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2007 (3) TMI 308
Issues Involved:
1. Classification of royalty income as business income or income from other sources.
2. Allowability of expenditure claimed against royalty income.
3. Setting off brought forward unabsorbed depreciation.
Summary:
Issue 1: Classification of Royalty Income
The primary issue was whether the royalty income should be treated as "business income" or "income from other sources." The AO argued that the business was discontinued in 1996 and thus, the royalty income should be classified as income from other sources. However, the CIT(A) and ITAT found that the manufacturing activity was temporarily suspended due to the sealing of the premises by the District Collector and not permanently discontinued. The assessee continued to exploit its commercial assets, such as brand names, through "manufacturing and selling license agreements" with various parties. The ITAT concluded that the royalty income was indeed business income, as the assessee intended to resume its manufacturing activities once circumstances became conducive.
Issue 2: Allowability of Expenditure
The AO disallowed various expenditures claimed by the assessee, arguing that these expenses were related to a closed business and not necessary for earning royalty income. However, the CIT(A) and ITAT disagreed, stating that the expenses were incurred for the purpose of business operations. The ITAT emphasized that litigation expenses, retrenchment compensation, advertisement expenses, and payments to MCD were intimately connected with the running of the business. The ITAT cited several Supreme Court cases, including *Shri Meenakshi Mills Ltd. vs. CIT* and *Sassoon J. David & Co. (P) Ltd. vs. CIT*, to support the allowability of these expenditures as business expenses.
Issue 3: Setting Off Brought Forward Unabsorbed Depreciation
The AO did not allow the set-off of brought forward unabsorbed depreciation, arguing that the business was not in existence. However, the CIT(A) and ITAT found that the business was temporarily suspended and not discontinued. Therefore, the ITAT directed the AO to allow the set-off of brought forward unabsorbed depreciation as per the provisions of the IT Act.
Conclusion:
The ITAT upheld the CIT(A)'s decision to treat the royalty income as business income, allow the claimed expenditures, and permit the set-off of brought forward unabsorbed depreciation. The appeal of the Revenue was dismissed.
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2007 (3) TMI 307
Depreciation u/s 32(1) - under the head "Intangible assets being copyrights, business and commercial rights"- Professional expenses - Disallowance of deferred revenue expenditure - Production and telecasting of TV serials - HELD THAT:- We agree with the learned AO that 'goodwill' as it is, is not eligible for claim of depreciation. When the AO himself has computed the value of goodwill at Rs. 1,59,480, there is no reason for declining the claim of depreciation on the balance part of consideration paid for acquiring various tangible and intangible assets, rights, etc. There is no dispute for allowing depreciation on tangible assets.
For intangible assets also, sub-cl. (ii) of s. 32(1) of the Act provides that know-how, patents, trademark, licenses, franchise or any other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April, 1998 are eligible for claim of depreciation. Expln. (2B) to s. 32(1) of the Act is also very much clear and provides for depreciation on these assets.
Thus, we can conclude that total value of tangible and intangible assets transferred to the assessee company, as per the valuation arrived at by Anand Parikh & Co., amounts to Rs. 4.22 crores. While valuing the intangible assets in the form of copyright, telecast rights, etc., the price offered by Doordarshan to the assessee company was taken into consideration. After having a negotiation with the transferee firm, the entire deal was finalized at a purchase consideration of Rs. 3.32 crores, as against valuation of Rs. 4.22 arrived at by the valuer, which is also supported by the agreement dt. 31st March, 2000 entered into by the assessee with the transferee firm. Both the agreement as well as valuation report were submitted to the AO. The AO himself has carried out independent valuation of the goodwill as per the prescribed norms which works out to Rs. 1,59,480.
We hereby accept the valuation of the goodwill as done by the AO, on which the assessee is not eligible to any claim of depreciation. After reducing the value of tangible assets amounting to Rs. 32.30 lacs and the value of goodwill arrived at Rs. 1.59 lacs, from the purchase consideration there remains a sum of Rs. 2.98 crores attributable to copyrights, telecast rights, commercial rights, etc. on which the assessee is entitled to allow depreciation as per Expln. (2B) to s. 32(1) of the Act. We direct accordingly.
Allowance Of Professional charges - HELD THAT:- We found that expenses were incurred for increasing the capital base of the assessee company, the same were essential in the nature of capital expenditure. We are, therefore, inclined to agree with the ld DR, that no interference is warranted in the orders of the lower authorities, disallowing assessee's claim of professional expenses.
Disallowance of deferred revenue expenses - HELD THAT:- As the expenses were incurred on production of films and no new assets were acquired by the assessee, the same is liable to be allowed deduction, notwithstanding the fact that part of such expenditure was carried to the balance sheet as "deferred revenue expenses". As the AO had already allowed 50 per cent of these expenses, which were debited to P&L a/c by treating the same as revenue expenses, there is no reason to disallow remaining 50 per cent of very same expenses, merely on the plea that it was treated by the assessee as deferred revenue expenses in the books of account.
Mere entry in the books of account cannot disentitle the claim of deduction of expenses which the assessee is entitled to claim as per provisions of IT Act, 1961, while computing its taxable income for income-tax purposes. For the purpose of income-tax what is to be taxed is the real income hence deferred revenue expenditures were claimed in full in computation of income in spite of carried forward of fifty per cent of the deferred revenue expenditure in the books of account. Moreover, this method of accounting is being continuously followed by the company and the company has claimed deferred revenue expenditure in full in the income-tax computation in the asst. yrs. 2000-01 and 2002-03 as well besides 2001-02 which is in the appeal. As a matter of abundant caution, the AO may keep watch on such expenses in the subsequent years, which are now carried in the balance sheet as "deferred revenue expenses". The assessee is not entitled for any depreciation on such expenses being carried to the balance sheet. We direct accordingly.
In the result, the appeal of the assessee is partly allowed.
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2007 (3) TMI 306
Computation Of Total Turnover - expenses incurred in foreign exchange for providing technical services outside India - Whether, in absence of the definition of the term "total turnover" in s. 10A, it should be interpreted by having recourse to the definition of the term "export turnover" furnished in the section? - HELD THAT:- It has also been pointed out that the deduction has to be computed under sub-s. (4) on the basis of the ratio of "export turnover" to the "total turnover". In the case of Sudarshan Chemicals Industries Ltd.[2000 (8) TMI 73 - BOMBAY HIGH COURT], a similar question confronted the Hon'ble Bombay High Court u/s 80HHC. The definition of the "export turnover", in s. 10A excludes from its ambit any expenses incurred in foreign exchange in providing technical services outside India. In view of the decision in the case of Sudarshan Chemicals Industries Ltd., such expenses will have to be included (sic-excluded) from the total turnover also.
Therefore, we are of the view that the learned CIT(A) was right in holding that the total turnover shall not include expenses incurred in foreign exchange in providing technical services outside India - In result, the appeal is dismissed.
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2007 (3) TMI 305
Issues:
Appeal against CIT(A) order for assessment year 1997-98; Dismissal of petition under section 154; Rectification of intimation under section 143(1); Application under section 154 dated 10-4-1999; Notice under section 143(2); Revised return filed under section 139(5); Assessment order under section 144; Request for rectification made after notice under section 143(2); Applicability of section 143(1B); Case laws cited; Rejection of application under section 154; Interpretation of relevant legal provisions.
Detailed Analysis:
1. The appeal was filed against the order of CIT(A) for the assessment year 1997-98. The appellant contended that the petition under section 154 was wrongly dismissed by the CIT(A), citing a mistake apparent from the record in the intimation under section 143(1) and the subsequent revised return filed under section 139(5) on a later date.
2. The appellant initially filed the return of income within the prescribed time, which was processed under section 143(1)(a) resulting in a demand due to missing TDS certificates and self-assessment tax details. Subsequently, a notice under section 143(2) was issued, and a revised return was filed after the notice, leading to a request for rectification under section 154 to align with section 143(1B) provisions.
3. The Assessing Officer rejected the application under section 154, stating no apparent mistake in the intimation under section 143(1). The CIT(A) concurred, emphasizing that rectification post-notice under section 143(2) was impermissible, citing legal precedents like Lakhanpal National Ltd. and Bombay Snuff Co.
4. The appellant's representative argued for the rectification based on the mandatory provisions of section 143(1B) and referenced the case of Janatha Tile Works Ltd. to support the contention that rectification could be validly considered even after assessment.
5. The ITAT considered the arguments, reviewed the relevant legal provisions, and upheld the decision of the CIT(A) to dismiss the appeal. The tribunal highlighted that the revised return and rectification application were filed after the notice under section 143(2), making rectification of the intimation under section 143(1) impermissible based on established case laws and legislative intent.
6. The tribunal referenced various case laws, including Gujarat Electricity Board, Gujarat Poly-AVX Electronics Ltd., Lakhanpal National Ltd., and Punjab National Bank, to reinforce the principle that rectification post-notice under section 143(2) was not permissible under the Income-tax Act.
7. The tribunal reiterated the significance of section 143(1B) in allowing amendments to intimation based on revised returns but emphasized that such amendments must align with the procedural requirements and timing specified in the Act, precluding rectification post-notice under section 143(2).
8. Ultimately, the tribunal upheld the dismissal of the appeal, affirming the decision of the CIT(A) and emphasizing the procedural adherence to statutory provisions and legal precedents in matters of rectification post-assessment notices.
This detailed analysis of the legal judgment provides a comprehensive overview of the issues involved, the arguments presented, the legal provisions considered, and the final decision rendered by the ITAT Delhi-D.
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2007 (3) TMI 304
Block Assessment in search case - Whether the defect in the notice u/s 158BC which gave less than 15 days' to the assessee to file the return affects the validity of the assessment so that it should be annulled or quashed or whether it is a mere procedural irregularity which can be cured, with the result that the assessment may only be set aside to be reframed after curing the defect? - HELD THAT:- We find that section 158BC in no uncertain terms requires an Assessing Officer to serve a notice to searched person requiring him to furnish a return of income for the Block Period within such time not being less than 15 days, as may be specified in the notice. Legislatures do not enact anything in the statute without any intent or purpose. Hence, it cannot be held that the statutory provision specified in the Act for notice of a minimum period of 15 days for filing of the return is without any intent or purpose.
Thus, in our considered opinion a notice served under section 158BC allowing a period less than the statutory specified time period of clear 15 days is in breach of the specific provision made in this respect in the statute and that such a defective notice cannot be held to be in substance and effect in conformity with or according to the intent of the Act. Further, such a defect is also not merely inconsequential technicality. When we examine the provisions of section 158BFA(1) it is observed that an assessee is liable to pay interest for a period which is determined with reference to the time allowed in the notice under section 158BC of the Act and thus, a short period allowed in the notice affects the liability of an assessee.
On service of such a defective notice u/s 158BC, a procedural irregularity has taken place which can be cured by serving a valid notice. It have been vehemently argued before us that the Assessing Officer cannot complete the Block Assessment without service of a valid notice u/s 158BC of the Act and we are in full agreement with the said proposition. As the Assessing Officer had the jurisdiction to make the Block Assessment, and after the bestowing of jurisdiction on him, a procedural irregularity has taken place, it is open to him to correct the procedural irregularity and then complete the block assessment. Hence, we also find ourselves in agreement with the contention of the learned D/R that in such a case the assessment should be set aside for being redone de novo from the stage where irregularity had occurred and the assessment proceedings cannot be declared null and void.
We set aside the impugned order and restore the matter to the file of the Assessing Officer for passing the order de novo after issuing a valid notice u/s 158BC in accordance with the law. In view of our decision to set aside the entire assessment for reframing of the same afresh as per law, at this stage we refrain from adjudicating the other issues raised in the appeals under consideration on merit.
In the result, the appeals filed by the assessee are allowed for the statistical purposes.
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2007 (3) TMI 303
Issues:
Appeal against order of CIT(A) under s. 143(3) for asst. yr. 1999-2000 - Increase in book profit under s. 115JA by disallowing loss on sale of vehicle debited to P&L a/c - Jurisdiction of AO to make adjustments under Explanation to s. 115JA - Correctness of AO's action in re-computing profit under s. 115JA - Whether loss on sale of assets is a capital loss - Compliance with provisions of Companies Act, 1956 for preparing P&L a/c - Power of AO to alter book profit under s. 115JA.
Analysis:
The appeal was filed against the order of CIT(A) for the assessment year 1999-2000, challenging the action of the Assessing Officer (AO) in passing an order under s. 154 of the IT Act, 1961 to increase the book profit computed under s. 115JA by disallowing the loss on the sale of a vehicle debited to the Profit & Loss (P&L) account, on the grounds that it was a capital loss. The AO added the loss on the sale of assets to the declared net profit, resulting in a higher book profit under s. 115JA. The CIT(A) upheld the AO's decision.
The contention of the assessee was that there was no mistake apparent from the record as the loss on the sale of the vehicle was correctly debited to the P&L account as per the prescribed accounting system. The Authorized Representative argued that the AO exceeded his jurisdiction by adding the loss debited in the P&L account, which was incurred on the sale of fixed assets, as none of the clauses in the Explanation to s. 115JA allowed for such adjustment.
On the other hand, the Departmental Representative argued that the AO correctly added back the loss on the sale of vehicles as it was a capital loss, and the AO had the power to make adjustments while computing the book profit under s. 115JA. The Tribunal analyzed the provisions of the IT Act, 1961, s. 154 read with s. 115JA, and the Companies Act, 1956 regarding the preparation of the P&L account.
The Tribunal held that the AO's jurisdiction to alter the book profit under s. 115JA was limited to the adjustments provided in the Explanation to s. 115JA. Since none of the clauses in the Explanation allowed for adjusting the actual loss debited on the sale of vehicles, the AO's action was deemed to be beyond the scope of the law. The Tribunal cited a Supreme Court case to emphasize the limited power of the AO in computing book profits under s. 115J.
Furthermore, the Tribunal distinguished between the computation of book profit under s. 115JA and the computation of profits under the IT Act, highlighting that while a loss on the sale of fixed assets is added back for taxable income computation, it is not required to be added back for book profit under s. 115JA. Therefore, the Tribunal concluded that there was no merit in the AO's action to enhance the book profit under s. 115JA by invoking powers under s. 154, as there was no mistake apparent from the record in debiting the loss on the sale of assets to the P&L account. Consequently, the appeal of the assessee was allowed.
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2007 (3) TMI 302
Applicability Of s. 5(2) r/w s. 9(1)(i) - DTAA between India and Canada - Method of accounting - denial of claim of appellant for attribution and apportionment of profit between Permanent Establishment (PE) in India and the Canadian Office (HO) - "fees for technical services" as defined in Expln. 2 in s. 9(1)(vii) of the Act, the income be computed as per the provisions of s. 44D of the Act and the tax may be charged as per s. 115A of the Act - HELD THAT:- Sec. 5(2) provides that subject to the provisions of this Act, the total income of a person who is a non-resident shall include all income from whatever source derived which (a) is received or deemed to be received in India; (b) accrues or arises or is deemed to accrue or arise to him in India. Sec. 9(1) provides that following income shall be deemed to accrue or arise in India. Clause (i) of s. 9(1) provides that all income accruing or arising directly or indirectly through or from any business connection in India. Thus, applying s. 5(2) r/w s. 9(1)(i) it can be held that the income accruing by way of execution of the Chamera project in India accrues in India and accordingly liable to tax in India.
There was composite contract for rendering services in connection with setting up of Hydroelectric project. Even if it is considered that part of work in relation of such services was carried out out side India, the services are the same as rendered by the PE in India. It is also fact that the invoices were raised through the PE in India which are accounted for in the books of project office set up in India. The work executed has been effected through the PE in India. Thus, even if admitting that merely 30 per cent of the part A work as contained in document No. 2 to the agreement dt.18th July, 1999 is attributable to Head Office in Canada, since it is of the same or similar kind as effected through the PE in India, profit attributable to such transaction is also chargeable to tax in India. The contention of learned counsel for assessee would have been valid had the art. 7 of the DTAA would have been on the basis of OECD Model Convention. However, the fact remains that the same is not so and in view of cl. (b) of sub-art. (1) of art. 7 of DTAA, whole of the profit in respect of Chamera project is to be taxed in India.
Thus, though in view of s. 5(2) r/w s. 9(1)(i) of the Act, and also r/w art. 7(1) of the DTAA, broadly the principles of attributions are acceptable yet in view of cl. (b) of sub-art. (1) of art. 7 of DTAA between India and Canada, no part of the profit from the execution of Chamera project can be excluded while computing the profit of the appellant non-resident in India. Accordingly, ground No. 2 raised in this regard is to be dismissed.
Income by way of fees for technical services - It is clear that the services of the assessee are technical services as defined in Expln. 2 to s. 9(1)(vii) of the Act. The assessee also does not dispute that the services are technical services. As per s. 44D while computing the income by way of fees for technical services, no deduction in respect of any expenditure or allowance is to be allowed. As per s. 115A(1)(b), where the total income of a foreign company includes any income by way of fees for technical services received from an Indian concern, the amount of income-tax on the income by way of fees for technical services shall be 20 per cent where such fees for technical services are received in pursuance of an agreement made after 31st May, 1997.
Since admittedly the assessee received fees for technical services as defined in Expln. 2 to s. 9(1)(vii), the same can be taxed as per the provisions of s. 44D r/w s. 115A of the Act. Since the assessee has chosen to be governed by the provisions of the IT Act, the AO shall compute the income as per s. 44D r/w s. 115A of the Act. Thus, the alternate plea raised on behalf of the assessee is accepted and the AO is directed to compute the tax liability in consonance with the above finding.
Addition made as alleged under statement of contractual proceeds - This is evident from the invoice raised by the assessee. As per the terms of contract, the invoice can be raised provided the work completed has reached billable stage. Accordingly, in respect of work done upto31st March, 2001, invoice NO.6 which contains a sum of over Rs. 3.94 crores, a sum of Rs. 3.09 crores has been accounted for. The credit by NHPC or deduction of tax by NHPC cannot be concluded as accrual of income in favour of assessee. Since the assessee raised the bill on 11th June, 2001 though pertaining to January till April, 2001, but since the payments were received prior to close of the accounts and audit thereof, instead of showing the work-in-progress the assessee has accounted for entire income in relation to work done between January and March, 2001 though claimed in the bill raised on 11th June, 2001. It is also to be noted that bill dt.11th June, 2001 also contains the period 1st April, 2001 till 30th April, 2001. Thus, the income for this period cannot be said to have been accrued before the close of the financial year on 31st March, 2001.
It is settled law that tax is payable on accrual of income and not on the basis of entries made by the payer or deduction of tax on such credit to the account, rather the provision is otherwise. As per s. 199, credit for tax deducted at source is allowable in the year in which the income comprised in such certificate is assessable. Thus, the reverse is not the law. The AO has merely presumed that since the amount has been credited by NHPC and since the work pertaining to J.P Industries Ltd. has been completed, the work of assessee is also completed. In our opinion, this presumption is not based on facts established in this regard. The assessee raised the running bill from month to month on the basis of work to be executed by it and not on the basis of work completed by J.P. Industries.
Since the value of work done is also part of the invoices raised in subsequent year and which is accounted as income in the subsequent year, we find that the assessee is following proper method of accounting for such contract receipts based on percentage completion method.
We accordingly do not find any justification to treat the income accruing in subsequent year as income of the year under appeal. We accordingly delete the addition as alleged under statement of contract proceeds.
In the result, the appeal of assessee is partly allowed.
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2007 (3) TMI 301
Issues Involved:
1. Applicability of Sections 234B and 234C for interest levy on non-resident assessee under Section 172(7).
2. Validity of rectification under Section 154 for levying interest under Sections 234B and 234C.
3. Impact of CBDT Circulars No. 730 and No. 9 of 2001.
4. Interpretation of Supreme Court's decision in A.S. Glittre D/5I/S Garonne v. CIT.
Issue-wise Detailed Analysis:
1. Applicability of Sections 234B and 234C for interest levy on non-resident assessee under Section 172(7):
The Tribunal examined whether a non-resident assessee, opting for assessment under Section 172(7), is liable for interest under Sections 234B and 234C. It was noted that Section 172 provides a special mechanism for the assessment of non-resident shipping companies, overriding other provisions of the Income-tax Act. The Tribunal emphasized that Section 172 is a complete code in itself, with no obligation for the non-resident to pay advance tax under Sections 207/208, and thus, no liability for interest under Sections 234B and 234C arises. The Tribunal also highlighted that the option under Section 172(7) is for the benefit of the assessee and can be exercised at any point during the assessment year, negating the possibility of advance tax payment.
2. Validity of rectification under Section 154 for levying interest under Sections 234B and 234C:
The Tribunal discussed whether the rectification of the assessment order under Section 154 to levy interest under Sections 234B and 234C was justified. It was concluded that Section 154 could only be invoked to rectify a clear and apparent mistake, not for debatable issues. The Tribunal found that the issue of charging interest under Sections 234B and 234C involved highly debatable points, such as the applicability of advance tax provisions to non-resident shipping companies and the retrospective application of CBDT Circulars. Therefore, it was held that the rectification under Section 154 was not valid.
3. Impact of CBDT Circulars No. 730 and No. 9 of 2001:
The Tribunal analyzed the relevance of CBDT Circulars No. 730 and No. 9 of 2001. Circular No. 730 clarified that non-resident assessees under Section 172 were not liable for advance tax and, consequently, not liable for interest under Sections 234B and 234C. This circular was withdrawn and replaced by Circular No. 9 of 2001, which stated that non-resident assessees opting for regular assessment under Section 172(7) were liable for interest under Sections 234B and 234C. The Tribunal held that Circular No. 9 of 2001 was based on a misinterpretation of the Supreme Court's decision in A.S. Glittre D/5I/S Garonne and was not binding on the assessee. The Tribunal concluded that Circular No. 730 was correctly issued and should be given effect.
4. Interpretation of Supreme Court's decision in A.S. Glittre D/5I/S Garonne v. CIT:
The Tribunal examined the Supreme Court's decision in A.S. Glittre D/5I/S Garonne, which held that payments under Section 172(4) are treated as advance tax by legal fiction, entitling the assessee to interest on refunds. The Tribunal clarified that the Supreme Court did not hold that non-resident assessees were liable to pay advance tax under Sections 207/208. The Tribunal emphasized that the decision was misinterpreted by the Revenue and the CBDT Circular No. 9 of 2001. It was concluded that the Supreme Court's decision did not justify the levy of interest under Sections 234B and 234C.
Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the interest charged under Sections 234B and 234C, confirming that non-resident shipping companies assessed under Section 172 are not liable for advance tax and corresponding interest. The rectification under Section 154 was deemed invalid due to the debatable nature of the issues involved. The Tribunal dismissed the Revenue's appeal, emphasizing the correct interpretation of relevant provisions and judicial decisions.
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2007 (3) TMI 300
Disallowance u/s 37(1) - Capital Or Revenue Expenditure - expenditure incurred on "promotional and trade marketing expenses" in relation to the existing products and on "product development expenses for new products - manufacture and sale of food and health care - HELD THAT:- The assessee is engaged in the business of manufacturing of fast moving consumer goods. The business of the assessee is subjected to volatility in consumer preferences, tastes and wants. The assessee is therefore required to perennially study the market and launch new varieties in its products line and meet the competition in the market. In our humble opinion the expenditure in question has merely enabled the assessee to remain competitive in the market and retain the customer preferences and/loyalty towards its brand of products. The said advantage certainly is not limited to the period under consideration but spills over to the future also. So however this is not conclusive to hold that the expenditure in question is a capital expenditure. The parity of reasoning laid down by the apex Court in the case of Empire Jute Co. Ltd.[1980 (5) TMI 1 - SUPREME COURT] is squarely applicable with respect to such expenditure also.
We are unable to appreciate as to how can it be said that mere development and introduction of new varieties of products result in creation at a new line of business. Factually speaking, prior to the development and introduction of the impugned new products the assessee was in the business of manufacturing and sale of food and health care products. Even post development and introduction of new products, the business of the assessee remains that of manufacturing and sale of food and health care products.
Therefore it is erroneous to conclude that the assessee acquired a new line of business by merely developing and introducing new products in the existing line of business. The new products clearly relate to the same line of business that the assessee has been hitherto carrying on. Therefore, on above consideration also the plea of the assessee that the expenditure in question is a revenue expenditure deserves to be upheld.
In conclusion, we hold that having regard to the aforesaid discussion the claim of the assessee for allowability of impugned expenditure as revenue expenditure is justified. We, therefore set aside the order of the CIT(A) and direct the AO to delete the addition.
Disallowance on interest u/s 36(1)(iii) - capital borrowed for setting up a new plant - HELD THAT:- It is evident that the deduction in respect of interest paid on borrowed money utilized for investment in capital assets acquired in connection with the expansion of existing business is an allowable deduction. Therefore on the basis of the aforesaid, we do not find any infirmity in the claim of the assessee that the impugned expenditure was an allowable deduction in terms of s. 36(1)(iii) of the Act. Similar proposition has also been upheld by the Tribunal in the assessee's own case for the asst. yr. 1992-93.
Therefore, we conclude by holding that since the impugned interest on borrowed capital is in respect of monies utilized for the purposes of assessee's business inasmuch as it was in connection with the expansion of the existing business, the said expenditure is allowable as a deduction u/s 36(1)(iii) of the Act. Therefore, we set aside the order of the CIT(A) and direct the AO to allow the impugned deduction. Thus on this ground the assessee succeeds.
Expenditure incurred on implementation of a new ERP package for recording of manufacturing and recording transactions - nature of the expenditure - HELD THAT:- The details of the expenditure reveal that the majority of heads of expenses are relating to salaries, employees' travelling cost, other routine business expenditure like postage, stationery, employees' training seminars, consultancy expenses etc. The first aspect is that the expenditures in question by itself do not result in acquisition of any asset in the hands of the assessee. The impugned expenditure also is not related to the actual acquisition of the ERP package and on this count, even the AO does not dispute the factual situation. The stand of the AO for treating the expenditure, as capital is that the said expenditure has brought enduring benefits to the assessee.
It is also pertinent to mention that even prior to the implementation of the new ERP package, the assessee has been carrying on the impugned activities. The only change is that with the implementation of the new ERP package, the assessee seeks to carryon such activities more smoothly, efficiently and meaningfully so as to enable the assessee to take business decisions. The expenditure in question is merely incurred on implementation of the new package. Therefore, our inference that the impugned expenditure has only enabled the assessee to carryon its business efficiently and smoothly.
Therefore, while in principle, we uphold the stand of the assessee that the expenditures of the nature which have been incurred in the implementation of the new ERP package, are revenue expenditures, insofar as it relates to the aforesaid two expenditures, we deem it fit and proper to direct the AO to ascertain their nature and thereafter decide the issue. For this limited purpose, we hereby set aside the order of the CIT(A) and restore the matter to the AO to carry out the aforesaid exercise. The assessee shall provide the necessary details to the AO and also justify that the same was of revenue nature in consonance with our discussion in the aforesaid paras.
In view of the discussion, on this ground the assessee succeeds to the above extent.
Nature Of expenses - expenditure incurred towards the renovation/improvement of leased building - Terms of Expln. 1 appended to s. 32(1) - HELD THAT:- A mere perusal of the details of expenditure listed on the paper book reveals that the heads of expenditure listed out are numerous and inter alia include travel expenses, statutory expenses, shifting/installation expenses etc. which purportedly are of revenue nature. However there are other expenditure heads which would need verification of facts since the requisite details are not on record. Therefore, for this purpose we deem it fit and proper to set aside the order of the CIT(A) and direct the AO to carry out the necessary exercise in this regard. The AO shall carry out the verification exercise to ascertain which expenditures are falling within the purview of Expln. 1 to s. 32(1) out of the expenditure in question. The AO shall bear in mind that only such expenditures which are of capital nature alone are includible within the purview of Expln. 1 to s. 32(1). The assessee shall provide the necessary details in this regard and also have liberty to make such further submissions in support of the return of income on this issue. The AO shall also take into consideration the case laws adverted to by the assessee before us in determining the nature of the expenditure in question. Thus on this, aspect we conclude by holding that the assessee succeeds for statistical purposes.
In conclusion, all the appeals of the assessee are partly allowed.
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2007 (3) TMI 299
Issues Involved:
1. Justification of the Assessing Officer in rectifying his earlier order under section 143(3) to withdraw the set-off of brought forward long-term capital loss.
2. Jurisdiction of the Assessing Officer in disallowing the carry forward and set-off of long-term capital loss without modifying the order for the initial assessment year.
3. Applicability of section 139(3), section 80, and section 74 of the Income-tax Act, 1961 regarding the filing of returns and carry forward of losses.
4. Validity of the Assessing Officer's actions under section 154 for rectifying mistakes apparent from the record.
Detailed Analysis:
1. Justification of the Assessing Officer in Rectifying His Earlier Order:
The core issue was whether the Assessing Officer (AO) was justified in rectifying his earlier order under section 143(3) to withdraw the set-off of brought forward long-term capital loss. The assessee had filed returns for assessment years 1997-98 and 1999-2000, setting off long-term capital gains against the carried forward long-term capital loss from assessment year 1996-97. The AO initially allowed this set-off but later rectified the orders under section 154, realizing that the return for 1996-97 was filed beyond the period allowed under section 139(1), thus disqualifying the loss for carry forward and set-off.
2. Jurisdiction of the Assessing Officer:
The assessee contended that the AO exceeded his jurisdiction by disallowing the carry forward and set-off of long-term capital loss without first modifying the order for assessment year 1996-97. The AO had allowed the carry forward of the loss in the original order for 1996-97, which had not been rectified or modified. The Tribunal, however, noted that the AO's decision in the year of loss does not bind the AO in the year of set-off, as per the Supreme Court's decision in CIT v. Manmohan Das.
3. Applicability of Sections 139(3), 80, and 74:
The Tribunal analyzed sections 139(3), 80, and 74 of the Income-tax Act, 1961. Section 80 stipulates that no loss can be carried forward and set off unless it has been determined in a return filed within the time allowed under section 139(1). Section 139(3) requires that a return declaring a loss must be filed within the time specified in section 139(1) to be eligible for carry forward. The assessee had filed the return for 1996-97 late, thus not complying with section 139(3). Consequently, the long-term capital loss from 1996-97 was not eligible for carry forward and set-off in subsequent years.
4. Validity of the Assessing Officer's Actions under Section 154:
The Tribunal upheld the AO's actions under section 154, which allows rectification of mistakes apparent from the record. The AO's initial allowance of the set-off was a mistake of law, as the loss was not eligible for carry forward due to the late filing of the return. The Tribunal cited the Supreme Court's decision in Maharana Mills (P.) Ltd. v. ITO, which held that the record for section 154 includes records of previous and subsequent years. The AO was justified in rectifying the mistake under section 154, as it was a glaring and obvious mistake of law.
Conclusion:
The Tribunal dismissed the appeals of the assessee, affirming the AO's rectification orders under section 154 for assessment years 1997-98 and 1999-2000. The Tribunal concluded that the AO was justified in denying the set-off of the long-term capital loss from 1996-97, as the return for that year was not filed within the time allowed under section 139(1), and thus the loss was not eligible for carry forward and set-off under sections 80 and 74 of the Income-tax Act, 1961.
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2007 (3) TMI 298
Issues Involved:
1. Sustenance of additions of Rs. 84,10,927 related to Amta Work.
2. Sustenance of additions of Rs. 46,90,650 related to Alipurduar Work.
3. Addition of Rs. 57,28,926 on account of work-in-progress.
Detailed Analysis:
1. Sustenance of Additions of Rs. 84,10,927 Related to Amta Work:
The core issue revolves around whether the addition of Rs. 84,10,927, representing the difference between the full value of the 6th RA bill and the ad hoc receipt, should be recognized as income for the year. The assessee argued that the bill was not fully approved by the Government by the end of the financial year, and therefore, only the received amount should be considered as income. The CIT(A) upheld the addition, reasoning that under the mercantile system of accounting, income accrues when the right to receive it is established, regardless of actual receipt. The Tribunal, however, concluded that mere raising of a bill does not equate to income accrual. It emphasized that income accrual requires acceptance and approval of the bill by the Government, which had not occurred by the financial year-end. Thus, the addition of Rs. 84,10,927 was unjustified and was directed to be deleted.
2. Sustenance of Additions of Rs. 46,90,650 Related to Alipurduar Work:
Similar to the Amta Work issue, the addition of Rs. 46,90,650 was contested on the grounds that the bill raised was not approved by the Government within the financial year. The CIT(A) upheld the addition using the same rationale applied to the Amta Work. The Tribunal reiterated its stance that income accrual under the mercantile system requires the bill's acceptance and approval. Since the bill for the Alipurduar project was not approved within the relevant financial year, the addition was deemed incorrect and was ordered to be deleted.
3. Addition of Rs. 57,28,926 on Account of Work-in-Progress:
The AO added Rs. 57,28,926 based on the difference between the opening and closing work-in-progress, citing non-submission of detailed pending works and cost attribution. The CIT(A) sustained this addition, questioning the reliability of the work-in-progress valuation. The Tribunal found merit in the assessee's argument that such an addition would result in double taxation. It noted that the closing work-in-progress was already taxed, and taxing the differential amount would lead to double taxation, which is impermissible. Consequently, the Tribunal directed the deletion of the addition of Rs. 57,28,926.
Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the additions of Rs. 84,10,927 and Rs. 46,90,650 related to the Amta and Alipurduar projects, respectively, as well as the addition of Rs. 57,28,926 on account of work-in-progress. The judgment emphasized the principles of income accrual under the mercantile system and the inadmissibility of double taxation.
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2007 (3) TMI 297
Issues Involved:
1. Whether the appellant was engaged in the manufacture or production of ornamental fishes.
2. Whether the processes adopted by the appellant amounted to rearing or production.
3. Whether the submissions made by the appellant were supported by evidence.
4. Whether there was a difference in identity between the original fish and the produced ornamental fishes.
5. Whether the appellant contributed to the formation of ornamental fishes.
6. Whether the definition of export-oriented undertaking should be equated with that of an industrial undertaking.
7. Legality of disallowing the claim of deduction under Section 10B.
8. Whether the disallowance of the claim under Section 10B was unjust, illegal, arbitrary, and excessive.
Issue-wise Detailed Analysis:
1. Manufacture or Production of Ornamental Fishes:
The appellant claimed that it was manufacturing ornamental fishes by converting juvenile fishes into ornamental fishes using various processes, thus creating a new article with a distinct character and identity. The Revenue, however, argued that fish being animate creatures cannot be termed as an article or thing and that the appellant was not producing fish as it is a natural process of development of eggs. The Tribunal found that the processes undertaken by the appellant, including sex reversal and artificial coloring, resulted in a new and distinct commodity known in the trade as ornamental fishes. Thus, the Tribunal concluded that the appellant was indeed engaged in manufacturing.
2. Processes Adopted: Rearing or Production:
The CIT(A) held that the processes adopted by the appellant amounted to rearing rather than production. The Tribunal, however, observed that the appellant's activities involved several complex processes requiring knowledge, skill, equipment, and technology, which culminated in the production of ornamental fishes. Therefore, the Tribunal concluded that these processes amounted to manufacturing rather than mere rearing.
3. Evidence Supporting Submissions:
The CIT(A) concluded that the appellant's submissions were based on assertions and not supported by evidence. The Tribunal, however, noted that the appellant had provided detailed descriptions of the processes, lists of plant and machinery, and supporting literature. Additionally, the Tribunal had conducted a site visit and verified the processes. Thus, the Tribunal found that the appellant's submissions were indeed supported by substantial evidence.
4. Difference in Identity Between Original and Produced Fishes:
The CIT(A) upheld the AO's view that there was no difference in identity between the original and produced ornamental fishes. The Tribunal, however, found that the processes undertaken by the appellant resulted in ornamental fishes that were distinct from the original juvenile fishes in terms of character, identity, and commercial value. Therefore, the Tribunal concluded that there was a significant difference in identity.
5. Contribution to Formation of Ornamental Fishes:
The CIT(A) upheld the AO's conclusion that the appellant did not contribute to the formation of ornamental fishes. The Tribunal, however, found that the appellant's processes, including sex reversal, artificial coloring, and disease treatment, significantly contributed to the formation of ornamental fishes, making them distinct from the original juvenile fishes.
6. Definition of Export-Oriented Undertaking:
The CIT(A) equated the definition of an export-oriented undertaking with that of an industrial undertaking. The Tribunal, however, noted that the definition of an export-oriented undertaking is specifically provided under Section 10B of the IT Act and should be adopted as such. The Tribunal concluded that the appellant met the criteria for an export-oriented undertaking as defined under Section 10B.
7. Legality of Disallowing Deduction Under Section 10B:
The appellant argued that the disallowance of the claim under Section 10B was bad in law. The Tribunal, after considering the processes and evidence provided by the appellant, concluded that the appellant was indeed engaged in manufacturing activities and was entitled to the deduction under Section 10B. Therefore, the disallowance was deemed incorrect.
8. Disallowance of Claim: Unjust, Illegal, Arbitrary, and Excessive:
The appellant contended that the disallowance of the claim under Section 10B was unjust, illegal, arbitrary, and excessive. The Tribunal, after a thorough analysis of the processes, evidence, and legal precedents, found that the appellant's activities qualified as manufacturing. Therefore, the disallowance of the claim was deemed unjust and incorrect.
Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the Revenue to allow the benefit under Section 10B to the appellant, concluding that the appellant was engaged in the manufacturing of ornamental fishes and met the criteria for deduction under Section 10B of the IT Act. The appellant's appeal was allowed.
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2007 (3) TMI 296
Issues Involved:
1. Classification of rental income as "income from house property" vs. "income from business."
2. Deductibility of various expenses related to the rental income.
3. Admissibility of additional grounds of appeal.
Issue-wise Detailed Analysis:
1. Classification of Rental Income:
The primary issue was whether the rental income earned by the assessee should be classified as "income from house property" or "income from business." The assessee argued that the income should be treated as business income, as it was derived from leasing properties and providing additional amenities. The AO treated the income as "income from house property," which was upheld by the CIT(A). The Tribunal found that the assessee was not the owner of the land but a lessee for an unexpired period of 13 years, and the structure was to revert to the lessor by 2014. The Tribunal noted that the assessee provided various amenities to tenants in an organized manner, which constituted business activities. Therefore, 60% of the income was treated as rental income and 40% as service charges, with the latter being classified as business income.
2. Deductibility of Expenses:
The assessee claimed various expenses such as repairs, maintenance, salary, electricity charges, and director's remuneration against the rental income. The AO disallowed these expenses, treating the entire income as "income from house property." The Tribunal, however, allowed the expenses related to the service charges portion (40% of the total receipts) under Section 37(1) of the Income Tax Act, as these were incurred in the course of business activities. For the rental income portion (60%), deductions were allowed as per Section 24 of the Act.
3. Admissibility of Additional Grounds of Appeal:
The assessee filed additional grounds of appeal, arguing that the business of taking properties on lease and providing amenities was its main business. The Tribunal admitted these additional grounds, relying on the Supreme Court's decision in the case of Jute Corporation of India Ltd. vs. CIT and the Allahabad Bench's decision in Verma Roadways vs. Asstt. CIT. The Tribunal found that these additional grounds did not involve any new facts and were based on existing material.
Conclusion:
The Tribunal concluded that the assessee's activities of providing amenities along with leasing properties constituted business activities. Thus, 60% of the receipts were treated as rental income, and 40% as service charges (business income). The assessee was allowed deductions for expenses related to the service charges portion under Section 37(1) and for the rental income portion under Section 24. Both appeals filed by the assessee were partly allowed.
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2007 (3) TMI 295
MAT - Deferred tax liability - differences between taxable income and accounting income - Nature of reserve - Unascertained liabilities - Tax on profit distributed as dividend u/s 115O - Fringe Benefit Tax - Whether the deferred tax charge is the charge of income-tax, which is liable to be added in Explanation (a) to sub-section (2) of section 115JB or the same should be treated as an amount credit to reserve within the meaning of Explanation (b) to sub-section (2) of section 115JB? - HELD THAT:- Deferred tax means the tax effect of timing difference due to differences between taxable income and accounting income for a period that originate in one period and is capable of reversal and, therefore, such deferred tax charge is a provision for tax effect of difference between taxable income and accounting income and not provision for income-tax paid or payable and, therefore, could not be covered under Explanation (a) to subsection (2) of section 115JB.
We have also noted down the objective behind enacting AS-22 by the ICAI, as deferred tax charge was meant to remove the difference between taxable income and accounting income arising due to difference between items of revenue and expenses as appearing in the statement of Profit & Loss A/c and the items which are considered as revenue expenses or deduction for tax purposes or there are difference between the amount in respect of a particular item of revenue or expense as recognized in the statement of profit and loss and the corresponding amount, which is recognised for the computation of taxable income.
Therefore, it is absolute apparent that deferred tax charge could not be termed as income-tax paid or payable, which has to be paid out of the profit earned by the assessee for the year under consideration and, therefore, in our considered opinion, the first objection raised by the revenue does not hold any merit.
Nature of reserve - Though the ld. DR has argued that such deferred tax liability should be treated at par with other reserve as the same has been debited to the profit & loss a/c and all the conditions stipulated in the provision are fulfilled. However, such contention of the ld. DR could not be accepted keeping in view our observation hereinabove while observing differences between the reserve as stipulated in clause (b) to sub-section (2) of section 115JB and the reserve created for deferred tax liability. The guidelines of ICAI also advice to treat deferred tax charge separately than reserve as stipulated in clause (b) to Explanation to sub-section (2) to section 115JB. We, therefore, dismiss this second limb objection raised by revenue while disputing the order of ld. CIT(A).
Unascertained liabilities - The revenue has not disputed the calculation of such deferred tax charge by the assessee which has been made as per guidelines stipulated in AS-22 by ICAI and the computation of deferred tax charge is scientifically made and globally accepted, the same could not be considered as an unascertained liability within the meaning of Explanation (c) to sub-section (2) of section 115JB. Moreover such calculation of deferred tax charge by the assessee has not been disputed by the revenue and such calculation of deferred tax liability has also been accepted as reasonable ascertained by ld. D.R. while arguing the case for the Department. We are, therefore, of the view that this third limb of objections raised by the revenue is also devoid of any merit.
We, therefore are of the opinion that deferred tax charge is not covered by any of the clauses of the Explanation to sub-section (2) to section 115JB as objected by the revenue before us, and therefore, in our considered opinion, such deferred tax charge is not required to be added back in the computation of book profit for the purpose of section 115JB and Hence, ld. CIT(A) was justified in deleting the addition made by the Assessing Officer in not accepting the claim of the assessee on account of such deferred tax charge. We, therefore, uphold such order of ld. CIT(A) in this regard and reject the ground raised by the revenue.
Dividend distributed u/s 115-O - HELD THAT:- Since income-tax is payable on the income earned by the assessee, tax on dividend as per the provision of section 115-O is paid at the time of distribution of profit in the form of dividend i.e., at the time of application of the income on which income-tax has already been paid. Furthermore as per sub-section (2) of section 115-O makes it clear that tax on distribution of profit has to be paid by a domestic company even if no income-tax is payable in the year in which dividend is distributed by the company. We have also considered the order of Tribunal, Panaji Bench in the case of Salgaocar Mining India (P) Ltd.[2006 (1) TMI 221 - ITAT PANAJI], wherein interest on income- tax was excluded from the said clause as both were to be treated separately. Since in the present case also, tax on distributed profit is different than income-tax payable, the same cannot be covered under clause (a) to Explanation to sub-section (2) of section 115JB.
Fringe benefit tax - HELD THAT:- In our considered opinion on distribution of profit payable as per provision of section 115-O of the Act is of similar nature as fringe benefit tax payable under Chapter XII-H of the Act, since both are payable at the time of incurring certain expenditure which is in the form of fringe benefit given to employees or dividend to shareholders, which are not otherwise taxable under the other provisions of the Act. Therefore, in our considered opinion, both fringe benefit tax and tax on distribution of profit are similar in nature. Since Circular No. 8 issued by the CBDT makes it clear that fringe benefit tax is an allowable deduction in the computation of book profit u/s 115JB of the Act while dealing in question, a copy of which is also available on record, in our considered opinion, the ld. CIT(A) has rightly treated the tax on profit distributed as dividend in similar manner as fringe benefit tax and has thereafter rightly directed the Assessing Officer not to add back such tax on distributed profit in the computation of book profit for the purpose of section 115JB. We, therefore, do not see any reason to interfere with such order of ld. CIT(A) and accordingly uphold his order and reject the grounds raised by the revenue.
In the result, the appeal filed by the revenue is dismissed.
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2007 (3) TMI 294
Issues involved:
1. Confirmation of disallowance of debenture issue expenditure amounting to Rs. 5,21,22,533 on the ground that it is capital in nature.
Issue-wise Detailed Analysis:
Issue 1: Confirmation of disallowance of debenture issue expenditure amounting to Rs. 5,21,22,533 on the ground that it is capital in nature.
The assessee, a public limited company, claimed debenture issue expenses of Rs. 5,21,22,533 as an allowable deduction while computing income under the head profit and gains of business/profession. The AO disallowed this claim, treating the expenses as capital in nature, arguing that the debentures were converted into equity shares within one year of their issuance, thus not qualifying as revenue expenditure.
Assessee's Arguments:
- The debentures, though convertible, were secured loans in nature, carrying a 14% interest rate, which was paid from the date of application.
- The assessee relied on the Supreme Court judgment in India Cement Ltd. vs. CIT and the Bombay High Court judgment in Dhrangadhra Chemical Works Ltd., arguing that debentures are debt instruments and expenses on raising funds through them are allowable as revenue expenditure.
Revenue's Arguments:
- The AO and CIT(A) rejected the assessee's contentions, maintaining that the debenture expenses were capital in nature.
- The learned Departmental Representative cited the Special Bench decision in Ashima Syntex Ltd. vs. Asstt. CIT, arguing that the debentures were issued to increase the capital base of the company, making the expenses capital in nature.
Tribunal's Analysis:
- The Tribunal considered the assessee's reliance on the Supreme Court's observations in India Cement Ltd. vs. CIT, which distinguished between obtaining capital by issuing shares and obtaining loans by debentures.
- The Tribunal noted that debentures are acknowledged as debt instruments, and any expenditure on raising funds through them is allowable under s. 36(1)(iii) of the Act.
- The Tribunal also referred to the Madras High Court's decision in CIT vs. Laxmi Vilas Bank Ltd., which elaborated on the distinction between debentures and shares, emphasizing that debentures are loans that must be repaid, unlike shares.
Precedent and Consistency:
- The Tribunal found that in the preceding assessment year (1996-97), a similar issue was decided in favor of the assessee, treating the issuance of convertible debentures as raising a loan and allowing the deduction of interest expenses.
- The Tribunal emphasized the importance of consistency, noting that the facts of the current year were identical to those of the previous year.
Special Bench Decision Consideration:
- The Tribunal examined the Special Bench decision, which categorized cases into three groups: fully in favor of the assessee, partially in favor (allowing expenses for the pre-conversion period), and against the assessee.
- The Tribunal highlighted that the Special Bench decision focused on the substance of the transaction, determining whether the expenditure was for raising the capital base.
Conclusion:
- The Tribunal concluded that the debenture issue expenses related to Part-B of the debentures (convertible after one year) should be allowed as revenue expenses until their conversion into equity shares.
- For Part-A of the debentures (convertible on the date of allotment), the expenses were treated as capital in nature, and the Tribunal directed the AO to grant deduction under s. 35D(2) of the Act.
Result:
- The appeal was partly allowed, granting the assessee deduction for expenses related to Part-B of the debentures and directing the AO to verify and grant deduction under s. 35D(2) for Part-A expenses.
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2007 (3) TMI 293
Exemption u/s 10(10C) - Consideration received by the employees who opted for "Optional Early Retirement Scheme" (OERS) - employees of other public sector banks which introduced Voluntary Retirement Scheme (VRS) for the benefit of the employees - exemption upto Rs.5 lacs - relief u/s 89 - HELD THAT:- The records produced before us does not show that the vacancies as a result of OERS has been filed by the bank. As the bank itself in its Annual Report states that there has been considerable reduction in staff strength as the result of the options exercised under the OERS, we do not accept the contention of the department that the relief to the employees be denied on the ground that the bank has not given any undertaking that the vacancy will not be filled up and it is also not the specific requirement of the guidelines.
We have read the entire scheme and do not find any obligation on the part of the RBI the employer, to show any alternative opportunities to the persons who have opted under the OERS. In other words, no evidence or material has been brought before us to show that there has been an obligation on the part of the RBI to employ the retiring employees in any other company or concerns under the same management.
We, therefore, on the basis of the scheme and the actual facts that are brought out by the bank itself, do not agree with the stand of the Assessing Officer or the CIT(A) that the conditions or the guidelines prescribed under rule 2BA are not complied in the OERS of the RBI. Any statement that it will not fill up the vacancies caused as a result of OERS would have resulted in opposition by the employees themselves as it will be a repressive measure against the labour.
The sums in question are clearly the part of salary in the form of profits in lieu of salary as defined in section 17(3) of the Act. These are amount of compensation received by the employee from the employer in connections with the terms of employment and, therefore, the assessees in question are clearly entitled for relief under section 89 in accordance with law in respect of the payments that are included in the total income.
Further a similar view has been expressed in the decision of the Hon'ble Madras High Court in the case of CIT v. G.V. Venugopal [2004 (12) TMI 35 - MADRAS HIGH COURT] and the decision of the Hon'ble Karnataka High Court in CIT v. P. Surendra Prabhu [2005 (9) TMI 67 - KARNATAKA HIGH COURT]. The orders of the CIT(A) in granting relief u/s 89 cannot be therefore found fault with.
As a result, we hold- (a) that the assessees in question are entitled for relief u/s 10(10C) of the Income-tax Act in respect of the sums received under the OERS up to a sum of Rs. 5 lakhs.
(b) the assessees are also entitled to relief u/s 89 of the Act in respect of the sums which are in excess of the exemption granted.
In the result, the appeals filed by the assessee are treated as allowed and those filed by the department are dismissed on the lines discussed above.
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2007 (3) TMI 292
Provisions of section 250 - addition on account of freight receipts - CIT deleted the additions made by the learned Assessing Officer based on the gross amounts shown in the TDS certificates issued by M/s. Ramco Industries Ltd. - HELD THAT:- In the instant case the entire additional evidence has come on the record of the first appellate authority because the first appellate authority decided to examine the facts of the case in depth and adjudicate upon the matter on the basis of evidence and material thus gathered. The learned CIT(A) was empowered to do so under the provisions of section 250(4). The results of enquiry conducted by him could either go to further cement the case made out by the Assessing Officer or to help out the assessee against the findings of the Assessing Officer. The mere fact that the results of the enquiries thus conducted supported the case of the assessee and not that of revenue has no bearing on the jurisdiction and powers of the learned CIT(A). The learned CIT(A) could have confronted the Assessing Officer with the evidence thus received and the material thus gathered and allow the Assessing Officer to have his say in the matter and perhaps had he done so this dispute would not have arisen.
But we do not see any requirement in law that the first appellate authority should invariably consult or confront the Assessing Officer every time an additional evidence that was not before the Assessing Officer comes on the record of the first appellate authority. Where the additional evidence is obtained by the first appellate authority on its own motion, there is no requirement in law to consult/confront the Assessing Officer with such additional evidence. There may be cases where additional evidence is admitted by the first appellate authority on a request or application being made by the assessee. In such cases sub-rule (2) of rule 46A requires the first appellate authority to allow the Assessing Officer a further opportunity to rebut the fresh evidence filed by the assessee. Even that requirement cannot be said to be a rule of universal application. If the additional evidence furnished by the assessee before the appellate authority is in the nature of clinching evidence leaving no further room for any doubt or controversy in such a case no useful purpose would be served on performing the ritual of forwarding the evidence/material to the Assessing Officer and obtain his report. In such exceptional circumstances, the requirement of sub-rule (3) may be dispensed with.
Thus, we see no infirmity in the impugned order of the learned CIT(A) who has taken pains to examine the issue before him comprehensively and arrive at a correct finding of fact and should be congratulated for having done so. We therefore uphold his order and dismiss these three appeals filed by the revenue.
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2007 (3) TMI 291
Issues Involved:
1. Maintainability of Department's Appeals.
2. Disallowance u/s 37(3A) for expenses reimbursed/paid to Advocates/Solicitors.
3. Disallowance u/s 37(3A) for customer services, catering, and hotel expenses.
4. Disallowance u/s 40A(5) for employees posted abroad.
5. Applicability of section 43B to foreign travel tax.
6. Disallowance of remuneration to the Managing Director.
Summary:
1. Maintainability of Department's Appeals:
The Department's appeals for assessment years 1985-86 and 1986-87 were dismissed in limine due to the lack of requisite approval from the Committee of Disputes (COD). The assessee had obtained the necessary COD approval, allowing their appeals to be adjudicated.
2. Disallowance u/s 37(3A) for expenses reimbursed/paid to Advocates/Solicitors:
The Assessing Officer disallowed Rs. 3,35,408 u/s 37(3A) for hotel, car hire, and entertainment expenses reimbursed/paid to Advocates/Solicitors. The Tribunal held that these expenses were in the nature of legal expenses and allowable u/s 37(1), not hit by section 37(3A)/(3B). Thus, the disallowance was vacated.
3. Disallowance u/s 37(3A) for customer services, catering, and hotel expenses:
The assessee incurred expenses on customer services (Rs. 6,00,74,389), catering (Rs. 22,62,26,779), and hotel facilities (Rs. 7,96,19,947). The Tribunal ruled that these expenses were not sales promotion expenses but were incurred in the ordinary course of business and contractual obligations. They were also excluded from section 37(3A) by section 37(3C). Consequently, the disallowances were vacated.
4. Disallowance u/s 40A(5) for employees posted abroad:
The Assessing Officer estimated a disallowance of Rs. 6,00,000 u/s 40A(5) for employees posted abroad. The Tribunal held that even short-term deputation abroad constitutes "any period of his employment outside India" within section 40A(5)(b)(i). Thus, the disallowance was vacated.
5. Applicability of section 43B to foreign travel tax:
The Assessing Officer disallowed Rs. 1,67,48,151 for foreign travel tax and Rs. 86,371 for turnover tax in Ceylon u/s 43B. The Tribunal upheld the CIT(A)'s view that foreign travel tax is covered by section 43B. However, the CIT(A) directed the Assessing Officer to verify if the amounts were paid before the due date u/s 139(1) and allow the claim accordingly. The Tribunal did not express an opinion on this direction as it was part of the Department's appeal.
6. Disallowance of remuneration to the Managing Director:
The Assessing Officer disallowed Rs. 40,000 from the Managing Director's remuneration u/s 40A(5). The Tribunal upheld the CIT(A)'s decision, agreeing that the provisions of section 40A(5) were applicable, not section 40(c). Thus, the disallowance was confirmed.
Conclusion:
The appeals filed by the assessee for the assessment years 1984-85, 1985-86, and 1986-87 were allowed in part, while the Department's appeals were dismissed due to lack of COD approval.
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2007 (3) TMI 290
Issues Involved:
1. Deduction under Section 80-O
2. Disallowance under Section 40A(9)
3. Compensation received on termination of joint venture agreement
4. Taxability of amount received from Narain Bhojwani
5. Assignment of leasehold land
6. Treatment of expenses on issue of bonus shares
7. Exclusion of Modvat credit from valuation of closing stock
8. Disallowance under Section 37(4)
9. Relief under Section 80-I
10. Treatment of interest income
11. Non-compete fees as capital gains
12. Disallowance of expenditure in hotels and clubs
13. Disallowance of club membership fees
Issue-wise Detailed Analysis:
1. Deduction under Section 80-O:
The assessee received Rs. 3,67,93,336 in foreign exchange for software consultancy services and claimed a 50% deduction under Section 80-O. The AO estimated indirect expenses at Rs. 50 lakhs, later reduced to Rs. 35 lakhs by the CIT(A). The Tribunal held that only actual expenditure, not estimated, should be deducted to arrive at net receipts. The matter was restored to the CIT(A) to allocate reasonable expenditure after giving a hearing to both parties.
2. Disallowance under Section 40A(9):
The CIT(A) did not adjudicate on the disallowance of Rs. 2,66,242 for payment to Blue Star Club. The Tribunal restored the matter to the AO to decide afresh in light of the decision in CIT vs. Bharat Petroleum Corporation Ltd.
3. Compensation received on termination of joint venture agreement:
The assessee received Rs. 15 crores from Hewlett Packard (HP) for termination of a joint venture agreement. The CIT(A) bifurcated the compensation into interest on share application money and long-term capital gains. The Tribunal held the compensation as a capital receipt liable to tax as long-term capital gains, directing the AO to allow the benefit of indexed cost of acquisition.
4. Taxability of amount received from Narain Bhojwani:
The CIT(A) upheld the AO's action of treating Rs. 2,87,50,000 as capital gains for transferring DRC to Mr. Bhojwani. The Tribunal dismissed ground No. 5 and restored ground No. 6 to the AO for treating it as long-term capital gain.
5. Assignment of leasehold land:
The CIT(A) treated Rs. 1,50,297 received on transferring leasehold land as casual income under Section 10(3). The Tribunal restored the issue to the AO for treating and taxing it as long-term capital gain.
6. Treatment of expenses on issue of bonus shares:
The CIT(A) allowed the treatment of expenses on issuing bonus shares as revenue expenditure. The Tribunal dismissed the Department's appeal, citing the decision of the Supreme Court in CIT vs. General Insurance Corporation.
7. Exclusion of Modvat credit from valuation of closing stock:
The CIT(A) allowed the exclusion of Modvat credit from the valuation of closing stock. The Tribunal dismissed the Department's appeal, referencing the Supreme Court decision in CIT vs. Indo Nippon Chemicals Co. Ltd.
8. Disallowance under Section 37(4):
The CIT(A) deleted the disallowance of Rs. 1,46,114 for maintaining a 'holiday home' for employees. The Tribunal remanded the matter to the AO for a fresh decision, considering the Supreme Court's decision in Britannia Industries Ltd. vs. CIT.
9. Relief under Section 80-I:
The CIT(A) allowed relief under Section 80-I without reducing eligible profits by relief under Section 80HH. The Tribunal dismissed the Department's appeal, citing the decision in CIT vs. Nima Specific Family Trust.
10. Treatment of interest income:
The CIT(A) treated interest income from discounting activities as business income. The Tribunal confirmed this, noting that discounting activity was part of the assessee's business.
11. Non-compete fees as capital gains:
The CIT(A) treated non-compete fees as long-term capital gains. The Tribunal dismissed the Department's appeal, following the same reasoning used for compensation received on termination of the joint venture agreement.
12. Disallowance of expenditure in hotels and clubs:
The CIT(A) restricted the disallowance of hotel expenditure to 50% and allowed 50% of club expenditure. The Tribunal directed the AO to modify the order, treating 25% of the expenses as non-entertainment.
13. Disallowance of club membership fees:
The CIT(A) allowed the deduction of Rs. 18,56,565 for club membership fees. The Tribunal dismissed the Department's appeal, following previous orders in the assessee's own case.
Conclusion:
The Tribunal provided a detailed analysis and directions on each issue, ensuring compliance with legal precedents and principles. The appeals were partly allowed or dismissed based on the merits of each case and relevant judicial decisions.
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2007 (3) TMI 289
Issues Involved:
1. Whether the Assessing Officer was justified in rejecting the application of the assessee under section 154 of the Income-tax Act, 1961, on the ground that intimation issued under section 143(1)(a) cannot be rectified after the issue of notice under section 143(2).
Issue-wise Detailed Analysis:
1. Assessing Officer's Rejection of Application under Section 154:
The primary issue in this appeal is whether the Assessing Officer was justified in rejecting the assessee's application under section 154 of the Income-tax Act, 1961, based on the premise that intimation issued under section 143(1)(a) cannot be rectified after the issuance of notice under section 143(2). The Assessing Officer relied on the decisions of the Gujarat High Court in Lakhanpal National Ltd. v. Dy. CIT [1996] 222 ITR 151 and the Madhya Pradesh High Court in CIT v. Regional Soya bean Products Co-operative Union Ltd. [1999] 239 ITR 217 to support this rejection.
2. Facts and Proceedings:
The assessee filed its return of income for the relevant year, declaring a loss which was processed under section 143(1)(a) and resulted in adjustments reducing the declared loss. Subsequently, a notice under section 143(2) was issued. The assessee then applied for rectification under section 154, arguing that the adjustments made were incorrect. The Assessing Officer rejected this application, stating that rectification under section 154 is not possible after a notice under section 143(2) has been issued.
3. Appeal to CIT(A):
The assessee contended before the CIT(A) that the reliance on the aforementioned High Court decisions was misplaced as those cases did not involve situations where the original jurisdiction of the Assessing Officer was in question. The assessee argued that the original jurisdiction of the Assessing Officer was being challenged and that the decisions cited were not applicable. The CIT(A) accepted the assessee's contentions and directed the Assessing Officer to consider the application under section 154 after providing a reasonable opportunity for the assessee to be heard.
4. Tribunal's Consideration:
The Tribunal carefully considered the rival submissions and the legal background. It noted that the intimation under section 143(1)(a) falls within the scope of rectification under section 154, which can be initiated either suo motu by the Assessing Officer or on the application of the assessee. The Tribunal emphasized that an existing order/intimation can be rectified unless the context or legislative intent suggests otherwise.
5. Analysis of Relevant High Court Decisions:
The Tribunal distinguished the facts of the present case from those in the Regional Soya bean Products Co-operative Union Ltd. case, where the issue was whether an intimation under section 143(1)(a) could be issued after a notice under section 143(2). The Tribunal noted that in the present case, the intimation was issued before the notice under section 143(2).
Similarly, in Lakhanpal National Ltd., the Gujarat High Court held that notice under section 154 could not be issued after the issuance of notice under section 143(2). However, the Tribunal clarified that this judgment only restricted the Assessing Officer's suo motu powers under section 154 and did not curtail the assessee's right to seek rectification.
6. Legal Position on Rectification:
The Tribunal emphasized that the intimation under section 143(1)(a) is not nullified by the issuance of a notice under section 143(2) and remains in force unless quashed or cancelled by higher authorities. Therefore, such intimation can be rectified under section 154 if there is an apparent mistake. The Tribunal also highlighted that the scope of sections 143(1)(a) and 143(3) is different, and mistakes under section 143(1)(a) may not be curable under section 143(3).
7. Conclusion:
The Tribunal concluded that if the Assessing Officer made adjustments under section 143(1)(a) that were legally incorrect and prejudicial to the assessee, the assessee has the right to seek rectification under section 154. The Tribunal upheld the CIT(A)'s order directing the Assessing Officer to consider the assessee's application under section 154.
8. Final Judgment:
The appeal by the revenue was dismissed, and the order of the CIT(A) was upheld, allowing the assessee's application for rectification under section 154 to be considered.
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