 92(1) and section 92B of the IT Act.
Lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether the same is at arm’s length price has to be considered. The question of rate interest on the borrowing loan is an integral part of arm’s length price of determination in this context. Thus, clearly the assessee contention seeks to add text to the clear legal position as embodied in statute. Such an interpolation is not permissible, that when an interest free loan is given to the AEs, income on account of interest cannot be attributed from the point of view of arm’s length consideration.
Argument of the TPO is that one of the AEs is situated in a tax heaven and not charging of the interest by the assessee from the AEs, would result in higher income in the hands of the AEs, and the income of the assessee in India would reduce by the corresponding amount - Thus this would bring down the overall tax incidence of the group by shifting profit from Indian jurisdiction to Bermuda which is a tax heaven country with zero rate of tax on corporate profit. It is a classic case of violation of transfer pricing norms where profits are shifted to tax heavens or low tax regimes to bring down the aggregate tax incidence of a multi-national group. Further as observed by the TPO even if profits are sufficient it is not mandatory to declare dividend the same may be retained as profit in Bermuda for further investment in group companies. We find considerable cogency in this argument.
As rightly observed by the ld. CIT(A) RBI’s approval does not put a seal of approval on the true character of the transaction from the perspective of transfer pricing regulation as the substance of the transaction has to be judged as to whether the transaction is at arm’s length or not. Decided in favour of revenue.
Valuation of LIBOR rate - Whether Assessing Officer/TPO/CIT(A) has erred by not providing the appellant the benefit of 5 per cent range as provided by the proviso of section 92C(2)? - HELD THAT:- We find ourselves in agreement that no more one price has been used for each transaction. Only one LIBOR rate has been applied which has been adjusted for some basis points as required. This cannot be equated with more than one price in respect of each transaction. Hence, we uphold the ld. CIT(A)’s order on this issue.
In the result, all the three appeals filed by the assessee are dismissed.
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2009 (10) TMI 637
Taxability of receipt - compensation/damages received by way of appropriation of liability - capital receipt or revenue receipt - Whether the amount received from Saumya Construction (P.) Ltd. on account of development rights is business income u/s 28(va) or the same is assessable u/s 41 (1) or a non-taxable capital receipt - assessee has received an amount from Saumya Construction (P.) Ltd. and shown the same as liability in balance-sheet for assessment year 1997-98. The assessee has not shown the same as trading liability and nor claimed any deduction or expense in that assessment year. During the relevant assessment year 2005-06, the liability standing in assessee’s books was written off towards the compensation/damages for relinquishment of right to sue in the court of law and the liability was credited as capital receipt in the assessee’s capital account - AO has treated it taxable and has added it back in the assessment order, treating it as a revenue receipt -
HELD THAT:- A liability created for purchase of stock-in-trade on credit is certainly a trading liability. Where A purchases his stock-in-trade from B on credit, the liability of A to B is a trading liability. But if A borrows money from C in order to pay off his liability to B, A’s liability to C on such borrowing is not a trading liability. It is thus clear that section 41(1) cannot be invoked if C remits a part or whole of his loan to A. Where the assessee had not claimed nor obtained a deduction in respect of a security deposit treating it as a trading liability, section 41(1) cannot be invoked when such security deposit is refunded to the assessee.
In the present case, none of the above probabilities existed and this is a case of amount received from assessee-firm shown as a liability in the shape of cash credit in assessment year 1997-98. The assessee has not claimed the same as deduction or expenses in any of the years till date. The assessee has written off the same as compensation/damages for relinquishment of right to sue in court of law and credited the same in the capital account as capital receipt. In view of the above, we are of the considered view that the provisions of section 41(1) or section 68 of the Act will not apply to the writing off this liability in the capital account and the liability has not been credited in the profit and loss account but the same has been taken as capital basis in the capital account in the books of account of the assessee.
We find that, exactly on similar facts, the Hon’ble jurisdictional High Court in the case of Baroda Cement & Chemicals Ltd.[1985 (12) TMI 55 - GUJARAT HIGH COURT] has stated that the compensation received by the assessee was not for consideration for the transfer of capital assets, however, the damages are in capital in nature.
The provisions of section 28(va) provides that any sum whether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services, shall be chargeable to income-tax under the head "Profits and gains of business or professions".
In view of the above facts and discussions, the compensation received in lieu of foregoing a right to sue does not fall under provisions of section 28(va). We further find from the facts of the case that the assessee has not received this amount under an agreement for not carrying out activity in relation to any business or not to share any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services, under the head "Profit & gains of business or profession". This provision is for taxing the receipt by the assessee in the nature of non-compete fee and exclusivity rights and not the receipt as received by the assessee.
The receipt received by the assessee has written off the same as compensation/damages for relinquishment of right to sue in court of law and credited the same in the capital account as capital receipt. Accordingly, we are of the considered view that this provision of section 28(va) will not apply to the facts of the present case. Accordingly, this appeal of the assessee is allowed.
In the result, assessee’s appeal is allowed.
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2009 (10) TMI 636
Issues Involved:
1. Disallowance of claim of deduction under section 80-IA(4F) read with section 80-IA(5)(vi) and 80-IB(10) of the Income-tax Act.
2. Legality and validity of proceedings initiated under section 147/148 of the Income-tax Act for the assessment year 1999-2000.
3. Action under section 263 of the Income-tax Act for the assessment year 2002-03.
Issue-wise Detailed Analysis:
1. Disallowance of Claim of Deduction under Section 80-IA(4F) and 80-IB(10)
The core issue revolves around the eligibility of the assessee to claim deductions under sections 80-IA(4F) and 80-IB(10) for the profits derived from four projects within the Shipra Riviera Complex. The Assessing Officer (AO) disallowed these claims, arguing that the development and construction of the projects commenced before the prescribed date of 1-10-1998. The CIT(A) allowed the claims for the assessment years 2000-01, 2001-02, and 2002-03, but not for 1999-2000.
The Tribunal examined the facts and found that the development and construction of the four disputed projects (Brahmaputra, Kaveri, Amravati, and Damodar) indeed commenced after 1-10-1998, based on evidence such as work orders, foundation laying ceremonies, and contracts with sub-contractors. The Tribunal emphasized that mere earth filling and levelling activities prior to the specified date do not constitute the commencement of development and construction of housing projects. Therefore, the Tribunal upheld the CIT(A)'s decision to allow the deductions for the assessment years 2000-01, 2001-02, and 2002-03.
2. Legality and Validity of Proceedings under Section 147/148 for Assessment Year 1999-2000
The assessee challenged the legality and validity of the proceedings initiated under sections 147/148 for the assessment year 1999-2000. The Tribunal found that the AO had not provided sufficient grounds to justify the reopening of the assessment. The Tribunal ruled in favor of the assessee, stating that the proceedings under sections 147/148 were not validly initiated.
3. Action under Section 263 for Assessment Year 2002-03
The CIT invoked section 263, alleging that the AO had not declined the claim on the grounds that the four projects were undertaken as a result of splitting up and reconstruction of an already existing project. The Tribunal found that the CIT's allegations were without merit and not supported by any material evidence. The Tribunal held that the AO had duly examined the books of account and other relevant documents before allowing the claim. The Tribunal set aside the CIT's order under section 263, thereby allowing the assessee's appeal.
Conclusion:
The Tribunal dismissed the revenue's appeals and allowed the assessee's appeals in part. The Tribunal upheld the CIT(A)'s decision to allow deductions under sections 80-IA(4F) and 80-IB(10) for the assessment years 2000-01, 2001-02, and 2002-03. The Tribunal also ruled in favor of the assessee regarding the validity of proceedings under sections 147/148 for the assessment year 1999-2000 and set aside the CIT's order under section 263 for the assessment year 2002-03.
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2009 (10) TMI 635
Issues Involved:
1. Taxability of arbitration award in the hands of the firm.
2. Taxability of arbitration award in the hands of individual partners.
3. Applicability of Section 176(3A) of the Income-tax Act.
4. Existence and taxability of an Association of Persons (AOP) post-dissolution of the firm.
Detailed Analysis:
1. Taxability of Arbitration Award in the Hands of the Firm
The firm, M/s. Prabhat Construction Co., dissolved on 30-11-1988 and had outstanding claims against the Government of Gujarat, which were pursued by the partners. The Arbitrator awarded Rs. 43,42,025 on 20-4-1989, and each partner received their share. Initially, the Department sought to tax the firm under Section 176(3A) of the Act. However, the ITAT Rajkot Bench, following the Gujarat High Court decision in Banyan & Berry v. CIT [1996] 222 ITR 831, directed the Assessing Officer not to tax the arbitration award in the hands of the firm.
2. Taxability of Arbitration Award in the Hands of Individual Partners
The Assessing Officer attempted to tax the individual partners by invoking Section 176(3A), issuing notices under Section 148, and passing ex parte assessment orders under Section 144. The Commissioner of Income-tax (Appeals) held that the receipt in the hands of the partners is capital in nature and exempt, aligning with the Gujarat High Court's decision in Banyan & Berry's case.
3. Applicability of Section 176(3A) of the Income-tax Act
Section 176(3A) states that any sum received after the discontinuance of business shall be deemed income of the recipient if it would have been income of the person carrying on the business before discontinuance. The ITAT concluded that Section 176(3A) would apply only if the business was discontinued. Since the business was continued by M/s. Rupal Construction Pvt. Ltd., Section 176(3A) was not applicable.
4. Existence and Taxability of an Association of Persons (AOP) Post-Dissolution of the Firm
The ITAT noted that the mere realization of assets or actionable claims by the partners does not amount to carrying on business. The Gujarat High Court in Banyan & Berry's case held that the realization of assets post-dissolution is not business activity. The ITAT found no evidence suggesting that the erstwhile partners intended to carry on the business as an AOP. Therefore, the sum received from the arbitration award could not be taxed in the hands of an AOP.
Conclusion:
The ITAT dismissed the revenue's appeals, confirming that the arbitration award could not be taxed in the hands of the dissolved firm, individual partners, or an AOP. The Cross Objections filed by the assessees were allowed, supporting the Commissioner of Income-tax (Appeals)'s order that treated the award money as a capital receipt, exempt from tax.
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2009 (10) TMI 634
Issues Involved:
1. Deletion of addition out of salary expenses and subscription charges.
2. Treatment of loss declared by the assessee as business loss versus speculation loss u/s 73 of the Income-tax Act.
Summary:
Issue 1: Deletion of Addition out of Salary Expenses and Subscription Charges
The first issue pertains to the deletion of the addition of Rs. 13,63,356 out of salary expenses and Rs. 7,28,220 out of subscription charges. The assessee claimed deductions for these expenses, which were significantly higher than the previous year. The Assessing Officer (AO) compared the expenses with the turnover and restricted the allowable expenses, suspecting them to be excessive. The ld. CIT (Appeals) deleted the addition, noting that the AO did not make any enquiries to prove the expenses were not genuine or unrelated to business activities. The Tribunal upheld the CIT (Appeals)'s decision, stating that the AO's disallowance was based on mere suspicion and not supported by any material evidence.
Issue 2: Treatment of Loss as Business Loss versus Speculation Loss u/s 73
The second issue concerns the treatment of a loss of Rs. 5,78,710 declared by the assessee. The AO treated the loss as speculation loss u/s 73, arguing that the assessee's business involved trading in shares, which falls under speculative transactions as per the Explanation to section 73. The ld. CIT (Appeals) disagreed, citing that the assessee was not part of a group of companies manipulating taxable income, and treated the loss as a business loss. The Tribunal, however, reversed the CIT (Appeals)'s decision, stating that the assessee's business did not fall under the exclusions provided in the Explanation to section 73. The Tribunal held that the profit or loss from share trading should be treated as speculative business, aligning with the decisions of various High Courts and the Supreme Court. The Tribunal emphasized that explanatory notes and circulars cannot override the clear language of the statute.
Conclusion:
The appeal by the revenue was partly allowed. The Tribunal upheld the deletion of the addition out of salary expenses and subscription charges but restored the AO's treatment of the loss as speculative business loss u/s 73.
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2009 (10) TMI 633
Disallowance of loss on F&O transaction carried at the stock exchange - Speculative transactions or not? - assessee is in business as builder, developer and contractor - AO held, that the transactions are carried on at National Stock Exchange and Bombay Stock Exchange. Bombay Stock Exchange Ltd. and National Stock Exchange of India Ltd. are recognized Stock Exchanges as per Notification dated 25-1-2006. Therefore the transactions in F&O segment prior to 25-1-2006 are regarded as speculative loss - CIT(A) hold that the appellant’s derivative transaction up to and including 24-1-2006 for the year under appeal should be construed as speculative transaction within the meaning of section 43(5)
HELD THAT:- The recognized stock exchange means a recognized stock exchange as notified by the Central Government for this purpose. Therefore, even if the notification is from a particular date, as per clause (d) inserted, the same will apply to all the transactions in relation to assessment year 2006-07 and onwards. Clause (d) does not mention that unless the recognized stock exchange is notified, the transaction will not be deemed to be a speculative transaction.
The power to notify the stock exchange is granted under the statute and hence once the recognized stock exchange is notified, the same will apply in respect of all eligible transactions carried out in relation to financial year relevant to assessment year 2006-07 and onwards. The Special Bench in the case of Shree Capital Services Ltd. [2009 (7) TMI 172 - ITAT CALCUTTA] held that "clause (d) of section 43(5) is prospective in nature and will be effective from the date from which the Legislature made it effective, i.e., 1-4-2006 and will be applicable to assessment year 2006-07 onwards". The notification is by way of a subordinated Legislation but cannot override the principal Legislation enacted by the Parliament. It only clarifies but will not override unless statutorily so prescribed.
Since there is no dispute to the fact that the transactions in the present case in F&O segment are the eligible transactions carried out in a recognized stock exchange, loss in such transactions cannot be deemed to be transaction in speculation business. The same being considered as regular business transaction, loss incurred in the same is to be treated as business loss and not loss in speculation business.
In the result, the appeal is allowed.
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2009 (10) TMI 632
Issues Involved:
1. Whether the miscellaneous application filed by the assessee under section 254(2) on the issue of addition of Rs. 11 lakhs made by the Assessing Officer can be allowed.
Detailed Analysis:
1. Background and Initial Proceedings:
- A search action under section 132 of the Income-tax Act, 1961, was conducted against the assessee on 15-12-1997.
- The assessee declared Nil undisclosed income for the block period from 1-4-1987 to 15-12-1997, but the Assessing Officer computed the total undisclosed income at Rs. 18,80,887.
- Upon appeal, the CIT(A) partially accepted the assessee's appeal.
- Cross appeals were filed by both sides before the Tribunal, where the revenue's appeal was dismissed, and two out of three grounds raised by the assessee were allowed. However, the third ground regarding the addition of Rs. 11 lakhs was dismissed.
2. Sustenance of Addition of Rs. 11 Lakhs:
- During the search, a document (Page No. 18 of Annexure A-1) was found, which the assessee claimed to be a proposed planner, not actual expenses.
- The Assessing Officer and CIT(A) did not accept the assessee's contention, treating the noted expenses as actual and adding Rs. 11 lakhs as income from undisclosed sources.
- The Tribunal upheld this view, noting the exact denominations of cash and date-wise entries of expenses over 15 months, which indicated actual transactions rather than a planner.
- The Tribunal also observed that the assessee's claim of sufficient cash availability was disproved by bank statements showing minimal balances.
3. First Miscellaneous Application:
- The assessee filed a miscellaneous application under section 254(2), arguing erroneous facts and misappreciation of facts, and non-consideration of vital issues.
- The Tribunal dismissed this application, emphasizing that the power of rectification under section 254(2) is limited to correcting mistakes apparent from the record and does not extend to reviewing the order.
4. Second Miscellaneous Application:
- The assessee filed another miscellaneous application with similar contentions as the first, adding reliance on certain judgments.
- The Judicial Member (JM) recalled the order based on the judgment of the Hon'ble Supreme Court in P.R. Metrani v. CIT, which clarified that the presumption under section 132(4A) is not available for framing regular assessment.
- The Accountant Member (AM) disagreed, stating that successive miscellaneous applications are not permissible and that the judgment in P.R. Metrani is not applicable.
5. Tribunal's Decision on Second Application:
- The Tribunal reiterated that the power under section 254(2) is confined to rectifying mistakes apparent from the record and does not allow for rehearing or rearguing the matter.
- The Tribunal noted that the addition of Rs. 11 lakhs was based on the appreciation of evidence (Page No. 18) found during the search, which was admitted by the assessee to be in his handwriting.
- The Tribunal found no mistake apparent from the record in the original order and dismissed the second miscellaneous application.
6. Legal Precedents and Jurisdictional High Court's View:
- The Tribunal referred to several judgments, including the Hon'ble Supreme Court's decisions in T.S. Balram, ITO v. Volkart Bros., CIT v. Hero Cycles (P.) Ltd., and Saurashtra Kutch Stock Exchange Ltd., which clarified the scope of rectification under section 254(2).
- The Tribunal also considered the jurisdictional High Court's ruling in CIT v. Ramesh Electric and Trading Co., which held that the Tribunal cannot review its orders under the guise of rectification.
7. Conclusion:
- The Tribunal concluded that the second miscellaneous application was not maintainable as it was based on the same set of facts as the first application.
- The Tribunal found no error in the original order, as the addition of Rs. 11 lakhs was based on substantial evidence and proper appreciation of facts.
- The Tribunal agreed with the Accountant Member's view and directed the matter to be listed before the Division Bench for passing an order in accordance with the majority view.
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2009 (10) TMI 631
Claim of exemption u/s 54EA for investment made around 5 years after the date of transfer instead of within 6 (six) months - Transfer took place in 1992 - compensation received in June 1997 - invested the same in UTI Monthly Income Scheme on July 5, 1997, and July 15, 1997 - Held that:- provisions of section 54EA is available to the assessee for the period relevant for the assessment year 1998-99 notwithstanding the provisions of section 54H not containing or not making reference to the provisions of section 54EA of the Act for the period corresponding to the assessment year, answer is answered in favour of the assessee and against the Revenue, appeal is dismissed
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2009 (10) TMI 630
whether on account of less user of inputs in the production of goods than as per the norms provided in the policy, the petitioner in respect of such balance amount of inputs is not entitled to exemption – Held that:- petitioners have not violated the terms of the notification, Tribunal has misdirected itself in law, in calling on the petitioners to pre-deposit the amount as ordered. There has been no violation of the notification and further prima facie the Customs Authorities cannot go behind the licence issued, calling on the petitioners to pre-deposit would by itself causing undue hardship to the petitioners
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2009 (10) TMI 629
Whether respondent is entitled to abatement in terms of Section 4(4)(d)(ii) of Central Excise Act, 1944 when the Hon’ble Apex Court has held that one cannot go by general implication that wholesale price would always mean cum duty price particularly when the assessee had cleared the goods on the basis of exemption notification – Held that:- Tribunal has held that the assessee is entitled to the benefit of Section 4(4)(d)(ii) of the Act which was obtained during the relevant period Whether remanding of the case by the CESTAT to the adjudicating authority for the consideration of modvat benefit is correct when Modvat credit has already been allowed in Order-in-Original by the adjudicating authority on the basis of available records, after verification – Held that:- remittal order is put in issue on the ground that it has been already considered and denied when the entire entitlement of the modvat benefit was originally considered. The only issue for which the matter had been remitted back to the original authority is whether the assessee is entitled to modvat credit, even that order of remittal has been granted by imposing a condition that the assessee should establish the claim by producing the documents showing payment of duty on the related inputs, remittal order is not in any way prejudicial to the interest or the Revenue to adjudicate the matter on appeal under Section 35(q) of Central Excise Act which requires question of law much less substantial question of law for entertaining the appeal, Appeal is dismissed
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2009 (10) TMI 627
Disallowance of claim of provision of warranty - warranty is based on a scientific method and that it was based on past practice and experience - warranty expense, if properly ascertained and discounted on accrual basis can be an item of deduction under section 37 - It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced – Held that:- historical trend indicates that a large number of sophisticated goods were being manufactured in the past and the facts show that defects existed in some of the items manufactured and sold, then provision made for warranty in respect of such sophisticated goods would be entitled to deduction from the gross receipts under section 37, in the light of the decision of the Supreme Court in the case of Rotork Controls India P. Ltd.(2009 - TMI - 33420 - SUPREME COURT OF INDIA), tax case appeal has to be allowed by answering all questions of law in favour of the assessee and against the Revenue.
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2009 (10) TMI 625
Penalty - penalty under the provisions of Section 114 of the Customs Act, 1962 (for short ‘the Act’) for being in the position of an abettor with an exporter, who had not only misdeclared the goods meant for export but had also over-valued the goods with an intention to claim additional or extra duty draw-back to which, he was otherwise not entitled to - Tribunal reduced the penalty from Rs. 2,00,000/- to Rs. 50,000/- in terms of the order - Held that:- no error or mistake or illegality in the order passed by the Tribunal and accordingly, this appeal is dismissed.
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2009 (10) TMI 623
Refund - penalty under Section 11AC - payment of duty at the time of the visit of the preventive officers to their factory on 23-12-2003 yet the fact remains that the duty was paid on the directions of the preventive officers. Such payment cannot be considered due to the own volition by the appellant. The very fact that the appellant contested the demand indicates that the payment made by them was involuntary and was forced upon them by the preventive officers - Held that:- payment of duty made by the appellant under protest. Hence, the time-bar will not apply. The appellant is entitled to the refund. order passed by the Commissioner (Appeals) is set aside. The appeal filed by the appellant is allowed
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2009 (10) TMI 621
Whether 'Transfer' of land from the assessee to the society is transferred u/s 2(47) or not. - Date of transfer - receipt of compensation - amendment w.e.f. 1.4.1988 - Held that:-the submission advanced by learned counsel for the Revenue that registration would relate back to the date of execution of the agreement, which was the date when the agreement was signed and attested and continued to be valid in the eyes of law till the date of registration on December 7, 1984, is not sustainable - there is no evidence of transfer of land to societies existed, the question of capital gains would not arise, and the same would be leviable within the meaning of section 45, as and when compensation is actually received by assessee.
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