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2008 (2) TMI 476
Capital gain computation - Property sold for a value less than the DLC rate - determination of the valuation on the date of the sale of the property in question - invoking section 50C - HELD THAT:- The provisions of s. 50C are deeming provisions and according to which if the assessee declares sale consideration for the purposes of computation of the capital gain which are lower than the DLC rate, the DLC rates have to be replaced as the actual cost of consideration.
We are of the opinion that in case the AO does not agree with the explanation of the assessee with regard to lower consideration disclosed by him then he should refer the matter to DVO for getting its market rate established as on date of the sale to arrive at the correct sale consideration. If this provision is read in the sense that if the AO is not satisfied with the explanation of the assessee then he 'may' or 'may not' send the matter for valuation to the DVO then in that case this provision would be rendered redundant. Ld AR has relied on the decision of the Hon'ble Supreme Court in the case of Ashok Leyland Ltd. vs. Union of India & Ors. [1997 (2) TMI 451 - SUPREME COURT] held that the deeming provisions are rebuttable one
In our considered opinion the befitting reply of all the queries arouse in our minds as well as raised by the parties is that the matter should be restored back to the file of the learned AO with a direction that he shall refer this matter of valuation in the light of sub-s. (2) of s. 50C to the DVO for determining the consideration of this plot sold by the assessee under s. 50C of the Act. The other connected grounds are also related to this main ground. Therefore, the entire appeal is restored back to the file of the AO with the direction that he would do as directed above and also give opportunity of hearing to the assessee as per law.
In the result, the appeal is allowed for statistical purposes.
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2008 (2) TMI 473
Eligibility for deduction u/s 80-IB - Mining of slate and sand stone boulders and sales of slates and sand stones is "Manufacture or production activities or not" - return of income filed declaring nil income u/s 143(1) - Assessee not aware of the technicalities and complexities of the tax laws - Alternate claim for allowing the benefit of deduction u/s 80HHC.
HELD THAT:- It is seen that it was the sand stone/slate excavated from the mines in the form of boulder which was used as raw material and it was consumed by the assessee firm. The finished products are mainly tiles also murals, medallion etc. In our opinion, certainly, these finished products are having separate and distinct commercial identity in the market in comparison to the original raw material, which was sand stone boulders, excavated from the mines. Though the various brand names under which these finished products are sold as stated by the assessee, will not have much relevance in the context of deciding as to what is being sold as finished product, but nevertheless it is clear that the finished product is certainly a separate and distinct commercial identity in the market and named as sand stone tiles/slate tiles. The word sand stone or slate has been used as prefix before the word tile/slabs to signify the origin and the material constituting the tile and also to distinguish and differentiate these tiles or another material like 'marble tiles'.
Another aspect is also worth consideration that the term production is wider than the term manufacture. The distinction between manufacture and production was noticed and explained by the Supreme Court in CIT vs. N.C. Budharaja & Co. & Anr. Etc. [1993 (9) TMI 6 - SUPREME COURT]. The apex Court clearly opined that all activities falling within the ambit of manufacture result in production but converse is not true. Thus, even assuming that the activities of the assessee are not treated as manufacturing, the same in any case have to be treated as production.
We also find that in AY 2002-03 also, the assessee made a claim under s. 80-IB on exactly same facts and circumstances and the Department accepted such a claim. The assessment stood completed, though under s. 143(1), however the statutory period for the issuance of a notice under s. 143(2), having already expired, the assessment so made attained finality and is binding upon the Revenue. There is no allegation of any change in the facts and circumstances of the case from the past and no other reason has been shown, hence, the AO could not have departed from the settled position in the past.
We also find substance in the contention of the ld AR, that liberal interpretation is required for incentive provision. While interpreting taxing statutes, the Supreme Court in Bajaj Tempo Ltd. vs. CIT [1992 (4) TMI 4 - SUPREME COURT] held: "A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it."
Therefore, fully satisfied the activities carried on by the assessee were manufacturing or production and hence entitled to deduction under s. 80-IB of the Act - AO is therefore, directed to allow the same as claimed. Thus the solitary ground of the Revenue is dismissed.
Alternate claim made by the assessee of allowing the benefit of deduction u/s 80HHC - The assessee was advised and therefore remained under the impression that once deduction of the entire business income is already to be allowed under s. 80-IB, there was no necessity of making a separate claim of deduction under s. 80HHC in the computation of total income. Rather such a claim may weaken its case under s. 80-IB. In any case, however the basic fact that the assessee was an exporter, was well known to the AO. The AO was also aware of the fact that the assessee did comply with all the requirements in law to allow the deduction under s. 80HHC of the Act, except the fact of obtaining an audit report by the assessee under s. 80HHC of the Act.
No doubt, the assessee was assisted by the services of a chartered accountant yet a bona fide confusion prevailed over that once the assessee is entitled to the claim of deduction of entire business income of the undertaking under s. 80-IB, it was not further required to pursue the claim under s. 80HHC, to which, otherwise, the assessee was duly and fully entitled to. Moreover in AY 2002-03 also similar claim under s. 80-IB only was made and no claim under s. 80HHC was made. It is under this background that neither the assessee nor the ld AR could make a specific claim of deduction under s. 80HHC of the Act. Therefore such a failure appears to be not willful or unreasonable.
In Jute Corporation of India Ltd. vs. CIT [1990 (9) TMI 6 - SUPREME COURT], the Hon'ble Supreme Court held that an appellate authority has all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the powers of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. However the learned CIT(A) neither referred to the decision of Jute Corporation nor distinguished the same and being a binding precedent, the learned CIT(A) was obliged to follow the same.
In view of the arguments of the ld AR and decisions relied upon and circumstances and facts of the case, the learned CIT(A) was not justified in refusing to admit the additional ground taken before him. In the interest of justice, the same is admitted. However, the matter has to be examined by the AO. Therefore, we direct the AO to consider the claim in accordance with law but by providing adequate opportunity of being heard to the assessee and to file the necessary documents. Therefore, ground No. 2 of the C.O. of the assessee is allowed for statistical purposes.
The ground No. 3 of the assessee is with regard to charging of interest which is mandatory and is consequential in nature.
In the result, the appeal of the Revenue is dismissed and the C.O. of the assessee is partly allowed.
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2008 (2) TMI 471
Revision u/s 263 - Erroneous and Prejudicial Order Passed by AO - No assessment order was passed u/s 143(3) - two views possible on the date when the CIT passed his order under section 263 - HELD THAT:- The Assessing Officer has not discussed the issue of deduction of the relief allowed under section 80-IA while computing the eligible profit for the purpose of deduction under section 80HHC. In those circumstances, we may not be able to say whether the Assessing Officer had expressed any opinion at all. It is also not possible to say that the Assessing Officer had taken one of the possible views. The matter would have been entirely different in case the Assessing Officer has discussed expressly in the assessment order and concluded that there was no need for deducting the profit allowed under section 80-IA while computing deduction under section 80HHC.
Unfortunately, in the case before us, the Assessing Officer has not discussed anything. Therefore, it clearly shows non-application of mind on the part of the Assessing Officer. The Apex Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007 (5) TMI 197 - SUPREME COURT] after considering the provisions of section 143(1)(a), found that when the return was processed under section 143(1) of the Income-tax Act, it cannot be said that the Assessing Officer has taken any view on the claim made by the assessee.
Therefore, it is very clear that when the Assessing Officer has not applied his mind and made proper enquiry with regard to the claim of the assessee, the order of the Assessing Officer is erroneous and prejudicial to the interests of the revenue. In those circumstances, we may not be able to say that the Assessing Officer has taken one of the views permissible under law.
Thus, we do not find any infirmity in the order of the lower authority.
In the result, the appeal of the assessee stands dismissed.
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2008 (2) TMI 470
Issues Involved:
1. Assessability of undisclosed income discovered during survey and converted into search.
2. Applicability of regular assessment proceedings u/s 143(3) vs. block assessment proceedings under Chapter XIV-B.
Summary:
Issue 1: Assessability of Undisclosed Income Discovered During Survey and Converted into Search
The Revenue contested whether the learned CIT(A) was correct in holding that the undisclosed income discovered during a survey, which was converted into a search u/s 132, should be assessed in regular assessment proceedings u/s 143(3) instead of under Chapter XIV-B.
Issue 2: Applicability of Regular Assessment Proceedings u/s 143(3) vs. Block Assessment Proceedings under Chapter XIV-B
The assessee, engaged in trading gold jewellery and silver articles, was subjected to a survey u/s 133A on 21st March 2003, which was converted into a search u/s 132 on the same day. During the survey and search, excess unaccounted stock was discovered, and the assessee admitted this as undisclosed income, agreeing to pay tax. The AO assessed this income under block assessment proceedings, while the CIT(A) held it should be assessed under regular assessment proceedings.
The Tribunal analyzed the provisions of the IT Act, distinguishing between the powers and procedures under sections 132 and 133A. It noted that survey operations u/s 133A are investigatory, while search operations u/s 132 are more comprehensive and can lead to block assessments. The Tribunal emphasized that the evidentiary value of statements recorded during a survey is not equivalent to those recorded during a search.
The Tribunal concluded that since the survey and search were conducted on the same day, the survey proceedings merged with the search proceedings. Therefore, the undisclosed income should be assessed under block assessment proceedings as the survey loses its independent identity once converted into a search.
Conclusion:
The appeal by the Revenue was allowed, determining that the excess unaccounted stock should be assessed in block assessment proceedings only.
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2008 (2) TMI 469
Issues Involved:
1. Permissibility of disallowance under section 43B by way of prima facie adjustment while processing the return under section 143(1)(a).
2. Correctness of the disallowance of sales tax liability converted into a loan.
Detailed Analysis:
1. Permissibility of Disallowance under Section 43B by Way of Prima Facie Adjustment While Processing the Return Under Section 143(1)(a):
The core issue for consideration was whether the outstanding sales tax liability could be disallowed as a prima facie adjustment while processing the return under section 143(1)(a). The CIT(A) concluded that the disallowance made while processing the return under section 143(1)(a) was not correct, as the deferred sales tax liability had been converted into a loan repayable after ten years without interest. The Tribunal upheld the CIT(A)'s decision, noting that the disallowance was beyond the scope of prima facie adjustments permissible under section 143(1)(a). The Tribunal cited the Bombay High Court decision in Khatau Junkar Ltd., which held that disallowances under section 143(1)(a) could only be made if the claim was prima facie inadmissible based on the material before the Assessing Officer.
2. Correctness of the Disallowance of Sales Tax Liability Converted into a Loan:
The Tribunal examined whether the sales tax liability of Rs. 31,29,350 for the period ending 31-3-1994 could be disallowed under section 43B when the amount was shown as a loan under the Deferment Scheme of the Sales Tax Department. The CIT(A) found that the eligibility certificate for the deferment was issued on 1-3-1994, within the relevant assessment year, and concluded that there was no justification for disallowance under section 43B. The Tribunal agreed with this conclusion, noting that the conversion of the sales tax liability into a loan was supported by necessary evidence on record.
Separate Judgments Delivered:
- Judicial Member's View:
The Judicial Member upheld the CIT(A)'s decision, emphasizing that the substantial issue was the permissibility of the disallowance by way of adjustment under section 143(1)(a). The Judicial Member cited the Supreme Court decision in Hindustan Electro Graphites Ltd., which held that the correctness of the claim should be assessed based on the law as it stood at the time of filing the return. The Judicial Member also noted that the issue was debatable and beyond the scope of prima facie adjustments permissible under section 143(1)(a).
- Accountant Member's View:
The Accountant Member disagreed, arguing that the deduction should be allowed based on the date of permission for conversion as specified in CBDT Circular No. 674, dated 29-12-1993. The Accountant Member noted that the permission for conversion was communicated on 28-6-1995, after the relevant assessment year, and therefore the deduction was not allowable for the assessment year 1994-95. The Accountant Member concluded that the assessee was not entitled to the deduction under section 43B.
- Third Member's Decision:
The Third Member agreed with the Judicial Member, finding that the matter was debatable and beyond the scope of prima facie adjustments under section 143(1)(a). The Third Member noted that the eligibility certificate for the deferment was issued within the relevant assessment year and that the conversion into a loan was supported by evidence. The Third Member also emphasized that additional tax, which bears the characteristics of a penalty, should not be imposed when there was no default at the time of filing the return, as per the Supreme Court decision in Hindustan Electro Graphites Ltd.
Conclusion:
The appeal of the revenue was dismissed, and the Tribunal upheld the CIT(A)'s decision that the disallowance under section 43B was not permissible as a prima facie adjustment while processing the return under section 143(1)(a). The Tribunal found that the sales tax liability converted into a loan was correctly claimed by the assessee and supported by necessary evidence.
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2008 (2) TMI 468
Issues Involved:
1. Legality and validity of the orders passed by the AO and CIT(A).
2. Treatment of the Liaison Office (LO) as a Permanent Establishment (PE) in India and its tax implications.
3. Presumption of income liable to tax in India from the LO.
4. Alleged submission of incorrect details to RBI and reliance on statements of the director of an Indian subsidiary.
5. Determination of profits attributable to the alleged PE.
6. Conduct of a survey by the AO and reliance on collected documents.
7. Request for details of expenses and time given to the appellant for compliance.
8. Liability to pay interest under section 234AC of the Act.
9. Adoption of correct figures of salary and fringe benefits in computing profits.
Issue-wise Detailed Analysis:
1. Legality and Validity of Orders:
The appellant argued that the orders passed by the AO and CIT(A) were illegal, invalid, and ab initio void. The Tribunal's analysis did not find specific grounds to support this claim, focusing instead on the substantive issues related to the LO's activities and tax implications.
2. Treatment of LO as PE and Tax Implications:
The central issue was whether the LO constituted a PE in India under Article 5 of the Double Taxation Avoidance Agreement (DTAA) with Japan. The AO and CIT(A) held that the LO was a PE, attributing business income to it. The Tribunal noted that the Special Bench of the Tribunal had previously held that the LO's activities were auxiliary and preparatory in nature, thus not constituting a PE. The Tribunal found no new material evidence to depart from this precedent, concluding that the LO's activities remained auxiliary and preparatory.
3. Presumption of Income Liable to Tax:
The AO presumed that the LO had income liable to tax in India. The Tribunal found that the LO's activities, such as collecting information and facilitating meetings, did not generate income or involve trading activities. The Tribunal emphasized that the LO was not authorized to conclude business contracts independently, and its activities were preparatory and auxiliary in nature.
4. Alleged Submission of Incorrect Details to RBI:
The CIT(A) held that the appellant submitted incorrect details to the RBI and relied on the statements of Mr. Yuki Morata, the director of an Indian subsidiary. The Tribunal found that the appellant complied with RBI guidelines, and there was no evidence of misleading the RBI. The Tribunal noted that the RBI had not found any violation of its conditions, supporting the appellant's claim that the LO's activities were within the permitted scope.
5. Determination of Profits Attributable to PE:
The CIT(A) determined profits attributable to the alleged PE at an arbitrary figure, ignoring the formula upheld by the Tribunal in previous years. The Tribunal did not adjudicate on this issue, as it concluded that the LO did not constitute a PE, rendering the profit computation dispute academic.
6. Conduct of Survey and Reliance on Documents:
The CIT(A) asked the AO to conduct a survey and relied on the collected documents. The Tribunal found that the CIT(A) could not direct a survey under section 250(4) of the Act, and the evidence gathered post-assessment could not be considered. The Tribunal held that the evidence did not establish that the LO was engaged in trading activities, supporting the appellant's claim that the LO's activities were preparatory and auxiliary.
7. Request for Details of Expenses and Compliance Time:
The appellant contended that the CIT(A) did not give adequate time to collect required details from its Tokyo office. The Tribunal did not specifically address this issue, focusing instead on the substantive matter of the LO's activities and tax implications.
8. Liability to Pay Interest under Section 234AC:
The appellant argued that it was not liable to pay interest under section 234AC of the Act. The Tribunal did not specifically address this issue, as the primary focus was on whether the LO constituted a PE and had taxable income in India.
9. Adoption of Correct Figures of Salary and Fringe Benefits:
The appellant contended that the CIT(A) did not adopt the correct figures of salary and fringe benefits while computing profits attributable to the alleged PE. The Tribunal did not adjudicate on this issue, as it concluded that the LO did not constitute a PE, rendering the profit computation dispute academic.
Conclusion:
The Tribunal held that the LO did not constitute a PE in India, and the appellant was not liable to tax in India. The appeal was allowed, following the precedent set by the Special Bench of the Tribunal in previous years. The Tribunal emphasized that the LO's activities were preparatory and auxiliary in nature, and there was no evidence to suggest otherwise.
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2008 (2) TMI 467
Disallowing exemption under section 10(34) - Avoidance Of Tax in other words "Interest stripping Transaction" - Transactions did not satisfy all the conditions as specified u/s 94(7) - expression 'or' nor the expression 'and' - Clauses (a), (b), and (c) of section 94(7) need to be satisfied cumulatively or not? - HELD THAT:- We find that a plain reading of the provision of section 94(7) of the Act shows that it has neither used the expression 'or' nor the expression 'and'. We would place a construction on the provisions of section 94(7) so as to place least restriction on an individual's (assessee) rights. Therefore, hold that the claim of the assessee that all the conditions laid down in clauses (a), (b), (c) have to be satisfied before the said provisions can be applied in a given case, should be accepted.
Therefore, the absence of word 'or' at the end of clauses (a) and (b) does not provide for the interpretation that sub-section (7) of section 94 apply, where transactions satisfy at least one condition. Rather, simple reading of the clauses even without the expression 'and' can lead only to one condition that all the three conditions cumulatively is required to be satisfied before invoking section 94(7). The use of words as 'such person', 'such unit', 'such date', 'such securities or units' in clauses (b) and (c) of section 94(7), also indicates that the three clauses have to be read together. Thus they advocate for cumulative application of conditions and not otherwise.
In view of the CBDT Circular, which explains the Finance Act, 2001 is that all the conditions prescribed in section 94(7) are to be cumulatively satisfied and not otherwise. Therefore, we find no reason to interfere with the order of learned CIT(A) and the grounds raised by revenue in appeal, being devoid of merit, are rejected.
In the result, the appeal by the revenue is dismissed.
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2008 (2) TMI 466
Issues involved:
Appeal against cancellation of penalty u/s 221 of the Income-tax Act, 1961 by Commissioner of Income-tax (Appeals)-II, Dehradun.
Summary:
The Revenue appealed against the cancellation of a penalty of Rs. 21 Lakhs imposed u/s 221 of the Income-tax Act, 1961. The assessee had filed a return of income for the assessment year 2000-01, declaring an income of Rs. 76,73,190 from Real Estate business. A demand of Rs. 30,52,501 was created, out of which Rs. 23,02,501 remained outstanding. The Assessing Officer initiated penalty proceedings u/s 222(1) for delay in payment of taxes. The Commissioner of Income-tax (Appeals) noted that the entire demand along with interest was paid by the assessee before the penalty notice was issued. The Commissioner considered financial difficulties, time extension by the ITO, and relevant circulars, and concluded that no penalty should be imposed. The Revenue contended that the default was admitted, and penalty was rightly imposed. The Commissioner's decision was supported by the assessee, arguing that the delay was covered by reasonable cause. The Tribunal found that while there was a technical delay, the penalty was not justified, as the entire taxes were paid within the time allowed by the Assessing Officer.
The Tribunal held that the penalty under section 221 was not automatic and should be imposed judiciously. The Assessing Officer had discretion in such matters, and in this case, the penalty of Rs. 21 Lakhs was deemed unjustified. The delay of less than 20 days in paying interest did not warrant such a penalty. Referring to a previous Tribunal decision, it was established that penalty under section 221 was not applicable to delays in interest payments. Therefore, the Commissioner's decision to cancel the penalty was upheld, and the Revenue's appeal was dismissed.
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2008 (2) TMI 465
Issues Involved:
1. Inclusion of reimbursement of expenses in gross receipts under Section 44BB of the Income Tax Act, 1961.
2. Taxation of interest on tax refunds under the Double Taxation Avoidance Agreement (DTAA) with France.
Detailed Analysis:
1. Inclusion of Reimbursement of Expenses in Gross Receipts under Section 44BB:
The Revenue's appeal contested the CIT(A)'s decision that reimbursements received by the non-resident company were not includible in gross receipts for taxation under Section 44BB of the Income Tax Act, 1961. The assessee, a French company engaged in oil drilling operations in India, argued that reimbursements for equipment, communication charges, and dry fruits were not taxable under Section 44BB as they were actual costs incurred on behalf of ONGC, without any profit element.
The AO included these reimbursements in gross receipts, citing that they were part of contractual receipts. However, the CIT(A) found that these reimbursements were not part of the drilling operations covered under Section 44BB and were obligations of ONGC. The CIT(A) directed the AO to exclude these amounts from gross receipts.
The Tribunal upheld the CIT(A)'s decision, stating that Section 44BB applies only to receipts connected with providing services or facilities related to oil extraction or production. Since the reimbursements were not related to these activities and lacked any profit element, they could not be taxed under Section 44BB or other provisions of the Act.
2. Taxation of Interest on Tax Refunds under DTAA with France:
The assessee's appeal challenged the AO's decision to tax interest on tax refunds as business income under Article 7 of the DTAA with France, instead of applying the specific provisions of Article 12(2) which prescribes a 10% tax rate.
The AO and CIT(A) treated the interest as business income connected to the assessee's Permanent Establishment (PE) in India, thus applying a higher tax rate. The assessee argued that the interest on tax refunds did not arise through the PE and should be taxed at 10% as per Article 12(2).
The Tribunal referred to the AAR decision in ABC, In re, which held that interest on tax refunds is not connected with any PE activity and falls under Article 12(2). The Tribunal also noted that in the assessee's own case for a previous assessment year, interest on tax refunds was classified as "Income from other sources," not business income.
The Tribunal concluded that the interest on tax refunds should be taxed at 10% under Article 12(2) of the DTAA, as it is not effectively connected with the PE in India.
Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, affirming that:
1. Reimbursements for equipment, communication charges, and dry fruits are not includible in gross receipts under Section 44BB due to their lack of connection with oil extraction activities and absence of profit element.
2. Interest on tax refunds should be taxed at 10% under Article 12(2) of the DTAA with France, as it is not connected with the PE in India.
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2008 (2) TMI 464
Issues Involved:1. Validity of notices issued u/s 148 of the IT Act, 1961. Summary:Validity of Notices Issued u/s 148 of the IT Act, 1961:The appeal concerns the validity of notices issued u/s 148 of the IT Act, 1961. The original assessment was completed u/s 143(3) at an income of Rs. 3,61,830. The AO issued a notice u/s 148, believing that income chargeable to tax had escaped assessment due to an excess claim of deduction u/s 80-IA. The assessee argued that the notice was issued due to a change of opinion, which is against the provisions of s. 147. The CIT(A) upheld the AO's action, stating that the excess deduction granted was not due to a change of opinion but a detection of excess deduction. The Tribunal examined whether the jurisdictional conditions for issuing a notice u/s 148 were met. It was noted that under the substituted s. 147 (w.e.f. 1st April, 1989), the AO must have reason to believe that income has escaped assessment. However, if the case falls within the proviso to s. 147, both conditions must be fulfilled: the AO must have reason to believe that income chargeable to tax has escaped assessment and that this occurred due to the assessee's failure to disclose fully and truly all material facts necessary for the assessment. The Tribunal found that the assessment for the year 1998-99 was made u/s 143(3) and the notice u/s 148 was issued after the expiry of four years from the end of the relevant assessment year. The AO's action was based on an audit party's opinion, which cannot be regarded as 'information' for the purpose of reopening the assessment. The Tribunal referred to the decision in CIT vs. Kelvinator of India Ltd., which held that a mere change of opinion cannot form the basis of reopening a completed assessment. It was concluded that the initiation of reassessment proceedings u/s 147/148 based on the audit report and change of opinion was not legally sustainable. Consequently, the notice issued u/s 148 and the subsequent assessment were quashed. The appeal filed by the assessee was allowed.
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2008 (2) TMI 463
Issues Involved:
1. Whether the CIT(A) was right in deleting the disallowance of Rs. 8,20,24,365 claimed by the assessee as deduction u/s 43B of the IT Act on account of customs duty on stock.
2. Whether s. 43B has overriding effect over s. 145A of the IT Act.
3. Whether the Tribunal committed mistakes apparent from the record in its order.
Summary:
Issue 1: Deletion of Disallowance of Rs. 8,20,24,365 Claimed as Deduction u/s 43B
The Tribunal initially held that the deduction of Rs. 8,20,24,365 on account of customs duty paid during the year is allowable to the assessee "irrespective of the fact that the same has not been included in the valuation of the closing stock by the assessee." However, the Tribunal restored the matter to the AO to ensure that the valuation is done in accordance with law, specifically considering s. 145A of the Act. The Tribunal noted that the implication of s. 145A was not correctly applied by the Departmental authorities and thus required fresh orders after considering s. 145A and affording sufficient opportunity to the assessee.
Issue 2: Overriding Effect of s. 43B Over s. 145A
The assessee contended that s. 43B has an overriding effect and thus s. 145A, introduced w.e.f. 1st April 1999, should not apply. This contention was supported by the Co-ordinate Bench's order in Maruti Udyog Ltd. vs. Dy. CIT. The Tribunal, however, did not address this contention in its order, leading to a claim of prejudice by the assessee. The Tribunal's omission to consider the binding order of the Co-ordinate Bench in Maruti Udyog Ltd. was deemed a mistake apparent from the record, as highlighted by the Supreme Court in Honda Siel Power Products Ltd. vs. CIT.
Issue 3: Mistakes Apparent from the Record
The assessee pointed out four mistakes by the Tribunal:
1. Contradictory statements regarding the inclusion of customs duty in the closing stock.
2. Failure to address the contention that s. 43B overrides s. 145A.
3. Non-following of the Co-ordinate Bench's decision in Maruti Udyog Ltd.
4. Overlooking the assessee's contention that similar claims were accepted by the IT Department in subsequent years.
The Tribunal acknowledged these mistakes, noting the contradiction in its findings regarding the inclusion of customs duty in the closing stock and the omission to consider the binding order of the Co-ordinate Bench. The Tribunal also failed to address the consistency rule, which was crucial as the Department had accepted similar claims in subsequent years. The Tribunal concluded that these omissions caused prejudice to the assessee and thus recalled its decision regarding the first ground taken by the Department, directing the Registry to post the appeal for fresh hearing on this ground.
Conclusion:
The miscellaneous application was allowed, and the Tribunal's decision on the first ground was recalled for fresh hearing, addressing the mistakes apparent from the record and ensuring that the assessee is not prejudiced by these errors.
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2008 (2) TMI 462
TDS deduction u/s 192 - bona fide estimate of the perquisite - valuation of free or concessional educational facilities provided to children of the teacher and staff member - assessee-in-default u/s 201(1) and 201(1A) - value of the benefit of free education exceeded Rs. 1,000 per month, the whole of the amount was to be treated as perquisite - HELD THAT:- Section 192 casts an obligation on the employer to estimate the income under the head "Salaries" and deduct tax at the average rate at the time of its payment. Section 200 casts further obligation that any person deducting any sum shall pay within the prescribed time the sum so deducted to the credit of the Central Government.
We find that the assessee had deducted a sum of Rs. 1,000 per child per month on the basis of the interpretation of the provisions given in the ready reckoner. To our mind, that interpretation may or may not have been correct, but the assessee had some basis on which the decision was taken not to deduct tax on the impugned amount of Rs. 1,000 per month per child. Therefore, unless it is shown that there was something more than mere reliance on the ready reckoner, the assessee cannot be held to be an assessee-in-default.
Assessee has been providing free educational facilities to the children of the teachers and staff members. Notwithstanding these orders of the Tribunal in the case of Bal Bharti Public School [2007 (7) TMI 347 - ITAT DELHI-G], it cannot wished away that there could have been doubts in the mind of the assessee as to whether in its case deduction of Rs. 1,000 per month per child should be allowed in valuing the perquisite of free educational facility. Therefore, its reliance on the ready reckoner was not completely misplaced and in any case such a reliance could not said to be not bona fide. Respectfully following the decision in the case of Nestle India Ltd. [2000 (1) TMI 35 - DELHI HIGH COURT] it is held that this case was not fit for passing an order under section 201(1) and consequently, under section 201(1A).
Thus, the appeals of the revenue are required to be dismissed on the finding that the valuation of the perquisite by the assessee could not be said to be not bona fide for the purpose of deeming it to be an assessee-in-default under section 201(1) and consequently levying interest under section 201(1A).
In the result, the appeals are dismissed.
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2008 (2) TMI 461
Issues:
Appeal against order canceling section 201(1) & 201(1A) orders and tax on perquisite under rule 3(e) of Income-tax Rules, 1962.
Analysis:
1. The revenue appealed against the cancellation of orders passed under section 201(1) and section 201(1A) of the Act, along with the issue of taxing perquisite under rule 3(e) of the Income-tax Rules, 1962. The Assessing Officer found that tax was not deducted at source for free educational facilities provided to teachers' and staff members' wards, leading to demands totaling Rs. 79,95,789 for two financial years. The CIT(A) held that no perquisite was taxable as the assessee did not incur expenses on the educational facilities for all employees, thus dismissing the revenue's contentions.
2. The revenue argued that no limitation applies to section 201(1) orders, citing the Prakash Nath Khanna case and the Aztec Software case, emphasizing clear statutory language interpretation. The assessee invoked the limitation plea before the CIT(A) and the ITAT, referring to the Raymond Woollen Mills case for a reasonable four-year period for interest levy under section 201(1A). The ITAT upheld the limitation argument, following precedents in the Sahara Airlines case and the Raymond Woollen Mills case, emphasizing timely action by the Assessing Officer and lack of cooperation from the assessee.
3. The ITAT concluded that orders under section 201(1) and 201(1A) were time-barred, aligning with the Raymond Woollen Mills and Sahara Airlines cases, as per the Sub-Inspector Rooplal directive. The NHK Japan Broadcasting case's non-referral to a Larger Bench affirmed the consistency in decisions, warranting adherence to established precedents. Consequently, the appeals of the revenue were dismissed based on the limitation aspect, without delving into the merits of the orders.
In summary, the ITAT upheld the dismissal of the revenue's appeals, emphasizing the time-barred nature of the orders under section 201(1) and 201(1A) based on established precedents and statutory interpretation principles, thereby highlighting the importance of adherence to legal precedents in tax matters.
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2008 (2) TMI 460
Issues involved: Validity of search authorization u/s 158BC of the Act and violation of limitation date.
For the issue of validity of search authorization u/s 158BC of the Act, the judgment highlighted that the search and seizure operation conducted were deemed invalid due to the authorization being issued by a Jt. Director of IT (Inv.) who lacked the statutory power to issue such authorization. The decision referenced the case of Dr. Nalini Mahajan v. Director of IT (Inv.) where it was held that unless an amendment is carried out, the Addl. Director does not possess the statutory power to issue authorization for search. The judgment further noted that a notification issued by the CBDT did not specify the Jt. Director of IT (Inv.) as an authorized authority under s. 132(1) of the Act. Consequently, it was concluded that the authorization was not issued by a competent authority, rendering the search invalid and resulting in the cancellation of the assessment made by the AO u/s 158BC of the Act.
Regarding the violation of the limitation date, the judgment mentioned that the assessee raised additional grounds during the hearing regarding the validity of the search and violation of the limitation date while passing the order by the Asstt. CIT, Circle 1(1), New Delhi u/s 158BC of the Act. These additional grounds were admitted as they were deemed purely legal in nature. The judgment ultimately canceled the assessment made by the AO under s. 158BC of the Act due to the invalidity of the search authorization, thereby allowing the appeal of the assessee and dismissing the appeal of the Revenue.
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2008 (2) TMI 459
Issues Involved:
1. Determination of whether the period of 41 days spent by the assessee in Pakistan, Sri Lanka, and the UK was for the performance of duties outside India.
2. Examination of the validity of the CIT(A)'s decision to treat the visits to Sri Lanka and Pakistan as work-related without the submission of a contract/appointment letter by the assessee.
3. Assessment of whether separate tax treatment should be given to on-period and off-period salaries under Explanation to section 9(1)(ii) of the Income Tax Act, 1961.
Detailed Analysis:
Issue 1: Performance of Duties Outside India
The primary issue was whether the 41 days spent by the assessee in Pakistan, Sri Lanka, and the UK were for the performance of duties outside India. The assessee, employed by The Economist, argued that the salary for these days should be exempt from Indian tax as it was earned outside India. The CIT(A) agreed, concluding that the remuneration for the period spent in Pakistan and Sri Lanka was for work done outside India. However, the Tribunal found that the assessee's visits were incidental to his assignment in India, and thus, the salary earned during these visits was taxable in India.
Issue 2: Submission of Contract/Appointment Letter
The CIT(A) held that the visits to Sri Lanka and Pakistan were on account of work done in those countries, despite the assessee failing to submit copies of the contract/appointment letter before the Assessing Officer. The Tribunal noted that the absence of an appointment letter made it challenging to ascertain the exact terms of the assessee's employment. The Tribunal emphasized that the onus was on the assessee to prove that his duties outside India were under a separate arrangement, which he failed to do.
Issue 3: Separate Tax Treatment for On-Period and Off-Period Salaries
The CIT(A) had held that separate tax treatment should be given to on-period and off-period salaries. The Tribunal disagreed, referencing section 9(1)(ii) of the Act and the Uttaranchal High Court decision in the case of CIT v. Halliburton Offshore Services Inc. The Tribunal concluded that the salary for the period spent outside India was for services rendered in connection with the assessee's assignment in India, and thus, taxable in India.
Conclusion:
The Tribunal set aside the CIT(A)'s order and restored the Assessing Officer's decision, holding that the salary earned by the assessee during his visits to Pakistan, Sri Lanka, and the UK was taxable in India. The Tribunal emphasized that the visits were incidental to his assignment in India and that the assessee failed to provide sufficient evidence to prove otherwise. The appeal filed by the revenue was allowed.
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2008 (2) TMI 458
Appellate Tribunal Jurisdiction u/s 254 - Entitlement for the benefit of section 80-IB(10) - profits derived from residential housing project - Amendment in the provisions of section 80-IB(10) extending the period for completion of eligible projects was made w.e.f. 1-4-2001 apparently because as per the pre-amended provisions, such period was prescribed up to 31-3-2001 - HELD THAT:- In the present case, what the ld. DR has sought to raise for the first time before the Tribunal is an alternative plea and not the additional plea and since the same cannot be said to change altogether the complexion of the case, we are of the view that he can be allowed to raise the same for the-first time before the Tribunal especially when the same involves legal issue which is based on the relevant provisions of law.
It is well-settled that if a particular disallowance made on one basis by the Assessing Officer which is a subject-matter of appeal can be sustained on the basis of other provisions not invoked by him, the Tribunal can invoke the said provisions to sustain the said disallowance.
It is no doubt true that the Tribunal's jurisdiction in an appeal before it is restricted only to passing orders on the subject-matter of the appeal. However, the words 'as it thinks fit' in section 254(1) even then will have to observe the prohibitions of the Income-tax Act and do not mean that the Tribunal can think 'fit' to disregard the clear mandates of the Statute.
We, therefore, overrule the objection raised by the ld. Counsel for the assessee for entertaining the new plea sought to be raised by the ld. DR and proceed to consider and decide the same on merits now.
Entitlement for the benefit of section 80-IB(10) - It is pertinent to note here that the period of commencement of the said projects in order to become eligible for benefits of section 80-IB(10) was also simultaneously specified as up to 31-3-2001 as against the period earlier prescribed as on or after 1-10-1998 which clearly means that the intention of the Legislature was to give the benefit of extended period of completion to all the projects which had already commenced on or after 1-10-1998. In this backdrop, if the interpretation to the said amendments as sought to be given by the ld. DR is accepted, the housing project commenced on or after 1-10-1998 but before 31-3-2001 and completed after 31-3-2001 would not be eligible for the benefits of section 80-IB especially in respect of profits derived from the said projects during the previous year relevant to assessment years 1999-2000 and 2000-01 which is not certainly in consonance with the legislative intention.
It is a well-settled canon of construction that in construing the provisions of beneficial legislation, the Court should adopt the construction, which advances, fulfils and furthers the object of the Act rather than the one, which would defeat the same and render the benefit illusory. It is also equally well-settled that, without doing violence to the language used, a beneficial provision shall receive fair, liberal and progressive construction so that its true objects might be promoted. In the case of Gurucharan Singh v. Kamla Singh [1975 (9) TMI 183 - SUPREME COURT], Hon'ble Apex Court has held that interpretation of social-economic legislation should further the object and purpose of the legislation.
Therefore, we find it difficult to accept the interpretation sought to be given by the ld. DR to the amendments made in the provisions of section 80-IB(10), which admittedly are beneficial provisions, because if the same is accepted, it will not only defeat the legislative intention clearly spelt out in the Explanatory Note to give the benefit of extended period of completion to all the projects which had already 'commenced, but shall also lead to the absurd results as discussed above.
Accordingly, we reject the same and uphold the impugned order of the ld. CIT(A) holding that the assessee having completed the residential project in question before 31-3-2003, it was entitled to the benefit of section 80-IB(10). Ground No. 4 of the Revenue's appeal is accordingly dismissed.
In the result, the appeal of the revenue is dismissed.
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2008 (2) TMI 457
Block Assessments for undisclosed income - Search And Seizure - Validity of AO's Jurisdiction to make assessments/reassessments in assessment u/s 153A - Addition due to retrospective amendment in the provision of section 80HHC - receipts of sale of DEPB.
Block Assessments for undisclosed income - Search And Seizure - Validity of AO's jurisdiction to make assessments/reassessments in assessment u/s 153A - HELD THAT:- From reading section 153A and second proviso to section 153A, it is further clear that on the date of initiation of search or requisition u/s 132 or section 132A the pending assessment or reassessments relating to any assessment year falling within a period of six assessment years shall stand abated but, assessment or reassessments can be done u/s 153A of the Act in cases of completed assessments or in cases where assessments have not been framed due to non-filing of returns etc. for the above-mentioned assessment years even if such assessment made u/s 153A is not based on material found during course of search. The word "abate" or "abatement" has not been defined in the Act or in the Departmental Circular. According to Chambers Dictionary the word "abate" means demolition or to put an end to.
Therefore, the contention of the learned counsel for the assessee have, no force because there is no requirement for an assessment made u/s 153A of the Act being based on any material seized in the course of search. Further, under the second proviso to section 153A pending assessment or reassessment proceedings in relation to any assessment year falling within the period of six assessment years referred to in section 153A(b) of the Act shall come to an end (abate), which means that the Assessing Officer gets jurisdiction for six assessment years referred to in section 153A(b) of the Act for making an assessment or reassessment. Further, it is not the contention of the assessee before us that any income, which was already subjected to assessment under section 143(3) or under section 143(3)/147 of the Act completed prior to search in respect of six assessment years referred to in section 153A(b) of the Act and in the second proviso to section 153A, has also been included in the assessment framed under section 153A of the Act.
Thus, the contention of the assessee in support of Ground Nos. 1 and 2 of its appeal are liable to be rejected and the same are rejected accordingly. Consequent upon our findings given hereinabove, we hold that in the existing facts and circumstances of the case the Assessing Officer was perfectly justified in framing assessment u/s 153A of the Act for the assessment years under consideration and accordingly the Ground Nos. 1 and 2 of the appeal of the assessee are rejected.
Deduction allowable under the amended provisions of section 80HHC - receipts of sale of DEPB - HELD THAT:- We hold that since in the instant case, it is clear that the assessee during the financial years relevant to assessment years under consideration has no option for choosing duty drawback or DEPB, the assessee has not fulfilled the two mandatory conditions laid down in the provisos to section 80HHC(3), though its turnover in each of the assessment years exceeded Rs. 10 crores, the tax authorities below were fully justified in coming to a conclusion that the assessee-company did not qualify for further increase by an amount which bears to 90 per cent of any sum referred to clause (iiid) of section 28 in the proportion as the export turnover bears to the total turnover of the business carried on by the assessee, hence, disentitling the assessee for deduction of the profits on the receipts of DEPB licenses under the amended provisions of section 80HHC of the Act as claimed by the assessee.
Accordingly, the impugned order of tax authorities below, in this regard are upheld and Ground No. 3 of respective appeals taken by the assessee in the instant appeals is rejected.
In the result, the instant three appeals filed by the assessee are dismissed.
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2008 (2) TMI 456
Disallowed claim for deduction u/s 37(1) - Lump sum fees paid for 'technical know-how' under the agreement - Nature of expenditure "Capital or Revenue" - depreciation on technical know-how - intangible assets - Disallowance PF contribution u/s 43B delayed payment - PF Deductions are deposited within the grace period.
Such agreement acquired exclusive ownership in contractual proprietary rights and technical know-how supplied by the German company or merely received right to use the technical know-how with the mentioned principles/guidelines in mind HELD THAT:- From analysis of the decisions referred to by both the parties following guidelines/principles can be deduced that:
(1) mere length of the period of the agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset in case the agreement itself could be terminated by any party before the expiry of the term on any of the grounds stated in the agreement. [Tata Engineering and Locomotive Co. [1979 (2) TMI 20 - BOMBAY HIGH COURT] and Shirram Refrigeration Industries Ltd.[1980 (8) TMI 72 - DELHI HIGH COURT];
(2) where lump sum payment is made only for obtaining access to information which does not become its own, the payment cannot be elevated to the status of payments of capital nature.
(3) the terms of the agreement in each case are to be taken into consideration before deciding the question of the expenditure being revenue or capital in nature on the basis of the principles laid down by the various High Courts and the apex Court in their decisions;
(4) if whole object of the agreement is only to obtain the benefit of technical know-how for running the business and the assessee does not absolutely acquire the technical know-how the expenditure incurred by the assessee for obtaining the same would be allowable as a revenue expenditure and cannot be treated as capital expenditure;
(5) the term "acquired"/"acquisition" means and implies the acquiring of the entire title of the expropriated owner, whatever the nature or extent of that title might be. The entire bundle of rights, which were vested in the original holder, would pass on acquisition to the acquirer leaving nothing in the former. [Charanjit Lal vs. Union of India [1950 (12) TMI 17 - SUPREME COURT] and in the case of Devidas Goopal Krishan vs. State of Punjab [1967 (4) TMI 131 - SUPREME COURT];
(6) in cl. 21 of the agreement where it is mentioned that the assessee is not obliged to return the documentation obtained from Kiekert after the termination of the contract, would again by itself, cannot result in the payment being treated as capital expenditure; and
(7) the entries in the books of account are not determinative of deductibility of an item of expenditure for the purposes of computation of taxable income under the provisions of the Act. [Kedarnath Jute Mfg. Co. Ltd. vs. CIT [1971 (8) TMI 10 - SUPREME COURT].
Assessee must wholly or partly own and use the asset for the purpose of its business or profession still remained as it is. It means that for the assessee to be entitled to depreciation on intangible assets as provided in s. 32(1)(ii), from AY 1999-2000, all the other conditions are still required to be fulfilled for claiming the depreciation on tangible assets like ownership of the asset and user thereof etc.
In view of clause Nos. 4.2, 4.3, 7,9, 12.1, 19, 21, 22 and 23 of the agreement, it is evident that the assessee company did not become the exclusive and absolute owner of the technical know-how received from the German company but it simply acquired a license or a limited right to use this technical know-how and, hence, the payment made by the assessee to the German company cannot be held to be on capital account but the payment is held to be on revenue account and, hence, deductible as revenue expenditure under s. 37(1) of the Act as laid down in the various cases.
Hence, for the reasons stated above, we hold that the technical know-how fee paid by the assessee, under the agreement with the German company, is to be treated as revenue expenditure and so the assessee is entitled to claim deduction under s. 37(1) of the Act of the impugned expenditure in the AY's 2000-01 and 2001-02 under consideration before us. Accordingly, the order of the CIT(A) passed in AY 2000-01 deleting the impugned addition is upheld and the order of CIT(A) passed in AY 2001-02 in sustaining the impugned addition is set aside. The ground of appeal taken by the Revenue is rejected and ground No. 1 of the appeal of the assessee is allowed.
Disallowance of PF under the provision of s. 43B - Payment by cheque Within the grace period - We are of the opinion that in case the assessee has made the payment by cheque Within the grace period and the cheque has not been dishonored, the assessee is entitled to claim deduction of this amount on account of the payment of PF through cheque under s. 43B of the Act. Hence, for this limited purpose, we restore this matter for verification to the file of AO and in case he finds the claim of the assessee to be correct he should allow the deduction to the assessee under s. 43B of the Act. With these observations, this ground of appeal of the assessee stands allowed for statistical purposes and order of CIT(A) sustaining the impugned addition is set aside.
In the result, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee stands partly allowed for statistical purposes in terms of the order passed hereinabove.
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2008 (2) TMI 455
Disallowance of interest - Expenditure Incurred - composite activity of subletting, inter-corporate deposits and investment in shares - earned dividend from investment in shares - scope and applicability of retrospective amendment and section 14A - Powers of Assessing Officer - HELD THAT:- We have examined the issue regarding applicability of section 14A by the appellate authorities and have held in earlier part of this order that CIT(A) and the Tribunal are empowered to apply the provisions of section 14A in the appeals pending before them for the assessment year 2001-02 and earlier years even if section 14A had not been invoked by the Assessing Officer or the said provision was not available at the time of assessment.
In this case, though the assessment for the assessment year 1998-99 had been completed by the Assessing Officer before section 14A was inserted on the statute, but the appeal for the said year is still pending before the Tribunal. The perusal of the balance sheet shows that in the beginning of the year i.e., on 1-4-1997, the funds available with the assessee were to the tune of Rs. 145 lakhs, which consisted of own funds of Rs. 22.60 lakhs and borrowings of Rs. 122.40 lakhs. As against that, the investments were Rs. 16.42 lakhs in fixed assets; Rs. 88.82 lakhs in shares and balance in loans and advances. The investment in shares remained for the entire year as the closing balance of share was Rs. 98.70 lakhs.
The borrowings also continued with a closing balance of Rs. 115.70 lakhs. These figures clearly show that substantial borrowings were utilized for investment in shares as own funds were only to the tune of Rs. 22.60 lakhs out of which investment in fixed assets alone was Rs. 16.42 lakhs. The investments in shares of the subsidiary company are long-term investments and are not held as trading stock. The dividend income received/receivable from the investment in shares is not taxable with effect from 1-6-1997.
In this year since the dividend was received on 9-5-1997 for earlier year, it was taxable and had rightly been offered for tax. But after the record date in may 1997 any dividend that may be received after 1-6-1997 is not taxable. Therefore, the borrowings utilized in investment of shares are not going to yield any taxable income after 31-5-1997. Thus, the interest on borrowings utilized in investment in shares for the period 1-6-1997 to 31-3-1998, is not allowable as deduction while computing the taxable income of the assessee in view of section 14A.
In fact, the assessee, before the lower authorities had made an alternate submission that disallowance of interest if any could be made only for the period 1-6-1997 to 31-3-1998. There is a prima facie case as pointed out earlier that substantial borrowings have been utilized for investment in shares. However, exact computation of interest on borrowings utilized for investment in shares will require detailed scrutiny.
We, therefore, restore this issue to the file of the Assessing Officer for quantification of interest for the period1-6-1997 to 31-3-1998 in respect of borrowings utilized for investment in shares and the same will be disallowed. The balance interest will be allowed as deduction as no other tax-free income has been brought to our notice. We order accordingly.
Consequently, the ground taken by the assessee is allowed for statistical purposes.
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2008 (2) TMI 454
Expenditure on acquire of computer software "Revenue Or Capital Expenditure" - tangible property - acquisition of know-how - business expenditure u/s. 37 - tests of ownership and enduring benefit - depreciation u/s 32 - HELD THAT:- Our conclusions on the issue under consideration thus can be summarized as under:-
(i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held relying on the decision of Hon'ble Supreme Court in the case of TCS [2004 (11) TMI 11 - SUPREME COURT].
(ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied.
(iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field.
We are of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessees in the present cases for acquiring different softwares. Since this exercise is required to be done in respect of each and every software independently having regard to the criteria laid down, we are of the view that the matter needs to be restored back to the file of the Assessing Officer for doing such exercise. The Assessing Officer shall examine the question whether expenditure on computer software is capital or revenue in the light of the criteria laid down above after giving an opportunity of being heard to the assessees. If on such examination, the Assessing Officer comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with the principles laid down in the subsequent paragraphs.
The assessee's ownership of limited right over the tangible asset is sufficient to conclude that the assessee is the owner of the Plant. There is therefore no difficulty in allowing depreciation claim at 25 per cent u/s 32(1)(i) read with Appendix-I, Part-A Division III (1) to the IT Rules, 1962. With effect from1-4-2003, Computer Software has been classified as a tangible asset under the heading "Plant" in Appendix-I to the IT Rules entitled to depreciation at 60 per cent. The assessee would be entitled to depreciation at 60 per cent from1-4-2003.
The argument of the assessee was that the amendment to the rules was merely clarificatory and therefore, even on computer software with effect from 1-41999, 60 per cent depreciation should be allowed. We do not agree with the submissions of the assessee in this regard. The amendment is prospective. It is not clarificatory for the reason that computer and computer software are two different items of assets. If the Legislature wanted to allow depreciation at 60 per cent with effect from1-4-1999 on computer software, it would have said so specifically by making the provisions retrospective. In this regard, we agree with the view expressed by the Delhi Bench of the ITAT in the case of Maruti Udyog Ltd. wherein similar view has been taken.
By the order of reference, the entire appeals in the case of M/s. Amway India Enterprises and M/s. SQL Star International Ltd. were referred for determination by the Special Bench. The arguments were heard only with regard to the issue of expenditure on Computer Software. There are other issues arising for consideration in these appeals. The same, however, are entirely different and have no interlinking whatsoever with the issue of expenditure on computer software. We, therefore, deem it proper to refer back the cases to the Hon'ble President for placing the appeals before the regular Division Bench for decision in accordance with the ruling of the Special Bench on the issue of expenditure on software and decision on other issues after hearing the parties.
Before parting, it would be our duty to explain the reasons as to why we have not made any reference to the various decisions which are specifically on the issue of expenditure on computer software. We have already noticed the question whether an expenditure is capital or revenue is dependent on facts and circumstances of a given case. We have also noticed that different minds may come to different conclusions with equal propriety. We, therefore, thought it fit to lay down general guidelines to be applied to individual cases. In the decisions of the Tribunal specifically on the issue, different considerations prevailed for the ultimate conclusion. In the case of Maruti Udyog Ltd. [2004 (10) TMI 278 - ITAT DELHI-A], Escorts Ltd.[2006 (1) TMI 186 - ITAT DELHI-G] and Hero Honda Motors Ltd. [2005 (5) TMI 265 - ITAT DELHI-G] the conclusion that the expenditure on purchase of computer software was capital proceeded on the footing that the purchase was an outright purchase and that Software was an intangible asset.
We are of the view that different considerations will apply in testing the nature of expenditure in the context of acquisition of know-how compared to expenditure on acquisition of software because know-how is an intangible asset whereas as held by Hon'ble Supreme Court in the case of TCS, software is a tangible asset.
The questions referred to this Special Bench thus are answered accordingly as indicated above. The respective appeals will now be placed for consideration before the regular Bench.
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