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Reliance Natural Resources Ltd. Versus Addl. CIT, Range 7 (2) Mumbai And Vice-Versa

2016 (7) TMI 562 - ITAT MUMBAI

TDS u/s 195 - non deduction of tax at source on payment to Centre for Investment and Business Advisory, Indonesia as fees for technical services (FTS) under section 9(1)(vii) - Disallowance of expenses under section 40(a)(ia) - India-Indonesia DTAA - Held that:- As contended by the learned A.R. for the assessee, a perusal of the impugned order shows that the learned CIT(A), in coming to the finding he did, has not examined the India-Indonesia DTAA and adjudicated thereon while passing the impugn .....

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etails/submissions in this regard. It is accordingly ordered. - Decided in favour of assessee for statistical purposes. - Disallowance of Expenses incurred for GDRs - revenue or Capital Expenditure - Held that:- Hon'ble Apex Court in the case of Brook Bond India Ltd. (1997 (2) TMI 11 - SUPREME Court ) has held that even though the increase in capital results in expansion of the capital base of the company and incidentally that would help the business of the company and may also help in profi .....

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eased consequent to the issue of GDRs and the said expenditure incurred is clearly capital in nature. We, therefore, finding no infirmity in the impugned order of the learned CIT(A) uphold the finding therein that the said expenditure of ₹ 49,01,024/- paid to Linklaters, U.K. in respect of listing of GDRs is capital expenditure and the same is not allowable under section 37(1) of the Act. - Decided against assessee - Disallowance under section 14A r.w. Rule 8D - Held that:- It is seen .....

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f VFC Securities Pvt. Ltd. vs. ITO [2010 (8) TMI 998 - ITAT MUMBAI ] and in DCIT vs. Alka Securities Ltd. [2012 (7) TMI 982 - ITAT MUMBAI] for A.Y. 2007-08 by Coordinate Benches of this Tribunal. Following the ratio of the aforesaid decisions of this Tribunal (supra), we direct the AO to instruct the disallowance under section 14A of the Act for this year to 5% of the exempt income earned by the assessee - Decided partly in favour of assessee - Disallowance of Expenditure on FCCB issue - Hel .....

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avour of assessee - TDS u/s 195 - non deduction of tds on payment of legal and professional fees, L/C Commission, arranger fees, etc.- Held that:- The issue under consideration is covered by the decision of the Coordinate Bench of this Tribunal in the case of Raymond Ltd. vs. DCIT (2002 (4) TMI 891 - ITAT MUMBAI ) wherein it was held that neither management commission nor underwriting commission nor selling commission would amount to FTS within the meaning of the DTAA with U.K. and consequen .....

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)(i) of the Act is called for. - Decided in favour of assessee - Disallowance of STCL on Loan Assignment - Held that:- Following the decision of the Coordinate Bench of this Tribunal in the case of Siemens Nixdorf Informations systeme GmbH (2016 (4) TMI 384 - ITAT MUMBAI) we uphold the order of the learned CIT(A) in allowing the assessee’s claim for STCL on assignment of loan to M/s. Western Power Alliance Ltd. - Decided in favour of assessee - ITA No. 847/Mum/2011, ITA No. 1425/Mum/2011 - .....

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litation and allied services in various forms to power plants, filed its return of income for A.Y. 2007-08 on 31.10.2007 declaring income of ₹ 28,51,21,095/-. A revised return of income was filed on 19.03.2008 declaring income of ₹ 28,51,21,595 /-, wherein, inter alia, the claim of TDS in the revised return was reduced to ₹ 11.11 crores from the claim of ₹ 20.79 crores in the original return of income and the book profits under section 115JB of the Income Tax Act, 1961 (i .....

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49,74,139/- iii) Disallowance under section 14A of the Act ₹ 5,97,63,000/- iv) Non deduction of withholding tax on interest payments on FCCB ₹ 3,35,70,044/- 2.2 Aggrieved by the order of the assessment for A.Y. 2007-08 dated 07.12.2009, the assessee preferred an appeal before the CIT(A)-13, Mumbai. The learned CIT(A) disposed off the appeal vide the impugned order dated 26.10.2010 allowing the assessee partial relief. 3. Both Revenue and the assessee, being aggrieved by the order of .....

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e to non deduction of tax at source, holding that the said payment of ₹ 7,31,115 made to Centre for Investment & Business Advisory, Indonesia was liable to tax in India as fee for technical service u/s 9(1)(vii) of the Income Tax Act. Your appellant submits that the payment made to the Indonesian Resident for tax due diligence services in Indonesia is not liable to tax in India under Double Tax Avoidance Agreement (DTAA) between India and Indonesia. Therefore no tax was deductible u/s .....

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of capital base. The expenditure ought to have been allowed as incurred wholly and exclusively for the purposes of business. 3. The Learned CIT (A) erred in directing to work out disallowance of administrative expenses u/s 14A at the rate of 6% of average weighted investment in tax free investments. Your appellant submits that as no disallowance could be made out of administrative expenses u/s 14A as Rule 8D came into force from Assessment Year 2008-09 only. Without prejudice, your appellant sub .....

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owance of ₹ 7,31,115/- under section 40(a)(ia) of the Act due to non deduction of tax at source by holding that the said payment to Centre for Investment and Business Advisory, Indonesia was exigible to tax in India as fees for technical services (FTS) under section 9(1)(vii) of the Act. It is contended that the said payment, made to the Indonesian resident for tax due diligence services in Indonesia, is not exigible to tax under the India-Indonesia DTAA and therefore since no tax was dedu .....

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ndonesia. The assessee claimed the said expenditure was revenue in nature in its computation of income. The Assessing Officer (AO), however, disallowed the assessee s claim on the ground that the said expenditure is capital in nature and also disallowed the said expenditure under section 40(a)(ia) of the Act for non-deduction of tax at source under section 195 of the Act. On appeal, the learned CIT(A) upheld the AO s decision that the said expenses are exigible to tax in India under section 9(1) .....

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ee submitted that the AO s view was that the said amount was to be disallowed under section 40(a)(ia) of the Act in view of the assessee s failure to deduct tax under section 195 of the Act. According to the learned A.R., while undisputedly the learned CIT(A) was correct in holding that this amount of ₹ 7,31,115/- paid to the Indonesian entity for tax due diligence is exigible to tax in India under section 9(1)(vii) of the Act, the learned CIT(A) has not considered the relevant provision o .....

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requirement of deducting tax at source thereon under section 195 of the Act. In support of this proposition, the learned A.R., inter alia, placed reliance on the decision of the Authority for Advance Ruling (AAR) in the case of Tekniskil (Sendirian) Berhard vs. CIT (1996) 88 Taxman 439 (Del)/222 ITR 551. 5.4 Per contra, the learned D.R. for Revenue placed reliance on the fining of the learned CIT(A) in the impugned order. 5.5.1 We have heard the rival contentions of both the parties and perused .....

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ever is favourable to it, the learned CIT(A) erred in not considering the DTAA, which is favourable to it, while passing the impugned order. It has been submitted that the India-Indonesia DTAA does not contain any Article in respect of FTS. In these circumstances, it is contended that the said payment for tax due diligence fees to the Indonesian entity would constitute a part of its business income as per Article 7 thereof and therefpre there is no requirement to deduct tax at source on the said .....

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d justice, we restore this issue to the file of the learned CIT(A) to examine the assessee s claim in this regard with respect to the India-Indonesia DTAA and to allow the assessee the benefit of that which is favourable to it, i.e. the DTAA or the Act, in accordance with law and after affording the assessee adequate opportunity of being heard and to submit details/submissions in this regard. It is accordingly ordered. Consequently, ground No. 1 of the assessee s appeal is treated as allowed for .....

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g of GDRs in connection with restructuring and re-organisation of existing business, which were wholly and exclusively for the purposes of assessee s business and not for expansion of capital base and therefore ought to have been allowed as claimed. The learned A.R. for the assessee was heard in support of the grounds raised and prayed that the assessee s claim be allowed. 6.2 The learned D.R. placed strong reliance on the decision of the learned CIT(A) in the impugned order. 6.3.1 We have heard .....

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earned CIT(A) held that the said expenditure is capital in nature placing reliance on the decision of the Hon'ble Apex Court in the case of Brook Bond India Ltd. (225 ITR 798). 6.3.2 We find that the Hon'ble Apex Court in the case of Brook Bond India Ltd. (supra) has held that even though the increase in capital results in expansion of the capital base of the company and incidentally that would help the business of the company and may also help in profit making, the expenses incurred in .....

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Rs and the said expenditure incurred is clearly capital in nature. We, therefore, finding no infirmity in the impugned order of the learned CIT(A) uphold the finding therein that the said expenditure of ₹ 49,01,024/- paid to Linklaters, U.K. in respect of listing of GDRs is capital expenditure and the same is not allowable under section 37(1) of the Act. Consequently ground No. 2 of the assessee s appeal is dismissed. 7. Ground No. 3 - Disallowance under section 14A r.w. Rule 8D 7.1.1 In t .....

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sallowance ought to have been minimal having regard to the minimal transactions of investments in mutual funds (MF) and passive investment in group company shares. 7.1.2 The learned A.R. for the assessee for the assessee submitted that the AO has passed the order giving effect to the impugned order of the learned CIT(A) vide order dated 11.04.2012 and has worked out the disallowance under Rule 8D(2)(iii) at ₹ 14,80,122/-. According to the learned A.R. for the assessee, in the year under co .....

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e Bench of this Tribunal in the case of VFC Securities Pvt. Ltd. vs. ITO in ITA No. 5523/Mum/2009 dated 27.08.2010 and M/s. Alka Securities Ltd. in ITA No. 4657/Mum/2011 dated 18.07.2012, wherein it has been held that disallowance upto the extent of 5% of the total exempt income earned by the assessee to be reasonable. 7.2 Per contra, the learned D.R. placed reliance on the finding of the learned CIT(A) in the impugned order on this issue. 73.1 We have heard the rival contentions of both the par .....

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377; 513.70 lakhs under section 14A r.w. Rule 8D(2)(ii) on the ground that the assessee has utilised borrowed funds for making investment in shares and MFs. The AO also worked out the disallowance under Rule 8D(2)(iii) @0.5% of the average value of investments at ₹ 83.93 lakhs. Thus the total disallowance made by the AO under section 14A w.r. Rule 8D of the I.T. Rules amounted to ₹ 597.63 lakhs (i.e. ₹ 513.7 lakhs plus ₹ 83.93 lakhs). On appeal, the learned CIT(A) held th .....

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alue of investments, which has since been worked out at ₹ 14,80,122/- vide the AO s order dated 11.04.2012. It is in respect of the learned CIT(A) s finding/direction in respect to the disallowance to be made under Rule 8D(2)(iii) of the Rules that the assessee is in appeal before the Tribunal. 7.3.2 The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (ITA No. 626/2010 dated 13.08.2010) has held that the provisions of section 14A of the Act r.w. Rule 8D of the .....

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asis. The Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. & Others vs. CIT (347 ITR 162) has expressed an almost similar view. In this view of the matter, the application of Rule 8D of the Income Tax Rules, 1962 in the case on hand by the authorities below is not sustainable. 7.3.3 It is seen that the case on hand is not one where no exempt income was earned by the assessee. In such circumstances, various Coordinate Benches of this Tribunal have observed that in such cases .....

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ate Benches of this Tribunal. Following the ratio of the aforesaid decisions of this Tribunal (supra), we direct the AO to instruct the disallowance under section 14A of the Act for this year to 5% of the exempt income earned by the assessee of ₹ 49,83,071/-. Consequently, ground No. 3 of the assessee s appeal is partly allowed. 8. Ground No. 4 - This ground being general in nature, no adjudication is called for thereon. 9. In the result, the assessee s appeal for A.Y. 2007-08 is partly al .....

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n in ground No. 1 above by saying that the decision of Karnataka High Court in the case of Samsung Electronics Co. Ltd (320 ITR 209) was overruled by the supreme court where in fact the case was remanded to the High Court for fresh adjudication. 3. Without prejudice to ground Nos.1 and 2, the CIT(A) erred in law in deleting the disallowance mentioned above because in the alternative even if the expenditure was treated as revenue in nature TDS was not deducted as required u/s 195 of the Act and s .....

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loss. 5. The appellant prays that the order of CTT(A) on the grounds be set aside and that of the AO restored . The appellant craves leave to amend or alter any ground or add a new ground that may be necessary. 11. Grounds No. 1 to 3 - Disallowance of Expenditure on FCCB issue - ₹ 28,58,28,246/- 11.1 In these grounds, the Revenue contends that the learned CIT(A) erred in deleting the disallowance made by the AO of expenditure of ₹ 28,58,28,246/- incurred by the assessee on the issue .....

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ts put forth in grounds 1 and 2, even if the aforesaid expenditure incurred on issue of FCCBs is held to be revenue in nature, TDS was not made thereon as required under section 195 of the Act and section 40(a)(i) had to be invoked. The learned D.R. for Revenue was heard in support of the grounds raised and placed reliance on the order of the AO on these issues, but was not able to bring material on record to controvert the findings of the learned CIT(A) on this issue. 11.2 In the year under con .....

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also of the view that the assessee had not deducted tax at source on the payment of the said expenses and therefore the same is to be disallowed under section 40(a)(i) of the Act. The AO also held that out of the total expenditure of ₹ 28,58,28,246/-, an amount of ₹ 2,28,29,616/- was in respect of payments to Barclays Bank (India) were not covered by TDS certificates and hence the same was to be disallowed. On appeal, the learned CIT(A) held that the FCCBs are in the nature of debent .....

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the company. It is contended that in such circumstances, the FCCB s are to be deemed to be the debentures issued by the assessee for business purposes. In support of the proposition that the said FCCBs were deemed as debentures and the expenses incurred in issuing the FCCBs were to be allowed as revenue expenditure under section 37(1) of the Act, the learned A.R., inter alia, placed reliance on the following judicial pronouncements: - i) Prime Focus Ltd. vs. DCIT (ITA No. 836/Mum/2011 dated 04.0 .....

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04.01.2013) x) Gati Limited (ITA No. 1325/Hyd/2015 dated 10.03.2016) 11.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncement cited. We find that similar issue of treatment of expenses incurred in issue of FFBs on similar facts, as in the case on hand, was dealt with by a Coordinate Bench of this Tribunal in the case of Prime Focus Ltd. in its order in ITA No. 8364/Mum/2011 dated 04.02.2016 at .....

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udication on the core issue is given in the following paragraphs: 9. Assessee spent ₹ 5,82,40,318/- by way of payments to (i) fee paid to the lead managers to the issue; (ii) fees paid to the legal advisors to the issue and (iii) listing fees paid. The same was paid to those parties who contributed for the success of the issue of FCCB amounting to US $5.5 millions. In principle, the payments of this nature in our opinion falls in revenue zone. But the fact is that they'd were incurred .....

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ose of Acquisition of the companies in similar lines abroad for expanding the business presence abroad. Whereas the relevant agreements and issue documents suggest that they were issued for equity purposes. It is a fact that the proceeds of the FCCBs were spent on acquiring the companies abroad. Being optionally convertible, the bond holders have the option to convert into equity. But the assessee did not issue shares to the Bond holders as they did not exercise that option. Rather, assessee ref .....

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. In such case, the claim is allowable in view of the decision of the Hon'ble Apex Court in the case of Hero Cycles P Ltd (supra). Relevant para from the said judgment is extracted as under:- "Insofar as loans to the sister concern / subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another‟ [2007 (288) ITR 1 (SC)]. Once it is established that thereso is nexus between th .....

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of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman." 11. Legal propositions : Scope of Ld DR - Making out a new case of applicability of Section 35D: Ld DR for the revenue filed written note stating that that the claim of such expenses is to be considered within the meaning of the provisions of section 35D of the Act. In this regard, Ld AR for the assessee traced the way AO dea .....

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(Supra). Therefore, we dismiss the Ld DR‟s argument on the issue. 12. ..... Summary 13. We have held that the expenses in question are in principle of revenue nature. It is the trite law such expenses incurred n connection with raising of debts / FCC Bonds constitute allowable expenditure of the Assessee. 11.4.2 Following the ratio of the decision of the Coordinate Bench of this Tribunal in the case of Prime Focus Ltd. (supra), we hold that, in the facts and circumstances of the case on ha .....

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rruled the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. (320 ITR 209) whereas the issue had been remanded to the Hon'ble High Court for fresh adjudication. 12.2 We have heard both parties in this regard. The learned A.R. for the assessee filed a copy of the decision of the Hon'ble Apex Court in the case of GE India Technology Cen. )P) Ltd. vs. CIT (2010) 1993 Taxman 234 (SC) (Civil Appeal Nos. 7541-7778 of 2010 dated 09.09.2010). We have re .....

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also held at para 5 of the assessment order, that since the assessee had not deducted tax at source on the payment of expenditure incurred in connection with the issue of FCCBs under section 195 of the Act, the same is disallowed under section 40(a)(i) of the Act. The details of the nature of payments (i.e. arranger s fees, legal and professional fees, L/C commission and trusteeship fees, principal agent fees, etc.), amounts paid and parties names, etc. are also mentioned at para 5 of the order .....

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r the assessee reiterated the submissions put forth before the learned CIT(A). According to the learned A.R. for the assessee, the said payments are not covered within the ambit of the provisions of section 195 of the Act and therefore there was no liability cast upon the assessee to make deduction of tax at source on such payments. It is contended by the learned A.R. that this issue is covered in favour of the assessee by the following judicial pronouncements on which he placed reliance earlier .....

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find that the issue under consideration is covered by the decision of the Coordinate Bench of this Tribunal in the case of Raymond Ltd. vs. DCIT (2003) 86 ITD 791 (Mum) wherein it was held that neither management commission nor underwriting commission nor selling commission would amount to FTS within the meaning of the DTAA with U.K. and consequently there was no obligation on the part of the assessee-company to deduct tax under section 195 of the Act. Following the decision of the Coordinate Be .....

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7,75,67,418/- on Loan Assignment 14.1 In this ground Revenue contends that the learned CIT(A) erred in deleting the disallowance of loss of ₹ 17,75,67,418/- arising out of assignment of loan to M/s. Western Alliance Power Ltd., originally loaned/ advanced to M/s. Reliance Patalganga Power Ltd. by the assessee and claimed as short term capital loss (STCL) without appreciating that the STCL arose because of lesser capital amount received and not on sale of capital gains and therefore could n .....

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ann.com 113 (Mumbai-Trib), wherein the issue of allowing of STCL was considered in the context of an assessee advancing loan to its subsidiary which ran into serious financial difficulties and the assessee sold this debt to another company for less consideration and claimed the difference as STCL. The Coordinate Bench held that the loss arising thereon was to be allowed as STCL. The learned A.R. contended that since the assessee s case was covered by the aforesaid decision of the Coordinate Benc .....

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₹ 17,84,67,418/- to M/s. Reliance Patalganga Power Ltd. According to the assessee due to difficulties faced, it was decided that the said advance/loan be assigned in order to recover whatever was possible and accordingly, the same was assigned to Western Power Alliance Ltd. for a consideration of ₹ 9,00,000/-. The assessee claimed a STCL on this transaction of sale of a book debt. 14.3.2 In assessment proceedings, the AO disallowed the assessee s claim on the ground that capital exp .....

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that the loss on assignment of loan is a capital loss but has disallowed the same on the ground that there is no provision for assessment under the head short term capital gain . The Assessing Officer s reasoning is vague and not supported by the law. What is required to be seen is whether the loss has occurred on account of transfer of capital asset or not and if the loss is on account of transfer of capital asset, the same is assessable under the head capital gain . Loan given is a capital ass .....

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ust v CIT 203 ITR 864 holding that it is clear from the above definition that for the purpose of this clause, property is a word of the widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded . c) Reliance has been made on the following case laws to state that the loan constitute capital asset 1. CIT v Minor Bababhai Alias Lavkumar Kantilal 128 ITR 1 (Guj) 2. CIT v East India Charitable Trust 207 ITR 152 (Cal) 3. Madhya Pradesh Fina .....

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wing the assessee s claim for STCL on assignment of loan to M/s. Western Power Alliance Ltd. is squarely covered in favour of the assessee by the decision of the Coordinate Bench of this Tribunal in the case of Nixdorf Informationssysteme GmbH (supra). At paras 6 to 12 thereof the Coordinate Bench has held as under: - 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. The first thing, whic .....

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aterials held for the purposes of his business or profession , and it is not, nor can it be, anybody s case is that an advance is covered by the exclusion clause. The question, therefore, arises as to what are the connotations of the expression property . Hon ble Bombay High Court, in the case of CWT Vs Vidur V Patel [1995] 215 ITR 30/79 Taxman 288 had an occasion to consider this question in the context of wealth tax, and this is what Their Lordships had to say: ………So far a .....

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hose well-recognised types of interests which have the insignia or characteristic of property right. [Emphasis, by underlining, supplied by us] 8. It was based on this analysis that Their Lordships held that even a deposit under the Compulsory Deposit Scheme Act, 1963, is also a property. When such are the views of Hon ble jurisdictional High Court, there is no reason for us to exclude an advance from the scope of capital asset . An advance given by the assessee is a property in the sense it is .....

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t, was allowed as a short term capital loss. Unless the amount due is treated as a capital asset, there was obviously no question of the short term capital loss. As a matter of fact, it was not even the case of the revenue, and rightly soin our opinion, that the debt was not a capital asset. As regards learned CIT(A) s observation to the effect that a loan is a current asset and not a capital asset , we may only point out that the concept of current asset is alien to the law on taxation of capit .....

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f capital gains. As regards the CIT(A) s observations that the assessee did not have a PE in India, that the assessee was not carrying out any business in India and that the assessee was not required to file a return of income in India, we are unable to see any relevance or basis of these observations. The capital asset in this case is the money recoverable from an Indian entity which is thus essentially required to be treated as in India, and, as is the mandate of Section 9(1)(i) any income, in .....

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the advance, debt or recoverable amount, in whichever way one describes it, was a capital asset under section 2(14). 9. The next thing that we need to decide is whether or not there was a transfer under section 2(47) or not. Section 2 (47)(i) provides that transfer, in relation to a capital asset, includes (i) the sale, exchange or relinquishment of the asset . There is no dispute that the rights to recover the money from the Indian entity, which is what the capital asset is in this case, was so .....

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ance so given, did not result in any transfer of capital asset. As we have held it to be in the nature of capital asset, the objection raised by the CIT(A) ceases to be relevant anyway. 10. We have noted that the right to recover the money from the Indian entity, in the light of the financial difficulties that the Indian entity was traversing through, was valued at Euro 7,31,000. There is no dispute about bonafides of this valuation. As for the vague allegations about the tax evasion motive, not .....

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