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2009 (5) TMI 621
Issues Involved:
1. Whether the transactions between the assessee and the entrepreneurs for the production of VCDs/DVDs are contracts for sale or work contracts under Section 194C.
2. The applicability of Section 194C and the consequent liability for non-deduction of tax at source.
3. The liability for interest under Section 201(1A) for non-deduction of tax at source.
Detailed Analysis:
1. Nature of Transactions: Sale or Work Contract
The primary issue is whether the transactions between the assessee and the entrepreneurs for producing VCDs/DVDs are contracts for sale or work contracts under Section 194C of the Income Tax Act. The assessee argued that these transactions were purchases of goods, while the Assessing Officer treated them as work contracts requiring tax deduction at source.
- The assessee was engaged in trading cassettes, VCDs, DVDs, and providing technical services and film production.
- A survey revealed that the assessee did not deduct tax under Section 194C on payments to replicators/manufacturers of VCDs/DVDs.
- The assessee contended that these were professional/technical services, not work contracts.
The Tribunal examined the business model, noting that the assessee acquired rights to multiple copies of films and outsourced the production of these copies to independent entrepreneurs. The entrepreneurs used their infrastructure, raw materials, and expertise to produce the VCDs/DVDs, bearing all associated costs and risks until delivery to the assessee.
2. Applicability of Section 194C
Section 194C mandates tax deduction at source for payments made for carrying out any work. The Tribunal analyzed whether the payments made by the assessee fell under this section.
- The Tribunal referenced Circular No. 681, which clarifies that contracts for the sale of goods are not covered under Section 194C.
- It was noted that the property in the VCDs/DVDs passed to the assessee only upon delivery, indicating a sale of goods rather than a work contract.
- The Tribunal also considered Circular No. 13/2006, which emphasized that contracts for the supply of goods fabricated as per specifications are contracts for sale if the property in goods passes upon delivery.
The Tribunal concluded that the transactions were contracts for sale, not work contracts, as the entrepreneurs bore the costs, risks, and responsibilities of production, and the property in the goods passed to the assessee only upon delivery.
3. Liability for Interest under Section 201(1A)
The Tribunal addressed the issue of interest liability under Section 201(1A) for non-deduction of tax at source.
- The CIT(A) had held that the assessee was in default under Section 201(1) but agreed that no liability for non-deduction of tax could be imposed if the payees had paid the tax.
- However, the CIT(A) upheld the interest liability under Section 201(1A) as mandatory.
Given the Tribunal's finding that the transactions were contracts for sale and not work contracts, the applicability of Section 194C was ruled out. Consequently, the assessee could not be treated as a defaulter under Section 201(1), and no interest under Section 201(1A) could be charged.
Conclusion
The Tribunal allowed the appeals, ruling that the transactions between the assessee and the entrepreneurs were contracts for sale, not work contracts. Therefore, Section 194C did not apply, and the assessee was not liable for tax deduction at source or interest under Section 201(1A).
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2009 (5) TMI 620
Issues involved:
The issue involves the disallowance of trade discount offered by the assessee under section 143(3) of the Income-tax Act, 1961, and whether it falls within the ambit of section 194H, necessitating tax deduction at source.
Details of the Judgment:
1. Background and Assessment:
The appellant, a private limited company engaged in the business of ayurvedic products, filed a return for the assessment year 2005-06 showing a loss. The Assessing Officer disallowed the trade discount offered by the appellant, treating it as commission paid to various agencies. This disallowance led to an increase in the total income of the appellant.
2. Appellant's Arguments:
The appellant contended that the trade discount was not akin to commission or brokerage. They argued that the sales were on a principal-to-principal basis, with the property in goods passing to buyers upon delivery, and no commission was paid to any agents.
3. Revenue's Position:
The Revenue argued that the discount given was a form of commission for distributing and selling the products, falling under section 194H. They contended that the transaction was not on a principal-to-principal basis but rather on a principal-to-agent basis.
4. Tribunal's Decision:
After considering the arguments and judicial precedents, the Tribunal concluded that the trade discount offered by the appellant did not attract tax deduction u/s 194H. It was held that the sales were on a principal-to-principal basis, and there was no obligation to deduct tax on the trade discount amount.
5. Precedents Considered:
The Tribunal cited cases where discounts given on goods were not considered as commission or brokerage for tax deduction purposes, emphasizing the distinction between trade discounts and commission.
6. Conclusion:
The Tribunal allowed the appeal, ruling in favor of the appellant and deleting the disallowance of the trade discount amount. The judgment highlighted that the appellant's transactions were not subject to tax deduction under section 194H, as they were on a principal-to-principal basis.
This summary encapsulates the key aspects of the judgment, including the arguments presented, the Tribunal's analysis, and the final decision in favor of the appellant regarding the treatment of trade discounts under the Income-tax Act.
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2009 (5) TMI 619
Issues Involved:
1. Deletion of disallowance under section 40A(3) by CIT(A).
2. Applicability of exceptions under rule 6DD(j) for cash payments exceeding Rs. 20,000.
Issue 1: Deletion of Disallowance under Section 40A(3) by CIT(A)
The Revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 19,52,252 made by the Assessing Officer (AO) under section 40A(3). The AO had disallowed 20% of cash payments exceeding Rs. 20,000 made by the assessee-company to its crew members, totaling Rs. 97,76,259. The AO argued that these payments were not covered by exceptions under rule 6DD(j). The CIT(A) found merit in the assessee's claim that the payments were covered by rule 6DD(j) exceptions and deleted the disallowance.
Issue 2: Applicability of Exceptions under Rule 6DD(j) for Cash Payments Exceeding Rs. 20,000
The assessee-company, engaged in supplying manpower to the Oil and Gas Industry, made cash payments to crew members who worked on offshore rigs for 28 days and returned to collect their wages. The company argued that these payments were covered by exceptions under rule 6DD(j), which allows cash payments exceeding Rs. 20,000 if certain conditions are met:
- Payment of salary after deducting income-tax.
- Employee posted temporarily for 15 days or more at a place other than their normal place of duty or on a ship.
- Employee does not maintain any bank account at such place or ship.
The AO rejected these claims, stating that the crew members were not temporarily posted for 15 days or more and that the rigs did not qualify as ships. The AO suggested that payments could be made through bank accounts to avoid disallowance under section 40A(3).
The CIT(A) accepted the assessee's arguments, relying on the Tribunal's decision in Sedco Forex International Drilling Inc. v. Asstt. CIT, which held that oil rigs are considered ships. The CIT(A) found that all conditions under rule 6DD(j) were satisfied and deleted the disallowance.
Tribunal's Analysis and Decision:
The Tribunal upheld the CIT(A)'s decision, confirming that the payments in question were covered by exceptions under rule 6DD(j). The Tribunal noted that:
- The payments were made after deducting income-tax.
- The crew members were posted on rigs for 28 days, satisfying the condition of being temporarily posted for 15 days or more.
- The rigs were considered ships, based on the Tribunal's earlier decision in Sedco Forex International Drilling Inc. v. Asstt. CIT.
- The employees did not maintain bank accounts on the rigs.
The Tribunal emphasized a pragmatic approach, as suggested by the Hon'ble Calcutta High Court in Giridharilal Goenka v. CIT, to balance legal requirements and practical hardships. Consequently, the Tribunal dismissed the Revenue's appeal and the assessee's cross-objection, which had become infructuous.
Conclusion:
The Tribunal confirmed that the cash payments made by the assessee-company were covered by exceptions under rule 6DD(j) and were not disallowable under section 40A(3). The appeal of the Revenue and the cross-objection of the assessee were both dismissed.
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2009 (5) TMI 618
Issues Involved:
1. Taxability of profits arising from the transfer of trademarks.
2. Classification of the profits as capital gains or business income.
3. Determination of the cost of acquisition of trademarks.
4. Allowability of stamp duty as a deduction.
5. Prematurity of penalty proceedings under sections 271-D, 271-E, and 271(1)(c).
6. Interest under section 234B.
Detailed Analysis:
1. Taxability of Profits Arising from the Transfer of Trademarks:
The assessee contended that the profits from the transfer of trademarks should be considered as capital receipts not liable to tax. The CIT(A) held that the profits arising from the transfer of trademarks are assessable under the head "Capital Gains" as long-term or short-term capital gains, depending on the period of holding by the appellant and its holding company. The tribunal upheld this view, stating that the transfer of trademarks and designs by the assessee to Hindustan Lever Ltd. for Rs. 110.05 crores is a transfer of a capital asset. The tribunal further clarified that the cost of acquisition and improvement of these trademarks and designs in the hands of the previous owner, Trent Ltd., is indeterminable, and hence, no long-term capital gain tax liability can be levied on the assessee.
2. Classification of the Profits as Capital Gains or Business Income:
The revenue argued that the profits should be taxed as business income. However, the CIT(A) and the tribunal held that the business of the assessee was not to deal in trademarks and designs but to earn royalty income by licensing them. Therefore, the profits from the transfer of these trademarks and designs are assessable under the head "Capital Gains."
3. Determination of the Cost of Acquisition of Trademarks:
The CIT(A) held that the cost of acquisition of these trademarks cannot be taken at "no cost" and determined the cost of acquisition to be Rs. 79.53 crores, which was the amount paid by the assessee to Trent Ltd. The tribunal noted that the cost of acquisition of the trademarks and designs in the hands of the previous owner, Trent Ltd., is indeterminable as these were self-generated assets. Consequently, no long-term capital gain tax liability can be levied on the assessee. However, if any trademark or design was registered within 36 months preceding May 1998, it would be treated as a short-term capital asset, and the Assessing Authority would be at liberty to levy short-term capital gain as per the provisions of the Act.
4. Allowability of Stamp Duty as a Deduction:
The assessee claimed a deduction for stamp duty of Rs. 1.10 crores. The CIT(A) upheld the disallowance, and the tribunal agreed, stating that the expenditure had not been incurred and thus was not allowable as a deduction under section 48(1), which allows deductions for "expenditure incurred wholly and exclusively in connection with such transfer."
5. Prematurity of Penalty Proceedings under Sections 271-D, 271-E, and 271(1)(c):
The CIT(A) held that the grounds of appeal related to the initiation of penalty under sections 271-D and 271-E of the Act are premature and dismissed these grounds. The tribunal did not find it necessary to address these grounds further as they were not pressed by the assessee.
6. Interest under Section 234B:
The assessee contended that interest leviable under section 234B should be restricted to tax payable on the returned income. The tribunal noted that this issue is consequential in nature and would depend on the final determination of the tax liability.
Conclusion:
The tribunal partly allowed the appeals of the assessee for statistical purposes and dismissed the revenue's appeal. The profits from the transfer of trademarks were held to be assessable under the head "Capital Gains," and the cost of acquisition in the hands of the previous owner was deemed indeterminable, leading to no long-term capital gain tax liability. The claim for stamp duty deduction was disallowed, and the penalty proceedings were deemed premature. The issue of interest under section 234B was left as consequential.
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2009 (5) TMI 617
Deduction u/s 10A - Interest earned on fixed deposits - Whether or not the deduction is available u/s 10A on the interest income - AO observed that the interest income on fixed deposits was in the nature of "income from other sources" as it had no relation with the activity of export of goods and merchandise - It was, therefore, held that assessee not entitled to deduction u/s 10A - No relief was allowed in the first appeal.
HELD THAT:- We find that sub-section (1) also employs the expression derived from the export of articles. But it is not the end of the matter. The expression ‘profits derived from export of articles or things or computer software’ as employed in sub-section (1) or (1A) has been given a specific meaning in sub-section (4). Once the expression ‘derived from’ having restricted scope has been specifically defined in the same section, then the meaning of such expression as understood in common parlance will not be applicable. Rather the specific meaning given to it will come into play. We further note that sub-section (4) has been worded on the pattern of section 80-IA, prior to its substitution with effect from 1-4-2000, which referred to ‘profits and gains derived from any business of an industrial undertaking’.
From the facts of the instant case it is noted that the assessee had given FDRs to the bank for obtaining credit facility. Such interest income has nexus with the business of the undertaking and falls under the head ‘Profits and gains of business or profession’ as having relation with the carrying on of the business. Similar view has been taken in the case of Motorola India Electronics (P.) Ltd.[2006 (11) TMI 541 - ITAT BANGALORE].
In our considered opinion CIT(A) was not justified in treating the interest income as not derived from the export activity. We, therefore, hold that the assessee was entitled to deduction u/s 10A in respect of the interest income. The resultant denial of deduction u/s 10A is deleted.
Appeal is allowed.
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2009 (5) TMI 616
Issues involved:
The judgment involves issues related to the exemption claimed by the assessee u/s 11 of the Income-tax Act for holding exhibitions, fulfillment of conditions as per section 11(4A), and set off of deficits against surplus income.
Exemption for holding exhibitions:
The Revenue challenged the assessee's claim that holding exhibitions was incidental to its objectives and fulfilled conditions for exemption u/s 11(4A). The Revenue argued that the Finance Act, 2008 amended section 2(15) to restrict activities involving trade/commerce/business from exemption. However, the Tribunal held that the proviso to section 2(15) was applicable only from 1-4-2009 and not for the assessment year 2004-05. The Tribunal dismissed the Revenue's grounds based on the legislative change, citing that the proviso did not apply retrospectively.
Set off of deficits against surplus income:
The issue of setting off deficits from earlier years against the surplus of the current year was raised. The Tribunal ruled in favor of the assessee, citing a decision of the jurisdictional High Court supporting the set off. The Tribunal dismissed this ground in favor of the assessee based on the High Court's decision.
Cross Objection by the Assessee:
The Assessee raised objections regarding the treatment of exhibition activity as a business activity, denial of exemption for membership subscriptions, and TDS credit. However, as the Tribunal had already dismissed the Revenue's grounds related to exhibition activities, the Cross Objections were deemed infructuous and subsequently dismissed.
In conclusion, the Tribunal upheld the assessee's claim for exemption for holding exhibitions and the set off of deficits against surplus income. The Cross Objections raised by the assessee were dismissed as they became irrelevant following the dismissal of the Revenue's grounds.
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2009 (5) TMI 615
Minimum alternate tax - "Assets Revaluation Reserve" - Capital Redemption Reserve - Computing adjusted book profit u/s 115JA - Assessment completed u/s 143(3) - CIT(A) found assessment order to be prima facie erroneous and prejudicial to the interest of the revenue - notice u/s 263 served on the assessee - CIT revised the order and directed AO to pass a consequential order - AO determined the adjusted book profit and total income at nil - Whether view taken by AO was a possible view under the law? - while working out book profits of earlier years, the assessee had claimed depreciation on the enhanced value of the assets and, therefore, a further reduction of the amount in this year would lead to double deduction.
HELD THAT:- We are of the view that the case of the ld. DR did not base upon correct legal interpretation of the clause and the proviso thereto. The reserve was created in AY 1986-87 by enhancing the value of the assets, on which depreciation was being debited to the books of account. However, for the purpose of computation of total income, the depreciation could not have been claimed and was also not allowed by AO. At the time of creation of the reserve, the provision contained in section 115JA was not there on the statute. It was inserted in the Act by Finance (No. 2) Act, 1996, with effect from 1-4-1997. Thus, it became applicable for AY 1997-98 and onwards. Therefore, insofar as computation of adjusted book profit is concerned, the creation of reserve had no implication and even it did not alter in any manner the computation of the total income. This provision remained on the statute book for AY's 1997-98 to 2000-01.
Since the reserve was not created in these years, there was no question of any adjustment in the book profit in these years at the time of its creation. Accordingly, there could have been no implication of withdrawing certain amount from this reserve and crediting it to the profit and loss account.
Therefore, the case of the ld. CIT is based on erroneous interpretation of law that the reduction could not be made in respect of amount withdrawn from this reserve as it had been credited to profit and loss account. In any case, such an interpretation is amenable to a valid difference of opinion, as held in the case of SRF Ltd.[1993 (8) TMI 124 - ITAT DELHI-D] under the analogous law contained in section 115J.
Therefore, we are of the view that in terms of the decision in the case of Malabar Industrial Co. Ltd.[2000 (2) TMI 10 - SUPREME COURT], the order cannot be said to be erroneous and prejudicial to the interest of revenue. In view of the fact that the decision of the AO was one possible view in the matter, the other cases relied upon by the ld. DR regarding lack of enquiry etc. cease to have any implication. Accordingly, it is held that the ld. CIT could not have made adjustment in respect of this matter.
Addition u/s 14A - Computation of adjusted book profits u/s 115JA - profit and loss account drawn under the Companies Act did not allocate any expenditure towards earning of the dividend income - HELD THAT:- We may at the outset consider the provisions contained in clause (f) of the Explanation to section 115JA and sub-section (1) of section 14A. Since we are dealing with the issue of expenditure relating to dividend income, a matter falling under Chapter III, it becomes clear on perusal of these two provisions that they are similar in nature. Clause (f) uses the words "expenditure relatable to any income", while section 14A uses the words "expenditure incurred by the assessee in relation to income". These words have the same meaning. We may also add here that section 14A contains two more sub-sections, sub-section (2) and sub-section (3), which do not find a place in the clause (f).
Therefore, insofar as computation of adjusted book profit is concerned, provisions of sub-section (2) and sub-section (3) of section 14A cannot be imported into clause (f).
Mixed funds - No expenditure incurred in this year for earning the dividend income - capital and free reserve far exceeded the investments - The ratio of the decision in the case of Munjal Sales Corpn.[2008 (2) TMI 19 - SUPREME COURT] is also applicable because no disallowance was made in the earlier years under aforesaid clause (f), leading to the presumption that funds were borrowed for the purpose of business. Thus, the position which emerges is that there is no evidence on record to show that the borrowed funds were deployed in the investments, the income from which was not to be included in the total income. It was also the case of the learned counsel that after making investments, no expenditure was incurred for earning dividend income and the same could not be estimated by working out certain formula. We tend to agree with this argument also.
Thus, it is held that there was no expenditure incurred by the assessee which could be related to the dividend income. In any case, on the facts of the case, two views are possible. AO chose one course of action, which was permissible under the law. Therefore, his order cannot be said to be prejudicial to the interest of the revenue because it did not find favour with the ld. CIT. In this view of the matter, these grounds are allowed.
In the result, the appeal of the assessee is allowed, and the appeal of the revenue is dismissed.
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2009 (5) TMI 614
Issues Involved:
1. Eligibility for deduction under section 80-IB of the Income Tax Act.
2. Determination of whether the industrial undertaking was formed by splitting up or reconstruction of an existing business.
Detailed Analysis:
1. Eligibility for Deduction under Section 80-IB:
The primary issue revolves around whether the assessee is eligible for deduction under section 80-IB of the Income Tax Act. The Assessing Officer (AO) denied the deduction on the grounds that the assessee did not meet the conditions stipulated in section 80-IB, specifically that the business was merely relocated rather than expanded by setting up a new industrial unit. The assessee argued that they had set up a new unit by installing new plant and machinery worth more than 80% of the total cost, which the AO rejected.
The Commissioner of Income Tax (Appeals) [CIT(A)] examined the conditions under section 80-IB and found that the assessee had indeed installed new plant and machinery, constituting 83.79% of the total cost. CIT(A) also referred to Explanation 2 to section 80-IB, which allows for the transfer of previously used machinery to a new business, provided it does not exceed 20% of the total value of the machinery used in the new business. Based on this, CIT(A) allowed the assessee's claim for deduction.
2. Formation by Splitting Up or Reconstruction:
The AO's objection was primarily that the industrial undertaking was formed by splitting up or reconstructing an existing business, which disqualifies it from the benefits under section 80-IB. The AO noted that the assessee did not provide reasons for relocating the factory and that the new setup was not an expansion but merely a relocation.
The assessee countered this by stating that they had moved from rented premises in Tirupur to a new leased premises in Tripura, investing significantly in new machinery and other assets. The learned Authorized Representative (AR) supported this claim with various judicial precedents, including cases like *CIT v. Electric Constructions & Equipment Co. Ltd.*, *CIT v. Associated Cement Co. Ltd.*, and others.
The Tribunal reviewed these submissions and the relevant judicial precedents. It highlighted that the purpose of sections like 80-IA/80-IB is to encourage the setting up of new industrial undertakings by offering tax incentives. The Tribunal referred to the Supreme Court's explanation in *Textile Machinery Corpn. Ltd. v. CIT*, which emphasized that substantial investment of new capital is essential and that the new business must be separate and distinct from the existing business.
The Tribunal also clarified that reconstruction implies continuity of the same business in an altered form, which was not the case here. The assessee had set up a new industrial unit with substantial new investments without disturbing the old business, thus not falling under the category of splitting up or reconstruction.
Conclusion:
The Tribunal concluded that the assessee had satisfied all the conditions laid down under section 80-IB. The new industrial undertaking was not formed by splitting up or reconstructing an existing business but was a separate and distinct entity with substantial new investments. Therefore, the CIT(A)'s order allowing the deduction under section 80-IB was upheld, and the revenue's appeals were dismissed.
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2009 (5) TMI 613
Issues Involved:
1. Validity of proceedings initiated under section 147.
2. Legality of reopening the assessment to disallow the deduction under section 80HHC on DEPB receipts.
3. Jurisdiction of the Assessing Officer to initiate reassessment proceedings when an appeal is pending.
Issue-wise Detailed Analysis:
1. Validity of Proceedings Initiated Under Section 147:
The Revenue contended that the CIT(A) erred in holding the proceedings initiated under section 147 as ab initio void. The CIT(A) based this on the belief that the Assessing Officer had a "change of opinion," which is not a valid reason for reopening an assessment. The Revenue argued that the Assessing Officer had not considered the DEPB issue during the original assessment, and thus, there was no change of opinion. The Tribunal agreed with the Revenue, stating that there was no evidence that the Assessing Officer had formed an opinion on the DEPB issue during the original assessment. The Tribunal emphasized that Explanation 2(c) to section 147 allows for reassessment if excessive relief has been granted, even if an assessment has been made. Therefore, the Tribunal concluded that the CIT(A)'s opinion was incorrect and that the reopening under section 147 was valid.
2. Legality of Reopening the Assessment to Disallow the Deduction Under Section 80HHC on DEPB Receipts:
The CIT(A) held that the reopening was not legally valid, as it was based on a Board's Circular, which is merely an opinion. The CIT(A) also noted that the Assessing Officer acted hastily before the amendment to section 80HHC(3) was brought into effect. The Tribunal disagreed, stating that the Board's Circular provided a valid basis for the Assessing Officer's belief that income had escaped assessment. The Tribunal further noted that the subsequent amendment to the Act justified the Assessing Officer's belief. Therefore, the Tribunal held that the Assessing Officer had a valid reason to reopen the assessment under section 147.
3. Jurisdiction of the Assessing Officer to Initiate Reassessment Proceedings When an Appeal is Pending:
The assessee argued that the Assessing Officer had no jurisdiction to initiate reassessment proceedings because an appeal was pending before the ITAT. The CIT(A) agreed, citing the case of Metro Auto Corpn. v. ITO, where the Bombay High Court held that an assessment could not be reopened while an appeal was pending. The Tribunal distinguished the present case from Metro Auto Corpn., noting that the issues in the original assessment and the reassessment were different. The Tribunal concluded that the Assessing Officer had jurisdiction to reopen the assessment under section 147, as the issue of DEPB receipts was not pending in the original appeal.
Conclusion:
The Tribunal set aside the order of the CIT(A), upholding the initiation of proceedings under section 147 and the consequent assessment. The Tribunal restored the appeal to the file of the CIT(A) for consideration on merits, as the CIT(A) had not addressed the issue of DEPB receipts on merits. Therefore, the Revenue's appeal was allowed.
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2009 (5) TMI 612
Issues Involved:
1. Whether the assessee is eligible for deduction under section 10A of the Income-tax Act, 1961.
2. Whether there was a change in ownership or beneficial interest in the assessee-company during the relevant previous year.
3. Verification of filing of Form No. III with the Registrar of Companies.
4. Alternative claim of the assessee regarding deduction under section 80HHE of the Income-tax Act.
Detailed Analysis:
1. Eligibility for Deduction under Section 10A:
The assessee, engaged in the business of development and export of IT-related software solutions, claimed an exemption of Rs. 65,75,677 under section 10A of the Income-tax Act for the assessment year 2001-02. The Assessing Officer allowed this claim during the assessment under section 143(3). However, the Commissioner of Income-tax (CIT) challenged this decision, asserting that the Assessing Officer did not properly examine the claim, particularly regarding a purported change in ownership or beneficial interest in the assessee-company.
2. Change in Ownership or Beneficial Interest:
The CIT argued that the initial allotment of 7,000 shares to Shri Ashish Vibhakar was in his individual capacity, not as a nominee of ebyz.com.LLC. This was based on various documents, including a letter from Shri Ashish Vibhakar dated 6-3-2000, minutes of the Board of Managers of ebyz.com.LLC dated 15-3-2000, and a declaration under section 187C of the Companies Act, 1956. The CIT concluded that the shareholding pattern had changed during the relevant previous year, thus impacting the eligibility for deduction under section 10A. The CIT's analysis of the shareholding patterns indicated a shift in ownership or beneficial interest, which he believed made the assessment erroneous and prejudicial to the revenue's interests.
3. Verification of Filing of Form No. III:
The assessee contended that Shri Ashish Vibhakar had always held the 7,000 shares on behalf of ebyz.com.LLC, as supported by declarations and filings with the Registrar of Companies. The CIT, however, rejected these documents as insufficient and self-serving. The Tribunal noted that the critical issue was whether the declaration in Form No. III, indicating beneficial interest, was filed within the prescribed period. The Tribunal found that neither the Assessing Officer nor the CIT had verified this crucial aspect. Therefore, the Tribunal set aside the CIT's order and remitted the case back to the CIT for verification of whether Form No. III was filed timely. If it was, the assessee's claim under section 10A should be accepted, and there would be no error in the assessment prejudicial to the revenue's interests.
4. Alternative Claim under Section 80HHE:
The Tribunal allowed the assessee to raise an alternative claim for deduction under section 80HHE of the Act before the CIT during the fresh proceedings. The CIT was directed to consider this alternative claim if the primary claim under section 10A was denied.
Conclusion:
The Tribunal allowed the appeal for statistical purposes, emphasizing the need for the CIT to verify the timely filing of Form No. III with the Registrar of Companies. If the form was filed within the due period, the assessee's claim under section 10A should be allowed. The Tribunal also permitted the assessee to raise an alternative claim under section 80HHE during the fresh proceedings.
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2009 (5) TMI 611
Issues Involved:
1. Validity and service of notice under section 143(2).
2. Fabrication of the proceedings sheet.
3. Denial of admission of fresh evidence under rule 46A.
4. Denial of inspection of records.
5. Merits of the addition of Rs. 1,51,11,635 under section 68.
6. Disallowance of other expenses amounting to Rs. 1,87,965.
7. Levy of interest under sections 234B and 234C.
Issue-wise Detailed Analysis:
1. Validity and Service of Notice under Section 143(2):
The assessee challenged the validity of the notice under section 143(2) and its service by affixture. The CIT(A) dismissed these objections, relying on section 124(3) of the Income-tax Act, which precludes questioning the jurisdiction of an Assessing Officer after one month from the date of service of the notice or the completion of the assessment, whichever is earlier. The Tribunal noted that the validity of the notice and its service are crucial and should be adjudicated before invoking section 124(3). The case was remanded to the CIT(A) for a detailed examination of the validity of the notice and its service, including the satisfaction of the Assessing Officer, direction for service by affixture, and the need for independent witnesses.
2. Fabrication of the Proceedings Sheet:
The assessee alleged that the proceedings sheet was manipulated. The CIT(A) did not address these objections adequately. The Tribunal directed the CIT(A) to re-examine these allegations, considering the legal precedents and providing a well-reasoned order.
3. Denial of Admission of Fresh Evidence under Rule 46A:
The CIT(A) rejected the additional evidence submitted by the assessee under rule 46A. The Tribunal found that the CIT(A) did not consider the illness of the assessee's mother as a sufficient cause. The Tribunal directed the CIT(A) to admit the additional evidence and adjudicate the issues afresh, considering the sufficiency of the cause and the interests of justice.
4. Denial of Inspection of Records:
The assessee's request for inspection of records was denied. The Tribunal directed the CIT(A) to allow the inspection of records to verify the veracity of the dates and entries in the proceedings sheet.
5. Merits of the Addition of Rs. 1,51,11,635 under Section 68:
The main addition by the Assessing Officer was Rs. 1,51,11,635 as unexplained credits. The assessee argued that the details of creditors were provided but not considered. The Tribunal directed the CIT(A) to re-examine the merits of the addition, considering the additional evidence and verifying the details of the creditors.
6. Disallowance of Other Expenses Amounting to Rs. 1,87,965:
The CIT(A) dismissed the grounds relating to the disallowance of other expenses as not pressed. The Tribunal found that these grounds need specific adjudication and directed the CIT(A) to provide a detailed finding on the disallowances.
7. Levy of Interest under Sections 234B and 234C:
The levy of interest under sections 234B and 234C was deemed consequential to the additions made during the assessment. The Tribunal noted that the interest is consequential and does not require specific adjudication.
Conclusion:
The Tribunal set aside all the issues to the files of the CIT(A) for fresh adjudication. The CIT(A) was directed to provide reasonable opportunities for the assessee to present additional evidence and to pass a well-reasoned, speaking order addressing all the objections and issues raised. The appeal was allowed for statistical purposes.
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2009 (5) TMI 610
Business expenditure - Bad debts written off recovered - Deduction u/s 36(1)(viia) or 41(4)? - assessee-Bank declared the amount written off as bad debts in the earlier years which has been subsequently recovered. However, same has not been offered to tax. Argument of the assessee Bank was that what was not claimed as deduction u/s 36(1)(vii), if subsequently recovered, need not be offered to tax u/s 41(4) - CIT(A) have appreciated the fact that the recoveries from such bad debts written off do not constitute income u/s 41.
HELD THAT:- We observe that by virtue of section 36(1)(viia) certain assessees like the appellant-bank are allowed to provide in a particular manner provision for bad and doubtful debts as a charge to P&L account, irrespective of the actual bad debts. If bad debts exceed the reserve, the excess amount alone can be charged to P&L account as per section 36(1)(vii), in such event section 41(4) comes to play, when the excess amount so charged to P&L account u/s 36(1)(vii) is subsequently recovered from bad debts. In this given case, the assessee asserts that the actual amount is adjusted against the reserve created by virtue of section 36(1)(viia) and had not exceeded the reserve account. Therefore, the assessee claims no amount was charged to P&L account by invoking section 36(1)(vii).
Since the assessee has not claimed bad debts u/s 36(1)(vii), but purely adjusted the amount against the reserve created u/s 36(1)(viia), section 41(4) cannot be invoked. Therefore, we are in agreement with the contentions of the assessee. Accordingly, this issue goes in favour of the assessee-Bank.
We remitted back on the file of AO to verify the other issues.
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2009 (5) TMI 609
Double taxation relief - DTAA between India and South Korea - Period of actual contract for less than 9 months in india - Mere assumption that assessee project office in India being the assessee’s PE in India - Whether case of the assessee falls under Article 5(3) as claimed by the assessee and as accepted by the ld. CIT(A) or under Articles 5(1) and 5(2), as held by the AO - Meaning of ''Permanent establishment'' - assessee is a non-resident foreign company incorporated in South Korea -
HELD THAT:- As per Articles 5(1) and 5(2), a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried out. According to Article 5(3), a permanent establishment encompasses a building site, a construction assembly or an installation project or supervisory activity in connection therewith but only where such site, project or activities continued for a period of more than 9 months.
The Tribunal, it is seen, has decided this issue in favour of the assessee and this lis has since attained finality, not resting at the Tribunal stage but culminating before the Hon’ble Supreme Court in Hyundai Heavy Industries Co. Ltd. [2007 (5) TMI 196 - SUPREME COURT]. Therein the Hon’ble Supreme Court held, inter alia, that where the permanent establishment of the assessee came to exist in India after fabrication but before installation, the profits relating to fabrication in South Korea were not taxable. The Assessing Officer in the present case has not been able to show otherwise. A project office cannot be treated as a PE, as has been held in favour of the assessee.
For AY 1995-96, the Tribunal held that PE begins to exist when the enterprise commences its business through a fixed place of business. Obviously, PE is attached to the situs of the business place in accordance with Article 5(3) of the DTAA. That being so, the provisions of Article 5(3) of the DTAA are more specific as compared to those of Articles 5(1) and 5(2) and so, the provisions of Article 5(3) take precedence over those of Articles 5(1) and 5(2). No PE of the assessee could be held to be in existing in India until the assessee began its project of "installation activities connected therewith", as per Article 5(3).
All the designated work of the assessee outside India was carried much before the dates of arrivals of structure in India. Pertinently, the duration of each of the projects was of less than 10 months, in keeping with Article 5(3) of the DTAA. The assessee duly furnished certificates in this regard. The actual contractual period was of less than 9 months.
Therefore, mere correspondence from the assessee’s Mumbai office is of no consequence in holding office of the assessee PE in India. It also does not make any difference if this office, i.e., the project office remained in existence for a number of years and it was manned by senior officers of the assessee.
Limitations set by RBI, while granting permission for opening Project office in India - Pertinently and as has rightly been taken into consideration for deciding in favour of the assessee, for each fresh contract, permission has to be sought from the RBI for opening a project office. Such permission is granted subject to limitations. These limitations are stringent. These limitations include the limitation that the office in India shall not enter into any new contract, nor shall it engage itself in any activity of a trading, commercial or industrial nature other than what may be necessary for the execution of the contract, without prior permission of the RBI. The project office is to restrict its operation exclusively to execution of the contract as approved by the Government of India. It is to meet all the expenses in India only from out of the inward remittances received from the head office through normal banking channels or the rupee amounts to be received under the contract. It is not to borrow or lend any money from/to any person in India without prior permission of the RBI. The project office, thus, undisputedly did not carry out any such activity as prohibited by the RBI from being carried out without its prior permission.
Therefore, order passed by the ld. CIT(A) is well versed inasmuch as it has followed the earlier years orders in assessee’s case passed by the CIT(A) and the Tribunal. Besides, it is a detailed order. Finding no error therein, we uphold the same. Our above observations shall, mutatis mutandis, apply to the rest of the appeals also, the facts therein remaining the same, as noted at the beginning of this order.
all the appeals of the department are dismissed.
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2009 (5) TMI 608
Issues Involved:
1. Treatment of loss on sale and purchase of shares as speculative loss.
2. Treatment of loss on devaluation of shares as notional loss.
3. Treatment of gain on disposal of Indira Vikas Patra (IVPs) as interest income instead of capital gain.
Detailed Analysis:
1. Treatment of Loss on Sale and Purchase of Shares as Speculative Loss:
The appellant contended that the loss incurred from the trading of shares should be considered as a normal business loss since the assessee was regularly engaged in the business of trading shares. The CIT(A) and the Assessing Officer treated the loss as speculative because the assessee did not receive actual delivery of the shares, and the transactions were executed through a broker. The Tribunal upheld the CIT(A)'s decision, stating that the transactions were speculative in nature as defined by the Income-tax provisions. The lack of actual delivery and the nature of the transactions supported this conclusion. Therefore, the loss incurred in such speculative transactions cannot be adjusted against the normal business profits.
2. Treatment of Loss on Devaluation of Shares as Notional Loss:
The appellant argued that the devaluation of shares held in stock should be treated as a business loss, as the shares were valued at the lower of cost or market value. The CIT(A) sustained the addition, stating that no notional loss could be allowed without actual sale. The Tribunal found that the shares held as stock-in-trade were different from those held as investments. The case was remanded to the CIT(A) for verification of whether the shares held in stock were different from those held as investments. If verified, the necessary relief would be granted.
3. Treatment of Gain on Disposal of Indira Vikas Patra (IVPs) as Interest Income:
The appellant claimed that the gain from the sale of IVPs should be treated as a capital gain since IVPs were held as investments. The CIT(A) treated the gain as interest income, following a CBDT circular that treated the difference between the issue price and redemption price of Deep Discount Bonds as interest income. The Tribunal noted that IVPs are capital assets as per section 2(14) of the Income-tax Act and that the provisions of the CBDT circular dated 15-2-2002 were not applicable retrospectively. The Tribunal held that the gain from the transfer of IVPs should be treated as capital gain and directed the lower authorities to work out the capital gain on the transfer of IVPs held as investments.
Conclusion:
The appeal was partly allowed. The Tribunal upheld the CIT(A)'s decision on treating the loss from share trading as speculative loss. However, the issue of devaluation of shares was remanded for verification, and the gain from the sale of IVPs was directed to be treated as capital gain instead of interest income.
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2009 (5) TMI 607
Rectification of mistake occurred in the intimation issued under section 143(1)(a) of the Act - Adjustment of receipt against pre-operative expenditure - whether interest earned from deposits made by the assessee is assessable to tax can only be decided after examining and verifying the purpose for which the deposit was made, the source of money to make deposit, and no uniform formula can be laid down in all cases that the interest earned on deposits during construction period prior to commencement of business would invariably be assessable to tax under head "Income from other sources". whether the assessee would be, or not liable to tax on the amount of interest, etc., simply because the assessee has made set-off of the same against expenses pending capitalisation, inasmuch as, in the present appeals, that question is not involved. whether the assessee can be held liable to tax, on this count or not - Held that:- it was wrong on the part of the Assessing Officer to reject the application under section 154 filed by the assessee. Thus, the assessee's applications under section 154 stand allowed and the intimation issued under section 143(1)(a) by the Assessing Officer shall stand rectified accordingly for the year under appeal, appeals filed by the Revenue dismissed.
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2009 (5) TMI 605
Application seeking relief in the nature of recall of order - appeals on the ground that, certain contentions, which were argued by the learned advocate for the applicant in relation to the matter in issue, were not considered and no findings thereon were given by the Tribunal while passing the said order and, therefore, there is mistake apparent from the record which would justify exercise of powers under Section 35C(2) of the Central Excise Act, 1944 - Held that:- observation by the Hon’ble High Court of Allahabad is, prima facie, observation in order to enable the party to file an application. That itself does not mean that the applicant has made out a case for grant of relief of rectification. The relief of rectification can only be granted only after the applicant makes out a case in that regard. Having failed to make out a case for rectification, the application is liable to be dismissed and is hereby accordingly dismissed.
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2009 (5) TMI 603
Refund application - GTA services - find from the record that appellants have paid the duty twice, thus they are entitled for the refund of the duty paid either on 8-12-2006 or in the year, 2005 through Cenvat account since tax is payable only once for the service received or provided one time under the Service Tax Act” - Admittedly the appellants have paid the duty twice and the denial of the credit would be unjust - Therefore, held that the refund application was filed on 8-1-2007 from the date of reversal on 8-12-2006 cannot be held to be barred by limitation.
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2009 (5) TMI 601
Disallowance of the foreseeable losses - disallowance on account of expenditure on computer software - reducing unabsorbed depreciation of earlier years while computing 'profits from the business' when granting deduction u/s 80HHE. - Held that:- Decision of the ITAT in the case of Metal Box Company Of India Limited Versus Their Workmenand (1968 - TMI - 39936 - SUPREME Court) the contention of the assessee regarding allowability of foreseeable loss is accepted in principle. However, the issue is restored to the file of A.O., for the purpose of quantification and calculation of the said loss. Disallowance on account of expenditure on computer software. - Held that:- the issue is set aside to the file of the A.O., for fresh adjudication, in the light of the Special Bench decision in the case of Amway India Enterprises. Versus Deputy Commissioner Of Income-tax, Circle - 1(1), New Delhi. (2008 - TMI - 64346 - ITAT DELHI), after affording proper and reasonable opportunity to the assessee. Reduction of Unabsorbed Depreciation of Earlier Years. - Held that:- deduction under Chapter VIA are to be allowed only on net income and not on gross income. The net income is to be computed after giving full effect to the provisions of sections 80AB, 32, 70, 71 & 72 of the Act. decided against Assessee.
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2009 (5) TMI 600
Arms length price - 100 per cent EOU - Transactions with associated enterprises (AEs) - CUP or TNMM method - assessee submitted that it is neither practical nor desirable for the assessee company to directly deal with third party suppliers in UK-particularly when the assessee has an AE, with several decades of experience in this line, in UK - With regard to import of raw material from AEs, the TPO noted assessee's stand that the Authorised Representative purchases raw material on behalf of the assessee and exports the same to the assessee company on bulk basis - although Chapter X has title 'Special provision relating to avoidance of tax' and aim of various sections under Chapter X is to check avoidance of taxes, diversion of income and funds by non-residents from India, it is not necessary that AO must demonstrate such avoidance and diversion of tax before invoking provisions of ss. 92C and 92CA. - the transfer pricing provisions could not have been invoked on the facts of this case, as the assessee did not have any tax avoidance motive, is hereby vacated. Regarding method of computation of ALP - It is an undisputed position that the imports of raw material, which mainly consist of copper and lead, are charged by the AE on the basis of rates prevailing at London Metal Exchange. and certain mark up thereon - once it is not in dispute that the billing by the AE for raw materials supplied to the assessee is done on the basis of the London Metal Exchange prices plus certain mark up, there is no further need of the internal comparables since London Metal Exchange, being an independent organization entering into transparent and arm's length transactions with a number of other organizations, provides the most reliable prices at which uncontrolled comparable transactions are entered into - assessee had offered the comparison of gross profit mark up margin of the assessee company on transactions with AEs with gross profit mark up margin of the assessee company on transactions with unrelated parties. which in our considered view. was a sufficient basis for determination of ALP under r. 10(1)(c) - Held that: TNMM was indeed not the appropriate method of determining ALP on the facts of this case, these comparables are no longer relevant. We decline to go into that aspect of the matter/issues as it is now purely academic aspect - Appeal is dismissed
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2009 (5) TMI 598
Reassessment - Whether in the given facts and circumstances of the case, the notice issued under s. 148 was served on the assessee as per law or not. If so, to what effect - On the address, Shri Jawahar Lal uncle of the assessee was found and who refused to receive the notice and told that Shri Arun Lal is out of India - assessee also raises an objection that the said notice under s. 148 was never received by him and this fact is recorded by the AO in the assessment order also - here is no material on record to suggest or to hold that any sincere attempt was made by the Revenue to make the service through normal mode Regarding applicability of section 292BB - in the case of Madan Lal Agarwal vs. CIT (1982 -TMI - 28542 - ALLAHABAD High Court) has held that a notice contemplated by s. 148 is a jurisdictional notice for initiating proceedings for making an assessment under s. 147 and any defect in that notice cannot be cured by anything done by the ITO subsequently - Tribunal has rightly held that s. 292B of the Act will have no application to the facts of the present case. The said section condones the invalidity which arises merely by reason of any mistake, defect or omission in a notice, if in substance and effect, it is in conformity with or according to the intent and purpose of the Act - Appeal is allowed
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