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Showing 501 to 520 of 941 Records
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2008 (9) TMI 499
Revision- Power of Commissioner- Whether on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in upsetting the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961? Held that- the Tribunal is correct in its view that the view taken by the Assessing Officer was a possible view and that the condition precedent for invoking jurisdiction under section 263 by the Commissioner of Income-tax did not exist. In view of the above, we hold that the Income-tax Appellate Tribunal was justified in upsetting the order passed by Commissioner of Income-tax under section 263 of the Income-tax Act, 1961. Therefore, answer the question of law raised in this appeal in favour of the assessee and against the Revenue. The above appeal, therefore, stands dismissed.
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2008 (9) TMI 496
Burden of proof- As per the ingredients of section 123 of custom act, onus of proof not discharged by revenue. In the light of the decision of Commissioner of Customs (Prev.), W.B., Kolkata v. Raj Kumar Jaiswal - 2006 (204) E.L.T. 561 (Cal.) Held that- In view of failure of the transaction to meet the tests of law, the Appellant is entitled to the benefits of doubt under Section 123 of the Customs Act, 1962 and the Appeal should succeed. Accordingly the impugned order is set aside and Appeal is allowed.
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2008 (9) TMI 493
Special deduction under section 80P(2)(a)(i) – interest – The assessee a co operative society, carried on the business of marketing the agricultural produce of its members. In its return total income “nil”, claiming the deduction of ‘income from business’ u/s 80P(2)(a)(i). The assessment was reopened. The Assessing officer holding that income from deposits and income from bonds and securities was assessable as income from other sources and no deduction u/s 80P(2)(a)(i) was allowable. Held that- the assessee was not a co-operative bank and was not doing any banking business and admittedly, the interest received from the securities and deposits with banks other than co-operative banks was not relatable to the business of the assessee and consequently it did not qualify for deduction u/s 80P of the act. That the original records revealed that the previous permission of the Additional Commissioner had been obtained before issuing notice to the assessee. Thus the proceedings for reopening of the assessment under section 147 of the act were proper and notice issued u/s 148 of the act was valid.
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2008 (9) TMI 489
Whether, in the facts and circumstances of the case, the Tribunal was right in treating the transfer of the right to exhibit the films, as a sale of goods or merchandise for the purpose of deduction under section 80HHC? - in respect of other assessee on the very issue in the case of CIT v. A. V. M. Production a Division Bench of this court has held in favour of the assessee to the effect that the assessee is entitled to deduction under section 80HHC in regard to export of one print of a film for exhibition outside India. – So it is held that assessee is entitled to special deduction
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2008 (9) TMI 488
Depreciation - “Whether the Appellate Tribunal is right in law and on facts in confirming the order of the Commissioner of Income-tax (Appeals) in deleting the disallowance of depreciation of Rs. 1,18,10,500 made on account of excess depreciation ?” - both the Commissioner (Appeals) and the Tribunal have concurrently found that ownership of assets in the hands of the assessee-lessor is not disputed and delivery of assets on September 30, 1996, is also not disputed. In so far as usage of assets is concerned, it has been held that there was no evidence to justify that assets were not put to use. – no any legal infirmity in the impugned order of the Tribunal - No question of law, much less a substantial question of law, as proposed or otherwise arises from the impugned order of the Tribunal. The appeal is accordingly dismissed. – Held that assessee is entitled to depreciation
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2008 (9) TMI 483
Appeal filed by the Revenue is against the order of the Commissioner (Appeals) granting the benefit of Notification No. 10/97-C.E., dt. 1-3-97 to the respondents in respect of Ammonium Chloride cleared to Vikram Sarabai Space Centre (Public funded research institution)- The respondents had cleared Ammonium Chloride to VSSC during May’ 06 to Jan’ 07 without payment of duty, claiming the benefit of Notification No. 10/97-C.E., ibid. The item was used as an “ingredient for preparing Ammonium Per-Chlorate”, an oxidizer used in solid propellant rockets for space research as per the “end-use certificate” issued by VSSC. - Admittedly, Ammonium Chloride was, ultimately, consumed in the rockets for research purposes. This squarely satisfies the obvious purpose intended under the Notification – Hence benefit of Notification No. 10/97-C.E., is not deniable
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2008 (9) TMI 479
Export and Import Policy - Special Import Licence – investigation revealed that SIL submitted by the said appellant were defaced and cancelled by the DGFT authorities on the request of the actual owner of the respective SILs. - The bonafide purchaser of the same cannot be deprived of any benefits arising out of the said licences, when on the face of the said licences there is no indication of the same having been cancelled. The licence is a documentary evidence and are admittedly freely transferable in the market. The investigations conducted at each and every level showed that neither of the persons was aware of the fact of cancellation, if at all. Not only licence numbers were appearing in the list of validly issued licences in the monthly bulletin published by DGFT, there was no indication, whatsoever to show that the licences were cancelled. – transferee held to be bonafide purchaser of licence for valuable consideration – Extended period could not be invoke against purchaser – held that transferee was not liable to penalty – appellant is entitled to clearance of the goods thereunder as the bona fide transferee of the licences for valuable consideration – Though they are goods for purpose of sales tax and are transferable, rights of transferee can be decided without refrence to Negotiable Instruments Act, 1881 - Commissioner further holds that the transfer letters are forged - No format of a transfer letter has been prescribed in any statute. It is a creation of trade and commerce – In absence of definition of ‘forgery’ in Cusotms Act, 1962, definition in Section 463 of Indian Penal Code, 1860 can be used – regarding the submission of the Revenue that the original licences surrendered to the DGFT were lost/stolen, Even if the licences were destroyed post utilisation, that by itself cannot, and will not incriminate him, for the reason that once the licences are fully utilised and the exchange control copies submitted to the bank for debiting the same, no purpose is served by keeping/retaining utilised/expired licences.
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2008 (9) TMI 475
Recovery of excise dues – petitioner purchased assets of defaulters company through bank – by the impugned letters, department directing petitioner to clear outstanding excise dues of defaulter company - The matter is not res integra. - It may be specifically noted here that no such “first charge” has been pleaded by the Excise Authorities – we hold that the Excise Department cannot enforce the payment of their dues against the property purchased by the petitioner though they would have the liberty to seek redress against the original debtors. - the present writ petition is allowed and the impugned letters are quashed.
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2008 (9) TMI 471
Settlement of the proceedings – valuation – Cookies sold to industrial consumers like airlines, hotel, industry etc. - Settlement Commission, in the absence of declaration of retail sale price on the packages by the first respondent in respect of Cookies manufactured by it and in the absence of any obligation on its part to make such declaration of retail sale price as per the Standards of Weights and Measures Act, 1976 (Act 60/76), there is absolutely no reason for the second respondent Settlement Commission to show leniency by making assessment under Section 4-A - In any event, the M.R.P. not having been declared on the packages, when the assessee has been selling the packages to the institutional customers for the purpose of consumption of their customers, the correctness or otherwise of the plea of the assessee should have been verified, which can be possible only by adjudication or at least by the Settlement Commission taking the role of Central Excise Officer as per section 32-I(2) of the Act by conducting proper enquiry. In the absence of such procedure being followed, certainly the impugned order of the Settlement Commission giving benefit to the first respondent under section 4-A of the Act in respect of bulk quantities of Cookies manufactured by it and supplied to the institutional customers is not proper, hence it is set aside
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2008 (9) TMI 467
Issues Involved:
1. Legality and application of mind in the impugned order.
2. Evaluation of facts by the Director of IT.
3. Non-commencement of activities as a ground for rejection.
4. Principles of natural justice.
5. Definition and scope of 'charitable purposes' under s. 2(15) of the IT Act.
6. Examination of the object of general public utility.
7. Procedural aspects of filing appeals.
Detailed Analysis:
1. Legality and Application of Mind in the Impugned Order:
The appellant argued that the impugned order was illegal, contrary to law, and vitiated due to non-application of mind by the Director of IT. The order was hastily concluded without proper analysis of the facts. The Tribunal noted that the Director of IT did not provide adequate reasoning or evidence to support his conclusions, indicating a lack of thorough evaluation.
2. Evaluation of Facts by the Director of IT:
The appellant contended that the Director of IT failed to evaluate essential facts, such as the appellant's plans to offer Ph.D. level programs and details of proposed research work. The Tribunal observed that the Director's order did not reflect a proper analysis of these features, leading to an erroneous conclusion.
3. Non-commencement of Activities as a Ground for Rejection:
The Director of IT rejected the application on the grounds that the appellant had not commenced activities. The Tribunal highlighted that the IT Act does not mandate the commencement of activities prior to applying for registration. The Director's conclusion was deemed whimsical and based on presumptions without proper verification.
4. Principles of Natural Justice:
The appellant argued that the rejection of the application on grounds not raised during the proceedings violated the principles of natural justice. The Tribunal agreed, noting that the Director of IT's decision was based on preconceived notions without providing the appellant an opportunity to clarify or respond.
5. Definition and Scope of 'Charitable Purposes' under s. 2(15) of the IT Act:
The appellant sought registration under s. 12A, claiming that the institute's activities qualified as charitable purposes under s. 2(15) of the IT Act. The Director of IT argued that the institute did not fulfill the requirement of 'education' as defined by the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust vs. CIT. The Tribunal upheld this contention but noted that the Director failed to consider whether the institute's activities could fall under the advancement of any other object of general public utility.
6. Examination of the Object of General Public Utility:
The Tribunal found that the Director of IT did not examine whether the institute's activities could be considered as advancing any other object of general public utility. The appellant had initiated research work, and it could not be said that the income was not applied for the intended purpose. The Tribunal restored the issue back to the Director of IT to examine this aspect.
7. Procedural Aspects of Filing Appeals:
The Tribunal addressed the procedural issue raised by the Departmental Representative regarding the filing of separate appeals for orders under s. 12A and s. 80G(5)(vi). The Tribunal considered the appeal as pertaining to the order under s. 12A and proceeded accordingly.
Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the Director of IT to re-examine the appellant's claim for registration under s. 12A, specifically considering whether the institute's activities advance any other object of general public utility. The Tribunal emphasized the need for a thorough and fair evaluation, ensuring compliance with principles of natural justice and proper application of legal standards.
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2008 (9) TMI 466
Application of Transfer Pricing (TP) provisions - determination of Arm's Length Price (ALP) - Use of Comparable Uncontrolled Price (CUP) method vs. Transactional Net Margin Method (TNMM) -Principle of Res Judicata in transfer pricing - Adjustments for differences in functions, assets, and risks -Binding nature of Circular No. 14 of 2001 by CBDT - deduction u/s 92C(2) of the Act - software development services to its AEs - learned counsel for the assessee has argued that the tax payable by it in India is lower than the tax rate applicable to its AE in the Netherlands. Since the assessee is availing the benefit under s. 10A of the Act, one cannot take a simplistic view on the matter of tax avoidance.
HELD THAT:- It is well-settled principle that instructions/circulars issued by the CBDT have a binding effect on the AO. More specifically, the binding nature of the abovementioned instruction issued by the CBDT has been confirmed by the Hon'ble Delhi High Court in case of Sony India (P) Ltd. vs. CBDT [2006 (10) TMI 88 - DELHI HIGH COURT]. Since the circulars issued by the CBDT have a binding effect on the tax authorities, Circular No. 14 of 2001 issued by the CBDT would also have a binding effect on the AO/TPO who is duty-bound to demonstrate that the assessee has manipulated its prices to shift profits outside India, before any transfer pricing adjustment is made.
It is clear that the intention of s. 92C(3) has always been that scrutiny of the international transactions of an assessee can only be done if the AO/TPO can prove that the circumstances enumerated in cls. (a) to (d) are satisfied. Even where any infirmity is identified by the AO/TPO, the action of the AO/TPO would be restricted to taking remedial action commensurate with the infirmity identified by him, and not beyond. For instance, if there is a finding, based on evidence, for satisfaction of the condition of s. 92C(3)(d), the AO/TPO could, at best, use his judgment as regards any information/document, unreasonably withheld by the taxpayer, for the purpose of making the assessment. On the other hand, for a case where condition of s. 92C(3)(a) is triggered, and not triggering any of the other conditions of s. 92C(3), the AO/TPO has to use the data used by the taxpayer and modify the analysis of the taxpayer only to the extent that the computation of the ALP deviates from sub-ss. (1) and (2) of s. 92C.
On a combined reading of ss. 92C and 92D, and rr. 10B and 10D, it is clear that the data used for the purpose of conducting a comparability analysis should relate to the relevant financial year [if the proviso to r. 10B (4) is not attracted]; and be available as on the specified date. It should be noted that both the conditions are cumulative in nature. If any one of the conditions is not satisfied, the relevant comparable ought not to be included in the comparability analysis.
Sec. 92C r/w r. 10C provide that the ALP of an international transaction shall be determined by any of the five prescribed methods, being the most appropriate method. In connection with the above, while conducting the TP study, the learned counsel had selected the CPM as the most appropriate method, after evaluating the criterion laid down in r. 10C(2).
In view of the submissions and based on the provisions of the law, the learned counsel had argued that the TPO and the CIT(A) have erred, in including companies having any related party transactions. Without prejudice to the above contention, even if companies having related party transactions were to be included in the set of the final comparables, the filter of 25 per cent over sales is ad hoc, and without any basis. Further, even if it were be assumed that companies with related party transactions could be included on the basis of the 25 per cent filter, the learned counsel submitted that the TPO/CIT(A) should have then also rejected two more companies, namely, Hinduja TMT Ltd. [margin computed by the CIT(A) at 111.87 per cent, normalized to 32.71 per cent] and Xansa India Ltd. [margin computed by the CIT(A) at 25.78 per cent] on the basis that these companies have related party transactions to the tune of 27 per cent and 99 per cent of their sales, respectively.
Compare this situation with the AE giving work to a third party service provider during a slow down. The AE might bargain hard on the price and the third party service provider might even agree a lower price just to keep his business going during the slow down. The fact that a captive service provider (a separate and distinct legal entity in India) is assured of business from an AE (another legal entity outside India) and is compensated at a consistent reasonable mark up over costs incurred by it (i.e., the captive service provider) is sufficient to demonstrate that the captive service provider is effectively insulated from all business risks and, as such, any mark up ought to be only commensurate with the captive service provider's risk taking ability, and not beyond. During the course of the hearing, the Departmental Representative referred to the commercial agreements to demonstrate that the assessee also carries on pricing risk as there is an overall cap on the fee the assessee can charge to the assessee.
Further, the TPO in the assessment made for asst. yr. 2002-03 has herself used an industry benchmark of USD 18-25 per hour. If the industry rates are considered as a potential comparable uncontrolled price (CUP), the man-hour rate of the assessee and the consequent value of the international transactions of the assessee with its AE would be at arm's length.
Conclusion: (i) Since the basic intention behind introducing the TP provisions in the Act is to prevent shifting of profits outside India, and the assessee is claiming benefit u/s 10A of the Act, the TP provisions ought not to be applied to the assessee.
(ii) Circular No. 14 of 2001 issued by the CBDT is binding upon the TPO.
(iii) There was no infirmity in the TP study conducted by the assessee, and the TPO erred in disregarding the same for the purpose of computing framing the assessment and making the transfer pricing adjustment.
(iv) The TPO or the AO needs to satisfy and communicate to the taxpayer the relevant clause u/s 92C(3) which has been triggered by the assessee, which has necessitated the application of the TP provisions. In the instant case, since this was not demonstrated to the assessee, the transfer pricing order is void.
(v) The TPO erred in conducting a fresh study for the purpose of passing his order. The study conducted by the TPO is not in conformity with the provisions of rr. 10B(4) and 10D(4).
(vi) The TPO erred in disregarding the most appropriate method adopted by the assessee in the TP study, and also in using the Prowess database. The TPO did not provide any reason for deviating from the TP study in respect of these matters.
(vii) The TP study cannot be ignored by the TPO, in the absence of any deficiency or insufficiency. Further, the order passed by the TPO appears to have been passed with the intention of making a higher transfer pricing adjustment.
(viii) For the purpose of comparability, companies with even a single rupee of transactions with AE cannot be considered as comparables.
(ix) Adjustment needs to be made to the margins of the comparables to eliminate differences on account of different functions, assets and risks. More specifically, adjustment needs to be made for: (a) Differences in risk profile. (b) Difference in working capital position. (c) Differences in accounting policies.
(x) The TPO has grossly erred in 'normalising' the profits of super profit companies. Such companies should have been excluded from the list of comparables.
(xi) The proviso to s. 92C(2) of the Act provides a standard deduction of 5 per cent to the taxpayers. The only condition for availing this benefit is that it is subject to the option of the taxpayer.
(xii) The decisions of the Tribunal in the cases of Mentor Graphics [2007 (11) TMI 339 - ITAT DELHI-H] and E-Gain Communication [2008 (6) TMI 299 - ITAT PUNE-A] are squarely applicable to the assessee's case.
(xiii) Based on the issues raised and discussed, it should be concluded that the transactions of the assessee with its AEs satisfy the arm's length test, and that the order of the TPO is bad in law and on facts.
(xiv) Without prejudice to the submission of the assessee that the comparables selected by the TPO should hot be considered for the purpose of comparability analysis, the assessee has prepared a working carrying out an accept/reject test on the comparables of the TP study as well as the companies selected by the TPO as comparables. Even on the basis of this statement, the transactions of the assessee with its AEs satisfy the arm's length test.
In the result, the appeal is allowed.
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2008 (9) TMI 462
Issues Involved:1. Whether the AO is required to confront the assessee with evidence gathered against them before passing a best judgment assessment u/s 144 of the IT Act. Summary:1. Requirement to Confront Assessee with Evidence:The question arisen for determination herein is as to whether, having proceeded to frame a best judgment under s. 144 of the IT Act, it is incumbent on the AO to confront the assessee with evidence gathered against the assessee before passing the assessment order using that evidence against the assessee. 2. Assessee's Claim and Evidence:The assessee claimed his income was agricultural, supported by J. Forms and affidavits from himself and his father. The AO issued letters to commission agents to confirm the sale of crops and issuance of J. Forms. The agents confirmed the issuance of J. Forms but denied any crop sales during the relevant financial years. 3. AO's Findings:The AO held that the assessee was non-cooperative, had no land in his name, and provided irrelevant J. Forms and self-serving affidavits. Consequently, the AO treated the income as income from other sources. 4. CIT(A) Confirmation:The CIT(A) confirmed the AO's order, leading to the assessee's appeal. 5. Assessee's Argument:The learned counsel for the assessee argued that the AO erred by relying on evidence gathered at the assessee's back without confronting him, violating principles of natural justice and rendering the assessment order void ab initio. 6. Departmental Representative's Argument:The learned Departmental Representative supported the AO's order, stating that the burden of proof was on the assessee, who failed to provide concrete evidence of agricultural income and was non-cooperative throughout the proceedings. 7. Tribunal's Analysis:Sec. 144 requires the AO to give the assessee an opportunity of being heard before making a best judgment assessment. The Tribunal noted that the legislature's amendment to s. 144 emphasized the necessity of this opportunity. The Tribunal referenced case law supporting the principle that material gathered by the AO must be disclosed to the assessee for rebuttal. 8. Conclusion:The Tribunal held that the AO's failure to confront the assessee with the commission agents' evidence violated principles of natural justice, making the assessment liable to be set aside. The assessment was restored to the AO for de novo consideration, with instructions to provide the assessee an opportunity to rebut the evidence. 9. Result:In the result, for statistical purposes, both the appeals are treated as allowed.
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2008 (9) TMI 461
Issues Involved:
1. Validity of service of notice under Section 148 of the IT Act.
2. Validity of ex parte assessment framed under Section 144 of the IT Act.
3. Addition of Rs. 21,500 on account of deposit in SB a/c No. 457.
4. Addition of Rs. 17 lacs on account of unexplained investment in purchase of FDRs.
Detailed Analysis:
1. Validity of Service of Notice under Section 148 of the IT Act:
The assessee contended that the notice under Section 148 was invalid as it was served on his wife, not on him personally. The CIT(A) held that service on the wife was valid since there was no other male member in the family and the assessee was abroad. The Tribunal upheld this, citing Section 282(1) of the IT Act and Rule 15 of Order V of the CPC, which allows service on any adult member of the family, male or female. The Tribunal found the service of notice on the wife in the absence of the assessee to be in accordance with law.
2. Validity of Ex Parte Assessment under Section 144 of the IT Act:
The assessee argued that the ex parte assessment under Section 144 was invalid as the notices under Section 142(1) were not properly served. The CIT(A) disagreed, noting that notices were served by affixture and that the assessee did not provide evidence to support his claim of being out of the country. The Tribunal upheld the CIT(A)'s decision, finding that due opportunity was given to the assessee, and the assessment was rightly completed under Section 144.
3. Addition of Rs. 21,500 on Account of Deposit in SB a/c No. 457:
The AO added Rs. 21,500 as unexplained investment. The assessee claimed it was from a prior withdrawal of Rs. 21,000. The CIT(A) rejected this, stating the assessee failed to prove the recycling of the withdrawn amount. The Tribunal did not provide further analysis on this issue, as the primary focus was on the larger sum of Rs. 17 lacs.
4. Addition of Rs. 17 lacs on Account of Unexplained Investment in Purchase of FDRs:
The AO treated the purchase of FDRs as unexplained investment. The assessee argued that the funds belonged to Shri R.K. Samuel, who had deposited the money and later asked for its premature encashment. The CIT(A) accepted this explanation, noting the assessee's poor financial condition and the affidavit from Shri Samuel confirming the funds were his. The Tribunal found the matter directly related to the case of Shri R.K. Samuel, which had been remitted to the AO for fresh decision. Consequently, the Tribunal also remitted the present case to the AO for a fresh decision in line with the outcome of Shri Samuel's case.
Conclusion:
The Tribunal upheld the validity of the notice under Section 148 and the ex parte assessment under Section 144. The addition of Rs. 21,500 was not specifically addressed further. The addition of Rs. 17 lacs was remitted to the AO for fresh consideration in line with the related case of Shri R.K. Samuel.
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2008 (9) TMI 460
Issues Involved:
Department's appeal against deletion of GP rate additions and other additions for asst. yrs. 2002-03 to 2005-06. Assessee's cross-objections on various grounds including GP rate addition, limitation of assessment, legal infirmity in assessment order, and interest under sections 234A, 234B.
Analysis:
1. Department's Appeal:
The Department appealed against the deletion of GP rate additions and other additions for multiple assessment years. The grounds included errors by the CIT(A) in deleting the additions without proper appreciation of evidence. The CIT(A) was criticized for not considering the estimate of sales based on raw material consumed and seized evidence, among other factors. Additionally, the Department contested the deletion of specific additions related to 'lawn charges' and 'heritage banquet hall,' highlighting the lack of complete details provided by the assessee.
2. Assessee's Cross-objections:
The assessee raised cross-objections on various grounds, including challenging the addition of GP rate and disputing the assessment's limitation. The cross-objections also questioned the legal infirmity in the assessment order, arguing that the CIT(A) erred in concluding that the assessment was not barred by limitation. The assessee further contended that interest under sections 234A and 234B was not mandatory, presenting explanations for non-chargeability of interest until a specific date.
3. Limitation of Assessment:
A crucial issue raised in the cross-objections was the limitation of assessment. The CIT(A) had ruled that the assessment was not time-barred, based on the assessment order date. However, the assessee provided various arguments challenging this decision, including discrepancies in weight, lack of inspection, and delays in serving assessment orders. The Tribunal found that the CIT(A) did not adequately consider these arguments, leading to a non-speaking order against the assessee.
4. Judicial Review and Remittance:
The Tribunal, noting the violation of natural justice principles, remitted the issue of limitation back to the CIT(A) for a proper review considering all arguments raised by the assessee. The failure to address specific contentions and material averments led to the decision for substantial justice. As the limitation issue impacted other grounds, the Tribunal refrained from delving into other issues until the limitation matter was resolved.
5. Final Decision:
For statistical purposes, the Tribunal treated all appeals of the assessees as allowed and the cross-objections of the assessees as well as the appeals of the Department as dismissed. The commonality of facts across all appeals and cross-objections led to a uniform decision for statistical purposes, pending the resolution of the limitation issue.
This comprehensive analysis highlights the key issues, arguments, and the Tribunal's decision regarding the Department's appeal and the assessee's cross-objections, particularly focusing on the critical aspect of the limitation of assessment and the subsequent judicial review and remittance for a fair consideration of all relevant factors.
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2008 (9) TMI 459
Issues Involved:
1. Legality of the order of CIT(A) and Asstt. CIT.
2. Validity of proceedings initiated under Section 147.
3. Consideration of explanations and affidavits provided by the assessee.
4. Addition of Rs. 22,58,241 and charging of interest under Sections 234B and 234C.
Issue-wise Detailed Analysis:
1. Legality of the Order of CIT(A) and Asstt. CIT:
The assessee argued that both the CIT(A) and Asstt. CIT's orders were "wrong, illegal and without justification." The Tribunal examined the original assessment process and found that the Assessing Officer (AO) had indeed considered all relevant details and explanations provided by the assessee during the original assessment. The AO had issued various questionnaires and received detailed responses, indicating a thorough examination of the case. The Tribunal concluded that the AO had applied his mind and that the original assessment was conducted properly, making the subsequent orders legally unjustified.
2. Validity of Proceedings Initiated Under Section 147:
The assessee contended that the provisions of Section 147 were not applicable, arguing that the reopening of the assessment was merely a "change of opinion." The Tribunal reviewed the reasons recorded by the AO for reopening the assessment, which were based on discrepancies found during a survey under Section 133A. However, the Tribunal noted that all material facts were already available with the AO at the time of the original assessment, and no new information had emerged to justify the reopening. The Tribunal cited several legal precedents, including CIT vs. Kelvinator of India Ltd. and CIT vs. Foramer France, to support the principle that reassessment cannot be initiated merely based on a change of opinion. Consequently, the Tribunal found the reopening of the assessment under Section 147 to be invalid.
3. Consideration of Explanations and Affidavits Provided by the Assessee:
The assessee argued that the AO and CIT(A) had erred in not considering the explanations and affidavits provided during the assessment proceedings. The Tribunal observed that the AO had indeed received and reviewed affidavits from various individuals claiming ownership of the gold. However, the AO had dismissed these affidavits as self-serving and unreliable, given the lack of supporting evidence and the assessee's inability to identify the owners during the survey. The Tribunal upheld the AO's decision to disregard the affidavits, noting that the burden of proof was on the assessee to provide credible evidence.
4. Addition of Rs. 22,58,241 and Charging of Interest Under Sections 234B and 234C:
The AO had added Rs. 22,58,241 to the assessee's income, representing the value of unexplained gold stock. The Tribunal found that the AO had already considered the excess stock during the original assessment and had accepted the assessee's voluntary surrender of additional income amounting to Rs. 14,00,000. The Tribunal concluded that the AO's decision to reopen the assessment and make further additions was unjustified, as it was based on the same set of facts already examined. Consequently, the Tribunal quashed the reassessment and allowed the appeal, nullifying the additional income and interest charges.
Conclusion:
The Tribunal quashed the reassessment proceedings initiated under Section 147, finding them to be based on a mere change of opinion without any new material facts. The original assessment was deemed proper and thorough, with all relevant explanations and affidavits considered. The addition of Rs. 22,58,241 and the charging of interest under Sections 234B and 234C were also nullified, resulting in the appeal being allowed in favor of the assessee.
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2008 (9) TMI 450
Non-service of notice within time as per Section 143(2)(ii) of Customs Act - Addition on account of suppressed sales.
Service of notice - Whether s. 292BB is a curative provision and therefore cures the notices served before 1st April, 2008 of their infirmities - Rule against retrospectivity - notice u/s.143(2)(ii) was not served upon as per the time provision contained therein - validity of assessment order.
HELD THAT:- It is well established that the rule against retrospectivity has no application to enactments which affect only the procedure. No person has a vested right in any course of procedure, but only the right of prosecution or defence in the manner prescribed for the time being, and if an Act alters that mode of procedure, he can only proceed according to the altered mode. Alterations in the form of procedure are always retrospective.
Sec. 292BB deals with service of notices which are matters of procedure and hence would always have retrospective (retroactive would be a more appropriate phrase) operation and therefore cure the procedural infirmities and irregularities in the matter of service of notice. This aspect of the matter is squarely covered by the judgment of the Hon'ble jurisdictional High Court in CWT vs. Kasturbhai Mayabhai [1985 (11) TMI 9 - GUJARAT HIGH COURT] [affirmed by the Hon'ble Supreme Court in CWT vs. Sharvan Kumar Swarup & Sons [1994 (9) TMI 2 - SUPREME COURT].
Since the Hon'ble jurisdictional High Court and Hon'ble Supreme Court have comprehensively dealt with this aspect of the matter, it is not necessary for us to deal further with the issue that procedural provisions are always applicable to pending matters. We therefore hold that the provisions of s. 292BB are procedural in nature and hence they would cure all the notices of their deficiencies regardless of the fact that they were served before 1st April, 2008.
It was contended that s. 292BB was not on the statute book as on the first day of the relevant assessment year under appeal and hence cannot be applied to that year. We are unable to agree with the aforesaid submissions also. where an assessment was made by an authority lacking jurisdiction but if the relevant law is amended afterwards by inserting a retrospective or retroactive or validating or curative or declaratory provision with the object of conferring upon that authority proper jurisdiction, which it originally lacked, the appellate Court/Tribunal should, In our considered opinion, not only take that amendment into account but also hold that the authority had the jurisdiction when it made the assessment.
We therefore hold that the provisions of s. 292BB will have to be invoked in all the pending proceedings including appellate proceedings after 31st March, 2008 otherwise the very purpose of disabling an assessee from taking any objection as to the service of notice would be defeated.
Therefore, the irresistible conclusion is that s. 292BB cures the notices of their deficiencies after 31st March, 2008 and therefore an assessee cannot be permitted to raise any of the objections enumerated in the said section after 31st March, 2008 once it is shown that an assessee has appeared in any proceeding or cooperated in any inquiry related to an assessment.
It shall now be deemed in terms of s. 292BB that the notice which was required to be served as per the time provision of s. 143 (2) has been duly served upon the assessee in time in accordance with the relevant provisions of the Act and therefore the assessee stands statutorily precluded from taking any objection at this stage that the notice was not served upon him, or was not served upon him in time, or was served upon him in an improper manner. All his submissions in this behalf are therefore rejected.
Addition on account of suppressed sales - HELD THAT:- AO had made addition towards suppressed profits and also rejected the books of account and accordingly worked out further addition on account of low GP. However he telescoped the addition on account of low GP against the larger addition and consequently did not make any addition separately for low GP. Thus the addition towards suppressed profits made by the AO included the other addition and it was for this reason that the AO had not made any separate addition for low GP. The ld CIT(A) ought to have considered this aspect of the matter while adjudicating upon and deleting the addition - Therefore, the order passed by the ld CIT(A) deleting the addition is set aside and the matter is restored to his file for a fresh decision. Now, the issue raised in the other appeal is also restored to his file for a fresh decision depending upon his order in the aforesaid appeal.
Resultantly, the appeals filed by the Department are treated as allowed for statistical purposes.
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2008 (9) TMI 448
Issues Involved:
Treatment of DEPB license benefits/receipts under s. 80HHC(3) of the IT Act.
Analysis:
1. The Special Bench was constituted to address the conflicting opinions regarding the treatment of DEPB license benefits/receipts by the assessee under s. 80HHC(3) of the IT Act. The Tribunal noted varying interpretations, with some considering it a receipt under different clauses of s. 28 of the Act. The Finance Act, 2005 introduced amendments, including the insertion of clauses (iiid) and (iiie) in s. 28, and a proviso to s. 80HHC(3) with retrospective effect from 1st April, 1998. This amendment clarified that DEPB receipts are to be included as part of the business income and profit for computing deductions under s. 80HHC(3). Consequently, the Tribunal set aside assessments in all appeals to re-examine the claim of the assessee in light of the amended provisions.
2. The Tribunal directed the Assessing Officer to review the conditions for claiming deduction under ss. 28 and 80HHC(3) as per the amendments introduced by the Finance Act, 2005. The appeals under consideration were allowed for statistical purposes, indicating that the assessments were to be reconsidered based on the revised understanding of the treatment of DEPB receipts. The cases were remanded back to the AO for fresh examination in accordance with the amended provisions to ensure a fair and just assessment process.
3. Additionally, certain other appeals and cross-objections involving different issues were identified. These cases were deemed to require a decision by the Division Bench for appropriate disposal. It was clarified that the issues raised in these specific appeals, distinct from the DEPB treatment matter, would be addressed separately by the Division Bench to ensure a comprehensive and accurate resolution of all legal matters raised in the appeals.
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2008 (9) TMI 447
Liability of the assessee company to tax under the Interest-tax Act, 1974 - financial company under the Interest Tax Act, 1974 or not - principal business is claimed to be of leasing, reckoning the same both from the percentage of turnover, or that of the funds employed (asset) wise - Assessee company claims that the leasing business is not among the prescribed businesses u/s 2(5B) of the Act which defines a financial company which could be treated as a Credit Institution u/s 2(5A) chargeable to tax u/s 4 of the Act - Special Bench order.
HELD THAT:- In the case of Rajath Leasing & Finance Ltd.[2003 (10) TMI 293 - ITAT RAJKOT] it is held that if the break-up of income under various heads was examined, then, in all the years under consideration, income from lease rentals constituted more than 50 per cent of the total receipts and as the leasing is not an activity which falls under any of the sub-clauses from (i) to (v) of section 2(5B), it cannot be said that the company was carrying on exclusively, or almost exclusively, two or more classes of business referred to in sub-clauses (i) to (v) of section 2(5B) of the Act. Therefore, it was held that the company is not a financial company as defined in section 2(5B) and consequently, it is not a credit institution as envisaged in section 2(5A) of the Act. Since it is not a credit institution as defined in the Act, the assessee-company will be out of the purview of interest-tax under the interest-tax Act, 1974.
In the present case, its income and assets being less than 50 per cent, its principal business may not be lease and the provision of Interest-tax Act may not be excluded on this ground of negative test. Further the mere fact that assessee is a public limited company and the Reserve Bank of India has classified it as a Leasing Company may not help the assessee. In our opinion, it cannot be said that the principal business of the assessee was in either of the two activities i.e., hire purchase loan business or investment business, the individual activity being less than 50 per cent. In this view of the matter the assessee cannot be a carrying on leasing as its principal business so as to exclude it from the term 'financial company' unless the theory of largest business is applied to hold it as a 'principal business'.
In the present case, if the entire income of the assessee excluding lease is taken into consideration it is 53 per cent (or 46 per cent if we consider the equalization reserve) on income as a base or 58 per cent if assets are taken as a base. These percentages cannot in our opinion be said to be almost exclusively not to speak of exclusively. The assessee-company in such circumstances may not fall into the definition of credit institution as envisaged by either clauses (i) to (va) or clause (vi) of section 2(5B) of the Act. The income in respect of which the same are covered for the purpose of credit institution, also collectively do not form exclusively or almost exclusively the business activities in both the cases, i.e., income/asset wise.
There is no reason to restrict the power of the Tribunal u/s 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have right to file an appeal/cross-objections before the Tribunal. Undoubtedly, the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider the question in order to correctly assess the tax liability of an assessee. When the assessee itself has stated and claimed that it was a finance lease and not operating lease what more facts are required to entertained the ground.
In these circumstances there is no merit in assessee's claim that it not a financial company to which the provisions of Interest. Tax Act would apply. It would be a residuary financial company cumulatively engaged almost exclusively in one or more businesses enumerated in section 2(5B) of the Act.
On merits of the case the submission of the assessee is that most of the receipts are not interest on loans and advances. It is submitted that section 2(7) of the Interest Tax Act, defines "interest" to mean interest on loans and advances made in India and includes (a) commitment charges on unutilized portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India. It however excludes (i) interest referred to in sub- section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills.
According to the assessee the definition of "Interest" as per section 2(7) of the Interest Tax Act, 1974 is a restrictive definition since the word used is "means" and not "includes".
Lease Income - In our opinion, when a part of the finance lease payment is inherently in the nature of interest inasmuch as it is compensation for time value of money, it could not be termed as not to be 'interest on loans and advances' for its inclusion in chargeable interest under the Interest-tax Act. There is no warrant in saying that merely because a payment is in the nature of interest, it would not mean that it was interest on loans and advances and could not be brought to tax under the Interest-tax Act. It is an interest on 'loan and advances'. Lease rental component attributable to interest, would be includible in 'chargeable interest' under the Interest Tax Act. We therefore set aside the order of the CIT(A) and direct the inclusion of interest portion of receipts imbedded in the lease rental, it being a financial lease.
Though the assessee had stated in Income-tax proceedings that it was a case of financial lease and in that case as we have held it would be a case of loan transaction and interest portion of the receipts in lease rentals would be chargeable to tax. The necessary material has not been on record to decide as to how much of interest is included in the instalment. The matter thus requires examination in the light of the above decisions of Sundaram Finance Ltd.'s case [1965 (11) TMI 123 - SUPREME COURT] and Deep Hire Purchase (P) Ltd. [2004 (11) TMI 38 - PUNJAB AND HARYANA HIGH COURT]. We therefore set aside the matter to be work out the interest portion and bring it to tax.
Hire Purchase - first dispute is with regard to income from hire purchase - It was concluded that the transaction was in the nature of contract of hire purchase having an element of bailment as well as that of sale, therefore, the hire purchase transaction in the present case cannot be considered as transactions of money-lending or advancing of loans, and therefore, such hire purchase transactions did not attract the provisions of Interest-tax Act.
In Kirloskar Leasing & Finance Ltd.'s case [2001 (3) TMI 280 - ITAT PUNE], it is held that the ownership is the deciding factor and where the equipment is sold and ownership is with the hirer, the agreement becomes a loan transaction and where the ownership is with the hiring company or with the leasing company and there is no sale of the equipment, it is a hire agreement and hire transaction or lease transaction. In Visharad Automobiles Financiers (P.) Ltd.'s case [2006 (8) TMI 95 - ITAT, DELHI], it is held that the agreements being hire purchase agreements in accordance with the provisions of Hire Purchase Act, 1972 they could not be treated as financing agreements and hire charges could not be brought to charge under the Interest-tax Act, 1974.
We therefore set aside the matter to be examined afresh in the light of aforesaid.
Interest from inter-corporate deposits - It might be true that assessees had offered it to tax initially but he claimed it as not taxable and therefore the matter has to be examined on merits and to determine as to whether it is taxable under the Act. We find it is not taxable in the light of the decision in the case of Utkarsh Finance (P.) Ltd.[2005 (11) TMI 167 - ITAT AHMEDABAD-A] wherein Tribunal after considering the decision in the case of Federation of Andhra Pradesh Chambers of Commerce & Industry v. State of AP [2000 (8) TMI 78 - SUPREME COURT], CIT v. Sahara India Savings & Investment Corpn. Ltd.[2003 (9) TMI 74 - ALLAHABAD HIGH COURT] and following the decisions in the case of Oriental Insurance Co. Ltd. v. Dy. CIT [2004 (1) TMI 311 - ITAT DELHI-A] held that interest on inter-corporate deposits are not chargeable to interest tax, as the deposits are in the nature of loan or advances.
In these circumstance we hold that interest on inter-corporate deposits is not an interest on loan or advance and therefore would not be includible in the chargeable interest under the Interest Tax Act.
Interest on delayed payment from debtors - Assessee contends that interest from delayed payment from debtors is not on account of interest on loans and advance and hence is not liable to interest tax.
We get support from the case of Kerala High Court in State Bank of Travancore holding that character of an overdue bill is not synonymous with loans and advances and, therefore, interest on overdue bills is to be excluded for chargeable interest under the Interest-tax Act.
Therefore, we hold that interest on interest on delayed payments would not be an interest on loan or advance and therefore would not be includible in the chargeable interest under the Interest-tax Act.
Other interest - The next dispute is that for considering other Interest as income liable for interest tax. It is submitted that this is not in the nature of interest and loans and advances. The amount in very meagre and it is not forming part of principal business of the company and hence it was submitted that the same should be excluded.
No specific reason is advanced to demonstrate that other income is not in the nature of interest on loans and advances and hence cannot be covered. The income from bill discounting is covered under interest tax is income. The break up of which is Bill Discounting charges plus Processing fees. The processing fees is not in the nature of interest on loans and advances and hence needs to be excluded.
The ld CIT (A) has erred in confirming charging of interest u/s 12A and 12B of the Act. No arguments are raised by the assessee as to why interest is not chargeable. It is consequential and there be modified accordingly.
Disallowance of bad debts and provision for bad debts - contention of the assessee is that the company is a finance company and as per the requirements of Reserve Bank of India, the company is lending money in different ways by way of leasing, hire purchase, inter-corporate deposits and bill discounting. The incomes in respect of all these activities are offered for taxation under the head "Business income". As this is the business of the company, the company is granting, leasing, hire purchase, inter-corporate deposits or bill discounting in its ordinary course of business.
The revenue authorities' claim is these transactions cannot be considered as regular transactions in the business of banking or money lending since they are in respect of bill discounting and inter-corporate deposits. As regards Bill discounting we are not in agreement with the CIT(A) that it cannot be equated with the business of banking or of money lending business. In this activity the finance is provide against bills that are discounted and the income therefrom is appearing in profit and loss account. The mere fact that it is less or not earned this year as on 31-3-2001 does not make any difference so long as the carries the business as an activity. We therefore vacate the order of the revenue authorities on this issue and allow the claim of the assessee.
Inter-corporate deposits debts in respect of Mafatlal Industries Ltd. and Precession Fasteners Ltd. the amounts relate to various advances/deposits made by the appellant company which have been made out the deposits received by the appellant itself from various companies including the parent company. Such receipt of advances/deposit, the advancement of the deposits in other concerns is not the business of the assessee and we have held that it in interest tax appeals that these are not loans or advance these cannot be allowed as bad debt arising in money lending business of the assessee.
Bad debts claim in hire purchase business which is though, one of the main business of the assessee, the claim u/s 36(1)(vii) r/w section 36(2) cannot be allowed unless a finding is reached that hire purchase business was its financing business and we have set aside this aspect in interest tax appeal, we set aside the issue in these appeals as well and the AO shall also be examine the issue in that direction.
Disallowance of Rs. 60,000 towards administrative and other expenses relating the same as expenditure incurred in earning dividend income, which is exempt from tax - HELD THAT:- There is no dispute and there cannot be any doubt, that some expenditure is incurred for making or earning the income from dividend. In case of mixed accounting the expenditure is not identified as such, which directly relates to earning of dividend. But that cannot be a ground to say that no expenditure is incurred for earning dividend income or that no expenditure could be related to that Income. Upon hearing both parties and considering material available on record, interest of justice will be served if 10 per cent of the expenditure is allocated for earning dividend and disallowed under Section 14A of the Act. We direct accordingly.
Provision made for non-performing assets of Rs. 1,32,12,521 in asst. yr. 2001-02 and Rs. 2,22,96,657 in asst. yr. 2002-03 as per the directives of the RBI - HELD THAT:- The decision of Madras High Court in the case of TN. POWER FINANCE AND INFRASTRUCTURE DEVELOPMENT CORPORATION LTD. VERSUS JOINT COMMISSIONER OF INCOME-TAX. [2005 (10) TMI 38 - MADRAS HIGH COURT] is on the issue and decides it against the assessee by holding The assessee was not entitled to deduction, in view of the Explanation to Section 36(1)(vii) which says that the provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction - the order of the CIT(A) on this issue upheld.
Deletion of disallowance of proportionate interest expenses amounting to Rs. 22,77,840 under Section14A of the IT Act - HELD THAT:- The observation of the CIT(A) that factual position which was found to be correct with reference to the balance sheet of the relevant financial year, the plea of the assessee company that no borrowed funds have been utilized for the small investment of Rs. 12.17 lacs where income is claimed to be exempt is therefore valid and Justified, cannot be found fault with. The figures shown above which also reflected in the relevant balance sheet do not indicate that the investment made by the assessee are out of borrowed funds, this being so, there is no reason that warrants for interference of the order of the CIT(A) on this issue, which is accordingly upheld, and this ground of Revenue is dismissed.
Non-inclusion of lease income of Rs. 4,44.367 in respect of various assets given on lease - HELD THAT:- The assessee is subsidiary of Gujarat Gas Company. The report was prepared by a firm of chartered accountants, Ernst and Young on the direction of GGCL for amalgamation and merger for efficient and effective functioning of GGCL and group companies. The charges bill was originally prepared in the name of GGCL, though later on the name of appellant company has been inserted by hand showing C/o GGCL. As this study was not commissioned by the assessee company, this expenditure does not relate to them and has nothing to do with the assessee. It could not be said to have been incurred wholly and exclusively for the carrying on business of the assessee. These findings were not successfully challenged or shown to be wrong in law therefore, considering the reasons given by AO and the CIT(A) we are of the opinion that the Revenue authorities are justified in disallowing the claim.
Appeal allowed in part.
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2008 (9) TMI 446
Issues Involved:1. Whether the deletion of the addition of Rs. 15,03,991, being the amount of provision for depreciation for earlier years written back, in computing tax liability u/s 115JB of the IT Act, 1961, is correct in law. Summary:Issue 1: Deletion of Addition of Rs. 15,03,991 in Computing Tax Liability u/s 115JBThe appeal by the Revenue challenges the order by the Commissioner of Income-tax (Appeals), Gwalior, which allowed the assessee's claim regarding the excess provision of depreciation written back. The Assessing Officer (AO) had disallowed the claim of Rs. 15,03,991, arguing that the assessee had not included the amount of depreciation written back in the Profit & Loss (P&L) account, thereby reducing the book profit by Rs. 22,66,988, which was not deductible for computing Minimum Alternate Tax (MAT) liability u/s 115JB. The Revenue's contention was based on the premise that the depreciation for the relevant years (1997-98 to 2000-01) had been provided for, thus deflating the profit for those years. The AO's treatment was claimed to be in line with Explanation 1 to s. 115JB. The assessee argued that the relief was granted based on s. 115JB. The accounting policy for depreciation on fixed assets was changed from the "written down value" (WDV) method to the "straight line method" (SLM). According to AS-6 issued by the ICAI, the difference in provision for depreciation due to the change in method should be adjusted in the P&L account. The assessee had an excess provision of Rs. 22,66,988, which was written back to the P&L account, with Rs. 15,03,991 relating to the assessment years 1997-98 to 2000-01. The Tribunal noted that Explanation 1 to s. 115JB allows for a reduction in profit for any amount withdrawn from a reserve or provision created for any year relevant to assessment year commencing on or after 1st April, 1997, provided the book profit of such year had been increased by those reserves or provisions. The Tribunal found that the MAT provision was applicable for the years in question, and the reduction in book profit for the current year due to the write-back of depreciation for preceding years was correctly directed by the CIT(A). The Tribunal also considered the decision in PSI Data Systems Ltd. vs. Dy. CIT, which supported the reduction of the amount withdrawn from depreciation written back from the book profit for the year. The Tribunal concluded that the basic condition for the reduction, i.e., the amount written back should have increased the profit for the relevant years, was met. The assessee had shown that the tax for those years was computed under regular provisions, and there was no claim of tax reduction due to the book profit represented by the excess depreciation written back. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the reduction of Rs. 15,03,991 from the book profit for the purpose of computing MAT liability u/s 115JB.
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2008 (9) TMI 439
Double Taxation Relief - denial of deduction u/s. 80HHE - claim for incentive - PE in India by way of a branch office - whether or not the assessee being denied deduction u/s. 80HHE in respect of export of software by its Indian branch office indeed amounts to discrimination against the assessee company in terms of the provisions of the Indo-US tax treaty - Article 26-Non-discrimination - test of reasonableness - Role of OECD Commentary in interpretating the provisions of the Indo-US tax treaty.
Whether or not the assessee being denied deduction under Section 80HHE in respect of export of software by its Indian branch office indeed amounts to discrimination against the assesses company in terms of the provisions of the Indo US tax treaty?
HELD THAT:- In our considered view, the OECD Model Convention Commentary has a role to play in construing the scope of provisions of the Indo-US tax treaty, only to the extent (i) the relevant provision, though based on OECD Model Convention, is not explained in the Technical Explanation to the US Model Convention, and (ii) specific reference is made to the OECD Model Convention Commentary, and the interpretation so given by the OECD Model Convention Commentary is not in conflict with the Technical Explanation to the US Model Convention. The case before us does not fit into any of these categories because while the relevant clause of the non-discrimination article is the same as art. 24(2) of the OECD Model Convention, the scope of non-discrimination is, as we will see a little later, well defined in the Technical Explanation and also because the scheme of non-discrimination in the OECD Model Convention and US Model Convention is materially different. It is only elementary that a sound interpretation of a sub-article of non-discrimination article cannot be based on reading of that clause in isolation, but it would require that the non-discrimination clause as a whole, or even a treaty as a whole, is to be carefully analyzed.
Scope of non-discrimination clauses in the tax treaties - The expressions 'discrimination' and 'non-discrimination' are not defined in the tax treaties, but, as noted by Brian J. Arnold and Michael J. McIntyre, in their oft referred book 'International Tax Primer' (Second Edition @ p. 128), "in general, discrimination means distinguishing between persons adversely on the grounds that are unreasonable, irrelevant, or arbitrary".
It is thus clear that in order to establish discrimination, not only that a taxpayer has to demonstrate that he has been subjected to different treatment vis-a-vis other taxpayers, but also that the ground for this differentiation in treatment is unreasonable, arbitrary or irrelevant.
This principle on reasonableness of the differential treatment is also evident from the Technical Explanation issued by the treaty partner State, i.e. US, to art. 26(2) its Model Convention which, barring the opening words "except where the provisions of para 3 of art. 7 (business profits) apply" is exactly the same as art. 26(2) of Indo-US tax treaty.
It is also interesting to note that art. 26(5) of the Indo-US tax treaty, inter alia, states that nothing in the non-discrimination article, "shall be construed as preventing either Contracting State from imposing the taxes described in art. 14 (permanent establishment tax)". A permanent establishment tax, which is levied in the US, obviously puts an additional tax burden on the PEs of Indian enterprise vis-a-vis US enterprise, and yet it is not construed as an act of discrimination against the PEs of Indian enterprise. This strengthens our interpretation that to make out a case for discrimination, demonstrating differential treatment, by itself, cannot suffice. In our considered view, to establish a case discrimination, it is to be established that the basis of differentiation lacks any coherent relationship with the object ought to be achieved by the legal provision which is alleged to be discriminatory.
In the light of the discussions, we are of the considered view that a differential treatment to the PE of the US tax resident, by itself, cannot be treated as covered by the scope of rule prohibiting non-discrimination. The true test for deciding whether or not there is a non-discrimination is whether or not the resident enterprise and the PE of the other Contracting State, who are similarly situated, get the same tax treatment or not. There could indeed be different tax treatments to the PE of the other Contracting State and the enterprise of the source State, but, as long as such tax differentiation could be justified on the grounds of dissimilarities in their situation, the prohibition against discrimination cannot be invoked.
Conclusions on the discrimination issue - In view of the discussions, we are of the considered opinion that, on the facts and in the circumstances of this case and in the light of the provisions of the Indo-US tax treaty, restricting entitlement to deduction u/s. 80HHE only to the resident taxpayers did not constitute discrimination against the non-resident taxpayers. We, therefore, uphold the CIT(A)'s action of rejecting the taxpayer's claim of deduction u/s. 80HHE. As we do so, we also make it clear that while our reasoning is different, our conclusion is the same as arrived by the ld CIT(A). We confirm the conclusion arrived at by the CIT(A) on this issue and decline to interfere in the matter to that extent - the ground of appeal against denial of deduction u/s. 80HHE to the assessee, is thus rejected.
Eligibility for deduction u/s. 10A - set off of losses incurred by new unit - Respectfully following the cases of Mindtree Consulting (P) Ltd. vs. Asstt. CIT [2005 (11) TMI 176 - ITAT BANGALORE-B] and Honeywell International (India) (P) Ltd. vs. Dy. CIT [2007 (2) TMI 248 - ITAT DELHI-F], in favour of the assessee, we hold that so far as the present assessment year is concerned, the assessee was indeed entitled to claim set off of s. 10A unit loss against business profits of the taxpayer company. We direct the AO to grant relief accordingly.
Disallowance of head office expenditure - deduction u/s 44C - Assessee has not been able to give any details of head office expenses which are attributable to the Indian branch office. He has furnished a certificate from CFO of the assessee company which confirms that such expenditure "definitely exceeds US $ 15,000". In our considered view, this is a vague certificate and. in the absence of details of head office expenditure attributable to Indian operations, we are unable to compute admissible deduction under s. 44C.
We hold that the assessee is not entitled to deduction u/s. 44C even on merits. We, therefore, confirm the conclusion arrived at by the CIT(A) and decline to interfere in the matter.
In the result, the appeal is partly allowed in the terms indicated above.
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